**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**








**x**  **ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE** **SECURITIES
      EXCHANGE ACT OF 1934**





**For
      the fiscal year ended December 31, 2006**





**OR**





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





**For
      the transition period from ____________ to ____________ .**





**Commission
      file number 000-27065**





**APTIMUS,
      INC.**


**(Exact
      name of registrant as specified in its charter)**





**Washington**
            **91-1809146****(Jurisdiction
                of incorporation)**
            **(I.R.S.
                Employer Identification
                No.)**





**199
      Fremont St.**


**Suite
      1800**


**San
      Francisco, CA 94105**


**(Address
      of principal executive offices)**





**Registrant's
      telephone number: (415) 896-2123**





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





**Title
                of each class**
            **Name
                of each exchange**
              **on
                which registered****Common
                Stock, no par value**
            **Nasdaq
                Global Market**





**Securities
      registered pursuant to Section 12(g) of the Act: None**




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




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Exchange Act.  Yes
o  No
x




1




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




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




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.  Large
      accelerated filer o Accelerated
      filer o   Non-accelerated
      filer x





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


The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      last sold on the Nasdaq National Market as of the last business day of the
      registrant’s most recently completed second fiscal quarter, which was June 30,
      2006: $28,391,635.




The
      number of shares of the registrant's Common Stock outstanding as of March 12,
      2007 was 6,587,719.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




Portions
      of the definitive Proxy Statement to be delivered to shareholders in connection
      with the Annual Meeting of Shareholders to be held on or about June 20, 2007
      are
      incorporated by reference into Part III.









2




**FORWARD
      LOOKING STATEMENTS**




Certain
      statements in this Annual Report constitute forward-looking statements within
      the meaning of Section 21E of the Securities Exchange Act of 1934.
      Forward-looking statements can often be identified by terminology such as may,
      will, should, expect, plan, intend, expect, anticipate, believe, estimate,
      predict, potential or continue, the negative of such terms or other comparable
      terminology. Such forward-looking statements involve known and unknown risks,
      uncertainties and other factors that may cause the actual results, performance
      or achievements of Aptimus, Inc. ("Aptimus", "we", "us" or the "Company"),
      or
      developments in the Company's industry, to differ materially from the
      anticipated results, performance or achievements expressed or implied by such
      forward-looking statements. Important factors currently known to management
      that
      could cause actual results to differ materially from those in forward-looking
      statements include, without limitation, fluctuation of the Company's operating
      results, the ability of the Company to compete successfully, the ability of
      the
      Company to maintain current client and publisher relationships and attract
      new
      ones, the sufficiency of remaining cash and short-term investments to fund
      ongoing operations and the ability to integrate acquired companies. For
      additional factors that may cause actual results to differ materially from
      those
      contemplated by such forward-looking statements, please see the risks and
      uncertainties described under "Business — Risk Factors" in Part I of this Annual
      Report. Certain of the forward-looking statements contained in this Report
      are
      identified with cross-references to this section and/or to specific risks
      identified under "Business — Risk Factors."




**PART
      I**




**Item
      1:** ***Business***




**Overview**




Aptimus
      operates a results-based advertising network, distributing advertisements for
      direct marketing advertisers across a network of third-party web sites.
      Advertisers pay us only for the results that we deliver through one of four
      pricing models - (i) cost per click, (ii) cost per lead, (iii) cost per
      acquisition or (iv) cost per impression. We then share a portion of the amounts
      we bill to our advertiser clients with publishers on whose web properties we
      distribute the advertisements. In addition, we occasionally pay web site owners
      either a fixed fee for each completed user transaction or a fee for each
      impression of a placement served on the web site.




At
      the
      core of the Aptimus Network is a database configuration and software platform
      used in conjunction with a direct marketing approach for which we have filed
      a
      non-provisional business method patent application called Dynamic Revenue
      OptimizationTM (DRO). DRO determines through computer-based logic, on a real-time
      basis, which advertisements in our system, using the yield of both response
      history and value, should be displayed for prominent promotion on each
      individual web site placement in our network. The outcome of this approach
      is
      that we generate superior user response and revenue potential for each specific
      web site placement and a targeted result for our advertiser
      clients.




**Company
      History**




Aptimus
      began in 1994 as the FreeShop division of Online Interactive, Inc. This division
      was spun-off from Online Interactive, Inc. in 1997 as FreeShop International,
      Inc., and later became FreeShop.com, Inc. FreeShop was an online direct
      marketing web site connecting marketers and consumers in an innovative new
      approach made possible by the Internet. The concept was to take advantage of
      the
      Internet’s ability to quickly link advertisers and individual consumers to
      increase the efficacy of direct marketing campaigns by allowing consumers to
      pick and choose the promotional offers they actually wanted from direct
      marketers. This site-centric approach led to our growth through our initial
      public offering in 1999 and into 2000. The core of our business model was the
      lead generation business, a decades-old two-step marketing process where
      marketers offer a free trial, sample or information as a first step in the
      process of acquiring a new customer. By the year 2000, our lead generation
      business was surrounded by advertising and sponsorship opportunities, which
      eventually grew to 65% of our revenues in the second quarter of 2000.




3




During
      the year 2000, funding for Internet companies slowed and stock prices generally
      declined. Lack of funding, combined with an increased focus among Internet
      companies on profitability over revenue growth objectives, resulted in reduced
      marketing spending by Internet companies, most notably in the second half of
      2000. This drop in spending had significant repercussions throughout the
      industry and materially affected our advertising and sponsorship
      businesses.




While
      we
      faced major challenges in 2000 and our results suffered, we maintained our
      aggressive posture and focused on what we know best - online direct marketing.
      Toward that end, beginning in June 2000, we undertook an evaluation of all
      aspects of how we do business. Through this effort, we made a number of
      determinations and commitments that formed the basis of our strategy going
      forward.




•
            We
                determined that revenue streams from advertising and sponsorship
                opportunities were declining quickly and would not likely return
                to their
                earlier levels for some time to come. Those revenue streams were
                critical
                to making rapid growth via our site-centric approach possible, given
                the
                high marketing and infrastructure costs of growing a web site
                audience.




•
            We
                determined that our response-based advertising business remained
                viable,
                since direct marketing in general continued to prosper, most direct
                marketers recognized the importance of the Internet as a key part
                of their
                distribution mix, and the core of our traditional direct marketer
                client
                base remained in place.




•
            We
                determined that all major sites throughout the industry would be
                feeling
                the same impacts on advertising spending, and thus would be seeking
                alternative revenue-generation opportunities such as results-based
                pricing
                (where fees are paid on a per-lead or other results
                basis).




•
            We
                determined that our direct marketing clients could be served even
                better
                by our placement of their offers in relevant context through other
                companies’ web sites and email channels, without Aptimus spending the
                significant resources required to continue to maintain and grow our
                own
                web site audiences.




As
      a
      result of these determinations, we made a shift to a network strategy beginning
      in the summer of 2000, placing direct marketing clients’ offers in contextually
      relevant locations on publisher web sites throughout the Internet. Consistent
      with this new strategy, in October 2000, we renamed our company Aptimus, Inc.,
      and named our network the Aptimus Network.




From
      the
      summer of 2000 to the summer of 2001, we laid the foundation for our new network
      business model, and also reevaluated and changed all aspects of our company
      in
      the process. We exited the web site business and terminated most of the
      contracts that were tied to our web site business. We also reduced our staff
      from a high of 215 to 28 at the end of 2001 primarily through restructuring
      plans implemented in February of 2001 and June of 2001. In addition, in November
      2001, we completed a major issuer tender offer, acquiring 9,230,228 shares
      of
      our outstanding common stock, or approximately 69.87% of our outstanding shares
      as of November 15, 2001, at a price per share of $0.48. The tender offer was
      designed to provide liquidity to shareholders who wished to sell their
      investment in us at a slight premium to market. In addition, management believed
      that the then current share price discounted the long-term value of our stock
      and, therefore, a buy-back would also be beneficial to remaining
      shareholders.




As
      of the
      summer of 2001, we completed our transition to a network business.




In
      August
      of 2006 we acquired High Voltage Interactive, which is an online marketing
      firm
      specializing in the advertising vertical of recruitment and enrollment solutions
      for the higher education marketplace. High Voltage focuses solely in the
      education category and they manage marketing solutions and lead generation
      programs for education clients. The High Voltage network manages a targeted
      network of publishers and affiliates focused on career and education.




4




**Industry
      Background**




*Direct
      Marketing*




Advertising
      expenditures can be broadly defined as either brand or direct marketing. Brand
      advertising is intended to generate brand name awareness and create a specific
      image for a particular company, product or service. Direct marketing involves
      any communication to a consumer intended to generate a specific response or
      action, generally a purchase of a product or service.




*Traditional
      Direct Marketing*




Traditional
      direct marketing media include direct mail, telemarketing, newspaper, magazine,
      radio and television advertising. Although traditional direct marketing is
      effective and widely used, it presents a number of challenges for marketers
      and
      consumers alike. Traditional direct marketers generally lack specific and timely
      information on a particular consumer’s immediate interests. Given the costs
      associated with traditional direct marketing, which typically include printing,
      data processing, postage, assembly, labor, telecommunications, and facilities,
      as well as the recent introduction of the FTC’s “do not call” registry, low
      response rates can make the process inefficient.




*Online
      Direct Marketing*




Online
      direct marketing media include banner advertisements, interstitials,
      advertorials, text-links, pop-ups, targeted email solicitations search and
      web
      site sponsorships. We believe that online direct marketing is more efficient
      than traditional direct marketing because online offers avoid expenses
      associated with physical advertising such as production costs, mailing expenses,
      and personnel expenses associated with individual telemarketing calls, while
      allowing offers to be tailored to the interests of specific demographic groups
      drawn to particular web sites. Further, user data input capabilities enable
      easier and faster customer response. In addition, online direct
      marketing:




·
            facilitates
                instantaneous data and feedback on marketing campaigns;




·
            provides
                direct marketers with multiple performance-based payment models;
                and




·
            enables
                highly customized marketing
                campaigns.




Even
      with
      these advantages, direct marketers face challenges in realizing the full
      potential of the Internet as a marketing medium. With millions of web sites,
      only a fraction of which have significant audiences, it is difficult for
      marketers to decide where to spend their marketing budgets. Even leading brand
      name marketers who build their own web sites must find ways to attract a
      sizeable audience. In addition, financial hurdles presented by rapidly evolving
      technologies such as updating archaic computer and legacy data entry systems,
      may impede conventional direct marketers from successfully extending their
      activities to the Internet. Also, a number of new applications such as programs
      that block pop-up ads, as well as new business practices such as charging
      commercial emailers a fee for every email sent to an email account holder,
      have
      recently emerged and are becoming more widely used. Similarly, there is evolving
      popular dissatisfaction with some of the more intrusive methods of online
      advertising, such as pop-ups and unsolicited email. These technologies, together
      with evolving consumer sentiment, may diminish the value of placing online
      advertisements, particularly in the pop-up and email format, and discourage
      online advertising in general. Finally, federal and state laws have been
      implemented or are being implemented that would limit the use of email
      advertising and the collection of personal data that has previously been used
      to
      help target offers. For example, the Controlling The Assault of Non-Solicited
      Pornography and Marketing Act of 2003, popularly described as the CAN SPAM
      Act,
      has placed strict limitations on how and to whom commercial email solicitations
      can be delivered. As a result, the number of consumers to whom direct marketers
      can legitimately communicate by email has been significantly reduced.




5




In
      addition, efforts by ISPs and private networks to limit or restrict a material
      portion of our emails, our increasingly successful emphasis on the growth and
      development of our Network business, our focus on improving lead quality, the
      steadily shrinking revenue contribution both in real and relative terms from
      our
      email operations, and the unjustifiably significant demand on internal resources
      all contributed to our decision in December 2005 to indefinitely suspend all
      email operations, effective immediately.




**The
      Aptimus Solution**




We
      have
      developed an effective performance-based advertising network. The Aptimus
      Network generates orders for marketers by presenting their offers across a
      network of web site publishers that we believe encompass a broad demographic
      of
      users from sites focused on personal finance, electronics and technology, health
      and fitness to sites devoted to games and trivia, hobbies, news and online
      community. At the same time, the Aptimus Network provides incremental revenue
      benefits to its web site publishers, enabling revenue generation for its key
      formats, while saving the publisher the risk and cost of supporting additional
      internal advertising sales and engineering personnel.




Our
      revenues per thousand page impressions or RPM, a standard measurement of value
      for Internet-based companies, for the year ended December 31, 2006 averaged
      $57.51 across all our impression. More specifically, our RPM was $218.91 for
      our
      core type placements and $31.14 for our other, non-transaction related type
      placements. Core placements are defined in our network as offers presented
      typically in the middle of an active process such as placing an offer in the
      middle of a website registration process. Whereas non-core placements are
      typically placed at the beginning or end of an active process such as a log
      in
      or thank you page. Advertising offers that are placed in the middle of a process
      will be noticed by the internet user as the user is trying to complete a process
      and is therefore paying greater attention to each page presented so that the
      user can complete the desired active process. Because of the nature of this
      placement, the conversion rate of a user potentially selecting an offer is
      much
      higher in a core type placement. Whereas, when an offer is placed at the end
      of
      an active process, the likelihood of the offer being paid attention to drops
      off
      significantly since the user does not have to pay such close attention to the
      process the user is looking to complete.




Our
      developed real-time data validation capabilities filter the data users input
      and
      reject orders with invalid data so that we only deliver orders to our
      advertising clients that our systems have prescreened for data quality. For
      the
      year ended December 31, 2006, 2005 and 2004, user leads from our top five
      largest website publishers accounted for 48.8%, 29.4% and 45.7% of our total
      revenues, respectively. For the year ended December 31, 2006, user leads from
      the largest publisher accounted for 21.2% of revenues and no other publisher
      accounted for more than 10% of total revenues. For the year ended December
      31,
      2005, user leads from the largest publisher accounting for 10.6% of revenues
      and
      no other publisher accounted for more than 10% of total revenues. For the year
      ended December 31, 2004, user leads the largest publisher accounted for 23.7%of
      revenues and no other publisher accounted for more than 10% of total revenues.
      Marketers pay only for the results they achieve on a cost per click, cost per
      lead, percentage of revenue, cost per acquisition, or cost per impression basis,
      as well as combinations of those models. As a result, marketers can refine
      their
      offers and payment models to achieve their specific objectives.




The
      Aptimus Network is focused primarily on advertising placements at the points
      of
      various user processes on web sites where consumers are more active and, thus,
      more likely to respond to offers from marketers. Key formats include
      cross-marketing promotions at the point of registration, log-in, download,
      end
      of process “thank you” and log-out or other transactional activities on web
      sites.




6




*Dynamic
      Revenue Optimization* *TM*




At
      the
      core of the Aptimus Network is a proprietary database configuration and software
      platform supporting a direct marketing approach for which we have filed a
      non-provisional business method patent application called Dynamic Revenue
      OptimizationTM, which automatically determines through computer-based logic on a
      real-time basis the offers from among the total offers in our rotation, in
      terms
      of response history and value, for promotion on each publisher’s web site and in
      each email sent. The technology is designed to optimize results for our
      advertiser clients by presenting offers that we believe are most likely to
      be of
      interest to specific customers, while maximizing revenues for our publishers
      and
      us. The system can target offers on a real time basis based on any information
      the user has submitted in the transaction process where our offer page is
      located. For example, male users on a particular publisher’s site may have a
      different response history to our offers than the site’s female visitors. Our
      system can tailor the offer mix displayed on the site depending on items such
      as
      the gender of the user to assure the highest response rate possible. Other
      useful targeting variables include age and physical address among others.




Our
      Dynamic Revenue Optimization system measures every offer in every ad position
      on
      a revenue generation basis. Then, the offers that generate the greatest revenues
      for that specific position automatically receive more exposure there, while
      lower performing offers receive less exposure. The analytics are continuously
      updated to quickly identify the performance of new offers and to adjust and
      improve the performance of every placement.




Revenues
      for each offer are determined based on response rate to each offer in each
      position multiplied by the fee for that response, whether the advertiser is
      paying a fee per click, a fee per lead, a fee per acquisition or based on any
      other measurable outcome. This approach is more flexible than other
      response-based systems that usually focus on one payment model exclusively,
      such
      as the cost per click approach of paid search networks.




Because
      Dynamic Revenue Optimization depends on consumer response as a central factor,
      the system automatically improves the targeting of each offer based on consumer
      behavior, emphasizing the offers that have generated the highest level of
      response in each location for that category of offer, target consumer and web
      site. This aspect of our algorithm ensures that offers are placed in front
      of a
      receptive audience. But consumer response is only one factor in determining
      offer placement. Dynamic Revenue Optimization also factors in the price per
      result paid by each advertiser. Offers are thus prioritized based on revenue
      received by us in combination with consumer response to the offers. For example,
      if two offers each generate 100 orders per 1,000 impressions and one advertiser
      is paying $1 per order and the other advertiser is paying $2 per order, Dynamic
      Revenue Optimization will emphasize the offer paying $2 per order. Similarly,
      if
      between these two offers, the first receives 30 orders and the second receives
      100 orders each per 1,000 impressions, and the first pays $10.00 per order
      and
      the second $2.00 per order, Dynamic Revenue Optimization will emphasis the
      first, higher paying offer even though it gets a fraction of the orders the
      second offer receives per 1,000 impressions. This is so because the higher
      paying offer generates more total revenue per 1,000 impressions than the lower
      paying offer. This dynamic creates a competitive environment where advertisers
      have an incentive to pay us higher fees and to create the most compelling offer
      in order to ensure priority placement of their offer along with creating offers
      of high interest to consumers.




*Benefits
      to Consumers*




We
      present our offers from leading brands to consumers, allowing consumers to
      easily select and respond to the offers that are of greatest interest to them.
      Because the Aptimus Network prioritizes offers in each location based on actual
      response behavior in that location, consumers are more likely to find offers
      of
      unique interest and value to them since they are likely to have interests in
      common with others who have come to the same location. Our traditional offer
      presentation format includes a brief, easy to read text that is accompanied
      by
      an HTML image of the advertised product or service. More recent enhancements
      to
      our technology support a high degree of user interactivity that, in turn, has
      expanded the functional and presentation capabilities of our offer formats.
      While we can support the placement of many offers on a page, we have found
      that
      users prefer and respond best if presented with relatively few offers on a
      page.
      And consistent with our desire to maintain a user-friendly process, our offer
      pages are intuitive and easy to navigate and users are not forced or required
      to
      order something before proceeding to the next step in the transaction process.




7




*Benefits
      to Advertisers*




We
      benefit advertisers by offering a flexible, cost effective way to acquire new
      customers online. The Aptimus Network presents their offers across a selection
      of web site publishers, and our Dynamic Revenue Optimization approach
      automatically attempts to determine where the most responsive customers are
      likely to be for each offer. Advertisers pay us solely based on the results
      achieved for them, on a cost per click, cost per lead, cost per order, or other
      payment model that makes the most sense for them. Thus, advertisers can test
      new
      marketing programs with us with little to no risk, and with the potential for
      high volume results for the best performing offers.




*Benefits
      to Publishers*




We
      work
      closely with publishers to identify key areas of their web sites that have
      the
      most profit potential, and then dynamically serve targeted offers into those
      placements on an ongoing basis. With our recently expanded capability of
      incorporating search-based ad units, our DRO-optimized placements are now
      available to publishers with high non-US based traffic volumes. Publishers
      share
      in the results achieved, and we do all of the work to manage the placements,
      advertiser sales, order taking, data validation, optimization, billing, and
      so
      forth.




The
      process-related positions on our publishers’ web sites that we prefer are
      different than the targeted positions of other ad networks. The Aptimus Network
      generates attractive revenues while keeping consumers at the publisher’s web
      site, rather than clicking them away to the web site of a sponsoring advertiser,
      which is disruptive to the consumer’s experience and counter to the publisher’s
      interests.




**Strategy**




Our
      objective is to be the performance-based advertising network on the Internet
      preferred by advertisers and web site publishers alike. We intend to achieve
      this objective by the following key strategies:




*Grow
      Web Site Publisher Base*




We
      intend
      to continue to grow our web site distribution network as our primary emphasis
      in
      2007 and beyond now that we have an established technology platform and a
      growing base of advertiser clients with both continuing and campaign-based
      customer acquisition goals. We believe our Dynamic Revenue Optimization system
      enables us to generate higher revenues than through random placement of offers.
      Our main emphasis is to increase the number of web site publisher impressions
      throughout our network. Our key distribution publishers are large web site
      properties with significant volumes of transactional activities such as
      registrations, log-ins, downloads, auction bids, and other processes where
      users
      are performing a transactional activity of some form. We are also seeking major
      brand distribution publishers in key vertical interest categories to continue
      to
      attract more and new types of major brand clients. These types of clients have
      products and services that appeal to a broad demographic market, have large
      advertising budgets, have historically relied on traditional print and
      electronic distribution channels to advertise and acquire new customers, and
      are
      interested in extending their customer acquisition efforts to direct, measurable
      online marketing programs.




*Expand
      Client Base*




We
      believe that we provide advertisers with a cost-effective alternative to
      traditional direct marketing and, as a result, we have a significant opportunity
      to increase the number of direct marketing clients we serve. In particular,
      we
      are seeing more national consumer brand companies seeking Internet-based direct
      marketing vehicles, and we plan to initiate new relationships and expand our
      existing relationships with these companies. We continue to focus our sales
      staff on broadening relationships with existing advertiser clients and acquiring
      new advertiser clients. We plan to continue to expand and refine the services
      we
      offer to our clients, including:




8




·
            enhanced
                marketing programs,




·
            new
                methods of presenting offers, and




·
            expanded
                data-gathering and validation options.




We
      intend
      to achieve these objectives by a combination of inquiry and research to
      determine evolving advertiser and publisher needs, placement opportunities
      and
      user interests and then focusing our development resources and efforts on
      solutions that will support the desired service extensions and enhancements.
      Finally, we also offer our services to advertising and direct marketing agencies
      as a solution for their client companies to access consumers on the
      Internet.




*Increase
      Revenues*




Our
      Dynamic Revenue Optimization platform is designed to increase revenues through
      an algorithmic approach. As discussed, the algorithm ranks offers based on
      two
      independent factors: (i) the number of responses (what we call “orders”)
      the offer receives, and (ii) the revenues received by us per response. As
      one or both of these factors increase, the algorithm places the offer
      incrementally more prominently versus offers not ranked as highly by the
      algorithm. Over time, as we continue to add new clients and competitive offers,
      our system should automatically increase our revenues from others based on
      the
      revenue optimizing function of our algorithm. In addition, clients have an
      incentive to make their offers more attractive to consumers and increase the
      fees they pay to us per order, as the revenue results for their offer will
      be a
      key factor in determining the exposure of their offer. We also offer marketers
      tools to dynamically test new offer formats and versions, such as different
      graphics or text, to improve the response rate to their preferred offer in
      the
      Aptimus Network.




**Sales
      and Marketing**




*Client
      Base Development*




We
      sell
      our solutions to advertiser clients primarily through a sales and marketing
      organization comprised of Aptimus employed sales staff based in San Francisco
      and New York. In addition, we work extensively with advertising agencies, which
      often act as “offer aggregators” bringing multiple new clients and offers to us
      simultaneously. Relationships with key advertising agencies have enabled us
      to
      expand our base of clients and offers more rapidly, without having to expand
      our
      internal sales team as quickly or as much as might otherwise be required. We
      consider our relationships with the agencies we work with to be good. However,
      use of agencies also can mean that we are paid a lower fee for the leads we
      generate than if we were to source the offers directly from the advertisers.
      This is so because the advertisers pay an agency fee to the agencies, which
      is
      calculated as a percentage of the total fee payable for the leads we deliver,
      and which have the effect of reducing the fee we get paid by the sum the
      advertiser must pay the agency. In addition, use of an agency as an intermediary
      between the advertiser and us inhibits or prevents the development of direct
      personal relationships with the advertiser. In the absence of direct personal
      relationships the potential for account retention and expansion can be limited
      or eliminated entirely. Finally, our policy is to not sign contracts with
      agencies that prohibit or restrict our ability to contract directly with the
      advertisers we source through them or to contract with other agencies to source
      the same offers from the same advertisers as we source through the first agency.
      There are no agency contracts currently in place with such limitations. Going
      forward, we intend to place a greater emphasis on continuing to develop direct
      relationships with advertisers and their agencies of record in 2007 and
      beyond.




9




*Publisher*  *Base
      Development*




We
      have a
      dedicated business development team who target and offer web sites the
      opportunity to participate in the Aptimus Network. Since our preferred
      transaction-oriented placements are not the more traditional banner and
      skyscraper placements sought by other ad networks, we have learned that the
      publisher sales process can take weeks or even months to complete from initial
      contact to the date our offers are live on the publisher’s site. Our business
      development employees work closely with our publishers and potential publishers
      to determine the most advantageous offer placements and presentation formats,
      often monetizing previously untapped content and traffic. Our technology
      platform continually and dynamically analyzes consumer response to offers
      presented on each publisher web site in order to optimize results on each of
      those sites. We also experiment with multiple overall presentation formats
      and
      placements in an attempt to enhance revenues for our publishers.




**Operations
      and Technology**




We
      have
      implemented a broad array of offer presentation, dynamic optimization, customer
      service, transaction processing and reporting systems using both proprietary
      and
      licensed technologies. The Aptimus Network resides on a proprietary platform
      that is flexible, reliable and scalable. The proprietary elements of our
      platform we have developed over the past six years include our database
      configurations, our data models and the software code we have written that
      retrieves, analyzes and assigns random values to user, offer and placement
      information, and distributes offers based on that analysis and random
      valuation. **** Together
      we term this combination of proprietary software code, data modeling and
      database architecture our offer rotation engine and the resulting process
      Dynamic Revenue Optimization. We believe that our system can support millions
      of
      consumers and large numbers of advertiser clients and web site distribution
      publishers. Our proprietary network has been developed using both data and
      process engineering approaches to ensure a comprehensive and reliable
      architecture. We have filed a non-provisional patent application with the US
      Patent and Trademark Office that covers our proprietary offer rotation engine
      as
      a whole as well as its various unique component parts. However, the proprietary
      elements of our platform will remain proprietary whether or not the US Patent
      and Trademark Office accepts our application and issues the requested business
      method patent. The Aptimus Network technology has been created with four
      foundation goals in mind:




*Flexibility:* The
      network is built entirely in Java, HTML, and XML, and is intended to run across
      all platforms and networks.




*Compatibility:* To
      support the network, we have designed our offer presentation formats to scale
      easily across publisher web sites with a minimum of technical integration
      required. Since our platform is based on standard open-source code, we have,
      to
      date, not encountered any systems incompatibility issues with our clients or
      publishers. Our offer page is extremely easy for our publishers to implement.
      Our engineers provide them with a line of code, which typically takes less
      than
      an hour for them to fully integrate into their system.




*Reliability:* We
      have
      conducted millions of paid transactions, such as leads, and clicks, across
      our
      network of publisher sites with a negligible failure rate. All our data
      transfers are conducted according to industry-standard security protocols,
      including Secure Sockets Layer (SSL). In the past four years, we have never
      encountered an outage exceeding three hours. However, in the event of a
      longer-term outage in the future, our system is designed to cache incoming
      data,
      which can then be processed when our system functionality is
      restored.




*Scalability:* All
      of
      our technologies are designed for rapid, complete deployment across a large
      number of distribution publishers. With our single point implementation process,
      new offers are built quickly and efficiently and go live simultaneously across
      all our network placements. We have to date not encountered any challenges
      or
      limitations to our ability to scale our technology infrastructure to meet the
      demands of our growing network. We believe that we can support up to five times
      the current traffic.




10




The
      Aptimus Network technology has been designed to evolve with the business and
      the
      Internet marketplace.




**Competition**




While
      we
      believe that our Dynamic Revenue Optimization technology offers us a significant
      advantage over any potential competition in the transaction-based environments
      we prefer, we nonetheless face competition from other online advertising and
      direct marketing networks in competing for client advertising budgets. Other
      online advertising networks and performance based marketing providers that
      advertisers might work with include ValueClick, Google, Q Interactive
      (f/k/a/CoolSavings), QuinStreet, aZoogle, Adteractive, aQuantive, Ask.com,
      Miva
      and Advertising.com. The online lead generation space continued to see increased
      competition in 2006, particularly in respect to “high value” ad inventory paying
      $10 or more per lead. It also saw heightened demand from advertisers,
      particularly those with high value lead inventory, for an increase in the
“quality” of the leads delivered to them. In this respect, the advertisers’
quality demands included both accuracy in respect to the data itself - for
      example, valid email and postal addresses and telephone numbers - as well as
      the
      interest level of the user selecting the offer - for example, users who have
      affirmatively selected an offer as opposed to being forced by the process to
      select the offer. We expect these trends to continue in the future. In response
      to these challenges, Aptimus must learn and monitor the consumer demographics
      and consumer intent with publishers whose site traffic the Company might
      ultimately conclude are incompatible with the quality requirements of our
      advertisers. We continue to improve automated data validation processes that
      are
      both scalable and unique to Aptimus that the Company believes will increase
      our
      lead quality and differentiates us favorably from the competition




We
      also
      compete indirectly for Internet advertising revenues in general with large
      Web
      publishers and Web portals, such as America Online, Microsoft Network, and
      Yahoo!, each of whom also either is or would be a strong distribution publisher
      for the Aptimus Network.




**Seasonality**




We
      are
      subject to seasonal and cyclical fluctuations from both the clients and
      publishers within our network. The primary seasonality is due to Web site
      publishers that are less likely to integrate our network solution into their
      transaction-based processes during their busiest revenue periods. The fourth
      quarter of each year will typically be the busiest period for most of our
      targeted publishers. Some publishers also buy media to drive traffic to their
      sites. These media buys will often fluctuate with the season, resulting in
      higher traffic volumes during the publishers’ peak media buying activities.
      Additionally, on the client side of our network, many advertisers generally
      increase their customer acquisition efforts in the third quarter and early
      fourth quarter more than at any other time of the year. Other clients generally
      increase their expenditures on advertising in the third and fourth quarters
      of
      their fiscal year, which typically end either on December 31 or June 30 of
      each
      calendar year. Further, in the United States Internet user traffic typically
      subsides during the summer months. Expenditures by advertisers also tend to
      reflect overall economic conditions as well as individual budgeting and buying
      patterns of advertisers.




**Significant
      Customers**




For
      the
      year ended December 31, 2006, 2005 and 2004 our ten largest clients accounted
      for 55.9%, 50.0% and 63.9% of our revenues, respectively. During the year ended
      December 31, 2006 no client accounted for more than 10% of our revenues. During
      the year ended December 31, 2005 Adteractive accounted for 10.2% of our revenues
      and no other client accounted for more than 10% of our revenues. During the
      year
      ended December 31, 2004 Advertising.com accounted for 20.2% of our revenues
      and
      Quinstreet accounted for 12.3% of our revenues.




11




We
      continue look to work with larger clients with bigger ad budgets. This has
      resulted in the percentage of our revenues derived from our 10 largest clients
      remaining relatively high. We expect our revenues to be composed of a similar
      mix of large and small advertiser clients in the immediate future.




**Intellectual
      Property**




We
      regard
      our copyrights, service marks, trademarks, pending patents, trade secrets,
      proprietary technology and similar intellectual property as critical to our
      success, and we rely on trademark, patent and copyright law, trade secret
      protection and confidentiality and license agreements with our employees,
      customers, independent contractors, publishers and others to protect our
      intellectual property rights. We have registrations of the trademark “Aptimus”
and the Centaur design in the United States, both of which will expire in 2013
      if we do not renew them prior to that time. We have registrations for the
      trademark “Aptimus” in Australia, Canada, China, and New Zealand, which will
      respectively expire in 2010, 2019, 2012 and 2007 if we do not renew them prior
      to their respective expiration dates. And we have a pending registration of
      the
      trademark “Aptimus” in the European Union. We also have a pending
      non-provisional business method patent application in the United States and
      Canada that covers our proprietary offer rotation engine as a whole as well
      as
      its various unique component parts. Our intellectual property rights have broad
      application across all of our business activities.




We
      have
      registered a number of domain names, including aptimus.com among others.
      Internet regulatory bodies regulate domain names. The regulation of domain
      names
      in the United States and in foreign countries is subject to change in the
      future. Regulatory bodies could establish additional top-level domains, appoint
      additional domain name registrars or modify the requirements for holding domain
      names. The relationship between regulations governing domain names and laws
      protecting trademarks and similar intellectual property rights is unclear.
      Therefore, we could be unable to prevent third parties from acquiring domain
      names that infringe on or otherwise decrease the value of our trademarks and
      other proprietary rights.




We
      may be
      required to obtain licenses from others to refine, develop, market and deliver
      new services. We may be unable to obtain any such license on commercially
      reasonable terms, if at all, or guarantee that rights granted by any licenses
      will be valid and enforceable. We currently hold perpetual licenses to “off the
      shelf” software programs developed and distributed by the following vendors:
      Oracle, Veritas, eGain, Embarcadero, Dell, Sun, Hitachi, Cisco, Foundry, Network
      Associates and Microsoft. We will be entitled to periodic updates to such
      programs provided we continue to pay yearly maintenance fees for each. Except
      for our Microsoft Office application where we do not feel paying for annual
      maintenance services is necessary or useful, we are currently paying yearly
      maintenance fees for all of the software programs that we currently use and
      have
      no current plans to cease paying such yearly maintenance fees. However, if
      we do
      elect to cease making such maintenance payments for a particular program, we
      may
      no longer be entitled to receive future updates, if any, to that software issued
      by the copyright holder, nor will we be entitled to free technical support
      service in the event the need for such support arises.




**Financial
      Information About Geographic Areas**




For
      the
      years ended December 31, 2006, 2005, and 2004 revenues attributable to the
      United States have been $15.2 million, $15.9 million, and $14.0 million, or
      100%
      in each year. For the past three fiscal years all long-lived assets of the
      Company have been located in the United States.




12




**Employees**




As
      of
      March 12, 2007, we had a total of 58 employees. The current employee mix
      includes 39 in sales and marketing, 10 in technology and development, and 9
      in
      finance and administration. Unions represent none of our employees. We consider
      relations with our employees to be good.




**Item
      1A:** ***Risk
      Factors***




**RISKS
      RELATED TO OUR BUSINESS**




***We
      generate substantially all of our revenue from advertising, and the reduction
      in
      spending by or loss of advertisers or publishers could materially reduce our
      revenues.***




We
      derive
      substantially all of our revenues from fees paid by our advertiser clients
      for
      results-based advertisements displayed on our publishers’ web sites. Our
      advertiser clients and publishers can generally terminate their contracts with
      us at any time on thirty (30) days prior notice or less. Advertisers will not
      continue to do business with us if their investment in advertising with us
      does
      not generate sales leads and, ultimately, customers, or if we fail to deliver
      their advertisements in an appropriate and effective manner. Publishers will
      not
      renew their contracts with us if we fail to generate revenue from the
      advertisements we place on their sites. If we are unable to remain competitive
      and provide value to our advertisers and publishers, they may stop placing
      advertisements with us or allowing us to display advertisements on their web
      sites, which would adversely affect our revenues.




***A
      limited number of advertisers accounted for a significant percentage of our
      revenues in 2006 and the loss of one or more of these advertisers could cause
      our revenues to decline.***




For
      the
      year ended December 31, 2006, revenues from our two largest advertiser clients
      accounted for 17.0% of our total revenues. For the year ended December 31,
      2006
      our largest client accounted for less than 10.0% of our total revenue. We
      anticipate that a limited number of clients collectively will continue to
      account for a significant portion of our revenues for the foreseeable
      future. **** Key
      factors in maintaining our relationships with these clients include our
      performance on individual campaigns, the quality of the results we generate
      for
      these clients, and the relationships of our sales employees with client
      personnel. To the extent that our performance does not meet client expectations,
      or the reputation of our data quality or relationships with one or more major
      clients are impaired such that they reduce or eliminate use of our services,
      our
      revenues could decline significantly and our operating results could be
      adversely affected.




***A
      limited number of publishers accounted for a significant percentage of our
      user
      leads in 2006 and the loss of one or more of these publishers could cause our
      revenues to decline.***




For
      the
      year ended December 31, 2006, user leads from our five largest website
      publishers accounted for 48.8% of our total revenue, with the top two publishers
      accounting for 21.2% and 18.5% of revenues, respectively. We anticipate that
      a
      limited number of publishers collectively will continue to account for a
      significant portion of our lead volume for the foreseeable future. **** Key
      factors in maintaining our relationships with these distributors include the
      performance of our individual placements on their respective sites, the total
      revenues we generate for each of these publishers, and the relationships of
      our
      business development employees with publisher personnel. Of this group of
      publishers, all but one can terminate its contract with us at any time on thirty
      (30) days prior notice or less. The other publisher has a contract with a three
      year term with three, one-year optional renewal term extensions. To the extent
      that our performance does not meet publisher expectations, or that the
      publishers source alternative, higher paying advertising placements from
      competitive third-party networks or directly from advertisers such that they
      reduce or eliminate use of our services, our lead volume and, in turn, our
      revenues could decline significantly and our operating results could be
      adversely affected.




13




***We
      face intense and growing competition, which could result in price reductions,
      reduced operating margins and loss of market share.***




The
      market for Internet advertising and related services is highly competitive.
      If
      we fail to compete effectively against other Internet advertising service
      companies, we could lose advertising clients or publishers and our revenues
      could decline **.** We
      expect
      competition to continue to increase because there are no significant barriers
      to
      entry. Our principal competitors include other on-line companies that provide
      advertisers with results-based advertising services, including advertising
      networks such as Google, aQuantive, Q Interactive (f/k/a CoolSavings),
      Advertising.com, QuinStreet and ValueClick. In addition, we compete with large
      interactive media companies with strong brand recognition, such as AOL,
      Microsoft and Yahoo!, that sell advertising inventory directly to advertisers.
      We also compete with traditional advertising media, such as direct mail,
      television, radio, cable and print, for a share of advertisers’ total
      advertising budgets.




Many
      current and potential competitors have advantages over us, such as longer
      operating histories, greater name recognition, larger client bases, greater
      access to advertising space on high-traffic web sites, and significantly greater
      financial, technical, marketing and human resources. These companies can use
      their experience and resources against us in a variety of competitive ways,
      including by making acquisitions, investing more aggressively in research and
      development and competing more aggressively for advertisers and publishers
      through increased marketing or other promotions. In addition, existing or future
      competitors may develop or offer services that provide significant performance,
      price, creative or other advantages over those offered by us.




Current
      and potential competitors may merge or establish cooperative relationships
      among
      themselves or with third parties to improve the ability of their products and
      services to address the needs of our clients and publishers and prospective
      clients and publishers. As a result, new competitors may emerge that may rapidly
      acquire significant market share as well as place significant downward pressure
      on the pricing of our services.





In
      addition, current and potential clients and publishers have or may establish
      products and services that are competitive with ours, or that better serve
      their
      own internal needs or the needs of others. For example, a number of our
      competitors for advertisers, including, QuinStreet, Advertising.com and
      ValueClick, are also clients of ours. Similarly, AOL and Yahoo! are publishers
      in our network. As a result, current clients and publishers may choose to
      terminate their contracts with us and potential clients and publishers may
      choose not to contract for our products and services or to contract with one
      of
      our competitors.




If
      we
      fail to compete successfully, we could have difficulties attracting and
      retaining advertising clients and publishers, which may decrease our revenues
      and adversely affect our operating results. Increased competition may also
      result in price reductions that cannot be offset by cost reductions resulting
      in
      substantial decreases in operating income.




***Our
      revenues would decline or stagnate if the market for results-based Internet
      marketing services fails to grow.***




Our
      services are offered to advertisers using results-based pricing models. The
      market for results-based Internet advertising remains at a relatively early
      stage, and the viability and profitability of this market is unproven. If
      advertisers conclude that results-based marketing services are not profitable
      or
      fail to achieve their customer acquisition goals, the Internet advertising
      market could move away from these services, and our revenues could decline
      or
      stagnate.




14




***We
      depend on interactive publishers for impression inventory to display our
      clients’ advertising, and any decline in the supply of advertising inventory
      available through our network could cause our revenues to decline.***




Most
      of
      the web sites and search engines on whose pages, and before whose users, our
      advertising is displayed are not bound by long-term contracts that ensure us
      a
      consistent supply of advertising impression inventory. We generate a significant
      portion of our revenues from the advertising impressions provided by a limited
      number of publishers. In many instances, publishers can change the amount of
      impressions they make available to us at any time. In addition, publishers
      may
      place reasonable restrictions on our use of their impression inventory. These
      restrictions may prohibit advertisements from specific advertisers or specific
      industries, or restrict the use of certain creative content or formats. If
      a
      publisher decides not to make inventory available to us, or decides to increase
      the cost, or places significant restrictions on the use of such inventory,
      we
      may not be able to replace this with impressions from other publishers that
      satisfy our requirements in a timely and cost-effective manner. As a result,
      we
      may be unable to place advertisements in high value positions and advertisers
      may be dissuaded from using our services. In addition, we may find it necessary
      to pay a substantially larger fee to publishers to maintain impression
      inventory. If this happens, our revenues could decline or our cost of acquiring
      inventory may increase.




***New
      technologies could block or filter our ads, which could reduce the effectiveness
      of our services and lead to a loss of customers.***




Technologies
      may be developed that can block the display of our ads. We derive substantially
      all of our revenues from fees paid to us by advertisers in connection with
      the
      display of ads on web pages. Any ad-blocking technology effective against our
      ad
      placements could severely restrict the number of advertisements that we are
      able
      to place before consumers resulting in a reduction in the attractiveness of
      our
      services to advertisers. If advertisers determine that our services are not
      providing substantial value, we may suffer a loss of clients. As a result,
      ad-blocking technology could, in the future, substantially decrease the number
      of ads we place resulting in a decrease in our revenues.




***We
      have to keep up with rapid technological change to continue offering our
      advertising clients competitive services or we may lose clients and be unable
      to
      compete.***




Our
      future success will depend on our ability to continue delivering our advertising
      clients and publishers competitive results-based Internet marketing services.
      In
      order to do so, we will need to adapt to rapidly changing technologies, to
      adapt
      our services to evolving industry standards and to improve the performance
      of
      our services. Our failure to adapt to such changes would likely lead to a loss
      of clients or a substantial reduction in the fees we are able to charge versus
      competitors who have more rapidly adopted improved technology. Any loss of
      clients or reduction of fees would adversely impact our revenue. In addition,
      the widespread adoption of new Internet technologies or other technological
      changes could require substantial expenditures by us to modify or adapt our
      services or infrastructure. If we are unable to pass all or part of these costs
      on to our clients, our margins and, therefore, profitability will be
      reduced.




***Because
      our advertiser client and publisher contracts generally can be cancelled by
      the
      client or publisher with little or no notice or penalty, the termination of
      one
      or more large contracts could result in an immediate decline in our revenues.***




We
      derive
      substantially all of our revenues from marketing services under short-term
      insertion order contracts with advertising clients and web site publishers,
      approximately 65% of which may be cancelled upon thirty (30) days or less
      notice. In addition, the client contracts generally do not contain penalty
      provisions for cancellation before the end of the contract term. The short
      contract terms in general reflect the limited timelines, budgets and customer
      acquisition goals of specific advertising campaigns and are consistent with
      industry practice. The non-renewal, re-negotiation, cancellation or deferral
      of
      large contracts or a number of contracts that in the aggregate account for
      a
      significant amount of revenues, could cause an immediate and significant decline
      in our revenues and harm our business.




15




***If
      our advertisers, publishers or we fail to comply with regulations governing
      consumer privacy, we could face substantial liability and incur significant
      litigation and other costs.***




Our
      collection, maintenance and use of information regarding Internet users could
      result in lawsuits or government inquiries. These actions may include those
      related to U.S. federal and state legislation limiting the ability of companies
      like ours to collect, receive and use information regarding Internet users
      and
      to distribute commercial emails. In addition, we cannot assure you that our
      advertiser clients, web site publishers and email list owners are currently
      in
      compliance, or will remain in compliance, with their own privacy policies,
      regulations governing data collection or consumer privacy or other applicable
      legal requirements. We may be held liable if our clients use our technology
      or
      the data we collect on their behalf, or they collect in a process initiated
      by
      us, in a manner that is not in compliance with applicable laws or regulations
      or
      their own stated privacy policies. Litigation and regulatory inquiries are
      often
      expensive and time-consuming and their outcome is uncertain. Any involvement
      by
      us in any of these matters may require us to:




·
            spend
                significant amounts on our legal defense;




·
            divert
                the attention of senior management from other aspects of our business;




·
            defer
                or cancel new product or service launches as a result of these claims
                or
                proceedings; and




·
            make
                changes to our present and planned products or services.




As
      a
      result of any of the foregoing, our revenues may decrease and our expenses
      may
      increase substantially.




***Changes
      in government regulation or industry standards applicable to the Internet could
      decrease the demand for our services and increase our costs of doing business.***




Our
      business is subject to existing laws and regulations that have been applied
      to
      Internet communications, commerce and advertising. New laws and regulations
      may
      restrict specific Internet activities, and existing laws and regulations may
      be
      applied to Internet activities, either of which could increase our costs of
      doing business over the Internet and adversely affect the demand for our
      advertising services. In the United States, federal and state laws already
      apply
      or may be applied in the future to areas, including children’s privacy,
      copyrights, taxation, user privacy, search engines, Internet tracking
      technologies, direct marketing, data security, pricing, sweepstakes, promotions,
      intellectual property ownership and infringement, trade secrets, export of
      encryption technology, acceptable content and quality of goods and services.




The
      European Union has adopted directives that may limit our ability to collect
      and
      use information regarding Internet users in Europe. The effectiveness of our
      Dynamic Revenue Optimization algorithm and database configuration could be
      limited by any regulation restricting the collection or use of information
      regarding Internet users. Furthermore, due to the global nature of the Internet,
      it is possible that although our transmissions originate in particular states,
      governments of other states or foreign countries might attempt to regulate
      our
      transmissions or levy sales or other taxes relating to our activities. In
      addition, the growth and development of the market for Internet commerce may
      prompt calls for more stringent consumer protection laws, both in the United
      States and abroad, that may impose additional burdens on companies conducting
      business over the Internet. Such legislation, if adopted, could hinder the
      growth in the use of the Internet generally and decrease the acceptance of
      the
      Internet as a communications, commercial and advertising medium.




16




In
      addition to government regulation, privacy advocacy groups and the technology
      and direct marketing industries may consider various new, additional or
      different self-regulatory standards applicable to the Internet. Governments,
      trade associations and industry self-regulatory groups may enact more burdensome
      laws, regulations and guidelines, including consumer privacy laws, affecting
      our
      clients, publishers and us, which could harm our business by increasing
      compliance costs or limiting the scope of our business.




***We
      have a history of losses and we have an accumulated deficit of $63.4
      million.***




We
      incurred net losses of $3.8 million, or one-quarter the amount of our revenues,
      for the year ended December 31, 2006, and $1.5 million, or one-third the amount
      of our revenues, for the year ended December 31, 2003. As of December 31, 2006,
      our accumulated deficit was $63.4 million. Even though we achieved profitability
      in the fiscal years ended December 31, 2005 and 2004, we may be unable to return
      to profitability on a quarterly or annual basis in the future. In the three
      months ended December 31, 2006 we incurred net operating losses of approximately
      $1.5 million. It is possible that our revenues will grow more slowly than we
      anticipate or that operating expenses will exceed our expectations.




***We
      may need additional financing at some point in the future, without which we
      may
      be required to restrict or discontinue our
      operations.***




We
      anticipate that our available cash resources will be sufficient to meet our
      currently anticipated capital expenditures and working capital requirements
      for
      the next twelve calendar months. In the event our cash from operations does
      not
      meet or exceed our capital expenditure and working capital requirements, we
      may
      need to raise additional funds to continue operation, significantly reduce
      our
      operating expenses or a combination of both. In addition, we may need to raise
      additional funds to develop or enhance our services or products, fund expansion,
      respond to competitive pressures or acquire businesses or technologies.
      Unanticipated expenses, poor financial results or unanticipated opportunities
      that require financial commitments could give rise to earlier financing
      requirements. If we raise additional funds through the issuance of equity or
      convertible debt securities, the percentage ownership of our existing
      shareholders would be reduced, and these securities might have rights,
      preferences or privileges senior to those of our common stock. Additional
      financing may not be available on terms favorable to the Company, or at all.
      If
      adequate funds are not available or are not available on acceptable terms,
      our
      ability to fund our expansion, take advantage of business opportunities, develop
      or enhance services or products or otherwise respond to competitive pressures
      would be significantly limited, and we might need to significantly restrict
      or
      discontinue our operations.




***Our
      quarterly operating results are uncertain and may fluctuate significantly,
      which
      could negatively affect the value of our share price.***




Our
      operating results have varied significantly from quarter to quarter in the
      past
      and may continue to fluctuate. For example, during the year ended December
      31,
      2006, the percentage of annual revenues attributable to the first, second,
      third
      and fourth quarters were 19.5%, 21.0%, 30.3% and 29.2%, respectively and for
      the
      year ended December 31, 2005, the percentage of annual revenues attributable
      to
      the first, second, third and fourth quarters were 24.2%, 28.2%, 24.4% and 23.2%,
      respectively.




Our
      limited operating history under our new business model also makes it difficult
      to ascertain the effects of seasonality and cyclicality on our business. You
      should not rely on period-to-period comparisons of our operating results as
      an
      indication of our future performance. Factors that may affect our quarterly
      operating results include the following:




·
            the
                addition of new clients or publishers or the loss of existing clients
                or
                publishers;




·
            the
                addition of new services or the limitation or loss of existing services;




17




·
            changes
                in demand and pricing for our services;




·
            changes
                in the volume, cost and quality of publisher and email database inventory
                available to us;




·
            the
                timing and amount of sales and marketing expenses incurred to attract
                new
                advertisers and publishers;




·
            changes
                in our pricing policies, the pricing policies of our competitors
                or the
                pricing of Internet advertising generally;




·
            changes
                in governmental regulation of the Internet itself or advertising
                on the
                Internet;




·
            changes
                in the health of the overall economy;




·
            timing
                differences at the end of each quarter between our payments to publishers
                and our collection of related revenues from advertisers; and




·
            predicted
                or unpredicted costs related to operations and corporate activities.




Because
      our business continues to change and evolve, our historical operating results
      may not be useful in predicting our future operating results. In addition,
      advertising spending has historically been cyclical in nature, reflecting
      overall economic conditions as well as budgeting and customer acquisition
      patterns. For example, in 1999 and 2000, advertisers spent heavily on Internet
      advertising. This was followed by a lengthy downturn in Internet ad spending.
      We
      also shifted the focus of our business from being web site-based to
      network-based during this period, which caused our revenues to decline below
      the
      expectations of securities analysts and investors as a web site-based business.
      Furthermore, spending by some advertisers tends to be seasonal, with larger
      portions of their ad budgets dedicated to customer acquisition efforts in the
      third and fourth quarters of the calendar year. We anticipate that cyclicality
      and seasonality of our business will continue in the future causing our
      operating results to fluctuate.





For
      these
      reasons, comparing our operating results on a period-to-period basis may not
      be
      meaningful, and you should not rely on past results as an indication of future
      performance. Quarterly and annual expenses as a percentage of revenues may
      be
      significantly different from historical or projected rates. These lower
      operating results may cause a decrease in our stock price.




***We
      may be liable for content in the advertisements we deliver for our clients
      resulting in unanticipated legal costs.***




We
      may be
      liable to third parties for content in the advertising we deliver if the
      artwork, text or other content involved violates copyrights, trademarks or
      other
      third-party intellectual property rights or if the content is defamatory.
      Although substantially all of our contracts include both warranties from our
      advertisers that they have the right to use and license any copyrights,
      trademarks or other intellectual property included in an advertisement and
      indemnities from our advertisers in the event of a breach of such warranties,
      a
      third party may still file a claim against us. Any claims by third parties
      against us could be time-consuming, could result in costly litigation and
      adverse judgments. Such expenses would increase our costs of doing business
      and
      reduce our net income per share. In addition, we may find it necessary to limit
      our exposure to such risks by accepting fewer or more restricted advertisements
      leading to loss of revenue.




18




***The
      loss of the services of any of our executive officers or key personnel would
      likely cause our business to suffer.***




Our
      future success depends to a significant extent on the efforts and abilities
      of
      our senior management and certain key employees. The loss of the services of
      any
      of these individuals could result in harm to key client or publisher
      relationships, loss of key information, expertise or know-how and unanticipated
      recruitment and training costs. Circumstances that may lead to a loss of such
      individuals include his recruitment and hiring by an entity inside or outside
      the industry, his voluntary termination of employment to pursue alternative
      career or personal opportunities, and the illness or death of the individual
      or
      a member of his immediate family. We may be unable to attract, motivate and
      retain other key employees in the future. We have, in the past, and may in
      the
      future, experienced difficulty in hiring qualified personnel. We do not have
      employment agreements with any of our key personnel, nor do we have key-person
      insurance for any of our employees. The loss of the services of our senior
      management or other key employees could make it more difficult to successfully
      operate our business and pursue our business goals.




***Decreased
      effectiveness of equity compensation could adversely affect our ability to
      attract and retain employees and changes in accounting rules will adversely
      affect our earnings.***




We
      have
      historically used stock options as a key component of our total employee
      compensation program in order to align employees’ interests with the interests
      of our stockholders, encourage employee retention, and provide competitive
      compensation packages. Volatility or lack of positive performance in our stock
      price may adversely affect our ability to retain key employees, all of who
      have
      been granted stock options, or attract additional highly qualified personnel.
      Recently granted outstanding employee stock options have exercise prices in
      excess of our current stock price. To the extent these circumstances continue
      or
      recur, our ability to retain present employees may be adversely affected. In
      addition, the Financial Accounting Standards Board has adopted changes to
      Generally Accepted Accounting Principles that will require an expense to be
      recorded for employee stock option grants and other equity incentives, as of
      January 1, 2006. And applicable Nasdaq stock exchange listing standards require
      stockholder approval of equity compensation plans, which will make amending
      current stock option plans to accommodate equity incentive arrangements with
      reduced expense potential more expensive, time consuming and, ultimately,
      uncertain. As a result, in addition to recording additional compensation
      expense, we may incur increased compensation costs, change our equity
      compensation strategy or find it difficult to attract, retain and motivate
      employees, any of which could materially adversely affect our business.




***Acquisitions
      could result in operating difficulties, dilution and other harmful consequences.***




We
      have
      limited experience acquiring companies. The companies we have acquired have
      been
      small. We have evaluated in the past, and may in the future evaluate, potential
      strategic transactions. Any of these transactions could be material to our
      financial condition and results of operations. In addition, the process of
      integrating an acquired company, business or technology may create unforeseen
      operating difficulties and expenditures and may not provide the benefits
      anticipated. The areas where we may face risks include ***:***





·
            difficulties
                integrating operations, personnel, technologies, products and information
                systems of acquired businesses;




·
            potential
                loss of key employees of acquired businesses;




·
            adverse
                effects on our results of operations from acquisition-related charges
                and
                amortization of goodwill and purchased
                technology;




·
            increased
                fixed costs, which could affect profitability;




19




·
            inability
                to maintain the key business relationships and the reputations of
                acquired
                businesses;




·
            potential
                dilution to current shareholders from the issuance of additional
                equity
                securities;




·
            inability
                to maintain our standards, controls, procedures and
                policies;




·
            responsibility
                for liabilities of companies we acquire; and




·
            diversion
                of management’s attention from other business
                concerns.




Also,
      the
      anticipated benefit of an acquisition may not materialize. Future acquisitions
      could result in the incurrence of debt or write-offs of goodwill. For example,
      our acquisition of XmarksTheSpot.com, Inc. in late 2000 was completed for $1.5
      million in cash, the issuance of 349,202 shares of additional common stock,
      and
      the assumption of $300,000 in outstanding liabilities. The acquisition also
      caused the consumption of our Chief Executive Officer’s, Chief Financial
      Officer’s and General Counsel’s attention at a time of mounting external
      challenges for the company. Subsequently, during 2001, $1.7 million of
      intangible assets recorded related to this acquisition were written
      off.




Incurring
      any of the stated difficulties could result in increased costs and decreased
      revenue. Future acquisitions may require us to obtain additional equity or
      debt
      financing, which may not be available on favorable terms or at all.




***Since
      our stock price is volatile, your ability to sell shares of our stock held
      by
      you at a profit may be impaired, and we may become subject to securities
      litigation that is expensive and could result in a diversion of
      resources.***




The
      market price of our common stock has fluctuated in the past and is likely to
      continue to be highly volatile. Factors affecting the stability of our stock
      price include the limited number of shares held by holders who are not deemed
      company “insiders” (i.e. executive management, directors and holders of in
      excess of 10% of the issued and outstanding shares of common stock), the limited
      trading volume of our common stock on the Nasdaq National Market, the limited
      size of the public market for our common stock, and speculative buying and
      selling of our common stock. In addition, as of December 31, 2006, our employees
      and outside directors held vested options to purchase a total of approximately
      1.6 million shares of our common stock. Significant sales of our common stock
      by
      a significant number of our employees and directors as a result of option
      exercises, could adversely impact the price of our common stock. As a result,
      it
      may be difficult to sell shares of our common stock at a profit. Furthermore,
      securities class action litigation has often been brought against companies
      that
      experience volatility in the market price of their securities. Litigation
      brought against us could result in substantial costs to us in defending against
      the lawsuit and a diversion of management’s attention that could result in
      higher expenses and lower revenue, which may, in turn, further diminish the
      value of your investment.




***The
      chairman of our board of directors holds a substantial portion of our stock,
      which could limit your ability to influence the outcome of key transactions,
      including changes of control.***




As
      of
      December 31, 2006, Mr. Choate beneficially owned approximately 20.1% of our
      issued and outstanding common stock. As a result, the ability of our other
      shareholders to influence matters requiring approval by our shareholders,
      including the election of directors and the approval of mergers or similar
      transactions, could be limited.




20




***Our
      articles of incorporation, bylaws, change in control agreements and the
      Washington Business Corporation Act contain anti-takeover provisions that could
      discourage or prevent a takeover, even if an acquisition would be beneficial
      to
      our shareholders.***




Provisions
      of our amended and restated articles of incorporation, our bylaws, change in
      control agreements we have entered into with certain of our executive officers,
      and our Shareholder Rights Plan, which provides for the dilutive issuance of
      shares in the event of a hostile takeover bid or similar transaction, could
      make
      it more difficult for a third party to acquire us, even if doing so would be
      beneficial to our shareholders. These provisions include:




·
            authorizing
                the issuance of “blank check” preferred stock that could be issued by our
                board of directors, without shareholder approval, to increase the
                number
                of outstanding shares or change the balance of voting control and
                thwart a
                takeover attempt;




·
            prohibiting
                cumulative voting in the election of directors, which would otherwise
                allow less than a majority of shareholders to elect directors;




·
            declaration
                of a dividend distribution of preferred share purchase rights and
                adoption
                of a Rights Plan in March 2002, which would discourage a change of
                control
                attempt without the approval of the Board of Directors;
                and




·
            under
                change in control agreements between the company and each of Messrs.
                Choate, Wade, Davis, Nelson, Wrubel, Benz and Mayor in the event
                of a sale
                or merger of the company that results in the termination of the
                executive’s employment, the executive will receive a severance payment
                equal to six months of his base salary (Messrs. Benz and Mayor),
                eight
                months of his base salary (Messrs. Wrubel, Wade, Davis and Nelson)
                or
                one-year of his base salary (Mr. Choate).. As of December 31, 2006,
                the
                aggregate total of such severance payments equals approximately $880,000.
                In addition, 100% of the unvested portion of any stock options held
                by the
                individual executive at the time of his termination will automatically
                vest and become exercisable.




Chapter
      23B.19 of the Washington Business Corporation Act imposes restrictions on
      transactions between corporations and significant shareholders unless such
      transactions are approved by a majority of the corporation’s board of directors
      prior to the time that such shareholders acquire 10% or more of the outstanding
      stock. In addition, under the terms of our stock option plan a change of control
      will trigger accelerated vesting of options unless the acquiring company assumes
      the options or grants comparable options. These factors may discourage, delay
      or
      prevent a change in control, which certain shareholders may favor.




***An
      increase in the number of orders on our network may strain our systems or those
      of our third-party service providers, and we are vulnerable to system
      malfunctions or failures.***




Any
      serious or repeated problems with the performance of our network could lead
      to
      the dissatisfaction of consumers, our clients or our publishers. The order
      volume on our network is expected to increase over time as we seek to expand
      our
      client, consumer and publisher base. The proprietary and third-party systems
      that support our network must be able to accommodate an increased volume of
      traffic. Although we believe our systems and those of our third-party hosting
      service providers in their current configuration can accommodate at least five
      times current order volumes, our network has, in the past, experienced slow
      response times and brief outages. Slow response times and outages can be caused
      by technical problems with our Internet service providers, denial of service
      attacks, network router, firewall or switch failures, database server failures,
      storage area network failures, and natural disasters. Except for a four-hour
      system failure caused by a computer hardware malfunction at our Internet service
      provider in early 2004, we have not experienced any system failures or slow
      downs exceeding two hours in length. We may experience similar problems in
      the
      future that could interrupt traffic on our network and lead to the loss of
      fees.
      In addition, if we experience a high volume of interruptions, advertisers may
      choose to use other providers, leading to a decrease in revenue.




21




Substantially
      all of our contracts specifically exclude liability resulting from computer
      hardware or software failures, third-party systems malfunctions and Internet
      connectivity failure. Furthermore, except for a very limited number of publisher
      contracts, we do not guarantee system availability or “up time” in any of our
      contracts. However, a third party may still file a claim against us. Any claims
      by third parties against us could be time-consuming, could result in costly
      litigation and adverse judgments and could require us to modify or upgrade
      our
      operating systems and infrastructure.




***In
      the future we may need to increase the capacity of our operating systems and
      infrastructure to grow our business.***




We
      may
      need in the future to improve and upgrade our operating systems and
      infrastructure in order to support the growth of our operations. Without such
      improvements, our operations might suffer from slow delivery times, unreliable
      service levels or insufficient capacity, any of which could negatively affect
      our reputation and ability to attract and retain advertising clients and
      publishers. We may be unable to expand our systems in a timely fashion, which
      could limit our ability to grow. In addition, the expansion of our systems
      and
      infrastructure will require us to commit financial, operational and technical
      resources before the volume of business the upgraded systems and infrastructure
      are designed to handle materializes. There can be no assurance that the volume
      of business will, in fact, increase. If we improve and upgrade our systems
      and
      the volume of our business does not increase to support the costs, our margins
      may decrease or disappear entirely.




***If
      our users request products and services directly from our clients instead of
      requesting the product or service through us, our revenues may
      decline.***




Our
      advertising clients and/or publishers may offer the same free, trial or
      promotional products or services on their own web sites that we offer via our
      advertising network. Users may choose to request products or services directly
      from our advertising clients and/or publishers instead of requesting the product
      or service through us. Our publisher agreements generally include a
      non-solicitation clause that prohibits our publishers from soliciting the
      business of our advertising clients directly while the publisher is under
      contract with us. However, our client agreements do not contain any restrictions
      on the client’s ability to solicit users directly or through other publishers or
      offer networks. If this happens, our revenues could decline or fail to grow
      and
      our profitability could be adversely affected.




***We
      may need to incur litigation expenses in order to defend our intellectual
      property rights, and might nevertheless be unable to adequately protect these
      rights.***




We
      may
      need to engage in costly litigation to enforce our intellectual property rights,
      to protect our trade secrets or to determine the validity and scope of the
      intellectual property rights of others. We can give no assurance that our
      efforts to prevent misappropriation or infringement of our intellectual property
      will be successful. An adverse determination in any litigation of this type
      could require us to make significant changes to the structure and operation
      of
      our services and features or to license alternative technology from another
      party. Implementation of any of these alternatives could be costly and
      time-consuming and may not be successful. Any intellectual property litigation
      would likely result in substantial costs and diversion of resources and
      management attention.




Our
      success largely depends on our trademarks, including “Aptimus,” and internally
      developed technologies, including our opt-in serving business method, which
      includes computer-driven offer rotation and implementation, consumer order
      collection, consumer order processing and lead generation, that we seek to
      protect through a combination of patent, trademark, copyright and trade secret
      laws. Protection of our proprietary business method and trademarks is crucial
      as
      we attempt to build our proprietary advantage, brand name and reputation.
      Despite actions we take to protect our intellectual property rights, it may
      be
      possible for third parties to copy or otherwise obtain and use our intellectual
      property without authorization or to develop similar intellectual property
      independently. In addition, legal standards relating to the validity,
      enforceability and scope of protection of intellectual property rights in
      Internet-related businesses are uncertain and still evolving. In the event
      that
      our pending non-provisional business method patent application is granted,
      we
      may experience difficulty entering this patent. The scope of business method
      patent and the activities that may be deemed to infringe on such patent is
      not
      as clearly defined as device patent rights. As a result, we may face additional
      difficulty enforcing such rights if granted. Although we are not currently
      engaged in any lawsuits for the purpose of defending our intellectual property
      rights, we may need to engage in such litigation in the future. Moreover, we
      may
      be unable to maintain the value of our intellectual property rights in the
      future.




22




***We
      could become involved in costly and time-consuming disputes regarding the
      validity and enforceability of recently issued or pending
      patents.***




The
      Internet, including the market for e-commerce and online advertising, direct
      marketing and promotion, is characterized by a rapidly evolving legal landscape.
      A variety of patents relating to the market have been recently issued. Other
      patent applications may be pending and yet other patent applications may be
      forthcoming. We have a pending non-provisional business method patent
      application before the United States Patent and Trademark Office and have made
      appropriate filings with certain foreign regulatory bodies preserving our patent
      rights in their jurisdictions, which we intend to prosecute. The patent
      application has been submitted to secure patent rights to our offer serving
      business method, which includes computer-driven, randomized offer rotation
      and
      implementation, consumer order collection, consumer order processing and lead
      generation. We intend to vigorously prosecute the patent application process,
      which may entail substantial expense and management attention.




We
      are
      not presently engaged in any patent-related disputes, nor have we ever been
      accused of infringing another’s patent rights. However, we may incur substantial
      expense and management attention may be diverted if litigation ever does occur.
      Moreover, whether or not claims against us have merit, we may be required to
      enter into license agreements or be subject to injunctive or other equitable
      relief, either of which would result in unexpected expenses that would affect
      our profitability or management distraction that would reduce the time
      management can devote to operational issues.




***We
      may face litigation and liability for information displayed on our network
      or
      that was formerly delivered in an email.***




We
      may be
      subjected to claims for defamation, negligence, copyright or trademark
      infringement and various other claims relating to the nature and content of
      materials we publish on our offer distribution network or distribute by email.
      These types of claims have been brought, sometimes successfully, against online
      services in the past. We could also face claims based on the content that is
      accessible from our network through links to other web sites. In addition,
      we
      may be subject to litigation based on laws and regulations concerning commercial
      email resulting from our discontinued email business. Any litigation arising
      from these claims would likely result in substantial costs and diversion of
      resources and management attention, and an unsuccessful defense to one or more
      such claims could result in material damages and/or injunctive or other
      equitable relief. We have no insurance coverage for these types of claims.




***Security
      and privacy breaches could subject us to litigation and liability and deter
      consumers from using our network.***




While
      we
      employ security measures typical of our industry, including encryption
      technology, we could be subject to litigation and liability if third parties
      penetrate our network security or otherwise misappropriate our users’ personal
      or credit card information. This liability could include claims for unauthorized
      purchases with credit card information, impersonation or other similar fraud
      claims. It could also include claims for other misuses of personal information,
      such as for unauthorized marketing purposes. In addition, the Federal Trade
      Commission and other federal and state agencies have investigated various
      Internet companies in connection with their use of personal information. We
      could be subject to investigations and enforcement actions by these or other
      agencies. In addition, we license on a very limited basis customer names and
      street addresses to third parties. Although we provide an opportunity for our
      customers to remove their names from our user list, we nevertheless may receive
      complaints from customers for these license arrangements.




23




The
      need
      to transmit confidential information securely has been a significant barrier
      to
      electronic commerce and communications over the Internet. Any compromise of
      security could deter people from using the Internet in general or, specifically,
      from using the Internet to conduct transactions that involve transmitting
      confidential information, such as purchases of goods or services. Many marketers
      seek to offer their products and services on our distribution network because
      they want to encourage people to use the Internet to purchase their goods or
      services. Internet security concerns could frustrate these efforts. Also, our
      relationships with consumers may be adversely affected if the security measures
      we use to protect their personal information prove to be ineffective. We cannot
      predict whether events or developments will result in a compromise or breach
      of
      the technology we use to protect customers’ personal information. We have no
      insurance coverage for these types of claims. In addition to direct losses
      from
      claims, if consumers are leery of using our system, we may not be able to
      attract advertisers to our network leading to a decline in
      revenues.




Furthermore,
      our computer servers or those of our third-party service providers, if any,
      may
      be vulnerable to computer viruses, physical or electronic break-ins and similar
      disruptions. We may need to expend significant additional capital and other
      resources to protect against a security breach or to alleviate problems caused
      by any such breaches. We may be unable to prevent or remedy all security
      breaches. If any of these breaches occur, we could lose marketing clients,
      distribution publishers and visitors to our distribution network resulting
      in a
      decline in revenues and, ultimately, profitability.




***Failure
      to timely collect amounts due pursuant to outstanding accounts receivable would
      have a negative impact on our cash position.***




Pursuant
      to our arrangements with our publishers, we make payments for leads generated
      on
      their web sites representing up to 100% of the total amount due prior to
      collecting fees from our advertising clients with respect to such fees. In
      the
      event that we are unable to collect payments due from a substantial number
      of
      our advertising clients in a reasonable time frame, we may be unable to make
      payments when due to our publisher or to other creditors and we may need to
      seek
      short-term financing or other financing means. Any failure to collect amounts
      due in a timely manner would adversely affect our cash position and increase
      our
      costs of operating to the extent we are required to borrow funds to cover any
      shortfalls.




***Consolidation
      among Internet publishers may result in a reduction in available inventory
      for
      ad placement and may increase the pricing power of publishers resulting in
      increased operating expenses.***




While
      we
      believe that the number of websites available for ad placement will continue
      to
      grow, many of the higher traffic sites have experienced consolidation over
      the
      past few years. If significant consolidation of attractive sites continues
      to
      occur, we may face additional difficulties in obtaining high value placements
      for our clients as a result of increased competition for limited space. If
      we
      are unable to provide high value placement to our clients, they may choose
      to
      use the services of a competitor, resulting in lower revenue. In addition,
      large
      publishers may have additional pricing power with respect to ad placement on
      their sites requiring increased expenditures without the guaranty of a
      concomitant increase in revenue. Any such occurrence would negatively impact
      profitability.




***We
      may not achieve the levels of revenues anticipated if our Dynamic Revenue
      Optimization system does not function as anticipated.***




Our
      Dynamic Revenue Optimization system is designed to measure every offer in every
      ad position on a revenue generation basis. Then, the offers with greater
      revenues for that specific position should automatically receive more exposure
      there, while lower performing offers receive less exposure. If the Dynamic
      Revenue Optimization system performs as expected, the analytics should be
      continuously updated to quickly identify the performance of new offers and
      to
      adjust and improve the performance of every placement. Revenues per offer are
      determined based on response rate to each offer in each position multiplied
      by
      the fee for that response, whether the advertiser is paying a fee per click,
      a
      fee per lead, a fee per acquisition or based on any other measurable outcome.
      In
      the event that the Dynamic Revenue Optimization system fails to properly place
      advertisements as anticipated or otherwise does not function as anticipated,
      our
      revenue may not achieve anticipated levels and our profitability may
      suffer.




24




***In
      the event that we suffer a catastrophic data loss, our ability to effectively
      utilize the Dynamic Revenue Optimization system and provide our advertising
      clients user information would be compromised resulting in decreased
      revenue.***




Our
      Dynamic Revenue Optimization system relies on historical data regarding consumer
      response to offers to adjust placement of ads in an attempt to maximize revenue
      generated. In the event that we suffer a catastrophic loss of data due to a
      failure of storage devices, or otherwise, the effectiveness of the Dynamic
      Revenue Optimization system would be substantially reduced until we are able
      to
      recapture the lost data. In addition, if we lose consumer data prior to
      providing it to advertising clients, we will be unable to collect fees with
      respect to such lost leads. Any such event would result in an interruption
      in
      our activities and a loss of revenue.




***We
      have a limited operating history as an advertising network business and a
      relatively new business model in an emerging and rapidly evolving market. This
      makes it difficult to evaluate our future prospects and may increase the risk
      of
      your investment.***




We
      first
      derived revenue from our advertising network business in late 2000. However,
      our
      advertising revenues were not 100% attributable to our results-based advertising
      network model until the second quarter of 2002. We introduced our current
      technology platform on which our model is based in June of 2002. Furthermore,
      the balance between our network publisher and former email distribution channels
      changed significantly in the past years reflecting both the public’s negative
      perception of commercial email solicitation, as well as our concerted efforts
      to
      expand our network of web site publishers during this period. And we suspended
      indefinitely our email business in its entirety in the fourth quarter of 2005.
      As a result, we have relatively little operating history as a results-based
      advertising network business for you to evaluate in assessing our future
      prospects. Also, we derive substantially all of our revenues from online
      advertising, which is an immature industry that that continues to undergo rapid
      and dramatic change. You must consider our business and prospects in light
      of
      the risks and difficulties we will encounter with a relatively immature business
      model in a new and rapidly evolving market. As a result, management may need
      to
      devote substantial time and effort to refining our business model. Such efforts
      may distract it from other aspects of our business such as growing the publisher
      base or attracting more advertising clients. In addition, due to the changes
      in
      our business model, our historic financial statements provide very limited
      guidance as to the current structure of our business, particularly the financial
      statements predating the second half of 2002.




**RISKS
      RELATED TO OUR INDUSTRY**




***If
      the acceptance of online advertising and online direct marketing does not
      increase, our business will suffer.***




The
      demand for online marketing may not develop to a level sufficient to support
      our
      continued operations or may develop more slowly than we expect. We derive all
      of
      our revenues from contracts with advertiser clients under which we provide
      online marketing services through our offer distribution network. The Internet
      has not existed long enough as a marketing medium to demonstrate its
      effectiveness relative to traditional marketing methods. Advertisers that have
      historically relied on traditional marketing methods may be reluctant or slow
      to
      adopt online marketing. Many advertisers have limited or no experience using
      the
      Internet as a marketing medium. In addition, advertisers that have invested
      substantial resources in traditional methods of marketing may be reluctant
      to
      reallocate these resources to online marketing. Those companies that have
      invested a significant portion of their marketing budgets in online marketing
      may decide after a time to return to more traditional methods if they find
      that
      online marketing is a less effective method of promoting their products and
      services than traditional marketing methods. Moreover, the Internet-based
      companies that have adopted online marketing methods may themselves develop
      more
      slowly than anticipated or not at all. This, in turn, may result in slower
      growth in demand for the online direct marketing services of the type we
      provide.




25




We
      do not
      know if accepted industry standards for measuring the effectiveness of online
      marketing, particularly of the cost per action model most commonly used by
      us,
      will develop. An absence of accepted standards for measuring effectiveness
      could
      discourage companies from committing significant resources to online marketing.
      Moreover, advertisers may determine that the cost per action pricing model
      is
      less effective in achieving, or entirely fails to achieve, their marketing
      objectives. If the market for Internet advertising fails to continue to develop,
      develops more slowly than we expect, or rejects our primary cost per action
      pricing model, our ability to place offers and generate revenues could be
      harmed.




***If
      we are unable to adapt to rapid changes in the online marketing industry, our
      revenues and profitability will suffer.***




Online
      marketing is characterized by rapidly changing technologies, frequent new
      product and service introductions, short development cycles and evolving
      industry standards. We may incur substantial costs to modify our services or
      infrastructure to adapt to these changes and to maintain and improve the
      performance, features and reliability of our services. We may be unable to
      successfully develop new services on a timely basis or achieve and maintain
      market acceptance. In the event our efforts are unsuccessful, we may be unable
      to recover the costs of such upgrades and, as a result, our profitability may
      suffer.




***We
      face risks from potential government regulation and other legal uncertainties
      relating to the Internet.***




Laws
      and
      regulations that apply to Internet communications, commerce and advertising
      are
      becoming more prevalent. The adoption of such laws could create uncertainty
      in
      use of the Internet and reduce the demand for our services, or impair our
      ability to provide our services to clients. Congress has enacted legislation
      regarding children’s privacy on the Internet. In addition, the federal Control
      the Assault of Non-Solicited Pornography and Marketing Act of 2003 (the “CAN
      SPAM Act”), which regulates commercial email practices in the United States, was
      signed into law in December 2003. Additional laws and regulations may be
      proposed or adopted with respect to the Internet covering issues such as user
      privacy, freedom of expression, pricing, content and quality of products and
      services, taxation, advertising, intellectual property rights and information
      security. Passage of the CAN SPAM Act, which preempts state laws regulating
      commercial email, certainly has eliminated some uncertainty in respect to our
      discontinued commercial email practices caused by the various, often conflicting
      state laws. The Act’s effect on our future business will be limited in scope and
      more likely positive than negative to the extent it makes our network business
      more attractive to advertisers and publishers alike, but it may still impact
      any
      legacy claims arising from our former email business as well as any new business
      opportunities we may elect to pursue in the future in respect to data licensing
      and rental. The passage of legislation regarding user privacy or direct
      marketing on the Internet may reduce demand for our services or limit our
      ability to provide customer information to marketers. Furthermore, the growth
      of
      electronic commerce may prompt calls for more stringent consumer protection
      laws. For example, the European Union has adopted a directive addressing data
      privacy that may result in limits on the collection and use of consumer
      information. The adoption of consumer protection laws that apply to online
      marketing could create uncertainty in Internet usage and reduce the demand
      for
      our services, or impair our ability to provide those services to
      clients.




26




In
      addition, we are not certain how our business may be affected by the application
      of existing laws governing issues such as property ownership, copyrights,
      encryption and other intellectual property issues, taxation, libel, obscenity
      and export or import matters. It is possible that future applications of these
      laws to our business could reduce demand for our services or increase the cost
      of doing business as a result of litigation costs or increased service delivery
      costs.




Our
      services are available on the Internet in many states and foreign countries,
      and
      these states or foreign countries may claim that we are required to qualify
      to
      do business in their jurisdictions. Currently, we are qualified to do business
      only in Washington and California. Our failure to qualify in other jurisdictions
      if we were required to do so could subject us to taxes and penalties and could
      restrict our ability to enforce contracts in those jurisdictions.




**Item
      1B.** ***Unresolved
      Staff Comments***




Not
      applicable




**Item
      2:** ***Properties***




We
      currently occupy 4,200 square feet in a leased facility in Seattle, Washington
      and 17,806 square feet in a leased facility in San Francisco, California. The
      current lease in Seattle expires in May 2009 and the current lease in San
      Francisco expires in September 2011. The leased facilities are adequate for
      our
      current needs.




**Item
      3:** ***Legal
      Proceedings***




We
      are
      not engaged in any material litigation at this time.




**Item
      4:** ***Submission
      of Matters to a Vote of Security Holders***




No
      matters were submitted for a vote of our shareholders during the fourth quarter
      of 2006.




27




**PART
      II**




**Item
      5:** ***Market
      For Our Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities***




**Price
      Range of Common Stock**




Our
      Common Stock was quoted on the Nasdaq National Market (now the Nasdaq Global
      Market) under the symbol “FSHP” from our initial public offering on September
      27, 1999 through October 23, 2000. From October 24, 2000 through September
      30,
      2002, the Common Stock was quoted on the Nasdaq Global Market under the symbol
      “APTM.” From October 1, 2002 to March 6, 2003, the Common Stock was quoted on
      the Nasdaq Small-Cap Market (now the Nasdaq Capital Market) under the symbol
      “APTM.” From March 7, 2003 through March 16, 2005, the Common Stock was traded
      on the OTCBB under the symbol “APTM.” As of March 17, 2005, the Common Stock has
      traded on the Nasdaq Global Market under the symbol “APTM.” Prior to September
      27, 1999, there was no public market for our common stock. The following table
      shows the high and low closing sale prices for our common stock as reported
      on
      the Nasdaq Blobal Market, the Nasdaq Capital Market and the OTCBB for the
      periods indicated:




**High**
            
            **Low****Year
                Ended December 31, 2005**First
                quarter
            
            $
            27.00
            
            $
            16.90Second
                quarter
            
            $
            22.24
            
            $
            12.96Third
                quarter
            
            $
            20.79
            
            $
            12.30Fourth
                quarter
            
            $
            14.09
            
            $
            6.15**Year
                Ended December 31, 2006**First
                quarter
            
            $
            7.77
            
            $
            4.58****Second
                quarter
            
            $
            8.90
            
            $
            5.46Third
                quarter
            
            $
            8.81
            
            $
            6.02****Fourth
                quarter
            
            $
            8.54
            
            $
            6.11




As
      of
      March 12, 2007, **** there
      were approximately 113 holders of record of the Common Stock and 6,587,719
      shares of the Common Stock outstanding. The number of holders of record is
      calculated excluding individual participants in securities positions listings.
      The closing price of our shares on March 12, 2007, was $4.27.




We
      have
      never paid cash dividends on the Common Stock and do not intend to pay cash
      dividends on the Common Stock in the foreseeable future. Our board of directors
      intends to retain any earnings to provide funds for the operation and expansion
      of our business.




We
      made
      no repurchases of our Common Stock during the fiscal year ended December 31,
      2006.




**Recent
      Sales of Unregistered Securities**




None




**Item
      6:** ***Selected
      Financial Data***




The
      following selected consolidated financial data should be read in conjunction
      with our audited consolidated financial statements and related notes thereto
      and
      with Management’s Discussion and Analysis of Financial Condition and Results of
      Operations, which are included elsewhere in this Form 10-K. The consolidated
      statement of operations data for the years ended December 31, 2006, 2005
      and 2004, and the selected consolidated balance sheet data as of
      December 31, 2006 and 2005 are derived from, and are qualified by reference
      to, the audited consolidated financial statements and are included in this
      Form
      10-K. The consolidated statement of operations data for the years ended
      December 31, 2003 and 2002 and the consolidated balance sheet data as of
      December 31, 2004, 2003 and 2002 are derived from audited consolidated
      financial statements which are not included in this Form 10-K.





28




**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**(in
                thousands, except per share data)**Consolidated
                Statement of Operations Data:**Revenues
            
            $
            15,198
            
            $
            15,894
            
            $
            13,993
            
            $
            4,571
            
            $
            2,915Operating
                expenses:Cost
                of revenues
            
            
            8,107
            
            
            7,316
            
            
            6,262
            
            
            1,436
            
            
            1,013Sales
                and marketing (1)
            
            
            6,217
            
            
            3,598
            
            
            2,316
            
            
            1,288
            
            
            1,974Connectivity
                and network costs (1)
            
            
            953
            
            
            865
            
            
            812
            
            
            1,023
            
            
            1,312Research
                and development (1)
            
            
            1,040
            
            
            658
            
            
            615
            
            
            527
            
            
            559General
                and administrative (1)
            
            
            2,462
            
            
            2,004
            
            
            1,564
            
            
            1,423
            
            
            1,695Depreciation
                and amortization
            
            
            509
            
            
            356
            
            
            256
            
            
            315
            
            
            1,305Lease
                renegotiation costs and abandonment of
              leasehold
                improvements
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            478Other
                operating expenses
            
            
            —
            
            
            95
            
            
            —
            
            
            37
            
            
            105Total
                operating expenses
            
            
            19,288
            
            
            14,892
            
            
            11,825
            
            
            6,049
            
            
            8,441Operating
                income (loss)
            
            
            (4,090
            )
            
            1,002
            
            
            2,168
            
            
            (1,478
            )
            
            (5,526
            )Interest
                expense
            
            
            64
            
            
            —
            
            
            35
            
            
            41
            
            
            24Interest
                income
            
            
            354
            
            
            261
            
            
            33
            
            
            8
            
            
            46Gain
                on warrant liability
            
            
            —
            
            
            89
            
            
            —
            
            
            —
            
            
            —Other
                income (expense), net
            
            
            —
            
            
            —
            
            
            40
            
            
            —
            
            
            —Net
                income (loss)
            
            $
            (3,800
            )
            $
            1,352
            
            $
            2,126
            
            $
            (1,511
            )
            $
            (5,504
            )Net
                income (loss) per share:Basic
            
            $
            (0.58
            )
            $
            0.21
            
            $
            0.38
            
            $
            (0.35
            )
            $
            (1.35
            )Diluted
            
            $
            (0.58
            )
            $
            0.18
            
            $
            0.30
            
            $
            (0.35
            )
            $
            (1.35
            )Weighted
                average shares outstanding:Basic
            
            
            6,541
            
            
            6,351
            
            
            5,630
            
            
            4,333
            
            
            4,073Diluted
            
            
            6,541
            
            
            7,578
            
            
            7,182
            
            
            4,333
            
            
            4,073





(1)
      Amounts include share-based compensation as follows:





**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**Sales
                and marketing
            
            $
            631
            
            $
            —
            
            $
            —
            
            $
            1
            
            $
            3Connectivity
                and network
            
            
            28
            
            
            —
            
            
            —
            
            
            —
            
            
            —Research
                and development
            
            
            46
            
            
            —
            
            
            —
            
            
            —
            
            
            —General
                and administrative
            
            
            82
            
            
            —
            
            
            —
            
            
            103
            
            
            8Total
                share-based compensation
            
            $
            787
            
            $
            —
            
            $
            —
            
            $
            104
            
            $
            11




29




**As
                of December 31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****Consolidated
                Balance Sheet Data:**Cash
                and cash equivalents
            
            $
            3,757
            
            $
            4,349
            
            $
            3,610
            
            $
            2,368
            
            $
            667Working
                capital
            
            
            3,368
            
            
            11,737
            
            
            4,591
            
            
            2,457
            
            
            698Total
                assets
            
            
            14,720
            
            
            13,827
            
            
            7,206
            
            
            3,975
            
            
            1,941Current
                Liabilities
            
            
            5,101
            
            
            1,341
            
            
            2,006
            
            
            996
            
            
            709Long-term
                obligations, less current portion
            
            
            —
            
            
            —
            
            
            —
            
            
            267
            
            
            —Total
                shareholders’ equity
            
            
            9,619
            
            
            12,486
            
            
            5,200
            
            
            2,712
            
            
            1,232




30




**Item
      7:** ***Management’s
      Discussion And Analysis Of Financial Conditions And Results Of
      Operations***




**OVERVIEW**





We
      are a
      results-based advertising network that distributes advertisements for direct
      marketing advertisers across a network of third-party web sites. For
      advertisers, the Aptimus Network offers an Internet-based distribution channel
      to present their advertisements to users on web sites. Advertisers pay us only
      for the results that we deliver. We then share a portion of the amounts we
      bill
      our advertiser clients with third-party web site owners or “publishers” on whose
      web properties we distribute the advertisements.




At
      the
      core of the Aptimus Network is a database configuration and software platform
      and direct marketing approach for which we have filed a non-provisional business
      method patent application called Dynamic Revenue OptimizationTM.





High
      Voltage Interactive, is an online marketing firm specializing in recruitment
      and
      enrollment solutions for the higher education marketplace. High Voltage focuses
      in the education category and they manage marketing solutions and lead
      generation programs for education clients. The High Voltage network manages
      a
      targeted network of publishers and affiliates focused on career and education.




**Acquisition
      and Comparability of Operations**





Our
      results of operations for the year ended December 31, 2006 include the results
      of High Voltage Interactive (HVI) from the date of acquisition (August 17,
      2006)
      through December 31, 2006. The results of HVI must be factored into any
      comparison of our 2006 results of operations to 2005 results. See Note 3 of
      our
      consolidated financial statements for pro forma financial statements as if
      HVI
      had been acquired on January 1, 2005.




**Focus
      in current year**





A
      continued key focus of ours has been expanding both the number of publishers
      along with the number of offers in our network. In addition, we are continually
      looking to increase the quality of leads delivered, measured by the resultant
      end value for our advertising clients. We have two separate teams which manage
      our network sales. Our Business Development employees job is to focus
      exclusively adding new publishers to our point of action network and expanding
      our existing relationships with current publishers. Our Sales team’s focus is to
      add new and compelling client offers into the Aptimus network and also mange
      existing accounts.





The
      key
      factors impacting revenues in the current year when compared to the previous
      year were the reduction in the RPM, or revenues per thousand impressions,
      generated from our network. This is in response to meeting our client’s needs of
      higher quality leads delivered to them. In order to meet their needs we decided
      to terminate a number of the web sites that we previously worked with. The
      result was that we had a decrease in impression volumes from the more
      promotionally oriented publishers that were in our network during 2005. Moving
      forward, Aptimus intends to focus developing distribution relationships with
      the
      entities within the “top 100” list of publishers, which we have found tend to
      generate higher quality of leads for our clients. Also, because we are publisher
      concentrated at this stage of our development, we expect our impression volumes
      will remain tied to the seasonality of the individual publishers for the
      foreseeable future. In addition to improving the quality of user impressions
      in
      our network through improved publisher quality, we have spent a considerable
      effort during the 2006 improving lead quality through enhanced data validation
      processes. We intend to continue this focus in 2007 and beyond.




31




**Concentrations**





Our
      lead
      volumes are concentrated among a limited number of top performing publishers.
      For the year ended December 31, 2006, 2005 and 2004, user leads from our top
      five largest website publishers accounted for 48.8%, 29.4% and 45.7% of our
      total revenues, respectively. For the year ended December 31, 2006, user leads
      from the largest publisher accounted for 21.2% of revenues and no other
      publisher accounted for more than 10% of total revenues. For the year ended
      December 31, 2005, user leads from the largest publisher accounting for 10.6%
      of
      revenues and no other publisher accounted for more than 10% of total revenues.
      For the year ended December 31, 2004, user leads the largest publisher accounted
      for 23.7%of revenues and no other publisher accounted for more than 10% of
      total
      revenues. We expect that the concentration of revenue among our five largest
      website publishers will decrease over time as a result of our continued focus
      to
      expand the number of publishers in our network. While our goal is to expand
      the
      number of publishers and reduce the concentration of revenue from any one
      publisher, we anticipate that a limited number of publishers collectively will
      continue to account for a significant portion of our lead volume for the
      foreseeable future.





For
      the
      year ended December 31, 2006, 2005 and 2004 our ten largest clients accounted
      for 55.9%, 50.0% and 63.9% of our revenues, respectively. During the year ended
      December 31, 2006 no client accounted for more than 10% of our revenues. During
      the year ended December 31, 2005 Adteractive accounted for 10.2% of our revenues
      and no other client accounted for more than 10% of our revenues. During the
      year
      ended December 31, 2004 Advertising.com accounted for 20.2% of our revenues
      and
      Quinstreet accounted for 12.3% of our revenues. No other client accounted for
      more than 10% of our revenues. We expect our revenues in the immediate future
      to
      be similarly concentrated at 2006 levels and to be composed of a similar mix
      of
      large and small advertiser clients.





**Other
      information**





In
      late
      2005, we initiated a focused drive to improve lead quality and customer
      conversion for our advertising clients. To this end, we terminated relationships
      with publishers with lower quality traffic and added or enhanced a number of
      automated data validation processes that screen in real time the lead data
      a
      user submits before that lead is passed on to our advertisers. We also directed
      considerable energy in the year toward building distribution relationships
      with
      name brand and high quality web sites. Going forward, to support enhanced lead
      quality and attract new and larger advertisers and budgets, Aptimus will
      continue to expand our technology and validation capabilities, add innovative
      product solutions, as well as develop focused marketing strategies around
      specific targeted verticals such as www.euniversitydegree.com and High Voltage’s www.searchforclasses.com education site. We will also continue pursuing distribution relationships with
      name brand and high quality publishers.




On
      March
      9, 2006, the Company’s board of directors repriced the strike price of certain
      option grants issued to certain employees and directors in 2005, including
      Rob
      Wrubel, Director and President, Bob Bejan, Director, senior members of the
      Company’s sales and business development groups, and other employees. The
      original strike price of the grants that were affected by the repricing ranged
      from $14.45 to $17.50. The new strike price was set at $7.00. A total of 31
      individuals representing 364,275 option shares were affected by the repricing.
      The repricing of 364,275 stock option grants resulted in share-based
      compensation of $153,000 in the three months ended March 31, 2006 period. No
      future expense was incurred as a result of repricing these options as the full
      repricing cost was fully incurred in the three months ended March 31, 2006
      period. Under paragraph 51 of 123R and illustration 12(a), paragraph A149-A150
      of FAS 123R states that - a modification of the exercise price of the options
      will result in recognition of additional expense in the period the grant is
      modified. The Incremental cost was measured as the excess, if any, of the fair
      value of the modified award determined in accordance with this Statement over
      the fair value of the original award immediately before its terms are modified,
      measured based on the share price and other pertinent factors at that date.
      In
      addition, the board of directors authorized the grant of 70,000 option shares
      to
      Mr. Wrubel, and the grant of an additional 65,000 to certain other senior
      members of the Company’s sales and business development groups. Each of these
      grants had a strike price of $4.58 and vest over a four-year period from the
      date of grant.




32




**RESULTS
      OF OPERATIONS**




**Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005**




*Revenues.* We
      derive
      our revenues primarily from response-based advertising contracts. Leads are
      obtained through promoting our clients’ offers across our Aptimus Network of web
      site publishers. Revenues generated through network publishers are recorded
      on a
      gross basis in accordance with Emerging Issues Task Force Issue Number 99-19
      (EITF 99-19). Fees paid to network publishers related to these revenues are
      shown as Cost of revenues on the Statement of Operations.




Revenue(In
                thousands, except percentages)
            
            2006
            
            2005
            
            Percentage
                Increase (Decrease)Year
                ended December 31,
            
            $
            15,198
            
            $
            15,894
            
            
            (4.4
            )%




Year
                Ended December 31,Revenue
                Per Thousand Impression (RPM)
              (In
                thousands, except percentages and RPM data)
            
            2006
            
            2005
            
            Percentage
                Increase (Decrease)Overall
                placement RPM
            
            $
            57.51
            
            $
            68.89
            
            
            (16.5
            )%Overall
                placement page impressions
            
            
            264,080
            
            
            209,929
            
            
            25.8
            %Core
                placement RPM
            
            $
            218.91
            
            $
            243.70
            
            
            (10.2
            )%Core
                placement page impressions
            
            
            40,399
            
            
            47,367
            
            
            (14.7
            )%Other
                placement RPM
            
            $
            31.14
            
            $
            17.96
            
            
            73.4
            %Other
                placement page impressions
            
            
            203,750
            
            
            162,561
            
            
            25.3
            %





Revenues
      have decreased $696,000 from 2005. The company suspended email operations at
      the
      end of 2005. During 2005 there was approximately a $1.4 million of revenue
      derived from email. This decrease was partially offset by an $800,000 increase
      in the revenues derived from the High Voltage acquisition, that occured in
      the
      middle of the third quarter of 2006, and website distribution revenues. Overall
      network impressions increased by 25.8% to 264 million from 210 million in 2005.
      Overall Placement RPM’s were reduced to $57.51 in 2006 from $68.89 in 2005, or
      16.5%, due to the increased focus on non core type placements. Core placements
      are defined in our network as offers presented typically in the middle of a
      process such as placing an offer in the middle of a website registration
      process. Whereas non-core placements are typically placed at the beginning
      or
      end of an active process such as a log in or thank you page. Offers that are
      placed in the middle of a process will be noticed by the internet user as the
      user is trying to complete a process and is therefore paying attention to each
      page so that the user can complete the desired process. Because of the nature
      of
      this placement, the conversion rate of a user selecting an offer is much higher
      in a core type placement. Since a non-core type placement is typically placed
      at
      the end of a process, the likelihood of the offer being paid attention to drops
      off significantly since the user does not have to pay such close attention
      to
      the offer. During the 2006 year, we found that our technical solution works
      very
      well for Publishers in non-core type placements as they can replace static
      Banner type advertising with a lead generation model. In addition, since the
      non
      core type placements tend to be of a less invasive nature, publishers appreciate
      the improved user experience for their consumers. Although these locations
      have
      historically been considered non-core, our future focus will be increased on
      these less invasive placements. Moving forward, we will be blending core and
      non
      core impressions and will just report on overall page and RPM
      metrics.




33




For
      the
      year ended December 31, 2006, our average RPM for our core placements decreased
      to $219 per thousand impressions compared to $244 for the comparable period
      in
      2005. The RPM rate for our core placements decreased by 10%, year over year,
      due
      to our efforts to increase the quality of our leads. We focused on higher
      quality during 2006 and a major way to do this was to terminate certain
      publisher relationships that although were delivering a higher RPM, we learned
      that were delivering a lower quality lead than desired by our clients. Quality,
      from a client perspective, is the return on their advertising investment
      spending. Our average revenue per thousand impressions for our other placements
      for the year ended December 31, 2006 increased to $23 from $18 for the
      comparable period of 2005. As we applied our technical solution, DRO, to these
      other placements we found that we could greatly increase upon the existing
      results for our publishers in these locations. As a result of our increased
      attention in the non-core area, we were able to increase the effective results
      of our RPM rate.





The
      number of page impressions for core placements for the year ending December
      31,
      2006 decreased to 40.4 million, compared to 47.4 million, for the comparable
      period in 2005. The primary reasons for the reduction in core impressions was
      our effort to terminate certain publisher relationships with promotionally
      oriented publishers, coupled with a shift in focus to placements located in
      high
      volume, less intrusive traffic flows. The number of page impressions for other
      placements for the year ending December 31, 2006 increased to 203.7 million,
      compared to 162.6 million, for the comparable period in 2005. We believe
      long-term opportunity lies in designing user friendly advertising products
      and
      have focused our technology and business development efforts accordingly. With
      an evolving suite of products that work well in higher traffic, less intrusive
      traffic flows and a growing publisher base eager to introduce our solution
      to
      their high traffic inventories, our future focus will be expanding what we
      have
      to date termed other type impressions and limiting efforts to maintain and
      expand more cumbersome and intrusive core impressions. Accordingly, in the
      future we will aggregate our core and non core impressions into one placement
      metric, and expect the average RPM will be closer to the current blended
      averages. However, levels over the long term might fluctuate quarter-to-quarter
      depending on the mix of publishers added to our network and the specific
      placements within those publishers as well as the mix and relative values of
      our
      offer inventory.





Our
      plan
      remains to continue our efforts to expand our network with new distribution
      publishers, client offers and product types and placements. We expect that
      these
      efforts will result in growth in our revenues.





*Cost
      of revenues* .
      Cost of
      revenues consists of fees to web site publishers and email list owners
      participating in our network.




(In
                thousands, except percentages)
            
            2006
            
            %
                of
              revenue
            
            2005
            
            %
                of
              revenue
            
            Percentage
              IncreaseYear
                Ended December 31,
            
            $
            8,107
            
            
            53.3
            %
            $
            7,316
            
            
            46.0
            %
            
            10.8
            %





Cost
      of
      revenues as a percentage of revenues has increased 7.3% from 46.0% in 2005
      to
      53.3% in 2006. The primary reason for the increase is a result of an increase
      in
      the average rate paid out to our website publishers. This increase is also
      partially a result of the Email programs that were indefinitely suspended during
      2005. The effective rate at which revenues were shared for email-based revenue
      was lower than that of website network based revenues. So, as email revenues
      were nearly zero in the current year and $1.4 million in the prior year, the
      percentage of revenue paid to our publishers increased. During late 2005 and
      2006, we also experimented with paying network publishers on a cost per thousand
      impressions basis, which has contributed to the increase in costs as a
      percentage of revenue for the year. Cost of revenues for 2007 is expected to
      normalize at around 52% to 55% of revenues.





*Sales
      and Marketing.* Sales
      and
      marketing expenses consist primarily of marketing and operational personnel
      costs, bad debts, and outside sales costs.




34




(In
                thousands, except percentages)
            
            2006
            
            %
                of
              revenue
            
            2005
            
            %
                of
              revenue
            
            Percentage
              IncreaseYear
                Ended December 31,
            
            $
            6,217
            
            
            40.9
            %
            $
            3,598
            
            
            22.6
            %
            
            55.3
            %





The
      increase in sales and marketing expenses was a result of the hiring of
      additional personnel, increases in overall commission costs and share-based
      compensation. These items accounted for 61%, 10% and 23% of the increase in
      sales and marketing expense, respectively. During 2006, the average number
      of
      sales and marketing employees increased by approximately 9 people, many of
      whom
      were senior level employees. In addition to this there were also annual pay
      raises during the year. Commission plans were also changed during the year
      to
      remain competitive, causing an increase in commission expense. The share-based
      compensation increase is a result of adopting FAS 123(R) effective January
      1,
      2006. Prior to the 2006 year, share-based compensation costs were not generally
      recognized in the income statement. Going forward, sales and marketing costs
      are
      expected to decrease 15% as a result of cost cutting measures implemented from
      December 2006 through January 2007.





*Connectivity
      and Network Costs.* Connectivity and network costs consist of expenses associated with the
      maintenance and usage of our network as well as email delivery costs. Such
      costs
      include Internet connection charges, hosting facility costs, email delivery
      costs and personnel costs.





(In
                thousands, except percentages)
            
            2006
            
            %
                of
              revenue
            
            2005
            
            %
                of
              revenue
            
            Percentage
              IncreaseYear
                Ended December 31,
            
            $
            953
            
            
            6.3
            %
            $
            865
            
            
            5.4
            %
            
            6.9
            %





This
      increase was the result of increased labor costs, increased connectivity costs,
      share-based compensation costs, and a decrease in outside services. These items
      accounted for 69%, 51%, 32% and (77%) of the change in connectivity and networks
      costs, respectively. Increased labor costs resulted form annual pay increases
      and the full-year cost of an employee hired half-way through 2005. Increased
      connectivity costs are a result of the addition of a redundant collocation
      facility in 2006 that will provide additional back up capabilities. The
      share-based compensation is a result of adopting FAS 123(R) January 1, 2006.
      Prior to the 2006 year share-based compensation costs were not generally
      recognized in the income statement. The decrease in outside services results
      primarily from approximately $40,000 of costs incurred in the prior year for
      email delivery consulting services, which were not incurred in the current
      year.
      Connectivity and network costs for 2007 are expected to be slightly higher
      than
      levels in 2006 as a result of annual pay increases and general price
      increases.




*Research
      and Development.* Research
      and development expenses primarily consist of personnel costs related to
      maintaining and enhancing the features, content and functionality of our Web
      sites, network and related systems.





(In
                thousands, except percentages)
            
            2006
            
            %
                of
              revenue
            
            2005
            
            %
                of
              revenue
            
            Percentage
              IncreaseYear
                Ended December 31,
            
            $
            1,040
            
            
            6.8
            %
            $
            658
            
            
            4.1
            %
            
            51.1
            %





This
      increase in research and development expense was due High Voltage research
      and
      development costs, an increase in labor costs and share-based compensation.
      High
      Voltage was acquired in August of 2006 and as part of the acquisition included
      approximately six development staff. The increase in labor costs was due
      primarily to pay increases. The share-based compensation is a result of adopting
      FAS 123(R) January 1, 2006. Prior to the 2006 year share-based compensation
      costs were not generally recognized in the income statement. Research and
      development expense for 2007 is expected to be slightly higher than levels
      in
      2006 as a result of annual pay increases and general price
      increases.




35




*General
      and Administrative.* General
      and administrative expenses primarily consist of management, financial and
      administrative personnel expenses and related costs and professional service
      fees.





(In
                thousands, except percentages)
            
            2006
            
            %
                of
              revenue
            
            2005
            
            %
                of
              revenue
            
            Percentage
              IncreaseYear
                Ended December 31,
            
            $
            2,462
            
            
            16.2
            %
            $
            2,004
            
            
            12.6
            %
            
            18.8
            %





There
      are
      six areas that account for the majority of the increase in general and
      administrative expense. These areas and the amount of the increase they account
      for or offset are as follows, in thousands:





Area
            
            Increase
                (offset)Labor
                and related costs
            
            $
            173Legal
                fees
            
            
            172High
                Voltage costs
            
            
            163Share-based
                compensation
            
            
            79Accounting
                and audit fees
            
            
            (62
            )Shareholder
                services
            
            
            (145
            )





Labor
      and
      related costs increased in the current year as a result of the hiring of a
      two
      new employees and pay increases. Legal fees in 2006 were substantially higher
      than in 2005 as a result of costs incurred related to the acquisition of High
      Voltage, investigating the potential acquisition of other companies, obtaining
      a
      line-of-credit, review by outside counsel of several publisher agreements and
      costs incurred to register and protect the Aptimus trade name in European
      countries. The business of High Voltage was acquired in August 2006. Significant
      general and administrative costs were incurred for High Voltage during the
      four
      and one-half months of included operations. The share-based compensation is
      a
      result of adopting FAS 123(R) January 1, 2006. Prior to the 2006 year
      share-based compensation costs were not generally recognized in the income
      statement. Accounting and audit fees were lower in 2006 as significant costs
      were incurred during 2005 to comply with Sarbanes Oxley Section 404
      requirements. Shareholder service costs were lower in 2006 compared to 2005
      as
      $200,000 was paid in 2005 to list Aptimus shares on the Nasdaq Global Market.
      General and administrative expense for 2007 is expected to be similar to levels
      in 2006 as a result of annual pay increases and general price increases offset
      by lower legal fees.





*Depreciation
      and Amortization.* Depreciation
      and amortization expenses consist of depreciation on leased and owned computer
      equipment, software, office equipment and furniture and amortization on
      intellectual property and purchased email lists.





(In
                thousands, except percentages)
            
            2006
            
            %
                of
              revenue
            
            2005
            
            %
                of
              revenue
            
            Percentage
              IncreaseYear
                Ended December 31,
            
            $
            509
            
            
            3.3
            %
            $
            356
            
            
            2.2
            %
            
            43
            %





Depreciation
      and amortization expense increased in 2006 as a result of the amortization
      of
      intangible assets related to the acquisition of High Voltage and as additional
      computer equipment and software was purchased. Amortization of intangible assets
      related to the acquisition of High Voltage accounted for approximately 54%
      of
      the increase in depreciation and amortization. We anticipate depreciation and
      amortization expense in 2007 to increase compared to 2006 because 2007 will
      include a full year of amortization for the High Voltage intangible assets
      and
      other computer equipment and software acquired in 2006.




36




*Other
      operating expense.* Other
      operating expense in 2005 consisted primarily of an impairment charge taken
      on
      the Neighbornet assets. No similar events occurred in 2006.





*Interest
      Expense.* Interest
      expense in the current year was incurred for four and one-half months from
      the
      line-of-credit established to facilitate the High Voltage acquisition. Interest
      expense is expected to increase slightly in 2007 due to the line of credit
      being
      outstanding for the entire year compared to only four and one-half months of
      2006.





*Interest
      Income.* Interest
      income results from earnings on our available cash reserves. Interest income
      totaled $354,000 in the year ended December 31, 2006 and $261,000 in 2005.
      The
      increase in interest income is primarily a result of increases in interest
      rates
      and continued investment of our excess cash reserves. Interest income is
      expected to be lower in 2007 as the average cash available for investment is
      expected to be lower in 2007 as compared to 2006.





*Income
      Taxes.* No
      provision for federal income taxes has been recorded for any of the periods
      presented due to taxable losses incurred in those years. The Company has
      provided full valuation allowances on the related net deferred tax assets
      because of the uncertainty regarding their realizability. As of December 31,
      2006, approximately $68.8 million of net operating losses remain for federal
      income tax reporting purposes. Current federal and California tax laws include
      substantial restrictions on the utilization of net operating losses and tax
      credits in the event of an ownership change of a corporation. Accordingly,
      the
      Company's ability to utilize net operating loss and tax credit carryforwards
      may
      be limited as a result of such ownership changes. Such a limitation could result
      in the expiration of carryforwards before they are utilized.





**Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004**




*Revenues.* We
      derive
      our revenues primarily from response-based advertising contracts. Leads are
      obtained through promoting our clients’ offers across our Aptimus Network of web
      site publishers and opt-in email lists. Revenues generated through network
      publishers and opt-in email list owners are recorded on a gross basis in
      accordance with Emerging Issues Task Force Issue Number 99-19 (EITF 99-19).
      Fees
      paid to network publishers and, formerly, opt-in email list owners related
      to
      these revenues are shown as Cost of revenues on the Statement of
      Operations.




Revenue
              (In
                thousands, except percentages)
            
            2005
            
            2004
            
            Percentage
              IncreaseYear
                ended December 31,
            
            $
            15,894
            
            $
            13,993
            
            
            13.6
            %





Year
                Ended December 31,Revenue
                Per Thousand Impression (RPM)
              (In
                thousands, except percentages and RPM data)
            
            2005
            
            2004
            
            Percentage
                Increase (Decrease)Core
                placement RPM
            
            $
            243.70
            
            $
            377.02
            
            
            (35.4
            )%Core
                placement page impressions
            
            
            47,367
            
            
            23,373
            
            
            102.7
            %Other
                placement RPM
            
            $
            17.96
            
            $
            20.24
            
            
            (11.3
            )%Other
                placement page impressions
            
            
            162,561
            
            
            133,737
            
            
            21.6
            %





The
      increase in revenue is primarily due to expansion of our Aptimus Network,
      including the addition of new web site distribution publishers thereby
      increasing our page impressions and corresponding user transactions, and the
      expansion of our advertiser client base. A primary focus for the company in
      2005
      was to continue expanding the number of publishers in our Network, thereby
      increasing the number of placements, both core and other, and corresponding
      page
      impressions. Offsetting the increase in website distribution publishers revenues
      was a reduction in the revenue derived from email activity for the year ended
      December 31, 2005. Email revenues decreased to $1.4, or 9% of total revenue,
      from $2.5 million, or 18% of total revenue, in 2004. This decrease both in
      total
      and as a percentage of overall revenue is primarily a result of growing
      resistance from ISPs and resulting deliverability challenges that made growth
      and stability in email uncertain. As discussed in the overview section in
      December of 2005 we indefinitely suspended our email channel as a vehicle for
      generating leads so that we could focus all of our attention and efforts on
      expansion of our network of website publishers.




37




For
      the
      year ended December 31, 2005, our average RPM for our core placements decreased
      to $244 per thousand impressions compared to $377 for the comparable period
      in
      2004. Our average revenue per thousand impressions for our other placements
      for
      the year ended December 31, 2005 decreased to $18 from $20 for the comparable
      period of 2004. The decrease in RPM rates for both our core and other placements
      resulted from our significant efforts in the current year to increase the
      back-end conversion, or quality from an advertiser perspective, of the leads
      being delivered to our clients. A primary change we made to effect client back
      end conversion quality was that during the second half of 2005 we ended multiple
      existing publisher relationships. We identified the sites in our network that
      had high impression volume yet had a user experience that involved a more
      promotion-oriented approach that, for our clients, delivered a lower quality
      user profile that failed to achieve back end conversion levels consistent with
      client expectations. We then looked to build the majority of our publisher
      network with impressions from non-promotional oriented sites that will yield
      a
      better lead for our clients. The number of page impressions for core placements
      and other placements for the year ending December 31, 2005 increased to 47.4
      million and 162.6 million, respectively, compared to 23.4 million and 133.7
      million, respectively, for the comparable period in 2004. The increase in page
      impressions was the result of adding more publishers to the Aptimus Network
      and
      adding additional placements within existing publisher websites.





*Cost
      of revenues* .
      Cost of
      revenues consists of fees to web site publishers and email list owners
      participating in our network.




(In
                thousands, except percentages)
            
            2005
            
            %
                of
              revenue
            
            2004
            
            %
                of
              revenue
            
            Percentage
              IncreaseYear
                Ended December 31,
            
            $
            7,316
            
            
            46.0
            %
            
            6,262
            
            
            44.8
            %
            
            16.8
            %





Cost
      of
      revenues has increased primarily as a result of the increase in total revenue.
      Cost of revenues have also increased on a percentage of revenue basis, as a
      result of the growth in web site network revenues compared to email based
      revenues. The effective rate at which we share revenues for email-based revenue
      is lower than that of website network based revenues. So, as email revenues
      declined year over year, the percentage of revenue paid to our publishers
      increased. During 2005, we also experimented with paying network publishers
      on a
      cost per thousand impressions basis, which has contributed to the increase
      in
      costs as a percentage of revenue for the year.





*Sales
      and Marketing.* Sales
      and
      marketing expenses consist primarily of marketing and operational personnel
      costs, bad debts, and outside sales costs.





(In
                thousands, except percentages)
            
            2005
            
            %
                of
              revenue
            
            2004
            
            %
                of
              revenue
            
            Percentage
              IncreaseYear
                Ended December 31,
            
            $
            3,598
            
            
            22.6
            %
            $
            2,316
            
            
            16.6
            %
            
            55.4
            %




38




The
      increase in sales and marketing expenses was a result of the hiring of
      additional personnel, costs of trade shows and their related marketing and
      travel expenses and outside services related to the operation of our email
      division, Neighbornet. These items accounted for 52.1%, 22.9% and 5.6% of the
      increase in expense, respectively. During 2005, the number of sales and
      marketing employees increased by 13 people. Also in 2005, we hosted a booth
      at
      three of the major direct marketing trade shows. We did not have a booth at
      any
      trade shows in 2004.





*Connectivity
      and Network Costs.* Connectivity and network costs consist of expenses associated with the
      maintenance and usage of our network as well as email delivery costs. Such
      costs
      include Internet connection charges, hosting facility costs, email delivery
      costs and personnel costs.





(In
                thousands, except percentages)
            
            2005
            
            %
                of
              revenue
            
            2004
            
            %
                of
              revenue
            
            Percentage
              IncreaseYear
                Ended December 31,
            
            $
            865
            
            
            5.4
            %
            $
            812
            
            
            5.8
            %
            
            6.5
            %





This
      increase was primarily the result of additional fees paid to outside vendors
      related to our quality initiative that has resulted in the addition of several
      new types of lead validations such as full lead confirm and call confirm
      validations. Data verification costs are unique to each specific offer in our
      network and will vary from month to month depending on the number of offers
      requiring this service





*Research
      and Development.* Research
      and development expenses primarily consist of personnel costs related to
      maintaining and enhancing the features, content and functionality of our Web
      sites, network and related systems.





(In
                thousands, except percentages)
            
            2005
            
            %
                of
              revenue
            
            2004
            
            %
                of
              revenue
            
            Percentage
              IncreaseYear
                Ended December 31,
            
            $
            658
            
            
            4.1
            %
            $
            615
            
            
            4.4
            %
            
            7.0
            %





This
      increase in research and development expense was primarily due to increases
      in
      labor costs. The increase in labor costs was due to the hiring of an additional
      developer in the first quarter of 2005.





*General
      and Administrative.* General
      and administrative expenses primarily consist of management, financial and
      administrative personnel expenses and related costs and professional service
      fees.





(In
                thousands, except percentages)
            
            2005
            
            %
                of
              revenue
            
            2004
            
            %
                of
              revenue
            
            Percentage
              IncreaseYear
                Ended December 31,
            
            $
            2,004
            
            
            12.6
            %
            $
            1,564
            
            
            11.2
            %
            
            28.1
            %





The
      majority, 98.9%, of the increase in general and administrative expense was
      due
      to increases in outside services related to compliance with Sarbanes Oxley
      and
      increases in audit fees.





*Depreciation
      and Amortization.* Depreciation
      and amortization expenses consist of depreciation on leased and owned computer
      equipment, software, office equipment and furniture and amortization on
      intellectual property and purchased email lists.




39




(In
                thousands, except percentages)
            
            2005
            
            %
                of
              revenue
            
            2004
            
            %
                of
              revenue
            
            Percentage
              IncreaseYear
                Ended December 31,
            
            $
            356
            
            
            2.2
            %
            $
            256
            
            
            1.8
            %
            
            39.6
            %





Depreciation
      and amortization expense increased in 2005 as additional computer equipment
      and
      software was purchased.





*Other
      operating expense.* Other
      operating expense primarily consists of an impairment charge taken on the
      Neighbornet assets that were acquired in May 2005.





*Interest
      Expense.* There
      is
      no interest expense in the current year, as the Company had no amounts
      outstanding under capital equipment leases or other debt
      instruments.





*Interest
      Income.* Interest
      income results from earnings on our available cash reserves. Interest income
      totaled $261,000 in the year ended December 31, 2005 and $33,000 in 2004. The
      increase in interest income is primarily a result of our improved cash position
      resulting from the proceeds from the sale of common stock in March 2005 and
      the
      positive cash flow generated by operations during 2005.





*Income
      Taxes.* No
      provision for federal income taxes has been recorded for any of the periods
      presented due to taxable losses incurred in those years. The Company has
      provided full valuation allowances on the related net deferred tax assets
      because of the uncertainty regarding their realizability. As of December 31,
      2005, approximately $65.9 million of net operating losses remain for federal
      income tax reporting purposes. Current federal and California tax laws include
      substantial restrictions on the utilization of net operating losses and tax
      credits in the event of an ownership change of a corporation. Accordingly,
      the
      Company's ability to utilize net operating loss and tax credit carryforwards
      may
      be limited as a result of such ownership changes. Such a limitation could result
      in the expiration of carryforwards before they are utilized.





**LIQUIDITY
      AND CAPITAL RESOURCES**




Since
      we
      began operating as an independent company in July 1997, we have financed our
      operations primarily through the issuance of equity securities. Net proceeds
      from the issuance of stock through December 31, 2006, totaled $73.4 million.
      As
      of December 31, 2006, we had approximately $3.8 million in cash and cash
      equivalents, providing working capital of $3.4 million. Other than the deferred
      tax asset, as described more fully below, no off-balance sheet assets or
      liabilities existed at December 31, 2006.




In
      August
      2006, the Company obtained a line-of-credit from a commercial bank, with a
      term
      of one year, which is renewable at the Company's option, and is secured by
      the
      Company's assets. The original line of credit allowed for draws up to the lesser
      of $5.0 million or 80% of eligible account receivable balances, generally those
      less than 90 days old. The line of credit was modified in November 2006 to
      reduce the eligible draws up to the lesser of $2.5 million or 80% of eligible
      account receivable balances, generally those less than 90 days old. The company
      used $2.8 million of the line to purchase High Voltage Interactive, Inc.
      Advances on the line bear interest, on the outstanding daily balance thereof,
      at
      a variable rate equal to :(i) one quarter of one percent (0.25%) above the
      Prime
      Rate if Company’s total cash maintained at the bank is less than $2.0 million,
      (ii) the Prime Rate if the Company’s total cash maintained at the bank is at
      least $2.0 million but less than $5.0 million and (iii) one quarter of one
      percent (0.25%) below the Prime Rate if the Company’s total cash maintained at
      the bank is greater than $5.0 million, 10.25% at December 31, 2006. Interest
      is
      payable monthly on the first calendar day of each month. As of December 31,
      2006
      $612,000 remained available under the revolving line-of-credit.




Net
      cash
      used in operating activities was $3.2 million during the year ended December
      31,
      2006. Net cash provided by operating activities was $1.3 million during the
      year
      ended December 31, 2005. Cash provided by (used in) operating activities
      consisted of (in thousands):




40




Years
                ended December 31,2006
            
            2005Cash
                received from customers
            
            $
            15,179
            
            $
            15,934Cash
                paid to employees and vendors
            
            
            (18,339
            )
            
            (14,791
            )Interest
                received
            
            
            102
            
            
            195Interest
                paid
            
            
            (64
            )
            
            —Net
                cash provided by (used in) operations
            
            $
            (3,182
            )
            $
            1,338





Net
      cash
      provided by (used in) investing activities was $556,000 and $($6.6 million)
      in
      the years ended December 31, 2006 and 2005, respectively. For the year ended
      December 31, 2006, $607,000 was used to acquire fixed assets, $5.2 million,
      net
      of cash acquired, was used to acquire the assets of High Voltage and $17.3
      million was used to acquire short-term investments. These uses of cash were
      offset by $23.7 million from the sale of short-term investments. For the year
      ended December 31, 2005, $438,000 was used to acquire fixed assets, $150,000
      was
      used to acquire the assets of Neighbornet, $9,000 was used to acquire intangible
      assets, and $6.0 million was used to acquire short-term
      investments.




Net
      cash
      provided by financing activities was $2.0 million and $6.0 million for the
      years
      ended December 31, 2006 and 2005, respectively. Net cash provided by financing
      activities during the year ended December 31, 2006 resulted from borrowing
      $2.8
      million under on a line-of-credit and $146,000 from the issuance of shares
      in
      connection with the exercise of options, warrants and the employee stock
      purchase plan. These sources of cash were offset by the repayment of $875,000
      under the line-of-credit. Net cash provided by financing activities during
      the
      year ended December 31, 2005 resulted from the sale of $6.0 million from the
      sale of stock in a private placement in March of 2005 and $287,000 from the
      issuance of stock in connection with the exercise of options, warrants and
      the
      employee stock purchase plan. These sources of cash were offset by the payment
      of $267,000 of costs related to the March 2005 private placement.




We
      believe our current cash and cash equivalents will be sufficient to meet our
      anticipated cash needs for working capital and capital expenditures for the
      next
      twelve calendar months. This is based on the balance of cash and cash
      equivalents at December 31, 2006. We currently anticipate spending $200,000
      to
      $300,000 on capital expenditures in 2007 in order to continue the expansion
      and
      improvements to our network infrastructure. Should our goal of returning to
      positive cash flow in 2007 not be met, we will need to raise additional capital,
      substantially reduce our operating expenses or a combination of both to meet
      our
      long-term operating requirements.




Our
      cash
      requirements depend on several factors, including the rate of market acceptance
      of our services and the extent to which we use cash for acquisitions and
      strategic investments. Although, no acquisitions or major strategic investments
      are currently planned, unanticipated expenses, poor financial results or
      unanticipated opportunities requiring financial commitments could give rise
      to
      earlier financing requirements. In addition, we do not currently anticipate
      any
      expenditure outside the ordinary course of business in pursuing the market
      strategies described in this annual report. If we raise additional funds through
      the issuance of equity or convertible debt securities, the percentage ownership
      of our shareholders would be reduced, and these securities might have rights,
      preferences or privileges senior to those of our common stock. Additional
      financing may not be available on terms favorable to us, or at all. If adequate
      funds are not available or are not available on acceptable terms, our ability
      to
      fund our expansion, take advantage of business opportunities, develop or enhance
      services or products or otherwise respond to competitive pressures would be
      significantly limited, and we might need to significantly restrict our
      operations.




The
      following table summarizes the contractual obligations and commercial
      commitments entered into by the Company (in thousands).




41




**Payments
                  Due by Period**
                **Year
                  ending December 31,**Contractual
                  Obligations
              
              Total
              
              **Less
                  than 1 year**
              
              **1-3
                  years**
              
              **3-5
                  years**
              
              **More
                  than 5 years**Operating
                  leases (1)
              
              $
              2,733
              
              $
              786
              
              $
              966
              
              $
              981
              
              $
              —Line-of-credit
                  (2)
              
              
              1,888
              
              
              1,888
              
              
              —
              
              
              —
              
              
              —Operating
                  agreements (3)
              
              
              80
              
              
              58
              
              
              22
              
              
              —
              
              
              —Total
                  Contractual Obligations
              
              $
              4,701
              
              $
              2,732
              
              $
              988
              
              $
              981
              
              $
              —


(1)  These
      commitments relate to the leasing of our offices in Seattle and San Francisco.
      We expect to fund these commitments with existing cash, cash flows from
      operations, and cash flows from sublease payments. Sublease payments expected
      to
      be received in 2007 are $159,000. No sublease payments are expected to be
      received after November 2007.




(2)  This
      commitment relates to balances due under a line of credit. We expect to fund
      this commitment with existing cash and cash flows from operations.




(3)  These
      commitments relate to connectivity and collocation contracts. We expect to
      fund
      these commitments with existing cash and cash flows from
      operations.




**OFF-BALANCE
      SHEET ARRANGEMENTS**




No
      off-balance sheet arrangements existed as of December 31, 2006.




**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**




Our
      significant accounting policies are described in Note 2 to the consolidated
      financial statements included in this annual report. We believe those areas
      subject to the greatest level of uncertainty are the recording of share-based
      compensation, the allocation of purchase price in acquisitions, the impairment
      of goodwill and other intangible assets, the valuation allowance for deferred
      tax assets, the allowance for doubtful accounts receivable. In addition to
      those
      areas subject to the greatest level of uncertainty, revenue recognition is
      also
      considered a critical accounting policy.




**Revenue
      Recognition**




The
      Company currently derives revenue from providing response-based advertising
      programs through a network of web site distribution publishers. The
      Company follows the provisions of SEC Staff Accounting Bulletin
      No. 104, *Revenue Recognition* .
      The
      Company recognizes revenue when all of the following conditions are
      met:




·
            There
                is persuasive evidence of an
                arrangement;


·
            The
                service has been provided to the
                customer;


·
            The
                collection of the fees is reasonably assured;
                and


·
            The
                amount of fees to be paid by the customer is fixed or
                determinable.




Revenue
      earned for response-based advertising through the Aptimus network is based
      on a
      fee per lead and is recognized when the lead information is delivered to the
      client. Revenue earned for email mailings can be based on a fee per lead, a
      percentage of revenue earned from the mailing, or a cost per thousand emails
      delivered. Revenue from email mailings delivered on a cost per thousand basis
      is
      recognized when the email is delivered. Revenues from email mailings sent on
      a
      fee per lead or a percentage of revenue earned from the mailing basis are
      recognized when amounts are determinable, generally when the customer receives
      the leads.




42




Revenues
      generated through network publishers and opt-in email list owners are recorded
      on a gross basis in accordance with Emerging Issues Task Force Issue Number
      99-19 (EITF 99-19). Fees paid to network publishers and opt-in email list owners
      related to these revenues are shown as Publisher fees on the Statement of
      Operations. Aptimus shares a portion of the amounts it bills its advertiser
      clients with the third-party web site owners or “publishers” and email list
      owners on whose web properties and email lists Aptimus distributes the
      advertisements. While this “revenue share” approach is Aptimus’ primary payment
      model, it will as a rare alternative pay web site owners either a fixed fee
      for
      each completed user transaction or a fee for each impression of an advertisement
      served on the web site. Email based campaigns that are sent to Company owned
      lists do not have publisher fees associated with them. Going forward, due to
      the
      indefinite suspension of our email business, we do not expect to generate or,
      consequently, share any email-related revenues.




The
      Company has evaluated the guidance provided by EITF 99-19 as it relates to
      determining whether revenue should be recorded gross or net for the payments
      made to network publishers and opt-in email list owners. The Company has
      determined the recording of revenues gross is appropriate based upon the
      following factors:




·
            Aptimus
                acts as a principal in these
                transactions;




·
            Aptimus
                and its customer are the only companies identified in the signed
                contracts;




·
            Aptimus
                and its customer are the parties who determine pricing for the
                services;




·
            Aptimus
                is solely responsible to the client for fulfillment of the
                contract;




·
            Aptimus
                bears the risk of loss related to
                collections




·
            Aptimus
                determines how the offer will be presented across the network;
                and




·
            Amounts
                earned are based on leads or emails delivered and are not based on
                amounts
                paid to publishers.




**Share-Based
      Compensation**




Effective
      January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based
      Payment” (“SFAS 123(R)”), which requires us to measure compensation cost for all
      outstanding unvested share-based awards at fair value and recognize compensation
      over the requisite service period for awards expected to vest. SFAS
      123(R) supersedes our previous accounting under Accounting Principles Board
      Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for
      periods beginning before January l, 2006. We adopted SFAS 123(R) using the
      modified prospective transition method, which requires the application of the
      accounting standard as of January 1, 2006, the first day of the Company’s fiscal
      year. Our consolidated financial statements as of and for the year ended
      December 31, 2006 reflect the impact of SFAS 123(R). In accordance with the
      modified prospective transition method, our consolidated financial statements
      for prior periods have not been restated to reflect, and do not include, the
      impact of SFAS 123(R).




The
      fair
      value of each option or stock appreciation award under the plans is estimated
      on
      the date of grant using the Black Scholes Merton option-pricing model. The
      risk-free rate used is based on the U.S. Treasury Constant Maturities for the
      applicable grant date and expected term. The
      estimation of stock awards that will ultimately vest requires judgment, and
      to
      the extent actual results differ from our estimates, such amounts will be
      recorded as a cumulative adjustment in the period estimates are revised. We
      consider several factors when estimating expected forfeitures, such as types
      of
      awards. Actual results may differ substantially from these estimates. In valuing
      shares-based awards, significant judgment is required in determining the
      expected volatility of our common stock and the expected term individuals will
      hold their share-based awards prior to exercising. Expected
      volatilities are based on the historical volatility of Aptimus common stock
      and
      other factors. The expected term of options granted is based on an analysis
      of
      historical exercise behavior and employee termination activity and represents
      the period of time that options granted are expected to be outstanding.




43





The
      fair
      value of stock options, as determined by the Black-Scholes option-pricing model,
      can vary significantly depending on the assumptions used.





**Business
      Combinations**





We
      are
      required to allocate the purchase price of acquired companies to the tangible
      and intangible assets acquired and liabilities assumed, based on their estimated
      fair values. We periodically engage third-party appraisal firms to assist us
      in
      determining the fair values of assets acquired and liabilities assumed. Such
      valuations require management to make significant estimates and assumptions,
      especially with respect to intangible assets. The significant purchased
      intangible assets recorded by us include customer relationships, trade names,
      trademarks, and customer lists. The fair values assigned to the identified
      intangible assets are discussed in detail in Note 3 to the Consolidated
      Financial Statements in Item 8.





Critical
      estimates in valuing certain intangible assets include but are not limited
      to:
      future expected cash flows from customer contracts and customer lists; trade
      name awareness and market position, as well as assumptions about the period
      of
      time the trade name will continue to be used in our product portfolio; and
      discount rates. Management’s estimates of fair value are based upon assumptions
      believed to be reasonable, but which are inherently uncertain and unpredictable
      and, as a result, actual results may differ from estimates.





Other
      estimates associated with the accounting for acquisitions may change as
      additional information becomes available regarding the assets acquired and
      liabilities assumed.




**Goodwill**





We
      review
      goodwill at least annually for impairment. Should certain events or indicators
      of impairment occur between annual impairment tests, we perform the impairment
      test of goodwill at that date. In testing for a potential impairment of
      goodwill, we: (1) allocate goodwill to our various reporting units to
      which the acquired goodwill relates; (2) estimate the fair value of our
      reporting units; and (3) determine the carrying value (book value) of those
      reporting, as some of the assets and liabilities related to those reporting
      are
      not held by those reporting units but by corporate headquarters. Furthermore,
      if
      the estimated fair value of a reporting unit is less than the carrying value,
      we
      must estimate the fair value of all identifiable assets and liabilities of
      the
      reporting unit, in a manner similar to a purchase price allocation for an
      acquired business. This can require independent valuations of certain internally
      generated and unrecognized intangible assets such as in-process research and
      development and developed technology. Only after this process is completed
      can
      the amount of goodwill impairment, if any, be determined.




The
      process of evaluating the potential impairment of goodwill is subjective and
      requires significant judgment at many points during the analysis. In estimating
      the fair value of a reporting unit for the purposes of our annual or periodic
      analyses, we make estimates and judgments about the future cash flows of that
      reporting unit. Although our cash flow forecasts are based on assumptions that
      are consistent with our plans and estimates we are using to manage the
      underlying businesses, there is significant exercise of judgment involved in
      determining the cash flows attributable to a reporting unit over its estimated
      remaining useful life. In addition, we make certain judgments about allocating
      shared assets to the estimated balance sheets of our reporting units. We also
      consider our and our competitor’s market capitalization on the date we perform
      the analysis. Changes in judgment on these assumptions and estimates could
      result in a goodwill impairment charge.




44




**Long-lived
      Assets**





We
      review
      our long-lived assets including fixed assets and identifiable intangible assets
      for indicators of impairment whenever events or changes in circumstances
      indicate that the carrying amount of the assets may not be fully recoverable.
      Determining if such events or changes in circumstances have occurred is
      subjective and judgmental. Should we determine such events have occurred, we
      then determine whether such assets are recoverable based on estimated future
      undiscounted net cash flows and fair value. If future undiscounted net cash
      flows and fair value are less than the carrying value of such asset, we write
      down that asset to its fair value.


We
      make
      estimates and judgments about future undiscounted cash flows and fair value.
      Although our cash flow forecasts are based on assumptions that are consistent
      with our plans, there is significant exercise of judgment involved in
      determining the cash flows attributable to a long-lived asset over its estimated
      remaining useful life. Our estimates of anticipated future cash flows could
      be
      reduced significantly in the future. As a result, the carrying amount of our
      long-lived assets could be reduced through impairment charges in the future.
      Additionally, changes in estimated future cash flows could result in a
      shortening of estimated useful lives for long-lived assets including
      intangibles.




**Valuation
      Allowance for Deferred Tax Assets**




SFAS
      109,
“Accounting for Income Taxes,” requires that deferred tax assets be evaluated
      for future realization and reduced by a valuation allowance to the extent we
      believe a portion will not be realized. We consider many factors when assessing
      the likelihood of future realization of our deferred tax assets including our
      recent cumulative earnings experience by taxing jurisdiction, expectations
      of
      future taxable income, the carry-forward periods available to us for tax
      reporting purposes, and other relevant factors. At December 31, 2006, our net
      deferred tax assets are $24.5 million. Currently a valuation allowance equal
      to
      the balance of the deferred tax assets has been recorded. This valuation
      allowance has been recorded, as the ability of the Company to utilize the
      deferred tax assets has not been assessed as being more likely than not.




Any
      change in the assessment of whether it is more likely than not that the deferred
      tax assets will be utilized will have a significant impact on the estimate
      of
      the valuation allowance.




**Allowance
      for Doubtful Accounts**




We
      maintain allowances for doubtful accounts for estimated losses resulting from
      the inability of our customers to pay their invoices to us in full. We regularly
      review the adequacy of our accounts receivable allowance after considering
      the
      size of the accounts receivable balance, each customer’s expected ability to
      pay, aging of accounts receivable balances and our collection history with
      each
      customer. We make estimates and judgments about the inability of customers
      to
      pay the amount they owe us which could change significantly if their financial
      condition changes or the economy in general deteriorates.  The
      estimate of allowance for doubtful accounts is comprised of two parts, a
      specific account analysis and a general reserve. Accounts where specific
      information indicates a potential loss may exist are reviewed and a specific
      reserve against amounts due is recorded. As additional information becomes
      available such specific account reserves are updated. Additionally, a general
      reserve is applied to the aging categories based on historical collection and
      write-off experience. As trends in historical collection and write-offs change,
      the percentages applied against the aging categories are updated.




**RECENT
      ACCOUNTING PRONOUNCMENTS**




In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, *Accounting for Uncertainty in Income Taxes,* (“FIN
      48”), which clarifies the accounting for uncertainty in income taxes recognized
      in an enterprise’s financial statements and prescribes a recognition threshold
      of whether it is more likely than not that a tax position will be sustained
      upon
      examination. Measurement of the tax uncertainty occurs if the recognition
      threshold has been met. FIN 48 also provides guidance on the recognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure, and transition. FIN 48 will be effective for fiscal years beginning
      after December 15, 2006. The Company is currently evaluating what the
      impact of the adoption of FIN 48 and believes it will not have a material impact
      on its financial position and results of operations.




45




In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (“SFAS
      No. 157”). The purpose of SFAS No. 157 is to define fair value, establish a
      framework for measuring fair value and enhance disclosures about fair value
      measurements. The measurement and disclosure requirements are effective
      beginning in the first quarter of the year ending December 31, 2008. The Company
      is currently assessing whether adoption of SFAS No. 157 will have an impact
      on
      its financial statements, but we do not expect the effect to be
      material.





**Item
      7A:** ***Quantitative
      and Qualitative Disclosures About Market Risk***




All
      of
      our cash is held in accounts that are not at fixed interest rates and therefore
      the fair value of these instruments is not affected by changes in market
      interest rates. As of December 31, 2006, we believe the reported amounts of
      cash
      equivalents to be reasonable approximations of their fair values. As a result,
      we believe that the market risk and interest risk arising from its holding
      of
      financial instruments is minimal.




46




**Item
      8** ***:
      Financial Statements and Supplementary Data***




**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





The
      following financial statements are filed as part of this Report:




**Page**Report
                of Independent Registered Public Accounting Firm
            48Consolidated
                Balance Sheets as of December 31, 2006 and 2005
            49Consolidated
                Statements of Operations for each of the three years in the period
                ended
                December 31, 2006
            50Consolidated
                Statements of Shareholders' Equity for each of the three years in
                the
                period ended December 31, 2006
            51Consolidated
                Statements of Cash Flows for each of the three years in the period
                ended
                December 31, 2006
            52Notes
                to Consolidated Financial Statements
            53







47




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





The
      Board
      of Directors and Shareholders of


Aptimus,
      Inc.





We
      have
      audited the accompanying consolidated balance sheets of Aptimus, Inc. as of
      December 31, 2006 and 2005 and the related consolidated statements of
      operations, shareholders’ equity and cash flows for each of the three years in
      the period ended December 31, 2006. Our audits also included the financial
      statement schedule listed in the Index at Item 15(a)(2). These consolidated
      financial statements and schedule are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these consolidated
      financial statements and schedule based on our audits.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Aptimus, Inc. as of
      December 31, 2006 and 2005 and the results of its operations and its cash
      flows for each of the three years in the period ended December 31, 2006, in
      conformity with U.S. generally accepted accounting principles. Also, in our
      opinion, the related financial statement schedule, when considered in relation
      to the basic consolidated financial statements taken as a whole, presents fairly
      in all material respects the information set forth therein.





As
      discussed in Note 2 to the consolidated financial statements, effective January
      1, 2006, Aptimus, Inc. changed its method of accounting for stock-based
      compensation in accordance with the guidance provided in Statement of Financial
      Accounting Standards No. 123 (revised 2004), *Share-Based
      Payment* .





/s/
      Moss
      Adams LLP


San
      Francisco, California


March
      30,
      2007





48




**APTIMUS,
      INC.**





**CONSOLIDATED
      BALANCE SHEETS**


**(in
      thousands)**




**December
                31,****2006**
            
            **2005****ASSETS**Cash
                and cash equivalents
            
            $
            3,757
            
            $
            4,349Accounts
                receivable, net
            
            
            3,953
            
            
            2,498Prepaid
                expenses and other current assets
            
            
            759
            
            
            140Marketable
                securities
            
            
            —
            
            
            6,091Total
                current assets
            
            
            8,469
            
            
            13,078Fixed
                assets, net
            
            
            901
            
            
            690Intangible
                assets, net
            
            
            2,026
            
            
            20Goodwill
            
            
            3,163
            
            
            —Other
                assets
            
            
            161
            
            
            39$
            14,720
            
            $
            13,827**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**Accounts
                payable
            
            $
            1,869
            
            $
            1,016Current
                portion of notes payable
            
            
            1,888
            
            
            —Accrued
                and other liabilities
            
            
            1,344
            
            
            325Total
                current liabilities
            
            
            5,101
            
            
            1,341Commitments
                and contingent liabilities (note 10)Shareholders’
                equity:Preferred
                stock, no par value; 10,000 shares authorized and none issued and
                outstanding at December 31, 2006 and 2005
            
            
            —
            
            
            —Common
                stock, no par value; 100,000 shares authorized, 6,566 and 6,528 issued
                and
                outstanding at December 31, 2006 and 2005, respectively
            
            
            69,369
            
            
            69,223Additional
                paid-in capital
            
            
            3,637
            
            
            2,850Accumulated
                deficit
            
            
            (63,387
            )
            
            (59,587
            )Total
                shareholders’ equity
            
            
            9,619
            
            
            12,486$
            14,720
            
            $
            13,827




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




49


**APTIMUS,
      INC.**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(in
      thousands, except per share data)**




**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004**Revenues
            
            $
            15,198
            
            $
            15,894
            
            $
            13,993Operating
                expenses:Cost
                of revenues
            
            
            8,107
            
            
            7,316
            
            
            6,262Sales
                and marketing (1)
            
            
            6,217
            
            
            3,598
            
            
            2,316Connectivity
                and network (1)
            
            
            953
            
            
            865
            
            
            812Research
                and development (1)
            
            
            1,040
            
            
            658
            
            
            615General
                and administrative (1)
            
            
            2,462
            
            
            2,004
            
            
            1,564Depreciation
                and amortization
            
            
            509
            
            
            356
            
            
            256Other
                operating expenses
            
            
            -
            
            
            95
            
            
            -Total
                operating expenses
            
            
            19,288
            
            
            14,892
            
            
            11,825Operating
                income (loss)
            
            
            (4,090
            )
            
            1,002
            
            
            2,168Interest
                expense
            
            
            (64
            )
            
            —
            
            
            (35
            )Gain
                on warrant liability
            
            
            —
            
            
            89
            
            
            —Interest
                income
            
            
            354
            
            
            261
            
            
            33Other
                income (expense), net
            
            
            —
            
            
            —
            
            
            (40
            )Net
                income (loss)
            
            $
            (3,800
            )
            $
            1,352
            
            $
            2,126Net
                income (loss) per share:Basic
            
            $
            (0.58
            )
            $
            0.21
            
            $
            0.38Diluted
            
            $
            (0.58
            )
            $
            0.18
            
            $
            0.30Weighted
                average shares outstanding:Basic
            
            
            6,541
            
            
            6,351
            
            
            5,630Diluted
            
            
            6,541
            
            
            7,575
            
            
            7,182





(1)
      Amounts include share-based compensation as follows (see Note 11)





**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004**Sales
                and marketing
            
            $
            631
            
            $
            —
            
            $
            —Connectivity
                and network
            
            
            28
            
            
            —
            
            
            —Research
                and development
            
            
            46
            
            
            —
            
            
            —General
                and administrative
            
            
            82
            
            
            —
            
            
            —Total
                share-based compensation
            
            $
            787
            
            $
            —
            
            $
            —




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




50




**APTIMUS,
      INC.**





**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**


**(in
      thousands)**





**Common
                stock****Shares**
            
            **Amount**
            
            **Additional
                Paid-in****Capital**
            
            **Accumulated****Deficit**
            
            **Total
                Shareholders’****Equity****Balances
                at December 31, 2003**
            
            
            5,213
            
            $
            63,098
            
            $
            2,679
            
            $
            (63,065
            )
            $
            2,712Costs
                related to issuance of stock
            
            
            —
            
            
            (168
            )
            
            —
            
            
            —
            
            
            (168
            )Issuance
                of shares under employee stock purchase program
            
            
            10
            
            
            44
            
            
            —
            
            
            —
            
            
            44Exercise
                of stock options and warrants
            
            
            369
            
            
            216
            
            
            —
            
            
            —
            
            
            216Conversion
                of Note Payable
            
            
            381
            
            
            305
            
            
            (35
            )
            
            —
            
            
            270Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            2,126
            
            
            2,126**Balances
                at December 31, 2004**
            
            
            5,973
            
            $
            63,495
            
            $
            2,644
            
            $
            (60,939
            )
            $
            5,200Issuance
                of stock, net of issuance costs
            
            
            351
            
            
            5,441
            
            
            203
            
            
            —
            
            
            5,644Issuance
                of shares under employee stock purchase program
            
            
            7
            
            
            95
            
            
            —
            
            
            —
            
            
            95Exercise
                of stock options and warrants
            
            
            197
            
            
            192
            
            
            —
            
            
            —
            
            
            192Disgorgement
                of profit
            
            
            —
            
            
            —
            
            
            3
            
            
            —
            
            
            3Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            1,352
            
            
            1,352**Balances
                at December 31, 2005**
            
            
            6,528
            
            $
            69,223
            
            $
            2,850
            
            $
            (59,587
            )
            $
            12,486Share-based
                compensation
            
            
            —
            
            
            —
            
            
            787
            
            
            —
            
            
            787Issuance
                of shares under employee stock purchase program
            
            
            16
            
            
            68
            
            
            —
            
            
            —
            
            
            68Exercise
                of stock options
            
            
            22
            
            
            78
            
            
            —
            
            
            —
            
            
            78Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (3,800
            )
            
            (3,800
            )**Balances
                at December 31, 2006**
            
            
            6,566
            
            $
            69,369
            
            $
            3,637
            
            $
            (63,387
            )
            $
            9,619





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





51





**APTIMUS,
      INC.**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(in
      thousands)**




**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004****Cash
              flows
              from operating activities**Net
                income (loss)
            
            $
            (3,800
            )
            $
            1,352
            
            $
            2,126Adjustments
                to reconcile net income (loss) to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            509
            
            
            356
            
            
            256Bad
                debt expense
            
            
            48
            
            
            123
            
            
            127Share-based
                compensation
            
            
            787
            
            
            —
            
            
            —Loss
                on impairment of intangible assets
            
            
            —
            
            
            95
            
            
            —Impairment
                of long-term investment
            
            
            —
            
            
            —
            
            
            40Gain
                on warrant liability
            
            
            —
            
            
            (89
            )
            
            —Amortization
                of discount on short-term investments
            
            
            (244
            )
            
            (66
            )
            
            —Amortization
                of discount on convertible notes payable
            
            
            —
            
            
            —
            
            
            3Changes
                in assets and liabilities:Accounts
                receivable
            
            
            (67
            )
            
            236
            
            
            (2,065
            )Prepaid
                expenses and other assets
            
            
            (723
            )
            
            (4
            )
            
            35Accounts
                payable
            
            
            (711
            )
            
            (359
            )
            
            739Accrued
                and other liabilities
            
            
            1,019
            
            
            (306
            )
            
            372Net
                cash provided by (used in) operating activities
            
            
            (3,182
            )
            
            1,338
            
            
            1,633**Cash
                flows from investing activities**Purchase
                of fixed assets
            
            
            (606
            )
            
            (438
            )
            
            (415
            )Proceeds
                from disposal of fixed assets
            
            
            —
            
            
            —
            
            
            41Acquisition
                of business, net of cash acquired
            
            
            (5,173
            )
            
            (150
            )
            
            —Purchase
                of intangible asset
            
            
            —
            
            
            (9
            )
            
            (8
            )Purchase
                of marketable securities
            
            
            (17,315
            )
            
            (6,025
            )
            
            —Sale
                of marketable securities
            
            
            23,650
            
            
            —
            
            
            —Net
                cash provided by (used in) investing activities
            
            
            556
            
            
            (6,622
            )
            
            (382
            )**Cash
                flows from financing activities**Borrowings
                under notes payable
            
            
            2,763
            
            
            —
            
            
            —Repayments
                under notes payable
            
            
            (875
            )
            
            —
            
            
            —Proceeds
                from disgorgement of profit
            
            
            —
            
            
            3
            
            
            —Principal
                payments under capital leases
            
            
            —
            
            
            —
            
            
            (101
            )Net
                proceeds from issuances of common stock
            
            
            146
            
            
            6,020
            
            
            92Net
                cash provided by (used in) financing activities
            
            
            2,034
            
            
            6,023
            
            
            (9
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            (592
            )
            
            739
            
            
            1,242Cash
                and cash equivalents at beginning of period
            
            
            4,349
            
            
            3,610
            
            
            2,368Cash
                and cash equivalents at end of period
            
            $
            3,757
            
            $
            4,349
            
            $
            3,610**Supplemental
                cash flow disclosure:**Cash
                paid during the period for interest
            
            $
            64
            
            $
            —
            
            $
            30




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




52




**APTIMUS,
      INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**1.
      Organization and business**




Aptimus,
      Inc. (the “Company”) is a results-based advertising network that distributes
      advertisements for direct marketing advertisers across a network of third-party
      web sites. In 2005 and prior years, the Company also distributed advertisements
      for direct marketing advertisers across company-owned and licensed email lists.
      Advertisers pay for the results that the Company delivers through one of four
      pricing models - (i) cost per click, (ii) cost per lead, (iii) cost per
      acquisition or (iv) cost per impression. The Company then shares a portion
      of
      the amounts billed to advertiser clients with publishers and email list owners
      on whose web properties and email lists the Company distributes the
      advertisements. In addition, the Company occasionally pays web site owners
      either a fixed fee for each completed user transaction or a fee for each
      impression of an advertisement served on the web site.




At
      the
      core of the Aptimus Network is a database configuration and software platform
      used in conjunction with a direct marketing approach for which the Company
      has
      filed a non-provisional business method patent application called Dynamic
      Revenue OptimizationTM (DRO). DRO determines through computer-based logic, on a
      real-time basis, which advertisements in the Company’s system, using the yield
      of both response history and value, should be reflected for prominent promotion
      on each individual web site placement and in each email sent to consumers.
      The
      outcome of this approach is that the Company generates superior user response
      and revenue potential for that specific web site or email placement and a
      targeted result for advertiser clients.




On
      August
      17, 2006, the Company acquired substantially all of the assets and assumed
      certain liabilities of High Voltage Interactive, Inc. (HVI), an Internet
      marketing and lead generation firm, for $5.4 million in cash. HVI is an online
      marketing firm specializing in recruitment and enrollment solutions for the
      higher education marketplace. HVI focuses in the education category and they
      manage marketing solutions and lead generation programs for education clients.
      The HVI network manages a targeted network of publishers and affiliates focused
      on career and education.




The
      results of operations of HVI have been included in the accompanying consolidated
      financial statements from the date of the acquisition. See Note 3 for additional
      details of the transaction.




**2.
      Summary of significant accounting policies**




*Principles
      of Consolidation*





The
      financial statements include the accounts of the Company and its wholly-owned
      subsidiaries. All significant intercompany balances and transactions have been
      eliminated in consolidation.




*Reclassifications*





Certain
      prior year amounts have been reclassified to conform to the current year
      presentation. The reclassifications had no impact on operating income (loss),
      net income (loss), or net income (loss) per share.





*Use
      of estimates*





The
      preparation of financial statements in conformity with U.S. generally accepted
      accounting principles 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 period.
      Actual results could differ materially from those estimates. Significant
      accounting policies and estimates underlying the accompanying financial
      statements include:




53




·
            the
                recognition of revenue


·
            the
                determination of fair values of share
                awards;


·
            the
                determination of fair values of assets acquired and liabilities assumed
                in
                business combinations


·
            assessing
                impairment of goodwill and long-lived
                assets;


·
            determining
                allowances for doubtful accounts;


·
            determining
                lives and recoverability of fixed
                assets;


·
            determining
                reserves for deferred tax assets;





It
      is
      reasonably possible that the estimates may change in the future.




*Cash
      and cash equivalents*




The
      Company generally considers any highly liquid investments purchased with an
      original or remaining maturity of three months or less at the date of purchase
      to be cash equivalents.




The
      Company invests its cash and cash equivalents in deposits at a major financial
      institution that may, at times, exceed federally insured limits. The Company
      believes that the risk of loss is minimal. To date, the Company has not
      experienced any losses related to temporary cash investments.




*Marketable
      securities*




The
      Company classifies, at the date of acquisition, its marketable securities into
      categories in accordance with the provisions of Statement of Financial
      Accounting Standards No. 115, *Accounting
      for Certain Investments in Debt and Equity Securities* . Securities,
      which are classified as available-for-sale are carried at fair value, with
      the
      unrealized gains and losses, net of tax, reported as a separate component of
      stockholders’ equity. Fair value is determined based on quoted market rates. Realized
      gains and losses and declines in value of securities judged to be other than
      temporary are included in other income (expense), net. There were no marketable
      securities at December 31, 2006. At December 31, 2005, marketable securities
      consisted of commercial paper with maturities of less than one year. There
      were
      no significant realized or unrealized gains or losses in any period presented.




*Accounts
      receivable*




The
      Company grants credit to its customers for substantially all of its sales.
      Accounts receivable are stated at their estimated net realizable value. The
      estimate of allowance for doubtful accounts is comprised of two parts, a
      specific account analysis and a general reserve. Accounts where specific
      information indicates a potential loss may exist are reviewed and a specific
      reserve against amounts due is recorded. As additional information becomes
      available such specific account reserves are updated. Additionally, a general
      reserve is applied to the aging categories based on historical collection and
      write-off experience. As trends in historical collection and write-offs change,
      the percentages applied against the aging categories are updated. Accounts
      receivable are considered past due when payment has not been received within
      the
      contractual terms, which are generally net 30 days from invoice date. Amounts
      are considered uncollectible and written off to the reserve for bad debts when
      all internal collection efforts have been exhausted.




*Fixed
      assets*




Fixed
      assets are stated at cost less accumulated depreciation and are depreciated
      using the straight-line method over their estimated useful lives. The estimated
      useful lives for financial reporting purposes are as follows:




54





Office
                furniture and equipment
            Five
                yearsComputer
                hardware and software
            Three
                yearsLeasehold
                improvements
            Shorter
                of the estimated useful lives or the lease
                term





The
      cost
      of normal maintenance and repairs are charged to expense as incurred and
      expenditures for major improvements are capitalized. Gains or losses on the
      disposition of assets in the normal course of business are reflected in the
      results of operations at the time of disposal.




*Intangible
      assets*




Intangible
      assets are stated at cost less accumulated amortization and are amortized using
      the straight-line method over their estimated useful lives. The estimated useful
      lives are as follows:





Email
                names
            Two
                yearsTrademarks,
                logos and patents
            Three
                yearsTrade
                names
            Fifteen
                yearsCustomer
                relationships
            Eight
                years





*Impairment
      of long-lived assets*




The
      Company evaluates the recoverability of its long-lived assets i n
      accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets* (“SFAS
      144”) .
      Long-lived assets are reviewed for impairment whenever events or changes in
      circumstances indicate that the carrying amount of such assets may not be fully
      recoverable. The Company evaluates the recoverability of long-lived assets
      by
      measuring the carrying amount of the assets against the estimated undiscounted
      future cash flows associated with these assets. If 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. No impairment charges were recognized during
      the
      years ended December 31, 2006 and December 31, 2004. A charge of $95,000 was
      recorded in other operating expenses for the year ended December 31, 2005
      related to the impairment of certain intangible assets.




*Goodwill*




The
      Company evaluates the recoverability of goodwill in
      accordance with SFAS No. 142, *Goodwill and Other Intangible Assets.*  The
      Company tests the goodwill balances for impairment on an annual basis or more
      often whenever events and changes in circumstances suggest that the carrying
      amount may not be recoverable. Impairment of goodwill is tested at the reporting
      unit level by comparing the reporting unit’s carrying amount, including
      goodwill, to the fair value of the reporting unit. The fair values of the
      reporting units are estimated using discounted projected cash flows. If the
      carrying amount of the reporting unit exceeds its fair value, goodwill is
      considered impaired and a second step is performed to measure the amount of
      impairment loss, if any. The Company conducts its annual impairment test in
      the
      fourth quarter of each year, and has determined there was no impairment in
      2006.





*Long-term
      investments*




During
      2006 and 2005, the Company had no long-term investments. During the year ended
      December 31, 2004, Aptimus recorded a charge of approximately $40,000 in other
      income (expense), related to the impairment of investments in equity investments
      in non-public companies.




55




*Fair
      value of financial instruments*




The
      carrying amounts of financial instruments, including cash and cash equivalents,
      accounts receivable, marketable securities, accounts payable and accrued
      liabilities, approximate fair value because of their short
      maturities.




*Deferred
      revenues*




Deferred
      revenues consist of advance billings and payments on marketing contracts and
      are
      included in accrued and other liabilities in the accompanying balance
      sheet.




*Revenue
      recognition*





The
      Company currently derives revenue primarily from providing response-based
      advertising programs through a network of websites.  The
      Company follows the provisions of SEC Staff Accounting Bulletin
      No. 104, *Revenue Recognition* .
      The
      Company recognizes revenue when all of the following conditions are
      met:




·
            There
                is persuasive evidence of an
                arrangement;


·
            The
                service has been provided to the
                customer;


·
            The
                collection of the fees is reasonably assured;
                and


·
            The
                amount of fees to be paid by the customer is fixed or
                determinable.




Revenue
      earned for lead generation through the Aptimus Network is based on a fee per
      lead and is recognized when the lead information is delivered to the client.
      Revenue earned for e-mail mailings can be based on a fee per lead, a percentage
      of revenue earned from the mailing, or a cost per thousand e-mails delivered.
      Revenue from e-mail mailings delivered on a cost per thousand basis is
      recognized when the e-mail is delivered. Revenue from e-mail mailings sent
      on a
      fee per lead or a percentage of revenue earned from the mailing basis is
      recognized when amounts are determinable, generally when the customer receives
      the leads. Reference to e-mail revenues herein is for use when comparing
      historical periods to the results for the year ended December 31, 2006 since
      the
      Company indefinitely suspended its e-mail marketing efforts in December
      2005.




Revenues
      generated through network publishers and opt-in email list owners are recorded
      on a gross basis in accordance with Emerging Issues Task Force Issue No. 99-19, *Reporting
      Revenue Gross as a Principal versus Net as an Agent* ** *(* EITF
      99-19). Fees paid to network publishers and opt-in email list owners related
      to
      these revenues are shown as Cost of revenues on the Statement of Operations.
      The
      Company shares a portion of the amounts it bills its advertiser clients with
      the
      third-party web site owners or “publishers” and email list owners on whose web
      properties and email lists the Company distributes the advertisements. While
      this “revenue share” approach is the Company’s primary payment model, it will as
      an alternative occasionally pay web site owners either a fixed fee for each
      completed user transaction or a fee for each impression of an advertisement
      served on the web site. Email based campaigns that are sent to Company owned
      lists do not have publisher fees associated with them. In the future, due to
      the
      indefinite suspension of the email business, the Company does not expect to
      generate or, consequently, share any email-related revenues.




The
      Company has evaluated the guidance provided by EITF 99-19 as it relates to
      determining whether revenue should be recorded gross or net for the payments
      made to network publishers and opt-in email list owners and has determined
      the
      recording of revenues gross is appropriate based upon the following
      factors:




·
            the
                Company acts as a principal in these
                transactions;




·
            the
                Company and its customer are the only companies identified in the
                signed
                contracts;




·
            the
                Company and its customer are the parties who determine pricing for
                the
                services;




56




·
            the
                Company is solely responsible to the client for fulfillment of the
                contract;




·
            the
                Company bears the risk of loss related to
                collections




·
            the
                Company determines how the offer will be presented across the network;
                and




·
            Amounts
                earned are based on leads or emails delivered and are not based on
                amounts
                paid to publishers.




In
      addition to response-based advertising revenues, the Company earns revenue
      from
      list rental activities. List rental revenues are received from the rental of
      customer names to third parties through the use of list brokers. Revenue from
      list rental activities are recognized in the period the payment is received
      due
      to uncertainty surrounding the net accepted number of names.




*Advertising
      costs*




The
      Company expenses advertising costs as incurred. Total advertising expense for
      the years ended December 31, 2006, 2005 and 2004, were $13,000, $205,000, and
      $67,000, respectively.




*Research
      and development costs*




Research
      and development costs are expensed as incurred.




*Income
      taxes*




The
      Company accounts for income taxes under the liability method, which requires
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of temporary differences between the carrying amounts and the
      tax
      bases of assets and liabilities. If it is more likely than not that some portion
      of a deferred tax asset will not be realized, a valuation allowance is
      recorded.




*Net
      income (loss) per share*




Basic
      net
      income (loss) per share represents net income (loss) available to common
      shareholders divided by the weighted average number of shares outstanding during
      the period. Diluted net income (loss) per share represents net income (loss)
      available to common shareholders divided by the weighted average number of
      shares outstanding, including the potentially dilutive impact of common stock
      options, stock appreciation rights and warrants. Common stock options, stock
      appreciation rights and warrants are converted using the treasury stock method.




The
      following table sets forth the computation of the numerators and denominators
      in
      the basic and diluted income (loss) per share calculations for the periods
      indicated and those common stock equivalent securities not included in the
      diluted net loss per share calculation as their effect on income (loss) per
      share is anti-dilutive (in thousands, except per share data):




57




**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004**Numerator:Net
                income (loss) (A)
            
            $
            (3,800
            )
            $
            1,352
            
            $
            2,126Denominator:Weighted
                average outstanding shares of common stock (B)
            
            
            6,541
            
            
            6,351
            
            
            5,630Weighted
                average dilutive effect of options to purchase common
                stock
            
            
            —
            
            
            1,121
            
            
            1,326Weighted
                average dilutive effect of shares to be issued on conversion of
                convertible notes payable
            
            
            —
            
            
            —
            
            
            86Weighted
                average dilutive effect of warrants to purchase common
                stock
            
            
            —
            
            
            103
            
            
            140Weighted
                average of common stock and common stock equivalents (C)
            
            
            6,541
            
            
            7,575
            
            
            7,182Net
                income (loss) per share:Basic
                (A) / (B)
            
            $
            (0.58
            )
            $
            0.21
            
            $
            0.38Diluted
                (A) / (C)
            
            $
            (0.58
            )
            $
            0.18
            
            $
            0.30Antidilutive
                securities excluded consist of the following:Options
                to purchase common stock
            
            
            2,076
            
            
            52
            
            
            32Restricted
                common stock
            
            
            25
            
            
            —
            
            
            —Warrants
                to purchase common stock
            
            
            495
            
            
            91
            
            
            —2,296
            
            
            143
            
            
            32




*Concentrations
      of credit risk and significant customers*




The
      Company’s financial instruments that are exposed to concentrations of credit
      risk consist primarily of cash and cash equivalents, marketable securities
      and
      trade accounts receivable. Although the Company deposits its cash with multiple
      financial institutions, its deposits, at times, may exceed federally insured
      limits. Collateral is not required for accounts receivable. Concentrations
      of credit risk with respect to accounts receivable exist due to the large number
      of Internet based companies that we do business with. This risk is mitigated
      due
      to the wide variety of customers to which the Company provides services, as
      well
      as the customer’s dispersion across many different geographic areas. The
      Company maintains an allowance for doubtful accounts receivable balance as
      described above under *Accounts
      receivable* .





During
      the year ended December 31, 2006, no customers accounted for more than 10%
      of
      total revenues. During the year ended December 31, 2005, one customer accounted
      for 10.2% of total revenues. During the year ended December 31, 2004, two
      customers accounted for 20.2% and 12.3% of total revenues, respectively. As
      of
      December 31, 2006, one customer accounted for 23.8% of outstanding accounts
      receivable. As of December 31, 2005, one customer accounted for 13.5% of
      outstanding accounts receivable. As of December 31, 2004, three customers
      accounted for 18.6%, 11.6% and 11.1%, of outstanding accounts receivable. During
      the year ended December 31, 2006, one publisher accounted for 21.2% of
      total revenues, respectively. During the year ended December 31, 2005, one
      publisher accounted for 10.6% of total revenues. During the year ended December
      31, 2004, one publisher accounted for 23.7% of revenues.





Aptimus
      has no operations outside of the United States and no significant amount of
      revenue is derived from outside of the United States.




*Share-based
      compensation*




Through
      December 31, 2005, Aptimus accounted for share-based compensation under the
      recognition and measurement principles of APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related Interpretations. Effective January 1, 2006 the Company has adopted
      Statement of Financial Accounting Standards No. 123(revised 2004), *Share-Based
      Payment* ,
      (SFAS
      123(R)), using the modified prospective application transition method. SFAS
      123(R) requires the measurement and recognition of compensation expense for
      all
      share-based payment awards made to employees and directors, including employee
      stock options and restricted stock grants related to the Company’s incentive
      plans, to be based on fair values. SFAS 123(R) requires companies to estimate
      the fair value of share-based payment awards on the date of grant using an
      option-pricing model. The Company will use the Black-Scholes model to determine
      the fair value of employee stock options granted. Financial statements for
      prior
      to the adoption of SFAS 123(R) do not reflect any restated amounts as a result
      of this adoption in accordance with the modified prospective transition method
      under SFAS 123(R). The following table illustrates the effect on net income
      (loss) and net income (loss) per share if the Company had applied the fair
      value
      recognition provisions of FASB Statement No. 123, *Accounting
      for Stock-Based Compensation* ,
      to
      share-based employee compensation for the periods indicated (in thousands,
      except per share data):




58





**Years
                ended**
              **December
                31,****2005**
            
            **2004**Net
                income (loss), as reported
            
            $
            1,352
            
            $
            2,126Add:
                Total share-based employee compensation expense, included in the
                determination of net income as reported, net of related tax
                effects
            
            
            —
            
            
            —Deduct:
                Total share-based employee compensation expense determined under
                fair
                value based method for all awards, net of related tax
                effects
            
            
            (4,978
            )
            
            (552
            )Pro
                forma net income (loss)
            
            $
            (3,626
            )
            $
            1,574**Net
                income (loss) per share:**Basic
                - as reported
            
            $
            0.21
            
            $
            0.38Basic
                - pro forma
            
            $
            (0.57
            )
            $
            0.28Diluted
                - as reported
            
            $
            0.18
            
            $
            0.30Diluted
                - pro forma
            
            $
            (0.57
            )
            $
            0.22




*Comprehensive
      income*




To
      date,
      the Company has not had any significant transactions required to be reported
      in
      comprehensive income other than its net income (loss).




*Segment
      information*





The
      Company has organized and managed its operations in a single operating segment
      providing results based advertising to direct marketing clients.




*Recent
      accounting pronouncements*




In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, *Accounting for Uncertainty in Income Taxes,* (“FIN
      48”), which clarifies the accounting for uncertainty in income taxes recognized
      in an enterprise’s financial statements and prescribes a recognition threshold
      of whether it is more likely than not that a tax position will be sustained
      upon
      examination. Measurement of the tax uncertainty occurs if the recognition
      threshold has been met. FIN 48 also provides guidance on the recognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure, and transition. FIN 48 will be effective for fiscal years beginning
      after December 15, 2006. The Company is currently evaluating what impact of
      the adoption of FIN 48 and believes it will not have a material impact on its
      financial position and results of operations.




59




In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (“SFAS
      No. 157”). The purpose of SFAS No. 157 is to define fair value, establish a
      framework for measuring fair value and enhance disclosures about fair value
      measurements. The measurement and disclosure requirements are effective
      beginning in the first quarter of the year ending December 31, 2008. The Company
      is currently assessing whether adoption of SFAS No. 157 will have an impact
      on
      its financial statements, but we do not expect the effect to be
      material.





**3.
      Acquisitions**





*High
      Voltage Interactive, Inc.*





In
      August
      2006, the Company acquired substantially all of the assets and assumed certain
      liabilities of High Voltage Interactive, Inc. (HVI), an Internet marketing
      and
      lead generation firm for $5.4 million cash. The Company believes the acquisition
      will create a full-service offering to help acquire, retain and extend
      relationships with customers.




The
      acquisition was accounted for under the purchase method of accounting. The
      results of operations of HVI have been included in the accompanying consolidated
      financial statements from the dated of the acquisition. In connection with
      the
      acquisition, the Company initially paid $6.0 million in cash and incurred
      negligible transaction related expenses, for a total initial purchase price
      of
      $6.0 million. The terms of the merger agreement called for $600,000 of the
      purchase price to be held in escrow for nine months pending the settlement
      of
      certain acquisition related conditions. In February 2007, the $600,000 escrow
      amount was returned to the Company pursuant to an agreement entered into with
      the seller. As a result, the preliminary purchase price was reduced by $600,000
      and the final purchase price is $5.4 million. Included in the assets acquired
      was approximately $228,000 in cash, reducing the cash used for the acquisition,
      net of cash acquired to approximately $5.2 million. At December 31, 2006, the
      $600,000 returned in February 2007 from the escrow account was included in
      Prepaid and other assets on the balance sheet.





As
      of
      December 31, 2006, the purchase price allocation associated with this
      acquisition is as follows (in thousands):





Goodwill
            
            $
            3,163Trade
                name
            
            
            600Customer
                relationships
            
            
            1,500Net
                book value of acquired assets and liabilities which approximate fair
                value
            
            
            137Total
                purchase price
            
            $
            5,400





The
      purchase price was allocated based on the fair value of the assets acquired
      and
      liabilities assumed. A valuation of the purchased assets was undertaken by
      a
      third party valuation specialist to assist the Company in determining the
      estimated fair value of each identifiable asset and in allocating the purchase
      price among acquired assets.





In
      conjunction with the acquisition, the Company issued 200,000 shares of
      restricted common stock to certain key employees of the acquired company. The
      restriction on the shares lapses in respect to specified amounts in three annual
      increments measured from the closing date conditioned on the retention of the
      specific key employees to whom the shares were issued. In the fourth quarter
      of
      2006, 175,000 shares of restricted common stock were forfeited. The Company
      is
      accounting for the restricted common stock as share-based payments as described
      in Note 11.




60




The
      unaudited pro forma combined historical results of operations, as if HVI had
      been acquired at the beginning of each period presented are as
      follows:




**Year
                ended December 31,****2006**
            
            **2005**Revenues
            
            $
            22,547
            
            $
            23,466Net
                income (loss)
            
            
            (3,513
            )
            
            1,649Net
                income (loss) per share:Basic
            
            $
            (0.54
            )
            $
            0.26Diluted
            
            $
            (0.54
            )
            $
            0.21Weighted
                average shares outstanding:Basic
            
            
            6,541
            
            
            6,351Diluted
            
            
            6,541
            
            
            7,778





*Neighbornet*





In
      May
      2005, the Company acquired substantially all of the assets of the Neighbornet
      division of Adfinis LLC. The aggregate cash purchase price of $152,500 cash
      was
      allocated to email list databases, customer relationships and customer
      contracts. The acquired intangible assets are being amortized over their
      estimated useful lives of two years. The results of operations of Neighbornet
      have been included in the accompanying consolidated financial statements from
      the date of the acquisition. The effect of this acquisition on consolidated
      revenues and operating income for the twelve months ended December 31, 2006
      and
      2005 was to reduce net income by approximately $32,000 and $268,000,
      respectively.




**4.
      Accounts receivable**




Accounts
      receivable consist of the following (in thousands):




**December
                31,****2006**
            
            **2005**Accounts
                receivable
            
            $
            4,189
            
            $
            2,721Less:
                Allowance for doubtful accounts
            
            
            (236
            )
            
            (223
            )$
            3,953
            
            $
            2,498





**5.
      Fixed assets**





Fixed
      assets consist of the following (in thousands):





**December
                31,****2006**
            
            **2005**Computer
                hardware and software
            
            $
            2,764
            
            $
            2,518Office
                furniture and equipment
            
            
            238
            
            
            179Leasehold
                improvements
            
            
            129
            
            
            77$
            3,131
            
            $
            2,774Less:
                Accumulated depreciation
            
            
            (2,230
            )
            
            (2,084
            )$
            901
            
            $
            690




61




Depreciation
      expense for the years ended December 31, 2006, 2005 and 2004, was $415,000,
      $297,000 and $232,000, respectively.




**6.
      Intangible assets**




Intangible
      assets consist of the following (in thousands):





**December
                31,****2006**
            
            **2005**Customer
                relationships
            
            $
            1,500
            
            $
            10Trade
                names
            
            
            600
            
            
            —Email
                names
            
            
            —
            
            
            45Trademarks,
                logos and patents
            
            
            83
            
            
            83$
            2,183
            
            $
            138Less:
                Accumulated amortization
            
            
            (177
            )
            
            (118
            )$
            2,006
            
            $
            20




Amortization
      expense for the years ended December 31, 2006, 2005 and 2004, was $94,000,
      $59,000 and $95,000, respectively.




Expected
      future amortization expense is as follows (in thousands):





**Year
                ending December 31,**
            
            **Amortization**2007
            
            $
            2772008
            
            
            2762009
            
            
            2732010
            
            
            2732011
            
            
            273Thereafter
            
            
            634Total
                expected future amortization
            
            $
            2,006





**7.
      Notes Payable**




In
      August
      2006, the Company obtained a line-of-credit from a commercial bank, with a
      term
      of one year, which is renewable at the Company's option for an additional one
      year term. The line-of-credit is secured by the Company's assets. The original
      line-of-credit allowed for draws up to the lesser of $5.0 million or 80% of
      eligible account receivable balances, generally those less than 90 days old.
      The
      line-of-credit was modified in November 2006 to reduce the eligible draws up
      to
      the lesser of $2.5 million or 80% of eligible account receivable balances,
      generally those less than 90 days old. The Company used $2.8 million of the
      line
      to purchase High Voltage Interactive, Inc. Advances on the line bear interest,
      on the outstanding daily balance thereof, at a variable rate equal to :(i)
      one
      quarter of one percent (0.25%) above the Prime Rate if the Company’s total cash
      maintained at the bank is less than $2.0 million, (ii) the Prime Rate if the
      Company’s total cash maintained at the bank is at least $2.0 million but less
      than $5.0 million and (iii) one quarter of one percent (0.25%) below the Prime
      Rate if the Company’s total cash maintained at the bank is greater than $5.0
      million. At December 31, 2006, the interest rate on outstanding balances was
      10.25%. Interest is payable monthly on the first calendar day of each month.
      As
      of December 31, 2006, $612,000 remained available under the revolving
      line-of-credit.




62




**8.
      Accrued and other liabilities**




Accrued
      and other liabilities consist of the following (in thousands):




**December
                31,****2006**
            
            **2005**Accrued
                network publisher fees
            
            $
            678
            
            $
            63Accrued
                vacation
            
            
            194
            
            
            73Deferred
                rent
            
            
            120
            
            
            37Accrued
                commissions
            
            
            89
            
            
            26Other
                liabilities
            
            
            263
            
            
            163$
            1,344
            
            $
            325





**9.
      Related party transactions**




In
      July
      2003, the Company borrowed $305,000 under a Convertible Note Purchase Agreement.
      The payment obligation, memorialized in a secured convertible promissory note
      issued to each investor, had a 36-month term, bore interest at 6% per annum,
      and
      could be converted to shares of common stock at the option of the holder at
      a
      fixed price of $0.80 per share. Accrued interest was payable quarterly,
      commencing one year from the closing date. As part of the transaction, the
      Company issued to the investors warrants to purchase a total of 127,094 shares
      of our common stock for $0.50 per share. The warrants have a term of five years.
      The value of the warrants was determined using the Black-Scholes option pricing
      model with the following assumptions: no dividends; risk-free interest rate
      of
      2.52%, the contractual life of 5.0 years and volatility of 100%. The $45,627
      value of these warrants was recorded as a discount on the convertible note
      obligation and amortized to expense over the 36-month term of the obligation.
      Timothy C. Choate, our CEO, and Robert W. Wrubel, one of our independent
      directors and an employee as of June 2005, participated in the convertible
      note
      financing in the amount of $50,000 and $15,000, respectively. Mr. Choate was
      granted a warrant to purchase 20,835 shares of common stock and Mr. Wrubel
      was
      granted a warrant to purchase 6,250 shares of common stock. In March 2004,
      the
      Convertible Promissory Note was converted into 381,250 shares of common stock
      of
      which Mr. Choate received 62,500 shares and Mr. Wrubel received 18,750 shares.




**10.
      Commitments and contingencies**




*Commitments*





The
      Company leases office space under non-cancelable operating leases with various
      expiration dates through October 2011 with options to extend through December
      2015. Additionally, the Company subleases facilities to third parties under
      non-cancelable operating subleases which expire in November 2007.





Future
      minimum lease payments and sublease income under the non-cancelable operating
      leases and subleases are as follows (in thousands).




63




**Year
                ending December 31,**
            
            **Operating
                Leases**
            
            **Sublease
                Income**2007
            
            $
            786
            
            $
            1592008
            
            
            470
            
            
            -2009
            
            
            496
            
            
            -2010
            
            
            523
            
            
            -2011
            
            
            458
            
            
            -Total
                minimum lease payments
            
            $
            2,733
            
            $
            159





Rent
      expense for the years ended December 31, 2006, 2005 and 2004, was $423,000,
      $231,000 and $224,000 respectively. Sublease rental income offsetting rent
      expense in the statement of operations for the years ended December 31, 2006,
      2005, and 2004, was not significant for any period presented.




*Litigation*




The
      Company may be subject to various claims and pending or threatened lawsuits
      in
      the normal course of business. Management believes that the outcome of any
      such
      lawsuits would not have a materially adverse effect on the Company’s financial
      position, results of operations or cash flows.




*Guarantees
      and Indemnifications*




The
      Company has agreements indemnifying its officers and directors for certain
      events or occurrences while the officer or director is, or was serving, at
      the
      Company’s request in such capacity. The term of the indemnification period is
      the applicable statute of limitations for indemnifiable claims. The maximum
      potential amount of future payments the Company could be required to make under
      these indemnification agreements is unlimited; however, the Company has a
      directors’ and officers’ insurance policy that may enable the Company to recover
      a portion of any future amounts paid. Assuming the applicability of coverage
      and
      the willingness of the insurer to assume coverage and subject to certain
      retention, loss limits and other policy provisions, the Company believes the
      estimated fair value of this indemnification obligation is not material.
      However, no assurances can be given that the insurers will not attempt to
      dispute the validity, applicability or amount of coverage, which attempts may
      result in expensive and time-consuming litigation against the
      insurers.




The
      Company’s standard advertising client and distribution publisher contracts
      include standard cross indemnification language that requires, among other
      things, that the Company indemnify the client or publisher, as the case may
      be,
      for certain claims and damages asserted by third-parties that arise out of
      breach of the contract. In the past, the Company has not been subject to any
      claims for such losses and has thus not incurred any material costs in defending
      or settling claims related to these indemnification obligations. Accordingly,
      the Company believes the estimated fair value of these obligations is not
      material.




Pursuant
      to these agreements, the Company may indemnify the other party for certain
      losses suffered or incurred by the indemnified party in connection with various
      types of third-party claims, which may include, claims of intellectual property
      infringement, breach of contract and intentional acts in the performance of
      the
      contract. The term of these indemnification obligations is generally limited
      to
      the term of the contract at issue. In addition, the Company limits the maximum
      potential amount of future payments it could be required to make under these
      indemnification obligations to the consideration paid during a limited period
      of
      time under the applicable contract, but in some infrequent cases the obligation
      may not be so limited. In addition, the Company’s standard policy is to disclaim
      most warranties, including any implied or statutory warranties such as
      warranties of merchantability, fitness for a particular purpose, quality and
      non-infringement, as well as any liability with respect to incidental, indirect,
      consequential, special, exemplary, punitive or similar damages. In some states,
      such disclaimers may not be enforceable. If necessary, the Company would provide
      for the estimated cost of service warranties based on specific warranty claims
      and claim history. The Company has not been subject to any claims for such
      losses and has not incurred any costs in defending or settling claims related
      to
      these indemnification obligations. Accordingly, the Company believes the
      estimated fair value of these agreements is not material.




64




**11.
      Shareholders’ equity**




*Common
      stock*




The
      following shares of common stock are available for future issuance at December
      31, 2006 (in thousands):





Options
                outstanding
            
            
            2,076Restricted
                stock
            
            
            25Warrants
                outstanding
            
            
            495Stock
                available for future grant:1997
                Stock Option Plan
            
            
            432001
                Stock Plan
            
            
            601Employee
                Stock Purchase Plan
            
            
            1,932Total
            
            
            5,172




In
      March
      2005, the Company issued 351,083 shares of unregistered common stock to certain
      accredited investors at a price of $17.09 per share. The Company received
      proceeds of $5.7 million, net of $0.3 million of issuance costs. The shares
      were
      issued in reliance upon the exemptions from registration provided by Rule 506
      of
      Regulation D and Section 4(2) under the Securities Act. In May 2005, the shares
      of common stock were registered with the Securities and Exchange Commission
      (SEC). In conjunction with the issuance of the unregistered common stock, the
      Company issued warrants to purchase 91,281 shares of common stock as described
      below.




In
      March
      2004, the Convertible Promissory Note described in Note 9 was converted into
      381,250 shares of unregistered common stock. These shares were subsequently
      registered in November 2004.




In
      March
      2002, the Board of Directors of the Company declared a dividend distribution
      of
      one preferred share purchase right (a “right”) for each outstanding share of the
      Company’s common stock. The dividend was payable to the stockholders of record
      on March 29, 2002. Each right entitles the registered holder to purchase from
      the Company one one-thousandth of a share of Series C Preferred Stock at a
      price
      of $15 per one one-thousandth of a Preferred Share. In the event of an
      acquisition, except pursuant to a tender or exchange offer which is for all
      outstanding Common Shares at a price and on terms which a majority of certain
      members of the Board of Directors determines to be adequate, each holder of
      a
      right will thereafter have the right to receive upon exercise the number of
      Common Shares or of one one-thousandth of a share of Preferred Shares having
      a
      value equal to two times the exercise price of the right. There were no
      transactions during 2006, 2005 or 2004 related to the rights.




*Warrants*




In
      August
      2006, the Company entered into a strategic distribution agreement (“Agreement”)
      with a website publisher with an initial term of three years and three
      additional one-year renewal options. Pursuant to the Agreement, the Company
      will
      place targeted performance-based advertising in transactional areas of the
      publisher’s network of leading Web brands. As part of the transaction, the
      Company issued warrants to the publisher to purchase up to 327,500 shares of
      the
      Company’s common stock for $7.50 per share upon the achievement of substantial
      financial milestones. The rights under these warrants expire in August 2009.
      The
      warrants were issued in reliance upon the exemptions from registration provided
      by Rule 506 of Regulation D and Section 4(2) under the Securities Act for sales
      to accredited investors, as that term is defined in Rule 501(a) of Regulation
      D.
      No compensation has been recorded for these warrants as they contain financial
      milestone vesting criteria, which were not probable of achievement at December
      31, 2006.




65




In
      conjunction with the issuance of the unregistered common stock in March 2005
      as
      described above, the Company issued warrants to purchase 70,216 shares of common
      stock for $20.22 per share to the investors and 21,065 shares of common stock
      for $18.15 per share to the Company’s financial advisor. The warrants were
      exercisable upon issuance and expire in March 2010. The fair values of the
      warrants issued to investors and financial advisors on the closing date of
      the
      transaction were estimated to be $955,000 and $292,000, respectively, using
      the
      Black-Scholes option-pricing model with the following assumptions: no dividends;
      risk-free interest rate of 4.3%, the contractual life of 5 years and volatility
      of 100%. The fair value of the warrants issued to financial advisors was
      recorded as a reduction in the proceeds received from the stock
      issuance.




In
      accordance with Emerging Issues Task Force Issue No. 00-19, *Accounting
      for Derivative Financial Instruments Indexed To, and Potentially Settled In
      a
      Company’s Own Stock* ,
      and the
      terms of the warrants, the fair value of the warrants issued to the investors
      was accounted for as a liability, with an offsetting reduction to the carrying
      value of the common stock.




In
      May
      2005 the registration statement related to the March 2005 offering was declared
      effective and the warrant liability was reclassified to equity. At the time
      of
      the reclassification the fair value of the warrants was estimated to be
      $866,000, calculated using the Black-Scholes option-pricing model with the
      following assumptions: no dividends; risk-free interest rate of 3.83%, the
      contractual life of 4.863 years and volatility of 100%. The $89,000 decrease
      in
      the fair market value of the warrants was recorded as a gain on warrant
      liability in the Statement of Operations.




In
      return
      for various services and in connection with various investment transactions,
      the
      Company has issued warrants to purchase shares of common stock. At December
      31,
      2006, warrants outstanding are as follows:




**Year
                of issue**
            
            **Shares**
            
            **Exercise
                price**
            
            **Year
                of**
              **expiration**2003
            
            
            27,085
            
            $
            0.50
            
            
            20082003
            
            
            43,125
            
            $
            2.05
            
            
            20082003
            
            
            5,634
            
            $
            5.00
            
            
            20082005
            
            
            70,216
            
            $
            20.22
            
            
            20102005
            
            
            21,065
            
            $
            18.15
            
            
            20102006
            
            
            327,500
            
            $
            7.50
            
            
            2009Total
            
            
            494,625





*Stock
      Option Plans*




In
      June
      1997, the Company approved the 1997 Stock Option Plan (the “1997 Plan”) that
      provides for the issuance of incentive and non-statutory options to employees
      and non-employees of the Company. The 1997 Plan provides for grants of
      immediately exercisable options; however, the Company has the right to
      repurchase any unvested common stock upon the termination of employment at
      the
      original exercise price. As of December 31, 2006, the 1997 Plan provided for
      the
      granting of options to purchase up to 2,400,000 shares of common stock, of
      which
      43,168 options remained unissued.




66




In
      June
      2001, the Company approved the 2001 Stock Plan (the “2001 Plan”) that provides
      for the issuance of incentive and non-statutory options and restricted stock
      to
      employees and non-employees of the Company. In June 2006, the Company amended
      the 2001 Plan to provide for the issuance of stock appreciation rights. The
      1997
      Plan provides for grants of immediately exercisable options; however, the
      Company has the right to repurchase any unvested common stock upon the
      termination of employment at the original exercise price. As of December 31,
      2006, the 2001 Plan provided for the granting of options, restricted stock,
      and
      stock appreciation rights to purchase up to 2,400,000 shares of common stock,
      of
      which 600,267 options, restricted stock and stock appreciation rights remained
      unissued.





Terms
      and
      conditions of the options, restricted stock, and stock appreciation rights
      are
      determined by the Board of Directors, which includes exercise price, number
      of
      shares granted, and the vesting period of the shares. Options issued under
      the
      Company’s stock option plans are generally for periods not to exceed 10 years
      and are issued at fair value of the shares of common stock on the date of grant
      as determined by the trading price of such stock with vesting periods of one
      to
      four years.





Stock
      option activity is as follows (in thousands, except prices and contractual
      term):





**Weighted-Average****Options**
            
            **Shares
                Available for Grant**
            
            **Shares
                Outstanding**
            
            **Exercise
                Price**
            
            **Remaining
                Contractual Term**
            
            **Aggregate
                Intrinsic Value**Balance
                at December 31, 2003
            
            
            1,704
            
            
            1,522
            
            $
            1.98Granted
            
            
            (174
            )
            
            174
            
            
            9.32Exercised
            
            
            —
            
            
            (303
            )
            
            0.57Forfeited
            
            
            17
            
            
            (17
            )
            
            2.73Balance
                at December 31, 2004
            
            
            1,547
            
            
            1,376
            
            
            1.98Granted
            
            
            (530
            )
            
            530
            
            
            14.13Exercised
            
            
            —
            
            
            (155
            )
            
            1.10Forfeited
            
            
            54
            
            
            (54
            )
            
            7.99Balance
                at December 31, 2005
            
            
            1,071
            
            
            1,697
            
            
            5.67Options
                granted
            
            
            (500
            )
            
            500
            
            
            6.08Restricted
                shares granted
            
            
            (85
            )
            
            —
            
            
            —Options
                exercised
            
            
            —
            
            
            (22
            )
            
            3.46Options
                forfeited
            
            
            99
            
            
            (99
            )
            
            7.92Restricted
                shares forfeited
            
            
            60
            
            
            —Balance
                at December 31, 2006
            
            
            645
            
            
            2,076
            
            $
            4.28
            
            
            6.87
            
            $
            6,262Exercisable
                at December 31, 2006
            
            
            
            
            
            1,624
            
            $
            2.94
            
            
            6.21
            
            $
            5,854Vested
                or expected to vest
            
            
            
            
            
            2,053
            
            $
            2.33




The
      fair
      value of each option or stock appreciation award under the plans is estimated
      on
      the date of grant using the Black Scholes Merton option-pricing model. Expected
      volatilities are based on the historical volatility of Aptimus common stock
      and
      other factors. The expected term of options granted is based on an analysis
      of
      historical exercise behavior and employee termination activity and represents
      the period of time that options granted are expected to be outstanding. The
      risk-free rate used is based on the U.S. Treasury Constant Maturities for the
      applicable grant date and expected term. Assumptions used to value employee
      options granted were as follows:




67




**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004**Range
                of expected volatility
            
            
            108.4
                - 113.2%
            %
            
            88.0
                - 92.4%
            %
            
            100.0
            %Weighted-average
                expected volatility
            
            
            111.5
            %
            
            91.8
            %
            
            100.0
            %Range
                of risk free interest rates
            
            
            4.69
                - 5.08
            %
            
            3.70
                - 4.43
            %
            
            2.60
                - 3.61
            %Weighted-average
                risk free interest rates
            
            
            4.83
            %
            
            3.88
            %
            
            3.16
            %Range
                of expected term
            
            
            5.0
                years
            
            
            4.0
                years
            
            
            4.0
                yearsWeighted-average
                expected term
            
            
            5.0
                years
            
            
            4.0
                years
            
            
            4.0
                yearsExpected
                dividends
            
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %





The
      weighted-average grant-date fair value of options granted during the years
      ended
      December 31, 2006, 2005 and 2004, was $4.91, $9.45 and $5.83, respectively.
      The
      total intrinsic value of options exercised during the years ended December
      31,
      2006, 2005 and 2004, was $80,000, $2.5 million and $3.9 million,
      respectively.




This
      was
      Deleted as it is disclosed in table. This was deleted as there is no such
      provision under out plan.





The
      following table summarizes information about stock options outstanding as of
      December 31, 2006:


**Options
                outstanding**
            
            **Options
                exercisable****Range
                of**
              **exercise
                prices**
            
            **Number
                of**
              **shares**
            
            **Weighted**
              **average**
              **remaining**
              **contractual**
              **life****(in
                years)**
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            **Number
                of**
              **shares**
            
            **Weighted**
              **average**
              **exercise**
              **price**$0.00
            
            
            25
            
            
            6.6
            
            $
            0.00
            
            
            25
            
            $
            0.00$0.28
                - $0.68
            
            
            827
            
            
            5.3
            
            
            0.45
            
            
            827
            
            
            0.45$1.02
                - $1.95
            
            
            103
            
            
            3.7
            
            
            1.61
            
            
            100
            
            
            1.61$4.27
                - $4.75
            
            
            213
            
            
            9.0
            
            
            4.58
            
            
            28
            
            
            4.59$5.31
                - $6.95
            
            
            225
            
            
            7.3
            
            
            6.47
            
            
            119
            
            
            6.35$7.00
                - $14.88
            
            
            683
            
            
            8.5
            
            
            8.64
            
            
            525
            
            
            8.922,076
            
            
            6.9
            
            $
            4.28
            
            
            1,624
            
            $
            2.94





In
      conjunction with the acquisition of High Voltage Interactive, Inc., the Company
      issued 200,000 restricted shares of common stock to certain key employees of
      the
      acquired company. The restriction on the shares lapses in three annual
      increments measured from the closing date under the condition that the specific
      key employees remain with the Company during the three year period. Shares
      issued in reliance upon the exemptions from registration provided by Rule 506
      of
      Regulation D and Section 4(2) under the Securities Act for sales to accredited
      investors, as that term is defined in Rule 501(a) of Regulation D, were 115,000
      and Shares issued pursuant to the Company’s 2001 Stock Plan and corresponding
      Registration Statement on Form S-8 were 85,000. The Company will recognize
      compensation expense over the three year vesting terms of the restricted stock
      grants under the guidelines of SFAS 123R. In the fourth quarter of 2006 the
      115,000 shares issued outside the 2001 plan and 60,000 of the shares issued
      under the 2001 plan were forfeited.




Restricted
      stock activity during the year ended December 31, 2006 is as follows (in
      thousands, except prices and term):





**Shares**
              **Outstanding**
            
            **Share
                Price**
            
            **Remaining**
              **Contractual**
              **Term**
            
            **Aggregate**
              **Intrinsic**
              **Value**Balance
                at December 31, 2005
            
            
            —
            
            $
            —Granted
            
            
            200
            
            
            7.32Forfeited
            
            
            (175
            )
            
            7.32Balance
                at December 31, 2006
            
            
            25
            
            $
            7.32
            
            
            2.63
            
            $
            165




68




As
      of
      December 31, 2006, none of the restricted stock had vested.





As
      of
      December 31, 2006, there was $2.1 million of total unrecognized compensation
      cost related to nonvested share-based compensation arrangements granted under
      the Plans. That cost is expected to be recognized over a weighted-average period
      of 3.2 years. The total fair value of shares vested during the years ended
      December 31, 2006, 2005 and 2004, was $340,000, $5.1 million and $307,000,
      respectively.




In
      December 2005 the Board of Directors approved the acceleration of vesting of
      the
      unvested portion of certain "out-of-the money" non-qualified stock options
      previously awarded to employees, officers and directors with option exercise
      prices greater than $13.97 to be effective as of December 31, 2005. The
      Company's directors, executive officers, and certain senior-level managers,
      prior to the acceleration effective date, entered into a Resale Restriction
      Agreement that imposes restrictions on the sale of any shares received through
      the exercise of accelerated options until the earlier of the original vesting
      dates set forth in the option or the individual holder’s termination of
      employment or Board service, as the case may be. The accelerated options
      represent approximately 23% of the total of all outstanding Company options.
      The
      Board of Directors' decision to accelerate the vesting of these options was
      in
      anticipation of compensation expense to be recorded subsequent to the applicable
      effective date of Statement of Financial Accounting Standards No. 123 (Revised
      2004), “ *Share-Based
      Payment”* ("SFAS
      123(R)"). SFAS 123(R) requires companies to recognize the grant-date fair value
      of stock options issued to employees as an expense in the income statement
      and,
      as of the applicable effective date, will require the Company to recognize
      the
      compensation costs related to share-based payment transactions, including stock
      options. In addition, the Board of Directors considered that because these
      options had exercise prices in excess of the current market value, they were
      not
      fully achieving their original objectives of incentive compensation, employee
      retention and goal alignment. The acceleration of the vesting of these options
      resulted in approximately $3.0 million of additional share-based employee
      compensation expense as determined under the fair value based
      method.




In
      March
      2006, the Company’s board of directors repriced the strike price of certain
      vested outstanding stock options that were granted to certain employees and
      directors in 2005, including Rob Wrubel, Director and President, Bob Bejan,
      Director, senior members of the Company’s sales and business development groups,
      and other employees. The original strike price of the grants that were affected
      by the repricing ranged from $14.45 to $17.50. The new strike price is $7.00.
      A
      total of 38 individuals representing 360,775 option shares were affected by
      the
      repricing. In addition, the board of directors authorized the grant of 70,000
      option shares to Mr. Wrubel, and the grant of an additional 65,000 to certain
      other senior members of the Company’s sales and business development groups.
      Each of these grants has a strike price of $4.58 and vest over a four-year
      period from the date of grant. The repricing of these options resulted in
      approximately $153,000 of additional share-based compensation expense as
      determined under SFAS 123(R).




Cash
      received from option exercise under all share-based payment arrangements for
      the
      years ended December 31, 2006, 2005 and 2004, was $78,000, 171,000 and 173,000,
      respectively. The actual tax benefit realized for the tax deductions from option
      exercise of the share-based payment arrangements totaled zero, $1.5 million
      and
      1.8 million, respectively, for the years ended December 31, 2006, 2005 and
      2004.




Shares
      used to settle options issued under the plan are issued from the Company’s
      authorized but unissued shares.




The
      Company follows SFAS 123 and EITF 96-18 in accounting for options and warrants
      issued to non-employees. Except for the warrants issued in August 2006 in
      conjunction with the strategic distribution agreement as described above, the
      Company did not issue any options or warrants to non-employees during the years
      ended December 31, 2006, 2005 or 2004.




69




*Employee
      stock purchase plan*




The
      Company’s Board of Directors adopted the Employee Stock Purchase Plan (the
      Purchase Plan) on April 17, 2000, under which 2,000,000 shares have been
      reserved for issuance. Under the Purchase Plan, eligible employees may purchase
      common stock in an amount not to exceed 50% of the employees’ cash compensation
      or 1,800 shares per purchase period. The purchase price per share will be 85%
      of
      the common stock fair value at the lower of certain plan-defined dates.
      Effective January 1, 2006, compensation expense for the employee stock purchase
      plan is recognized in accordance with SFAS 123(R). Pursuant to the Purchase
      Plan, 15,620, 7,171 and 9,906 shares were purchased at a weighted average price
      of $4.37, $13.29 and $4.42 per share for the years ended December 31, 2006,
      2005
      and 2004, respectively. The amount included in share-based compensation for
      the
      year ended December 31, 2006 related to the employee stock purchase plan was
      approximately $34,000. No share-based compensation was recorded prior to the
      adoption of SFAS 123(R).




**12.
      Employee retirement plan**




During
      1999, the Company established the Aptimus 401(k) plan, a tax-qualified savings
      and retirement plan intended to qualify under Section 401 of the Internal
      Revenue Code. All employees who satisfy the eligibility requirements relating
      to
      minimum age and length of service are eligible to participate in the plan and
      may enter the plan on the first day of any month after they become eligible
      to
      participate. Participants may make pre-tax contributions to the plan of up
      to
      50% of their eligible earnings, subject to a statutorily prescribed annual
      limit. The Company may make matching contributions of up to 100% of the first
      6%
      of the compensation elected for contribution to the plan by an employee. Each
      participant is fully vested in his or her contributions and the investment
      earnings thereon, but vesting in any matching contributions by the Company
      takes
      place over a period of five years. The Company made no matching contributions
      to
      the plan for any period presented.




**13.
      Income taxes**




A
      current
      provision for income taxes was not recorded for the years ended December 31,
      2006, 2005 and 2004 due to taxable losses incurred in those years. In addition,
      no benefit for income taxes has been recorded due to the uncertainty of the
      realization of any tax assets. A valuation allowance has been recorded for
      the
      full value of deferred tax assets because realization is primarily dependent
      on
      generating sufficient taxable income prior to the expiration of net operating
      loss carry-forwards.




Items
      that account for differences between income taxes computed at the federal
      statutory rate and the provision (benefit) recorded for income taxes are as
      follows:




**December
                31,****2006**
            
            **2005**
            
            **2004**Federal
                Statutory rate
            
            
            34.00
            %
            
            34.00
            %
            
            34.00
            %Change
                in valuation allowance
            
            
            (36.48
            )%
            
            (38.91
            )%
            
            (37.07
            )%Impact
                of state tax provision
            
            
            4.14
            %
            
            3.07
            %
            
            2.92
            %Other
            
            
            (1.66
            )%
            
            1.84
            %
            
            0.15
            %Effective
                income tax rate
            
            
            0.00
            %
            
            0.00
            %
            
            0.00
            %







Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial statement purposes
      and
      the amounts used for income tax purposes. Significant components of our deferred
      tax assets and liabilities at December 31, 2006 and 2005 are as follows (in
      thousands):




70




**December
                31,****2006**
            
            **2005**Deferred
                tax assets:Net
                operating loss carryforwards
            
            $
            23,828
            
            $
            22,707Write
                down of long-term investment
            
            
            131
            
            
            128Nondeductible
                allowances and accruals
            
            
            172
            
            
            140Expense
                related to stock options and warrants
            
            
            336
            
            
            75Difference
                between book and tax depreciation
            
            
            29
            
            
            44Total
                deferred tax assets
            
            
            24,496
            
            
            23,094Deferred
                tax liabilities:None
            
            
            —
            
            
            —Net
                Deferred tax assets before valuation allowance
            
            
            24,496
            
            
            23,094Less:
                Valuation allowance
            
            
            (24,496
            )
            
            (23,094
            )$
            —
            
            $
            —





The
      valuation allowance has increased by approximately $1.4 million, $403,000,
      and
      $2.3 million in the years ended December 31, 2006, 2005, and 2004, respectively.
      Included in the net increase in the valuation allowance are amounts from
      share-based compensation that will be recorded to shareholders’ equity when they
      are realized in the amounts of $16,000, $929,000 and $1.5 million for the years
      ended December 31, 2006, 2005 and 2004, respectively.





At
      December 31, 2006, the Company had approximately $68.8 million of federal and
      $7.5 million of state net operating losses. The net operating loss
      carryforwards, if not utilized, will begin to expire in 2017 for federal
      purposes and in 2012 for California purposes. Current federal and California
      tax
      laws include substantial restrictions on the utilization of net operating losses
      and tax credits in the event of an ownership change of a corporation.
      Accordingly, the Company's ability to utilize net operating loss and tax credit
      carryforwards may be limited as a result of such ownership changes. Such a
      limitation could result in the expiration of carryforwards before they are
      utilized.





Approximately
      $3.3 million of the valuation allowance is attributable to stock options, the
      benefit of which will be credited to additional paid in capital when
      realized.




**14.
      Quarterly financial information (unaudited)**





The
      following table sets forth the Company’s unaudited quarterly financial
      information for the years ended December 31, 2006 and 2005 (in thousands, except
      per share data).




**Three
                months ended****3/31/06**
            
            **6/30/06**
            
            **9/30/06**
            
            **12/31/06**Revenue
            
            $
            2,959
            
            $
            3,186
            
            $
            4,608
            
            $
            4,445Net
                loss
            
            $
            (740
            )
            $
            (613
            )
            $
            (983
            )
            $
            (1,464
            )Basic
                net loss per share
            
            $
            (0.11
            )
            $
            (0.09
            )
            $
            (0.15
            )
            $
            (0.22
            )Diluted
                net loss per share
            
            $
            (0.11
            )
            $
            (0.09
            )
            $
            (0.15
            )
            $
            (0.22
            )





**Three
                months ended****3/31/05**
            
            **6/30/05**
            
            **9/30/05**
            
            **12/31/05**Revenue
            
            $
            3,852
            
            $
            4,483
            
            $
            3879
            
            $
            3,680Net
                income (loss)
            
            $
            681
            
            $
            949
            
            $
            10
            
            $
            (288
            )Basic
                net income (loss) per share
            
            $
            0.11
            
            $
            0.15
            
            $
            0.00
            
            $
            (0.04
            )Diluted
                net income (loss) per share
            
            $
            0.09
            
            $
            0.12
            
            $
            0.00
            
            $
            (0.04
            )





71




**Item
      9:** ***Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure***




Not
      applicable.




**Item
      9A:** ***Controls
      And Procedures***




**Evaluation
      of Disclosure Controls and Procedures**





We
      maintain disclosure controls and procedures designed to ensure that information
      required to be disclosed in reports filed under the Securities Exchange Act
      of
      1934, as amended, is recorded, processed, summarized and reported within the
      specified time periods. Disclosure controls are also designed to reasonably
      assure that such information is accumulated and communicated to our management,
      including the Chief Executive Officer and Chief Financial Officer, as
      appropriate to allow timely decisions regarding required disclosure. As of
      the
      end of the Company’s 2006 fiscal year, management conducted an assessment of the
      effectiveness of the design and operation of the Company’s disclosure controls.
      Based on this assessment, management has determined that the Company’s
      disclosure controls, as of December 31, 2006 are effective.





**Changes
      in Internal Controls**




During
      the year ended December 31, 2006, there have been no changes in our internal
      control over financial reporting (as defined in Rule 13a-15(f) under the
      Exchange Act) that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial reporting.





**Inherent
      Limitations on Effectiveness of Controls**




Our
      management, including our Chief Executive Officer and Chief Financial Officer,
      does not expect that our disclosure controls and procedures or our internal
      controls will prevent or detect all error and all fraud. A control system,
      no
      matter how well conceived and operated, can provide only reasonable, not
      absolute, assurance that the objectives of the control system are met. The
      design of a control system must reflect the fact that there are resource
      constraints, and the benefits of controls must be considered relative to their
      costs. Further, because of the inherent limitations in all control systems,
      no
      evaluation of controls can provide absolute assurance that misstatements due
      to
      error or fraud will not occur or that all control issues and instances of fraud,
      if any, within the Company have been detected. These inherent limitations
      include the realities that judgments in decision-making can be faulty and that
      breakdowns can occur because of simple error or mistake. Controls can also
      be
      circumvented by the individual acts of some persons, by collusion of two or
      more
      people, or by management override of the controls. The design of any system
      of
      controls is based in part on certain assumptions about the likelihood of future
      events, and there can be no assurance that any design will succeed in achieving
      its stated goals under all potential future conditions. Projections of any
      evaluation of controls effectiveness to future periods are subject to risks.
      Over time, controls may become inadequate because of changes in conditions
      or
      deterioration in the degree of compliance with policies or
      procedures.





**Item
      9B:** ***Other
      Information***




None.




II-1


**PART
      III**




**Item
      10:** ***Directors
      and Executive Officers of the Registrant***




Information
      with respect to Directors may be found under the caption "Election of Directors
      and Management Information" in the Company's Proxy Statement for the Annual
      Meeting of Shareholders to be held June 20, 2007 (the "Proxy Statement"). Such
      information is incorporated herein by reference.





Code
      of
      Ethics





We
      have
      adopted a Code of Ethics that applies to all directors, officers and employees
      of Aptimus, Inc., including the Chief Executive Officer and Chief Financial
      Officer. The key principles of the Code of Ethics are to act legally and with
      integrity in all work for Aptimus, Inc. The Code of Ethics is posted on the
      corporate governance page of our website at http://www.aptimus.com/ethics.shtml.
      We will post any amendments to our Code of Ethics on our website. In the
      unlikely event that the Board of Directors approves any sort of waiver to the
      Code of Ethics for our executive officers or directors, information concerning
      such waiver will also be posted on our website. In addition to posting
      information regarding amendments and waivers on our website, the same
      information will be included in a Current Report on Form 8-K within four
      business days following the date of the amendment or waiver, unless website
      posting of such amendments or waivers is permitted by the rules of The Nasdaq
      Stock Market, Inc.





**Item
      11:** ***Executive
      Compensation***




The
      information in the Proxy Statement set forth under the captions "Information
      Regarding Executive Officer Compensation" and "Information Regarding the Board
      and its Committees" is incorporated herein by reference.





**Item
      12:** ***Security
      Ownership of Certain Beneficial Owners and Management and related Stockholder
      Matters***




The
      information set forth under the caption "Information Regarding Beneficial
      Ownership of Principal Shareholders, Directors, and Management" of the Proxy
      Statement is incorporated herein by reference.





**Securities
      Authorized for Issuance under Equity Compensation Plans [SEE S-K
      201(d)]**




The
      following table sets forth the number of securities issuable under our equity
      compensation plans and indicates whether or not the plan received shareholder
      approval:




II-2




Plan
                Category
            A
            B
            CNumber
                of securities to be issued upon exercise of options, warrants and
                rights
            Weighted-average
                exercise price of outstanding options, warrants and rights
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in Column
                A)Equity
                compensation plans approved by security holders
            2,101,521
            $4.22
            2,575,102*Equity
                compensation plans not approved by security holders
            —
            —
            —Total
            2,101,521
            $4.22
            2,575,102*


*Includes
      1,931,667 shares of common stock subject to the 2000 Employee Stock Purchase
      Plan





**Item
      13:** ***Certain
      Relationships and Related Transactions***







The
      information set forth under the caption "Certain Relationships and Related
      Transactions" of the Proxy Statement is incorporated herein by
      reference.





**Item
      14:** ***Principal
      Accountant Fees and Services***




It
      is the
      policy of the Company for the Audit Committee to pre-approve all audit, tax
      and
      financial advisory services. All services rendered by Moss Adams were
      pre-approved by the audit committee in the years ended December 31, 2006 and
      2005. The aggregate fees billed by Moss Adams for professional services rendered
      for the audit of the Company’s financial statements and other services were as
      follows:




**Year
                ended December 31,****2006**
            
            **2005**Audit
                fees
            
            $
            402,500
            
            $
            427,194Audit
                related fees
            
            
            —
            
            
            6,056Tax
                fees
            
            
            —
            
            
            4,209All
                other fees
            
            
            —
            
            
            —Total
                fees
            
            $
            402,500
            
            $
            437,459






*Audit
      Fees.* This
      category includes the audit of the Company’s annual financial statements, review
      of financial statements included in the Company’s Form 10-Q quarterly
      reports, and services that are normally provided by Moss Adams LLP in connection
      with regulatory filings or engagements for those fiscal years. This category
      also includes advice on accounting matters that arose during, or as a result
      of,
      the audit or the review of interim financial statements. In addition, 2006
      audit
      fees include those fees related to Moss Adams LLP’s audit
      of
      High Voltage Interactive, Inc.’s financial statements included in the Company’s
      Form 8-K/A filing on November 2, 2006 .




II-3





PART
      IV


**Item
      15.** ***Exhibits
      and Financial Statement Schedules***




(a)1. *Financial
      Statements*




The
      following financial statements of the registrant and the Reports of our
      Independent Registered Public Accounting Firm thereon are included herewith
      in
      Item 8 above.




**Page****Report
                of Independent Registered Public Accounting Firm**
            **47****Consolidated
                Balance Sheets as of December 31, 2006 and 2005**
            **48****Consolidated
                Statements of Operations for each of the three years in the period
                ended
                December 31, 2006**
            **49****Consolidated
                Statements of Shareholders' Equity for each of the three years in
                the
                period ended December 31, 2006**
            **50****Consolidated
                Statements of Cash Flows for each of the three years in the period
                ended
                December 31, 2006**
            **51****Notes
                to Consolidated Financial Statements**
            **52**





(a)2. *Financial
      Statement Schedules*





**Schedule
                No.**
            **Description**1.1
            Valuation
                and Qualifying Accounts and Reserves Year Ended December 31, 2006,
                2005
                and 2004





**Valuation
      and Qualifying Accounts and Reserves Year Ended December 31, 2006, 2005 and
      2004**





**Balance
                at**
              **beginning**
              **of
                period**
            
            **Charges
                to**
              **costs
                and**
              **expenses**
            
            **Charges
                to**
              **other**
              **accounts**
            
            **Deductions**
            
            **Balance
                at**
              **end
                of**
              **period**Year
                ended December 31, 2006 Allowance for doubtful accounts
            
            
            223,000
            
            
            48,120
            
            
            —
            
            
            (35,120
            )
            
            236,000Tax
                valuation allowance
            
            
            23,094,000
            
            
            —
            
            
            1,402,000
            
            
            —
            
            
            24,496,000Year
                ended December 31, 2005 Allowance for doubtful accounts
            
            
            100,000
            
            
            123,000
            
            
            —
            
            
            —
            
            
            223,000Tax
                valuation allowance
            
            
            22,691,000
            
            
            —
            
            
            403,000
            
            
            —
            
            
            23,094,000Year
                ended December 31, 2004 Allowance for doubtful accounts
            
            
            61,000
            
            
            39,000
            
            
            —
            
            
            —
            
            
            100,000Tax
                valuation allowance
            
            
            20,436,000
            
            
            —
            
            
            2,255,000
            
            
            —
            
            
            22,691,000




*(a)3
      Exhibits:*





**Exhibit**
              **Number**
            **Description**3.1*
            Second
                Amended and Restated Articles of Incorporation of
                registrant.3.1.1(2)
            Articles
                of Amendment filed September 16, 2000.3.1.2(6)
            Articles
                of Amendment filed March 29, 2002.3.2*
            Amended
                and Restated Bylaws of registrant.




II-4




4.1*
            Specimen
                Stock Certificate.4.3(3)
            Rights
                Agreement dated as of March 12, 2002 between registrant and Mellon
                Investor Services LLC, as rights agent.10.1*(7)
            Form
                of Indemnification Agreement between the registrant and each of its
                directors.10.2*(7)
            1997
                Stock Option Plan, as amended.10.3*(7)
            Form
                of Stock Option Agreement.10.4(1)(7)
            Aptimus,
                Inc. 2001 Stock Plan.10.4.1(2)(7)
            Form
                of Stock Option Agreement.10.4.2(2)(7)
            Form
                of Restricted Stock Agreement (for grants).10.4.3(2)(7)
            Form
                of Restricted Stock Agreement (for rights to purchase).10.5(4)(7)
            Change
                in Control Agreement, dated as of December 6, 2002, by and between
                registrant and Timothy C. Choate10.6(4)(7)
            Form
                of Change in Control Agreement, dated as of December 6, 2002, by
                and
                between registrant and each of certain executive managers of
                registrant10.7(5)
            Form
                of Common Stock Warrant, dated July 2003, by and between the Company
                and
                certain investors.10.8(5)
            Form
                of Registration Rights Agreement, dated as of July 1, 2003, by and
                between
                the Company and certain investors.10.9(11)
            Agreement
                of Lease, dated as of November 18, 2003, by and between 100 Spear
                Street
                Owner’s Corp. and the Company.10.10(9)
            Agreement
                of Lease, dated as of April 29, 2004, by and between Sixth and Virginia
                Properties and the Company.10.11(8)
            Stock
                Purchase Agreement, dated as of December 4, 2003, by and between
                the
                Company and certain investors.10.12(10)
            Stock
                Purchase Agreement, dated as of March 25, 2005, by and between the
                Company
                and certain investors.10.13(10)
            Form
                of Common Stock Warrant, dated March 25 2005, by and between the
                Company
                and certain investors and service providers.10.14(7)
            Form
                of Stock Resale Restriction Agreement, dated as of December 23, 2005,
                by
                and between registrant and each of certain executive managers and
                key
                employees of registrant.23.1
            Consent
                of Moss Adams LLP, Independent Registered Public Accounting
                Firm.31.1
            Rule
                13a-14(a) Certification of the Chief Executive Officer31.2
            Rule
                13a-14(a) Certification of the Chief Financial Officer32.1
            Section
                1350 Certification of the Chief Executive Officer32.2
            Section
                1350 Certification of the Chief Financial
                Officer




Incorporated
      by reference to the Company’s Registration Statement on Form S-1 (No.
      333-81151).





(1)
            Incorporated
                by reference to the Company’s Proxy Statement on Schedule 14A, dated May
                17, 2001.


(2)
            Incorporated
                by reference to the Company’s Quarterly Report on Form 10-Q, dated
                November 14, 2001.


(3)
            Incorporated
                by reference to the Company’s Annual Report on Form 10-K, dated March 29,
                2002.




II-5




(4)
            Incorporated
                by reference to the Company’s Annual Report on Form 10-K, dated March 28,
                2003.


(5)
            Incorporated
                by reference to the Company’s Quarterly Report on Form 10-Q, dated August
                14, 2003.


(6)
            Incorporated
                by reference to the Company’s Quarterly Report on Form 10-Q, dated May 15,
                2002.


(7)
            Management
                compensation plan or agreement.


(8)
            Incorporated
                by reference to the Company’s Annual Report on Form 10-K, dated March 30,
                2004


(9)
            Incorporated
                by reference to the Company’s Quarterly Report on Form 10-Q, dated May 17,
                2004.


(10)
            Incorporated
                by reference to the Company’s Registration Statement on Form S-3 (No.
                333-124403), dated April 28, 2005.


(11)
            Incorporated
                by reference to the Company’s Quarterly Report on Form 10-Q, dated May 13,
                2005.





II-6




**SIGNATURES**





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




March
              30, 2007
            APTIMUS,
              INC.By:
            /s/
              ROBERT
              W. WRUBELRobert
              W. Wrubel,*Chief
              Executive Officer*




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





**Signature**
            **Title**
            **Date**/s/
                Robert W. Wrubel
            Chief
                Executive Officer,
            March
                30, 2007Robert
                W. Wrubel
            President
                and Director/s/John
                A. Wade
            Vice
                President, Finance
            March
                30, 2007John
                A. Wade
            Chief
                Financial Officer andChief
                Accounting Officer/s/Timothy
                C. Choate
            Chairman
                of the Board,
            March
                30, 2007Timothy
                C. Choate
            and
                Director/s/John
                B. Balousek
            Director
            March
                30, 2007John
                B. Balousek/s/Bob
                Bejan
            Director
            March
                30, 2007Bob
                Bejan/s/
                Eric Helgeland
            Director
            March
                30, 2007Eric
                Helgeland




II-7




**EXHIBITS
      INDEX**




**Exhibit**
              **Number**
            **Description**3.1*
            Second
                Amended and Restated Articles of Incorporation of
                registrant.3.1.1(2)
            Articles
                of Amendment filed September 16, 2000.3.1.2(6)
            Articles
                of Amendment filed March 29, 2002.3.2*
            Amended
                and Restated Bylaws of registrant.4.1*
            Specimen
                Stock Certificate.4.3(3)
            Rights
                Agreement dated as of March 12, 2002 between registrant and Mellon
                Investor Services LLC, as rights agent.10.1*(7)
            Form
                of Indemnification Agreement between the registrant and each of its
                directors.10.2*(7)
            1997
                Stock Option Plan, as amended.10.3*(7)
            Form
                of Stock Option Agreement.10.4(1)(7)
            Aptimus,
                Inc. 2001 Stock Plan.10.4.1(2)(7)
            Form
                of Stock Option Agreement.10.4.2(2)(7)
            Form
                of Restricted Stock Agreement (for grants).10.4.3(2)(7)
            Form
                of Restricted Stock Agreement (for rights to purchase).10.5(4)(7)
            Change
                in Control Agreement, dated as of December 6, 2002, by and between
                registrant and Timothy C. Choate10.6(4)(7)
            Form
                of Change in Control Agreement, dated as of December 6, 2002, by
                and
                between registrant and each of certain executive managers of
                registrant10.7(5)
            Form
                of Common Stock Warrant, dated July 2003, by and between the Company
                and
                certain investors.10.8(5)
            Form
                of Registration Rights Agreement, dated as of July 1, 2003, by and
                between
                the Company and certain investors.10.9(11)
            Agreement
                of Lease, dated as of November 18, 2003, by and between 100 Spear
                Street
                Owner’s Corp. and the Company.10.10(9)
            Agreement
                of Lease, dated as of April 29, 2004, by and between Sixth and Virginia
                Properties and the Company.10.11(8)
            Stock
                Purchase Agreement, dated as of December 4, 2003, by and between
                the
                Company and certain investors.10.12(10)
            Stock
                Purchase Agreement, dated as of March 25, 2005, by and between the
                Company
                and certain investors.10.13(10)
            Form
                of Common Stock Warrant, dated March 25 2005, by and between the
                Company
                and certain investors and service providers.10.14(7)
            Form
                of Stock Resale Restriction Agreement, dated as of December 23, 2005,
                by
                and between registrant and each of certain executive managers and
                key
                employees of registrant.23.1
            Consent
                of Moss Adams LLP, Independent Registered Public Accounting
                Firm.31.1
            Rule
                13a-14(a) Certification of the Chief Executive Officer31.2
            Rule
                13a-14(a) Certification of the Chief Financial Officer32.1
            Section
                1350 Certification of the Chief Executive Officer32.2
            Section
                1350 Certification of the Chief Financial
                Officer




II-8




Incorporated
      by reference to the Company’s Registration Statement on Form S-1 (No.
      333-81151).





(1)  Incorporated
      by reference to the Company’s Proxy Statement on Schedule 14A, dated May 17,
      2001.


(2)  Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q, dated November 14,
      2001.


(3)  Incorporated
      by reference to the Company’s Annual Report on Form 10-K, dated March 18,
      2002.


(4)  Incorporated
      by reference to the Company’s Annual Report on Form 10-K, dated March 28,
      2003.


(5)  Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q, dated August 14,
      2003.


(6)  Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q, dated May 15,
      2002.


(7)  Management compensation plan or agreement.


(8)  Incorporated
      by reference to the Company’s Annual Report on Form 10-K, dated March 30,
      2004


(9)  Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q, dated May 17,
      2004.


(10)  Incorporated
      by reference to the Company’s Registration Statement on Form S-3 (No.
      333-124403), dated April 28, 2005.


(11)  Incorporated
      by reference to the Company’s Quarterly Report on Form 10-Q, dated May 13,
      2005.





II-9