UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      DC 20549





**FORM
      10-K**





(Mark
                  One)


[X] 
      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF
      1934


For
      the
      fiscal year ended December 31, 2005.





OR





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


For
      the
      transition period from ________to__________ .





Commission
      File Number: **0-21202**





**Firstwave
                Technologies, Inc.**(Exact
                name of registrant as specified in its
                charter)





**Georgia**
            **58-1588291**(State
                or other jurisdiction of incorporation or organization)
            (IRS Employer
                Identification No.)





**5775
                Glenridge Drive, Building E, Suite 400, Atlanta,
                Georgia**
            **30328**(Address
                of principal executive offices)
            (Zip
                Code)





Registrant's
      telephone number, including area code: **(770) 250-0360**





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





**None**





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





**Common
                Stock, $.0019 par value**(Title
                of Class)





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 Act.


Yes o No **x**





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.


Large
      accelerated filer   o       
Accelerated filer    o     
      Non-accelerated filer  x





Aggregate
      market value of the Common
      Stock held by non-affiliates of the
      Registrant, based on the closing price as quoted on the NASDAQ Small Cap Market
      on  June
      30,
      2005: $4,782,841





Number
      of shares of Common Stock outstanding as of March 27, 2006:
      2,768,302





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the Company's definitive Proxy Statement for its Annual Meeting of
      Shareholders to be held on June 5, 2006 are incorporated by reference into
      Part
      III of this Report.














**Firstwave
      Technologies, Inc.**


**Annual
      Report on Form 10-K**


**For
      the Year Ended December 31, 2005**








**Table
      of Contents**





**Part
      I**








Item
                1.
            Business
            3Item
                1A.
            Risk
                Factors
            6Item
                2.
            Properties
            11Item
                3.
            Legal
                Proceedings
            11Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            11**Part
                II**Item
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder
                Matters, and Issuer Purchases of Equity Securities
            11Item
                6.
            Selected
                Financial Data
            12Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            12Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            22Item
                8.
            Financial
                Statements and Supplementary
                Data
            23Item
                9.
            Changes
                in and Disagreements With Accountants on Accounting
                and Financial Disclosure
            41Item
                9A.
            Controls
                and Procedures
            41Item
                9B.
            Other
                Information
            41**Part
                III**Item
                10.
            Directors
                and Executive Officers of the
                Registrant
            41Item
                11.
            Executive
                Compensation
            42Item
                12.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters
            42Item
                13.
            Certain
                Relationships and Related
                Transactions
            42Item
                14.
            Principal
                Accounting Fees and Services
            42**Part
                IV**Item
                15.
            Exhibits
                and Financial Statement
                Schedules
            42Signatures








2





**PartI**





**Item1.  
Business**





**Safe
      Harbor for Forward Looking Statements**





Except
      for historical information contained herein, this section and other parts of
      this Form 10-K contain “forward-looking statements” within the meaning of
      various provisions of the Securities Act of 1933 and the Securities Exchange
      Act
      of 1934. Such forward-looking statements can generally be identified by words
      such as ”will”, “expect”, “intends”, “believes”, “anticipates”, “should” and
      words of similar meaning. Firstwave Technologies, Inc. (“Firstwave” or “the
      Company”) notes that the forward-looking statements involve a number of risks
      and uncertainties that could cause actual results to differ materially from
      any
      such statement, such as potential fluctuations in quarterly results due to
      factors including delays in purchase decisions and other adverse market
      conditions, whether the Company will be able to continue diversification of
      its
      revenues, competition and technological developments, the Company’s capital
      requirements and other liquidity concerns, the Company's ability to continue
      to
      comply with NASDAQ listing requirements, and the size, timing, and contractual
      terms of orders, and also the risks and uncertainties discussed under the
      caption “Risk Factors” in this Annual Report on Form 10-K. The information set
      forth herein is provided as of the date hereof.





**General**





Headquartered
      in Atlanta, Georgia, Firstwave is a provider of Customer Relationship Management
      (CRM) industry-focused solutions. Firstwave's corporate and product mission
      reflects our customer-first commitment: To develop and integrate the best
      software solutions to manage customer interactions and information. We strive
      to
      provide our clients with effective CRM, robust technology and the highest
      standard of customer service. The Company was incorporated in October of 1984
      in
      the State of Georgia, and has one subsidiary: Connect-Care, Inc., acquired
      in
      March of 2003, which is incorporated under the laws of the State of Georgia.





Firstwave
      offers a suite of features to specifically meet the needs of companies and
      organizations in the high technology industry. Firstwave Technology helps
      software and technology customers keep current customers loyal, close more
      sales
      and capture more market share. Our CRM solutions offer sales, marketing, and
      customer support automation along with project and product quality management.
      Firstwave CRM is adaptive and scalable and easily integrates with existing
      systems. This allows for rapid deployment and, typically, a lower total cost
      of
      ownership.





Our
      CRM
      solutions are divided into three product groups: Firstwave CRM, Firstwave
      Technology and TakeControl.





**Firstwave
      CRM Solutions**





**Firstwave
      CRM**





Firstwave
      provides enterprise-wide CRM software solutions specifically designed for the
      high-technology industries. By embracing a customer-focused business strategy,
      Firstwave's CRM solutions help improve an organization's efficiency enabling
      revenue growth, cost containment and customer retention.





Firstwave
      CRM handles the collaboration and interaction between workforce, customers
      and
      prospects. Through the use of Firstwave CRM, companies have the ability to
      increase revenue growth, customer retention and employee productivity.





Firstwave
      offers a variety of tools, applications and access options designed to enhance
      the customer experience across the entire enterprise. Firstwave CRM consists
      of
      the following modules:





First-SalesTM
      - Manage sales cycle for increased revenue and efficiency


First-MarketTM
      - Marketing campaign and content management


First-SupportTM
      - Increase customer satisfaction, retention and loyalty


First-SurveyTM
      - Keep a pulse on customer preferences through poll and survey management


First-ProjectTM
      - Streamline service delivery and project management


First-QualityTM
      - Close the customer feedback loop and quickly identify product issues


First-WebTM
      - Reduce customer support costs and improve communication through customized
      web
      portals


DataWave
      - Help maintain a quality database





3











**Firstwave
      TechnologyTM**





Firstwave
      Technology is an enterprise-wide CRM solution specifically designed for today's
      fast-paced software and hardware companies. Maintaining our customer-first
      commitment, Firstwave Technology gives high technology companies the tools
      to
      improve operational efficiency, maximize revenue and legacy investments, and
      increase customer satisfaction, loyalty and retention.





Firstwave
      Technology handles the collaboration and interaction between a company’s
      workforce, customers and prospects.





Firstwave’s
      CRM product suite is built on Microsoft technologies and includes support for
      multiple databases, including Oracle and Microsoft SQL. In addition to offering
      support for multiple database technologies, Firstwave offers a plug-in based
      architecture allowing for a flexible approach to changing business logic and
      new
      data sources.





**TakeControlTM**





The
      TakeControl suite consists of CRM systems designed to optimize sales, marketing
      and customer service operations through delivering highly functional solutions.





TakeControl
      Sales creates a virtual sales environment through linking field and office
      personnel into a powerful sales team by automating account and opportunity
      management procedures. Management tools include a report writing facility,
      scheduling features, full account and contact details, and graphical analysis
      tools.





TakeControl
      Marketing pinpoints marketing opportunities to support and enhance differing
      marketing campaigns. Specializing on capturing the information required from
      prospects and customers, it delivers key facilities such as call scripting,
      mail
      merge, order taking, and activity scheduling to provide a compilation of
      simplified, yet precise, information.





TakeControl
      Customer Support establishes a support center that builds customer satisfaction
      and loyalty by providing support team members with instant access to customer
      information to quickly log and trouble-shoot problems while shortening response
      times. It also identifies the trends of calls received within the support center
      to enable future improvements based on customer feedback.





**Leveraging
      Strategic Alliances**





We
      market and support our CRM solutions through a combination of limited direct
      sales channels and the efforts of our strategic alliance partners, primarily
      M1
      Global Solutions, Inc. (“M1 Global”). Our relationship with M1 Global is based
      on a three-year OEM/Outsourcing Agreement and a Licensing Agreement. Under
      the
      terms of the agreements, both Firstwave and M1 Global are contributing to the
      ongoing development, maintenance and support of Firstwave products; M1 Global
      has licensed the Firstwave CRM database schema to develop its future products;
      Firstwave is outsourcing its Professional Services and Support functions to
      M1
      Global; and M1 Global is a non-exclusive reseller of Firstwave products.
      Firstwave retains all maintenance revenues and pays to M1 Global $154,315 per
      quarter in consideration for M1 Global providing support services to Firstwave
      customers. The agreements provide that M1 Global also pays royalty commissions
      to Firstwave as follows: 33% on licenses and 20% on services.





On
      June
      3, 2005, Firstwave entered into a Stock Purchase Agreement with AllAboutTickets
      LLC, now operating as First Sports International (”First Sports”). Under the
      terms of the Agreement, the Company sold all of the issued share capital of
      Firstwave Technologies U.K., Ltd., a subsidiary of the Company, to First Sports.
      The total purchase price was $2,214,000, of which $256,000 was paid at closing,
      $1,620,000 is to be paid pursuant to a Promissory Note, and $338,000 is to
      be
      paid as software revenues are achieved to reimburse the Company for certain
      prepaid royalties.





On
      July
      1, 2005, we entered into a consulting arrangement with First Sports
      International (“First Sports”) to provide service and maintenance to our
      existing U.K. CRM customers. These CRM customers remain customers of Firstwave,
      but First Sports provides the services to support these customers. If First
      Sports did not provide the services, we would either provide the support
      services ourselves or would contract with another third party in the U.K. to
      provide such services. These customers are not associated with the sports
      customers acquired by First Sports as part of the sale of the U.K. Subsidiary
      on
      June 3, 2005, and they are part of the continuing operations disclosed in this
      Form 10-K. Under the terms of this outsourcing arrangement, we pay First Sports
      a fee of 20% of the maintenance revenues upon collection, for providing local
      support.





4








**Sources
      of Revenues, Pricing and Material Terms for Licensing
      Agreements**





The
      first component of revenue is software license revenues. The Company’s CRM
      solutions are generally licensed on a per-user model, except for hosting
      services. Customers generally pay a license fee for the software based upon
      the
      number of licensed users for the application as well as for the tool set.
      Hosting allows organizations to deploy the applications without the need for
      internal hardware infrastructure or system administrative capabilities. All
      license fees are fixed and determinable, whether under the per-user model or
      hosting model. On sales made by M1 Global, Firstwave receives 33% of the license
      fees.





The
      second component of revenue is services revenues, which consist of professional
      consulting, technical services and training services. Consulting and technical
      services are charged on an hourly basis and may be billed in advance or weekly,
      pursuant to customer work orders. Training services are charged on a
      per-attendee basis with a minimum daily charge. For classes conducted at
      customer sites, we charge a per-day rate for a set number of attendees. Actual
      travel expenses are billed as incurred. Hosting services are priced as a monthly
      or yearly fixed amount based upon the number of users and are recognized as
      services revenues ratably by month over the period of services. M1 Global is
      the
      primary provider of services for Firstwave, and Firstwave receives 20% of the
      fees received by M1 Global for providing services to Firstwave
      customers.





The
      third component of revenue is maintenance revenues, which are derived from
      the
      provision of: (1) customer support in the form of customer services via
      communication channels, and (2) updates and enhancements of products and related
      documentation provided on a when and if available basis. Customers are provided
      maintenance and support for an annual fee. This fee is billed monthly,
      quarterly, or annually and is subject to changes in pricing upon 90 days'
      written notice to the customer. Firstwave generally invoices and collects 100%
      of the maintenance revenues for Firstwave customers directly, while the support
      services for such fees are performed by M1 Global. Firstwave pays M1 Global
      $154,315 per quarter in consideration for such maintenance services.





**Customers**





Firstwave’s
      customers operate in many industries, but we have a dedicated focus in the
      high-technology marketplace. Our industry-focused solution is developed
      specifically for companies in the technology industry, taking into consideration
      their unique needs, revenue sources and customer demands.





During
      2005, we continued to pursue strategies to transition our revenue stream to
      a
      more diverse customer base and away from dependency on one large customer.
      As
      part of such strategies, we entered into the relationship with M1 Global as
      detailed above.





In
      2005,
      none of our customers contributed more than 10% of total revenue. The table
      below identifies the customer who contributed more than 10% of total revenue
      in
      the previous years shown.





**Year
                  ended December 31,****2005**
              
              **2004**
              
              **2003**Electronic
                  Data Systems, Ltd
              
              
              6.2%
              
              
              11.8%
              
              
              55.2%








**Competition**





The
      competition in our high technology vertical comes from a multitude of software
      vendors, including existing CRM vendors, new web-based CRM vendors and ERP
      vendors who have penetrated the CRM industry through acquisitions or product
      development.





Companies
      that offer competing products include Salesforce.com, Peoplesoft, Epiphany,
      Onyx, Microsoft, Seibel On Demand, Pivotal, and SalesLogix. These companies
      offer comprehensive packages, which include marketing, sales, and service.
      These
      companies also have integrated some Internet technology into their products
      and
      have customization capabilities within their product sets. SAP, Oracle and
      Siebel Systems, due to their large international presence and market share,
      are
      also competitors at the enterprise level. There are also hundreds of vendors
      addressing the needs evident in this industry, including specialists who provide
      cross-industry solutions and vertically focused solutions, such as for
      pharmaceuticals or finance.








5





Our
      biggest competitive advantage is our demonstrated domain expertise in our
      vertical and high customer satisfaction. Although we frequently compete
      favorably with respect to these factors, there can be no assurance that we
      will
      be able to achieve the innovation, product development and market share
      necessary to maintain competitive advantage. Associated risks and uncertainties
      are discussed under the caption “Risk Factors” in this Annual Report on Form
      10-K.





**Proprietary
      Rights and Licenses**





We
      depend upon a combination of trade secrets, copyright and trademark laws,
      license agreements, non-disclosure and other contractual provisions with
      customers and employees to protect our proprietary rights in our products.
      We
      also maintain confidentiality agreements with our employees. Because Firstwave
      CRM solutions allow customers to customize their applications without altering
      the source code, the source code for our products is neither licensed nor
      provided to customers, although we have contractually agreed in certain
      instances to have our source code held in escrow by a third party.
      Notwithstanding these precautions, it may be possible for unauthorized persons
      to copy aspects of the products or to obtain information that we regard as
      proprietary. There can be no assurance that these protections will be adequate
      or that competitors will not independently develop technologies that are
      substantially equivalent or superior to our technology.





**Employees**





As
      of
      March 1, 2006, the Company employed 5 persons, including 3 executive and
      administrative personnel and 2 persons involved in product innovation and
      development. Professional services and customer support services for Firstwave
      customers are now provided primarily by M1 Global employees through an
      outsourcing agreement that supplements the Firstwave staff with 8 sales and
      marketing professionals, 21 service and support representatives, 13 persons
      involved in product innovation and development and 5 executive/administrative
      personnel.





**Item1A.
      Risk Factors**





An
      investment in our common stock involves a significant degree of risk.
      Prospective investors should carefully consider the following factors that
      may
      affect our current and future operations and prospects. If any of the following
      risks actually occur, our business, financial condition or results of operations
      could be materially adversely affected, the trading price of our common stock
      could decline, and you may lose all or part of your investment.





**Negative
      cash flow and the difficulty of raising additional capital may adversely affect
      our operations and the price of our common stock.**





During
      2004 and 2005, we experienced negative cash flows and may experience negative
      cash flow in the future. Prior to our outsourcing agreements, we required
      significant amounts of capital to fund our business operations and product
      development efforts. Our ability to maintain and develop our revenue sources
      will directly impact our ability to raise capital needed to grow our business.





In
      the
      past, we have funded our operating losses and working capital needs through
      cash
      flow from operations and from the proceeds of equity offerings and debt
      financings. If we raise additional funds through the issuance of equity,
      equity-linked or debt securities, those securities may have rights, preferences
      or privileges senior to those of the rights of our common stock and, in light
      of
      our current market capitalization, our shareholders may experience substantial
      dilution.





**We
      are heavily dependent upon M1 Global’s key personnel, expertise in the CRM
      software market, and future business strategy; the loss of which could affect
      our ability to successfully grow or maintain our business; and if M1 Global
      changes its strategy to sell Firstwave products and services, our revenues
      may
      be materially harmed.**





We
      depend in large part upon the continued relationship with M1 Global and its
      ability to successfully market, sell, service and support Firstwave products.
      The loss of M1 Global key personnel or a change in its business strategy to
      sell
      Firstwave products and services would likely harm our operations significantly.
      Our revenues could suffer, and we may experience a material adverse impact
      on
      our business, operating results, and financial condition.





**We
      are reliant upon First Sports’ expertise in the CRM software market and with our
      U.K. customers; the loss of which could affect our ability to successfully
      support our U.K. customers and retain the maintenance revenues associated
      therewith.**





Outside
      of the discontinued operations associated with the sale of the U.K. Subsidiary
      to First Sports on June 3, 2005, we depend upon First Sports and its ability
      to
      successfully support and maintain our U.K. CRM customers. If First Sports were
      to no longer provide such local support, we would need to support these
      customers ourselves or contract with another third party to provide the support
      services, or our maintenance revenues from the U.K. CRM customers would suffer,
      and we may experience an adverse impact on our revenues, operating results,
      and
      financial condition.





6











**We
      have in the past and may in the future experience significant fluctuations
      in
      our operating results and rate of growth, and the price of our common stock
      may
      be adversely affected by these fluctuations.**





Our
      quarterly operating results have in the past and may in the future vary or
      decrease significantly depending on factors such as:





·
            the
                effect of past and future
                acquisitions,


·
            the
                dependence on the efforts of others, such as M1 Global and First
                Sports,


·
            changes
                in operating expenses,


·
            changes
                in our strategy,


·
            key
                personnel departures,


·
            the
                size and timing of significant
                orders,


·
            the
                impact of estimates of our future operating results published by
                third
                parties,


·
            the
                timing of revenue from software sales and professional services,


·
            the
                timing of new product and service announcements,


·
            changes
                in pricing policies by us and our competitors,


·
            market
                acceptance of new and enhanced versions of our products,


·
            the
                introduction of alternative technologies,
                and


·
            general
                economic factors.





We
      have
      limited or no control over many of these factors. Investors are cautioned that
      as a matter of policy we do not provide earnings projections or guidance to
      any
      financial analysts or other publishers of financial reports. If we change this
      policy, which we do not anticipate, we will make a public announcement regarding
      such change. Until such time, if it occurs, you should not rely upon any such
      information, reports, statements, estimates or projections of financial
      analysts, publishers of financial reports or others as having been provided
      or
      endorsed by us. We expressly do not adopt or endorse, and expressly disclaim,
      any and all such independent third party information, reports, statements,
      estimates and projections.





We
      believe that period-to-period comparisons of our results of operations are
      not
      necessarily meaningful and should not be relied upon as indications of future
      performance. Due to all these factors, it is likely that in some future quarter
      our operating results will be below the expectations of investors. In that
      event, the price of our common stock will likely be adversely
      affected.





**Our
      stock price has been and may continue to be highly
      volatile.**





The
      trading price of our common stock fluctuates significantly. Trading prices
      of
      our common stock may fluctuate in response to a number of events and factors
      such as:





·
            general
                economic conditions,


·
            conditions
                or trends in the CRM industry,


·
            fluctuations
                in the stock market in general, and


·
            quarterly
                variations in operating results.





**Decreases
      or delays in our target customers’ information technology spending and other
      circumstances that result from poor economic conditions may harm our revenues;
      if general economic conditions do not improve or if they worsen, our revenues
      may be materially harmed.**





Some
      of
      our customers and prospective customers have indicated that they have reduced
      their budgets available for spending on outsourced technology applications
      or
      have delayed purchase decisions for information technology products like ours
      due, in part, to difficult economic conditions.  If the
      economy does not improve or if it worsens, our customers may continue to delay
      or reduce their spending on CRM software and customization. When economic
      conditions weaken, sales cycles for sales of software products tend to lengthen
      and companies’ information technology budgets tend to be reduced. Accordingly,
      our business has suffered and could continue to suffer. The impact of these
      reduced budgets and delays in purchase decisions is not possible to measure
      or
      quantify.





7





**The
      market for our CRM software and services is subject to rapid change stemming
      from customer requirements and changes in related technologies, including
      hardware, operating systems and telecommunications; if we fail to improve our
      products in response to these changes, our sales may
      decline.**





The
      market for our CRM software and services is subject to rapid change,
      including  technological
      advances, changes in customer requirements and frequent new product
      introductions and enhancements.  Our
      future success depends upon our ability to enhance our current products and
      continue to develop and market new products that address the increasingly
      sophisticated needs of customers and achieve market acceptance. In particular,
      we believe that we must continue to respond quickly to customer needs for
      additional functionality and to ongoing advances in hardware, operating systems
      and telecommunications. Any failure by us to anticipate or respond rapidly
      to
      technological advances, new products and enhancements and changes in customer
      requirements could have a material adverse effect on our competitive position
      or
      render some of our products obsolete or less desirable than available
      alternatives.





With
      the
      release of any new product release, we are subject to the risks generally
      associated with new product introductions and applications, including lack
      of
      market acceptance, delays in development and implementation, and failure of
      products to perform as expected. In order to introduce and market new or
      enhanced products successfully with minimal disruption in customer purchasing
      patterns, we must manage the transition from existing products. There can be
      no
      assurance that we will be successful in developing and marketing, on a timely
      basis, product enhancements or products that respond to technological advances
      by others, that our new products will adequately address the changing needs
      of
      the market or that we will successfully manage product transitions. Further,
      failure to generate sufficient cash from operations or financing activities
      to
      develop or obtain improved products and technologies could have a material
      adverse effect on our results of operations and financial
      condition.





**To
      grow our business, we may acquire additional companies, including by issuing
      shares of our stock, which may subject us to additional risks and may dilute
      your ownership.**





To
      initiate our growth strategies, we acquired Connect-Care, Inc. in March 2003,
      and we may acquire other businesses. An inability to identify, acquire and
      integrate businesses, products or services that complement our business may
      negatively affect our ability to grow. We cannot guarantee that we will be
      able
      to identify and acquire suitable candidates on acceptable terms. We also cannot
      provide any assurance that we will be able to arrange adequate financing,
      complete additional transactions or successfully integrate the acquired
      businesses. As in the case of the Connect-Care merger, we may issue shares
      of
      stock in future acquisitions or in financing transactions, which would dilute
      the ownership percentages of our existing shareholders. Acquisitions and stock
      offerings may also distract management and result in the incurrence of debt,
      expenses related to goodwill and other intangible assets and unforeseen
      liabilities, all of which could have a material adverse effect on our business
      and financial condition. In addition, we may not be able to successfully compete
      with other companies for acquisition candidates. In order for any acquisition
      to
      be successful, we would have to successfully and quickly integrate the new
      business with our business, including:





·
            cross-market
                and sell our services and products to the new business’
                customers;


·
            minimize
                duplicative managerial, sales and marketing efforts and eliminate
                redundant costs of our operations;
                and


·
            make
                the new business’ personnel operate together with our personnel in a
                cost-effective manner.





If
      we do
      not integrate our operations successfully, we may fail to achieve our business
      goals. This would likely cause a slow-down in our growth rate that may result
      in
      a decrease in the value of your investment.





**Our
      CRM software products, like most software products of a complex nature, may
      contain undetected errors; as a result, we could experience delays, additional
      expenses or lost revenues.**





Software
      products as complex as those we offer may contain undetected errors. We could
      experience delays or lost revenues during the period required to correct those
      errors. There can be no assurance that, despite testing by us and by current
      and
      potential customers, errors will not be found in our software. If our products
      are found to contain errors, the result to us could be:





·
            a
                loss of or delay in market acceptance,


·
            additional
                and unexpected expenses to fund further product development,


·
            additional
                and unexpected expenses to add programming personnel to complete
                a
                development project,


·
            loss
                of revenue because of the inability to sell the new product on a
                timely
                basis, and


·
            loss
                of revenue due to adverse effect on our reputation, any one or more
                of
                which could have a material adverse effect on
                us.





8








**Like
      most providers of complex software, our most valuable asset is an intangible,
      intellectual property; protection of our proprietary rights can be difficult,
      complex and expensive; if we are unable to protect our proprietary rights,
      then
      our competitive position could be weakened, which may reduce our
      revenues.**





We
      derive a significant portion of our revenues from license, service and
      maintenance fees generated from our software. We do not have any patents on
      our
      software; rather we  rely
      on
      a combination of trade secrets, copyright and trademark laws, non-disclosure
      and
      other contractual provisions and technical measures to protect our proprietary
      rights. We may be required to spend significant resources to monitor and police
      our proprietary rights. There can be no assurance that these protections will
      be
      adequate or that our competitors will not independently develop technologies
      that are substantially equivalent or superior to our technologies.





Other
      software providers could copy or otherwise obtain and use our products or
      technology without authorization. We may not be able to detect infringement
      and
      may lose a competitive position in the market before we do so. In addition,
      competitors may design around our technology or develop competing technologies.
      The laws of some foreign countries do not protect proprietary rights to the
      same
      extent as the laws of the United States. If we fail to successfully enforce
      our
      proprietary rights, our competitive position may be harmed.





**Because
      it is not difficult to enter our industry, we expect increased competition
      from
      the introduction of superior products or by pricing pressure from competitors,
      all of which could harm our business.**





The
      market for our products is characterized by significant price competition,
      and
      we expect that we will face increasing pricing pressures from our current
      competitors. In addition, some of our competitors may have significant
      advantages including the ability to adapt quickly to new technologies and
      changes in customer demands, and substantially greater resources and market
      presence. Moreover, because there are low barriers to entry into the software
      market, we believe that competition will increase in the future. Accordingly,
      there can be no assurance that we will be able to provide products that compare
      favorably with the products of our competitors or that competitive pressures
      will not require us to reduce our prices. Any material reduction in the price
      of
      our products would negatively affect gross margins as a percentage of new
      revenue and would require us to increase software unit sales in order to
      maintain net revenues.





**The
      terms of our preferred stock**  **include
      preferences over our common stock and the issuance of additional shares of
      preferred stock may have a material adverse effect on the market value of our
      common stock.**





Our
      board of directors has the authority to issue up to 1,000,000 shares of
      preferred stock and to fix the rights, preferences, privileges and restrictions,
      including voting rights, of these shares without any further vote or action
      by
      our shareholders. At December 31, 2005 shares of outstanding preferred stock
      were as follows:





·
            10,000
                shares of Series A Convertible Preferred Stock


·
            7,020
                shares of Series B Convertible Preferred Stock


·
            10,000
                shares of Series C Convertible Preferred
                Stock


·
            7,000
                shares of Series D Convertible Preferred
                Stock





The
      rights of the holders of the common stock are subject to, and may be adversely
      affected by, the rights of the holders of Series A, Series B, Series C and
      Series D Convertible Preferred Stock and any other preferred stock that may
      be
      issued in the future. The issuance of the Series A, Series B, Series C and
      Series D Convertible Preferred Stock and any future issuances of other classes
      of preferred stock, while providing desirable flexibility in connection with
      possible acquisitions and other corporate purposes, could have the effect of
      making it more difficult for a third party to acquire a majority of our
      outstanding voting stock, thereby delaying, deferring or preventing a change
      in
      control of our company. Furthermore, the Series A, Series B, Series C and Series
      D Convertible Preferred Stock have other rights, including economic rights,
      senior to the common stock and, as a result, the existence of our preferred
      stock may have a material adverse effect on the market value of our common
      stock. Any future issuances of other classes of preferred stock may have other
      rights, including economic rights, senior to the common stock, and as a result,
      the issuance of new preferred stock could have a material adverse effect on
      the
      market value of our common stock. We may, in the future, adopt other measures
      that may have the effect of delaying, deferring or preventing a change in
      control of our company. Some of these measures may be adopted without any
      further vote or action by our shareholders. We have no present plans to adopt
      any of those types of measures.








9





**We
      are reliant upon certain key personnel for expertise in the CRM software market
      and in the technical aspects of the CRM software product; the loss of such
      key
      personnel could affect our ability to successfully grow our
      business.**





We
      depend in large part upon the continued service of our chief executive officer
      and key engineering and technical staff with expertise in our industry and
      products. The loss of the services of our executive officer and key personnel
      could harm our operations. Currently, none of our personnel are bound by an
      employment agreement, and we do not maintain key person insurance on any of
      our
      employees. We would also be harmed if one or more of our key employees decided
      to join a competitor or otherwise compete with us.





**The
      market for CRM software has fluctuated over the past several years, and we
      are
      uncertain as to its future; if the market for CRM software does not grow, our
      revenues may be reduced.**





The
      CRM
      software market is fluctuating, and our success depends on its growth. If the
      market for CRM software does not grow as quickly or become as large as
      anticipated, our revenues may be reduced. Our potential customers
      may:





·
            not
                understand or see the benefits of using these products,


·
            not
                achieve favorable results using these products,


·
            experience
                technical difficulty in implementing or using these products, or


·
            use
                alternative methods to solve the same business problems.





**Our
      products can have long sales cycles which make it difficult to plan expenses
      and
      forecast results.**





It
      takes
      between three and six months to complete the majority of our sales, and some
      sales take longer to complete. Therefore, it is difficult to predict the quarter
      in which a particular sale will occur and to plan expenditures accordingly.
      The
      length of the period between initial contact with a potential customer and
      their
      purchase of products and services is due to several factors,
      including:





·
            the
                complex nature of our products,


·
            our
                need to educate potential customers about the uses and benefits of
                our
                products,


·
            the
                purchase of our products may require a significant investment of
                resources
                by a customer,


·
            customer
                budget cycles which affect the timing of purchases,


·
            uncertainty
                regarding future economic conditions,


·
            customer
                requirements for competitive evaluation and internal approval before
                purchasing our products,


·
            customer
                delay of purchases due to announcements or planned introductions
                of new
                products by us or our competitors, and


·
            large
                customer purchasing procedures, which may require a longer time to
                make
                decisions.





The
      delay or failure to complete sales in a particular quarter could reduce our
      revenues in that quarter, as well as subsequent quarters over which revenues
      for
      the sale would likely be recognized. If our sales cycle unexpectedly lengthens
      in general or for one or more large orders, it would adversely affect the timing
      of our revenues.





**Because
      our business involves the electronic transmission and storage of data, privacy
      and security concerns, particularly related to the use of our software on the
      internet, may limit the effectiveness of and reduce the demand for our
      products.**





The
      effectiveness of our software products relies on the storage and use of customer
      data collected from various sources, including information collected on web
      sites, as well as other data derived from customer registrations, billings,
      purchase transactions and surveys. Our collection and use of that data for
      customer profiling may raise privacy and security concerns. Our customers
      generally have implemented security measures to protect customer data from
      disclosure or interception by third parties. However, these security measures
      may not be effective against all potential security threats. If a
      well-publicized breach of customer data security were to occur, our software
      products may be perceived as less desirable, impacting our future sales and
      profitability.





In
      addition, due to privacy concerns, some internet commentators, consumer
      advocates, and governmental or legislative bodies have suggested legislation
      to
      limit the use of customer profiling technologies. The European Union and some
      European countries have already adopted some restrictions on the use of customer
      profiling data. In addition, internet users can, if they choose, configure
      their
      web browsers to limit the collection of user data for customer profiling. Should
      many internet users choose to limit the use of customer profiling technologies,
      or if major countries or regions adopt legislation or other restrictions on
      the
      use of customer profiling data, our software would be less useful to customers,
      our sales could decrease and our results of operations could be materially
      adversely affected.





10





**The
      requirements of Section 404 of the Sarbanes-Oxley Act of 2002 require that
      we
      undertake an evaluation of our internal controls that may identify internal
      control weaknesses.**





The
      Sarbanes-Oxley Act of 2002 imposes new duties on us and our executives,
      directors, attorneys and independent registered public accounting firm. In
      order
      to comply with the Sarbanes-Oxley Act, we
      are evaluating our internal controls systems to allow management to report
      on,
      and our independent auditors to attest to, our internal controls. We have
      initiated establishing the procedures for performing the system and process
      evaluation and testing required in an effort to comply with the management
      certification and auditor attestation requirements of Section 404 of the
      Sarbanes-Oxley Act. As the Securities and Exchange Commission has extended
      the
      deadline for non-accelerated filers, such as Firstwave, until December 31,
      2007,
      we anticipate being able to fully implement the requirements relating to
      internal controls and all other aspects of Section 404 in a timely fashion.
      If
      we are not able to implement the requirements of Section 404 in a timely manner
      or with adequate compliance, our auditors may not be able to render the required
      attestation concerning our assessment and the effectiveness of the internal
      controls over financial reporting, we may be subject to investigation and/or
      sanctions by regulatory authorities, such as the Securities and Exchange
      Commission or The NASDAQ Stock Market, and our reputation may be harmed. Any
      such action could adversely affect our financial results and the market price
      of
      our common stock.








**Item2.  
Properties.**





As
      of
      December 31, 2005, the Company's headquarters and principal operations were
      located in approximately 1,600 square feet of office space sublet from M-1
      Global in metropolitan Atlanta, Georgia. The sublease expires on October 31,
      2006. The total amount of base rent ($1 per month) is being charged to rent
      expense.








**Item3.  
Legal
      Proceedings.**





From
      time to time, the Company may be involved in litigation relating to claims
      arising out of its operations in the normal course of business. As of the date
      of this Report, the Company was not engaged in any legal proceedings that are
      expected, individually or in the aggregate, to have a material adverse effect
      on
      the Company.








**Item4.  
Submission
      of Matters to a Vote of Security
      Holders.**





None








**PARTII**





**Item5.  
Market
      for Registrant's Common Equity,
      Related Stockholder Matters, and Issuer Purchases of Equity
      Securities.**




Our
      common stock is traded on the NASDAQ SmallCap Market under the symbol “FSTW”.
      The following table sets forth, for the calendar quarters indicated, the high
      and low close prices of the Company’s common stock. Note that prices set forth
      below reflect inter-dealer prices without retail mark-ups, markdowns, or
      commissions and may not necessarily reflect actual transactions.





2005
              First
              Second
              Third
              Fourth
              
              2004
              First
              Second
              Third
              FourthQuarter
              Quarter
              Quarter
              Quarter
              
              
              Quarter
              Quarter
              Quarter
              QuarterHigh
              $
                  2.57
              $
                  3.07
              $
                  1.99
              $
                  2.45
              
              High
              $
                  6.62
              $
                  4.40
              $
                  2.50
              $
                  3.50Low
              $
                  1.55
              $
                  1.62
              $
                  1.57
              $
                  1.23
              
              Low
              $
                  4.25
              $
                  2.10
              $
                  1.28
              $
                  1.28





As
      of
      March 27, 2006, there were approximately 67 shareholders of record and
      approximately 2,000 persons or entities that hold common stock in nominee name.
      There were no common stock dividends declared during 2005 or 2004. The
      Company does not plan to pay dividends on its common stock in the future.
      Pursuant to a merger agreement, o n
      March
      3, 2003 Firstwave issued 200,000 shares of common stock to the shareholders
      of
      Connect-Care, Inc. in exchange for all outstanding shares of Connect-Care stock.
      These 200,000 shares, valued at $2,630,000, were registered effective July
      25,
      2003. On August 12, 2004, the Company filed a Post-Effective Amendment No 1
      to
      Registration Statement on Form S-3, File No. 333-103903, to remove from
      registration 198,925 shares originally registered related to the Connect-Care
      acquisition that remained unsold at the termination of the
      offering.





11





**Item6.  
Selected
      Financial
      Data** **.**





The
      following table sets forth selected financial data about the Company and its
      subsidiaries for each of the last five fiscal years. The information presented
      below has been derived from the Company's audited consolidated financial
      statements, after consideration of discontinued operations from the sale of
      the
      U.K. Subsidiary on June 3, 2005.








For
                  the Year
                  Ended December 31,(In
                  thousands,
                  except per share amounts)2005**
              
              2004***
              
              2003****
              
              2002
              
              2001*****Net
                  revenues
                  from continuing operations
              
              $
              3,224
              
              $
              4,526
              
              $
              11,169
              
              $
              13,200
              
              $
              8,501Income/(loss)
                  from continuing operations before income tax
              
              
              (1,578
              )
              
              (5,048
              )
              
              (1,212
              )
              
              2,679
              
              
              (1,213
              )Income
                  tax
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (6
              )Net
                  income/(loss) from continuing operations
              
              
              (1,578
              )
              
              (5,048
              )
              
              (1,212
              )
              
              2,679
              
              
              (1,219
              )Income/(Loss)
                  from discontinued operations
              
              
              (457
              )
              
              410
              
              
              437
              
              
              346
              
              
              -Gain/(Loss)
                  on
                  sale of discontinued operations
              
              
              327
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income/(loss) applicable to common shareholders
              
              
              (1,992
              )
              
              (4,893
              )
              
              (996
              )
              
              2,773
              
              
              (1,825
              )Basic
&
                  Diluted earnings per shareEarnings/(Loss)
                  from continuing operations
              
              
              (0.69
              )
              
              (1.98
              )
              
              (0.56
              )
              
              1.13
              
              
              (0.87
              )Earnings/(Loss)
                  from discontinued operations
              
              
              (0.05
              )
              
              0.15
              
              
              0.17
              
              
              0.16
              
              
              -Net
                  income/(loss) per common share
              
              
              (0.74
              )
              
              (1.82
              )
              
              (0.39
              )
              
              1.29
              
              
              (0.87
              )Total
                  assets
              
              $
              4,259
              
              $
              6,273
              
              $
              11,807
              
              $
              9,803
              
              $
              6,016Basic
                  and
                  diluted weighted average shares outstanding *
              
              
              2,709
              
              
              2,682
              
              
              2,572
              
              
              2,150
              
              
              2,099
  *
              Stock
                  options
                  and convertible preferred stock are not included in the diluted
                  earnings
                  per share if they are antidilutive**
              2005
                  includes
                  a charge for Goodwill Impairment of $528,000, the gain on sale
                  of
                  discontinued operations wasreduced
                  by an
                  allocation of Goodwill totaling $488,000.***
              2004
                  includes
                  the one-time write-off of certain amounts of capitalized software
                  and a
                  charge for Goodwill Impairmentof
                  $750,000****
              2003
                  includes
                  the acquisition of Connect-Care in March of 2003*****
              The
                  operations
                  discontinued in 2005 did not exist in 2001, therefore there is
                  no
                  adjustment for discontinuedoperations








**Item7.  
Management’s
      Discussion and Analysis of
      Financial Condition and Results of Operations** .





*The
      following discussion should be read in conjunction with the Financial Statements
      and Notes thereto presented elsewhere herein. This section contains
      forward-looking statements that reflect the Company’s management’s expectations,
      estimates, and projections for future periods. These statements may be
      identified by the use of forward-looking words such as “may”, “will”, “believe”,
“anticipate”, “estimate”, “expect”, “projects”, or “intends”. Actual events and
      results may differ from the results anticipated by the forward-looking
      statements. Factors that might cause such differences include, but are not
      limited to, those items discussed previously under the caption "Risk
      Factors"*  *and
      the discussion below in “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations”.*





**Overview**





Headquartered
      in Atlanta, Georgia, Firstwave is a provider of Customer Relationship Management
      (CRM) industry-focused solutions. Firstwave's corporate and product mission
      reflects our customer-first commitment: To develop and integrate the best
      software solutions to manage customer interactions and information. We strive
      to
      provide our clients with effective CRM, robust technology and the highest
      standard of customer service.





Firstwave
      Technology helps software and technology customers keep current customers loyal,
      close more sales and capture more market share. Our CRM solutions offer sales,
      marketing, and customer support automation along with project and product
      quality management. Firstwave CRM is adaptive and scalable and easily integrates
      with existing systems. This allows for rapid deployment and, typically, a lower
      total cost of ownership.





Our
      CRM
      solutions are divided into three product groups: Firstwave CRM, Firstwave
      Technology and TakeControl.





12





**Results
      of Operations**





On
      October 10, 2005, the Company entered into a three-year OEM/Outsourcing
      Agreement and a Licensing Agreement with M1 Global, an Atlanta-based technology
      company. Under the terms of the agreements, both Firstwave and M1 Global are
      contributing to the ongoing development, maintenance and support of Firstwave
      products; M1 Global has licensed the Firstwave CRM database schema to develop
      its future products; Firstwave is outsourcing its Professional Services and
      Support functions to M1 Global; and M1 Global is a non-exclusive reseller of
      Firstwave products. Firstwave retains all maintenance revenues and pays to
      M1
      Global $154,315 per quarter in consideration for M1 Global providing support
      services to Firstwave customers. The agreements provide that M1 Global also
      pays
      royalty commissions to Firstwave as follows: 33% on licenses and 20% on
      services.





**Results
      of Continuing Operations**





On
      June
      3, 2005, Firstwave entered into a Stock Purchase Agreement (the “Agreement”)
      with AllAboutTickets LLC, now doing business as First Sports International
      (“First Sports”). Pursuant to the Agreement, the Company sold to First Sports
      all of the issued share capital of Firstwave Technologies U.K., Ltd., a
      subsidiary of the Company. The Company sold its U.K. Subsidiary to re-focus
      on
      the high technology market and to direct its efforts away from the Sports
      business that was concentrated in the U.K. market. This Management’s Discussion
      and Analysis of Financial Condition compares the Company’s results from
      continuing operations, not including the operations from the discontinued
      business.




The
        following table sets forth for the periods indicated selected financial data
        and
        the percentages of our net revenues represented by each line item presented.
        It
        also sets forth the percentage change in each line item presented from 2004
        to
        2005. Certain percentage columns do not add to 100% due to
        rounding.


Year
                  Ended
              
              Year
                  EndedDecember
                  31,
                  2005
              
              December
                  31,
                  2004
              
              %
                  Change($
                  in
                  thousands)
              
              $
              
              %
              
              $
              
              %
              
              2004
                  to 2005RevenuesSoftware
              
              $
              551
              
              
              17.1
              
              $
              876
              
              
              19.3
              
              
              (37.1
              )Services
              
              
              623
              
              
              19.3
              
              
              1,145
              
              
              25.3
              
              
              (45.6
              )Maintenance
              
              
              2,002
              
              
              62.1
              
              
              2,457
              
              
              54.3
              
              
              (18.5
              )Other
              
              
              48
              
              
              1.5
              
              
              48
              
              
              1.1
              
              
              0.0Net
                  revenues
              
              
              3,224
              
              
              100.0
              
              
              4,526
              
              
              100.0
              
              
              (28.8
              )Costs
                  and
                  expensesCost
                  of
                  revenuesSoftware
              
              
              803
              
              
              24.9
              
              
              2,032
              
              
              44.9
              
              
              (60.5
              )Services
              
              
              578
              
              
              17.9
              
              
              1,193
              
              
              26.4
              
              
              (51.6
              )Maintenance
              
              
              422
              
              
              13.1
              
              
              405
              
              
              8.9
              
              
              4.2Other
              
              
              32
              
              
              1.0
              
              
              38
              
              
              0.8
              
              
              (15.8
              )Sales
                  and
                  marketing
              
              
              506
              
              
              15.7
              
              
              1,903
              
              
              42.0
              
              
              (73.4
              )Product
                  development
              
              
              631
              
              
              19.6
              
              
              1,188
              
              
              26.2
              
              
              (46.9
              )General
&
                  administrative
              
              
              1,410
              
              
              43.7
              
              
              2,082
              
              
              46.0
              
              
              (32.3
              )Charge
                  for
                  Goodwill Impairment
              
              
              528
              
              
              16.4
              
              
              750
              
              
              16.6Total
                  operating cost and exp
              
              
              4,910
              
              
              152.3
              
              
              9,591
              
              
              211.9
              
              
              (48.8
              )Operating
                  loss
              
              
              (1,686
              )
              
              (52.3
              )
              
              (5,065
              )
              
              (111.9
              )
              
              (66.7
              )Interest
                  income,net
              
              
              108
              
              
              3.3
              
              
              17
              
              
              0.4
              
              
              535.3Loss
                  from
                  continuing operations
              
              $
              (1,578
              )
              
              (48.9
              )
              $
              (5,048
              )
              
              (111.5
              )
              
              (68.7
              )Income/Loss
                  from discontinued operations
              
              
              (457
              )
              
              (14.2
              )
              
              410
              
              
              9.1
              
              
              (211.5
              )Gain
                  on sale
                  of discontinued operations
              
              
              327
              
              
              10.1
              
              
              -
              
              
              0.0Net
                  income/(loss) from discontinued operations
              
              
              (130
              )
              
              (4.0
              )
              
              410
              
              
              9.1
              
              
              (131.7
              )Net
                  loss
                  before income taxes
              
              $
              (1,708
              )
              
              (53.0
              )
              $
              (4,638
              )
              
              (102.5
              )
              
              (63.2
              )


In
      general, competition in the software industry has increasingly been
      characterized by shortening product cycles, and we are not immune to this trend.
      If the product cycle for our systems proves to be shorter than management
      anticipates, our pricing structure and revenues could be impaired. In addition,
      in order to remain competitive, we may be required to expend a greater
      percentage of our revenues on product innovation and development than has
      historically been the case. In either case, our gross profit margins and results
      of operations could be materially adversely affected. See ”Risk Factors” in Part
      I, Item 1A of this Annual Report. In addition, we depend upon our strategic
      relationship with M1 Global to market, sell, service, and support our existing
      and prospective customers, the loss of which could materially adversely affect
      our results of operations. See “Risk Factors” in Part 1, Item 1A of this Annual
      Report.





13








**2005
      Compared to 2004**




The
      information presented below compares
      the Company’s results from continuing operations ,
      after
      consideration of discontinued operations from the sale of the U.K. Subsidiary
      on
      June 3, 2005.





**Revenue**


Total
      revenues, which include software license fees, services, and maintenance
      revenues, decreased 29% from $4,526,000 in 2004 to $3,224,000 in 2005 due to
      decreases in software license, services and maintenance revenues. The decrease
      in total revenues was primarily attributable to lower revenues from our
      relationship with Electronic Data Systems, Ltd. (“EDS”), which contributed 12%,
      or $874,000, of total revenues during 2004, compared to 6%, or $222,000, of
      total revenues for 2005.





Software
      revenues decreased 37% from $876,000 in 2004 to $551,000 in 2005. During 2004,
      we recognized three large software license agreements with Manhattan Associates,
      Inc., SmartMail, LLC, and Northrop Grumman; while in 2005 we recognized just
      one
      large software license with M1 Global Solutions. Our software revenues are
      significantly dependent upon the timing of closing of license agreements, and
      current quarterly results may not be indicative of future performance. During
      the continuation of our current relationship with M1 Global, we anticipated
      that
      nearly all of our software revenues will come from our 33% share of the software
      revenues received by M1 Global.





Total
      revenues from international sources decreased from 33% of total revenues in
      2004
      to 24% in 2005 primarily due to decreased services revenue from our U.K. CRM
      customers, including revenue from the EDS relationship that decreased from
      $874,000 in 2004 to $222,000 in 2005.





Services
      revenues decreased 46% from $1,145,000 in 2004 to $623,000 in 2005, primarily
      due to decreased services revenue from EDS. The service revenues from EDS were
      $358,000 in 2004 compared to only $11,000 in 2005. Our
      services revenues decreased from 2004 levels because the services revenues
      we
      derived from the multi-year contract with EDS have not been replaced with other
      customer accounts. Our services revenues are subject to fluctuations based
      on
      variations in the length of and number of active service engagements in a given
      quarter. During the continuation of our current relationship with M1 Global,
      we
      anticipate that nearly all of our services revenues will come from our 20%
      share
      of the service revenues received by M1 Global.





Maintenance
      revenues decreased 19% from $2,457,000 in 2004 to $2,002,000 in 2005. The
      decrease is due to cancellations from existing customers offset by additional
      maintenance revenues associated with new and expansion customers. Maintenance
      revenues are primarily the result of renewal agreements from previous software
      license agreements as well as new license agreements.





**Cost
      of Revenue**


Cost
      of
      software revenues decreased 61% from $2,032,000 in 2004 to $803,000 in 2005.
      Cost of software revenues includes amortization of capitalized software costs,
      costs of third party software, media costs, and documentation materials. The
      decrease is primarily due to a decrease in amortization expense related to
      the
      write-off of two product lines in the fourth quarter of 2004, resulting in
      lower
      amortization expense in 2005. Cost of software revenues as a percentage of
      software revenues decreased from 232% in 2004 to 146% in 2005, primarily due
      to
      a decrease in amortization expense. Amortization of capitalized software
      represented 97% of total cost of software revenues during 2004, compared to
      91%
      in 2005.




Cost
      of
      revenues for services decreased 52% from $1,193,000 in 2004 to $578,000 in
      2005.
      The decrease is primarily due to decreases in payroll, resulting from a
      reduction in the number of services personnel, and payroll related costs,
      including travel expenses, consistent with decreased services revenues. The
      cost
      of revenues for services as a percentage of services revenues decreased from
      104% in 2004 to 93% in 2005. During the continuation of our current relationship
      with M1 Global, we anticipate that the cost of revenues for services is expected
      to decrease as a result of the fixed cost related to staffing and
      overhead.





Cost
      of
      revenues for maintenance increased 4% from $405,000 in 2004 to $422,000 in
      2005.
      The increase is primarily due to the launch of our outsourcing arrangement
      with
      M1 Global Solutions, Inc. and the fees paid to First Sports for the support
      of
      our U.K. CRM customers. Costs of revenues for maintenance as a percentage of
      maintenance revenues increased from 16% in 2004 to 21% in 2005. During the
      continuation of our current relationship with M1 Global, we anticipate that
      the
      cost of revenues for maintenance is expected to decrease as a result of the
      fixed cost related to staffing and overhead.









14





**Sales
      and Marketing Expense**


Sales
      and marketing expense decreased 73% from $1,903,000 in 2004 to $506,000 in
      2005,
      and decreased as a percentage of total revenues from 42% in 2004 to 16% in
      2005.
      The decreases are the result of decreases in payroll expenses associated with
      a
      reduction in the number of personnel, telemarketing costs, and costs relating
      to
      sports sponsorships in the U.S. During the continuation of our current
      relationship with M1 Global, we anticipate that sales and marketing expense
      is
      expected to decrease as a result of the fixed cost related to staffing and
      overhead.





**Product
      Development Expense**


The
      Company’s product innovation and development expenditures, which includes
      amounts capitalized, decreased 47% from $1,188,000 in 2004 to $631,000 in 2005.
      The decrease is primarily related to decreases in payroll costs associated
      with
      staff reductions, and reductions associated with fewer outside contractors.
      Software development costs capitalized during 2004 were $94,000; there were
      no
      software development costs capitalized during 2005.





A
      net
      realizable analysis of capitalized software development costs was performed
      as
      of December 31, 2005 in accordance with SFAS 86 “Accounting for the Costs of
      Computer Software to be Sold, Leased, or Otherwise Marketed.” Based on the
      results of the analysis, a determination was made that the carrying amount
      of
      the unamortized capitalized software costs does not exceed their net realizable
      value; therefore, no impairment loss was recorded.





**General
      and Administrative Expense**


General
      and administrative expenses decreased 32% from $2,082,000 in 2004 to $1,410,000
      in 2005. These changes were primarily due to reduced payroll costs associated
      with a reduction in personnel and decreased rent expense. During the
      continuation of our current relationship with M1 Global, we anticipate that
      general and administrative expense is expected to decrease as a result of the
      fixed cost related to staffing and overhead.





**Goodwill
      Impairment**


In
      accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”, intangible
      assets with indefinite useful lives must be tested periodically for impairment.
      Examples of Management’s judgment regarding the existence of impairment of an
      intangible asset and the resulting fair value, would include management’s
      estimates of future net cash flows and assessment of adverse changes in legal
      factors, market conditions, or loss of key personnel. If the fair value of
      the
      intangible asset is determined to be less than the carrying value, the Company
      would record an impairment loss. SFAS
      No. 142 prescribes a two-phase approach for impairment testing of goodwill.
      The
      first phase screens for impairment; while the second phase (if necessary)
      measures the impairment.





Goodwill
      was evaluated for impairment quarterly throughout 2004 and 2005 in accordance
      with SFAS No. 142. The fair value was estimated using the expected net present
      value of future cash flows. The analysis for the fourth quarter of 2004 and
      then
      the third quarter of 2005, identified lower-than-expected operating results,
      and
      the Company revised the anticipated future earnings projections at the end
      of
      each quarter. As a result of these reviews, it was determined that there was
      an
      impairment of goodwill, and the second phase was required. The second phase
      resulted in the Company recording non-cash impairment charges of $750,000 at
      December 31, 2004 and $528,000 at September 30, 2005 to write-off a portion
      of
      the carrying value of goodwill. Additionally, as a result of the sale of the
      U.K. Subsidiary, Goodwill was written down by $488,000 in June of 2005 to
      account for the allocation of goodwill to the U.K. Subsidiary. From the analysis
      conducted at December 31, 2005, it was determined that there was no further
      instance of impairment of the remaining recorded Goodwill. Therefore, the second
      phase of the testing was not required.





**Net
      Interest Income**


Interest
      income increased 151% from $43,000 in 2004 to $108,000 in 2005 primarily from
      imputed interest recognized on the note receivable from First Sports, explained
      in “Discontinued Operations.” Interest expense of $26,000 in 2004 was related to
      the Company’s line of credit with RBC Centura that was paid off December 30,
      2004. In 2005, there was no interest expense, as the Company carried no debt
      during the year. The above factors resulted in a net increase in net interest
      income of 535.0% from $17,000 in 2004 to $108,000 in 2005.





**Income
      Tax Expense**


There
      was no income tax expense in either 2004 or 2005. As of December 31, 2005,
      the
      Company had a net operating loss carryforward in the United States of
      approximately $23,300,000, which expires in years 2009 through 2019. A valuation
      allowance has been created for all deferred tax assets as of 2005 and 2004,
      respectively.








15





**2004
      Compared to 2003**





The
      information presented below compares
      the Company’s results from continuing operations ,
      after
      consideration of discontinued operations from the sale of the U.K. Subsidiary
      on
      June 3, 2005.




**Revenue**


Total
      revenues, which include software license fees, services, and maintenance
      revenues, decreased 60.0% from $11,169,000 in 2003 to $4,526,000 in 2004 due
      to
      decreases in software and services revenues. The decrease in total revenues
      was
      primarily attributable to lower revenues from our relationship with Electronic
      Data Systems, Ltd. (“EDS”), which contributed 59.0% of total revenues during
      2003, compared to 19.0% of total revenues for 2004. Software revenues decreased
      74.0% from $3,315,000 in 2003 to $876,000 in 2004. Software license revenues
      from companies expected to replace prior revenues from EDS were lower than
      anticipated. Our software revenues are significantly dependent upon the timing
      of closing of license agreements, and current quarterly results may not be
      indicative of future performance.





Services
      revenues decreased 79.0% from $5,349,000 in 2003 to $1,145,000 in 2004,
      primarily due to decreased services revenue from EDS. Although w e
      successfully completed implementation of the multi-year services project for
      EDS
      during 2003, we continued to provide limited additional services to this
      customer in 2004. Services revenues decreased from 2003 levels because the
      services revenues we derived from the multi-year contract were not replaced
      with
      other customer accounts. Our services revenues are subject to fluctuations
      based
      on variations in the length of and number of active service engagements in
      a
      given quarter.





Maintenance
      revenues were basically unchanged from $2,452,000 in 2003 to $2,457,000 in
      2004.
      Maintenance revenues are the result of renewal agreements from previous software
      license agreements as well as new license agreements.





**Cost
      of Revenue**


Cost
      of
      software revenues increased 64.0% from $1,239,000 in 2003 to $2,032,000 in
      2004
      and as a percentage of software revenue increased from 37.0% in 2003 to 232.0%
      in 2004. The increase in cost of software as a percentage of software revenue
      is
      primarily the result of $136,000 in amortization costs related to the write-off
      of two product lines prior to release, and $575,000 in amortization for the
      write-off of a product line we were no longer actively marketing. Cost of
      software revenues includes costs of third-party software, amortization of
      capitalized software, and costs of packaging, media and documentation.
      Amortization of capitalized software represented 89.6% of total cost of software
      revenues during 2003, compared to 96.8% in 2004.




Cost
      of
      revenues for services decreased 58.0% from $2,836,000 in 2003 to $1,193,000
      in
      2004. The decrease was a result of decreases in outside consultants and bundled
      travel associated with the decrease in services revenue. Cost of revenues for
      services as a percentage of services revenues increased from 53.0% in 2003
      to
      104.0% in 2004 primarily due to certain fixed personnel costs, which at lower
      revenue levels resulted in a decrease in the services revenue margin. During
      2004, we invested some of our billable resources in non-billable activities
      in
      order to maintain customer satisfaction and expand the functionality of our
      products.





Cost
      of
      revenues for maintenance decreased 31.0% from $588,000 in 2003 to $405,000
      in
      2004. The decrease was primarily due to decreased payroll costs associated
      with
      a reduction in the number of maintenance personnel. Cost of revenues for
      maintenance as a percentage of maintenance revenues decreased from 24.0% in
      2003
      to 16.0% in 2004.




**Sales
      and Marketing Expense**


Sales
      and marketing expense decreased 48.0% from $3,653,000 in 2003 to $1,903,000
      in
      2004, but increased as a percentage of total revenues from 33.0% in 2003 to
      42.0% in 2004 due to the decrease in total revenues for 2004. The decrease
      in
      expense was attributed to decreases in payroll and commission expenses,
      telemarketing costs, and costs relating to investor relations.





**Product
      Development Expense**


The
      Company's product innovation and development expenditures which consist
      principally of salaries, contract services, and certain other expenses related
      to development and modifications of software products, including amounts
      capitalized, decreased 62.1% from $3,384,000 in 2003 to $1,282,000 in 2004,
      and
      decreased as a percentage of total revenues from 28.4% in 2003 to 17.3% in
      2004.
      Software development costs capitalized decreased from $2,035,000 in 2003 to
      $94,000 in 2004. The decreases were primarily related to a decrease in payroll
      costs and expenses associated with outside contractors.





A
      net
      realizable analysis of capitalized software development costs was performed
      as
      of December 31, 2004 in accordance with SFAS 86 “Accounting for the Costs of
      Computer Software to be Sold, Leased, or Otherwise Marketed.” Based on the
      results of the analysis, we determined that the carrying amount of the
      unamortized capitalized software costs did not exceed their net realizable
      value; therefore, no impairment loss was recorded.





16








**General
      and Administrative Expense**


General
      and administrative expenses decreased 23.0% from $2,688,000 in 2003 to
      $2,082,000 in 2004 primarily due to decreases in payroll and employee benefit
      costs, partially offset by an increase in rent expense related to an expense
      for
      abandoned office space of $153,000 and by a reserve of $240,000 for surplus
      third party products.





**Goodwill
      Impairment**


In
      accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”, intangible
      assets with indefinite useful lives must be tested periodically for impairment.
      Examples of Management’s judgment regarding the existence of impairment of an
      intangible asset and the resulting fair value, would include management’s
      estimates of future net cash flows and assessment of adverse changes in legal
      factors, market conditions, or loss of key personnel. If the fair value of
      the
      intangible asset were determined to be less than the carrying value, the Company
      would record an impairment loss. SFAS
      No. 142 prescribes a two-phase approach for impairment testing of goodwill.
      The
      first phase screens for impairment; while the second phase (if necessary)
      measures the impairment. Goodwill was evaluated at year-end for impairment
      during the fourth quarter of 2004 in accordance with SFAS No. 142. The fair
      value was estimated using the expected net present value of future cash flows.
      It was determined there was no instance of impairment of recorded Goodwill.
      Therefore, the second phase of the testing was not required. During the first
      quarter of 2005, based on lower-than-expected operating results, the Company
      re-evaluated the assumptions utilized at year-end and revised the anticipated
      future earnings projections. As a result of the review, it was determined that
      there was an impairment of goodwill, and the second phase was required. The
      second phase resulted in the Company recording a non-cash impairment charge
      of
      $750,000 to write-off a portion of the carrying value of goodwill.





**Net
      Interest Income**


Interest
      income of $43,000 in 2004 came primarily from interest on cash deposits and
      from
      interest payments resulting from a favorable resolution of a customer collection
      issue. Interest expense of $26,000 in 2004 was related to the Company’s line of
      credit with RBC Centura, which originated in July 2003 and was paid off December
      30, 2004. The above factors resulted in a net decrease in net interest income
      of
      32.0% from $25,000 in 2003 to $17,000 in 2004.





**Income
      Tax Expense**


Income
      tax expense was $1,000 in 2003 related to withholding tax on an international
      cash receipt compared to no income tax expense in 2004. As of December 31,
      2004
      the Company had a net operating loss carryforward in the United States of
      approximately $22,500,000, which would expire in years 2009 through 2019, and
      approximately $4,700,000 in foreign net operating loss carryforwards. United
      Kingdom tax law does not provide for expiration of net operating losses,
      consequently the foreign tax operating losses carryforward indefinitely. A
      valuation allowance had been created for all deferred tax assets as of 2004
      and
      2003, respectively.





**Balance
      Sheet**





Net
      accounts receivable decreased 34.0% from $605,000 at December 31, 2004 to
      $399,000 at December 31, 2005 consistent with lower total revenues during the
      fourth quarter of 2005 compared to fourth quarter of 2004, plus the impact
      of
      discontinued operations. The allowance for doubtful accounts decreased 22.0%
      from $61,000 at December 31, 2004 to $43,000 at December 31, 2005 consistent
      with the decrease in accounts receivable. As a result of the sale of the U.K.
      Subsidiary explained below in “discontinued operations,” a note receivable in
      the amount of $1,620,000 was received.  At December 31, 2005, the portion
      of the note receivable due within twelve months is $300,000 and is classified
      as
      a current asset on the Balance Sheet. Other assets decreased 16% from $565,000
      at December 31, 2004 to $475,000 at December 31, 2005, primarily due to
      expensing of prepaid marketing expenses during 2005. Property and equipment
      decreased 69.0% from $264,000 at December 31, 2004 to $82,000 at December 31,
      2005 due to fixed asset purchases offset by year-to-date depreciation and
      disposals.





Goodwill
      decreased by $1,065,000 from $1,658,000 at December 31, 2004 to $593,000 at
      December 31, 2005 due to the recording of an impairment charge of $528,000
      as of
      September 30, 2005, $488,000 allocated to the sale of the U.K. Subsidiary in
      June, 2005, $41,000 related to a recovered Connect Care bad debt previously
      written off on the date of acquisition, and $8,000 due to a change in the
      foreign currency rate used to translate Goodwill associated with the U.K.
      Subsidiary on the date of sale. Other intangible assets decreased 29.0% from
      $800,000 at December 31, 2004 to $572,000 at December 31, 2005, as a result
      of
      amortization expense of $228,000. Capitalized software decreased 67.0% from
      $1,095,000 at December 31, 2004 to $363,000 at December 31, 2005, as a result
      of
      amortization expense of $762,000.





As
      a
      result of the sale of the U.K. Subsidiary, a note receivable in the amount
      of
      $1,620,000 was received in June of 2005. The initial long-term portion of the
      note was $1,250,000, payable in installments, and is classified as a non-current
      asset on the Balance Sheet. In accordance with APB 21, ”Interest on Receivables
      and Payables,” imputed





17





interest,
      which was calculated at 8%, resulted in an unamortized discount at May 31,
      2005
      totaling $233,000 and recorded as a direct reduction from the face amount of
      the
      note. Through December of 2005, $48,000 was amortized, resulting in a balance
      of
      $185,000 in imputed interest and a net non-current note receivable of $1,065,000
      as of December 31, 2005.





Accounts
      payable decreased 48.0% from $581,000 at December 31, 2004 to $302,000 at
      December 31, 2005 due to the timing of payment of certain payables. Deferred
      revenue decreased 17.0% from $1,351,000 at December 31, 2004 to $1,117,000
      at
      December 31, 2005 primarily due to a decrease in deferred professional services
      at year end. Accrued employee compensation and benefits decreased 37.0% from
      $156,000 at December 31, 2004 to $99,000 at December 31, 2005 due to reduced
      vacation expense and employee incentives, consistent with reduced revenues
      and
      staff reductions. Other accrued liabilities decreased 89.0% from $290,000 at
      December 31, 2004 to $32,000 at December 31, 2005 primarily due to reduced
      sales
      tax and value added tax in the United Kingdom consistent with reduced revenue
      and the impact of discontinued operations.





**Liquidity
      and Capital Resources**




As
      of December 31, 2005, the Company had cash and cash equivalents of $360,000,
      a
      decrease of 72.0% from the cash balance of $1,286,000 at December 31, 2004.
      The
      decreased cash balance is primarily due to the loss from operations and payment
      of preferred stock dividends, offset by the cash received at the closing for
      the
      sale of our U.K. Subsidiary. The Company carries no debt. Our future capital
      requirements will depend on many factors, including our ability to generate
      positive cash flows, to collect the note receivable from First Sports, to
      realize royalty revenues from the M1 Global relationship, to retain our
      maintenance revenues from existing customers, to control expenses, and to
      generate additional revenues from other sources. Any projections of future
      cash
      needs and cash flows are subject to substantial uncertainty. We have no material
      commitments for capital expenditures. We do not believe that inflation has
      historically had a material effect on our Company's results of
      operations.





**Taxes**





As
      of
      December 31, 2005, we had general business tax credit carryforwards of
      approximately $245,000, which will expire in 2008 through 2011. We also have
      U.S. net operating loss carryforwards for federal and state income tax reporting
      purposes of approximately $23,300,000 which expire in years 2009 through 2019.
      The Internal Revenue Code contains provisions that limit the use in any future
      period of net operating loss and tax credit carryforwards upon the occurrence
      of
      specific events. A valuation allowance has been created for all deferred tax
      assets.





**Discontinued
      Operations**





On
      June
      3, 2005, Firstwave entered into the Stock Purchase Agreement with
      AllAboutTickets LLC, now operating as First Sports International (”First
      Sports”), as more fully detailed in the financial statements under Note 1, Basis
      of Presentation. The Company sold its U.K. Subsidiary to re-focus on the high
      technology market and to direct its efforts away from the Sports business that
      was concentrated in the U.K. market. Pursuant to the Agreement, the Company
      sold
      to Buyer all of the issued share capital of Firstwave Technologies U.K., Ltd.,
      a
      subsidiary of the Company. This sale of the Company’s U.K. Subsidiary has been
      treated as a discontinued operation in the accompanying consolidated financial
      statements.





The
      total purchase price for the sale was $2,214,000, of which $256,000 in cash
      was
      paid at closing, $1,620,000 is payable under a non-interest bearing Promissory
      Note that calls for payments to be made over a maximum of three years, and
      $338,000 is to be paid as software revenues are achieved to reimburse the
      Company for certain prepaid royalties. In 2005, First Sports met the terms
      of
      the note, and paid the required $70,000 in principal payments due in August
      and
      November. In addition, First Sports reimbursed $13,230 of the prepaid royalties
      mentioned above.





As
      a
      result of the sale of the U.K. Subsidiary, the Company recognized a pre-tax
      gain
      on the disposition of the subsidiary of $327,000, which is recorded separately
      below income/(loss) from discontinued operations in the Consolidated Income
      Statements.





**Off
      Balance Sheet Arrangements**





The
      Company does not have off-balance sheet arrangements, financings, or other
      relationships with unconsolidated entities known as “Variable Interest Entities”
(VIEs). In the ordinary course of business the Company leases certain real
      properties and equipment as disclosed in Note 11 in the Notes to Financial
      Statements.





**Contractual
      Obligations**





At
      December 31, 2005, the Company had no material outstanding contractual
      obligations.





18








**Critical
      Accounting Policies**





The
      Company believes that the following accounting policies are critical to
      understanding the consolidated financial statements.





**Revenue
      recognition**


The
      Company recognizes revenue in accordance with Statement of Position (SOP) 97-2,
      “Software Revenue Recognition”, as amended by SOP 98-9, and related
      interpretations.





Revenue
      from software product licenses (other than ticketing and fan memberships
      described below) is recognized upon shipment of the product when the Company
      has
      a signed contract, the fees are fixed and determinable, no significant
      obligations remain and collection of the resulting receivable is probable.
      The
      Company accrues for estimated warranty costs at the time it recognizes revenue.





The
      Company’s products are licensed on a per-user model, except for hosting
      services. In accordance with Paragraph 8 of SOP 97-2, license revenues under
      the
      per-user model are recognized under the Company’s revenue recognition polices
      when revenue recognition criteria are met. Hosting services are priced as a
      monthly or yearly fixed amount based upon number of users, and are recognized
      ratably by month over the period of service. Hosting services revenues are
      consolidated into services revenues on the Company’s financial
      statements.





Services
      revenue is recognized as services are performed. Our software product is able
      to
      function independently in a customer’s environment without additional services.
      Our training, implementation, and customization services are optional services
      to our customers and are not necessary for the functioning of the software
      product. Our software is offered as a stand-alone product. It can be implemented
      with minimal services. The essential functionality of the software, such as
      database support and maintenance, preparation of marketing campaigns, and
      standard workflow, is functional and can be utilized by the customer upon
      installation as intended by the customer. At a customer’s request, the software
      can also be implemented with additional services, such as data conversion and
      workflow modifications, which are not significant to the functionality of the
      software, but rather tailor features to most effectively function in the
      customer’s environment.





The
      revenue for the customization or implementation services is recognized as the
      services are provided and earned. Revenue is allocated to software and services
      based on vendor specific objective evidence of fair values. Because the software
      is a stand-alone product that can be used for the customer’s purpose upon
      installation, and because any services performed have insignificant effect
      on
      the functionality of the software, services revenues are accounted for
      separately in accordance with Paragraph 69 of SOP 97-2.





The
      Company has not recorded any unbilled receivables related to implementation
      and
      customization service revenues, and the Company has accounted for any
      implementation and customization service revenues that have been billed as
      the
      services were performed, in accordance with Paragraphs 65 and 66 of SOP 97-2.





The
      Company has arrangements with customers that provide for the delivery of
      multiple elements, including software licenses and services. The Company
      allocates and recognizes revenue related to each of the multiple elements based
      on vendor specific objective evidence of the fair value of each element and
      when
      there are no undelivered elements essential to the functionality of the
      delivered element. Vendor specific objective evidence is based on standard
      pricing for each of the elements in our multiple element arrangements. Revenue
      associated with the various elements of multiple element arrangements is based
      on such vendor specific objective evidence as the price charged for each element
      is the same as when the element would be sold separately from any other element.
      Standard pricing does not vary by customer or by duration, or by requirements
      of
      the arrangement.





Maintenance
      revenue is recognized on a **** pro-rata
      basis over the term of the maintenance agreements.





Advanced
      billings for services and maintenance contracts are recorded as deferred revenue
      on the Company's balance sheet, with revenue recognized as the services are
      performed and on a pro-rata basis over the term of the maintenance agreements.





The
      Company provides an allowance for doubtful accounts based on management’s
      estimate of receivables that will be uncollectible. The estimate is based on
      historical charge-off activity and current account status.





**Software
      development costs**


Capitalized
      software development costs consist principally of salaries, contract services,
      and certain other expenses related to development and modifications of software
      products capitalized in accordance with the provisions of SFAS 86, "Accounting
      for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.”
Capitalization of such





19





costs
      begins only upon establishment of technological feasibility as defined in SFAS
      86 and ends when the resulting product is available for sale. The Company
      evaluates the establishment of technological feasibility based on the existence
      of a working model of the software product. Capitalized costs may include costs
      related to product enhancements resulting in new features and increased
      functionality as well as writing the code in a new programming language. All
      costs incurred to establish the technological feasibility of software products
      are classified as research and development and are expensed as
      incurred.





The
      Company evaluates the realizability of unamortized capitalized software costs
      at
      each balance sheet date. Software development costs which are capitalized are
      subsequently reported at the lower of unamortized cost or net realizable value.
      If the unamortized capitalized software cost exceeds the net realizable value
      of
      the asset, the amount would be written off accordingly. The net realizable
      value
      of the capitalized software development costs is the estimated future gross
      revenues of the software product reduced by the estimated future costs of
      completing and disposing of that product. Amortization of capitalized software
      costs is provided at the greater of the ratio of current product revenue to
      the
      total of current and anticipated product revenue or on a straight-line basis
      over the estimated economic life of the software, which is not more than three
      years. It is possible that those estimates of anticipated product revenues,
      the
      remaining estimated economic life of the product, or both could be reduced
      due
      to changing technologies. The amortization of software development costs is
      presented as a cost of software revenue in the Company’s financial
      statements.





During
      the fourth quarter of 2004, a decision to no longer market one product and
      to
      discontinue development of two other products resulted in a write-off of
      $711,000 of previously capitalized software development costs which is reflected
      in cost of software revenue in the Company’s consolidated financial statements
      for the period ending December 31, 2004.





**Goodwill
      and other intangibles**


In
      accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”, intangible
      assets with indefinite useful lives must be tested periodically for impairment.
      Examples of management’s judgment regarding the existence of impairment of an
      intangible asset and the resulting fair value, would include management’s
      estimates of future net cash flows and assessment of adverse changes in legal
      factors, market conditions, or loss of key personnel. If the fair value of
      the
      intangible asset is determined to be less than the carrying value, the Company
      would record an impairment loss. SFAS No. 142 prescribes a two-phase approach
      for impairment testing of goodwill. The first phase screens for impairment;
      while the second phase (if necessary) measures the impairment.





Goodwill
      was evaluated for impairment quarterly throughout 2004 and 2005 in accordance
      with SFAS No. 142. The fair value was estimated using the expected net present
      value of future cash flows. The analysis for the fourth quarter of 2004 and
      then
      the third quarter of 2005 identified lower-than-expected operating results,
      and
      the Company revised the anticipated future earnings projections at the end
      of
      each quarter. As a result of these reviews, it was determined that the fair
      value of goodwill was less than the carrying value, and the second phase was
      required. The second phase resulted in the Company recording non-cash impairment
      charges of $750,000 at December 31, 2004 and $528,000 at September 30, 2005
      to
      write-off a portion of the carrying value of goodwill. Additionally, as a result
      of the sale of the U.K. Subsidiary, Goodwill was written down by $488,000 in
      June of 2005 to account for the allocation of goodwill to the U.K. Subsidiary.
      From the analysis conducted at December 31, 2005, it was determined that there
      was no further instance of impairment of the remaining recorded Goodwill.
      Therefore, the second phase of the testing was not required.





**Recent
      Accounting Pronouncements**





FASB
      Statement No. 148, *Accounting
      for Stock-Based Compensation - Transition and Disclosure - An Amendment of
      FASB
      Statement No. 123* ,
      was
      issued in December 2002 and provides alternative methods of transition for
      a
      voluntary change to the fair value based method of accounting for stock-based
      employee compensation. In addition, SFAS No. 148 amends the disclosure
      requirements of SFAS No. 123 to require prominent disclosures in both annual
      and
      interim financial statements about the method of accounting for stock-based
      employee compensation and the effect of the method used on reported results.
      The
      disclosure requirements of this statement are effective for fiscal years ending
      after December 15, 2002 and are included in the consolidated financial
      statements.





FASB
      Statement No. 150, *Accounting
      for Certain Financial Instruments with Characteristics of Both Liabilities
      and
      Equity* ,
      was
      issued in May 2003 and establishes standards for how to classify and measure
      certain financial instruments with characteristics of both liabilities and
      equity. This statement is effective for financial instruments entered into
      or
      modified after May 31, 2003, and otherwise is effective at the beginning of
      the
      first interim period beginning after June 15, 2003. The adoption of the
      provisions of this statement did not have a material impact on the consolidated
      financial statements of the Company.





20











FASB
      Interpretation No. 45, *Guarantor's
      Accounting and Disclosure Requirements for Guarantees, Including Guarantees
      of
      Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and
      107,
      and rescission of FASB Interpretation No. 34* was
      issued in November 2002 and elaborates on the disclosures to be made by a
      guarantor in its interim and annual financial statements about its obligations
      under certain guarantees that it has issued. It also clarifies that a guarantor
      is required to recognize, at the inception of a guarantee, a liability for
      the
      fair value of the obligation undertaken in issuing the guarantee. The provisions
      of this interpretation are required prospectively for guarantees issued or
      modified after December 31, 2002. The adoption of the provisions of this FASB
      Interpretation did not have a material impact on the consolidated financial
      statements of the Company.





FASB
      Interpretation No. 46, *Consolidation
      of Variable Interest Entities an interpretation of ARB No. 51* ,
      as
      amended by FASB Interpretation No. 46R, was issued in January 2003 and addresses
      consolidation by business enterprises of variable interest entities. The Company
      does not have variable interest entities as defined by this Interpretation
      and
      therefore, the adoption of the provisions of this FASB Interpretation did not
      have a material impact on the consolidated financial statements of the Company.





FASB
      Statement No. 123(R) *Share-Based
      Payment* ,
      was
      issued in December 2004 and requires compensation costs related to share-based
      payment transactions be recognized in the financial statements. With minor
      exceptions, the amounts of compensation costs will be measured based on the
      grant-date fair value of the equity or liability instruments issued, over the
      period that the employee provides service in exchange for the award. In addition
      liability awards will be re-measured each reporting period. This pronouncement
      is effective as of the first interim or annual reporting period that begins
      after June 15, 2005. The Company is currently evaluating the requirements of
      SFAS No. 123R and expects that adoption of SFAS No. 123R will have a material
      impact on the company’s consolidated financial position and consolidated results
      of operations. The Company has not yet determined the method of adoption or
      the
      effect of adopting SFAS No. 123R, and it has not determined whether the adoption
      will result in amounts that are similar to the current pro forma disclosures
      under SFAS No. 123. See stock-based compensation in Note 3 of the Notes to
      consolidated financial statements .





In
      December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets.
      This Statement amends APB Opinion No. 29, Accounting for Nonmonetary
      Transactions, and is based on the principle that exchanges of nonmonetary assets
      should be measured based on the fair value of the assets exchanged. The
      provisions of this statement are effective for nonmonetary asset exchanges
      occurring in fiscal periods beginning after June 15, 2005. The adoption of
      FAS
      No. 153 is not expected to have a material impact on the financial statements
      of
      the Company. ****





In
      May
      2005, the FASB issued SFAS No. 154, *Accounting
      Changes and Error Corrections -- a replacement of APB Opinion No. 20 and FASB
      Statement No. 3”* .
      SFAS
      No. 154 changes the requirements for the accounting for and reporting of a
      change in accounting principle. It applies to all voluntary changes in
      accounting principle and to changes required by an accounting pronouncement
      that
      does not include specific transition provisions. This Statement requires
      retrospective application to prior period financial statements of changes in
      accounting principle, unless it is impractical to determine either the
      period-specific or cumulative effects of the change. SFAS No. 154 is effective
      for accounting changes made in fiscal years beginning after December 15, 2005.
      The adoption of this standard is not expected to have a material impact on
      the
      financial statements of the Company.





*In
      February 2006, the FASB issued SFAS No. 155,* Accounting
      for Certain Hybrid Financial Instruments, an amendment of FASB Statements No.
      133 and 140 *.
      This Statement amends SFAS No. 133,* Accounting
      for Derivative Instruments and Hedging *Activities,
      and SFAS No. 140,* Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities *and
      resolves issues in Statement No. 133 Implementation Issue No. D1,* Application
      of Statement 133 to Beneficial Interests in Securitized Financial
      Assets. *The
      provisions of this statement are effective for all financial instruments
      acquired or issued after the beginning of an entity’s first fiscal year that
      begins after September 15, 2006. The adoption of FAS No. 155 is* *not
      expected to have a material impact on the financial statements of the
      Company.*





**Quarterly
      Financial Data (Unaudited)**





The
      table below sets forth certain unaudited operating results for each of the
      eight
      quarters in the two-year period ended December 31, 2005. This information has
      been prepared on the same basis as the consolidated financial statements
      appearing elsewhere in this document, includes all adjustments necessary to
      present fairly this information when read in conjunction with the Financial
      Statements and Notes thereto, and includes consideration of discontinued
      operations from the sale of the U.K. Subsidiary on June 3, 2005. Our operating
      results for any one quarter are not necessarily indicative of results for any
      future period.





21





**Quarter
                  ended**3/31/05
              
              6/30/05
              
              9/30/05
              
              12/31/05
              
              3/31/04
              
              6/30/04
              
              9/30/04
              
              12/31/04(in
                  thousands,
                  except per share amounts)Net
                  revenues
                  from continuing operations
              
              $
              881
              
              $
              793
              
              $
              928
              
              $
              622
              
              $
              1,551
              
              $
              838
              
              $
              1,132
              
              $
              1,006Net
                  Income/(Loss) from continuing operations
              
              
              (323
              )
              
              (439
              )
              
              (657
              )
              
              (159
              )
              
              (651
              )
              
              (931
              )
              
              (607
              )
              
              (2,860
              )Net
                    Income/(Loss) from continuing operationsapplicable
                    to
                    common shareholders
              
              
              (394
              )
              
              (510
              )
              
              (728
              )
              
              (230
              )
              
              (706
              )
              
              (989
              )
              
              (678
              )
              
              (2,931
              )Income/(Loss)
                  from discontinued operations
              
              
              (428
              )
              
              (29
              )
              
              -
              
              
              -
              
              
              (481
              )
              
              789
              
              
              (110
              )
              
              213Gain/(Loss)
                  on
                  sale of discontinued operations
              
              
              -
              
              
              327
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Basic
&
                  Diluted earnings per shareEarnings/(Loss)
                  from continuing operations
              
              
              (0.15
              )
              
              (0.19
              )
              
              (0.27
              )
              
              (0.08
              )
              
              (0.26
              )
              
              (0.37
              )
              
              (0.25
              )
              
              (1.09
              )Earnings/(Loss)
                  from discontinued operations
              
              
              (0.16
              )
              
              0.11
              
              
              -
              
              
              -
              
              
              (0.18
              )
              
              0.29
              
              
              (0.04
              )
              
              0.08Net
                  income/(loss) per common share
              
              
              (0.31
              )
              
              (0.08
              )
              
              (0.27
              )
              
              (0.08
              )
              
              (0.44
              )
              
              (0.07
              )
              
              (0.29
              )
              
              (1.01
              )





In
      accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”, intangible
      assets with indefinite useful lives must be tested periodically for impairment.
      Examples of Management’s judgment regarding the existence of impairment of an
      intangible asset and the resulting fair value, would include management’s
      estimates of future net cash flows and assessment of adverse changes in legal
      factors, market conditions, or loss of key personnel. If the fair value of
      the
      intangible asset is determined to be less than the carrying value, the Company
      would record an impairment loss. SFAS
      No. 142 prescribes a two-phase approach for impairment testing of goodwill.
      The
      first phase screens for impairment; while the second phase (if necessary)
      measures the impairment.





Goodwill
      was evaluated for impairment quarterly throughout 2004 and 2005 in accordance
      with SFAS No. 142. The fair value was estimated using the expected net present
      value of future cash flows. The analysis for the fourth quarter of 2004 and
      then
      the third quarter of 2005, identified lower-than-expected operating results,
      and
      the Company revised the anticipated future earnings projections at the end
      of
      each quarter. As a result of these reviews, it was determined that there was
      an
      impairment of goodwill, and the second phase was required. The second phase
      resulted in the Company recording non-cash impairment charges of $750,000 at
      December 31, 2004 and $528,000 at September 30, 2005 to write-off a portion
      of
      the carrying value of goodwill. Additionally, as a result of the sale of the
      U.K. Subsidiary, Goodwill was written down by $488,000 in June of 2005 to
      account for the allocation of goodwill to the U.K. Subsidiary. From the analysis
      conducted at December 31, 2005 it was determined that there was no further
      instance of impairment of the remaining recorded Goodwill. Therefore, the second
      phase of the testing was not required.





**Item7A.  
Quantitative
      and Qualitative Disclosures
      about Market Risk**





The
      Company is subject to market risk exposures of varying correlations and
      volatilities, including interest rate risk and foreign exchange rate risk.
      Currently, the Company maintains its cash position primarily in money market
      funds and other bank accounts. The Company does not currently engage in hedging
      activities or otherwise use derivatives to alter the interest characteristics
      of
      its financial assets. Although a decrease in interest rates could reduce our
      interest income, management does not believe a change in interest rates will
      materially affect the Company's financial position or results of operations
      in
      2006.





Changes
      in interest rates could make it more costly to borrow money in the future and
      may impede our future acquisition and growth strategies if management determines
      that the costs associated with borrowing funds are too high to implement these
      strategies.





We
      do
      not engage in any hedging activities. As foreign currency exchange rates vary,
      the fluctuations in revenues and expenses related to our international customers
      may impact the financial statements. A weaker US dollar would result in an
      increase to revenues and expenses and a stronger US dollar would result in
      a
      decrease to revenues and expenses.








22





**Item8.  
Financial
      Statements and Supplementary
      Data.**





Information
      included under Item 15 (a) (1) and (2)










REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











To
      The Board of Directors


Firstwave
      Technologies, Inc.


Atlanta,
      Georgia






We
      have audited the accompanying consolidated balance sheets of Firstwave
      Technologies, Inc. and Subsidiary (the “Company”) as of December 31, 2005 and
      2004, and the related consolidated statements of operations, changes in
      shareholders’ equity and cash flows for each of the years in the three-year
      period ended December 31, 2005.  These consolidated financial statements
      are the responsibility of the Company’s management.  Our responsibility is
      to express an opinion on these consolidated financial statements 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 audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement.  An
      audit includes examining, on a test basis, evidence supporting the amounts
      and
      disclosures in the consolidated financial statements.  An audit also
      includes assessing the accounting principles used and significant estimates
      made
      by management, as well as evaluating the overall consolidated 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 Firstwave
      Technologies, Inc. and Subsidiary as of December 31, 2005 and 2004, and the
      results of their operations and their cash flows for each of the years in the
      three-year period ended December 31, 2005, in conformity with accounting
      principles generally accepted in the United States of America.









/s/Cherry,
      Bekaert & Holland, L.L.P.




Atlanta,
      Georgia


March
      27,
      2006












23











**Firstwave
                  Technologies, Inc.****Consolidated
                  Balance Sheet****(in
                  thousands, except share data)****December
                  31,****2005**
              
              **2004**AssetsCurrent
                  assetsCash
                  and cash
                  equivalents
              
              $
              360
              
              $
              1,286Accounts
                    receivable, less allowance for doubtfulaccounts
                    of
                    $43 and $61 in 2005 and 2004, respectively
              
              
              399
              
              
              605Note
                  Receivable, Current
              
              
              300
              
              
              -Prepaid
                  expenses and other assets
              
              
              475
              
              
              565Total
                  current
                  assets
              
              
              1,534
              
              
              2,456Property
                  and
                  equipment, net
              
              
              82
              
              
              264Investments
              
              
              50
              
              
              -Software
                  development costs, net
              
              
              363
              
              
              1,095Intangible
                  assets
              
              
              572
              
              
              800Goodwill
              
              
              593
              
              
              1,658Note
                  Receivable, Net
              
              
              1,065
              
              
              -Total
                  assets
              
              $
              4,259
              
              $
              6,273Liabilities
                  and Shareholders' EquityCurrent
                  liabilitiesAccounts
                  payable
              
              $
              302
              
              $
              581Sales
                  tax
                  payable
              
              
              30
              
              
              220Deferred
                  revenue
              
              
              1,117
              
              
              1,351Accrued
                  employee compensation and benefits
              
              
              99
              
              
              156Dividends
                  payable
              
              
              46
              
              
              46Other
                  accrued
                  liabilities
              
              
              2
              
              
              70Total
                  current
                  liabilities
              
              
              1,596
              
              
              2,424Shareholders'
                  equityPreferred
                          stock, no par value; 1,000,000 shares authorized; 50,687
                          shares issued;
                          34,020 and 27,020 outstanding at 2005 and 2004, respectively
                          24,020 shares
                          @$100 per share liquidation preference 10,000 shares @$75
                          per share
                          liquidation preference
              
              
              3,011
              
              
              3,011Common
                      stock,
                      par value $.0019 per share; 10,000,000 shares authorized; 2,729,135
                      and
                      2,693,993 shares issued  and outstanding at 2005 and 2004,
                      respectively
              
              
              13
              
              
              13Additional
                  paid-in capital
              
              
              25,269
              
              
              25,485Accumulated
                  other comprehensive loss
              
              
              (16
              )
              
              (754
              )Accumulated
                  deficit
              
              
              (25,614
              )
              
              (23,906
              )Total
                  shareholders' equity
              
              
              2,663
              
              
              3,849Total
                  liabilities and shareholders' equity
              
              $
              4,259
              
              $
              6,273
















**The
              accompanying notes are an integral part of these consolidated financial
              statements.**
 24





**Firstwave
                  Technologies, Inc.****Consolidated
                  Statement of Operations****(in
                  thousands, except share data)****For
                  the year ended****December
                  31,****2005**
              
              **2004**
              
              **2003**Net
                  revenuesSoftware
              
              $
              551
              
              $
              876
              
              
              3,315Services
              
              
              623
              
              
              1,145
              
              
              5,349Maintenance
              
              
              2,002
              
              
              2,457
              
              
              2,452Other
              
              
              48
              
              
              48
              
              
              533,224
              
              
              4,526
              
              
              11,169Costs
                  and
                  expensesCost
                  of
                  revenuesSoftware
              
              
              803
              
              
              2,032
              
              
              1,239Services
              
              
              578
              
              
              1,193
              
              
              2,836Maintenance
              
              
              422
              
              
              405
              
              
              588Other
              
              
              32
              
              
              38
              
              
              53Sales
                  and
                  marketing
              
              
              506
              
              
              1,903
              
              
              3,653Product
                  development
              
              
              631
              
              
              1,188
              
              
              1,349General
                  and
                  administrative
              
              
              1,410
              
              
              2,082
              
              
              2,688Charge
                  for
                  Goodwill Impairment
              
              
              528
              
              
              750
              
              
              -Operating
                  income/(loss)
              
              
              (1,686
              )
              
              (5,065
              )
              
              (1,237
              )Interest
                  income, net
              
              
              108
              
              
              17
              
              
              25Income/(loss)
                  from continuing operations before taxes
              
              
              (1,578
              )
              
              (5,048
              )
              
              (1,212
              )Income
                  tax
                  provision, continuing operations
              
              
              -
              
              
              -
              
              
              -Income/(loss)
                  from continuing operations
              
              $
              (1,578
              )
              $
              (5,048
              )
              $
              (1,212
              )Income/(Loss)
                  from discontinued operations
              
              $
              (457
              )
              $
              410
              
              $
              437Gain
                  on sale
                  of discontinued operations
              
              
              327
              
              
              -
              
              
              -Net
                  income/(loss) from discontinued operations
              
              $
              (130
              )
              $
              410
              
              $
              437Net
                  income/(loss)
              
              $
              (1,708
              )
              $
              (4,638
              )
              $
              (775
              )Dividends
                  on
                  preferred stock
              
              
              (284
              )
              
              (255
              )
              
              (221
              )Net
                  income/(loss) applicable to common shareholders
              
              $
              (1,992
              )
              $
              (4,893
              )
              $
              (996
              )Basic
                  and
                  Diluted per shareEarnings/(Loss)
                  from continuing operations
              
              $
              (0.69
              )
              $
              (1.98
              )
              $
              (0.56
              )Earnings/(Loss)
                  from discontinued operations
              
              $
              (0.05
              )
              $
              0.15
              
              $
              0.17Net
                  income/(Loss) per common share
              
              $
              (0.74
              )
              $
              (1.82
              )
              $
              (0.39
              )Basic
                  and
                  Diluted weighted average shares outstanding
              
              
              2,709
              
              
              2,682
              
              
              2,572









**The
              accompanying notes are an integral part of these consolidated financial
              statements.**
 25




**Firstwave
      Technologies, Inc.**


**Consolidated
      Statement of Changes in S** **hareholders'
      Equity**


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




**Compre-**
            
            **Accumulated****Additional**
            
            **hensive**
            
            **other****Common
                Stock**
            
            **Preferred
                Stock**
            
            **paid-in**
            
            **income**
            
            **comprehensive**
            
            **Accumulated****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **capital**
            
            **(loss)**
            
            **income/(loss)**
            
            **deficit**
            
            **Total**Balance
                at
                December 31, 2002
            
            
            2,328,713
            
            $
            12
            
            
            29,020
            
            $
            2,483
            
            $
            22,950
            
            $
            -
            
            $
            (131
            )
            $
            (18,493
            )
            $
            6,821Exercise
                of
                common stock options
            
            
            56,311
            
            
            1
            
            
            -
            
            
            -
            
            
            233
            
            
            -
            
            
            -
            
            
            -
            
            
            234Employee
                stock
                purchases
            
            
            65
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Issuance
                of
                common stock for Connect Care acquisition
            
            
            200,000
            
            
            -
            
            
            
            
            
            
            
            
            2,535
            
            
            -
            
            
            -
            
            
            -
            
            
            2,535Issuance
                of
                common stock
            
            
            4,306
            
            
            
            
            
            
            
            
            
            
            
            44
            
            
            
            
            
            
            
            
            
            
            
            44Conversion
                of
                Series C Preferred Stock to Common
            
            
            83,333
            
            
            -
            
            
            (2,000
            )
            
            (150
            )
            
            150
            
            
            -
            
            
            -
            
            
            -
            
            
            -Dividends
            
            
            -
            
            
            
            
            
            -
            
            
            -
            
            
            (221
            )
            
            -
            
            
            -
            
            
            
            
            
            (221
            )Comprehensive
                lossNet
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (775
            )
            
            -
            
            
            (775
            )
            
            (775
            )Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (269
            )
            
            (269
            )
            
            -
            
            
            (269
            )Comprehensive
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,044
            )Balance
                at
                December 31, 2003
            
            
            2,672,728
            
            
            13
            
            
            27,020
            
            
            2,333
            
            
            25,691
            
            
            
            
            
            (400
            )
            
            (19,268
            )
            
            8,369Exercise
                of
                common stock options
            
            
            2,292
            
            
            -
            
            
            -
            
            
            -
            
            
            4
            
            
            -
            
            
            -
            
            
            -
            
            
            4Employee
                stock
                purchases
            
            
            745
            
            
            -
            
            
            -
            
            
            -
            
            
            1
            
            
            -
            
            
            -
            
            
            -
            
            
            1Issuance
                of
                common stock
            
            
            18,228
            
            
            
            
            
            
            
            
            
            
            
            44
            
            
            
            
            
            
            
            
            
            
            
            44Series
                D
                Convertible Preferred Stock
            
            
            -
            
            
            -
            
            
            7,000
            
            
            678
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            678Dividends
            
            
            -
            
            
            
            
            
            -
            
            
            -
            
            
            (255
            )
            
            -
            
            
            -
            
            
            
            
            
            (255
            )Comprehensive
                lossNet
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (4,638
            )
            
            -
            
            
            (4,638
            )
            
            (4,638
            )Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (354
            )
            
            (354
            )
            
            -
            
            
            (354
            )Comprehensive
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (4,992
            )Balance
                at
                December 31, 2004
            
            
            2,693,993
            
            
            13
            
            
            34,020
            
            
            3,011
            
            
            25,485
            
            
            
            
            
            (754
            )
            
            (23,906
            )
            
            3,849Exercise
                of
                common stock options
            
            
            4,051
            
            
            -
            
            
            
            
            
            
            
            
            6
            
            
            
            
            
            
            
            
            
            
            
            6Employee
                stock
                purchases
            
            
            1,547
            
            
            -
            
            
            
            
            
            
            
            
            3
            
            
            
            
            
            
            
            
            
            
            
            3Issuance
                of
                common stock
            
            
            29,544
            
            
            -
            
            
            
            
            
            
            
            
            59
            
            
            
            
            
            
            
            
            
            
            
            59Dividends
            
            
            -
            
            
            -
            
            
            
            
            
            
            
            
            (284
            )
            
            
            
            
            
            
            
            
            
            
            (284
            )Comprehensive
                lossNet
                loss
            
            
            -
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            (1,708
            )
            
            
            
            
            (1,708
            )
            
            (1,708
            )Unrealized
                loss on equity securities: available for sale
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (16
            )
            
            (16
            )
            
            
            
            
            (16
            )Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            754
            
            
            754
            
            
            
            
            
            754Comprehensive
                loss
            
            
            -
            
            
            -
            
            
            
            
            
            
            
            
            
            
            $
            (970
            )Balance
                at
                December 31, 2005
            
            
            2,729,135
            
            $
            13
            
            
            34,020
            
            $
            3,011
            
            $
            25,269
            
            
            
            
            $
            (16
            )
            $
            (25,614
            )
            $
            2,663







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




26




**Firstwave
        Technologies, Inc.**
 **Consolidated
        Statement of Cash Flows**
 **(in
        thousands)**
   **For
                  Year Ended****December
                  31,****2005**
              
              **2004**
              
              **2003**Cash
                  flows
                  from operating activitiesNet
                  income/(loss)
              
              $
              (1,708
              )
              $
              (4,638
              )
              $
              (775
              )Adjustments
                  to
                  reconcile net income/(loss) to net cashProvided
                  by/(used in) operating activitiesDepreciation
                  and amortization
              
              
              1,130
              
              
              1,817
              
              
              1,660Non-cash
                  interest income
              
              
              (42
              )
              
              -
              
              
              -(Gain)/loss
                  on
                  disposal of fixed assets
              
              
              1
              
              
              3
              
              
              (8
              )Stock
                  proceeds
                  from sale
              
              
              (66
              )
              
              -
              
              
              -Provision
                  for
                  bad debts
              
              
              27
              
              
              (33
              )
              
              (10
              )Stock
                  compensation
              
              
              30
              
              
              44
              
              
              44Impairment
                  of
                  Goodwill
              
              
              569
              
              
              750
              
              
              -Write-off
                  of
                  capitalized software
              
              
              -
              
              
              711
              
              
              -Changes
                  in
                  assets and liabilitiesAccounts
                  receivable
              
              
              193
              
              
              658
              
              
              1,889Note
                  receivable
              
              
              (300
              )
              
              -
              
              
              -Prepaid
                  expenses and other assets
              
              
              25
              
              
              426
              
              
              (284
              )Accounts
                  payable
              
              
              (277
              )
              
              13
              
              
              (695
              )Sales
                  tax
                  payable
              
              
              (187
              )
              
              (153
              )
              
              (344
              )Deferred
                  revenue
              
              
              (196
              )
              
              (78
              )
              
              (148
              )Accrued
                  employee compensation and benefits
              
              
              (57
              )
              
              (212
              )
              
              (356
              )Other
                  accrued
                  liabilities
              
              
              (68
              )
              
              (89
              )
              
              74Total
                  adjustments
              
              
              782
              
              
              3,857
              
              
              1,822Net
                  cash
                  provided by operating activities
              
              
              (926
              )
              
              (781
              )
              
              1,047Cash
                  flows
                  from investing activitiesSoftware
                  development costs
              
              
              -
              
              
              (94
              )
              
              (2,035
              )Purchases
                  of
                  property and equipment,net
              
              
              (20
              )
              
              (108
              )
              
              (93
              )Sale
                  of UK
                  Subsidiary
              
              
              256
              
              
              -
              
              
              -Acquisition
                  of
                  Connect Care, net of cash acquired
              
              
              -
              
              
              -
              
              
              (130
              )Net
                  cash used
                  in investing activities
              
              
              236
              
              
              (202
              )
              
              (2,258
              )Cash
                  flows
                  from financing activitiesProceeds
                  from
                  issuance of convertible preferred stock, net
              
              
              -
              
              
              678
              
              
              -Issuance
                  of
                  common stock
              
              
              29
              
              
              -
              
              
              (95
              )Exercise
                  of
                  common stock options
              
              
              6
              
              
              4
              
              
              234Proceeds
                  from
                  employee stock purchase plan
              
              
              3
              
              
              1
              
              
              -Proceeds
                  from
                  borrowings
              
              
              -
              
              
              -
              
              
              500Repayment
                  of
                  borrowings
              
              
              -
              
              
              (500
              )
              
              -Payment
                  of
                  dividends on convertible preferred stock
              
              
              (284
              )
              
              (250
              )
              
              (222
              )Net
                  cash
                  provided by/(used in) financing activities
              
              
              (246
              )
              
              (67
              )
              
              417Effect
                  of
                  exchange rate changes on cash
              
              
              10
              
              
              (368
              )
              
              (281
              )Net
                  increase/(decrease) in cash
              
              
              (926
              )
              
              (1,418
              )
              
              (1,075
              )Cash
                  and cash
                  equivalents, beginning of year
              
              
              1,286
              
              
              2,704
              
              
              3,779Cash
                  and cash
                  equivalents, end of year
              
              $
              360
              
              $
              1,286
              
              $
              2,704Supplemental
                  disclosure of cash flow informationCash
                  paid for
                  interest
              
              $
              -
              
              $
              26
              
              $
              4Cash
                  paid for
                  income taxes
              
              $
              -
              
              $
              -
              
              $
              1




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




27




**1.****Description of Business and Basis of
      Presentation**





**Description
      of the Company**


Headquartered
      in Atlanta, Georgia, Firstwave (“Firstwave” or the “Company”) is a provider of
      Customer Relationship Management (CRM) industry-focused solutions. Firstwave's
      corporate and product mission reflects our customer-first commitment: To develop
      and integrate the best software solutions to manage customer interactions and
      information. We strive to provide our clients with effective CRM, robust
      technology and the highest standard of customer service.





Firstwave
      Technology helps software and technology customers keep current customers loyal,
      close more sales and capture more market share. Our CRM solutions offer sales,
      marketing, customer support automation along with project and product quality
      management. Firstwave CRM is adaptive and scalable and easily integrates with
      an
      organization’s existing systems. This allows for rapid deployment and,
      typically, a lower total cost of ownership.





Firstwave
      supports several product lines: Firstwave CRM, Firstwave Technology and
      TakeControl.





**Basis
      of presentation and liquidity considerations**





**Fair
      value of financial instruments**


The
      Company has identified cash, accounts receivable, notes receivable, investments,
      accounts payable and debt as financial instruments of the Company. Due to the
      nature of these financial instruments the Company believes that the fair value
      of these financial instruments approximates their carrying value.





**Consolidation**


The
      consolidated financial statements include the accounts of Firstwave
      Technologies, Inc. and its wholly owned subsidiary, Connect-Care, Inc. All
      intercompany transactions and balances have been eliminated in consolidation.





**Reclassifications**


Certain
      amounts in the 2004 and 2003 consolidated financial statements have been
      reclassified to conform to the 2005 presentation.





**Liquidity**


Maintaining
      the Company’s future capital requirements will depend on many factors, including
      the ability to generate positive cash flows, to collect the note receivable
      from
      First Sports, to realize royalty revenues from the M1 Global transaction, to
      retain maintenance revenues from existing customers, to control expenses, and
      to
      generate additional revenues from other sources. Although the Company has
      historically been able to satisfy its cash requirements, there can be no
      assurance that efforts to obtain additional financing, if needed, for operations
      will be successful in the future. Any projections of future cash needs and
      cash
      flows are subject to uncertainty. If the Company is unable to obtain the
      additional capital, if needed, its business and financial condition and its
      ability to generate profits or reduce losses could be materially adversely
      impacted.





**2.** **Use
      of Estimates**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      the 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. Examples of estimates which require management’s judgment
      include revenue recognition, accounts receivable reserve, notes receivable,
      investments, valuation of long-lived assets and intangible assets, and goodwill.
      Management bases its estimates on historical experience and on other factors
      which are believed to be reasonable under the circumstances. All accounting
      estimates and the basis for these estimates are discussed between the Company’s
      senior management and the Audit Committee. Actual results could differ from
      those estimates.










28





**3.** **Summary
      of Significant Accounting Policies**





**Revenue
      recognition**


The
      Company recognizes revenue in accordance with Statement of Position (SOP) 97-2,
      “Software Revenue Recognition,” as amended by SOP 98-9, and related
      interpretations.





Revenue
      from software product licenses is recognized upon shipment of the product when
      the Company has a signed contract, the fees are fixed and determinable, no
      significant obligations remain and collection of the resulting receivable is
      probable. The Company accrues for estimated warranty costs at the time it
      recognizes revenue.





The
      Company’s products are licensed on a per-user model, except for hosting
      services. In accordance with Paragraph 8 of SOP 97-2, license revenues under
      the
      per-user model are recognized under the Company’s revenue recognition polices
      when revenue recognition criteria are met. Hosting services are priced as a
      monthly or yearly fixed amount based upon number of users, and are recognized
      ratably by month over the period of service. Hosting services revenues are
      consolidated into services revenues on the Company’s financial
      statements.





Services
      revenue is recognized as services are performed. Our software product is able
      to
      function independently in a customer’s environment without additional services.
      Our training, implementation, and customization services are optional services
      to our customers and are not necessary for the functioning of the software
      product. Our software is offered as a stand-alone product. It can be implemented
      with minimal services. The essential functionality of the software, such as
      database support and maintenance, preparation of marketing campaigns, and
      standard workflow, is functional and can be utilized by the customer upon
      installation as intended by the customer. At a customer’s request, the software
      can also be implemented with additional services, such as data conversion and
      workflow modifications, which are not significant to the functionality of the
      software, but rather tailor features to most effectively function in the
      customer’s environment.





The
      revenue for the customization or implementation services is recognized as the
      services are provided and earned. Revenue is allocated to software and services
      based on vendor specific objective evidence of fair values. Because the software
      is a stand-alone product that can be used for the customer’s purpose upon
      installation, and because any services performed have insignificant effect
      on
      the functionality of the software, services revenue is accounted for separately
      in accordance with Paragraph 69 of SOP 97-2.





The
      Company has not recorded any unbilled receivables related to implementation
      and
      customization service revenues, and the Company has accounted for any
      implementation and customization service revenues that have been billed as
      the
      services were performed, in accordance with Paragraphs 65 and 66 of SOP 97-2.





The
      Company has arrangements with customers that provide for the delivery of
      multiple elements, including software licenses and services. The Company
      allocates and recognizes revenue related to each of the multiple elements based
      on vendor specific objective evidence of the fair value of each element and
      when
      there are no undelivered elements essential to the functionality of the
      delivered element. Vendor specific objective evidence is based on standard
      pricing for each of the elements in our multiple element arrangements. Revenue
      associated with the various elements of multiple element arrangements is based
      on such vendor-specific objective evidence as the price charged for each element
      is the same as when the element would be sold separately from any other element.
      Standard pricing does not vary by customer or by duration, or by requirements
      of
      the arrangement.





Maintenance
      revenue is recognized on a **** pro
      rata
      basis over the term of the maintenance agreements.





On
      October 10, 2005, the Company entered into a three-year OEM/Outsourcing
      Agreement with M1 Global Solutions, Inc. (“M1 Global”). Under the terms of the
      agreement, M1 Global will pay royalty commissions to Firstwave as follows:
      33%
      on licenses and 20% on services.




Advanced
      billings for services and maintenance contracts are recorded as deferred revenue
      on the Company's balance sheet, with revenue recognized as the services are
      performed and on a pro-rata basis over the term of the maintenance agreements.





The
      Company provides an allowance for doubtful accounts based on management’s
      estimate of receivables that will be uncollectible. The estimate is based on
      historical charge-off activity and current account status.





29








**Software
      development costs**


Capitalized
      software development costs consist principally of salaries, contract services,
      and certain other expenses related to development and modifications of software
      products capitalized in accordance with the provisions of SFAS 86, "Accounting
      for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.”
Capitalization of such costs begins only upon establishment of technological
      feasibility as defined in SFAS 86 and ends when the resulting product is
      available for sale. The Company evaluates the establishment of technological
      feasibility based on the existence of a working model of the software product.
      Capitalized costs may include costs related to product enhancements resulting
      in
      new features and increased functionality as well as writing the code in a new
      programming language. All costs incurred to establish the technological
      feasibility of software products are classified as research and development
      and
      are expensed as incurred.





The
      Company evaluates the realizability of unamortized capitalized software costs
      at
      each balance sheet date. Software development costs which are capitalized are
      subsequently reported at the lower of unamortized cost or net realizable value.
      If the unamortized capitalized software cost exceeds the net realizable value
      of
      the asset, the amount would be written off accordingly. The net realizable
      value
      of the capitalized software development costs is the estimated future gross
      revenues of the software product reduced by the estimated future costs of
      completing and disposing of that product. Amortization of capitalized software
      costs is provided at the greater of the ratio of current product revenue to
      the
      total of current and anticipated product revenue or on a straight-line basis
      over the estimated economic life of the software, which is not more than three
      years. It is possible that those estimates of anticipated product revenues,
      the
      remaining estimated economic life of the product, or both could be reduced
      due
      to changing technologies. The amortization of software development costs is
      presented as a cost of software revenues in the Company’s financial
      statements.








**Goodwill
      and other intangibles**


In
      accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”, intangible
      assets with indefinite useful lives must be tested periodically for impairment.
      Examples of Management’s judgment regarding the existence of impairment of an
      intangible asset and the resulting fair value, would include management’s
      estimates of future net cash flows and assessment of adverse changes in legal
      factors, market conditions, or loss of key personnel. If the fair value of
      the
      intangible asset is determined to be less than the carrying value, the Company
      would record an impairment loss. SFAS No. 142 prescribes a two-phase approach
      for impairment testing of goodwill. The first phase screens for impairment;
      while the second phase (if necessary) measures the impairment.





Goodwill
      was evaluated for impairment quarterly throughout 2004 and 2005 in accordance
      with SFAS No. 142. The fair value was estimated using the expected net present
      value of future cash flows. The analysis for the fourth quarter of 2004 and
      then
      the third quarter of 2005, identified lower-than-expected operating results,
      the
      Company revised the anticipated future earnings projections at the end of each
      quarter. As a result of these reviews, it was determined that the fair value
      of
      goodwill was less than the carrying value, and the second phase was required.
      The second phase resulted in the Company recording non-cash impairment charges
      of $750,000 at December 31, 2004 and $528,000 at September 30, 2005 to write-off
      a portion of the carrying value of goodwill. Additionally, as a result of the
      sale of the U.K. Subsidiary, Goodwill was written down by $488,000 in June
      of
      2005 to account for the allocation of goodwill to the U.K. Subsidiary. From
      the
      analysis conducted at December 31, 2005, it was determined that there was no
      further instance of impairment of the remaining recorded Goodwill. Therefore,
      the second phase of the testing was not required.





**Concentration
      of credit risk**




The
        Company is subject to credit risk primarily due to its trade receivables.
        The
        Company is subject to credit risk primarily due to its trade receivables.
        The
        Company has credit risk due to the high concentration of trade receivables
        through certain customers. The customer accounts receivable which represented
        more than 10% of total accounts receivable are shown below:


**December
                  31,****2005**
              
              **2004**Argos,
                  Ltd
              16.4%
              
              13.8%Barclaycard
                  IT
              10.0%
              
              --CapGemini
                  UK
              14.2%
              
              12.6%M1
                  Global
                  Solutions, Inc.
              10.9%
              
              --Sungard
                  HTE,
                  Inc.
              2.3%
              
              15.0%







30











**Significant
      Customers**


There
      were no customers in 2005 contributing 10% or more of total revenue for the
      year.





As
      a
      result of the sale of its UK subsidiary, the Company is also subject to credit
      risk related to the $1,620,000 promissory note it holds from First Sports,
      as
      discussed in detail under “Discontinued Operations.”





**Stock-based
      compensation**


Effective
      for 2002, the Company adopted SFAS No. 148, “Accounting for Stock-Based
      Compensation - Transition and Disclosure”, which did not have a material impact
      on the consolidated financial statements. The Company has chosen to continue
      to
      account for stock-based compensation using the intrinsic value method prescribed
      in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
      to
      Employees," and related Interpretations and to elect the disclosure option
      of
      SFAS No. 123, "Accounting for Stock-Based Compensation.” Accordingly,
      compensation cost for stock options is measured as the excess, if any, of the
      quoted market price of the Company's stock at the date of the grant over the
      amount an employee must pay to acquire the stock.





The
      Company has adopted the disclosure only provisions of SFAS No. 123, "Accounting
      for Stock-Based Compensation." 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 SFAS No. 123 to stock-based employee awards
      (in thousands, except for per share data).





**Year
                  Ended****December
                  31,****2005**
              
              **2004**
              
              **2003**Net
                    income/(loss) applicable to common shareholders as
                    reported
              
              $
              (1,992
              )
              $
              (4,893
              )
              $
              (996
              )Stock
                    based
                    employee compensation, net of related tax effects under the fair
                    value
                    based method
              
              
              774
              
              
              943
              
              
              556Net
                  income/(loss) as adjusted
              
              $
              (2,766
              )
              $
              (5,836
              )
              $
              (1,552
              )Earnings/(loss)
                  per share:Basic
                  - as
                  reported
              
              $
              (.73
              )
              $
              (1.82
              )
              $
              (.39
              )Basic
                  - as
                  adjusted
              
              $
              (1.02
              )
              $
              (2.18
              )
              $
              (.60
              )Diluted
                  - as
                  reported
              
              $
              (.73
              )
              $
              (1.82
              )
              $
              (.39
              )Diluted
                  - as
                  adjusted
              
              $
              (1.02
              )
              $
              (2.18
              )
              $
              (.60
              )








The
      fair
      value of each option grant and the employees' purchase rights are estimated
      on
      the dates of grant using the Black-Scholes option-pricing model with the
      following weighted-average assumptions used in 2005, 2004 and 2003,
      respectively: dividend yield of 0% for all years; expected volatility of 125%,
      127% and 143%, and risk-free interest rate ranging from 2.96% to 4.04% and
      expected life of 4.5 years for grants in all years and 90 days for stock
      purchase rights for all quarters.





There
      is
      no tax benefit included in the stock-based employee compensation expense
      determined under the fair-value-based method for the twelve month periods ended
      December 31, 2005 and December 31, 2004, as the Company established a full
      valuation allowance for its net deferred tax assets.





In
      the
      second quarter of 2005, the Board of Directors of the Company voted to
      immediately vest all outstanding unvested options held by employees and
      directors of the Company. We believe that the Company would have had to record
      significant non-monetary compensation expense once SFAS 123(R) is adopted in
      2006. This adoption of SFAS 123(R) would have had a material impact on the
      Company’s financial performance, commencing in 2006, which can now be avoided by
      the Company’s decision.










31





**Basic
      and diluted net income/(loss) per common share**


Basic
      net income/(loss) per common share is based on the weighted average number
      of
      shares of common stock outstanding during the period. Stock options and
      convertible preferred stock would have been included in the diluted earnings
      per
      share calculation in 2003, 2004 and 2005 had they not been antidilutive. Net
      income/(loss) applicable to common shareholders includes a charge for dividends
      related to the Company’s outstanding preferred stock.





The
      number of common shares that would have been included in the Company's
      computation of diluted loss per share if they had been dilutive was 1,099,063
      in
      2005, 830,779 in 2004 and 791,419 in 2003. Weighted average options to purchase
      shares of common stock outstanding but not included in the computation of
      diluted EPS were 152,002 in 2005, 426,975 in 2004, and 126,227 in 2003. These
      options were not included in the computation of diluted EPS because the options’
exercise price was greater than the average market price of the common
      shares.





Shown
      below is a reconciliation of the numerators and denominators of the basic and
      diluted per share computations for income from continuing operations (in
      thousands, except per share data):


**For
                  Year Ended December 31, 2005**Income
              
              Shares
              
              
              
              Per
                  Share(Numerator)
              
              (Denominator)
              
              
              
              AmountIncome/(Loss)
                  from continuing operations
              
              $
              (1,578
              )Less:
                  Preferred Stock Dividends
              
              
              (284
              )Net
                  loss from
                  continuing operations
              
              
              (1,862
              )Income/(Loss)
                  from discontinued operations
              
              
              (457
              )Gain
                  on sale
                  of discontinued operations
              
              
              327**Basic
                  EPS**Loss
                  applicable to common shareholders
              
              
              (1,992
              )
              
              2,709
              
              
              
              
              $
              (0.74
              )**Effect
                  of Dilutive Securities**Warrants
              
              
              
              
              
              19Convertible
                  Preferred Stock
              
              
              -
              
              
              898Stock
                  Options
              
              
              
              
              
              1821,099
              
              
              (1
              )**Diluted
                  EPS**Loss
                  applicable to common shareholders
              
              $
              (1,992
              )
              
              2,709
              
              
              
              
              $
              (0.74
              )(1)
                  Not
                  included in Diluted EPS because they were anti-dilutive







**For
                  Year Ended December 31, 2004**Income
              
              Shares
              
              
              
              Per
                  Share(Numerator)
              
              (Denominator)
              
              
              
              AmountIncome/(Loss)
                  from continuing operations
              
              $
              (5,048
              )Less:
                  Preferred Stock Dividends
              
              
              (255
              )Net
                  loss from
                  continuing operations
              
              
              (5,303
              )Income/(Loss)
                  from discontinued operations
              
              
              410Gain
                  on sale
                  of discontinued operations
              
              
              -**Basic
                  EPS**Loss
                  applicable to common shareholders
              
              
              (4,893
              )
              
              2,682
              
              
              
              
              $
              (1.82
              )**Effect
                  of Dilutive Securities**Warrants
              
              
              
              
              
              19Convertible
                  Preferred Stock
              
              
              -
              
              
              792Stock
                  Options
              
              
              
              
              
              20831
              
              
              (1
              )**Diluted
                  EPS**Loss
                  applicable to common shareholders
              
              $
              (4,893
              )
              
              2,682
              
              
              
              
              $
              (1.82
              )(1)
                  Not
                  included in Diluted EPS because they were anti-dilutive







32










**For
                Year Ended December 31, 2003**Income
            
            Shares
            
            
            
            Per
                Share(Numerator)
            
            (Denominator)
            
            
            
            AmountIncome/(Loss)
                from continuing operations
            
            $
            (1,211
            )Less:
                Preferred Stock Dividends
            
            
            (221
            )Net
                loss from
                continuing operations
            
            
            (1,432
            )Income/(Loss)
                from discontinued operations
            
            
            436Gain
                on sale
                of discontinued operations
            
            
            -**Basic
                EPS**Loss
                applicable to common shareholders
            
            
            (996
            )
            
            2,572
            
            
            
            
            $
            (0.39
            )**Effect
                of Dilutive Securities**Warrants
            
            
            
            
            
            19Convertible
                Preferred Stock
            
            
            -
            
            
            665Stock
                Options
            
            
            
            
            
            107791
            
            
            (1
            )**Diluted
                EPS**Loss
                applicable to common shareholders
            
            $
            (996
            )
            
            2,572
            
            
            
            
            $
            (0.39
            )(1)
                Not
                included in Diluted EPS because they were anti-dilutive





**Advertising
      Expense**


The
      Company expenses advertising costs when the advertising takes place. Advertising
      costs from continuing operations were $5,000, $239,000 and $37,000 in 2005,
      2004
      and 2003, respectively.





**Impairment
      of long-lived assets**


The
      Company evaluates impairment of long-lived assets whenever events or changes
      in
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. If the sum of the expected future undiscounted cash flows is less
      than the carrying amount of the asset, an impairment loss would be recognized.
      Measurement of an impairment loss for long-lived assets would be based on the
      fair value of the asset.





**Cash
      and cash equivalents**


Cash
      and
      cash equivalents include all highly liquid investment instruments with an
      original maturity of three months or less.





**Property
      and equipment**


Property
      and equipment consist of furniture, computers, other office equipment, and
      purchased software, recorded at cost less accumulated depreciation and
      amortization. Depreciation and amortization for financial reporting purposes
      are
      recorded using the straight-line method over estimated useful lives ranging
      from
      three to six years. Expenditures for maintenance and repairs are charged to
      expense as incurred.





**Income
      taxes**


The
      Company accounts for income taxes utilizing the liability method and deferred
      income taxes are determined based on the estimated future tax effects of
      differences between the financial reporting and income tax basis of assets
      and
      liabilities given the provisions of the enacted tax laws. A valuation allowance
      is provided if, based upon the weight of available evidence, it is more likely
      than not that some or all of the deferred tax assets will not be
      realized.





**Comprehensive
      income/(loss)**


Comprehensive
      income/(loss) consists of net income/(loss) and other gains and losses affecting
      shareholders’ equity that, under generally accepted accounting principles are
      excluded from net income/(loss).










33





**4.** **Discontinued
      Operations**





On
      June
      3, 2005, Firstwave entered into the Stock Purchase Agreement with
      AllAboutTickets LLC, now known as First Sports International (“First Sports”).
      The Company sold its U.K. Subsidiary to re-focus on the high technology market
      and to direct its efforts away from the Sports business that was concentrated
      in
      the U.K. market. Pursuant to the Agreement, effective May 1, 2005, the Company
      sold to Buyer all of the issued share capital of Firstwave Technologies U.K.,
      Ltd., a subsidiary of the Company. This sale of the Company’s U.K. Subsidiary
      has been treated as a discontinued operation in the accompanying consolidated
      statement of operations. The total price for the stock purchase transaction
      was
      $2,214,000, of which $256,000 in cash was received at closing, $1,620,000 is
      due
      under a non-interest bearing Promissory Note that calls for payments to be
      made
      over a maximum of three years, and $338,000 is due as software revenues are
      achieved by the Buyer and which will reimburse the Company for certain prepaid
      royalties.





As
      of
      December 31, 2005, the remaining balance of the promissory note is $1,365,000
      payable in installments. The short-term portion of the note is $300,000, is
      payable prior to December 31, 2006, and has been classified as a current asset
      on the Balance Sheet. The long-term portion of the note is $1,065,000, is
      payable in installments, and is classified as a non-current asset on the Balance
      Sheet. Under the License Agreement, Buyer will pay quarterly royalty amounts
      to
      the Company if such royalty amounts exceed the quarterly payments due under
      the
      Promissory Note, and such amounts will be applied to the uncollected balance
      of
      the note receivable. In accordance with APB 21,”Interest on Receivables and
      Payables,” imputed interest was calculated at 8%, resulting in an unamortized
      discount at May 31, 2005 totaling $233,000 and recorded as a direct reduction
      from the face amount of the note. Through December 31, 2005, $48,000 was
      amortized, resulting in a balance of $185,000 in imputed interest as of December
      31, 2005.





The
      sale
      of the U.K. subsidiary included $79,000 of total assets, consisting of accounts
      receivable, prepaid assets, furniture and equipment. The total liabilities
      sold
      were $67,000, consisting of accounts payable, taxes payable, benefits payable
      and deferred revenue. Net income/(loss) from discontinued operations was a
      loss
      of $130,000 through December 31, 2005 and net earnings of $410,000 for the
      same
      period of 2004. Total revenues from discontinued operations were
      $341,000 and $2,874,000 for 2005 and 2004, respectively.





As
      a
      result of the sale of the U.K. Subsidiary, the Company recognized a pre-tax
      gain
      of $327,000 in 2005, which is combined and reported as income/(loss) from
      discontinued operations in the Consolidated
      Statement of Operations .





**5.** **Property
      and Equipment**




Property
      and equipment are summarized as follows (in thousands):





**December
                  31,****2005**
              
              **2004**
              
              **2003**Computer
                  hardware and other equipment
              
              $
              1,744
              
              $
              1,789
              
              $
              1,825Furniture
                  and
                  fixtures
              
              
              323
              
              
              780
              
              
              773Purchased
                  software
              
              
              1,803
              
              
              1,796
              
              
              1,7403,870
              
              
              4,365
              
              
              4,338Less:
                  Accumulated depreciation and amortization
              
              
              (3,788
              )
              
              (4,101
              )
              
              (3,849
              )$
              82
              
              $
              264
              
              $
              489





Depreciation
      and amortization of property and equipment totaled $170,000, $334,000, and
      $379,000 in 2005, 2004 and 2003, respectively.








34





**6.    
      Goodwill and Intangible Assets**





At
      December 31, 2005 and 2004 the Company had the following amounts recorded as
      goodwill and intangible assets (in thousands):





2005
              
              2004Goodwill
              
              $
              593
              
              $
              1,658Amortizable
                  Intangible Assets:Connect
                  Care
                  technology
              
              $
              300
              
              $
              300Accumulated
                  amortization
              
              
              (275
              )
              
              (175
              )Net
                  book value
              
              $
              25
              
              $
              125Connect-Care
                  customer relationships
              
              $
              900
              
              $
              900Accumulated
                  amortization
              
              
              (353
              )
              
              (225
              )Net
                  book value
              
              $
              547
              
              $
              675





Amortization
      expense was $229,000 for each of the years 2005 and 2004.





Estimated
      amortization expense through 2010 is as follows (in thousands):




2006
              
              $
              1542007
              
              $
              1292008
              
              $
              1292009
              
              $
              1292010
              
              $
              32




During
      2004 the Company recorded an impairment charge to goodwill in the amount of
      $750,000. Based on the Company’s fair value of the entity determination at
      December 31, 2004, utilizing the expected net present value of future cash
      flows, it was determined that this impairment existed.





During
      2005 the Company sold its U.K. subsidiary. The Company allocated $488,000 of
      goodwill to the basis of the subsidiary in calculating the gain on sale of
      the
      subsidiary.





During
      2005 the Company recorded an impairment charge to goodwill in the amount of
      $528,000. Based on the Company’s fair value of the entity determination at an
      interim period during 2005, utilizing the expected net present value of future
      cash flows, it was determined that goodwill was impaired.





**7.    
      Product Development Expenses**




Product
      development expenses are summarized as follows (in thousands):


**Year
                  ended December 31,****2005**
              
              **2004**
              
              **2003**Total
                  development expenses
              
              $
              632
              
              $
              1,282
              
              $
              3,384Less:
                  Additions to capitalized softwaredevelopment
                  before amortization
              
              
              -
              
              
              94
              
              
              2,035Product
                  development expenses
              
              $
              632
              
              $
              1,188
              
              $
              1,349








35








The
      activity in the capitalized software development account is summarized as
      follows (in thousands):




**Year
                  ended December 31,****2005**
              
              **2004**
              
              **2003**Balance
                  at
                  beginning of year, net
              
              $
              1,095
              
              $
              2,966
              
              $
              2,041Additions
              
              
              -
              
              
              94
              
              
              2,035Amortization
                  expense
              
              
              (732
              )
              
              (1,254
              )
              
              (1,110
              )Write-off
                  of
                  discontinued products prior to release
              
              
              -
              
              
              (136
              )
              
              -Write-off
                  of
                  discontinued product
              
              
              -
              
              
              (575
              )
              
              -Balance
                  at end
                  of year, net
              
              $
              363
              
              $
              1,095
              
              $
              2,966





During
      the fourth quarter of 2004, a decision to no longer market one product and
      discontinue development of two other products resulted in a write-off of
      $711,000 of previously capitalized software development costs which is reflected
      in cost of software revenue in the Company’s consolidated financial statements.





8. **Borrowings**





On
      July
      29, 2003, the Company signed a “Revolving Credit Facility” loan with RBC Centura
      whereby the Company could borrow up to $1,000,000. The Company had borrowings
      of
      $500,000 against the line of credit as of December 31, 2003. The Revolving
      Facility accrued interest at a variable rate equal to the one month London
      Interbank Offered Rate (LIBOR) plus 300 basis points, or the “RBC Centura Prime
      Rate” plus 0.50%, at Borrower’s option. The assets of the Company secured the
      loan. The Company had to comply with certain financial covenants per the terms
      of the agreement.




On
      July
      29, 2004, the Company renewed its Revolving Credit Facility with RBC Centura.
      The renewal was made on the same terms and conditions set forth in the original
      Loan Agreement dated July 29, 2003 with the following modifications: the
      principal amount was decreased from a maximum of $1,000,000 to a maximum of
      $500,000, no margin formula or certified borrowing base was required for any
      borrowings under the Line of Credit, and the maturity date was extended to
      July
      27, 2005.





The
      weighted average interest rates for 2004 and for the period from July 29 through
      December 31, 2003 were 5.03% and 4.43%, respectively.





The
      Company repaid its $500,000 of borrowings under the line of credit in full
      on
      December 30, 2004 and, on March 1, 2005, cancelled the Revolving Credit
      Facility. The Company currently carries no debt.





**9.** **Shareholders’
      Equity**




**Preferred
      Stock**


During
      June 2004, the Company issued 7,000 shares of Series D Convertible Preferred
      Stock in a private placement. The Company received $700,000 in gross proceeds
      and incurred approximately $22,000 in expenses related to this offering. The
      Preferred Stock has voting rights and accumulates dividends at an annual rate
      of
      9%, payable monthly in cash or shares of common stock, and is convertible at
      the
      holder’s option into Common Stock of the Company at any time after June 15,
      2005, at a conversion rate of $3.00 per share of Common Stock. The Series D
      Convertible Preferred Stock has a liquidation preference of $100 per share
      plus
      all accrued and unpaid dividends but ranks junior to the Company’s Series A
      Convertible Preferred, Series B Convertible Preferred Stock and Series C
      Convertible Preferred Stock with respect to payment upon liquidation and
      dividends. At December 31, 2005, there were 7,000 shares of Series D Preferred
      Stock outstanding and $5,250 of dividends payable related to this offering.
      Net
      loss applicable to common shareholders included a year to date charge of
      approximately $63,000 and $34,000 in dividends related to the Series D
      Convertible Preferred Stock for the years ending December 31, 2005 and 2004,
      respectively.





In
      September 2001, 16,667 shares of the Company’s Series C Convertible Preferred
      Stock were issued. The Series C Preferred Stock has voting rights and
      accumulates dividends at a rate of 9% payable in cash monthly and are
      convertible into Common Stock of the Company at anytime at a conversion rate
      of
      $1.80 per share of Common Stock. The Preferred Stock has a liquidation
      preference





36





of
      $75
      per share plus all accrued and unpaid dividends. The Company incurred $119,000
      in legal fees and cost related to the special proxy mailing associated with
      this
      offering. These costs were netted from the proceeds received for the stock.
      In
      2003, 2,000 shares of this offering were converted to 83,333 shares of Common
      Stock and in 2002, 4,667 shares of this offering were converted to 194,458
      shares of Common Stock pursuant to the original terms of the Preferred Stock.
      At
      December 31, 2005, there were 10,000 shares of Series C Preferred Stock
      outstanding and $5,625 of dividends payable related to this offering. Net
      income/(loss) applicable to common shareholders included a year to date charge
      of approximately $68,000, $68,000 and $68,000 in dividends related to the Series
      C Convertible Preferred Stock for years ending December 31, 2005, 2004 and
      2003,
      respectively.





In
      November 2000, the Company issued 7,020 shares of Series B Convertible Preferred
      Stock in a private placement. The Company received $702,000 in November 2000
      related to this offering. The Series B Convertible Preferred Stock has voting
      rights and accumulates dividends at a rate of 9% payable in cash monthly,
      effective January 2002, and is convertible into Common Stock of the Company,
      at
      a conversion rate of $8.10 per share of Common Stock. The Preferred Stock has
      a
      liquidation preference of $100 per share plus all accrued and unpaid dividends
      but ranks junior to the Company’s Series A Convertible Preferred Stock and
      Series C Convertible Preferred Stock with respect to payment upon liquidation
      and dividends. At December 31, 2005, there were 7,020 shares of Series B
      Preferred Stock outstanding and $5,266 in dividends payable related to this
      offering. Net income/(loss) applicable to common shareholders included a year
      to
      date charge of approximately $63,000 per year in dividends related to the Series
      B Convertible Preferred Stock for years ending December 31, 2005, 2004, and
      2003.





During
      the second quarter of 1999, the Company issued 20,000 shares of Series A
      Convertible Preferred Stock in a private placement. The Company received
      $2,000,000 related to this offering. The Series A Convertible Preferred Stock
      has voting rights and accumulates dividends at a rate of 9% payable in cash
      monthly, effective January 2002, and is convertible into Common Stock of the
      Company, at a conversion rate of $6.18 per share of Common Stock. The Preferred
      Stock has a liquidation preference of $100 per share plus all accrued and unpaid
      dividends but ranks junior to the Company’s Series C Convertible Preferred Stock
      with respect to payment upon liquidation and dividends. During 2000, 10,000
      shares of this offering were converted to 161,812 shares of Common Stock
      pursuant to the original terms of the Preferred Stock. At December 31, 2005,
      there were 10,000 shares of Series A Convertible Preferred Stock outstanding
      and
      $7,500 dividends payable related to this offering. Net income/(loss) applicable
      to common shareholders included a year to date charge of $90,000 per year in
      dividends related to the Series A Convertible Preferred Stock for years ending
      December 31, 2005, 2004, and 2003.








**10.** **Income
      Taxes**




Income
      tax amounts are presented based on continuing operations.





The
      components of the provision/(benefit) for income taxes are as follows (in
      thousands):





**Year
                  ended December 31,****2005**
              
              **2004**
              
              **2003**Current
              
              $
              -
              
              $
              -
              
              $
              -Deferred
              
              
              329
              
              
              (941
              )
              
              338Change
                  in
                  valuation allowance
              
              
              (329
              )
              
              941
              
              
              (338
              )$
              -
              
              $
              -
              
              $
              -





The
      difference between the provision for income taxes at the approximate statutory
      income tax rate of 34% and the Company's effective tax rate is as
      follows:








**Year
                  ended December 31,****2005**
              
              **2004**
              
              **2003**Statutory
                  income taxes
              
              
              -34.0
              %
              
              -34.0
              %
              
              -34.0
              %State
                  income
                  taxes
              
              
              -4.0
              %
              
              -4.0
              %
              
              -4.0
              %Change
                  in
                  valuation allowance
              
              
              38.0
              %
              
              38.0
              %
              
              38.0
              %0.0
              %
              
              0.0
              %
              
              0.0
              %











37





At
      December 31, 2005 and 2004, deferred tax (assets) liabilities are comprised
      of
      the following


(in
      thousands):








**Year
                  ended****December
                  31,****2005**
              
              **2004**Gross
                  deferred
                  tax liabilitiesCapitalization
                  of software development costs
              
              $
              124
              
              $
              374Depreciation
              
              
              91
              
              
              150Other
              
              
              -
              
              
              -215
              
              
              524Gross
                  deferred
                  tax assetsNet
                  operating
                  loss carryforwards
              
              
              (9,095
              )
              
              (9,073
              )Tax
                  credit
                  carryforwards
              
              
              (83
              )
              
              (83
              )Allowance
                  for
                  doubtful accounts receivable
              
              
              (14
              )
              
              (16
              )(9,192
              )
              
              (9,172
              )Valuation
                  allowance
              
              
              8,977
              
              
              8,648(215
              )
              
              (524
              )Net
                  deferred
                  tax assets
              
              $
              -
              
              $
              -










The
      Company has general business tax credit carryforwards of approximately $245,000
      which will expire in years 2008 through 2011. At December 31, 2005 the Company
      has U.S. net operating loss carryforwards of approximately $23,300,000 which
      expire in years 2009 through 2019.





SFAS
      No.
      109 specifies that deferred tax assets are to be reduced by a valuation
      allowance if it is more likely than not that some portion or all of the deferred
      tax assets will not be realized. A valuation allowance has been provided for
      those net operating loss carryforwards and foreign tax credits which are
      estimated to expire before they are utilized. Management's estimate of the
      valuation allowance could be affected in the near term based on results of
      operations in future periods.





**11.** **Stock
      Option Plans**





In
      February of 1993, the Board of Directors adopted a Stock Option Plan (the
“Option Plan”). In May of 2005, the shareholders of Firstwave approved the 2005
      Stock Incentive Plan for the Company (the “Incentive Plan”). The Incentive Plan permits
      the grant and issuance of both incentive and non-qualified stock options to
      purchase Common Stock, restricted stock awards, restricted stock units and
      stock
      appreciation rights to directors, officers and employees of the Company (the
      “Awards”). The
      total number of shares that may be issued pursuant to the Incentive Plan shall
      not exceed 300,000 shares plus all shares that were reserved for issuance under
      the Option Plan which had not been issued. The Incentive Plan provides for
      the
      grant of Awards representing up to 816,667 shares of Common Stock. Pursuant
      to
      the terms of the Incentive Plan, the Compensation Committee of the Board of
      Directors is authorized to grant options to employees and directors of the
      Company who are eligible to receive options under the Incentive Plan. The
      Compensation Committee is further authorized to establish the exercise price,
      which for incentive stock options will be equal to the fair market value of
      the
      stock at the date of grant. Options generally vest over a four-year period
      from
      date of grant. In the second quarter of 2005, the Board of Directors of the
      Company voted to immediately vest all outstanding unvested options held by
      employees and directors of the Company. Options expire ten years after the
      date
      of grant.





At
      December 31, 2005, 483,081options were available for grant and 333,586 options
      were outstanding related to the Incentive Plan.








38





A
      summary of stock option activity is as follows:





**Exercise**
              
              **Weighted**
              
              **Weighted****Price**
              
              **Avg
                  Exercise**
              
              **Average****Shares**
              
              **Per
                  Share**
              
              **Price**
              
              **Fair
                  Value**$
              
              $
              
              $Outstanding
                  at
                  December 31, 2002
              
              
              356,598
              
              
              .95
                  - 16.50
              
              
              5.93Granted
              
              
              219,734
              
              
              5.50
                  - 16.50
              
              
              9.87
              
              
              8.61Exercised
              
              
              (56,311
              )
              
              .95
                  - 11.25
              
              
              4.15Canceled
                  or
                  expired
              
              
              (135,192
              )
              
              .95
                  - 16.50
              
              
              6.63Outstanding
                  at
                  December 31, 2003
              
              
              384,829
              
              
              1.32
                  - 16.50
              
              
              8.21Granted
              
              
              312,000
              
              
              2.24
                  - 5.59
              
              
              3.81
              
              
              3.23Exercised
              
              
              (2,292
              )
              
              1.38
                  - 4.05
              
              
              2.11Canceled
                  or
                  expired
              
              
              (114,925
              )
              
              1.38
                  - 15.92
              
              
              7.39Outstanding
                  at
                  December 31, 2004
              
              
              579,612
              
              
              1.32
                  - 16.50
              
              
              6.02Granted
              
              
              207,500
              
              
              1.47
                  - 1.71
              
              
              1.53
              
              
              1.53Exercised
              
              
              (16,051
              )
              
              1.58
                  - 2.72
              
              
              2.18Canceled
                  or
                  expired
              
              
              (437,475
              )
              
              1.38
                  - 15.92
              
              
              6.32Outstanding
                  at
                  December 31, 2005
              
              
              333,586
              
              
              1.32
                  - 16.50
              
              
              3.02










**Weighted****Avg
                    Exercise**Options
                    exercisable
                
                
                **Shares**
                
                
                **Price**$at
                    December
                    31, 2005
                
                
                333,586
                
                
                3.02at
                    December
                    31, 2004
                
                
                310,822
                
                
                5.19at
                    December
                    31, 2003
                
                
                118,860
                
                
                7.52




In
      the
      second quarter of 2005, the Board of Directors of the Company voted to
      immediately vest all outstanding unvested options held by employees and
      directors of the Company. We believe that the Company would have had to record
      significant non-monetary compensation expense once SFAS 123(R) is adopted in
      2006. This adoption of SFAS 123(R) would have had a material impact on the
      Company’s financial performance, commencing in 2006, which can now be avoided by
      the Company’s decision.




The
      following table summarizes information about stock options outstanding at
      December 31, 2005:





**Options
                  Outstanding**
              
              **Options
                  Exercisable****Number**
              
              **Weighted**
              
              
              
              **Number****Outstanding**
              
              **Average**
              
              **Weighted**
              
              **Outstanding**
              
              **Weighted****at**
              
              **Remaining**
              
              **Average**
              
              **at**
              
              **Average****December
                  31,**
              
              **Contractual**
              
              **Exercise**
              
              **December
                  31,**
              
              **Exercise****2005**
              
              **Life
                  (years)**
              
              **Price**
              
              **2005**
              
              **Price**$
                  1.32 - $
                  2.84
              
              
              282,084
              
              
              9.17
              
              $
              1.97
              
              
              282,084
              
              $
              1.97$
                  2.85 - $
                  7.71
              
              
              29,168
              
              
              4.88
              
              
              6.47
              
              
              29,168
              
              
              6.47$
                  7.72 -
                  $16.50
              
              
              22,334
              
              
              3.24
              
              
              11.83
              
              
              22,334
              
              
              11.83$
                  1.32 -
                  $16.50
              
              
              333,586
              
              
              8.40
              
              
              3.02
              
              
              333,586
              
              
              3.02





39








**12.**  **Commitments
      and Contingencies**





As
      of
      December 31, 2005, the Company's headquarters and principal operations were
      located in approximately 1,668 square feet of office space under a sublease
      with
      M-1 Global in metropolitan Atlanta, Georgia. The sublease expires on October
      31,
      2006. The total amount of base rent is $12 annually and is recorded as rent
      expense. At December 31, 2005, the company had no material future rental
      commitments for noncancelable leases.





Net
      rent
      expense under this and previous agreements were approximately $196,000,
      $628,000, and $495,000, for the years ended December 31, 2005, 2004 and 2003,
      respectively.





Rent
      expense for the twelve months ending December 31, 2005 was reduced primarily
      due
      to the Company’s evaluation of its future lease commitments in its Atlanta,
      Georgia office on December 31, 2004. The Company determined that it was using
      approximately 7,000 square feet of the 16,995 square feet leased through October
      31, 2005. The remaining 9,995 square feet were not used by the Company and
      would
      provide no economic benefit for the remaining term of the lease. In accordance
      with SFAS No. 146, the Company accrued $153,000 representing the remaining
      rent
      expense relating to the 9,995 square feet ($218,000) net of estimated potential
      sublease rental income ($65,000).





On
      October 10, 2005, the Company entered into a three-year OEM/Outsourcing
      Agreement with M1 Global Solutions, Inc. (“M1 Global”), an Atlanta-based
      technology company. Under the terms of the agreement, both Firstwave and M1
      Global are contributing to the ongoing development, maintenance and support
      of
      Firstwave products; M1 Global has licensed the Firstwave CRM database schema
      to
      develop its future products; Firstwave is outsourcing its Professional Services
      and Support functions to M1 Global; and M1 Global will be a non-exclusive
      reseller of Firstwave products. For these services, Firstwave will retain all
      maintenance revenues during the term of this agreement and pay M1 Global as
      follows:





**Year
                  ending**
              
              **Annual****December
                  31,**
              
              **Fees**2006
              
              $
              6172007
              
              
              6172008
              
              
              463$
              1,697








The
      Company may be subject to legal proceedings and claims, which may arise, in
      the
      ordinary course of its business. In the opinion of management, the amount of
      the
      ultimate liability with respect to these actions will not materially effect
      the
      financial position of the Company.





**13.**  **Employee
      Benefit Plans**





**401(k)
      Plan**


Effective
      August 1, 1990 the Company established a defined contribution plan (the "401(k)
      Plan") which qualifies under Section 401(k) of the Internal Revenue Code for
      the
      benefit of eligible employees and their beneficiaries. Employees may elect
      to
      contribute up to 100% of their annual compensation to the 401(k) Plan, subject
      to Internal Revenue Service annual contribution limits. For each payroll period,
      the Company matches 30% of the lesser of (1) the participants' contribution
      or
      (2) 7.5% of the participants' compensation. In addition, the Company may make
      discretionary annual contributions. For the years ended December 31, 2005,
      2004,
      and 2003, the Company made matching contributions of approximately $32,000,
      $46,500and $55,000, respectively, to the 401(k) Plan and no discretionary
      contributions were made.




**Employee
      Stock Purchase Plan**


The
      Company has reserved 40,000 shares of common stock for issuance under its
      Employee Stock Purchase Plan ("ESPP"), which was effective January 31, 1995.
      The
      ESPP was designed to qualify as an employee stock purchase plan under Section
      423 of the Internal Revenue Code. The ESPP provides that eligible employees
      may
      contribute up to 10% of their base earnings each quarter for an option to
      purchase the Company's common stock. Effective April 1, 1998, the exercise
      price
      is 85% of the fair market value of the common stock on the last business day
      of
      each quarter. No compensation expense is recorded in





40





connection
      with this plan. During 2005 and 2004, 1,547 and 745 shares, respectively, were
      issued under the ESPP. At December 31, 2005, 24,596 shares had been issued
      cumulatively under the plan, and there were no options to purchase
      outstanding.





**14.** **Segment
      Information**




Management
      believes that the Company has only a single segment consisting of software
      sales
      with related services and support. The information presented in the consolidated
      statement of operations reflects the revenues and costs associated with this
      segment that management uses to make operating decisions and assess
      performance.




**15.** **Related
      Party Transactions**





The
      Chairman and Chief Executive Officer of the Company is paid $16,875 monthly
      for
      dividends related to his $2,250,000 investment in Series A Convertible Preferred
      Stock, Series B Convertible Preferred Stock, and Series C Convertible Preferred
      Stock. He was paid $202,500 annually in dividends during 2005, 2004 and 2003,
      and $16,875 was accrued but not paid at December 31, 2005 and 2004.





The
      former President and Chief Operating Officer of the Company participated in
      the
      Series D Convertible Preferred Stock offering during June 2004 purchasing 300
      shares of Series D Convertible Preferred Stock for a total investment of
      $30,000. He is paid monthly dividends of $225, with approximately $2,700 paid
      during 2005, $1,200 paid during 2004 and $225 has been accrued but not paid
      at
      December 31, 2005. In addition, he is the current General Manager of First
      Sports, the buyer of the Company’s UK Subsidiary detailed in Item 8, Note 4,
“Discontinued Operations.”





**Item9.****Changes
      in and Disagreements
      with Accountants on Accounting and Financial
      Disclosure.**


None





**Item9A.** **Controls
      and Procedures**


**Evaluation
      of disclosure controls and procedures**


Based
      on their most
      recent evaluation, which was completed in consultation with management within
      90 days of the filing of this Form 10-K, the Company’s Chairman and
      Chief Executive Officer and Principal Financial Manager believe the design
      and
      operation of the Company’s disclosure controls and procedures (as defined in
      Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act
      of 1934, as amended (the “Exchange Act”)) were effective as of the date of such
      evaluation in timely alerting the Company’s management to material information
      required to be included in this Form 10-K and other Exchange Act filings.




**Changes
      in
      internal controls**


There
      were no significant changes (including corrective actions with regard to
      significant deficiencies or material weaknesses) in the Company’s internal
      controls or other factors that could significantly affect these controls
      subsequent to the date of the evaluation described above.





**Item
      9B.   Other Information**


None








**PARTIII**





**Item10.  
Directors
      and Executive Officers of the
      Registrant.**


The
      information required by this item is incorporated by reference to information
      under the captions
      “Corporate Governance and Board Matters,” “Proposal 1 - Election of Directors,”
“Executive Officers,” and “Section 16(A) Beneficial Ownership Reporting
      Compliance” of the Company’s Proxy Statement for the Annual Meeting of
      Shareholders to be held on June 5, 2006.





**Code
      of Ethics**


The
      Company has adopted a Code of Business Conduct and Ethics that applies to all
      of
      our directors, officers, and employees. The Code of Business Conduct and Ethics
      is posted on the Company’s web site at www.firstwave.net under
      the caption “Codes and Charters” under “Investor Relations.”








41





**Item11.  
Executive
      Compensation** .


The
      information required by this item is incorporated by reference to information
      under the captions “Corporate
      Governance and Board Matters,” “Proposal 1 - Election of Directors,” “Executive
      Compensation” (excluding the section entitled “Certain Relationships and Related
      Transactions”), and “Stock Performance Graph” in the Company’s Proxy
      Statement for the Annual Meeting of Shareholders to be held on June 5,
      2006.





**Item12.  
Security
      Ownership of Certain Beneficial
      Owners and Management and Related Stockholder Matters.**


The
      information required by this item is incorporated by reference to information
      under the caption "Beneficial Ownership of Common Stock" in the Company's Proxy
      Statement for the Annual Meeting of Shareholders to be
      held on June 5, 2006 .





**Item13.  
Certain
      Relationships and Related
      Transactions** .


The
      information required by this item is incorporated by reference to information
      under the caption "Executive Compensation - Certain Relationship and Related Transactions"
      in the Company's Proxy Statement for the Annual Meeting of Shareholders to
      be
      held on June 5, 2006.





**Item14.  
Principal
      Accounting Fees and
      Services**


The
      information required by this item is incorporated by reference to information
      under the caption "Independent Accountants” in the Company's Proxy Statement for
      the Annual Meeting of Shareholders to be
      held on June 5, 2006 .





**PARTIV**





**Item15.  
Exhibits
      and Financial Statement
      Schedules.**





(a) T he
      following documents are filed as part of this report:





1. Financial
      Statements


·
            Report
                of Independent Registered Public Accounting
                Firm


·
            Consolidated
                Balance Sheet at December 31, 2005 and December 31,
                2004


·
            Consolidated
                Statement of Operations for the three years ended December 31, 2005


·
            Consolidated
                Statement of Changes in Shareholders' Equity for the three years
                ended
                December 31, 2005


·
            Consolidated
                Statement of Cash Flows for the three years ended December 31,
                2005


·
            Notes
                to Financial Statements








42







2.
            Exhibits




3.1
            Amended
                and Restated Articles of Incorporation of the Company.(1)3.2
            Amended
                and Restated By-laws of the Company (incorporated herein by reference
                to
                Exhibit 3(b)of
                the Company's Registration Statement on Form S-8 (Registration No.
                333-55939)).3.3
            Articles
                of Amendment dated April 26, 1999 setting forth the designation of
                the
                Series A Redeemable Preferred Stock.3.4
            Articles
                of Amendment dated November 15, 2000 setting forth the designation
                of the
                Series B Redeemable Preferred Stock.3.5
            Articles
                of Amendment dated July 18, 2001 setting forth the designation of
                the
                Series C Convertible Preferred Stock(4)3.6
            Articles
                of Amendment dated September 7, 2001 setting forth certain revisions
                to
                Series A and Series B Convertible Preferred Stock.(4)3.7
            Articles
                of Amendment dated September 12, 2001 setting forth the one-for-three
                reverse stock split.(4)3.8
            Articles
                of Amendment dated June 11, 2004 setting forth the designation of
                the
                Series D Convertible Preferred Stock(5)4.1
            See
                Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Articles
                of Incorporation and Amended and Restated By-Laws of the Company
                defining
                rights of holders of Common Stock of the Company.4.9
            Second
                Amendment to the Firstwave Technologies, Inc. 1993 Stock Option Plan(12)4.10
            Third
                Amendment to the Firstwave Technologies, Inc. 1993 Stock Option
                Plan4.11
            Fourth
                Amendment to the Firstwave Technologies, Inc. 1993 Stock Option
                Plan4.14
            Second
                Amendment to the Firstwave Technologies, Inc. Employee Stock Purchase
                Plan4.15
            Third
                Amendment to the Firstwave Technologies, Inc. Employee Stock Purchase
                Plan4.16
            Fourth
                Amendment to the Firstwave Technologies, Inc. Employee Stock Purchase
                Plan10.1
            Form
                of Series D Convertible Preferred Stock Purchase Agreement(16)10.3
            Lease
                dated January 30, 1988 between the Company and Atlanta Overlook
                Associates #3 concerning the Company's principal offices located at
                2859 Paces Ferry Road, Atlanta, GA, as amended by that certain First
                Amendment of Office Building Lease dated as of December 27, 1988 and
                as further amended by that certain Second Amendment of Office Building
                Lease dated as of October 2, 1989.(1)10.4
            Firstwave
                Technologies, Inc. Amended and Restated 1993 Stock Option Plan
                (incorporated herein by reference to Exhibit 4(a) of the Company's
                Registration Statement on Form S-8 (Registration No. 333-55939)).(7)10.5
            Tax
                Indemnification Agreement dated February 4, 1993 among the Company
                and certain of its shareholders.(2)10.6
            Form
                of Selective Distribution Agreement for International
                Distributors.(1)10.7
            Form
                of Software License Agreement.(1)10.9
            Computer
                Software License Marketing Agreement dated December 21, 1987 between
                the Company and Co-Cam Computer Services, Pty. Ltd.(1)10.10
            Third
                Amendment to Lease Agreement dated as of March 10, 1993 between the
                Company and State of California Public Employees Retirement System
                relating to the Company's principal offices located at 2859 Paces
                Ferry
                Road, Atlanta, GA.(2)10.11
            Fourth
                Amendment to Lease Agreement dated as of June 24, 1993 between the
                Company and State of California Public Employees Retirement System
                relating to the Company's principal offices located at 2859 Paces
                Ferry
                Road, Atlanta, GA.(2)10.12
            Fifth
                Amendment to Lease Agreement dated as of March 22, 1994 between the
                Companyand
                State of California Public Employees Retirement System relating to
                the
                Company's principal offices located at 2859 Paces Ferry Road, Atlanta,
                GA.(2)







44








10.13
            Sixth
                Amendment to Lease Agreement dated as of September 22, 1994 between
                the Company and State of California Public Employees Retirement System
                relating to the Company's principal offices located at 2859 Paces
                Ferry
                Road, Atlanta, GA.(3)10.14
            Firstwave
                Technologies, Inc. Employee Stock Purchase Plan. (incorporated herein
                by
                reference to Exhibit 4(a) of the Company's Registration Statement
                on Form
                S-8(Registration
                No. 333-55971)(7)10.17
            Seventh
                Amendment to Lease Agreement dated as of January 20, 1998 between
                the
                Company and State of California Public Employees Retirement System
                relating to the Company’s principal offices located at 2859 Paces Ferry
                Road, Atlanta, GA.(6)10.18
            Eighth
                Amendment to Lease Agreement dated as of May 8, 1998 betweenthe
                Company and State of California Public Employees Retirement System
                relating to the Company's principal offices located at 2859 Paces
                Ferry
                Road, Atlanta, GA.(5)10.19
            First
                Amendment to Firstwave Technologies, Inc. 1993 Stock Option Plan
                (incorporated herein by reference to Exhibit 4(c) of the Company's
                Registration Statement on Form S-8 Registration No. 333-55939)).(7)10.20
            First
                Amendment to Firstwave Technologies, Inc. Employee Stock Purchase
                Plan
                (incorporated herein by reference to Exhibit 4(b) of the Company's
                Registration Statement on Form S-8 (Registration No. 333-55971)).(7)10.21
            Board
                of Directors Compensation Plan (incorporated herein by reference
                to
                Exhibit 4(b) of the Company's Registration Statement on Form S-8
                (Registration No. 333-55939)).(7)10.22
            Ninth
                Amendment to Lease Agreement dated as of February 3, 2000 betweenthe
                Company and National Office Partners Limited Partnership relating
                to the
                Company's principal offices located at 2859 Paces Ferry Road, Atlanta,
                GA.(8)10.23
            Tenth
                Amendment to Lease Agreement dated as of February 28, 2000 between
                the
                Company and National Office Partners Limited Partnership relating
                to the
                Company's principal offices located at 2859 Paces Ferry Road, Atlanta,
                GA.(8)10.24
            Certificate
                of Designation of Series C Convertible Preferred Stock.(4)10.25
            Registration
                Rights Agreement dated July 18, 2001 between the Company and Mercury
                Fund
                No.1 LTD and Mercury Fund II, LTD.(4)10.26
            Eleventh
                Amendment to Lease Agreement dated as of October 28, 2002 betweenthe
                Company and National Office Partners Limited Partnership relating
                to the
                Company's principal offices located at 2859 Paces Ferry Road, Atlanta,
                GA.(9)10.27
            Software
                License Agreement dated July 25, 2001, by and between Firstwave
                Technologies U.K. Limited and Electronic Data Systems Ltd.(10)10.28
            Software
                Development and License Agreement dated December 23, 2002, by and
                between
                The Football Association Limited and Firstwave Technologies U.K.
                Ltd.(10)(11)10.29
            Software
              License Agreement dated September 2, 2002, between The Football
              Association and Firstwave Technologies U.K. Limited.(10)10.30
            Letter
                Amendment dated February 10, 2004 amending the Software Development
                and
                License Agreement dated December 23, 2002, by and between the Football
                Association Limited and Firstwave Technologies U.K. Ltd.(14)10.30
            Secured
                Loan Agreement in the amount of up to $1,000,000 dated July 29, 2003
                by
                the Company in favor of RBC Centura(13)10.31
            Commercial
                Promissory Note in the amount of up to $1,000,000 dated July 29,
                2003 by
                the Company in favor of RBC Centura(13)10.33
            Waiver
                and First Amendment to Secured Loan Agreement dated July 29, 2003,
                by the
                Company in favor of RBC Centura(14)10.34
            Second
                Amendment of Loan Agreement and Revolving Line of Credit Note by
                and
                between Firstwave Technologies, Inc. and RBC Centura Bank.(15)10.35
            Company
                2005
                Stock Incentive Plan(19)10.36
            License
                Agreement dated September 30, 2005 between the Company and
                M1 Global Solutions, Inc.(20)10.37
            OEM/Outsourcing
                Agreement dated October 10, 2005 between the Company and M1 Global
                Solutions, Inc.(20)









45





10.38
            Stock
                Purchase
                Agreement dated June 3, 2005 between the Company and AllAboutTickets,
                LLC.(21)10.39
            License
              Agreement dated June 3, 2005 between the Company, Firstwave Technologies
              UK Ltd, and AllAboutTickets, LLC. (21)10.40
            Sublease
                Agreement dated October 24, 2005 between the Company and M1 Global
                Solutions, Inc.(22)14.1
            Firstwave
                Technologies, Inc. Code of Business Conduct and Ethics(17)21.1
            Subsidiaries
                of the Company. (18)23.1
            Consent
                of Independent Registered Public Accounting Firm31.1
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
            Certification
                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002







(1)
                Incorporated
                  herein by reference to exhibit of the same number in the Company’s
                  Registration Statement on Form S-1 (Registration No.
                  33-57984). (2)
                Incorporated
                    herein by reference to exhibit of the same number in the Company’s Form
                    10-K for the year ended December 31,
                    1993.


(3)
            Incorporated
                herein by reference to exhibit of the same number in the Company’s Form
                10-K for the year ended December 31,
                1994.


(4)
            Incorporated
                by reference to exhibits of the Company’s Definitive Proxy Statement dated
                August 17, 2001 for special meeting of Shareholders held on September
                7,
                2001.


(5)
            Incorporated
                by reference to Exhibit 3.1 of the Company’s current report on Form 8-K
                filed with the Commission on June 18,
                2004.


(6)
            Incorporated
                herein by reference to exhibit of the same number in the Company’s Form
                10-K for the year ended December 31,
                1998.


(7)
            Incorporated
                herein by reference to exhibit of the same number in the Company’s Form
                10-K for the year ended December 31,
                1997.


(8)
            Management
                contract or compensatory plan or arrangement required to be filed
                pursuant
                to Item 14(c) of Form 10-K.


(9)
            Incorporated
                herein by reference to exhibit of the same number in the Company’s Form
                10-K for the year ended December 31,
                1999.


(10)
            not
                used


(11)
            Incorporated
                herein by reference to exhibits attached to the Company’s Registration
                Statement on Form S-3 filed with the Commission March 18,
                2003.


(12)
            Confidential
                treatment has been requested with respect to portions of this document
                pursuant to Rule 406 of the Securities Act. The redacted portions
                of this
                document were filed separately with the Securities and Exchange
                Commission.


(13)
            Incorporated
                herein by reference to exhibits attached to the Company’s Registration
                Statement on Form S-8 filed with the Commission February 9,
                2004.


(14)
            Incorporated
                herein by reference to exhibits attached to the Company’s Form 10-Q for
                the quarter ended September 30, 2003.


(15)
            Incorporated
                herein by reference to exhibits attached to the Company’s Form 10-Q for
                the quarter ended March 31, 2004.


(16)
            Incorporated
                herein by reference to exhibits attached to the Company’s Form 10-Q for
                the quarter ended June 30, 2004.


(17)
            Incorporated
                herein by reference to exhibits attached to the Company’s Current Report
                on Form 8-k filed with the Commission on June 14, 2004.


(18)
            Incorporated
                herein by reference to exhibit of the same number in the Company’s Form
                10-K for the year ended December 31, 2003.


(19)
            Incorporated
                herein by reference to Annex A filed as part of the Company’s Definitive
                Proxy Statement dated May 6, 2005 for Special Meeting of Shareholders
                held
                on May 31, 2005.


(20)
            Incorporated
                herein by reference to exhibits attached to the Company’s current report
                on Form 8-K filed with the Commission on October 14,
                2005.


(21)
            Incorporated
                herein by reference to exhibits attached to the Company’s current report
                on Form 8-K filed with the Commission on June 9,
                2005.





46










SIGNATURES





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









Firstwave
              Technologies, Inc.Date:
                March 29, 2006
            By:/s/
                Richard T. BrockRichard T. Brock Chairman and
              Chief Executive Officer





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











Date:
                March 29, 2006
            /s/
                Richard T. BrockRichard
                T. BrockChairman
                and Chief Executive Officer(Principal
                Executive Officer)Date:
                March 29, 2006
            /s/
                David KaneDavid
                KanePrincipal
                Financial and Accounting OfficerDate:
                March 29, 2006
            /s/
                Roger A. BabbRoger
                A. BabbLead
                DirectorDate:
                March 29, 2006
            /s/
                I. Sigmund Mosley, Jr.I.
                Sigmund Mosley, Jr.DirectorDate:
                March 29, 2006
            /s/
                John N. Spencer, Jr.John
                N. Spencer, Jr.Director









47