**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**







**FORM
      10-K**







xANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934




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




**OR**




oTRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      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*
                *(I.R.S. Employer**Incorporation
                    or Organization)*
                *Identification
                    No.)*


**5775
      Glenridge Drive, Building E,**


**Suite
      400, Atlanta, Georgia, 30328**


*(Address
      of Principal Executive Offices including Zip Code)*




**(770)
      250-0360**


*(Registrant’s
      Telephone Number, Including Area Code)*




**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




Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Act). Yes o No 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, 2006:
      $5,666,709




Number
      of
      shares of Common Stock outstanding as of March 20, 2007: 2,868,302




**DOCUMENTS
      INCORPORATED BY REFERENCE**




Portions
      of the Company’s definitive Proxy Statement for its 2007 Annual Meeting of
      Shareholders to be held 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, 2006**




**TABLE
      OF CONTENTS**




**Part
                  I**
              ****
              ****
              ****
              **Page**Item
                  1.
              
              Business
              
              1Item
                  1A.
              
              Risk
                  Factors
              
              5Item
                  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,
                  andIssuer
                  Purchases of Equity Securities
              
              12Item
                  6.
              
              Selected
                  Financial Data
              
              14Item
                  7.
              
              Management’s
                  Discussion and Analysis of Financial Condition andResults
                  of Operations
              
              14Item
                  7A.
              
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              25Item
                  8.
              
              Financial
                  Statements and Supplementary Data
              
              25Item
                  9.
              
              Changes
                  in and Disagreements With Accountants on Accounting
                  andFinancial
                  Disclosure
              
              43Item
                  9A.
              
              Controls
                  and Procedures
              
              44Item
                  9B.
              
              Other
                  Information
              
              44**Part
                  III**Item
                  10.
              
              Directors
                  and Executive Officers of the Registrant
              
              45Item
                  11.
              
              Executive
                  Compensation
              
              45Item
                  12.
              
              Security
                  Ownership of Certain Beneficial Owners and Management and
                  RelatedStockholder
                  Matters
              
              45Item
                  13.
              
              Certain
                  Relationships and Related Transactions
              
              45Item
                  14.
              
              Principal
                  Accounting Fees and Services
              
              45**Part
                  IV**Item
                  15.
              
              Exhibits
                  and Financial Statement Schedules
              
              46**Signatures**
              
              
              
              50







**PART
      I**




**ITEM****1.**
            **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 lead generation, lead nurturing
      and customer management and tracking solutions built upon a suite of Customer
      Relationship Management (CRM) products. Firstwave’s solutions help customers
      find new prospects, continuously engage these prospects throughout the sales
      cycle and maintain contact with customers throughout their lifecycle.
      Firstwave’s modular internet marketing, sales lead, and customer management
      solutions help customers achieve results. 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. Our product solutions include client-server based CRM
      products, web-based (on demand or behind the firewall) CRM products and a series
      of marketing products and services integrated with our CRM product
      suite.




**Firstwave
      CRM Solutions**




***Firstwave
      CRM***




Firstwave
      provides enterprise-wide CRM software solutions in both client/server and
      web-based architectures. This allows our customers tremendous flexibility in
      determining how they would like to purchase, implement and support their CRM
      system. 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 client-server
      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




1




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




DataWave –
      Help maintain a quality database




Firstwave’s
      web-based (.NET architecture) CRM consists of the following
      modules:




Sales
      -
      Manage sales cycles for increased revenue and efficiency




Marketing –
      Marketing campaign tracking and management




Customer
      Support – Increase customer satisfaction, retention and
      loyalty




Quality
–
      Close the customer feedback loop and quickly identify product
      issues




Customer
      Portal – Reduce customer support costs and improve communication through
      customer web portal




**Firstwave
      Marketing services and products:**




***Email
      Marketing Service***




Firstwave’s
      technology delivers a very high percentage of email to decision makers’
in-boxes. With Firstwave, it is not just about the list, or the delivery
      mechanism or the tracking, it is about results. Through technology, process
      and
      expertise, Firstwave is able to help our customers deliver the most effective
      message to the right buyer.




Features
      include:




·
              Real-time
                  metric dashboard




·
                Behavioral
                    Tracking




·
            Real-time
                lead quality scoring on each
                prospect




·
            Automatic
                unsubscribe accumulation and
                management




·
            Integration
                with Firstwave sales and marketing modules or third party
                tools




***Lead
      Nurturing email module***




Our
      lead
      nurturing email module consists of the following components:




·
            **Newsletters**:
                Email-based publications, custom communications and promotional
                announcements




·
            **Surveys**:
                Instant, online market research into customer satisfaction, member
                interests, or employee preference




·
            **Invitations**:
                RSVP tracking and event management for trade shows, meetings, or
                other
                events




Together,
      these modules make “coordinated contact” possible. Our customers can touch their
      target audiences multiple times, in multiple ways because Firstwave provides
      a
      vehicle for recurring, meaningful contact with prospects or
      customers.




**Personalization
      solutions** :
      These
      solutions allow marketers to send out personalized emails or post cards to
      prospects with a complete loop to a personal URL.




**PURL** (Personal URLs) – These dynamically derived web pages are personal to the
      prospect and provide a connection to the outbound direct mail post card or
      email
      that was received. As well, full tracking allows the customer to track interest
      for all outbound marketing campaigns including direct mail. Additionally,
      prospects’ interests are scored based on their behavior on the
      website.




**Variable
      Data Printing** –
      through a web-based interface, a marketing person can put together a fully
      integrated campaign targeted at specific prospects catering to their specific
      interests and printing post cards with personalized information, including
      the
      prospect’s name.




2




***Firstwave
      Technology***TM




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. The web-based CRM suite
      is built on .NET technologies allowing for strong web-based functionality.
      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.




***TakeControl***TM




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, including M1 Global
      Solutions, Inc. (“M1 Global”). Our relationship with M1 Global is based on a
      three-year OEM/Outsourcing Agreement and a Licensing Agreement. M1 Global has
      licensed the Firstwave CRM database schema to develop its future products,
      and
      is a non-exclusive reseller of Firstwave products. During the first six months
      of 2006, M1 Global handled most of the professional services and paid a
      commission of 20% of services revenues to Firstwave. Commissions received from
      M1 Global for professional services for 2006 were $72,259. As we have increased
      our professional services staff since July of 2006, the amount of professional
      services provided by M1 Global to our customers, and the commissions received
      from M1 Global, have declined. In addition, during the first six months of
      2006,
      M1 Global provided most of the maintenance services for our customers in
      exchange for a quarterly fee of $154,315 per quarter. Since July of 2006, we
      have hired additional personnel for customer support and the support services
      provided by M1 Global have also been reduced. The quarterly fees to M1 Global
      were approximately $90,000 in the third quarter and $78,000 in the fourth
      quarter of 2006. For 2007, there have been no fees paid or payable to M1Global
      through March 31, 2007.




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 was agreed to be paid pursuant to a Promissory Note, and $338,000
      was
      agreed to be paid as software revenues are achieved to reimburse the Company
      for
      certain prepaid royalties. As of December 31, 2006, the Company has received
      $445,000 in payments on the promissory note and $104,051 as payments against
      the
      prepaid royalties.




3




On
      July
      1, 2005, we entered into a consulting arrangement with 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 were not to 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 of Firstwave described 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. The agreement was renewed
      for one year under the same terms and conditions in July of 2006, except that
      Firstwave now pays First Sports a fee of 15% of the maintenance revenues upon
      collection.




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




The
      first
      component of revenue is software license revenues. The Company’s technology
      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, system administrative capabilities or large
      capital outlays. 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, including hosting revenues,
      which consist of professional consulting, technical services, email 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. Email services are charged by volume of contacts that are sent emails,
      pursuant to customer order forms. Training services are charged on a per
      training session 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 amount based upon
      the number of users and are recognized as services revenues ratably by month
      over the period of services. During the first six months of 2006, M1 Global
      handled most of the professional services for our customers and paid Firstwave
      a
      commission of 20% on professional services revenues received. Commissions
      received from M1 Global for 2006 were $72,259. As we have increased our
      professional services staff since July of 2006, the amount of professional
      services provided by M1 Global to our customers, and the commissions received
      from M1 Global, have declined.




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. During the first six months of 2006, M1 Global
      handled most of the maintenance services for our customers in exchange for
      a
      quarterly fee of $154,315 per quarter. Since July of 2006, we have hired
      additional personnel for customer support and the services provided by M1 Global
      have been reduced. The quarterly fees to M1 Global were approximately $90,000
      in
      the third quarter and $78,000 in the fourth quarter of 2006. For 2007, there
      have been no fees paid or payable to M1Global through March 31,
      2007.




**Customers**




Firstwave’s
      customers operate in many industries. We have an industry-focused solution
      developed specifically for companies in the technology industry, taking into
      consideration their unique needs, revenue sources and customer demands. During
      2006, we continued to pursue strategies to transition our revenue stream to
      a
      more diverse customer base.




The
      table
      below identifies the customer who contributed more than 10% of total revenue
      in
      2006, 2005, or 2004.




**Year
                  ended December 31,****2006**
              
              
              **2005**
              
              
              **2004**Electronic
                  Data Systems, Ltd
              
              
              4.3
              %
              
              6.2
              %
              
              11.8
              %Galactus
                  Software
              
              
              18.8
              %
              
              0.0
              %
              
              0.0
              %




4




**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. Firstwave’s solutions help customers find new prospects,
      continuously engage these prospects throughout the sales cycle and maintain
      contact with customers throughout their lifecycle. Firstwave’s modular internet
      marketing, sales lead, and customer management solutions help customers achieve
      results.




Companies
      that offer competing products include Salesforce.com, Peoplesoft, Epiphany,
      Onyx, Microsoft, Seibel On Demand (now part of Oracle), Pivotal, SAP, 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. In our new market spaces, we compete with Eloqua
      Corporation, Genius.com, Inc., iCentera Corporation, Market2Lead, Inc., and
      Vtrenz, Inc. 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 pharmaceutical companies or financial
      institutions.




Our
      biggest competitive advantage is our demonstrated expertise in modular internet
      marketing, sales lead, and customer management solutions, our interactive
      web-based marketing capabilities, and high customer satisfaction, as well as
      providing a unique combination of list, delivery, and metrics capability.
      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 our 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, 2007, the Company employed 16 individuals, including 3 executive and
      administrative personnel, 2 sales and marketing personnel, 4 professional
      services personnel, 2 customer support personnel, and 5 persons involved in
      product innovation and development.




**ITEM
              1A.**
            **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.**




In
      the
      past, we have experienced negative cash flows and may experience negative cash
      flow in the future. Our ability to maintain and develop our revenue sources
      will
      directly impact our ability to raise capital needed to grow our business. We
      do
      not expect to incur any material capital costs in connection with the subleasing
      of new furnished office space in June of 2007.




5




In
      the
      past, we have funded our operating losses and working capital needs through
      existing cash balances and cash flows 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 reliant upon our new lead generation and web-based marketing solutions,
      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.**




We
      depend
      upon not only our existing CRM products but also our lead generation and
      web-based products and our ability to successfully market, sell, service and
      support these products. The loss of key personnel or an inability to penetrate
      the web-based marketing industry 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.




**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 and annual 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 ListK 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.




6




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, and our stock
      is
      thinly traded.**




The
      trading price of our common stock fluctuates significantly for a variety of
      reasons, including the fact that on a typical day, less than 10,000 shares
      of
      stock are traded. 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.




**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
      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.




7




**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 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
      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.




**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.




8




**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 stockinclude
      dividend payments, preferences over our common stock, and anti-dilution
      provisions that 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, 2006, 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




·
            6,700
                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 dividend rights
      and
      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 dividend rights and 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.




**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/or 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.**




9




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.




**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 reporting on internal controls and all other
      aspects of Section 404 in a timely fashion. If we are not able to implement
      the
      reporting requirements of Section 404 in a timely manner or with adequate
      compliance, our management and/or our auditors may not be able to render the
      required certification and/or attestation concerning 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.




10




**ITEM
              2.**
            **PROPERTIES**




As
      of
      December 31, 2006, the Company’s headquarters and principal operations were
      located in approximately 5,000 square feet of office space sublet from M1 Global
      in metropolitan Atlanta, Georgia. The sublease expires on June 30, 2007. The
      total amount of base rent ($10.00 per square foot) is being charged to rent
      expense. As of April 1, 2007, the Company will move its headquarters to 7000
      Central Parkway, Suite 330, Atlanta, GA 30328, in approximately 4,200 square
      feet of furnished subleased office space at a rate of $16.50 per square foot.
      The term of the new subleased office space expires in June of 2009.




**ITEM
              3.**
            **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.




**ITEM
              4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS**




None




11


**PART
      II**




**ITEM
              5.**
            **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.




**Period**
              
              **High**
              
              **Low**Fiscal
                  2006:First
                  Quarter
              
              $
              2.18
              
              $
              1.65Second
                  Quarter
              
              $
              2.15
              
              $
              1.66Third
                  Quarter
              
              $
              2.29
              
              $
              2.00Fourth
                  Quarter
              
              $
              2.47
              
              $
              2.08Fiscal
                  2005:First
                  Quarter
              
              $
              2.57
              
              $
              1.55Second
                  Quarter
              
              $
              3.07
              
              $
              1.62Third
                  Quarter
              
              $
              1.99
              
              $
              1.57Fourth
                  Quarter
              
              $
              2.45
              
              $
              1.23




As
      of
      March 20, 2007, there were approximately 75 shareholders of record and
      approximately 1700 persons or entities that hold common stock in nominee name.
      There were no common stock dividends declared during 2006 or 2005. The Company
      does not plan to pay dividends on its common stock in the future. Pursuant
      to a
      merger agreement, on 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 by the former
      Connect-Care shareholders at the termination of the offering.




12




*STOCK
      PERFORMANCE GRAPH*




The
      following indexed line graph indicates the Company’s total return to
      shareholders from December 31, 2001 to December 31, 2006, as compared to total
      return for the Russell 2000 and Russell 2000-Technology indices for the same
      period. The Russell 2000 index is comprised of the 2,000 publicly traded
      companies with market capitalizations (in terms of number of shares outstanding)
      ranked immediately below the 1,000 companies with the highest market
      capitalizations. The Russell 2000-Technology index is comprised of the 2,000
      publicly traded companies in the high-technology industry with market
      capitalizations (in terms of number of shares outstanding) ranked immediately
      below the 1,000 companies in the high-technology industry with the highest
      market capitalizations.









13




**ITEM
              6.**
            **SELECTED
                FINANCIAL DATA**




**For
                  the Year Ended December 31,****(in
                  thousands, except per share amounts)****2006**
              
              **2005****
              
              **2004*****
              
              **2003******
              
              **2002**Net
                  revenues from continuing operations
              
              $
              2,694
              
              $
              3,224
              
              $
              4,526
              
              $
              11,169
              
              $
              13,200Income/(loss)
                  from continuing operationsbefore
                  income tax
              
              
              172
              
              
              (1,578
              )
              
              (5,048
              )
              
              (1,212
              )
              
              2,679Income
                  tax
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Net
                  income/(loss) from continuing operations
              
              
              172
              
              
              (1,578
              )
              
              (5,048
              )
              
              (1,212
              )
              
              2,679Income/(loss)
                  from discontinued operations
              
              
              —
              
              
              (457
              )
              
              410
              
              
              437
              
              
              346Gain/(loss)
                  on sale of discontinued operations
              
              
              —
              
              
              327
              
              
              —
              
              
              —
              
              
              —Net
                  income/(loss) applicable to commonshareholders
              
              
              (111
              )
              
              (1,992
              )
              
              (4,893
              )
              
              (996
              )
              
              2,773Basic
                  & diluted earnings per shareEarnings/(loss)
                  from continuing operations
              
              
              (0.04
              )
              
              (0.69
              )
              
              (1.98
              )
              
              (0.56
              )
              
              1.13Earnings/(loss)
                  from discontinued operations
              
              
              —
              
              
              (0.05
              )
              
              0.15
              
              
              0.17
              
              
              0.16Net
                  income/(loss) per common share
              
              
              (0.04
              )
              
              (0.74
              )
              
              (1.82
              )
              
              (0.39
              )
              
              1.29Total
                  assets
              
              
              3,824
              
              
              4,259
              
              
              6,273
              
              
              11,807
              
              
              9,803Basic
                  and diluted weighted average sharesoutstanding*
              
              
              2,792
              
              
              2,709
              
              
              2,682
              
              
              2,572
              
              
              2,150







*
            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 Impairment of
                $750,000.




****
            2003
                includes the acquisition of Connect-Care in March of
                2003.




**ITEM
              7.**
            **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 lead generation, lead nurturing
      and customer management and tracking solutions built upon a suite of Customer
      Relationship Management (CRM) products. Firstwave’s solutions help customers
      find new prospects, continuously engage these prospects throughout the sales
      cycle and maintain contact with customers throughout their lifecycle.
      Firstwave’s modular internet marketing, sales lead, and customer management
      solutions help customers achieve results.




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, M1 Global has licensed the Firstwave
      CRM database schema to develop its future products, and is a non-exclusive
      reseller of Firstwave products. Although the agreements included the outsourcing
      of Firstwave’s Professional Services and Support functions to M1 Global,
      Firstwave is currently providing its own coverage in those areas and no longer
      pays M1 Global for these services. The agreements provide that M1 Global also
      pays royalty commissions to Firstwave as follows: 33% on licenses and 20% on
      services. During the first six months of 2006, M1 Global handled most of the
      professional services and paid a commission of 20% of services revenues to
      Firstwave. Commissions received from M1 Global for professional services for
      2006 were $72,259. As we have increased our professional services staff since
      July of 2006, the amount of professional services provided by M1 Global to
      our
      customers, and the commissions received from M1 Global, have declined. In
      addition, during the first six months of 2006, M1 Global provided most of the
      maintenance services for our customers in exchange for a quarterly fee of
      $154,315 per quarter. Since July of 2006, we have hired additional personnel
      for
      customer support and the support services provided by M1 Global have also been
      reduced. The quarterly fees to M1 Global were approximately $90,000 in the
      third
      quarter and $78,000 in the fourth quarter of 2006. For 2007, there have been
      no
      fees paid or payable to M1Global through March 31, 2007.




14


On
      May 5,
      2006, the Company entered into an Intellectual Property Assignment Agreement
      with Galactus Software LLP (“Galactus”), a Florida-based software application
      company. Under the terms of the agreement, Galactus assumes ownership of the
      .Net Integrated Development Environment (IDE) that Firstwave developed to use
      in
      writing applications in the CRM Market. Firstwave retains exclusive use of
      the
      technology in the CRM Market, and Galactus will use the technology in the
      software application marketplace. The purchase price for the assignment was
      Five
      Hundred Thousand Dollars ($500,000.00) and, as directed by the agreement, paid
      by cashier’s check on the Assignment Effective Date, May 2, 2006, when Galactus
      gave notice to Firstwave that it had accepted the software.




**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.




15




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 2005
      to
      2006. Certain percentage columns do not add to 100% due to
      rounding.




**Year
                  Ended**
              
              **Year
                  Ended**
              
              **%
                  Change****December
                  31, 2006**
              
              **December
                  31, 2005**
              
              **2005
                  to 2006**Revenues:Software
              
              $
              743
              
              
              27.6
              %
              $
              551
              
              
              17.1
              %
              
              34.8Services
              
              
              291
              
              
              10.8
              
              
              623
              
              
              19.3
              
              
              (53.3
              )Maintenance
              
              
              1,651
              
              
              61.3
              
              
              2,002
              
              
              62.1
              
              
              (17.5
              )Other
              
              
              9
              
              
              0.3
              
              
              48
              
              
              1.5
              
              
              (81.2
              )Net
                  revenues
              
              
              2,694
              
              
              100.0
              
              
              3,224
              
              
              100.0
              
              
              (16.4
              )Costs
                  and expenses:Cost
                  of revenuesSoftware
              
              
              411
              
              
              15.3
              
              
              803
              
              
              24.9
              
              
              (48.8
              )Services
              
              
              159
              
              
              5.9
              
              
              578
              
              
              17.9
              
              
              (72.5
              )Maintenance
              
              
              563
              
              
              20.9
              
              
              422
              
              
              13.1
              
              
              33.4Other
              
              
              14
              
              
              0.5
              
              
              32
              
              
              1.0
              
              
              (56.3
              )Sales
                  and marketing
              
              
              339
              
              
              12.6
              
              
              506
              
              
              15.7
              
              
              (33.0
              )Product
                  development
              
              
              317
              
              
              11.8
              
              
              631
              
              
              19.6
              
              
              (49.8
              )General
                  and administrative
              
              
              768
              
              
              28.5
              
              
              1,410
              
              
              43.7
              
              
              (45.5
              )Goodwill
                  impairment
              
              
              —
              
              
              —
              
              
              528
              
              
              16.4
              
              
              (100.0
              )Total
                  operating cost and expenses
              
              
              2,571
              
              
              95.4
              
              
              4,910
              
              
              152.3
              
              
              (47.6
              )Operating
                  income/(loss)
              
              
              123
              
              
              4.6
              
              
              (1,686
              )
              
              (52.3
              )
              
              (107.3
              )Gain/(loss)
                  on investment
              
              
              (57
              )
              
              (2.1
              )Interest
                  income, net
              
              
              106
              
              
              3.9
              
              
              108
              
              
              3.3
              
              
              (1.9
              )Income/(loss)
                  from continuing operations
              
              $
              172
              
              
              6.4
              
              $
              (1,578
              )
              
              (48.9
              )
              
              (110.9
              )Loss
                  from discontinued operations
              
              
              —
              
              
              —
              
              
              (457
              )
              
              (14.2
              )
              
              (100.0
              )Gain
                  on sale of discontinued operations
              
              
              —
              
              
              —
              
              
              327
              
              
              10.1Net
                  loss from discontinued operations
              
              
              —
              
              
              —
              
              
              (130
              )
              
              (4.0
              )
              
              (100.0
              )Net
                  income/(loss) before/after income taxes
              
              $
              172
              
              
              6.4
              
              $
              (1,708
              )
              
              (53.0
              )
              
              (110.1
              )




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.




*2006
      COMPARED TO 2005*




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 16.4% from $3,224,000 in 2005 to $2,694,000 in 2006 due
      to
      decreases in services and maintenance revenues, offset by an increase in
      software license revenues. Software revenues increased 34.8% from $551,000
      in
      2005 to $743,000 in 2006, primarily due to the assignment of the Company’s .Net
      Integrated Development Environment to Galactus Software in the second quarter
      of
      fiscal 2006. Our software revenues are significantly dependent upon the timing
      of closing of license agreements. Total revenues from international sources
      decreased from 24% of total revenues in 2005 to 16% in 2006 primarily due to
      decreased maintenance revenue from our U.K. CRM customers.




16






Services
      revenues decreased 53.3% from $623,000 in 2005 to $291,000 in 2006. Our services
      revenues are subject to fluctuations based on variations in the length of and
      number of active service engagements in a given quarter. Professional services
      revenues from the M1 Global relationship were lower than anticipated in 2006.
      We
      have, therefore, increased our professional services staff in an effort to
      expand those services ourselves.




Maintenance
      revenues decreased 17.5% from $2,002,000 in 2005 to $1,651,000 in 2006. The
      decrease is due to cancellations of $240,000 from existing customers and
      reductions of $105,000 in maintenance for existing customers, offset by
      additional maintenance revenues of $9,000 associated with new and existing
      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 48.8% from $803,000 in 2005 to $411,000 in 2006.
      Cost of software revenues includes amortization of capitalized software costs,
      costs of third party software, media costs, and documentation materials. The
      decrease is due to a decrease in amortization expense related to the assignment
      of the .Net Integrated Development Environment technology to Galactus and final
      amortization of the remaining capitalized software. Cost of software revenues
      as
      a percentage of software revenues decreased from 145.7% in 2005 to 55.3% in
      2006, primarily due to a decrease in amortization expense.




Cost
      of
      revenues for services decreased 72.5% from $578,000 in 2005 to $159,000 in
      2006.
      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. As
      we
      reduced the services outsourced to M1 Global after July of 2006 and increased
      our personnel providing these services, costs of revenues for services
      increased. The cost of revenues for services as a percentage of services
      revenues decreased from 92.8% in 2005 to 54.6% in 2006, due to reduction in
      personnel and personnel-related expenses.




Cost
      of
      revenues for maintenance increased 33.4% from $422,000 in 2005 to $563,000
      in
      2006. The increase is primarily due to the outsourcing arrangement with M1
      Global as to which we paid $476,925 in 2006 and the fees paid to First Sports
      of
      $68,908 for the support of our U.K. CRM customers. The reduction of the
      maintenance and support services outsourced to M1 Global after July of 2006
      reduced our quarterly fees to M1 Global and increased our personnel related
      expenses. Costs of revenues for maintenance as a percentage of maintenance
      revenues increased from 21.1% in 2005 to 34.1% in 2006, primarily due to the
      outsourcing of personnel to M1 Global.




**Sales
      and Marketing Expense**




Sales
      and
      marketing expense decreased 33.0% from $506,000 in 2005 to $339,000 in 2006,
      and
      decreased as a percentage of total revenues from 15.7% in 2005 to 12.6% in
      2006.
      The decreases are the result of lower payroll expenses associated with a
      reduction in the number of personnel and lower marketing expenses. However,
      we
      added a Chief Sales and Marketing Officer in August of 2006 and other sales
      personnel to focus on lead generation and to begin our new marketing
      efforts.




**Product
      Development Expense**




The
      Company’s product innovation and development expenditures decreased 49.8% from
      $631,000 in 2005 to $317,000 in 2006. The decrease is primarily related to
      decreases in payroll costs associated with staff reductions, and reductions
      associated with fewer outside contractors. There were no software development
      costs capitalized during either 2005 or 2006. We have added to our personnel
      in
      product development in late 2006.




**General
      and Administrative Expense**




General
      and administrative expenses decreased 45.5% from $1,410,000 in 2005 to $768,000
      in 2006. These changes were primarily due to $791,000 in reduced payroll costs
      associated with a reduction in personnel and $183,806 of decreased rent expense.
      Management anticipates that general and administrative expenses will not
      increase materially with the new facilities in April 2007.




17




**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 amount of the
      impairment.




Goodwill
      was evaluated for impairment quarterly throughout 2006 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 third quarter of 2005
      identified lower-than-expected operating results, and the Company revised the
      anticipated future earnings projections. 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 a non-cash
      impairment charge of $528,000 during the third quarter of 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. Based on the
      quarterly analyses conducted in 2006, 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 decreased 1.9% from $108,000 in 2005 to $106,000 in 2006 primarily from
      imputed interest recognized on the note receivable from First Sports, explained
      in “Discontinued Operations.” In 2006 and 2005, there was no interest expense,
      as the Company carried no debt during those years.




**Income
      Tax Expense**




There
      was
      no income tax expense in either 2006 or 2005. As of December 31, 2006, the
      Company had a net operating loss carryforward in the United States of
      approximately $25,600,000, which expires in years 2009 through 2019. A valuation
      allowance has been established for all deferred tax assets as of December 31,
      2006 and 2005, respectively.




*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.




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.




18


Maintenance
      revenues decreased 19% from $2,457,000 in 2004 to $2,002,000 in 2005. The
      decrease was due to cancellations from existing customers offset by additional
      maintenance revenues associated with new and expansion customers.




**Cost
      of Revenue**




Cost
      of
      software revenues decreased 61% from $2,032,000 in 2004 to $803,000 in 2005.
      The
      decrease was 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 was 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.




Cost
      of
      revenues for maintenance increased 4% from $405,000 in 2004 to $422,000 in
      2005.
      The increase was 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.




**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 were 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.




**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 was 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.




**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.




19


Goodwill
      was evaluated for impairment quarterly throughout 2005 and 2004 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 third quarter of 2005 and
      the
      fourth quarter of 2004, identified lower than previously expected operating
      results, and the Company revised the anticipated future earnings projections
      at
      the end of each of those quarters. 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 $528,000 at September 30, 2005, and $750,000 at December 31, 2004,
      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
      the
      second quarter 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 2005 or 2004. As of December 31, 2005, the
      Company had a net operating loss carryforward in the United States of
      approximately $25,600,000, which expires in years 2009 through 2019. A valuation
      allowance has been established for all deferred tax assets as of December 31,
      2005 and 2004, respectively.




*BALANCE
      SHEET*




Net
      accounts receivable decreased 37.8% from $399,000 at December 31, 2005 to
      $248,000 at December 31, 2006 consistent with lower total revenues. The
      allowance for doubtful accounts decreased 53.5% from $43,000 at December 31,
      2005 to $20,000 at December 31, 2006 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, 2006, the portion of the note receivable due within
      twelve months is $500,000 and is classified as a current asset on the Balance
      Sheet. Other assets decreased 10.5% from $475,000 at December 31, 2005 to
      $425,000 at December 31, 2006, primarily due to reimbursement of prepaid royalty
      expenses by First Sports International. Property and equipment decreased 32.9%
      from $82,000 at December 31, 2005 to $55,000 at December 31, 2006 due to fixed
      asset purchases of $20,000 offset by year-to-date depreciation and disposals
      totaling $47,000.




Goodwill
      remained at $593,000 at December 31, 2005 and December 31, 2006. Other
      intangible assets decreased 26.9% from $572,000 at December 31, 2005 to $418,000
      at December 31, 2006, as a result of amortization expense of $154,000. There
      was
      no capitalized software at December 31, 2006, as compared to $363,000 at
      December 31, 2005, as a result of amortization expense of $363,000.




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 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 2006, $137,000
      was amortized, resulting in a balance of $96,000 in imputed interest and a
      net
      non-current note receivable of $580,000 as of December 31, 2006.




20


Accounts
      payable decreased 54.3% from $302,000 at December 31, 2005 to $138,000 at
      December 31, 2006 due to certain expense reductions and the timing of payment
      of
      certain payables. Deferred revenue decreased 37.1% from $1,117,000 at December
      31, 2005 to $703,000 at December 31, 2006 primarily due to customer
      cancellations and customer prepayments prior to 2006 recognized as revenue
      in
      2006 Accrued employee compensation and benefits decreased 40.4% from $99,000
      at
      December 31, 2005 to $59,000 at December 31, 2006 due to reduced vacation
      expense and employee incentives, consistent with reduced revenues and staff
      reductions. Other accrued liabilities decreased 6.3% from $32,000 at December
      31, 2005 to $30,000 at December 31, 2006 primarily due to reduced sales
      tax.




*LIQUIDITY
      AND CAPITAL RESOURCES*




As
      of
      December 31, 2006, the Company had cash and cash equivalents of $997,000, an
      increase of 176.9% from the cash balance of $360,000 at December 31, 2005.
      The
      increased cash balance is primarily due to $375,000 received in payment of
      a
      portion of the promissory note with First-Sports and the assignment of the
      Company’s .Net Integrated Development Environment technology to Galactus
      Software for $500,000. The Company carries no debt. We are currently expanding
      our employee base and moving into new facilities. We anticipate that these
      new
      expenditures will have an impact on our operating costs, cash flows and
      requirements for capital. Our future capital requirements will depend on many
      factors, including our ability to continue to generate positive cash flows,
      to
      collect the note receivable from First Sports, to generate revenues from our
      new
      modular internet marketing and sales lead solutions, 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, 2006, we had general business tax credit carryforwards of
      approximately $245,000, which will expire in years 2008 through 2011. We also
      have U.S. net operating loss carryforwards for federal and state income tax
      reporting purposes of approximately $25,600,000 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 Note 1 to the Company’s consolidated
      financial statements. 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 First Sports 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 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 was agreed to be paid under a non-interest bearing
      Promissory Note that calls for payments to be made over a maximum of three
      years, and $338,000 was agreed to be paid as software revenues are achieved
      to
      reimburse the Company for certain prepaid royalties. In 2006, First Sports
      met
      the terms of the note and paid the required $300,000 in principal payment due
      in
      June. In addition, First Sports reimbursed $90,821 of the prepaid royalties
      mentioned above during 2006.




As
      a
      result of the sale of the U.K. Subsidiary, the Company recognized in 2005 a
      pre-tax gain on the disposition of the subsidiary of $327,000, which is reported
      as a separate component of discontinued operations in the consolidated
      statements of operations.




*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 12 in the Notes to the Company’s
      Consolidated Financial Statements.




21




*CONTRACTUAL
      OBLIGATIONS*




At
      December 31, 2006, the Company had no material outstanding contractual
      obligations. The sublease with M1 Global included a 30-day termination clause
      and expires in June of 2007. See Note 12 in the Notes to the Company’s
      Consolidated Financial Statements for more information.




**Lease**
                  **Commitments**Less
                    than one year
                
                $
                53Greater
                    than one year to three years
                
                
                117Total
                
                $
                170


*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 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’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, email, 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.




22


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 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.




**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.




*RECENT
      ACCOUNTING PRONOUNCEMENTS*




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.




23


In
      September 2006, the SEC issued SAB No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements*. SAB
      No. 108 provides guidance on how prior year misstatements should be
      considered when quantifying misstatements in current year financial statements
      for purposes of determining whether the current year’s financial statements are
      materially misstated. SAB No. 108 is effective for fiscal years ending
      after November 15, 2006. The application of SAB No. 108 did not have a
      material impact on the Company’s results of operations or financial
      position.




In
      July
      2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* (“FIN
      48”). The interpretation clarifies the accounting for uncertainty in income
      taxes recognized in a company’s financial statements in accordance with SFAS
      No. 109, Accounting
      for Income Taxes .
      Specifically, the pronouncement prescribes a recognition threshold and a
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return. The interpretation
      also provides guidance on the related derecognition, classification, interest
      and penalties, accounting for interim periods, disclosure and transition of
      uncertain tax positions. This interpretation was effective for the Company
      on
      January 1, 2007. The Company is currently evaluating the impact this new
      standard will have on its future results of operations and financial
      position.




In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (“SFAS
      157”), which defines fair value, establishes a framework for measuring fair
      value in accordance with GAAP, and expands disclosures about fair value
      measurements. SFAS 157 applies where other accounting pronouncements require
      or
      permit fair value measurements; it does not require any new fair value
      measurements under GAAP. SFAS 157 is effective for the Company on
      January 1, 2007. The effects of adoption will be determined by the types of
      instruments carried at fair value in the Company’s financial statements at the
      time of adoption as well as the method utilized to determine their fair values
      prior to adoption. Based on the Company’s current use of fair value
      measurements, SFAS 157 is not expected to have a material effect on the results
      of operations or financial position 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, 2006. 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.




**Quarter
                  ended****3/31/06**
              
              **6/30/06**
              
              **9/30/06**
              
              **12/31/06**
              
              **3/31/05**
              
              **6/30/05**
              
              **9/30/05**
              
              **12/31/05****(in
                  thousands, except per share amounts)**Net
                  revenues from continuing operations
              
              $
              599
              
              $
              958
              
              $
              583
              
              $
              554
              
              $
              881
              
              $
              793
              
              $
              928
              
              $
              622Net
                  Income/(loss) from continuing operations
              
              
              (116
              )
              
              281
              
              
              (44
              )
              
              51
              
              
              (323
              )
              
              (439
              )
              
              (657
              )
              
              (159
              )Net
                  Income/(loss) from continuing operationsapplicable
                  to common shareholders
              
              
              (187
              )
              
              210
              
              
              (114
              )
              
              (20
              )
              
              (394
              )
              
              (510
              )
              
              (728
              )
              
              (230
              )Income/(loss)
                  from discontinued operations
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (428
              )
              
              (29
              )
              
              —
              
              
              —Gain/(loss)
                  on sale of discontinued operations
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              327
              
              
              —
              
              
              —Basic
                  earnings per shareEarnings/(loss)
                  from continuing operations
              
              
              (0.06
              )
              
              0.08
              
              
              (0.04
              )
              
              (0.01
              )
              
              (0.15
              )
              
              (0.19
              )
              
              (0.27
              )
              
              (0.08
              )Earnings/(loss)
                  from discontinued operations
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (0.16
              )
              
              0.11
              
              
              —
              
              
              —Net
                  income/(loss) per common share
              
              
              (0.06
              )
              
              0.08
              
              
              (0.04
              )
              
              (0.01
              )
              
              (0.31
              )
              
              (0.08
              )
              
              (0.27
              )
              
              (0.08
              )Diluted
                  earnings per shareEarnings/(loss)
                  from continuing operations
              
              
              (0.06
              )
              
              0.07
              
              
              (0.04
              )
              
              (0.01
              )
              
              (0.15
              )
              
              (0.19
              )
              
              (0.27
              )
              
              (0.08
              )Earnings/(loss)
                  from discontinued operations
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (0.16
              )
              
              0.11
              
              
              —
              
              
              —Net
                  income/(loss) per common share
              
              
              (0.06
              )
              
              0.07
              
              
              (0.04
              )
              
              (0.01
              )
              
              (0.31
              )
              
              (0.08
              )
              
              (0.27
              )
              
              (0.08
              )




24




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 2006 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 third quarter of 2005
      identified lower-than-expected operating results, and the Company revised the
      anticipated future earnings projections. As a result of this 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 $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. As a result
      of
      the quarterly analyses conducted in 2006, 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.




**ITEM
                7A.**
              **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
      2007.




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 our consolidated 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.




**ITEM
              8.**
            **FINANCIAL
                STATEMENTS AND SUPPLEMENTARY
                DATA**




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




25




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      The
      Board of Directors


Firstwave
      Technologies, Inc. and Subsidiary


Atlanta,
      Georgia




We
      have
      audited the accompanying consolidated balance sheets of Firstwave Technologies,
      Inc. and Subsidiary (the “Company”) as of December 31, 2006 and 2005, 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,
      2006. 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. We were
      not
      engaged to perform an audit of the Company’s internal control over financial
      reporting. Our audit included consideration of internal control over financial
      reporting as a basis for designing audit procedures that are appropriate in
      the
      circumstances, but not for the purpose of expressing an opinion on the
      effectiveness of the Company’s internal control over financial reporting.
      Accordingly, we express no such opinion. An audit includes examining, on a
      test
      basis, evidence supporting the amounts and disclosures in the consolidated
      financial statements, 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, 2006 and 2005, and the results of their
      operations and their cash flows for each of the years in the three-year period
      ended December 31, 2006, in conformity with accounting principles generally
      accepted in the United States of America.




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




Atlanta,
      Georgia


March
      28,
      2007




26






**FIRSTWAVE
      TECHNOLOGIES, INC.**




**CONSOLIDATED
      BALANCE SHEETS**


**(IN
      THOUSANDS, EXCEPT PER SHARE DATA)**




**December
                  31,****2006**
              
              **2005****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              997
              
              $
              360Accounts
                  receivable, less allowance for doubtfulaccounts
                  of $20 and $43 in 2006 and 2005, respectively
              
              
              248
              
              
              399Note
                  receivable, current
              
              
              500
              
              
              300Prepaid
                  expenses and other current assets
              
              
              425
              
              
              475Total
                  current assets
              
              
              2,170
              
              
              1,534Property
                  and equipment, net
              
              
              55
              
              
              82Investments
              
              
              8
              
              
              50Software
                  development costs, net
              
              
              —
              
              
              363Intangible
                  assets
              
              
              418
              
              
              572Goodwill
              
              
              593
              
              
              593Note
                  receivable, net
              
              
              580
              
              
              1,065Total
                  assets
              
              $
              3,824
              
              $
              4,259**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              138
              
              $
              302Sales
                  tax payable
              
              
              28
              
              
              30Deferred
                  revenue
              
              
              703
              
              
              1,117Accrued
                  employee compensation and benefits
              
              
              59
              
              
              99Dividends
                  payable
              
              
              46
              
              
              46Other
                  accrued liabilities
              
              
              2
              
              
              2Total
                  current liabilities
              
              
              976
              
              
              1,596Shareholders’
                  equity:Preferred
                  stock, no par value; 1,000,000 shares authorized;50,687
                  shares issued; 33,720 and 34,020 outstandingat
                  2006 and 2005, respectively23,720
                  shares @$100 per share liquidation preference10,000
                  shares @$75 per share liquidation preference
              
              $
              2,981
              
              $
              3,011Common
                  stock, par value $.0019 per share; 10,000,000shares
                  authorized; 2,868,302 and 2,729,135 shares issuedand
                  outstanding at 2006 and 2005, respectively
              
              
              13
              
              
              13Additional
                  paid-in capital
              
              
              25,296
              
              
              25,269Accumulated
                  other comprehensive loss
              
              
              —
              
              
              (16
              )Accumulated
                  deficit
              
              
              (25,442
              )
              
              (25,614
              )Total
                  shareholders’ equity
              
              
              2,848
              
              
              2,663Total
                  liabilities and shareholders’ equity
              
              $
              3,824
              
              $
              4,259




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




27




**FIRSTWAVE
      TECHNOLOGIES, INC.**




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(IN
      THOUSANDS, EXCEPT PER SHARE DATA)**




**For
                  the Year Ended December 31,****2006**
              
              **2005**
              
              **2004**Net
                  Revenues:Software
              
              $
              743
              
              $
              551
              
              $
              876Services
              
              
              291
              
              
              623
              
              
              1,145Maintenance
              
              
              1,651
              
              
              2,002
              
              
              2,457Other
              
              
              9
              
              
              48
              
              
              482,694
              
              
              3,224
              
              
              4,526Cost
                  and Expenses:Cost
                  of revenues:Software
              
              
              411
              
              
              803
              
              
              2,032Services
              
              
              159
              
              
              578
              
              
              1,193Maintenance
              
              
              563
              
              
              422
              
              
              405Other
              
              
              14
              
              
              32
              
              
              38Sales
                  and marketing
              
              
              339
              
              
              506
              
              
              1,903Product
                  development
              
              
              317
              
              
              631
              
              
              1,188General
                  and administrative
              
              
              768
              
              
              1,410
              
              
              2,082Goodwill
                  impairment
              
              
              —
              
              
              528
              
              
              7502,571
              
              
              4,910
              
              
              9,591Operating
                  income/(loss)
              
              
              123
              
              
              (1,686
              )
              
              (5,065
              )Loss
                  on investment
              
              
              (57
              )
              
              —
              
              
              —Interest
                  income, net
              
              
              106
              
              
              108
              
              
              17Income/(loss)
                  from continuing operations before income taxes
              
              
              172
              
              
              (1,578
              )
              
              (5,048
              )Income
                  tax provision, continuing operations
              
              
              —
              
              
              —
              
              
              —Income/(loss)
                  from continuing operations
              
              
              172
              
              
              (1,578
              )
              
              (5,048
              )Income/(loss)
                  from discontinued operations
              
              
              —
              
              
              (457
              )
              
              410Gain
                  on sale of discontinued operations
              
              
              —
              
              
              327
              
              
              —Net
                  income/(loss) from discontinued operations
              
              
              —
              
              
              (130
              )
              
              410Net
                  income/(loss)
              
              
              172
              
              
              (1,708
              )
              
              (4,638
              )Dividends
                  on preferred stock
              
              
              (283
              )
              
              (284
              )
              
              (255
              )Net
                  loss applicable to common shareholders
              
              $
              (111
              )
              $
              (1,992
              )
              $
              (4,893
              )Basic
                  and diluted per share:Loss
                  from continuing operations
              
              $
              (0.04
              )
              $
              (0.69
              )
              $
              (1.98
              )Earnings/(loss)
                  from discontinued operations
              
              
              —
              
              
              (0.05
              )
              
              0.15Net
                  loss per common share –
                  Basic and
                  diluted
              
              $
              (0.04
              )
              $
              (0.74
              )
              $
              (1.82
              )Basic
                  and diluted weighted average shares outstanding
              
              
              2,792
              
              
              2,709
              
              
              2,682




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




28




**FIRSTWAVE
      TECHNOLOGIES, INC.**




**CONSOLIDATED
      STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY**


**(IN
      THOUSANDS, EXCEPT SHARE DATA)**




**Common
                  Stock**
              
              **Preferred
                  Stock**
              
              **Additional**
                  **paid-in**
              
              **Comprehensiveincome**
              
              **Accumulated****other****comprehensive**
              
              **Accumulated****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **capital**
              
              **(loss)**
              
              **income/(loss)**
              
              **deficit**
              
              **Total**Balance
                  at December 31, 2003
              
              
              2,672,728
              
              $
              13
              
              
              27,020
              
              $
              2,333
              
              $
              25,691
              
              
              
              
              $
              (400
              )
              $
              (19,268
              )
              $
              8,369Exercise
                  of common stockoptions/employee
                  stock purchases
              
              
              3,037
              
              
              —
              
              
              —
              
              
              —
              
              
              5
              
              
              —
              
              
              —
              
              
              —
              
              
              5Issuance
                  of common stock
              
              
              18,228
              
              
              
              
              
              
              
              
              
              
              
              44
              
              
              
              
              
              
              
              
              
              
              
              44Series
                  D Convertible Preferred Stock
              
              
              —
              
              
              —
              
              
              7,000
              
              
              678
              
              
              
              
              
              —
              
              
              —
              
              
              —
              
              
              678Dividends
                  on preferred stock
              
              
              —
              
              
              
              
              
              —
              
              
              —
              
              
              (255
              )
              
              —
              
              
              —
              
              
              
              
              
              (255
              )Net
                  Income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (4,638
              )
              
              —
              
              
              (4,638
              )
              
              (4,638
              )Foreign
                  currency translation adjustment
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (354
              )
              
              (354
              )
              
              —
              
              
              (354
              )Comprehensive
                  Income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (4,992
              )Balance
                  at December 31, 2004
              
              
              2,693,993
              
              
              13
              
              
              34,020
              
              
              3,011
              
              
              25,485
              
              
              
              
              
              (754
              )
              
              (23,906
              )
              
              3,849Exercise
                  of common stockoptions/employee
                  stock purchases
              
              
              5,598
              
              
              —
              
              
              
              
              
              
              
              
              9
              
              
              
              
              
              
              
              
              
              
              
              9Issuance
                  of common stock
              
              
              29,544
              
              
              —
              
              
              
              
              
              
              
              
              59
              
              
              
              
              
              
              
              
              
              
              
              59Dividends
                  on preferred stock
              
              
              —
              
              
              —
              
              
              
              
              
              
              
              
              (284
              )
              
              
              
              
              
              
              
              
              
              
              (284
              )Net
                  Income
              
              
              —
              
              
              —
              
              
              
              
              
              
              
              
              
              
              
              (1,708
              )
              
              
              
              
              (1,708
              )
              
              (1,708
              )Unrecognized
                  loss on equity securities:available
                  for sale
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (16
              )
              
              (16
              )
              
              
              
              
              (16
              )Foreign
                  currency translation adjustment
              
              
              —
              
              
              —
              
              
              
              
              
              
              
              
              
              
              
              754
              
              
              754
              
              
              
              
              
              754Comprehensive
                  Income
              
              
              —
              
              
              —
              
              
              
              
              
              
              
              
              
              
              $
              (970
              )Balance
                  at December 31, 2005
              
              
              2,729,135
              
              $
              13
              
              
              34,020
              
              $
              3,011
              
              $
              25,269
              
              
              
              
              $
              (16
              )
              $
              (25,614
              )
              $
              2,663Exercise
                  of common stock options
              
              
              64,167
              
              
              —
              
              
              
              
              
              
              
              
              96
              
              
              
              
              
              
              
              
              
              
              
              96Issuance
                  of common stock
              
              
              65,000
              
              
              —
              
              
              
              
              
              
              
              
              127
              
              
              
              
              
              
              
              
              
              
              
              127Conversion
                  of preferred stock
              
              
              10,000
              
              
              
              
              
              (300
              )
              
              (30
              )
              
              30
              
              
              
              
              
              
              
              
              
              
              
              —Dividends
                  on preferred stock
              
              
              —
              
              
              —
              
              
              
              
              
              
              
              
              (283
              )
              
              
              
              
              
              
              
              
              
              
              (283
              )Stock
                  option expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              57
              
              
              
              
              
              
              
              
              
              
              
              57Net
                  Income
              
              
              —
              
              
              —
              
              
              
              
              
              
              
              
              
              
              
              172
              
              
              
              
              
              172
              
              
              172Reclassification
                  adjustment for realizedloss
                  included in net earnings
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              16
              
              
              16
              
              
              
              
              
              16Comprehensive
                  Income
              
              
              —
              
              
              —
              
              
              
              
              
              
              
              
              
              
              $
              188Balance
                  at December 31, 2006
              
              
              2,868,302
              
              $
              13
              
              
              33,720
              
              $
              2,981
              
              $
              25,296
              
              
              
              
              $
              —
              
              $
              (25,442
              )
              $
              2,848




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




29


**FIRSTWAVE
      TECHNOLOGIES, INC.**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(IN
      THOUSANDS)**




**For
                  Year Ended December****31,****2006**
              
              **2005**
              
              **2004**Cash
                  flows from operating activities:Net
                  income/(loss)
              
              $
              172
              
              $
              (1,708
              )
              $
              (4,638
              )Adjustments
                  to reconcile net income/(loss) to net cash:Provided
                  by/(used in) operating activities:Depreciation
                  and amortization
              
              
              562
              
              
              1,130
              
              
              1,817Non-cash
                  interest income
              
              
              (89
              )
              
              (42
              )
              
              —(Gain)/loss
                  on disposal of fixed assets
              
              
              —
              
              
              1
              
              
              3Loss
                  on investments
              
              
              57
              
              
              —
              
              
              —Stock
                  proceeds from sale
              
              
              —
              
              
              (66
              )
              
              —Provision
                  for bad debts
              
              
              (23
              )
              
              27
              
              
              (33
              )Stock
                  compensation
              
              
              57
              
              
              30
              
              
              44Impairment
                  of Goodwill
              
              
              —
              
              
              569
              
              
              750Write-off
                  of capitalized software
              
              
              —
              
              
              —
              
              
              711Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              174
              
              
              193
              
              
              658Note
                  receivable
              
              
              375
              
              
              (300
              )
              
              —Prepaid
                  expenses and other assets
              
              
              50
              
              
              25
              
              
              426Accounts
                  payable
              
              
              (164
              )
              
              (277
              )
              
              13Sales
                  tax payable
              
              
              (2
              )
              
              (187
              )
              
              (153
              )Deferred
                  revenue
              
              
              (414
              )
              
              (196
              )
              
              (78
              )Accrued
                  employee compensation and benefits
              
              
              (40
              )
              
              (57
              )
              
              (212
              )Other
                  accrued liabilities
              
              
              —
              
              
              (68
              )
              
              (89
              )Total
                  adjustments
              
              
              543
              
              
              782
              
              
              3,857Net
                  cash provided by/(used in) operating activities
              
              
              715
              
              
              (926
              )
              
              (781
              )Cash
                  flows from investing activities:Software
                  development costs
              
              
              —
              
              
              —
              
              
              (94
              )Purchases
                  of property and equipment, net
              
              
              (18
              )
              
              (20
              )
              
              (108
              )Sale
                  of UK Subsidiary
              
              
              —
              
              
              256
              
              
              —Net
                  cash provided by/(used in) investing activities
              
              
              (18
              )
              
              236
              
              
              (202
              )Cash
                  flows from financing activities:Proceeds
                  from issuance of convertible preferred stock, net
              
              
              —
              
              
              —
              
              
              678Issuance
                  of common stock
              
              
              127
              
              
              29
              
              
              —Exercise
                  of common stock options
              
              
              96
              
              
              6
              
              
              4Proceeds
                  from employee stock purchase plan
              
              
              —
              
              
              3
              
              
              1Repayment
                  of borrowings
              
              
              —
              
              
              —
              
              
              (500
              )Payment
                  of dividends on convertible preferred stock
              
              
              (283
              )
              
              (284
              )
              
              (250
              )Net
                  cash used in financing activities
              
              
              (60
              )
              
              (246
              )
              
              (67
              )Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              —
              
              
              10
              
              
              (368
              )Net
                  increase/(decrease) in cash and cash equivalents
              
              
              637
              
              
              (926
              )
              
              (1,418
              )Cash
                  and cash equivalents, beginning of year
              
              
              360
              
              
              1,286
              
              
              2,704Cash
                  and cash equivalents, end of year
              
              $
              997
              
              $
              360
              
              $
              1,286Supplemental
                  disclosure of cash flow information:Cash
                  paid for interest
              
              $
              —
              
              $
              —
              
              $
              26Cash
                  paid for income taxes
              
              $
              —
              
              $
              —
              
              $
              —




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




30




**1.**
            **DESCRIPTION
                OF BUSINESS AND BASIS OF
                PRESENTATION**




***Description
      of the Company***




Headquartered
      in Atlanta, Georgia, Firstwave is a provider of lead generation, lead nurturing
      and customer management and tracking solutions built upon a suite of Customer
      Relationship Management (CRM) products. Firstwave’s solutions help customers
      find new prospects, continuously engage these prospects throughout the sales
      cycle and maintain contact with customers throughout their lifecycle.
      Firstwave’s modular internet marketing, sales lead, and customer management
      solutions help customers achieve results.




***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 2005 and 2004 consolidated financial statements have been
      reclassified to conform to the 2006 presentation.




*Liquidity*




As
      of
      December 31, 2006, the Company had cash and cash equivalents of $997,000, an
      increase of 176.9% from the cash balance of $360,000 at December 31, 2005.
      The
      increased cash balance is primarily due to $375,000 received in payment of
      a
      portion of the promissory note with First-Sports and the assignment of the
      company’s .Net Integrated Development Environment technology to Galactus
      Software for $500,000. The Company carries no debt. We are currently expanding
      our employee base and moving into new facilities. We anticipate that these
      new
      expenditures will have an impact on our operating costs, cash flows and
      requirements for capital. Our future capital requirements will depend on many
      factors, including our ability to continue to generate positive cash flows,
      to
      collect the note receivable from First Sports, to generate revenues from our
      new
      modular internet marketing and sales lead solutions, 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.




**2.**
            **USE
                OF ESTIMATES**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and 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.




31




**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’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, email, 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 and a Licensing Agreement with M1 Global, an Atlanta-based technology
      company. Under the terms of the agreements, M1 Global has licensed the Firstwave
      CRM database schema to develop its future products, and is a non-exclusive
      reseller of Firstwave products. Although the agreements included the outsourcing
      of Firstwave’s Professional Services and Support functions to M1 Global,
      Firstwave is currently providing its own coverage in those areas and no longer
      pays M1 Global for these services. The agreements provide that M1 Global also
      pays royalty commissions to Firstwave as follows: 33% on licenses and 20% on
      services. During the first six months of 2006, M1 Global handled most of the
      professional services and paid a commission of 20% of services revenues to
      Firstwave. Commissions received from M1 Global for professional services for
      2006 were $72,259. As we have increased our professional services staff since
      July of 2006, the amount of professional services provided by M1 Global to
      our
      customers, and the commissions received from M1 Global, have declined. In
      addition, during the first six months of 2006, M1 Global provided most of the
      maintenance services for our customers in exchange for a quarterly fee of
      $154,315 per quarter. Since July of 2006, we have hired additional personnel
      for
      customer support and the support services provided by M1 Global have also been
      reduced. The quarterly fees to M1 Global were approximately $90,000 in the
      third
      quarter and $78,000 in the fourth quarter of 2006. For 2007, there have been
      no
      fees paid or payable to M1Global through March 31, 2007.




32




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 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 the three years ended December
      31, 2006 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 third
      quarter of 2005 identified lower-than-expected operating results, and the
      Company revised the anticipated future earnings projections. As a result of
      this
      review, 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 a non-cash impairment charge of $528,000 at September
      30,
      2005 to write-off a portion of the carrying value of goodwill. In December
      of
      2004, the Company recorded a non-cash impairment charge of $750,000 against
      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, and is shown in discontinued
      operations. Based upon the quarterly analyses conducted during 2006, 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.




33




***Concentration
      of credit risk***




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




**December
                  31,****2006**
              
              **2005**Argos,
                  Ltd
              
              
              0.0
              %
              
              16.4
              %Barclaycard
                  IT
              
              
              0.0
              %
              
              10.0
              %CapGemini
                  UK
              
              
              22.9
              %
              
              14.2
              %Idexx
                  Systems
              
              
              23.1
              %
              
              0.0
              %M1
                  Global Solutions, Inc.
              
              
              1.9
              %
              
              10.9
              %Sungard
                  HTE, Inc.
              
              
              0.0
              %
              
              2.3
              %




***Significant
      Customers***




The
      table
      below identifies the customer who contributed more than 10% of total revenue
      in
      2006, 2005, or 2004.




**Year
                  ended December 31,****2006**
              
              **2005**
              
              **2004**Electronic
                  Data Systems, Ltd
              
              
              4.3
              %
              
              6.2
              %
              
              11.8
              %Galactus
                  Software
              
              
              18.8
              %
              
              0.0
              %
              
              0.0
              %




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,
      the
      balance of such note at December 31, 2006, was $1,250,000, as discussed in
      detail under “Discontinued Operations.”




***Stock-based
      compensation***




Statement
      of Financial Accounting Standards (“SFAS”) Statement No. 123(R) *Share-Based
      Payment* ,
      was
      issued in December 2004 and is effective for the year ended December 31, 2006.
      Accordingly, on January 1, 2006, the Company adopted SFAS No. 123 (R)
      which requires the measurement and recognition of compensation expense for
      all
      share-based payment awards made to employees, directors, and outside consultants
      including employee stock options and employee stock purchases related to the
      Employee Stock Purchase Plan based on estimated fair values. SFAS 123
      (R) supersedes the Company’s previous accounting under Accounting
      Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
(“APB 25”). The Company elected the modified prospective transition method,
      under which the Company’s Consolidated Financial Statements for prior periods
      have not been restated to reflect and do not include the impact of SFAS 123
      (R).
      SFAS 123(R) requires companies to estimate the fair value of share-based
      payment awards on the date of grant using an option-pricing model. Compensation
      expense is recognized ratably over the period of vesting. Compensation expense
      for all share-based payment awards granted subsequent to January 1, 2006 is
      being recognized using the straight-line method.




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 2006, 2005 and 2004,
      respectively: dividend yield of 0% for all years; expected volatility of 125%,
      125% and 127%, respectively; risk-free interest rate ranging from 2.96% to
      5.10%
      and expected lives of 6 years, 4.5 years, and 4.5 years, respectively. For
      the
      year ended December 31, 2006, a forfeiture rate of 2% was used.




34




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, 2006, December 31, 2005 and December 31, 2004, as the Company
      established a full valuation allowance for its net deferred tax
      assets.




The
      Company adopted the disclosure only provisions of SFAS No. 123, “Accounting for
      Stock-Based Compensation” for 2005 and 2004, while stock compensation expense
      was recorded in the Company’s Consolidated Financial Statements for 2006. The
      stock compensation expense for 2006 was $57,000. The following table illustrates
      the effect on net loss per share if the Company had applied the fair value
      recognition provisions of SFAS No. 123 to stock-based employee awards for 2005
      and 2004 (in thousands, except for per share data).


**Year
                  Ended**
                **December
                  31,****2005**
              
              **2004**Net
                  loss applicable to commonshareholders
                  as reported
              
              $
              (1,992
              )
              $
              (4,893
              )Stock
                  based employee compensation, net of relatedtax
                  effects under the fair value based method
              
              
              774
              
              
              943Net
                  loss as adjusted
              
              $
              (2,766
              )
              $
              (5,836
              )Net
                  loss per share:Basic
                  –
                  as
                  reported
              
              $
              (.74
              )
              $
              (1.82
              )Basic
                  – as adjusted
              
              $
              (1.02
              )
              $
              (2.18
              )Diluted
                  – as reported
              
              $
              (.74
              )
              $
              (1.82
              )Diluted
                  – as adjusted
              
              $
              (1.02
              )
              $
              (2.18
              )




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.




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




Basic
      net
      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 had they not been antidilutive. Net loss applicable to common
      shareholders includes a charge for dividends related to the Company’s
      outstanding preferred stock.




Potential
      common shares from stock options and convertible preferred stock have been
      excluded from the computation of diluted earnings per share due to
      net losses from continuing operations in 2006, 2005, and 2004 as their
      effect is antidilutive. The number of common shares that could have potentially
      diluted earnings per share and therefore were not included in the computation
      of
      diluted earnings per share were $1,025,396 in 2006, 1,099,063 in 2005, and
      830,779 in 2004. Weighted average options to purchase shares of common stock
      outstanding but not included in the computation of diluted EPS were 149,502
      in
      2006, 152,002 in 2005, and 426,975 in 2004. 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.




***Advertising
      Expense***




The
      Company expenses advertising costs when the advertising takes place. Advertising
      costs from continuing operations were $5,000 and $239,000 in 2005 and 2004,
      respectively, with no advertising expense in 2006.




***Impairment
      of long-lived assets***




The
      Company evaluates impairment of long-lived assets annually or 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.




35




***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 bases of the related
      assets and liabilities under the provisions of currently 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).




**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 First Sports 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 First Sports and which will reimburse
      the
      Company for certain prepaid royalties.




As
      of
      December 31, 2006, the remaining balance of the promissory note was $1,175,000
      payable in installments. The short-term portion of the note is $500,000, is
      payable prior to December 31, 2007, and has been classified as a current asset
      on the Balance Sheet. The long-term portion of the note is $675,000, is payable
      in fiscal year 2008, and is classified as a non-current asset on the Balance
      Sheet. Under the License Agreement, First Sports will pay quarterly royalty
      amounts to the Company if such royalty amounts exceed the 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, 2006, $138,000 was
      amortized, resulting in an unamortized balance of $95,000 of imputed interest
      as
      of December 31, 2006. Additionally, as of December 31, 2006, the Company
      received $104,051 as payments against the prepaid royalties.




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 loss from discontinued operations was $130,000 for
      the
      year ended December 31, 2005. Total revenues from discontinued operations were
      $341,000 in 2005.




36




As
      a
      result of the sale of the U.K. Subsidiary, the Company recognized a pre-tax
      gain
      of $327,000 in 2005; this amount is included in income/(loss) from discontinued
      operations in the 2005 Consolidated Statement of Operations.




**5.**
            **PROPERTY
                AND EQUIPMENT**




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


**December
                  31,****2006**
              
              **2005**
              
              **2004**Computer
                  hardware and other equipment
              
              $
              1,763
              
              $
              1,744
              
              $
              1,789Furniture
                  and fixtures
              
              
              323
              
              
              323
              
              
              780Purchased
                  software
              
              
              1,803
              
              
              1,803
              
              
              1,7963,889
              
              
              3,870
              
              
              4,365Less:
                  Accumulated depreciation and amortization
              
              
              (3,834
              )
              
              (3,788
              )
              
              (4,101
              )$
              55
              
              $
              82
              
              $
              264




Depreciation
      and amortization of property and equipment totaled $45,000, $170,000, and
      $334,000 in 2006, 2005, and 2004, respectively.




**6.**
            **GOODWILL
                AND INTANGIBLE ASSETS**




At
      December 31, 2006 and 2005, the Company had the following amounts recorded
      as
      goodwill and intangible assets (in thousands):


**2006**
              
              **2005**Goodwill
              
              $
              593
              
              $
              593Amortizable
                  Intangible Assets:Connect
                  Care technology
              
              $
              300
              
              $
              300Accumulated
                  amortization
              
              
              (300
              )
              
              (275
              )Net
                  book value
              
              $
              —
              
              $
              25Connect-Care
                  customer relationships
              
              $
              900
              
              $
              900Accumulated
                  amortization
              
              
              (482
              )
              
              (353
              )Net
                  book value
              
              $
              418
              
              $
              547




Amortization
      expense was $154,000 in 2006 and $229,000 in 2005.




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


2007
              
              $
              1292008
              
              $
              1292009
              
              $
              1292010
              
              $
              31




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.




During
      2006 the Company did not record an impairment charge to goodwill. Based on
      the
      Company’s fair value of the entity determination, utilizing the expected net
      present value of future cash flows, it was determined that goodwill was not
      impaired.




37




7.
            **PRODUCT
                DEVELOPMENT EXPENSES**




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


**Year
                  ended December 31,****2006**
              
              **2005**
              
              **2004**Total
                  development expenses
              
              $
              317
              
              $
              631
              
              $
              1,282Less:
                  Additions to capitalized softwaredevelopment
                  before amortization
              
              
              —
              
              
              —
              
              
              94Product
                  development expenses
              
              $
              317
              
              $
              631
              
              $
              1,188




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


**Year
                  ended December 31,****2006**
              
              **2005**
              
              **2004**Balance
                  at beginning of year, net
              
              $
              363
              
              $
              1,095
              
              $
              2,966Additions
              
              
              —
              
              
              —
              
              
              94Amortization
                  expense
              
              
              (363
              )
              
              (732
              )
              
              (1,254
              )Write-off
                  of discontinued products prior to release
              
              
              —
              
              
              —
              
              
              (136
              )Write-off
                  of discontinued product
              
              
              —
              
              
              —
              
              
              (575
              )Balance
                  at end of year, net
              
              $
              —
              
              $
              363
              
              $
              1,095




**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 rate for 2004 was 5.03%. 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 series. 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. One Series D Convertible Preferred Stock shareholder converted 300
      preferred shares into 10,000 shares of common stock during 2006. At December
      31,
      2006, there were 6,700 shares of Series D Preferred Stock outstanding and $5,025
      of dividends payable related to this series. Net loss applicable to common
      shareholders included a year to date charge of approximately $60,000 and $63,000
      in dividends related to the Series D Convertible Preferred Stock for the years
      ended December 31, 2006 and 2005, respectively.




38




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 anytime at a conversion rate of
      $1.80 per share of Common Stock. The Preferred Stock has a liquidation
      preference 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 series. These costs were netted from the proceeds received
      for the stock. In 2003, 2,000 shares of this series were converted to 83,333
      shares of Common Stock and in 2002, 4,667 shares of this series were converted
      to 194,458 shares of Common Stock pursuant to the original terms of the
      Preferred Stock. At December 31, 2006, there were 10,000 shares of Series C
      Preferred Stock outstanding and $5,625 of dividends payable related to this
      series. Net income/(loss) applicable to common shareholders included a year
      to
      date charge of approximately $68,000 per year in dividends related to the Series
      C Convertible Preferred Stock for each of the three years ended December 31,
      2006.




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 series. 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, 2006, there were 7,020 shares of Series B
      Preferred Stock outstanding and $5,265 in dividends payable related to this
      series. 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 each of the three years ended December 31,
      2006.




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 series. 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 series were converted to 161,812 shares of Common Stock pursuant to the
      original terms of the Preferred Stock. At December 31, 2006, there were 10,000
      shares of Series A Convertible Preferred Stock outstanding and $7,500 dividends
      payable related to this series. 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 each of the three years
      ended December 31, 2006.




**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,****2006**
              
              **2005**
              
              **2004**Current
              
              $
              —
              
              $
              —
              
              $
              —Deferred
              
              
              39
              
              
              329
              
              
              (941
              )Change
                  in valuation allowance
              
              
              (39
              )
              
              (329
              )
              
              941$
              —
              
              $
              —
              
              $
              —




39






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,****2006**
              
              **2005**
              
              **2004**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
              %




At
      December 31, 2006 and 2005, deferred tax (assets) liabilities are comprised
      of
      the following (in thousands):




**December
                  31,****2006**
              
              **2005**Gross
                  deferred tax liabilitiesCapitalization
                  of software development costs
              
              $
              —
              
              $
              124Depreciation
              
              
              —
              
              
              91Other
              
              
              —
              
              
              ——
              
              
              215Gross
                  deferred tax assetsNet
                  operating loss carryforwards
              
              
              (9,743
              )
              
              (10,001
              )Tax
                  credit carryforwards
              
              
              (93
              )
              
              (83
              )Allowance
                  for doubtful accounts receivable
              
              
              (8
              )
              
              (14
              )(9,844
              )
              
              (10,098
              )Valuation
                  allowance
              
              
              9,844
              
              
              9,883—
              
              
              (215
              )Net
                  deferred tax assets
              
              $
              —
              
              $
              —




Included
      in the deferred tax assets above are general business tax credit carryforwards
      of approximately $245,000 which will expire in years 2008 through 2011, and
      U.S.
      net operating loss carryforwards of approximately $25,600,000 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 deemed
      more likely than note 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
                COMPENSATION 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.
      Accordingly, 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 make
      stock
      compensation grants to employees and directors of the Company who are eligible
      to receive such grants under the Incentive Plan. The Compensation Committee
      is
      further authorized to establish the grant or 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 three or four year period from date of
      grant. Options expire ten years after the date of grant.




40


At
      December 31, 2006, 310,841 options were available for grant and 556,919 options
      were outstanding related to the Incentive Plan.




A
      summary
      of stock option activity is as follows:




**Shares**
              
              **Exercise**
                **Price**
                **Per
                  Share**
              
              **Weighted**
                **Avg
                  Exercise**
                **Price**
              
              **Weighted**
                **Average**
                **Fair
                  Value**Outstanding
                  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
              
              
              3.02Granted
              
              
              317,000
              
              
              1.95
                  – 2.18
              
              
              2.16
              
              
              1.91Exercised
              
              
              (64,167
              )
              
              1.81
                  – 2.00
              
              
              1.48Canceled
                  or expired
              
              
              (29,500
              )
              
              1.98
                  – 11.77
              
              
              2.75Outstanding
                  at December 31, 2006
              
              
              556,919
              
              
              1.47
                  – 16.50
              
              
              2.72




A
      summary
      of the nonvested option activity with changes during the year is as
      follows:




**Nonvested
                  Shares**
              
              **Shares**
              
              **Weighted-**
                **Average
                  Grant**
                **Date
                  Fair Value**Nonvested
                  at January 1, 2006
              
              —
              
              —Granted
              
              
              317,000
              
              
              1.91Vested
              
              
              —
              
              
              —Forfeited
                  or expired
              
              
              28,000
              
              
              1.80Nonvested
                  at December 31, 2006
              
              
              289,000
              
              
              1.92




The
      total
      intrinsic value of options exercised during the years ended December 31, 2006,
      2005 and 2004 was $29,235, $4,273, and $5,767, respectively.




In
      the
      second quarter of 2005, the Board of Directors of the Company voted to
      immediately vest all outstanding nonvested options held by employees and
      directors of the Company. The Company would have had to record significant
      non-monetary compensation expense once SFAS 123(R) was adopted in 2006 which
      was
      avoided by the Company’s decision.




41




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




**Options
                  Outstanding**
              
              **Options
                  Exercisable****Number**
                **Outstanding**
                **at**
                **December
                  31,**
                **2006**
              
              **Weighted**
                **Average**
                **Remaining**
                **Contractual**
                **Life
                  (years)**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              
              **Number**
                **Outstanding**
                **at**
                **December
                  31,**
                **2006**
              
              **Weighted**
                **Average**
                **Remaining**
                **Contractual**
                **Life
                  (years)**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**$
                  1.47 - $ 1.47
              
              
              105,000
              
              
              8.79
              
              $
              1.47
              
              
              105,000
              
              
              8.79
              
              
              1.47$
                  1.51 - $ 2.14
              
              
              34,417
              
              
              8.24
              
              
              1.83
              
              
              12,417
              
              
              7.07
              
              
              1.67$
                  2.16 - $ 2.16
              
              
              57,500
              
              
              9.56
              
              
              2.16
              
              
              0
              
              
              —
              
              
              —$
                  2.18 - $ 2.18
              
              
              210,000
              
              
              9.80
              
              
              2.18
              
              
              0
              
              
              —
              
              
              —$
                  2.24 - $ 2.24
              
              
              500
              
              
              7.35
              
              
              2.24
              
              
              500
              
              
              7.35
              
              
              2.24$
                  2.84 - $ 2.84
              
              
              100,000
              
              
              7.43
              
              
              2.84
              
              
              100,000
              
              
              7.43
              
              
              2.84$
                  5.50 - $ 8.47
              
              
              39,168
              
              
              4.85
              
              
              6.72
              
              
              39,168
              
              
              4.85
              
              
              6.72$
                  9.28 - $ 9.28
              
              
              1,667
              
              
              5.35
              
              
              9.28
              
              
              1,667
              
              
              5.35
              
              
              9.28$15.00
                  - $15.00
              
              
              1,667
              
              
              3.35
              
              
              15.00
              
              
              1,667
              
              
              3.35
              
              
              15.00$16.50
                  - $16.50
              
              
              7,000
              
              
              6.06
              
              
              16.50
              
              
              7,000
              
              
              6.06
              
              
              16.50$
                  1.47 - $16.50
              
              
              556,919
              
              
              7.96
              
              $
              3.71
              
              
              267,419
              
              
              6.67
              
              $
              4.89




A
      summary
      of the status of all nonvested shares as of December 31, 2006, and changes
      during the year ended is presented below:




**Options**
              
              **Shares**
              
              **Weighted-**
                **Avg
                  Exercise**
                **Price
                  ($)**
              
              **Weighted-**
                **Avg
                  Remaining**
                **Contractual
                  Term**
              
              **Aggregate**
                **Intrinsic**
                **Value**Outstanding
                  at January 1, 2006
              
              
              334,000
              
              
              3.02
              
              
              8.40
              
              
              48,000Granted
              
              
              317,000
              
              
              2.14
              
              
              9.64
              
              
              51,000Exercised
              
              
              64,000
              
              
              1.49
              
              
              7.99
              
              
              29,000Forfeited
                  or expired
              
              
              30,000
              
              
              4.52
              
              
              8.67
              
              
              6,000Outstanding
                  at December 31, 2006
              
              
              557,000
              
              
              3.71
              
              
              7.96
              
              
              142,000Exercisable
                  at December 31, 2006
              
              
              267,000
              
              
              4.89
              
              
              6.67
              
              
              97,000




**12.**
            **COMMITMENTS
                AND CONTINGENCIES**




As
      of
      December 31, 2006, the Company’s headquarters and principal operations were
      located in office space under a sublease with M-1 Global in metropolitan
      Atlanta, Georgia. The sublease expires on June 30, 2007. The total amount of
      base rent (at $10.00 per square foot per year, effective beginning November
      2006) is recorded as rent expense. At December 31, 2006, the Company’s material
      future rental commitments were approximately $13,000. Net rent expense under
      this and previous agreements were approximately $5,072, $196,000, and $628,000,
      for the years ended December 31, 2006, 2005 and 2004, respectively. For 2006,
      rent for the subleased space was $1.00 per square foot until November of 2006
      when it increased to $10.00 per square foot.




Rent
      expense for 2005 was reduced from 2004 levels primarily due to the Company’s
      evaluation of its future lease commitments in its Atlanta, Georgia office during
      2004. The Company determined that it was not using a portion of its leased
      office space and that such space 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. M1 Global has licensed the Firstwave CRM database schema
      to
      develop its future products, and is a non-exclusive reseller of Firstwave
      products. Although the agreements included the outsourcing of Firstwave’s
      Professional Services and Support functions to M1 Global, Firstwave is currently
      providing its own coverage in those areas and no longer pays M1 Global for
      these
      services. During the first six months of 2006, M1 Global handled most of the
      maintenance services for our customers in exchange for a quarterly fee. Since
      July of 2006, we have hired additional personnel for customer support and the
      services provided by M1 Global have been reduced. The quarterly fees to M1
      Global were approximately $90,000 in the third quarter and $78,000 in the fourth
      quarter of 2006. For 2007, there have been no fees paid or payable to M1Global
      through March 31, 2007.




42


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 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, 2006, 2005, and 2004, the
      Company made matching contributions of approximately $11,374, $32,000, and
      $46,500, 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 connection with this plan.
      During 2006, no shares were issued under the ESPP. In 2005, 1,547 shares were
      issued under the ESPP. At December 31, 2006, 24,596 shares had been issued
      cumulatively under the plan, and there were no options to purchase outstanding.
      There was no activity in the plan in 2006. Shares purchased in 2005 and 2004,
      respectively, were 1,029 and 1,180.




**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 2006, 2005, and 2004,
      and $16,875 was accrued but not paid at December 31, 2006 and 2005.




The
      former President and Chief Operating Officer of the Company participated in
      the
      Series D Convertible Preferred Stock series during June 2004 purchasing 300
      shares of Series D Convertible Preferred Stock for a total investment of
      $30,000. He was paid monthly dividends of $225, with approximately $1,250 paid
      during 2006 and $2,700 paid during 2005. He converted his shares during 2006
      and
      no longer is paid dividends. 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.”




**ITEM
              9.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE**




None




43




**ITEM
              9A.**
            **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, Chief Executive Officer, and Principal Accounting Officer
      believes 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




44


**PART
      III**




**ITEM
              10.**
            **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 2007 Annual
      Meeting of Shareholders.




**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.”




**ITEM
              11.**
            **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,” and “Executive Compensation” (excluding the section
      entitled “Certain Relationships and Related Transactions”) in the Company’s
      Proxy Statement for the 2007 Annual Meeting of Shareholders.




**ITEM
              12.**
            **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 2007 Annual Meeting of Shareholders.




**ITEM
              13.**
            **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 2007 Annual Meeting of
      Shareholders.




**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 2007 Annual Meeting of Shareholders.




45




**PART
      IV**




**ITEM
              15.**
            **EXHIBITS
                AND FINANCIAL STATEMENT
                SCHEDULES**




(a)
              The
                  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, 2006 and December 31,
                  2005·
              Consolidated
                  Statement of Operations for the three years ended December 31,
                  2006·
              Consolidated
                  Statement of Changes in Shareholders’ Equity for the three years ended
                  December 31, 2006·
              Consolidated
                  Statement of Cash Flows for the three years ended December 31,
                  2006·
              Notes
                  to Financial Statements**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)
  46
  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
                  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)10.13
              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 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.(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 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)
  47
 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 between
                  the
                  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)10.31
              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)10.32
              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)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)10.41
              Intellectual
                  Property Assignment Agreement dated May 5, 2006, between the Company
                  and
                  Galactus Software, LLP(23)14.1
              Firstwave
                  Technologies, Inc. Code of Business Conduct and Ethics(17)
  48
 21.1
              Subsidiaries
                  of the Company.23.1
              Consent
                  of Independent Registered Public Accounting Firm31.1
              Certification
                  pursuant to Section 302 of the Sarbanes-Oxley Act of
                  200232
              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.(23)
              Incorporated
                  herein by reference to exhibits attached to the Company’s current report
                  on Form 8-K filed with the Commission on May 5,
                  2006.




49


**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
              30, 2007
            By:
            /s/
              RICHARD
              T. BROCKRichard
              T. BrockChairman 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.




**Signature**
              
              **Title**
              
              **Date**/s/RICHARD
                  T. BROCK
              
              Chairman
                  and Chief Executive Officer
              
              Date:
                  March 30, 2007Richard
                  T. Brock
              
              (Principal
                  Executive Officer)/s/ROGER
                  A. BABB
              
              Lead
                  Director
              
              Date:
                  March 30, 2007Roger
                  A. Babb/s/
                  I.SIGMUND
                  MOSLEY, JR.
              
              Director
              
              Date:
                  March 30, 2007I.
                  Sigmund Mosley, Jr./s/JOHN
                  N. SPENCER, JR
              
              Director
              
              Date:
                  March 30, 2007John
                  N. Spencer, Jr.




50