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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549



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FORM 10-KSB



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(Mark One)

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

For the fiscal year period ended December 31, 2006

OR



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

For the transition period from to

Commission File Number: 000-31559



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E-centives, Inc.

(Name of Small Business Issuer in Its Charter)



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|                                                               |  |                                 
|-------------------------------------------------------------- |  | --------------------------------
|Delaware                                                       |  | 52-1988332                      
|(State or other jurisdiction of incorporation or organization) |  | (IRS EmployerIdentification No.)

6901 Rockledge Drive, 6th Floor, Bethesda, MD 20817

(Address of principal executive offices)

(240) 333-6100

(Registrants telephone number, including area code)



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Securities registered pursuant
to Section 12(b) of the Act: Not Applicable

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

Common Stock, par value $0.01 per share

(Title of class)



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Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. ̈

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 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 ̈

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

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

Issuers revenues for the fiscal year ended December 31, 2006: $ 6,502,073.

The aggregate market value of common stock held by non-affiliates of the registrant, based upon the closing price of the issuers common stock on the SWX Swiss Exchange as of March 26,2007 was
$7,703,911(1).



|(1) | Assumes an exchange rate of
1.2185 Swiss Francs per one U.S. Dollar as of March 26,2007.
|--- | ----------------------------------------------------------------------------------------

As of March 26,2007, there were 62,554,506
shares of issuers common stock outstanding.

Transitional Small Business Disclosure Format (check
one):    Yes ̈No  x



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E-centives, Inc.

Form 10-KSB

Table of Contents



|           |  |                                                                                                                                       |  |     
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                                                       |  | Page
|PART I     |  |                                                                                                                                      
|Item 1.    |  | Description of Business                                                                                                               |  | 4   
|Item 2.    |  | Description of Property                                                                                                               |  | 14  
|Item 3.    |  | Legal Proceedings                                                                                                                     |  | 14  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                                   |  | 14  
|PART II    |  |                                                                                                                                      
|Item 5.    |  | Market for Common Equity and Related Stockholder Matters                                                                              |  | 15  
|Item 6.    |  | Managements Discussion And Analysis or Plan of Operations                                                                            |  | 16  
|Item 7.    |  | Financial Statements                                                                                                                  |  | 23  
|Item 8.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                                                  |  | 23  
|Item 8A.   |  | Controls And Procedures                                                                                                               |  | 23  
|Item 8B.   |  | Other Information                                                                                                                     |  | 24  
|PART III   |  |                                                                                                                                      
|Item 9.    |  | Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act |  | 24  
|Item 10.   |  | Executive Compensation                                                                                                                |  | 26  
|Item 11.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                                        |  | 29  
|Item 12.   |  | Certain Relationships and Related Transactions, and Director Independence                                                             |  | 31  
|Item 13.   |  | Exhibits                                                                                                                              |  | 31  
|Item 14.   |  | Principal Accounting Fees and Services                                                                                                |  | 32  
|SIGNATURES |  |                                                                                                                                       |  | 33  



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Cautionary Note Regarding Forward-Looking Statements

Except for any historical information, the matters we discuss in this Annual Report on Form 10-KSB concerning our company contain forward-looking
statements. Any statements in this Annual Report on Form 10-KSB that are not statements of historical fact, are intended to be, and are, forward-looking statements under the safe harbor provided by Section 27(a) of the Securities
Act of 1933. Without limitation, the words anticipates, believes, estimates, expects, intends, plans and similar expressions are intended to identify forward-looking statements.
The important factors we discuss below under the captions Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations, as well as other factors identified in our filings with
the SEC and those presented elsewhere by its management from time to time, could cause actual results to differ materially from those indicated by the forward-looking statements made in this Annual Report on Form 10-KSB. The Company assumes no
obligation to update any forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information.



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E-CENTIVES, INC.

PART I

ITEM 1- DESCRIPTION OF BUSINESS

Overview

We provide interactive database marketing technologies and services, as well as on-line advertising capabilities and solutions for companies across a
range of industries. We were founded in 1996 to enable businesses to acquire and retain customers through the Internet. With our proprietary technologies and services, we provide customer acquisition and retention solutions for companies that do
business with millions of Internet users every day. We currently derive our revenues from two operating segments: the Interactive Database Marketing division and the ConsumerREVIEW.com division.



| |  |  | Our Interactive Database Marketing division offers a suite of digital marketing technologies and services, including e-mail marketing, Internet couponing, data
warehousing, online reporting, strategic consulting and program management, user experience design and development, and analytics and data mining. Through a hosted technology infrastructure, this division provides solutions for relationship
marketing, including creating, targeting, publishing, managing and tracking e-mails, coupons and promotional incentives, as well as data management and tracking of individual consumers responses to such activities.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our ConsumerREVIEW.com division manages web communities around common product interests, and provides on-line advertising and e-commerce services through its
network of web communities. The web properties are dedicated to meeting the needs of consumers who are researching products on the web. We focus on creating an online environment that fosters communication and consumer-generated reviews of products,
by providing an interface to a large database of product information, forums, and other useful content.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For financial
information regarding our reportable segments, including operating revenue, operating profit/loss, identifiable assets and other information by segment, see Note 13 of the Notes to Financial Statements that begin on page F-7 of this annual report.

Of our total revenue of $6.5 million for the year ended December 31, 2006, one of our Interactive Database Marketing division
customers, Reckitt Benckiser, contributed $1.8 million, or 28%, of our net revenue. This customers initial contract expired in October 2002 and the customer subsequently signed four annual renewal agreements, with the most recent renewal
expiring on December 31, 2007. Although the percentage of our total revenue that this customer has contributed over the past three years has decreased, loss of this customer would have a material adverse effect on our business, financial
condition, results of operations and cash flow.

Industry Background

The Internet has emerged as a powerful marketing medium that allows millions of consumers and marketers to conduct business and interact with each other in unprecedented ways. The Internet is particularly well suited
to direct marketers because of its ability to access both broad audiences, as well as precisely defined groups. As a result, the Internet provides marketers with opportunities to identify and attract customers, as well as target specific types of
users and collect data on their preferences. At the same time, we believe the Internet appeals to consumers because it offers more individual control over marketing messages. The growth of the Internet has encouraged companies to spend more of their
marketing budgets via the Internet. We believe there is a need for a marketing infrastructure that could satisfy the objectives of both marketers and consumers, which would enable businesses to acquire and retain customers, yet operate from a
consumer-centric approach that would provide relevant information and meaningful value to the individual user.

Services

Interactive Database Marketing Division

For the years ended December 31, 2006, 2005 and 2004, the Interactive Database Marketing division generated 61%, 62% and 55%, respectively, of our total revenue. Approximately 47%, 50% and 41% of the
divisions revenue for the years ended December 31, 2006, 2005 and 2004, respectively, was generated from our contract with Reckitt Benckiser. Our principal products and services of the Interactive Database Marketing division include the
Interactive Database Marketing System, the Promotions System,the E-mail Marketing System and related professional services.

During
the year ended December 31, 2005 we began to receive royalties from licensing two of our patents related to the Interactive Database Marketing division. This was the result of the settlement of a lawsuit with Coupons, Inc. whereby we are being
paid quarterly royalties based on revenue earned by Coupons, Inc. related to patents that were licensed to them as part of a settlement agreement. Royalties represented 1% and less than 1% of our total revenue for the years ended December 31,
2006 and 2005, respectively.



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Interactive Database Marketing System

In December 2001, we combined our Promotions System, our E-mail Marketing System, our data warehousing system and our online reporting
system, and began offering these services as part of our Interactive Database Marketing System. This is a hosted technology infrastructure which allows companies to establish direct consumer relationships through a set of integrated tools that
include campaign management, targeted e-mail marketing, transaction database, data warehouse, micro site and survey generator and our patented coupon promotion system. This system enables companies to acquire consumers, collect consumers
preferences and usage information, segment consumers within loyalty categories, communicate with consumers via e-mail marketing, deliver coupons, track individual usage of each coupon, as well as track and report every consumer interaction with the
system.

Promotions System

Our Promotions System, which we acquired in December 2001 as part of the acquisition of substantially all of the assets of BrightStreet.com, enables companies to create, manage, deliver and track promotions, such as
print-at-home online coupons. Our systems printable coupons can be individually tailored with relevant content and different incentive values based on the respective recipients, enabling manufacturers to target coupons much more efficiently
and cost-effectively than traditional methods. In addition, our system has high tracking capabilities, including individually coded offers that can be cross-referenced against specific consumer profiles.

E-mail Marketing System

Our E-mail Marketing System allows companies to build ongoing, personalized dialogs with their audiences by outsourcing their e-mail marketing needs to us. It lets businesses cost-effectively conduct e-mail marketing
without having to acquire or develop their own e-mail infrastructure and manage the process. This solution consists of list management and hosting, e-mail delivery and management, as well as tracking and analytical services. It is designed to help
build an ongoing, personalized communication with the clients intended audience and maximize effectiveness of marketing efforts through improved targeting.

Professional Services

We provide a broad range of professional services to
assist our clients in their digital marketing needs. The service teams blend interactive consumer marketing expertise with technical capabilities to ensure the most effective management of our clients programs. Our professional services
include strategic consulting & program management, user experience design & development, and analytics & data mining.

ConsumerREVIEW.com Division

For the years ended December 31, 2006, 2005 and 2004, the ConsumerREVIEW.com
division generated 39%, 38% and 45%, respectively, of our revenues through its advertising and e-commerce related services. Our ConsumerREVIEW.com division is a source of user-generated buying advice for outdoor sporting goods and consumer
electronics. Consumers visit this divisions websites to learn, interact, and buy or sell the products showcased within our network of web communities, including sites like AudioREVIEW.com and MtbREVIEW.com. On these websites, users find the
products they are interested in, read and write reviews, participate in discussions, compare prices, and are able to link to other sites where they can shop online. Our ConsumerREVIEW.com divisions revenues are primarily derived from online
advertising and e-commerce referral fees.

Sales and Marketing

We seek to establish relationships with clients principally through our direct sales force, as well as working with advertising or promotional agencies to reach their clients. During 2006, we maintained sales
personnel in the Washington, D.C., San Francisco and New York metropolitan areas, as well as in Florida.

In order to strengthen our
existing relationships with clients, we offer account management, technology integration and consulting services. We assign account managers with knowledge of on-line marketing to clients with the goal of increasing the performance of their
marketing efforts and overall satisfaction with our services. Our account managers also provide periodic reports to clients and help formulate strategies to more effectively market their products and services.

Our primary marketing efforts include conferences and tradeshows.



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Technology

We have a variety of technologies that enable our solutions. Our Interactive Database Marketing division technologies are delivered through a hosted infrastructure and consist of a variety of hardware and software, such as application
servers, database servers, data collection and transformation servers, web servers, mail servers, reporting servers, and client-side plug-in software. Our hardware infrastructure has been designed to allow us to scale our systems, by adding hardware
as required. Our ConsumerREVIEW.com division has a proprietary web architecture based on Microsoft .NET® enterprise server technology that enables it to meet the demands of its network of growing web communities and product research sites. The system was built for scalability, reliability,
and interoperability with web-enabled enterprise partners.

We host our systems in a data center that provides redundant network
connectivity and diesel generated backup power. In addition we monitor and test our system and software, and from time to time have identified minor defects. We address such defects by rewriting software code and, if possible, replacing small
portions of our proprietary software with commercially available software components. Any difficulties in implementing new software may result in greater than expected expense and may cause disruptions to our business.

We spent approximately $930,000 and $968,000 in 2006 and 2005 on research and development activities.

Intellectual Property Rights

A large part of our
success depends on protecting our intellectual property, which we believe is one of our most important assets. If we do not adequately protect our intellectual property, our business, financial condition, results of operations and cash flow could be
seriously harmed.

We have developed and acquired various proprietary technologies. Our Interactive Database Marketing division clients
enter into technology and services agreements with us. In addition, we generally require employees, contractors and other persons with access to our proprietary information to execute confidentiality and non-compete agreements. We seek to protect
our software, documentation and other written materials under trade secret and other intellectual property laws, which afford only limited protection. We have not registered any copyrights in the U.S. or elsewhere related to our software or other
technology.

We have several issued U.S. patents and a number of pending U.S. and foreign patent applications. Many of our pending patent
applications seek to protect technology we use or may use in our business. We have no issued foreign patents, but we have several pending foreign patent applications. It is possible that no patents will be issued from the currently pending U.S. or
foreign patent applications. It is also possible that our patents or any potential future patents may be found not infringed, invalid or unenforceable, or otherwise be successfully challenged. Also, any patent we have currently or that is
issued to us may not provide us with any competitive advantages. We may not develop future proprietary products or technologies that are patentable, and the patents of others may seriously limit or prevent our ability to do business.

We have filed intent to use U.S. trademark applications for BrightStreet and BrightStreet.com and both applications have been approved for publication.
We have also filed two applications for registration of the trademark MAESTRO and both of the applications have been published. MasterCard International opposed one of the applications; however, we have settled the matter. Through our acquisition of
substantially all of the assets of Consumer Review, Inc., we obtained several additional registered U.S. trademarks, including but not limited to Car Review, MTB Review, PC Photo Review, Golf Review, Garden Review, Computing Review, Videogame Review
and Photography Review. We currently own several additional U.S. registered trademarks related to the ConsumerREVIEW.com business line, and we also claim rights in a number of additional tradenames associated with our business activities.

We hold rights to various web domain names including E-centives.com, BrightStreet.com, ConsumerREVIEW.com and Collabrys.com, as well as
several other review-related domains. Regulatory bodies in the United States and abroad could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. The relationship
between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. We may be unable to prevent third parties from acquiring domain names that are similar to or diminish the value of our trademarks
and other proprietary rights.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of
our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and, while we are unable to determine the extent to which piracy of our software products exists, software piracy
can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Our means of protecting our proprietary rights may not be
adequate, and our competitors may independently develop similar technology, duplicate our products or design around patents issued to us or our other intellectual property.



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There has been a substantial amount of litigation in the software industry regarding intellectual
property rights. During 2005, we reached a settlement with one of our competitors regarding infringement of two of our patents and during 2000 we reached a settlement with another competitor regarding intellectual property (see Item 3 
Legal Proceedings for further details). It is possible that in the future, other third parties may claim that our current or potential future products infringe upon their intellectual property. We expect that software developers will
increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any claims, with or without merit, could be
time-consuming to defend, result in costly litigation, require us to enter into royalty or licensing agreements or subject us to an injunction. These agreements, if required, may not be available on terms acceptable to us or at all, which could
materially adversely affect our business, financial condition, results of operations and cash flow.

We integrate third-party software from
vendors such as Oracle Corporation into the software we use in our business. The third-party software may not continue to be available to us on commercially reasonable terms. We may not be able to renew these agreements or develop alternative
technology. If we cannot maintain licenses to key third-party software, develop similar technology or license similar technology from another source on a timely or commercially feasible basis, our business, financial condition, results of operations
and cash flow could be materially adversely affected.

Competition

We generally compete for the budgets that companies allocate to marketing.

We believe that the market for
our Interactive Database Marketing divisions solutions to be rapidly evolving and intensely competitive. As a provider of digital marketing technologies and services, we generally compete with other marketing programs for a portion of a
marketers total marketing budget. In this area, we compete with a variety of businesses. Current or potential competitors include vendors that provide:



| |  |  | marketing technologies and services;
| | - |  | ------------------------------------



| |  |  | e-mail marketing solutions;
| | - |  | ---------------------------



| |  |  | coupon and promotion programs;
| | - |  | ------------------------------



| |  |  | database marketing solutions; and
| | - |  | ---------------------------------



| |  |  | interactive advertising agencies.
| | - |  | ---------------------------------

We believe the market for our ConsumerREVIEW.com division to also be rapidly evolving and competitive. In this area, some of our current and potential competitors include:



| |  |  | other providers of product reviews;
| | - |  | -----------------------------------



| |  |  | publishers of content and information on special interest product categories;
| | - |  | -----------------------------------------------------------------------------



| |  |  | shopping comparison or price search web sites; and
| | - |  | --------------------------------------------------



| |  |  | providers of community forums, message boards, and photo galleries.
| | - |  | -------------------------------------------------------------------

The failure to compete successfully would impair our ability to generate revenues and become profitable. Our ability to compete depends on many factors.

Factors over which we have some level of control include:



| |  |  | ability to enter into relationships with marketers;
| | - |  | ---------------------------------------------------



| |  |  | ability to provide simple, cost-effective and reliable solutions;
| | - |  | -----------------------------------------------------------------



| |  |  | timely development and marketing of new services; and
| | - |  | -----------------------------------------------------



| |  |  | ability to manage rapidly changing technologies, frequent new service introductions and evolving industry standards.
| | - |  | --------------------------------------------------------------------------------------------------------------------

Factors outside our control include:



| |  |  | development, introduction and market acceptance of new or enhanced services by our competitors;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | changes in pricing policies of our competitors;
| | - |  | -----------------------------------------------



| |  |  | entry of new competitors in the market;
| | - |  | ---------------------------------------



| |  |  | ability of marketers to provide simple, cost-effective and reliable promotions; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | market economy impacts on our clients marketing budgets.
| | - |  | ---------------------------------------------------------

We expect competition to intensify as more competitors enter our markets. However, as referenced above, one of our most important assets is our intellectual property, which we believe will help offset some of the
competitive pressures for certain of our



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offerings. Many of our existing competitors, as well as a number of potential new competitors, have significantly greater financial, technical, marketing and
managerial resources than we do. Many of our competitors also generate greater revenue and are better known than we are. They may compete more effectively and be more responsive to industry and technological change.

Employees

As of December 31, 2006, we employed
a total of 43 employees, 41 of whom are full-time and based in the United States. None of our employees are represented by a labor union, nor have we ever experienced a work stoppage. We believe our relationship with our employees is good.

Risk Factors

We caution you that our
performance is subject to risks and uncertainties. There are a variety of important factors like those that follow that may cause our future business, financial conditions, results of operations and cash flow to differ materially and/or adversely
from those projected in any of our forward-looking statements made in this Annual Report on Form 10-KSB or otherwise. The following risk factors and other information in this Annual Report on Form 10-KSB should be carefully considered. The
risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business, financial conditions, results of operations and
cash flow.

Risks Related to Our Business

We have incurred net losses since inception, expect to incur continuing losses and may never become profitable.

To date, we have not been profitable. As of December 31, 2006, we had an accumulated deficit of approximately $147 million. We incurred net losses in 2006, 2005 and 2004 of $3.1 million, $4.3 million and $10.8
million, respectively. We may continue to incur losses and may never become profitable. If we cannot achieve operating profitability or positive cash flows from our operating activities, we may be unable to secure additional funding, our stock price
may decline and we may be unable to continue our operations.

Our future results and the demand for our services are uncertain, and we will not
become profitable if our services do not achieve market acceptance.

We were incorporated in August 1996 and launched our online
direct marketing system in November 1998. We did not charge for our services and did not begin to generate revenues until the third quarter of 1999. Since then, we have discontinued offering certain services and have started offering additional
services, some through acquisitions and others through the launching of internally developed services. Since some of our services are new, our future results are uncertain and our historical results may not be representative of our future results.
If our products and services do not achieve market acceptance, our business will not become profitable.

Loss of a significant customer could have a
material adverse effect on our business, financial condition, results of operations and cash flow.

Approximately 28%, 31% and 22%
of our revenue for the years ended December 31, 2006, 2005 and 2004, respectively, was derived from one of our Interactive Database Marketing division customers. Our most recent contract with this customer expires on December 31, 2007.
While this customer has renewed its contract for the past five years, there can be no assurance that it will renew again. The loss of this client could be a material adverse effect on our business, financial condition, results of operations and cash
flow.

If we are unable to obtain financing to fund our business we may be forced to cease operations.

We believe that future revenues and cash from our existing financing sources will be sufficient to meet our anticipated cash needs for working capital
and capital expenditures into the first quarter of 2008. This forecast is based on our plan to use the funds from the financing commitment described below.

In September 2002 Friedli Corporate Finance, Inc., Belize provided us with a written commitment to provide us with debt or equity financing of up to $20 million in the aggregate. As of October 2006, none of the $20
million aggregate commitment remains. Friedli Corporate Finance, Inc., Belize subsequently committed to providing our financing needs for 2007. If Friedli Corporate Finance, Inc., Belize is unable to fulfill its remaining financing commitment to us
or we are not offered financing by Friedli Corporate Finance, Inc., Belize on acceptable terms and conditions, it is not likely that we will be able to replace such committed funds on acceptable terms or at all. If future revenues are insufficient
to cover our operating costs, we will need to secure additional funds to continue operations. In addition, we may need to raise additional funds sooner than anticipated to respond to competitive pressures, to



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develop new or enhanced products or services, to fund our future expansion or to make acquisitions. We may not find any additional financing on acceptable
terms or at all. If adequate funds are not available or not available on acceptable terms, we may not be able to continue operations, and would need to seek bankruptcy protection or a buyer for our assets.

We may not be able to compete successfully against current and future competitors.

We generally compete with companies for the budgets that companies allocate to marketing. We expect competition to continue to increase as a result of
such factors as:



| |  |  | market acceptance of existing, or development, introduction of new or enhanced, services by our competitors;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | changes in pricing policies of our competitors; and
| | - |  | ---------------------------------------------------



| |  |  | entry of new competitors in the market;
| | - |  | ---------------------------------------

The market to provide our Interactive Database Marketing solutions is intensely competitive and rapidly changing. We compete for marketing budgets with many companies in several fields, such as vendors that provide:



| |  |  | marketing technologies and services;
| | - |  | ------------------------------------



| |  |  | e-mail marketing solutions;
| | - |  | ---------------------------



| |  |  | coupon and promotions programs;
| | - |  | -------------------------------



| |  |  | database marketing solutions; and
| | - |  | ---------------------------------



| |  |  | interactive advertising agencies.
| | - |  | ---------------------------------

We believe the market for our ConsumerREVIEW.com division to also be rapidly evolving and competitive. In this area, some of our current and potential competitors include:



| |  |  | other providers of product reviews;
| | - |  | -----------------------------------



| |  |  | publishers of content and information on special interest product categories;
| | - |  | -----------------------------------------------------------------------------



| |  |  | shopping comparison or price search web sites; and
| | - |  | --------------------------------------------------



| |  |  | providers of community forums, message boards and photo galleries.
| | - |  | ------------------------------------------------------------------

Many of our other existing and potential competitors have significantly greater financial, technical, marketing and managerial resources than we do. Many competitors also generate greater revenue and are better known
than we are. As a result, they may compete more effectively than we do and be more responsive to industry and technological change than we are. We operate in an intensely competitive environment with a significant number of existing and potential
competitors. The failure to compete successfully would impair our ability to generate revenues and become profitable.

Our E-centives brand may not
achieve the level of recognition necessary to attract additional clients, and building recognition of the E-centives brand may require us to expend funds on marketing, either of which could materially adversely affect our business, financial
condition, results of operations and cash flow.

To be successful, we must continue to build and increase market recognition of our
corporate brand because our market is competitive, with low barriers to entry. We do not advertise to attract visitors to our website, but rather are attempting to build a brand that businesses identify with online marketing. We believe that the
recognition of the E-centives brand is critical to our success and the importance of this will increase as more companies enter our market and competition for marketers attention increases. Building recognition of the E-centives brand may
require us to expend funds on marketing. The outcome of our marketing efforts is hard to predict. If we are not successful in our marketing efforts to increase our brand awareness, our ability to attract marketing clients could be harmed which would
cause a materially adverse affect on our business, financial condition, results of operations and cash flow.

Our ConsumerReview brand, and the
brands of our respective web sites, may not achieve the level of recognition necessary to attract additional clients and consumers, and building recognition of such brands may require us to expend funds on marketing, either of which could materially
adversely affect our business, financial condition, results of operations and cash flow.

To be successful, we also must continue
to build and increase market recognition of the brands within our ConsumerReview network of sites. We believe that the recognition of these brands is critical to our success and the importance of this will increase as more companies enter our market
and competition for marketers and consumers attention increases. Building recognition of the ConsumerReview brands may require us to expend significant funds on marketing. If we are not successful in our marketing efforts to increase our
brand awareness, our ability to attract consumers and marketing clients could be harmed which would cause a materially adverse affect on our business, financial condition, results of operations and cash flow.

Our network infrastructure, computing systems or software may fail or be compromised or damaged, which could harm our reputation, as well as materially adversely
affect our business, financial condition, results of operations and cash flow.



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The performance of our hardware and software is critical to our business. System failures that cause an
interruption in service or a decrease in responsiveness of our transaction processing or data storage capabilities could impair our reputation and the attractiveness of our products and services. We have experienced periodic system interruptions,
which may occur from time to time in the future. All such disruptions were caused by errors in our software code that were all subsequently corrected and did not result in a material disruption to our business. Any significant increase in the
frequency or severity of future disruptions could have a material adverse effect on our business, financial condition, results of operations and cash flow.

The software for our systems is complex and may contain undetected errors or defects, especially when we implement upgrades to our system. Any errors or defects that are discovered after our software is released for
use could damage our reputation or result in lost revenues.

We regularly monitor and test our system and software, and from time to time
we have identified minor defects. We currently address such defects by rewriting software code and, if possible, replacing portions of our proprietary software with commercially available software components. Any difficulties in implementing this
new software may result in greater than expected expense and may cause disruptions to our business.

SAVVIS hosts our systems and provides
us with communications links. The delivery of our services is substantially dependent on our ability and the ability of the provider to protect our computer hardware and network infrastructure against damage from, among other things:



| |  |  | human error;
| | - |  | ------------



| |  |  | fire and flooding;
| | - |  | ------------------



| |  |  | power loss;
| | - |  | -----------



| |  |  | telecommunications failure; and
| | - |  | -------------------------------



| |  |  | on-line or physical sabotage.
| | - |  | -----------------------------

We
rely on SAVVIS for a significant portion of our Internet access as well as monitoring and managing the power and operating environment for our server and networking equipment. Any interruption in these services, or any failure of SAVVIS to handle
higher volumes of Internet use, could result in financial losses or impair our reputation.

Our system capacity needs are untested and our failure to
handle the growth of our database may materially adversely affect our business, financial condition, results of operations and cash flow or require us to expend substantial capital.

The capacity of our system has not been tested and we do not yet know the ability of our system to manage substantially larger amounts of users and
related activity or data. A substantial increase in the number of users and a corresponding increase in the number of data records could strain our servers and storage capacity, which could lead to slower response time or system failures. We may not
be able to handle our expected user and transaction levels while maintaining satisfactory performance. System failures or slowdowns adversely affect the speed and responsiveness of our transaction processing. These would have a negative impact on
the experience for our clients users and our sites users, and reduce our systems effectiveness. Such an increase could require us to expand and upgrade our technology, processing systems and network infrastructure. Any unexpected
upgrades could be disruptive and costly. Our failure to handle the growth of our databases could lead to system failures, inadequate response times or corruption of our data, and could materially adversely affect our business, financial condition,
results of operations and cash flow. We believe that on average, our various systems hardware, at peak traffic levels, run at approximately 10-50% of capacity. We may be unable to expand and upgrade our systems and infrastructure to
accommodate this growth in a timely manner. Any failure to expand or upgrade our systems could damage our reputation and our business.

In
addition, if our usage of telecommunications capacity increases, we will need to purchase additional networking equipment and rely more heavily on our web hosting providers to maintain adequate data transmission speeds. The availability of these
products or services may be limited or their cost may be significant.

Our business could suffer if Internet users reduce or block our access to
their personal data.

For certain parts of our business, we collect consumer demographic and purchase preference information from
users and also collect certain data, such as data regarding the e-mails viewed or offers clicked-on by such users. Privacy concerns may cause users to resist signing up for our system, providing personal information and allowing us to monitor their
usage. If users were to reduce the information voluntarily supplied or block access to their data, our ability to improve our database of user information and the value of our service would diminish.

Privacy laws may be enacted or applied to us, which could restrict our ability to disclose consumer data to third parties, which could materially adversely affect
our business, financial condition, results of operations and cash flow.



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For certain parts of our business we currently report consumer information to our clients about their
users. Our clients receive detailed and specific information about the activities of their users for purposes of targeting marketing messages or promotions to subscribers with certain demographic or purchase preference criteria. Growing concern
about privacy and the collection, distribution and use of personal information, even in the aggregate, may lead to the enactment and application of federal or state laws or regulations that would restrict our ability to provide user data to third
parties. In addition, several states have proposed legislation that would limit the uses of user information gathered online. Consequently, any future regulation that would restrict our ability to provide information regarding users would have a
materially adverse impact on our business, financial condition, results of operations and cash flow by restricting our methods of operation or imposing additional costs.

If we are not successful in protecting our intellectual property, our business will suffer.

We depend heavily on technology to operate our business. Our success depends on protecting and enforcing our intellectual property, which is one of our most important assets. We have developed and acquired various proprietary technologies.

Our means of protecting our intellectual property may not be adequate. Unauthorized parties may attempt to copy aspects of our service or
to obtain and use information that we regard as proprietary. It is also possible that our patents or any potential future patents may be found invalid or unenforceable, or otherwise be successfully challenged. If any of our current or future patents
are successfully challenged by a third party, we could be deprived of our right to prevent others from using the methods covered by such patents. In addition, competitors may be able to devise methods of competing with our business that are not
covered by our patents or other intellectual property. Although Internet users can access our service over the Internet from anywhere in the world, we currently only provide our services from the U.S. The laws of some foreign countries do not
protect our intellectual property rights to as great an extent as do the laws of the United States. Our competitors may independently develop similar technology, duplicate our technology or design around any patents that we may obtain or our other
intellectual property. If we do not adequately protect our intellectual property, our business, financial condition, results of operations and cash flow could be materially adversely affected.

If we infringe upon the intellectual property rights of others, our business, financial condition, results of operations and cash flow could be materially
adversely affected.

There has been a substantial amount of litigation in the software and Internet industry regarding intellectual
property rights. It is possible that, in the future, third parties may claim that our current or potential future technologies infringe upon their intellectual property. We expect that software developers will increasingly be subject to infringement
claims as the number of products and competitors in our industry segment grows. Any such claims, with or without merit, could be time-consuming, result in costly litigation and diversion of management resources, require us to enter into royalty or
licensing agreements or subject us to an injunction. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our ability to operate our business and our financial condition
may suffer.

We may be subject to claims based on the content of promotions we deliver.

The online promotions developed by our clients may not comply with federal, state or local laws governing the content of advertisements and the sale of
products and services. We do not control the content of the promotions for which we provide promotions technology. Our role in facilitating these promotions may expose us to liability based on the content of the promotions. We also may face
liability if the promotional information in the promotions is defamatory, inaccurate, or infringes on proprietary rights of others. Our clients or our employees may make errors or enter inaccurate information, and we do not verify the accuracy of
information contained in the promotions or otherwise for compliance with applicable advertising laws. We may face civil or criminal liability for unlawful advertising or other marketer activities. We could also face claims based on the content that
is accessible from our website through links to other websites.

We may not be adequately insured to cover these claims. Any claims could
require us to spend significant time and money in litigation, even if we ultimately prevail. In addition, negative publicity caused by these inaccuracies could damage our reputation and diminish our brand.

Our business may be affected by seasonal fluctuations in marketing spending and Internet use, which could cause our stock price to fluctuate widely and/or
materially adversely affect our business, financial operations, financial results and cash flow.

We expect seasonal fluctuations
will affect our ConsumerREVIEW.com division. We believe that marketing spending is generally highest in the fourth quarter of each calendar year due to increased consumer spending during the holiday period, and lowest during the summer months of the
third quarter. Because the market for Internet marketing services is emerging, we cannot be certain of these seasonal patterns and additional patterns may develop in the future as the market matures. This could cause our operating results and stock
price to fluctuate widely and/or materially adversely affect our business, financial operations, financial results and cash flow.



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If we do not manage our growth, our business, financial condition, results of operations and cash flow could be
materially adversely affected.

We may not be successful in managing our growth. Past growth has placed, and future growth will
continue to place, a significant strain on our management and resources, related to the successful integration of personnel.

To manage the
expected growth of our operations, we will need to improve our operational and financial systems, procedures and controls. We will also need to manage our finance, administrative, client services and operations staff and train and manage our growing
employee base effectively. Our current and planned personnel, systems, procedures and controls may not be adequate to support our future operations. Our business, financial condition, results of operations and cash flow could be materially adversely
affected if we do not effectively manage our growth.

If we lose the services of any of our key personnel, our business and stock price could suffer.

Our success depends in large part on the contributions of Kamran Amjadi, our Chairman and Chief Executive Officer and Mehrdad
Akhavan, our President and Chief Marketing Officer and certain other key executives, whose understanding of our services, strategy and relationships would be extremely difficult to duplicate from outside our company. The loss of the services of any
of our key personnel could have a material adverse effect on our business, financial condition, results of operations and cash flow. The Company does not have any key man life insurance policies.

If we are unable to attract and retain highly skilled employees, our business, financial condition, results of operations and cash flow could be materially
adversely affected.

Our future success also depends on our ability to identify, attract, retain and motivate highly skilled
employees, particularly additional technical, sales and marketing personnel. We face competition in hiring and retaining personnel from a number of sectors, including technology and Internet companies, government contractors and traditional
businesses. Many of these companies have greater financial resources than we have to attract and retain qualified personnel. We have occasionally encountered and expect to continue to encounter difficulties in hiring and retaining highly skilled
employees. We may be unable to retain our highly skilled employees or identify, attract, assimilate or retain other highly qualified employees in the future, which may in turn materially adversely affect our business, financial operations, financial
results and cash flow.

Risks Related to Our Industry

The demand for Internet direct marketing services is uncertain.

The market for online direct
marketing has only recently begun to develop. Many businesses have little or no experience using the Internet for direct marketing and promotion. As a result, many businesses have allocated only a limited portion of their marketing budgets to online
marketing. In addition, companies that have invested a significant portion of their marketing budgets in online marketing may decide after a time to return to more traditional methods if they find that online marketing is a less effective method of
promoting their products and services than traditional marketing methods. We cannot predict the amount of marketing spending on the Internet in general, or demand for our targeted direct marketing services in particular. The demand for online
marketing may not develop to a level sufficient to support our continued operations or may develop more slowly than we expect.

Many of the clients
for our ConsumerREVIEW.com business unit are emerging Internet companies that represent credit risks.

Many of our
ConsumerREVIEW.com clients are Internet companies, which have significant losses, negative cash flow and limited access to capital. Many of these companies represent credit risks and could fail. Any financial difficulties of our clients may result
in difficulties in our ability to collect accounts receivable or lower than expected sales of our products and services. If our Internet clients continue to have financial difficulties or if such difficulties worsen, our business, financial
condition, results of operations and cash flow could be materially adversely affected.

New regulation of, and uncertainties regarding the
application of existing laws and regulations to, online direct marketing and the Internet could prohibit, limit or increase the cost of our business.

New laws or regulations applicable to online direct marketing, e-mail marketing or the Internet, or the application of existing laws and regulations to online direct marketing, e-mail marketing or the Internet, could
negatively impact our business. Due to the increasing popularity and use of the Internet, as well as increase in e-mail marketing, it is likely that additional laws and regulations will be adopted covering issues such as privacy, pricing, content,
copyrights, distribution, taxation, antitrust, characteristics and quality of services and consumer protection. The adoption of any additional laws or regulations may impair the growth of the Internet or online direct marketing, which could, in
turn, decrease the demand for our services and prohibit, limit or increase the cost of our doing business.



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Additional Risks Related to Ownership of Our Common Stock

We are, and will continue to be, controlled by our board members, who may approve corporate actions with which you may disagree.

We are, and will continue to be, controlled by our board members, who may approve corporate actions with which you may disagree. As of December 31,
2006, our Executive officers and Board of Directors beneficially owned directly or indirectly approximately 70% of our outstanding common stock. To the extent that these stockholders exercise their voting rights in concert, they may to be able to
control most matters requiring stockholder approval, such as electing a majority of the directors and approving significant corporate matters, including a merger or sale of the business. The interest of these stockholders may at times conflict with
the interests of our other stockholders.

Although our common stock is listed on the SWX Swiss Exchange, it is thinly traded. The market price of our
common stock, like the market prices of stocks of other Internet-related companies, may fluctuate widely and rapidly.

For the most
part, trading volume in our common stock has been low. Although our common stock has been listed on the SWX Swiss Exchange since October 3, 2000, there is no assurance that more trading activity in the common stock will develop.

In addition, the market price of our common stock, like the market prices of stocks of other Internet-related companies, may fluctuate widely and
rapidly. The market price and trading volume of our common stock, since our initial public offering has been and may continue to be highly volatile. Factors such as variations in our revenue, earnings and cash flow and announcements of new service
offerings, technological innovations, strategic alliances and/or acquisitions involving competitors or price reductions by us, our competitors or providers of alternative services could cause the market price of our common stock to fluctuate
substantially. Also, broad market fluctuations, including fluctuations of the SWX Swiss Exchange, which result in changes to the market prices of the stocks of many companies but are not directly related to the operating performance of those
companies, could also adversely affect the market price of our common stock.

The listing of our shares on the SWX Swiss Exchange may limit our
ability to raise capital and could limit our ability to do acquisitions with our stock.

We are the first U.S. company to list
solely on the SWX Swiss Exchange. We are not listed on any U.S. exchange. Because we are the first U.S. company to do this, we are uncertain what effect, if any, our listing solely on the SWX Swiss Exchange will have upon our ability to raise
additional financing in the U.S. capital markets. If the listing of our shares solely on the SWX Swiss Exchange is received by investors with uncertainty, the listing may discourage potential investors and could hinder our ability to raise necessary
financing on acceptable terms. In addition, the fact that our shares are not listed on any U.S. exchange may make acquisitions using our stock more difficult or more costly due to concerns about or unfamiliarity with the listing on the SWX Exchange.

Our stockholders have experienced substantial dilution in their equity ownership and voting power over the last several years and may experience
further dilution in the future.

Over the last several years, our stockholders have experienced substantial dilution of their
percentage of equity ownership interest and voting power in our company due to the issuance of convertible securities issued in connection with various financings and acquisitions. Our stockholders may experience further dilution based on the
conversion or exercise of our outstanding convertible preferred stock, convertible promissory notes, options and warrants. We may continue to raise additional financing or to pay for acquisitions from time to time through the issuance of equity or
debt securities convertible into common stock. In the event of any such issuances, the relative voting power and equity interests of persons who purchased the common stock prior to the time of such issuances would be reduced. Further, a significant
amount of shares of common stock sold on the SWX Swiss Exchange after the conversion of such securities could adversely affect the market price for our common stock.

Available Information

Our Internet website address is www.e-centives.com. We make available, free of
charge, on or through our website our Annual Reports on Forms 10-KSB, Quarterly Reports on Forms 10-QSB and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material
with, or furnish such material to, the Securities and Exchange Commission. The information contained on our website does not form a part of and is not incorporated in this Form 10-KSB.



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ITEM 2  DESCRIPTION OF PROPERTY

We do not currently own any real estate. Our headquarters and
principal administrative, finance, legal, sales and marketing operations are located in leased office space in Bethesda, Maryland, a suburb of Washington, D.C. This lease for approximately 7,116 square feet was renewed during the fourth quarter of
2005. The lease has monthly rent payments of approximately $16,000 and expires in September 2008.

We also maintain an office in
California. In December 2004, we entered into an 8,000-square-foot office space lease in San Mateo, California. This lease was renewed in December 2006 and has monthly rent payments of approximately $16,000. This lease currently expires in December
2007.

ITEM 3  LEGAL PROCEEDINGS

We are subject to legal proceedings and claims from time to time, which
arise in the ordinary course of business. Other than the matters described below, as of December 31, 2006, management is not aware of any asserted or pending litigation or claims against the Company that would have a material adverse effect on
our financial condition, results of operations or liquidity.

On September 24, 2003, Trifocal, LLC (Trifocal) filed suit
against the Company in California Superior Court, County of Santa Clara, alleging, among other things, breach of contract, breach of statute, and intentional and negligent misrepresentation. Trifocal sought over $1 million in compensatory damages,
plus interest, statutory damages and attorneys fees and costs. In December 2003, we removed the case to the United States District Court for the Northern District of California, San Jose Division (the Court), denied any liability,
and filed counterclaims seeking damages of approximately $1.8 million. During trial proceedings held in January and February 2006, we withdrew our counterclaims and Trifocal reduced its damages claim to approximately $800,000, not including
interest, statutory damages, attorneys fees or costs. At the close of trial proceedings, the Court found in our favor on $536,515 of Trifocals claims, and awarded Trifocal $50,937. In a subsequent decision of the Court on the remaining
open issues, the Court found in our favor on all issues but the interest due on the original $50,937 award. The Court then entered judgment against the Company on April 19, 2006 for $83,417 (the Judgment). The total amount of the
Judgment, with interest and costs, of approximately $100,000 was paid in July 2006.

On November 14, 2002, we filed a joint patent
infringement action with Black Diamond CCT Holding, LLC against Coupons, Inc. in the Federal District Court of Maryland. In this suit, we alleged infringement of two U.S. patents relating to online coupons, rights of which we acquired from
BrightStreet.com. On April 25, 2005 the companies reached a settlement in which we will receive an aggregate of $1 million over two years (starting in May 2005), in exchange for the release of all claims raised in the suit, including claims of
lost profits and past royalties. As part of the settlement, Coupons, Inc. has been granted a limited license to the two patents, pursuant to which the Company may receive royalty payments based on future revenue of Coupons, Inc. related to these
patents. The $1 million is being recognized on a cash receipts basis due to the uncertainty as to its collection.

On September 29,
2000, we settled all of the patent infringement litigation matters between us and CoolSavings.com, Inc. (CoolSavings). The terms of the settlement provided for a cross-license between us and CoolSavings for each of the patents that were
in dispute. Pursuant to this settlement, we paid $650,000 to CoolSavings on September 29, 2000, at the signing of the settlement documents. The settlement agreement provided that we would make additional payments of up to $700,000 in certain
circumstances. We accrued $250,000 for this contingency during 2001 and have subsequently determined in the second quarter of 2006 that a reserve is no longer appropriate due to managements determination that the likelihood of us having to
make this payment is remote.

ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We held our annual meeting of
stockholders on December 12, 2006 for the purpose of considering and voting upon the following matters:



| |  |  | To elect four directors to our Board of Directors to serve until their successors have been duly elected and qualified.
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | To ratify the designation of BDO Seidman, LLP as independent registered public accounting firm.
| | - |  | -----------------------------------------------------------------------------------------------

The following table sets forth the number of votes cast for, against or withheld, as well as the number of abstentions as to each of the matters set
forth above.



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|                                                                             |  |             |  |                 |  |                  |  |            
|---------------------------------------------------------------------------- |  | ----------- |  | --------------- |  | ---------------- |  | -----------
|MATTER DESCRIPTION                                                           |  | FOR Votes |  | AGAINST Votes |  | WITHHELD Votes |  | Abstentions
|Election of Directors:                                                       |  |             |  |                 |  |                  |  |            
|Kamran Amjadi                                                                |  | 53,006,701  |  |                |  |                 |  |            
|Mehrdad Akhavan                                                              |  | 53,006,701  |  |                |  |                 |  |            
|Peter Friedli                                                                |  | 53,006,671  |  |                |  | 30               |  |            
|David Jodoin                                                                 |  | 53,006,701  |  |                |  |                 |  |            
|Ratify BDO Seidman, LLP as our independent registered public accounting firm |  | 53,006,701  |  |                |  |                  |  |           

PART II

ITEM 5  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

Since our initial public offering on October 3, 2000, our common stock has traded on the SWX Swiss Exchange under the symbol ECEN. The
following table reflects the high and low sales prices, in Swiss Francs and U.S. Dollars, reported on the SWX Swiss Exchange for each quarter listed. The amounts listed in U.S. Dollars reflect the relevant exchange rate as of the date of such high
or low price.



|                                 |      |              |     |            |      |                |      |  |      |      |     |        |  |       
|-------------------------------- | ---- | ------------ | --- | ---------- | ---- | -------------- | ---- |  | ---- | ---- | --- | ------ |  | ------
|PERIOD                           |      | SWISS FRANCS |     | US DOLLARS |      | EXCHANGE RATES
|                                 | HIGH |              | LOW |            | HIGH |                | LOW  |  | HIGH |      | LOW
|2005                             |      |              |     |            |      |                |      |  |      |      |     |        |  |       
|Quarter ended March 31, 2005     |      | CHF 0.52     |     | CHF 0.43   |      | $              | 0.44 |  | $    | 0.37 |     | 0.8436 |  | 0.8592
|Quarter ended June 30, 2005      |      | CHF 0.51     |     | CHF 0.43   |      | $              | 0.43 |  | $    | 0.35 |     | 0.8384 |  | 0.8213
|Quarter ended September 30, 2005 |      | CHF 0.48     |     | CHF 0.40   |      | $              | 0.37 |  | $    | 0.32 |     | 0.7727 |  | 0.8096
|Quarter ended December 31, 2005  |      | CHF 0.43     |     | CHF 0.34   |      | $              | 0.33 |  | $    | 0.26 |     | 0.7586 |  | 0.7766
|2006                             |      |              |     |            |      |                |      |  |      |      |     |        |  |       
|Quarter ended March 31, 2006     |      | CHF 0.44     |     | CHF 0.35   |      | $              | 0.34 |  | $    | 0.27 |     | 0.7367 |  | 0.7701
|Quarter ended June 30, 2006      |      | CHF 0.40     |     | CHF 0.22   |      | $              | 0.31 |  | $    | 0.18 |     | 0.7776 |  | 0.8046
|Quarter ended September 30, 2006 |      | CHF 0.26     |     | CHF 0.21   |      | $              | 0.21 |  | $    | 0.17 |     | 0.8177 |  | 0.8146
|Quarter ended December 31, 2006  |      | CHF 0.33     |     | CHF 0.22   |      | $              | 0.26 |  | $    | 0.18 |     | 0.7889 |  | 0.8001

Holders

As of December 31, 2006, there were approximately 92 holders of record of our common stock.

Dividends

We have never declared or paid any cash dividends on our common stock. We intend to retain future earnings, if any, to finance the
expansion of our business, and do not expect to pay any cash dividends in the foreseeable future. Please see Item 7  Managements Discussion and Analysis of Financial Conditions and Results of Operations  Liquidity and
Capital Resources for further details.

The declaration of dividends is within the discretion of our Board of Directors and subject
to limitations set forth in the Delaware General Corporation Law. Our certificate of incorporation provides that if dividends are paid, they must be paid equally on each share of outstanding common stock. Payment of any dividends on our common stock
is subject to the rights of any preferred stock then outstanding.

Recent Sale and Issuance of Unregistered Securities

Options

During the year ended
December 31, 2006, we granted options to purchase a total of 448,000 shares of common stock under our stock incentive plan to certain of our employees. During that period, 316,000 options were exercised and 837,250 options were cancelled due to
the forfeiture of options resulting from employees leaving the Company.



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Convertible Promissory Notes

We issued the following convertible promissory notes during the year ended December 31, 2006:



| |  |  | A 10% convertible promissory note with a principal amount of $500,000 and an amended maturity date of September 30, 2007 was issued on January 26, 2006.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A 10% convertible promissory note with a principal amount of $500,000 and an amended maturity date of September 30, 2007 was issued on June 15, 2006.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A 10% convertible promissory note with a principal amount of $500,000 and a maturity date of September 30, 2007 was issued on September 19, 2006.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A 4% convertible promissory note with a principal amount of $1,000,000 and a maturity date of September 30, 2007 was issued on October 13, 2006.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

The terms of the convertible promissory notes include, among other things:



| |  |  | an interest rate of 10% or 4%, respectively;
| | - |  | --------------------------------------------



| |  |  | a conversion feature, whereby the principal amount of and accrued interest on the note is convertible at the option of the holder at any time into shares of Series
C preferred stock at a conversion price of $4 per share (The Series C convertible preferred stock into which the convertible promissory notes are convertible has an issue price of $4.00 per share, has an 8% cumulative dividend feature, is
convertible into ten shares of our common stock and has a liquidation feature providing for a payment of two times the initial purchase price upon a liquidation, dissolution, merger or sale of the company.);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a redemption feature, whereby the note may be redeemed by us at any time by payment of the principal amount of and accrued interest on the note to the holder;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a security interest in substantially all of the our assets; and
| | - |  | ---------------------------------------------------------------



| |  |  | subordinated in right of payment to all existing and future bank indebtedness, including lease and equipment finance obligations, as well as all other indebtedness
designated as senior indebtedness.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 6  MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

You should read the
following discussion of our financial condition and results of operations together with our financial statements and the notes to those financial statements elsewhere in this Annual Report on Form 10-KSB beginning on page F-1. In addition to
historical information, this discussion contains forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to competitive factors,
risks associated with our expansion plans and other factors.

Overview

We provide customer acquisition and retention solutions for companies that do business with millions of Internet users every day. We currently derive our
revenues from two operating segments: the Interactive Database Marketing division and the ConsumerREVIEW.com division.



| |  |  | Our Interactive Database Marketing division offers a suite of digital marketing technologies and services, including e-mail marketing system, Internet coupon
system, data warehousing system, online reporting system, strategic consulting and program management, user experience design and development, and analytics and data mining. Through a hosted technology infrastructure, this division provides
solutions for relationship marketing, including creating, targeting, publishing, managing and tracking e-mails, coupons and promotional incentives, as well as data management and tracking of individual consumers responses to such activities.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our ConsumerREVIEW.com division manages web communities around common product interests, and provides on-line advertising and e-commerce services through its
network of web communities. The web properties are dedicated to meeting the needs of consumers who are researching products on the web. We focus on creating an online environment that fosters communication and consumer-generated reviews of products,
by providing an interface to a large database of product information, forums, and other useful content.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

To date we have
not been profitable, incurring net losses of $3.1 million and $4.3 million for the years ended December 31, 2006 and 2005, respectively. Over the past few years we have shifted focus away from our older solutions and devoted resources towards
building our two operating segments. We have undertaken a series of cost-cutting measures to preserve cash and have continued to



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decrease our losses over the past few years. This has included reduction in personnel and other operating expenses such as rent, hosting charges and
professional fees. We also continue to examine ways to reduce general overhead expenses and manage our human and capital resources more efficiently, without materially impacting our ability to properly serve our clients and continue technological
innovation.

We believe that as more consumers use the Internet and as the economy continues to grow, marketers will shift more of their
marketing budgets online. We believe this will improve demand for Internet based marketing programs. According to Forrester Research, marketers are pushing more of their budgets online, with U.S. online advertising and marketing spending expected to
reach $26 billion by 2010.

We have focused on further building our products and services through internal development. We gained new
clients through our internal sales force, and expanded our relationship with existing clients through the provision of additional products and services. We have renewed agreements with key clients, including Reckitt Benckiser whose renewal also
included the addition of a new division and expansion of the solutions we provide to them. We plan to continue to evaluate corporate acquisitions or other strategic arrangements that could enable us to increase our revenues, expand our list of
clients or add to our products and services.

We have continued to change the sales force of our Interactive Database Marketing division,
hiring new sales personnel whose background and experience we believe are better suited to positively impact revenues. We have also continued to revamp and expand our client services and service delivery personnel in order to improve operational
efficiencies and enhance our strategic capabilities. We believe these changes will enable us to acquire new clients and to better focus on increasing the size of our existing clients businesses through growing the level and types of
technologies and services we provide to them. Our ConsumerREVIEW.com division also plans to focus on enhancing the user experience on its sites, growing traffic to its various sites and increasing business with its existing clients and expanding its
number of advertiser clients.

We believe that the combination of expense reduction and control measures, new sales and client services
resources and the pursuit of additional acquisitions, will enable us to achieve profitability, although there can be no assurances as to the timing or effectiveness of any such efforts. If future revenues are insufficient to cover our operating
costs or if we do not receive the proceeds from the financing commitments or obtain addition funding, we may not be able to obtain replacement or additional financing on acceptable terms or at all. In such event, we would not be able to continue our
operations, which could result in the full loss of your investment in us. (See Liquidity and Capital Resources below for further details.)

Results of Operations

Year ended December 31, 2006 compared to year ended December 31, 2005:

Revenue. Revenue increased by $485,000, or 8%, to $6,502,000 for the year ended December 31, 2006, compared to $6,017,000 for
the year ended December 31, 2005.

The Interactive Database Marketing divisions revenue of $3,939,000 was higher by $215,000 and
ConsumerREVIEW.coms revenue of $2,563,000 was higher by $270,000 when compared to the prior year. ConsumerREVIEW.coms increase in revenue can largely be attributed to the increase in the number and dollar amount of advertising contracts.

Approximately $40,000 of the $215,000 increase for the Interactive Database Marketing division relates to royalties associated with the
settlement of our litigation with Coupons, Inc. Per the settlement, starting in mid 2005, we began receiving quarterly royalties based upon revenue that Coupons, Inc. earns relating to the patents licensed to them. (See Item 3  Legal
Proceedings for further details.)

To increase our future revenue, we are continuing to focus on acquiring new clients and increasing
the size of our existing clients businesses through growing the level and types of technologies and services we provide to them.

Cost of Revenue. Cost of revenue consists primarily of expenses related to providing our services, including payroll and related expenses for personnel, depreciation of servers, content costs, network and
hosting charges. For the year ended December 31, 2006, cost of revenue related expenses of $2,990,000 was only $8,000 higher than the $2,982,000 for the year ended December 31, 2005. Although network and hosting charges and personnel
related costs were lower, content costs and outsourced consulting costs were higher.

Our cost of revenue will fluctuate based on future
revenue activity; however, there are some fixed costs that will not change if revenue does not significantly increase or decrease. Such fixed costs include network and hosting and personnel related costs.

Product Development. Product development consists primarily of expenses related to the development and enhancement of our
technology and services, including payroll and related expenses for personnel, as well as other associated expenses for our technology department. We expense product development costs as incurred. Product development expense, exclusive of



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stock-based compensation of approximately $32,000 and $25,000 for years ended December 31, 2006 and 2005, decreased by $44,000, or 5%, to $899,000 for
the year ended December 31, 2006, compared to $943,000 for the year ended December 31, 2005. There were no significant changes in the amounts and types of expenses for the year ended December 31, 2006 when comparing expenses to those
for the year ended December 31, 2005.

We expect that product development costs will remain at the same level, with no current plans to
significantly change the number of personnel related to this group.

General and Administrative. General and
administrative expenses include payroll and related expenses for accounting, finance, legal, human resources, and administrative personnel, as well as selected executives. In addition, general and administrative expenses include fees for
professional services, occupancy related costs, and all other corporate costs, including depreciation and amortization. General and administrative expenses, exclusive of stock-based compensation of approximately $106,000 and $112,000 for years ended
December 31, 2006 and 2005, decreased $588,000, or 15%, to $3,419,000 for the year ended December 31, 2006 when compared to $4,007,000 for the year ended December 31, 2005.

Approximately $276,000 of this decrease is attributable to the September 2005 renewal of our Bethesda, Maryland office lease for less space. In addition,
the second quarter of 2006 included a reversal of a $250,000 accrual recorded in 2001 associated with a legal settlement. The accrual was reversed because the payment of the amount was deemed remote.

We expect that our general and administrative expenses will stay at or near the current level in future periods in the near term.

Sales and Marketing. Sales and marketing expenses consist primarily of payroll, sales commissions and related expenses for
personnel engaged in sales and marketing, as well as advertising and promotional expenditures. Sales and marketing expenses, exclusive of stock-based compensation of approximately $3,000 and $46,000 for years ended December 31, 2006 and 2005,
was $1,280,000 for the year ended December 31, 2006. These expenses were lower by $162,000, or 11%, when compared to $1,442,000 for the year ended December 31, 2005. A large portion of the expense can be attributed to the Interactive
Database Marketing division having fewer sales personnel during 2006.

We expect that our sales and marketing expenses will increase in
future periods as we increase our sales force and our marketing efforts.

Stock-based Compensation. Stock-based
compensation expense of approximately $140,000 for the year ended December 31, 2006 represents our adoption of the modified prospective method of FAS 123(R) in which compensation cost is recognized beginning with the effective date
(a) based on the requirements of FAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirement of FAS 123(R) for all awards granted to employees prior to the effective date of FAS 123(R) that
remain unvested on the effective date.

Stock-based compensation expense of approximately $182,000 for the year ended December 31, 2005
consists of the difference between the fair value of our common stock and the exercise price of certain performance-based options prior to the measurement date and the difference between the estimated fair value of our common stock and the exercise
price of stock options issued to employees recognized ratably over the vesting period.

Other Income. Other income
for the years ended December 31, 2006 and 2005 was $500,000 and $333,000, respectively. Other income represents payments associated with the settlement of our litigation with Coupons, Inc. Per the settlement, starting in May 2005, we are
receiving an aggregate of $1 million dollars over a two year period. (See Item 3  Legal Proceedings, for further details.) This income is being recognized on a cash receipts basis due to the uncertainty as to the collection of the $1
million.

Interest Expense. Interest expense primarily consists of interest related to the convertible promissory
notes and deferred financing fee amortization. Interest expense of $1,383,000 for the year ended December 31, 2006 was $313,000 higher than the interest expense of $1,070,000 for the year ended December 31, 2005. This increase is the
effect of the higher interest and financing fee amortization resulting from the higher amount of debt held during the year ended December 31, 2006.

Net Loss. Net loss decreased by $1.2 million to $3.1 million for the year ended December 31, 2006, compared to $4.3 million for the year ended December 31, 2005. This is the combined effect of higher
revenue of $485,000, a decrease in operating costs of $829,000, an increase in other income of $167,000 and higher interest expense of $313,000.

We believe that our net loss will incrementally decrease in future periods due to anticipated increases in revenue based on revamping the sales force of our Interactive Database Marketing division and improved user experience in some of our
ConsumerREVIEW.com division sites, as well as constant operating costs



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Liquidity and Capital Resources

Since our inception through December 31, 2000, we funded our operations primarily from the private sale of our convertible preferred stock and common stock, as well as our initial public offering on the SWX Swiss
Exchange. Through these financing activities, we raised net proceeds of approximately $82.5 million. In late 2001, we closed a rights offering in which we received approximately $22.2 million in net proceeds.

In March 2003, we executed convertible promissory notes for an aggregate sum of up to $6 million, from which we could draw down against at any time and
in any amount during the first two years of the notes. Subsequent to the issuance of the promissory notes, we agreed to assemble a syndicate of third parties to whom we would issue convertible promissory notes on terms similar to the March 2003
convertible promissory notes. The aggregate dollar amount of the convertible promissory notes issued to third parties through the syndication process reduced, on a dollar-for-dollar basis, the $6 million convertible promissory notes and the balance,
if any, would continue to be available to us under the initial $6 million commitment. The last convertible promissory note was issued on March 24, 2005, and through that date we issued convertible promissory notes totaling $11,000,000.

In March 2005 we finalized the terms of a preferred stock financing with Friedli Corporate Finance, Inc., Belize that consisted of an
offering of shares of a newly created series of preferred stock designated Series C convertible preferred stock. From March 2005 through June 2005 we received $2,500,000 in new funding and issued 625,192 shares of Series C convertible preferred
stock as part of the Series C preferred stock financing. On March 31, 2005 convertible promissory notes totaling $9,750,000, along with associated accrued interest, were exchanged for Series C convertible preferred stock.

From July 2005 through December 2005 we issued three 10% convertible promissory notes with principal balances totaling $4,500,000 and during the year
ended December 31, 2006 we issued three 10% convertible promissory notes with principal balances totaling $1,500,000 and one 4% convertible with a principal value of $1,000,000.

On December 31, 2006, we held $586,000 in cash and cash equivalents. Cash used in operating activities for the year ended December 31, 2006 was
$1.8 million, a decrease of $2.8 million over the $4.6 million for the year ended December 31, 2005.

Investing activities for the
year ended December 31, 2006 used $340,000, while investing activities for the year ended December 31, 2005 used $1,877,000. Cash used in investing activities for the year ended December 31, 2006 reflected the purchase of property and
equipment. Cash used in investing activities for the year ended December 31, 2005 included $1,872,000 in transaction compensation for the patent related to the BrightStreet.com acquisition, $79,000 for the purchase of property and equipment and
a decrease in restricted cash of $70,000 due to the return of the security deposit associated with prior lease for the Bethesda, MD office lease.

For the year ended December 31, 2006, net cash provided by financing activities of $2.3 million reflects the $2.5 million in funding associated with issuance of convertible promissory notes, $41,000 from the exercise of options, offset
by $250,000 in debt issuance costs and $5,000 in payments for capital lease obligations. The net cash provided by financing activities of $6.7 million for the year ended December 31, 2005 reflects $5.4 million in funding associated with
issuance of convertible promissory notes, $2.5 million in proceeds from the issuance of Series C convertible preferred stock and $48,000 received from the exercise of stock options. These proceeds were offset by $750,000 in debt issuance costs, a
payment of $400,000 in debt and $123,000 in payments for capital lease obligations.

We currently anticipate that future revenues and cash
from our existing financing commitments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures through the first quarter of 2008. This forecast is based on our plan to use the funds from the financing
commitment described below.

In September 2002, Friedli Corporate Finance, Inc., Belize provided us with a written commitment to provide us
with debt or equity financing of up to $20 million in the aggregate. As of October 2006, we had used the $20 million commitment. Friedli Corporate Finance, Inc., Belize subsequently committed to provide our financing needs for 2007.

Of the September 2002 $20 million commitment, $12 million was in the form of two $6 million global three-year convertible promissory notes that were
issued in March 2003 and March 2004. We borrowed $11 million of the $12 million available pursuant to the convertible promissory notes. In March 2005 we finalized the terms of a preferred stock financing with Friedli Corporate Finance, Inc., Belize
that consisted of an offering of a newly created series of preferred stock designated as Series C convertible preferred stock. We are authorized to issue up to 5,000,000 shares of the Series C convertible preferred stock at an issue price of $4.00
per share, of which 625,192 shares have been issued in association with new funding and 2,614,794 shares have been issued in exchange for existing convertible promissory notes. During the year ended December 31, 2005 we issued three 10%
convertible promissory notes with principal balances totaling $4,500,000 and during the year ended December 31, 2006 we issued three 10% convertible promissory note with principal balances totaling $1,500,000 and one 4% convertible promissory
note with a principal balance of $1,000,000. See below for a schedule of our outstanding convertible promissory notes as of December 31, 2006:



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|               |  |            |  |               |  |                    |  |                  
|-------------- |  | ---------- |  | ------------- |  | ------------------ |  | -----------------
|Month Issued   |  | Principal  |  | Interest Rate |  | Final Payment Rate |  | Month Due        
|May-2003       |  | $100,000   |  | 8%            |  | 10%(1)             |  | September-2007(3)
|May-2003       |  | $100,000   |  | 8%            |  | 10%(1)             |  | September-2007(3)
|June-2003      |  | $300,000   |  | 8%            |  | 10%(1)             |  | September-2007(3)
|June-2003      |  | $150,000   |  | 8%            |  | 10%(1)             |  | September-2007(3)
|November-2003  |  | $500,000   |  | 8%            |  | 10%(1)             |  | September-2007(3)
|February-2004  |  | $100,000   |  | 8%            |  | 10%(1)             |  | February-2007(4) 
|July-2005      |  | $500,000   |  | 10%           |  |                   |  | September-2007(3)
|September-2005 |  | $1,000,000 |  | 10%           |  |                   |  | September-2007(3)
|November-2005  |  | $3,000,000 |  | 10%           |  | 8%(2)              |  | September-2007(3)
|January-2006   |  | $500,000   |  | 10%           |  |                   |  | September-2007(3)
|June-2006      |  | $500,000   |  | 10%           |  |                   |  | September-2007(3)
|September-2006 |  | $500,000   |  | 10%           |  |                   |  | September-2007   
|October-2006   |  | $1,000,000 |  | 4%            |  |                   |  | September-2007   
|               |  |            |  |               |  |                    |  |                  
|Total          |  | $8,250,000 |  |               |  |                    |  |                  
|               |  |            |  |               |  |                    |  |                  

---

|(1) | A final payment charge of 10% of the principal for each year that the principal is not paid on or before each annual anniversary of the date the note was issued (with a maximum of
30%).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | A final payment charge of 8% of the principal for each year that the principal is not paid on or before each annual anniversary of the date the note was issued (with a maximum of
16%).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Per an amendment to the convertible promissory note.
|--- | ----------------------------------------------------

|(4) | We are currently negotiating an extension to the maturity date of the convertible promissory note.
|--- | --------------------------------------------------------------------------------------------------

If Friedli Corporate Finance, Inc., Belize is unable or unwilling to fulfill its remaining financing commitment to us or we are not offered financing by
Friedli Corporate Finance, Inc., Belize on acceptable terms and conditions, it is not likely that we will be able to replace such committed funds on acceptable terms or at all. If our future revenues do not increase significantly to a level
sufficient to cover our operating costs, we will continue to need to raise additional funds to continue operations. We do not know when, if ever, our future revenues will reach a level sufficient to cover operating expenses. In addition, we may need
to raise additional funds sooner than anticipated to respond to competitive pressures, to develop new or enhanced products or services, to fund our expansion or to make acquisitions. We may not be able to find financing on acceptable terms or at
all.

If adequate funds are not available, or not available on acceptable terms, we may not be able to continue operations, and would need
to seek bankruptcy protection or a buyer for our assets.

Critical Accounting Policies

E-centives financial statements are prepared in conformity with accounting principles generally accepted in the United States. For a comprehensive
discussion of our accounting policies, see Note 2 of the Notes to the Financial Statements, which notes begin on page F-8.

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 amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Estimates are used in accounting for, among other things, allowances for uncollectible receivables, recoverability of long-lived assets, intangible
assets, and investments, depreciation and amortization, goodwill, employee benefits, taxes and contingencies. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the financial statement in the period
they are determined to be necessary.

Our critical accounting policies are as follows:

Revenue Recognition

Interactive
Database Marketing Division:The Interactive Database Marketing division, which represented 61% and 62% of our revenue for the years ended December 31, 2006 and 2005, respectively, is a solution that allows businesses to build direct
consumer relationships. Revenue is generated by charging fees for data hosting, database management, e-mail delivery,



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promotion delivery, campaign and program management, strategy services, creative services, as well as various analytical services. Revenue related to
one-time service fees for setting up the customer is recognized ratably over the expected term of the customer relationship and all other revenue is recognized when the service is provided, assuming collection is reasonably assured.

During the year ended December 31, 2005 we began to receive royalties from licensing two of our patents related to the Interactive Database Marketing
division. This was the result of a settlement of a lawsuit with Coupons, Inc. (see Item 3  Legal Proceedings for further details) whereby we are being paid quarterly royalties based on revenue earned by Coupons, Inc. related to patents
that were licensed to them as part of the settlement agreement. Revenue is being recognized on a cash receipts basis due to our inability to calculate the royalties.

ConsumerREVIEW.com Division:ConsumerREVIEW.com, which was acquired in December 2002, manages web communities around common
product interests. The web properties are dedicated to meeting the needs of consumers who are researching products on the web. Revenue is predominantly generated through on-line advertising and e-commerce fees. Advertising revenue is derived from
the sale of advertisements on pages delivered to community members of our websites. This revenue is recognized in the period in which the advertisements are delivered. E-commerce fees are derived from on-line performance-based programs and are
earned on either a lead referral basis or on an affiliate commission basis. Revenue is earned from performance-based programs when a user of our websites responds to a commerce link by linking to a customers websites. For lead referral
programs, customers are charged on a cost-per-click basis, and revenue is recognized in the month the click occurs. For affiliate-commission programs revenue is recognized when the commission is earned, which is in the month the transaction occurs.
ConsumerREVIEW.com represented 39% and 38% of our total revenue for years ended December 31, 2006 and 2005, respectively.

Other Income

Starting in May 2005 we began to receive monthly payments resulting from the settlement of a lawsuit with Coupons, Inc.
(see Item 3  Legal Proceedings for further details). We will be receiving an aggregate of $1 million over a two year period. Income is being recognized on a cash receipts basis due the risk associated with receiving the $1 million.

Estimating valuation allowance for doubtful accounts

The preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of assets and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported period. We analyze historical bad debts, customer concentrations, customer credit-worthiness, and current economic trends when evaluating the adequacy of the allowance
for doubtful accounts. As a result, we recorded bad debt expense of approximately $25,000 and $14,000 for the years ended December 31, 2006 and 2005, respectively. As of December 31, 2006, our accounts receivable balance was approximately
$2 million, net of allowance for doubtful accounts of approximately $74,000.

Stock-Based Compensation

At December 31, 2006, the Company had one stock-based employee compensation plan. Through December 31, 2005, as permitted under
FAS 148, Accounting for Stock-Based CompensationTransition and Disclosure, which amended FAS 123, Accounting for Stock-Based Compensation, the Company elected to follow the intrinsic value method in accounting for its stock-based
employee compensation arrangement as defined by APB 25, Accounting for Stock Issued to Employees and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation.
Beginning January 1, 2006, the company adopted FAS 123(R) using the modified-prospective method, and as such, prior periods have not been restated. Compensation expense is recognized over the requisite service period.

Impairment of long-lived and amortizable intangible assets

We perform an on-going analysis of the recoverability of our long-lived and amortizable intangible assets and, for the year ended December 31, 2006, this was done in accordance with FAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets,which we adopted on January 1, 2002. Based on quantitative and qualitative measures, we assess the need to record impairment losses on long-lived and amortizable intangible assets used in
operations when impairment indicators are present. The impairment conditions evaluated by us may change from period to period, given that we operate in a volatile business environment. However, such impairment conditions considered are the ability
to maintain financial performance objectives, access to new markets and customers, overall market conditions, as well as the value of new contracts. We recorded no impairment charges during 2006 and 2005.



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Because the conditions underlying the factors we use to evaluate our acquisitions change
from time to time, we may determine that it is necessary to take additional material impairment charges in future periods, which could have a material adverse impact on our business, financial condition, results of operations and cash flow.

Impairment of Goodwill and intangible assets with indefinite useful lives

We adopted the provisions of FAS 142, Goodwill and Other Intangible Assets, as of January 1, 2002. FAS 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested, at least annually, for impairment. We continually evaluate whether events and circumstances that have occurred that indicate that the
remaining value of any goodwill and/or intangible assets with indefinite useful lives may not be recoverable. At December 31, 2006, we had no goodwill or intangible assets with indefinite useful lives.

Contractual Obligations and Commercial Commitments

As of December 31, 2006, our contractual obligations and commercial commitments, which consist of future minimum lease payments under non-cancelable leases and short-term debt, are as follows:



|                            |  |                  |            |           |   |               |  |       |   |  |   |           
|--------------------------- |  | ---------------- | ---------- | --------- | - | ------------- |  | ----- | - |  | - | ----------
|Contractual Obligations     |  | less than 1 year |            | 1-3 years |   | after 3 years |  | total
|capital lease obligations   |  | $                |           |           | $ |              |  | $     |  |  | $ |          
|operating lease obligations |  |                  | 391,380    |           |   | 152,875       |  |       |  |  |   | 544,255   
|short-term debt (1)         |  |                  | 10,425,974 |           |   |              |  |       |  |  |   | 10,425,974
|                            |  |                  |            |           |   |               |  |       |   |  |   |           
|total                       |  | $                | 10,817,354 |           | $ | 152,875       |  | $     |  |  | $ | 10,970,229
|                            |  |                  |            |           |   |               |  |       |   |  |   |           

| | 
| | 

| | (1) | Includes approximately $1,321,000 in interest and $855,000 in final payment fees.
| | --- | ---------------------------------------------------------------------------------

Lease Obligations

As of December 31, 2006 we are not obligated under any capital leases, but we did have several
capital leases for certain computer and office equipment that expired in early 2006. Payments under capital leases were approximately $5,000 and $123,000 for the years ended December 31, 2006 and 2005, respectively. We are obligated under
non-cancelable operating leases for office space in Maryland and California, which expire in September 2008 and in December 2007, respectively. Rent expense under operating leases was approximately $341,000 and $618,000 for the years ended
December 31, 2006 and 2005, respectively.

Short-Term Debt

As of December 31, 2006, we had $8,250,000 in short term debt relating to the principal balance associated with one 4% convertible promissory note issued in October 2006, six 10% convertible promissory notes
issued during July 2005 through September 2006 and six 8% convertible promissory notes issued during May 2003 through February 2004.

The
terms of the 4% and 10% convertible promissory notes include, among other things:



| |  |  | an interest rate of 4% or 10%, respectively;
| | - |  | --------------------------------------------



| |  |  | a conversion feature, whereby the principal amount of and accrued interest on the note is convertible at the option of the holder at any time into shares of Series
C preferred stock at a conversion price of $4 per share;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a redemption feature, whereby the note may be redeemed by the us at any time by payment of the principal amount of and accrued interest on the note to the holder;
and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a security interest in substantially all of the our assets.
| | - |  | -----------------------------------------------------------

One of the 10% convertible promissory notes has a one-time final payment charge of 8% of the principal for each year that the principal is not paid on or before each annual anniversary of the date the notes were
issued (with a maximum of 16%).

The terms of the notes include, among other things:



| |  |  | an 8% interest rate;
| | - |  | --------------------



| |  |  | a maturity date three years from the date of issuance;
| | - |  | ------------------------------------------------------



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| |  |  | an automatic conversion feature, whereby the notes automatically convert into shares of the our common stock at a conversion rate, as defined in the notes, on the
date when the average trading price on the SWX Swiss Exchange of the our common stock for 30 consecutive trading days has been equal to or greater than 2.75 CHF;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ¡ |  | The conversion price will be 2 CHF or lower in certain circumstances described below (as converted to U. S. dollars pursuant to a then recent exchange rate, as
calculated by us).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ¡ |  | The number of shares of common stock to which the holders of the 8% convertible promissory notes will be entitled upon an automatic conversion would be equal to the
product of the principal amount outstanding under the convertible notes divided by the average trading price on the SWX Swiss Exchange of the common stock for the five previous trading days (but in no event higher than CHF 2). If all of the
aggregated principal amount of the 8% convertible promissory notes outstanding as of December 31, 2006 were to be converted into shares of common stock at the conversion price of 2 CHF (assuming an exchange rate of 1.2235 CHF per one
U.S. Dollar as of December 31, 2006), the aggregated number of shares issued upon such conversion would be approximately 764,700.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a one-time final payment charge of 10% of the principal for each year that the principal is not paid on or before each annual anniversary of the date the notes were
issued (with a maximum of 30%); and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a security interest in substantially all of the our assets.
| | - |  | -----------------------------------------------------------

If we hold the convertible promissory notes that have one-time final payment charges to maturity, a final payment charge of $855,000 will be due.

As of December 31, 2006, we had accrued interest of approximately $771,000 and accrued final payment fees of approximately $640,000 associated with
all outstanding convertible promissory notes.

Off Balance Sheet Arrangements

We do not currently have any off balance sheet arrangements.

ITEM 7  FINANCIAL STATEMENTS

Our Financial Statements are set forth starting on page F-1 of this
annual report.

ITEM 8  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.



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

Disclosure Controls and
Procedures

Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(3) under the Exchange Act) as of December 31, 2006. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, except as noted below, the Companys disclosure controls and procedures were designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and were operating in an effective manner.

Limitations on the Effectiveness of Controls

A control system is subject to inherent limitations
and, as a result, can provide only reasonable, not absolute, assurance that the systems objectives will be achieved. In the first instance, the design of a control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Further, decision-making in connection with system design or operation can be faulty, and breakdowns can occur because of simple error or mistake. In addition, controls can be
circumvented by the acts of single individuals, by collusion of two or more individuals, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of
compliance with policies or procedures. In light of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.



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Internal Control over Financial Reporting

No change in the Companys internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred
during the year ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting. As previously discussed, the Company intends to take necessary
steps to address certain reportable conditions noted above while enhancing and improving its internal controls and procedures.

ITEM 8B  OTHER INFORMATION

None.

PART III

ITEM 9  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The following table presents information about each of our executive officers, key employees and directors as of December 31, 2006.



|                |  |     |  |                                                           
|--------------- |  | --- |  | ----------------------------------------------------------
|Name            |  | Age |  | Position(s) with Company                                  
|Kamran Amjadi   |  | 43  |  | Chief Executive Officer and Chairman                      
|Mehrdad Akhavan |  | 43  |  | Chief Marketing Officer, President, Secretary and Director
|Tracy Slavin    |  | 37  |  | Chief Financial Officer                                   
|John Hoffman    |  | 47  |  | Vice President of Network Operations                      
|Amori Langstaff |  | 35  |  | Vice President of Client Services                         
|Peter Friedli   |  | 53  |  | Director                                                  
|David Jodoin    |  | 42  |  | Director                                                  

Kamran Amjadi served as our Chairman and Chief Executive Officer from August 1996 (when he
co-founded our business) through June 2004 when he resigned as Chief Executive Officer and Chairman. From June 2004 through April 2005 he worked as a consultant for the Company and in April 2005 he was re-appointed our Chairman and Chief Executive
Officer. From September 1990 until August 1996, Mr. Amjadi was the Executive Vice President and Director of United States Operations for MP Technologies, a software company. From July 1986 until August 1990, Mr. Amjadi was a software
engineer with the Hewlett-Packard Corporation.

Mehrdad Akhavan was appointed to the new position of Chief Marketing Officer in April 2005.
From June 2004 through April 2005 he served as our Chief Executive Officer. Prior to that time, he served as our President and Chief Operating Officer since October 1999, having served as our Executive Vice President and Secretary since he
co-founded our business in August 1996. Mr. Akhavan was elected to our Board of Directors in October 1996. From December 1994 until August 1996, Mr. Akhavan was President of TechTreK, a childrens computer entertainment and education
center. From January 1991 until December 1994, Mr. Akhavan was President of Trident Software, a company he co-founded, which digitized works of art.

Tracy Slavin became our Chief Financial Officer in June 2004. Ms. Slavin joined us in September 2000, and until her promotion served as Controller and Senior Director of Accounting. Ms. Slavin, a CPA, has an
MBA and corporate accounting, finance and auditing experience. Prior to joining the Company, she served as Vice President of Accounting for Thomson Financial, a division of The Thomson Corporation, a leading provider of financial information,
analysis, research and software products. From 1993 to 1997, Ms. Slavin served as Assistant Controller for Phillips International, Inc., a consumer and business-to-business information company. Ms. Slavin began her career as an auditor
with PricewaterhouseCoopers LLP.

John Hoffman oversees our internal and external computer services, security and operation as our Vice
President of Network Operations. He became a member or our team when we acquired BrightStreet.com in December 2001. At BrightStreet Inc.s he oversaw their network infrastructure, where he managed more than 24 systems providing scalability and
high availability architectures. John brings more than 19 years of experience in computer operations, software development and security. He has obtained varied development and operational experience both in high security government work and the
Internet. Prior to BrightStreet, he held various positions at Lockheed Missile & Space Company, from 1998 to 2000, and at Netcom Online Communications, from 1994 to 1998.

Amori Langstaff, our Vice President of Client Services, joined us in March 2000. Amori oversees all client implementations,



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managing such processes as account services, business strategy, performance analyses and production. She brings to the Company ten years of experience
designing and delivering results-based database and customer loyalty marketing solutions for retail and hospitality companies, including the Mandarin Oriental Hotel Group, Asset Marketing and Regent International Hotels. Amori has extensive
experience in creating and implementing marketing campaigns, customer segmentations, database marketing programs and corporate business plans, and in leading consultative client engagements. At the Company, her contributions have promoted better and
more profitable client relationships, streamlined sales and fulfillment processes.

Peter Friedli co-founded our business in August 1996.
Mr. Friedli was elected to our Board of Directors in October 1996. Mr. Friedli has been the principal of Friedli Corporate Finance, Inc., Belize, a venture capital firm, since its inception in 1986. Prior to joining Friedli Corporate
Finance, Inc., Belize, Mr. Friedli worked as an international management consultant for service and industrial companies in Europe and the U.S. Mr. Friedli also serves as the President of New Venturetec, Inc., a publicly traded Swiss
venture capital investment company and currently serves as a Director of Osiris Therapeutics a publicly traded biotech company. He also serves as a Director in certain private companies.

David Jodoin was appointed as a Director in November 2005. Since December 2005 Mr. Jodoin has been the Chief Executive Officer of Iperia, an
enterprise software company specializing in solutions for service providers in the voice over IP industry. From 2002 until 2005, Mr. Jodoin served as Chief Executive Officer of Alpha NetSolutions, Inc., an information technology consulting
organization specializing in strategic consulting, web services and Linux migration strategies. Previously, Mr. Jodoin was the founder and Chief Executive Officer of Innovative Computer Concepts, which merged with Vantive Corporation, a
publicly held customer relationship management software company, which eventually merged with PeopleSoft, Inc. While at Vantive, Mr. Jodoin held the position of Executive Vice President and General Manager.

Board of Directors

As of December 31, 2006, our
Board of Directors consisted of Kamran Amjadi, Mehrdad Akhavan, Peter Friedli and David Jodoin, with Mr. Amjadi serving as Chairman of the Board.

Compensation Committee:The Compensation Committee determines the salaries and incentive compensation of our officers and provides recommendations for the salaries and incentive compensation of other employees
and consultants. The Compensation Committee also administers our various incentive compensation, stock and benefit plans. As of December 31, 2006, the Compensation Committee consisted of Mr. Friedli.

Compensation Committee Interlocks and Insider Participation:None of our executive officers serves as a member of the Board of Directors or
compensation committee of any entity that has one or more executive officers serving on our Board of Directors or Compensation Committee.

Stockholder Communications with Directors: Company stockholders who want to communicate with the Board or any individual director can write to:

E-centives, Inc.

Board Administration

6901 Rockledge Drive, 6th Floor

Bethesda,
MD 20817

Letters should indicate that you are a Company stockholder. Depending on the subject matter, management will:



| |  |  | Forward the communication to the director or directors to whom it is addressed;
| | - |  | -------------------------------------------------------------------------------



| |  |  | Attempt to handle the inquiry directly, when it is a request for information about the Company or it is a stock-related matter; or
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Not forward the communication if it is primarily commercial in nature or if it relates to an improper or irrelevant topic.
| | - |  | --------------------------------------------------------------------------------------------------------------------------

At each Board meeting, a member of management will present a summary of all communications received since the last meeting that were not forwarded and
will make those communications available to the directors on request.

Limitation of Liability and Indemnification of Directors and Officers

Our certificate of incorporation provides that our directors will not be personally liable to us, or our stockholders, for monetary
damages for breach of their fiduciary duties as a director, except for liability:



| |  |  | for any breach of the directors duty of loyalty to us or our stockholders;
| | - |  | ---------------------------------------------------------------------------



| |  |  | for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
| | - |  | --------------------------------------------------------------------------------------------------------------



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| |  |  | under a provision of Delaware law relating to unlawful payment of dividends or unlawful stock purchase or redemption of stock; or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | for any transaction from which the director derives an improper personal benefit.
| | - |  | ---------------------------------------------------------------------------------

As a result of this provision, we and our stockholders may be unable to obtain monetary damages from a director for breach of his or her duty of care.

Our bylaws provide for the indemnification of our directors and officers and any person who is or was serving at our request as a
director, officer, employee, partner or agent of another corporation or of a partnership, joint venture, limited liability company, trust or other enterprise. This indemnification is provided to the fullest extent authorized by, and subject to the
conditions set forth in, the Delaware General Corporation Law. This indemnification will include the right to advanced payment of expenses by us of any proceeding for which indemnification may be had in advance of its final disposition.

Audit Committee/Audit Committee Financial Expert

We do not have a separately designated standing Audit Committee of our Board of Directors, and therefore we do not have any independent audit committee financial experts under Item 401(e) of Regulation S-B. We are listed on the SWX
Swiss Exchange, which does not currently require that listed companies have an audit committee. We intend to expand our current Board of Directors to accommodate a separately designated Audit Committee, and to appoint members of such Committee, at a
later date.

Section 16(a) Beneficial Ownership Reporting Compliance

To our knowledge, based solely on review of the copies of reports under Section 16(a) of the Exchange Act that have been furnished to us and written
representations that no other reports were required, during the fiscal year ended December 31, 2006 all executive officers, directors and greater than 10% beneficial owners have complied with all applicable Section 16(a) filing
requirements.

Code of Ethics

We have
adopted a Code of Ethics that applies to our directors and to all of our employees, including our chief executive officer and chief financial officer. Our Code of Ethics has been distributed to all employees and is available at our website
(www.e-centives.com). Any additions or amendments to the Code of Ethics, and any waivers of the Code of Ethics for executive officers or our Directors, will be posted on the Companys website.

ITEM 10  EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth the compensation for the year ended December 31, 2006 for our Chief Executive Officer and our other executive officers
as of December 31, 2006, and two other most highly compensated employees for the year ended December 31, 2006 (collectively, the Named Executive Officers).



|                                                           |  |      |  |        |         |                   |   |                   |  |   |        
|---------------------------------------------------------- |  | ---- |  | ------ | ------- | ----------------- | - | ----------------- |  | - | -------
|Name and Principal Position(s)                             |  | Year |  | Salary |         | Option Awards (1) |   | TotalCompensation
|Kamran Amjadi                                              |  | 2006 |  | $      | 250,000 |                   | $ |                  |  | $ | 250,000
|Chief Executive Officer and Chairman                       |  |      |  |        |         |                   |   |                   |  |   |        
|Mehrdad Akhavan                                            |  | 2006 |  | $      | 200,000 |                   | $ |                  |  | $ | 200,000
|Chief Marketing Officer, President, Secretary and Director |  |      |  |        |         |                   |   |                   |  |   |        
|Tracy Slavin                                               |  | 2006 |  | $      | 149,995 |                   | $ | 44,713            |  | $ | 194,707
|Chief Financial Officer                                    |  |      |  |        |         |                   |   |                   |  |   |        
|John Hoffman                                               |  | 2006 |  | $      | 150,000 |                   | $ | 11,250            |  | $ | 161,250
|Vice President of Network Operations                       |  |      |  |        |         |                   |   |                   |  |   |        
|Amori Langstaff                                            |  | 2006 |  | $      | 150,000 |                   | $ | 36,375            |  | $ | 186,375
|Vice President of Client Services                          |  |      |  |        |         |                   |   |                   |  |   |        

---

|(1) | Amounts shown in this column are based on the accounting expense for the corresponding year related to stock option awards made in that year and in prior periods. The assumptions
used to calculate the accounting expense recognized are set forth in Note 11 of the Notes to Financial Statements that begin on page F-7 of this annual report.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Grants of Plan-Based Awards Table

There were no grants of plan-based awards to any of our Named Executive Officers during the year ended December 31, 2006.

Compensation Discussion and Analysis

Our compensation policies are designed to attract, motivate and retain experienced and
qualified executives, increase the Companys overall performance, increase stockholder value and enhance the performance of individual executives.

The Compensation Committee seeks to provide competitive salaries based upon individual performance together with annual cash bonuses awarded based on the Companys overall performance relative to corporate
objectives, taking into account individual contributions, teamwork and performance levels. In addition, it is Company policy to grant stock options to executives upon their commencement of employment and thereafter as determined by the Compensation
Committee in order to strengthen the alliance of interest between such executives and our stockholders and to give executives the opportunity to reach the top compensation levels of the competitive market depending on the Companys performance,
as reflected in the market price of our common stock.

The following describes in more specific terms the elements of compensation that
implement the Compensation Committees compensation policies, with specific reference to compensation reported for 2006.

Base
Salaries. Base salaries of executives are initially determined by evaluating the responsibilities of the position, the experience and knowledge of the individual, and the competitive marketplace for executive talent, including a comparison
to base salaries for comparable positions at peer companies in the our geographic region. The Compensation Committee reviews the base salaries of executive officers based upon, among other things, individual performance and responsibilities.

The Chief Executive Officer recommends annual salary adjustments by evaluating the performance of each executive officer after considering
new responsibilities and the previous years performance and the financial health of the Company. The Compensation Committee performs the same review when evaluating the performance of the Chief Executive Officer. Individual performance ratings
take into account such factors as achievement of specific goals that are driven by the Companys strategic plan and attainment of specific individual objectives.

Bonuses. The Compensation Committee may award bonuses to its executive officers that are based on both corporate and individual performance, as well as the financial health of the Company. The corporate
performance factors include, among other things, revenue and earnings targets established in the Companys annual budget. The Company decided not to issue any bonuses to its executives for the year ended December 31, 2006, primarily due to
the fact that the Company continued to require external funding. This decision does not reflect future decisions on bonus payments as other factors may weigh more prominently in the future.

Stock Based Compensation. Another component of executive officers compensation consists of awards under the our Amended and Restated
Stock Option and Incentive Plan, pursuant to which we grant executive officers and other key employees options to purchase shares of common stock.

The Compensation Committee grants stock options to executives in order to align the interests of those executives with the interests of the stockholders. Stock options are considered by the Compensation Committee to be an effective
long-term incentive because the executives gains are linked to increases in the value of the common stock, which in turn results in stockholder gains. The Compensation Committee generally grants options to new executive officers and other
employees upon their commencement of employment and thereafter as determined by the Compensation Committee. The options generally are granted at an exercise price equal to the closing market price of the common stock on the trading day of the date
of grant. Options granted typically vest over a period of four years following the date of grant. The maximum option term is ten years. The full benefit of the options is realized upon appreciation of the stock price in future periods, thus
providing an incentive to create value for our stockholders through appreciation of stock price. Management believes that stock options have been helpful in attracting and retaining skilled executive personnel.

The Company decided not to issue any options to its executives for the year ended December 31, 2006, primarily due to the fact that the Company
continued to require external funding. This decision does not reflect future decisions on option grants as other factors may weigh more prominently in the future.

Other. The Company has a tax-qualified employee savings plan, which covers all of its employees. Eligible employees may defer



27



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up to 25% of their pre-tax earnings, subject to the Internal Revenue Services annual contribution limit. The 401(k) plan permits the Company to make
additional discretionary matching contributions on behalf of all participants in the 401(k) plan in an amount determined by the Company, although it currently does not do so. The 401(k) plan is intended to qualify under Section 401 of the
Internal Revenue Code of 1986 so that contributions by employees or by the Company to the 401(k) plan, and income earned on plan contributions, are not taxable to employees until withdrawn from the plan, and so that contributions made by the
Company, if any, will be deductible by the Company when made.

Chief Executive Officer Compensation. The executive
compensation policy described above is applied in setting the Chief Executive Officers compensation. The Chief Executive Officers compensation generally participates in the same executive compensation plans and arrangements available to
the other senior executives. Accordingly, the compensation consists of an annual base salary, a potential annual cash bonus and, potentially, long-term equity-linked compensation in the form of stock options. The Compensation Committees
general approach in establishing the Chief Executive Officers compensation is to be competitive with peer companies, but to have a percentage of his target compensation based upon certain performance criteria and targets established in the
Companys strategic plan.

Outstanding Equity Awards at Fiscal Year End Table

The following table presents information with respect to stock options held by each of our Named Executive Officers as of December 31, 2006. The
Company has not issued any stock awards.



|                |  |                                                     |  |                       |  |                        |               |  |                               
|--------------- |  | --------------------------------------------------- |  | --------------------- |  | ---------------------- | ------------- |  | ------------------------------
|                |  | Option Awards                                      
|Name            |  | Number of Securities Underlying Unexercised Options |  | Option Exercise Price |  | Option Expiration Date
|                |  | Exercisable                                         |  | Unexercisable         |  |                        |               | 
|Kamran Amjadi   |  | 100,000275,0002,611,791                             |  |                    |  | $$$                    | 2.5013.000.13 |  | 07/27/200707/27/200707/27/2007
|Mehrdad Akhavan |  | 100,000275,0001,868,256                             |  |                    |  | $$$                    | 2.5013.000.13 |  | 05/14/200906/30/201010/07/2012
|Tracy Slavin    |  | 15,00011,25076,250                                  |  |   152,500           |  | $$$                    | 6.500.130.13  |  | 10/03/201010/07/201206/21/2014
|John Hoffman    |  | 20,000100,000                                       |  |                     |  | $$                     | 0.550.13      |  | 12/12/201110/07/2012          
|Amori Langstaff |  | 5,000100,00075,000                                  |  |   75,000            |  | $$$                    | 6.500.130.13  |  | 03/12/201010/07/201206/21/2014

Option Exercises and Stock Vested Table

During the year ended December 31, 2006, no stock options were exercised by any of the Named Executive Officers and as we do not grant any stock
awards, there were no stock awards that vested.

Potential Payments upon Termination or Change in Control

There are no potential payments upon termination or a change in control of the Company for any of our Named Executive Officers.

Director Compensation

We do not currently compensate
our directors who are also employees. Each non-employee director is currently reimbursed for reasonable travel expenses for each board meeting attended. In 2006, David Jodoin received 50,000 shares of our common stock for his appointment to the
Board of Directors. Future years compensation for non-employee directors has not yet been decided.

The following tables set forth
the compensation for the year ended December 31, 2006 and the aggregate number of equity awards outstanding at December 31, 2006 for our non-employee directors as of December 31, 2006.



28



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Director Compensation Table



|              |  |              |        |     |       |   |       
|------------- |  | ------------ | ------ | --- | ----- | - | ------
|Name          |  | Stock Awards |        |     | Total
|Peter Friedli |  | $            |       |     |       | $ |      
|David Jodoin  |  | $            | 11,000 | (1) |       | $ | 11,000

---

|(1) | David Jodoin was awarded 50,000 shares of our common stock for service on our board of directors. The value was determined using the closing market price of $0.22 on the date of
grant.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Outstanding Director Equity Awards at Fiscal Year-End Table



|              |  |                                                
|------------- |  | -----------------------------------------------
|Name          |  | Stock Option Awards (exercisable/unexercisable)
|Peter Friedli |  | 90,000/                                       
|David Jodoin  |  | /                                            

ITEM 11  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table presents information regarding the beneficial ownership of common stock as of January 31, 2007:



| |  |  | each person, or group of affiliated persons, who is the beneficial owner of more than 5% of our outstanding common stock;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | each of our Named Executive Officers;
| | - |  | -------------------------------------



| |  |  | each of our directors; and
| | - |  | --------------------------



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

Unless otherwise indicated, the address of each person identified is c/o E-centives, Inc., 6901
Rockledge Drive, 6thFloor, Bethesda, Maryland 20817.

Holders of our common stock are entitled to one vote for each share held on all matters submitted to a stockholder vote. The persons named in this table
have sole voting power for all shares of our common stock shown as beneficially owned by them, subject to community property laws where applicable and except as indicated in the footnotes to this table. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options and warrants held by that
person that are currently exercisable or exercisable within 60 days after January 31, 2007 are deemed outstanding. These shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person.



|                                                             |  |                           |  |                 
|------------------------------------------------------------ |  | ------------------------- |  | ----------------
|                                                             |  | Shares Beneficially Owned
|Name                                                         |  | Number                    |  | Percent of Class
|Kamran Amjadi (1)                                            |  | 4,582,791                 |  | 7.0             
|Mehrdad Akhavan (2)                                          |  | 2,903,256                 |  | 4.5             
|David Jodoin                                                 |  | 50,000                    |  | *               
|Peter Friedli (3)                                            |  | 63,829,721                |  | 65.8            
|Venturetec, Inc. (4)                                         |  | 19,282,253                |  | 26.5            
|c/o Friedli Corporate Finance                                |  |                           |  |                 
|Freigutstrasse 5                                             |  |                           |  |                 
|8002 Zürich, Switzerland                                     |  |                           |  |                 
|New Venturetec AG (5)                                        |  | 19,282,253                |  | 26.5            
|c/o Friedli Corporate Finance                                |  |                           |  |                 
|Freigutstrasse 5                                             |  |                           |  |                 
|8002 Zürich, Switzerland                                     |  |                           |  |                 
|InVenture, Inc. (6)                                          |  | 25,898,477                |  | 33.9            
|c/o Friedli Corporate Finance                                |  |                           |  |                 
|Freigutstrasse 5                                             |  |                           |  |                 
|8002 Zürich, Switzerland                                     |  |                           |  |                 
|US Venture 05, Inc. (7)                                      |  | 3,750,000                 |  | 5.7             
|c/o Friedli Corporate Finance                                |  |                           |  |                 
|Freigutstrasse 5                                             |  |                           |  |                 
|8002 Zürich, Switzerland                                     |  |                           |  |                 
|Bank J Vontobel & Co AG                                      |  | 5,000,000                 |  | 8.0             
|Bahnhofstrasse 3                                             |  |                           |  |                 
|8002 Zurich, Switzerland                                     |  |                           |  |                 
|Tracy Slavin (8)                                             |  | 102,000                   |  | *               
|John Hoffman (9)                                             |  | 120,000                   |  | *               
|Amori Langstaff (10)                                         |  | 180,000                   |  | *               
|Executive officers and directors as a group (5 persons) (11) |  | 71,468,268                |  | 69.9            



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---

|* | Less than 1% of the outstanding shares of common stock.
|- | -------------------------------------------------------

|(1) | Includes 2,986,791 shares issuable upon exercise of vested stock options.
|--- | -------------------------------------------------------------------------

|(2) | Includes 2,243,256 shares issuable upon exercise of vested stock options.
|--- | -------------------------------------------------------------------------

|(3) | Includes 90,000 shares issuable upon exercise of vested stock options, 1,907,000 shares issuable upon exercise of warrants and 32,399,860 shares issuable upon conversions of Series
C preferred stock held by Mr. Friedli individually, as well as shares of common stock and common stock underlying warrants held by entities over which Mr. Friedli has control, as follows: InVenture, Inc.  11,983,337 shares of common
stock and 13,915,140 shares issuable upon conversions of Series C preferred stock; Joyce, Ltd.  235,000 shares of common stock; Pine Inc.  291,000 shares of common stock and 137,000 shares issuable upon the exercise of warrants;
Nikatech, Inc.  165,383 shares of common stock; Spring Technology Corp.  177,520 shares of common stock; USVentech  145,750 shares of common stock; US Venture 05, Inc.  3,750,000 shares issuable upon conversions of Series C
preferred stock and Venturetec, Inc.  9,035,263 shares of common stock, 1,000,000 issuable on exercise of warrants and 9,246,990 shares issuable upon conversions of Series C preferred stock. Mr. Friedli has sole voting and investment
power with respect to 13,747,338 shares and shared voting and investment power with respect to 50,082,383 shares. See Item 12Certain Relationships and Related Transactions for a description of Mr. Friedlis relationships
with these entities.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes 9,035,263 shares of common stock, 1,000,000 issuable on exercise of warrants and 9,246,990 shares issuable upon conversions of Series C preferred stock.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes 9,035,263 shares of common stock, 1,000,000 issuable on exercise of warrants and 9,246,990 shares issuable upon conversions of Series C preferred stock held by Venturetech,
Inc. New Venturetec AG may be deemed to control Venturetec, Inc. by virtue of its ownership of 100% of Venturetec, Inc.s capital stock and its corresponding right to elect Venturetec, Inc.s directors, and, therefore, our capital stock
owned by Venturetec, Inc. may also be deemed to be beneficially owned by New Venturetec, Inc. New Venturetech AG has shared voting and investment power with respect to 10,035,263 shares.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Includes 13,915,140 shares issuable upon conversions of Series C preferred stock.
|--- | ---------------------------------------------------------------------------------

|(7) | Includes 3,750,000 shares issuable upon conversions of Series C preferred stock.
|--- | --------------------------------------------------------------------------------

|(8) | Includes 102,000 shares issuable upon exercise of vested stock options.
|--- | -----------------------------------------------------------------------

|(9) | Includes 120,000 shares issuable upon exercise of vested stock options.
|--- | -----------------------------------------------------------------------

|(10) | Includes 180,000 shares issuable upon exercise of vested stock options.
|---- | -----------------------------------------------------------------------

|(11) | Includes 5,422,547 shares issuable upon exercise of vested stock options, 1,907,000 shares issuable upon exercise of warrants and 32,399,860 shares issuable upon conversions of
Series C preferred stock.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Securities Authorized for Issuance under Equity Compensation Plans

Below is information as of December 31, 2006 with respect to compensation plans under which equity securities are authorized for issuance.



|                                                           |  |                                                                                          |  |    |   |  |                                                                          |      |                                                                                                                                        |            |  |    |  
|---------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | -- | - |  | ------------------------------------------------------------------------ | ---- | -------------------------------------------------------------------------------------------------------------------------------------- | ---------- |  | -- | -
|                                                           |  | A                                                                                        |  |    |   |  | B                                                                        |      | C                                                                                                                                      |            |  |   
|                                                           |  | Number of securities to beissued upon exercise ofoutstanding options,warrants and
rights |  |    |   |  | Weighted-averageexercise price ofoutstanding options,warrants and rights |      | Number of securities remaining availablefor future issuance under equitycompensation plans (excluding
securitiesreflected in column A) |            |  |   
|Equity compensation plans approved by security holders (1) |  | 6,630,130                                                                                |  | (2 | ) |  | $                                                                        | 1.34 |                                                                                                                                        | 14,249,897 |  | (2 | )
|Equity compensation plans not approved by security holders |  |                                                                                         |  |    |   |  |                                                                          |     |                                                                                                                                        |           |  |    |  
|Total                                                      |  | 6,630,130                                                                                |  |    |   |  |                                                                          |      |                                                                                                                                        | 14,249,897 |  |    |  

---

|(1) | Plans approved by stockholders include the Amended and Restated Stock Incentive and Option Plan.
|--- | ------------------------------------------------------------------------------------------------

|(2) | 90,000 options were granted to Peter Friedli, one of our directors, as compensation for a non-employee member of our Board of Directors.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------



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ITEM 12  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Peter Friedli,
one of our stockholders and Directors, has relationships with several of our investors and stockholders. He serves as the investment advisor to Venturetec, Inc., Pine, Inc., InVenture, Inc., Joyce, Ltd., Nikatech, Inc., Spring Technology Corp. and
USVentech, Inc. He also serves as President of US Venture 05, Inc. and Venturetec, Inc., as well as its parent corporation, New Venturetec AG. Mr. Friedli is also the President and a controlling stockholder of Friedli Corporate Finance, Inc.,
Belize. Mr. Friedli engaged in a number of transactions with us, both directly and through companies with which he has affiliations, as follows:

Funding Commitment and Promissory Notes. In September 2002, Friedli Corporate Finance, Inc., Belize committed to provide us with a capital infusion of up to $20 million for continued operations and
future business expansion purposes. As of October 2006, none of the $20 million aggregate commitment remains. Friedli Corporate Finance, Inc., Belize subsequently committed to providing our financing needs for 2007.

During the year ended December 31, 2006, we issued three 10% convertible promissory notes with principal amounts totaling $1,500,000 and one 4%
convertible promissory note with a principal amount of $1,000,000 to US Venture 05, Inc.

The terms of the convertible promissory notes
include, among other things:



| |  |  | an interest rate of 10% or 4%, respectively;
| | - |  | --------------------------------------------



| |  |  | a conversion feature, whereby the principal amount of and accrued interest on the note is convertible at the option of the holder at any time into shares of Series
C preferred stock at a conversion price of $4 per share;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ¡ |  | The Series C convertible preferred stock into which the convertible promissory notes are convertible has an issue price of $4.00 per share, has an 8% cumulative
dividend feature, is convertible into ten shares of our common stock and has a liquidation feature providing for a payment of two times the initial purchase price upon a liquidation, dissolution, merger or sale of the company.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a redemption feature, whereby the note may be redeemed by us at any time by payment of the principal amount of and accrued interest on the note to the holder;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a security interest in substantially all of the our assets; and
| | - |  | ---------------------------------------------------------------



| |  |  | subordinated in right of payment to all existing and future bank indebtedness, including lease and equipment finance obligations, as well as all other indebtedness
designated as senior indebtedness.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Consulting Agreement. In July 1996, we entered into a consulting
agreement with Friedli Corporate Finance, Inc., Belize, whereby Mr. Friedli provides us with financial consulting services and investor relations advice. There have been subsequent renewal agreements, with the most recent renewal being signed
in November 2006, extending the agreement until November 2008. Pursuant to this agreement, Friedli Corporate Finance, Inc., Belize is paid $4,000 per month plus reimbursement of expenses related to Mr. Friedlis services. Consulting
expense under the Friedli Corporate Finance, Inc., Belize agreement was approximately $63,000 for the year ended December 31, 2006.

Funding Assistance. Friedli Corporate Finance, Inc., Belize also earns fees for helping raise funds for the Company. For help in securing the funds associated with the convertible promissory notes issued during the year ended
December 31, 2006, Friedli Corporate Finance, Inc., Belize was paid $250,000, which they have indicated to us may be distributed to a number of third party banks who assisted in the financing efforts.

As of December 31, 2006, only one member of our Board of Directors, David Jodoin, is independent.

ITEM 13  EXHIBITS

Exhibits

See Exhibit Index attached.



31



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##### Table of Contents

ITEM 14  PRINCIPAL ACCOUNTING FEES AND SERVICES

Aggregate fees for professional services rendered
to the Company by BDO Seidman, LLP for the years ended December 31, 2006 and 2005, respectively, are summarized in the table below.



|                   |  |      |         |      |   |        
|------------------ |  | ---- | ------- | ---- | - | -------
|                   |  | 2006 |         | 2005
|Audit fees(1)      |  | $    | 152,000 |      | $ | 141,000
|                   |  |     
|Audit Related fees |  |      | 0       |      |   | 0      
|                   |  |     
|Tax fees(2)        |  |      | 27,000  |      |   | 26,000 
|                   |  |     
|All Other fees     |  |      | 0       |      |   | 0      
|                   |  |      |         |      |   |        
|Total fees         |  | $    | 179,000 |      | $ | 167,000
|                   |  |      |         |      |   |        

---

|(1) | Audit fees include consents and review of and assistance with documents filed with the SEC
|--- | ------------------------------------------------------------------------------------------

|(2) | Tax fees consists of fees for services related to tax compliance, including the preparation of tax returns, tax planning and tax advice.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

Audit Committee Pre-Approval Policies and Procedures

As we do not have an Audit Committee, the Board of Directors has established a policy regarding pre-approval of all audit and non-audit services provided to us by our independent auditor. On an ongoing basis, management communicates
specific projects and categories of service for which the advance approval of the Board of Directors is requested. The Board of Directors reviews these requests and advises management if the Board of Directors approves the engagement of the
independent auditor. On a periodic basis, management reports to the Board of Directors regarding the actual spending for such projects and services compared to the approved amounts. The projects and categories of service are as follows:



| |  |  | Audit fees: Professional services rendered for the audits of the financial statements of the Company and assistance with review of documents filed with the SEC.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Audit Related fees: Services related to employee benefit plan audits, business acquisitions, accounting consultations and consultations concerning financial and
accounting and reporting standards.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Tax fees: Services related to tax compliance, including the preparation of tax returns, tax planning and tax advice.
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | All Other fees: Other services are pre-approved on an engagement-by-engagement basis.
| | - |  | -------------------------------------------------------------------------------------



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Bethesda, State of Maryland, on March 29, 2007.



E-CENTIVES, INC.By:

/s/ Kamran AmjadiKamran AmjadiChief Executive Officer and Chairman


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



|                    |  |                                    |  |               
|------------------- |  | ---------------------------------- |  | --------------
|Name                |  | Title                              |  | Date          
|                    |  |                                   
|/s/ Kamran Amjadi   |  | Chief Executive Officer (Principal |  | March 29, 2007
|Kamran Amjadi       |  | Executive Officer) and Chairman    |  |               
|                    |  |                                   
|/s/ Tracy L. Slavin |  | Chief Financial Officer (Principal |  | March 29, 2007
|Tracy L. Slavin     |  | Financial and Accounting Officer)  |  |               
|                    |  |                                   
|/s/ Mehrdad Akhavan |  | Director                           |  | March 29, 2007
|Mehrdad Akhavan     |  |                                    |  |               
|                    |  |                                   
|/s/ Peter Friedli   |  | Director                           |  | March 29, 2007
|Peter Friedli       |  |                                    |  |               
|                    |  |                                   
|/s/ David Jodoin    |  | Director                           |  | March 29, 2007
|David Jodoin        |  |                                    |  |               



33



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##### Table of Contents

E-CENTIVES, INC

INDEX TO FINANCIAL STATEMENTS



|                                                        |  |    
|------------------------------------------------------- |  | ---
|Report of Independent Registered Public Accounting Firm |  | F-2
|Balance Sheets                                          |  | F-3
|Statements of Operations                                |  | F-4
|Statements of Stockholders Equity (Deficit)            |  | F-5
|Statements of Cash Flows                                |  | F-6
|Notes to Financial Statements                           |  | F-7



F-1



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

E-centives, Inc.

Bethesda, MD

We have audited the accompanying balance sheets of E-centives, Inc. (the Company) as of December 31, 2006 and 2005 and the related statements of operations,
stockholders equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our
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 financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of E-centives, Inc. at December 31, 2006
and 2005, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, the Company is dependent upon its principal stockholder for continued funding.

As discussed in Note 1 to the financial statements, effective January 1, 2006, the Company adopted Financial Accounting Standard FAS 123(R), Share-Based Payments.

/s/ BDO Seidman, LLP

Bethesda, MD

March 23, 2007



F-2



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##### Table of Contents

E-CENTIVES, INC.

BALANCE SHEETS



|                                                                                                                                                                                                                                               |  |                   |              |   |                   |   |              |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------------ | - | ----------------- | - | ------------ | -
|                                                                                                                                                                                                                                               |  | December 31, 2006 |              |   | December 31, 2005 |  
|ASSETS                                                                                                                                                                                                                                         |  |                   |              |   |                   |   |              |  
|Current assets:                                                                                                                                                                                                                                |  |                   |              |   |                   |   |              |  
|Cash and cash equivalents                                                                                                                                                                                                                      |  | $                 | 586,051      |   |                   | $ | 467,295      |  
|Accounts receivable, net of allowance for doubtful accounts of $73,536 and $87,350 at December 31, 2006 and December 31, 2005,
respectively.                                                                                                   |  |                   | 2,020,823    |   |                   |   | 1,331,177    |  
|Other receivables                                                                                                                                                                                                                              |  |                   | 43,033       |   |                   |   | 351,397      |  
|Prepaid expenses                                                                                                                                                                                                                               |  |                   | 63,872       |   |                   |   | 54,456       |  
|Other                                                                                                                                                                                                                                          |  |                   | 11,000       |   |                   |   | 11,000       |  
|                                                                                                                                                                                                                                               |  |                   |              |   |                   |   |              |  
|Total current assets                                                                                                                                                                                                                           |  |                   | 2,724,779    |   |                   |   | 2,215,325    |  
|Property and equipment, net                                                                                                                                                                                                                    |  |                   | 346,185      |   |                   |   | 153,075      |  
|Other intangible assets, net                                                                                                                                                                                                                   |  |                   | 1,195,836    |   |                   |   | 1,819,750    |  
|Deferred financing fee                                                                                                                                                                                                                         |  |                   | 246,454      |   |                   |   | 375,751      |  
|Other assets                                                                                                                                                                                                                                   |  |                   | 16,011       |   |                   |   | 16,011       |  
|                                                                                                                                                                                                                                               |  |                   |              |   |                   |   |              |  
|Total assets                                                                                                                                                                                                                                   |  | $                 | 4,529,265    |   |                   | $ | 4,579,912    |  
|                                                                                                                                                                                                                                               |  |                   |              |   |                   |   |              |  
|LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS DEFICIT                                                                                                                                                                  | 
|Current liabilities:                                                                                                                                                                                                                           |  |                   |              |   |                   |   |              |  
|Short term debt                                                                                                                                                                                                                                |  | $                 | 8,250,000    |   |                   | $ | 2,650,000    |  
|Interest and final payment fees payable                                                                                                                                                                                                        |  |                   | 1,411,410    |   |                   |   | 201,025      |  
|Accounts payable                                                                                                                                                                                                                               |  |                   | 905,713      |   |                   |   | 1,403,904    |  
|Accrued expenses                                                                                                                                                                                                                               |  |                   | 204,404      |   |                   |   | 499,737      |  
|Deferred revenue                                                                                                                                                                                                                               |  |                   | 175,572      |   |                   |   | 75,042       |  
|Current portion of capital leases                                                                                                                                                                                                              |  |                   |             |   |                   |   | 5,208        |  
|Other liabilities                                                                                                                                                                                                                              |  |                   | 111,853      |   |                   |   | 19,215       |  
|                                                                                                                                                                                                                                               |  |                   |              |   |                   |   |              |  
|Total current liabilities                                                                                                                                                                                                                      |  |                   | 11,058,952   |   |                   |   | 4,854,131    |  
|Long-term debt                                                                                                                                                                                                                                 |  |                   |             |   |                   |   | 3,100,000    |  
|Other long-term liabilities                                                                                                                                                                                                                    |  |                   | 35,578       |   |                   |   | 291,452      |  
|                                                                                                                                                                                                                                               |  |                   |              |   |                   |   |              |  
|Total liabilities                                                                                                                                                                                                                              |  |                   | 11,094,530   |   |                   |   | 8,245,583    |  
|                                                                                                                                                                                                                                               |  |                   |              |   |                   |   |              |  
|Commitments and contingencies                                                                                                                                                                                                                  |  |                   |              |   |                   |   |              |  
|Convertible redeemable preferred stock                                                                                                                                                                                                         |  |                   |              |   |                   |   |              |  
|Series C convertible preferred stock (voting), $.01 par value, 5,000,000 shares authorized and 3,239,986 shares issued and outstanding at
December 31, 2006 and December 31,2005. (liquidation preference of $25,919,888 at December 31, 2006) |  |                   | 12,959,940   |   |                   |   | 12,959,940   |  
|                                                                                                                                                                                                                                               |  |                   |              |   |                   |   |              |  
|Total convertible redeemable preferred stock                                                                                                                                                                                                   |  |                   | 12,959,940   |   |                   |   | 12,959,940   |  
|                                                                                                                                                                                                                                               |  |                   |              |   |                   |   |              |  
|Stockholders deficit:                                                                                                                                                                                                                         |  |                   |              |   |                   |   |              |  
|Common stock, $.01 par value, 120,000,000 shares authorized, 62,543,756 and 62,165,256 shares issued and outstanding at December 31, 2006
and December 31, 2005, respectively.                                                                 |  |                   | 625,438      |   |                   |   | 621,653      |  
|Additional paid-in capital                                                                                                                                                                                                                     |  |                   | 127,098,918  |   |                   |   | 126,906,002  |  
|Accumulated deficit                                                                                                                                                                                                                            |  |                   | (147,249,561 | ) |                   |   | (144,153,266 | )
|                                                                                                                                                                                                                                               |  |                   |              |   |                   |   |              |  
|Total stockholders deficit                                                                                                                                                                                                                    |  |                   | (19,525,205  | ) |                   |   | (16,625,611  | )
|                                                                                                                                                                                                                                               |  |                   |              |   |                   |   |              |  
|Total liabilities, convertible redeemable preferred stock and stockholders deficit                                                                                                                                                            |  | $                 | 4,529,265    |   |                   | $ | 4,579,912    |  
|                                                                                                                                                                                                                                               |  |                   |              |   |                   |   |              |  

See accompanying notes to financial statements.



F-3



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##### Table of Contents

E-CENTIVES, INC.

STATEMENTS OF OPERATIONS



|                                                                                                                                                                      |  |                         |            |   |      |    |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | -- | ---------- | -
|                                                                                                                                                                      |  | Year ended December 31, |           
|                                                                                                                                                                      |  | 2006                    |            |   | 2005 |   
|Revenue                                                                                                                                                               |  |                         |            |   |      |    |            |  
|Product sales                                                                                                                                                         |  | $                       | 6,445,502  |   |      | $  | 6,000,191  |  
|Royalties                                                                                                                                                             |  |                         | 56,571     |   |      |    | 16,603     |  
|                                                                                                                                                                      |  |                         |            |   |      |    |            |  
|Total revenue                                                                                                                                                         |  |                         | 6,502,073  |   |      |    | 6,016,794  |  
|                                                                                                                                                                      |  |                         |            |   |      |    |            |  
|Operating expenses (income)                                                                                                                                           |  |                         |            |   |      |    |            |  
|                                                                                                                                                                      |  |                        
|Cost of revenue                                                                                                                                                       |  |                         | 2,989,671  |   |      |    | 2,981,728  |  
|Product development, inclusive of stock-based compensation of $31,618 and $24,748 for the years ended December 31, 2006 and
December 31, 2005, respectively.          |  |                         | 930,305    |   |      |    | 968,148    |  
|General and administrative, inclusive of stock-based compensation of $105,653 and $112,084 for the years ended December 31, 2006 and
December 31, 2005, respectively. |  |                         | 3,524,671  |   |      |    | 4,119,151  |  
|Sales and marketing, inclusive of stock-based compensation of $3,141 and $45,612 for the years ended December 31, 2006 and
December 31, 2005, respectively.           |  |                         | 1,283,067  |   |      |    | 1,487,411  |  
|                                                                                                                                                                      |  |                        
|Other income                                                                                                                                                          |  |                         | (500,000   | ) |      |    | (333,333   | )
|                                                                                                                                                                      |  |                         |            |   |      |    |            |  
|Total operating expenses (income)                                                                                                                                     |  |                         | 8,227,714  |   |      |    | 9,223,105  |  
|                                                                                                                                                                      |  |                         |            |   |      |    |            |  
|Loss from operations                                                                                                                                                  |  |                         | (1,725,641 | ) |      |    | (3,206,311 | )
|                                                                                                                                                                      |  |                        
|Interest expense                                                                                                                                                      |  |                         | (1,382,741 | ) |      |    | (1,070,123 | )
|                                                                                                                                                                      |  |                        
|Interest income                                                                                                                                                       |  |                         | 12,087     |   |      |    | 13,184     |  
|                                                                                                                                                                      |  |                         |            |   |      |    |            |  
|Loss before income taxes                                                                                                                                              |  |                         | (3,096,295 | ) |      |    | (4,263,250 | )
|Income taxes                                                                                                                                                          |  |                         |           |   |      |    |           |  
|                                                                                                                                                                      |  |                         |            |   |      |    |            |  
|Net loss                                                                                                                                                              |  | $                       | (3,096,295 | ) |      | $  | (4,263,250 | )
|                                                                                                                                                                      |  |                         |            |   |      |    |            |  
|Basic and diluted net loss per common share                                                                                                                           |  | ($                      | 0.05       | ) |      | ($ | 0.07       | )
|                                                                                                                                                                      |  |                        
|Shares used to compute basic and diluted net loss per common share                                                                                                    |  |                         | 62,368,698 |   |      |    | 60,723,903 |  

See accompanying notes to financial statements.



F-4



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##### Table of Contents

E-CENTIVES, INC.

STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)



|                                                       |        |              |        |                            |         |                     |   |                                      |  |   |               |  |   |             
|------------------------------------------------------ | ------ | ------------ | ------ | -------------------------- | ------- | ------------------- | - | ------------------------------------ |  | - | ------------- |  | - | ------------
|                                                       |        | Common Stock |        | Additional paid-in Capital |         | Accumulated Deficit |   | Total Stockholders Equity
(Deficit)
|                                                       | Shares |              | Amount |                            |         |                    
|Balance at January 1, 2005                             |        | 58,388,946   |        | $                          | 583,889 |                     | $ | 124,563,498                          |  | $ | (139,890,016) |  | $ | (14,742,629)
|                                                       |        |              |        |                            |         |                     |   |                                      |  |   |               |  |   |             
|Stock-based compensation                               |        |             |        |                            |        |                     |   | 182,444                              |  |   |              |  |   | 182,444     
|                                                       |        |              |        |                            |        
|Exercise of stock options                              |        | 363,800      |        |                            | 3,638   |                     |   | 44,576                               |  |   |              |  |   | 48,214      
|                                                       |        |              |        |                            |        
|Issuance of common stock for services                  |        | 212,510      |        |                            | 2,126   |                     |   | 79,884                               |  |   |              |  |   | 82,010      
|                                                       |        |              |        |                            |        
|Conversion of Series B preferred stock to common stock |        | 3,200,000    |        |                            | 32,000  |                     |   | 2,035,600                            |  |   |              |  |   | 2,067,600   
|                                                       |        |              |        |                            |        
|Net loss                                               |        |             |        |                            |        |                     |   |                                     |  |   | (4,263,250)   |  |   | (4,263,250) 
|                                                       |        |              |        |                            |         |                     |   |                                      |  |   |               |  |   |             
|Balance at December 31, 2005                           |        | 62,165,256   |        | $                          | 621,653 |                     |   | 126,906,002                          |  |   | (144,153,266) |  |   | (16,625,611)
|                                                       |        |              |        |                            |         |                     |   |                                      |  |   |               |  |   |             
|Stock-based compensation                               |        |             |        |                            |        |                     |   | 140,412                              |  |   |              |  |   | 140,412     
|                                                       |        |              |        |                            |        
|Exercise of stock options                              |        | 316,000      |        |                            | 3,160   |                     |   | 38,254                               |  |   |              |  |   | 41,414      
|                                                       |        |              |        |                            |        
|Issuance of common stock for services                  |        | 62,500       |        |                            | 2,126   |                     |   | 14,250                               |  |   |              |  |   | 14,875      
|                                                       |        |              |        |                            |        
|Net loss                                               |        |             |        |                            |        |                     |   |                                     |  |   | (3,096,295)   |  |   | (3,096,295) 
|                                                       |        |              |        |                            |         |                     |   |                                      |  |   |               |  |   |             
|Balance at December 31, 2006                           |        | 62,543,756   |        | $                          | 625,438 |                     | $ | 127,098,918                          |  | $ | (147,249,561) |  | $ | (19,525,205)
|                                                       |        |              |        |                            |         |                     |   |                                      |  |   |               |  |   |             

See accompanying notes to financial statements.



F-5



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##### Table of Contents

E-CENTIVES, INC.

STATEMENTS OF CASH FLOWS



|                                                                                                                                                                                                        |  |                         |            |   |      |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                                                                                                                        |  | Year ended December 31, |           
|                                                                                                                                                                                                        |  | 2006                    |            |   | 2005 |  
|Cash flows used in operating activities:                                                                                                                                                                |  |                         |            |   |      |   |            |  
|Net loss                                                                                                                                                                                                |  | $                       | (3,096,295 | ) |      | $ | (4,263,250 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                                                                                                                             |  |                         |            |   |      |   |            |  
|Depreciation and amortization                                                                                                                                                                           |  |                         | 770,757    |   |      |   | 763,912    |  
|Loss on sale/disposal of property and equipment                                                                                                                                                         |  |                         |           |   |      |   | 2,705      |  
|Amortization of deferred financing fee                                                                                                                                                                  |  |                         | 379,297    |   |      |   | 1,462,705  |  
|Stock-based compensation                                                                                                                                                                                |  |                         | 140,412    |   |      |   | 182,444    |  
|Issuance of common stock for services                                                                                                                                                                   |  |                         | 14,875     |   |      |   | 82,010     |  
|Provision for doubtful accounts                                                                                                                                                                         |  |                         | 25,000     |   |      |   | 14,000     |  
|(Increase) decrease in:                                                                                                                                                                                 |  |                         |            |   |      |   |            |  
|Accounts receivable                                                                                                                                                                                     |  |                         | (714,646   | ) |      |   | 25,063     |  
|Other receivables                                                                                                                                                                                       |  |                         | 308,364    |   |      |   | (322,549   | )
|Prepaid expenses and other current assets                                                                                                                                                               |  |                         | (9,416     | ) |      |   | 39,180     |  
|Security deposits                                                                                                                                                                                       |  |                         |           |   |      |   | (16,011    | )
|Increase (decrease) in:                                                                                                                                                                                 |  |                         |            |   |      |   |            |  
|Accounts payable                                                                                                                                                                                        |  |                         | (498,191   | ) |      |   | (1,606,244 | )
|Accrued expenses and other liabilities                                                                                                                                                                  |  |                         | 751,816    |   |      |   | (769,016   | )
|Deferred revenue                                                                                                                                                                                        |  |                         | 100,530    |   |      |   | (179,627   | )
|                                                                                                                                                                                                        |  |                         |            |   |      |   |            |  
|Net cash used in operating activities                                                                                                                                                                   |  |                         | (1,827,497 | ) |      |   | (4,634,678 | )
|                                                                                                                                                                                                        |  |                         |            |   |      |   |            |  
|Cash flows from investing activities:                                                                                                                                                                   |  |                         |            |   |      |   |            |  
|Decrease in restricted cash                                                                                                                                                                             |  |                         |           |   |      |   | 70,000     |  
|Acquisition of property and equipment                                                                                                                                                                   |  |                         | (339,953   | ) |      |   | (79,331    | )
|Sale of property and equipment                                                                                                                                                                          |  |                         |           |   |      |   | 3,640      |  
|Purchase of intangible asset                                                                                                                                                                            |  |                         |           |   |      |   | (1,871,743 | )
|                                                                                                                                                                                                        |  |                         |            |   |      |   |            |  
|Net cash used in investing activities                                                                                                                                                                   |  |                         | (339,953   | ) |      |   | (1,877,434 | )
|                                                                                                                                                                                                        |  |                         |            |   |      |   |            |  
|Cash flows from financing activities:                                                                                                                                                                   |  |                         |            |   |      |   |            |  
|Payments on obligations under capital leases                                                                                                                                                            |  |                         | (5,208     | ) |      |   | (122,710   | )
|Proceeds from issuance of debt                                                                                                                                                                          |  |                         | 2,500,000  |   |      |   | 5,400,000  |  
|Payment of debt                                                                                                                                                                                         |  |                         |           |   |      |   | (400,000   | )
|Debt issuance costs                                                                                                                                                                                     |  |                         | (250,000   | ) |      |   | (750,000   | )
|Issuance of Series C convertible preferred stock                                                                                                                                                        |  |                         |           |   |      |   | 2,500,767  |  
|Exercise of stock options                                                                                                                                                                               |  |                         | 41,414     |   |      |   | 48,214     |  
|                                                                                                                                                                                                        |  |                         |            |   |      |   |            |  
|Net cash provided by financing activities                                                                                                                                                               |  |                         | 2,286,206  |   |      |   | 6,676,271  |  
|                                                                                                                                                                                                        |  |                         |            |   |      |   |            |  
|Net increase in cash and cash equivalents                                                                                                                                                               |  |                         | 118,756    |   |      |   | 164,159    |  
|Cash and cash equivalents, beginning of year                                                                                                                                                            |  |                         | 467,295    |   |      |   | 303,136    |  
|                                                                                                                                                                                                        |  |                         |            |   |      |   |            |  
|Cash and cash equivalents, end of year                                                                                                                                                                  |  | $                       | 586,051    |   |      | $ | 467,295    |  
|                                                                                                                                                                                                        |  |                         |            |   |      |   |            |  
|Supplemental disclosure of cash flow information:                                                                                                                                                       |  |                         |            |   |      |   |            |  
|                                                                                                                                                                                                        |  |                         |            |   |      |   |            |  
|Cash paid for interest                                                                                                                                                                                  |  | $                       | 84,511     |   |      | $ | 77,016     |  
|                                                                                                                                                                                                        |  |                         |            |   |      |   |            |  
|Supplemental disclosure of non-cash investing and financing activities:                                                                                                                                 |  |                         |            |   |      |   |            |  
|                                                                                                                                                                                                       
|During May 2005, 400,000 shares of Series B convertible preferred stock automatically converted into an aggregate of 3,200,000
shares of common stock.                                                  | 
|                                                                                                                                                                                                       
|During March 2005, convertible promissory notes totaling $9,750,000, along with accrued interest of approximately $709,000 were
exchanged for 2,614,794 shares of Series C convertible preferred stock. | 

See accompanying notes to financial statements.



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##### Table of Contents

E-CENTIVES, INC.

NOTES TO FINANCIAL STATEMENTS

(1) Organization

E-centives, Inc. (E-centives or the Company) was established as Imaginex, Inc. on August 2, 1996, through incorporation in
the State of Delaware. During October 1996, the Company amended its articles of incorporation to change its name to Emaginet, Inc. and again, in March 1999, the Company amended its certificate of incorporation to change its name to E-centives, Inc.

E-centives provides interactive database marketing technologies and services, as well as on-line advertising capabilities and solutions
for companies across a range of industries. With its proprietary technology, the Company provides acquisition and retention solutions for companies that do business with millions of Internet users every day. The Company currently derives its
revenues from two divisions: the Interactive Database Marketing division and the ConsumerREVIEW.com division. The principal offerings of the Interactive Database Marketing division include: data warehousing, online reporting, Internet couponing,
e-mail marketing, strategic consulting and program management, user experience design and development, as well as analytics and data mining. The ConsumerREVIEW.com division provides on-line advertising and e-commerce services through its network of
web communities.

One of the Companys Interactive Database Marketing division customers, Reckitt Benckiser, contributed 28% and 31%,
respectively, of the Companys revenue for the years ended December 31, 2006 and 2005. The customers initial contract expired in October 2002 and the customer has subsequently signed five annual renewal agreements, with the most
recent renewal expiring on December 31, 2007. Loss of this customer could have a material adverse effect on the Companys business, financial condition, results of operations and cash flows.

In September 2002, Friedli Corporate Finance, Inc., Belize provided a written commitment to provide the Company with debt or equity financing of up to
$20 million in the aggregate. As of October 2006, the Company has used the full $20 million commitment. However, Friedli Corporate Finance, Inc., Belize has committed to providing the Companys funding needs for 2007. If Friedli Corporate
Finance, Inc., Belize is unable to fulfill its financing commitment or the Company is not offered financing by Friedli Corporate Finance, Inc., Belize on acceptable terms and conditions, the Company is not likely to be able to replace such committed
funds on acceptable terms or at all. If future revenues are insufficient to cover the Companys operating costs, the Company will need to secure additional funds to continue operations. In addition, the Company may need to raise additional
funds sooner than anticipated to respond to competitive pressures, to develop new or enhanced products or services, to fund the Companys future expansion or to make acquisitions. The Company may not find any additional financing on acceptable
terms or at all. If adequate funds are not available, or not available on acceptable terms, the Company may not be able to continue its business, and would need to seek bankruptcy protection or a buyer for its assets.

(2) Summary of Significant Accounting Policies

(a) 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 amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

Estimates are
used in accounting for, among other things, allowances for uncollectible receivables, recoverability of long-lived assets, intangible assets, depreciation and amortization, goodwill, employee benefits, restructuring accruals, taxes and
contingencies. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the financial statements in the period they are determined to be necessary.

(b) Cash and Cash Equivalents

All
highly liquid investments with maturities of three months or less when purchased are considered cash equivalents. Those investments with maturities less than twelve months at the balance sheet date are considered short-term investments. Cash and
cash equivalents consist of cash on deposit with banks and money market funds stated at cost, which approximates fair value.

(c) Fair Value of
Financial Instruments

The Company considers the carrying value of the Companys financial instruments, which
include cash equivalents, accounts receivable, accounts payable, and accrued expenses to approximate fair value at December 31, 2006 and 2005 because of the relatively short period of time between origination of the instruments and their
expected realization or settlement.



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##### Table of Contents

The Company provides an allowance for doubtful accounts equal to the estimated collection
losses that could be incurred. The estimated losses are based on historical collection experience coupled with review of the current status of existing receivables.

(d) Property and Equipment

Property and equipment are stated at cost, and equipment
under capital leases are stated at the present value of minimum lease payments. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Equipment under capital
leases are capitalized and amortized using the straight-line method over the shorter of their estimated useful life or the term of the respective lease. Leasehold improvements acquired in a business combination or purchased after the inception of a
lease are capitalized and amortized over the shorter of (a) the useful life of the assets or (b) a term that includes required lease periods and renewals that are reasonably assured upon the acquisition of the purchase (see Note 4).

Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for major renewals and
betterments that extend the useful lives of property and equipment are capitalized and depreciated over the remaining useful lives of the asset. When assets are retired or sold, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in the results of operations.

(e) Long-Lived and Amortizable Intangible Assets

Effective January 1, 2002, the Company adopted the provisions of FAS 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, which supersedes both FAS 121 and the accounting and reporting provisions of APB Opinion 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). The Company assesses the recoverability of long-lived assets, including amortizable intangible assets, whenever adverse
events or changes in circumstances or business climate indicate that the carrying value of the asset may not be recoverable. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If
impairment is indicated, the asset is written down by the amount, if any, in which the carrying value of the asset exceeds the related fair value of the asset. No impairment charges were recorded during the years ended December 31, 2006 and
2005.

In accordance with the amortization provisions of FAS 142, Goodwill and Other Intangible Assets, the Company
amortizes intangible assets with definite useful lives over their respective estimated useful lives to their estimated residual values, and reviews them for impairment in accordance with FAS 144.

Amortizable intangible assets at December 31, 2006 and December 31, 2005, consisted of patents, technology and tradenames, which
were acquired in connection with the BrightStreet.com and ConsumerREVIEW.com acquisitions. As of December 31, 2006, the Company had the following amortizable intangible assets:



|                                     |  |                       |           |                          |   |            |           |  |   |          
|------------------------------------ |  | --------------------- | --------- | ------------------------ | - | ---------- | --------- |  | - | ---------
|                                     |  | Gross Carrying Amount |           | Accumulated Amortization |   |            | Net Value
|Amortizable intangible assets:       |  |                       |           |                          |   |            |           |  |   |          
|                                     |  |                       |          
|Patents                              |  | $                     | 2,345,679 |                          | $ | (1,149,843 | )         |  | $ | 1,195,836
|                                     |  |                       |          
|Technology                           |  |                       | 3,774,685 |                          |   | (3,774,685 | )         |  |   |         
|                                     |  |                       |          
|Tradenames                           |  |                       | 112,408   |                          |   | (112,408   | )         |  |   |         
|                                     |  |                       |           |                          |   |            |           |  |   |          
|Total amortizable intangible assets  |  | $                     | 6,232,772 |                          | $ | (5,036,936 | )         |  | $ | 1,195,836
|                                     |  |                       |           |                          |   |            |           |  |   |          
|Aggregate Amortization Expense:      |  |                       |           |                          |   |            |           |  |   |          
|For the year ended December 31, 2006 |  |                       |           |                          | $ | 623,914    |           |  |   |          
|                                     |  |                       |          
|Estimated Amortization Expense:      |  |                       |           |                          |   |            |           |  |   |          
|                                     |  |                       |          
|For the year ended December 31, 2007 |  |                       |           |                          | $ | 623,914    |           |  |   |          
|                                     |  |                       |          
|For the year ended December 31, 2008 |  |                       |           |                          | $ | 571,922    |           |  |   |          
|                                     |  |                       |          
|For the year ended December 31, 2009 |  |                       |           |                          | $ |           |           |  |   |          

(f) Deferred Revenue

Deferred revenue represents billings or collections on contracts in advance of performance of services and is recognized as revenue as the
related service is performed based upon the applicable revenue recognition methodology.



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##### Table of Contents

(g) Revenue Recognition

Revenue is currently generated by providing the services of the Companys two divisions: Interactive Database Marketing division and
ConsumerREVIEW.com.

The Interactive Database Marketing division, which represented 61% and 62% of the Companys
revenue for the years ended December 31, 2006 and 2005, respectively, is a solution that allows businesses to build direct consumer relationships. Revenue is generated by charging fees for data hosting, database management, e-mail delivery,
promotion delivery, campaign and program management, strategy services, creative services, as well as various analytical services. Revenue related to one-time service fees for setting up the customer is recognized ratably over the expected term of
the customer relationship and all other revenue is recognized when the service is provided, assuming collection is reasonably assured. During the year ended December 31, 2005 the Company began to receive royalties from licensing two of its
patents related to the Interactive Database Marketing division. This was the result of a settlement of a lawsuit with Coupons, Inc. (see Note 9b) whereby the Company is being paid quarterly royalties based on revenue earned by Coupons, Inc. related
to patents that were licensed to them as part of the settlement agreement. Royalties are being recognized on a cash receipts basis due to the Companys inability to calculate the royalties.

ConsumerREVIEW.com, which was acquired in December 2002, manages web communities around common product interests. The web properties are
dedicated to meeting the needs of consumers who are researching products on the web. Revenue is predominantly generated through on-line advertising and e-commerce fees. Advertising revenue is derived from the sale of advertisements on pages
delivered to community members of our websites. This revenue is recognized in the period in which the advertisements are delivered. E-commerce fees are derived from on-line performance-based programs and are earned on either a lead referral basis or
on an affiliate commission basis. Revenue is earned from performance-based programs when a user of our websites responds to a commerce link by linking to a customers websites. For lead referral programs, customers are charged on a
cost-per-click basis, and revenue is recognized in the month the click occurs. For affiliate-commission programs revenue is recognized when the commission is earned, which is in the month the transaction occurs. ConsumerREVIEW.com represented 39%
and 38% of the Companys total revenue for years ended December 31, 2006 and 2005, respectively.

(h) Cost of Revenue

Cost of revenue consists primarily of expenses related to providing the Companys services, including related personnel costs,
depreciation of servers, content costs, as well as network and hosting charges.

(i) Product Development Costs

Product development consists primarily of compensation and related benefits and other operating expenses associated with the
Companys technology department. The technology performs research and development, enhances and maintains existing products and provides quality assurance. The Company expenses product development costs as they are incurred, as the costs do not
meet the criteria to be capitalized.

(j) Sales and Marketing Costs

Sales and marketing expenses consist primarily of payroll, sales commissions and related expenses for personnel engaged in sales,
marketing and customer support, as well as advertising and promotional expenditures. Such costs are expensed as incurred.

(k) Stock-Based Compensation

At December 31, 2006, the Company had one stock-based employee compensation plan, which is described more fully in
Note 11. Through December 31, 2005, as permitted under FAS 148, Accounting for Stock-Based CompensationTransition and Disclosure, which amended FAS 123, Accounting for Stock-Based Compensation, the Company elected to follow
the intrinsic value method in accounting for its stock-based employee compensation arrangement as defined by APB 25, Accounting for Stock Issued to Employees and related interpretations including FASB Interpretation No. 44, Accounting
for Certain Transactions involving Stock Compensation. Beginning January 1, 2006, the company adopted FAS 123(R) using the modified-prospective method, and as such, prior periods have not been restated. Compensation expense is recognized
over the requisite service period.

(l) Income Taxes

The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating and tax loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be recognized.



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(m) Net Income (Loss) Per Share

The Company computes net income (loss) applicable to common stockholders in accordance with FAS 128, Earnings Per Share. Under the
provisions of FAS 128, basic net income (loss) available per share is computed by dividing the net income (loss) available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted
net income (loss) available per share is computed by dividing the net income (loss) for the period by the weighted average number of common and dilutive common equivalent shares outstanding during the period. As the Company had a net loss in each of
the periods presented, basic and diluted net income (loss) available per share is the same.

(n) Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and cash equivalents and
accounts receivable. The Company maintains its cash and cash equivalents with high quality financial institutions. At times, these accounts may exceed federally insured limits. The Company has not experienced any losses in such bank accounts. The
Company believes it is not exposed to significant credit risk related to cash and cash equivalents and short-term investments.

In the year ended December 31, 2006, the Company incurred charges related to bad debts of approximately $25,000. While the Company believes that its allowance for doubtful accounts as of December 31, 2006 is adequate to cover any
difficulties with the collection of its accounts receivable balance, there can be no assurance that the allowance will be adequate to cover any receivables later deemed to be uncollectible.

For the years ended December 31, 2006 and 2005, one customer accounted for 28% and 31%, respectively, of the Companys total
revenue.

(o) Retirement Plan

The Company sponsors a defined contribution retirement plan established under the provisions of Internal Revenue Code 401(k). Eligible employees may defer up to 25% of their pre-tax earnings, subject to the Internal Revenue Services
annual contribution limit. The 401(k) plan permits the Company to make additional discretionary matching contributions on behalf of all participants in the 401(k) plan in an amount determined by the Company; however, no contributions have been made
for the years presented.

(p) Reclassification

Certain amounts in prior years financial statements have been reclassified to conform to the current year presentation.

(3) Recent Accounting Pronouncements

In February 2006, the FASB issued FAS 155, Accounting for Certain Hybrid Financial
Instruments. This statement amends FAS 133, Accounting for Derivative Instruments and Hedging Activities and FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement
permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. This statement is 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 Company expects to adopt this statement effective January 1, 2007 and does not expect it to have a material effect on the financial statements.

In June 2006, FASB issued FIN 48, Accounting for Uncertainty in Income Taxes,an interpretation of FASB Statement No. 109. FIN 48 clarifies
the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. FIN 48 utilizes a two-step approach for evaluating tax positions. Recognition (step one) occurs when a company concludes that a tax position, based solely on its technical merits,
is more-likely-than-not to be sustained upon examination. Measurement (step two) is only addressed if step one has been satisfied (i.e., the position is more-likely-than-not to be sustained). Under step two, the tax benefit is measured as the
largest amount of benefit, determined on a cumulative probability basis that is more-likely-than-not to be realized upon ultimate settlement. FIN 48s use of the term more-likely-than-not is consistent with how that term is used in
FAS 109, a likelihood of occurrence greater than fifty percent. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not believe that the adoption of FIN 48 will have a material effect on the financial
statements.

In September 2006, FASB issued FAS 157, Fair Value Measurement, which defines fair value, establishes a framework for
measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. FAS 157 is effective for
fiscal years beginning after November 15, 2007, the year beginning January 1, 2008 for the Company. The Company does not believe that the adoption of FAS 157 will have a material effect on the financial statements.



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##### Table of Contents

(4) Property and Equipment

Property and equipment consists of the following:



|                               |  |             |  |              |            |   |      |   |            |  
|------------------------------ |  | ----------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                               |  |             |  | December 31, |           
|                               |  | useful life |  | 2006         |            |   | 2005 |  
|Computer equipment             |  | 3 years     |  | $            | 7,023,880  |   |      | $ | 6,683,927  |  
|                               |  |             | 
|Furniture and equipment        |  | 5-7 years   |  |              | 107,795    |   |      |   | 107,795    |  
|                               |  |             | 
|Leasehold improvements         |  | 5 years     |  |              | 23,072     |   |      |   | 23,072     |  
|                               |  |             |  |              |            |   |      |   |            |  
|                               |  |             |  |              | 7,154,747  |   |      |   | 6,814,794  |  
|                               |  |             | 
|Less: accumulated depreciation |  |             |  |              | (6,808,562 | ) |      |   | (6,661,719 | )
|                               |  |             |  |              |            |   |      |   |            |  
|                               |  |             |  | $            | 346,185    |   |      | $ | 153,075    |  
|                               |  |             |  |              |            |   |      |   |            |  

Depreciation expense related to property and equipment was approximately $147,000 and $178,000 for
the years ended December 31, 2006 and 2005, respectively

(5) Intangible Assets

Intangible assets at December 31, 2006 and December 31, 2005, consisted of patents, which were acquired in connection with the BrightStreet.com
acquisition, and technology and tradenames, which were acquired in connection with the ConsumerREVIEW.com acquisition. The intangible assets were recorded at their estimated fair value and are amortized on a straight-line basis over three years. The
technology and tradenames intangible assets were fully amortized as of November 2005.

As of December 31, 2006 and 2005, intangible
assets consisted of the following:



|                               |  |              |            |   |      |   |            |  
|------------------------------ |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                               |  | December 31, |           
|                               |  | 2006         |            |   | 2005 |  
|Patent                         |  | $            | 2,345,679  |   |      | $ | 2,345,679  |  
|                               |  |             
|Technology                     |  |              | 3,774,685  |   |      |   | 3,774,685  |  
|                               |  |             
|Tradenames                     |  |              | 112,408    |   |      |   | 112,408    |  
|                               |  |              |            |   |      |   |            |  
|                               |  |              | 6,232,772  |   |      |   | 6,232,772  |  
|                               |  |             
|Less: accumulated amortization |  |              | (5,036,936 | ) |      |   | (4,413,022 | )
|                               |  |              |            |   |      |   |            |  
|                               |  | $            | 1,195,836  |   |      | $ | 1,819,750  |  
|                               |  |              |            |   |      |   |            |  

(6) Income Taxes

The Company has incurred operating losses since its inception and has recognized no US current or deferred income tax provision or benefit. For the years ended December 31, 2006 and 2005, there was no income tax
expense or benefit attributable to operations.

The provision for income taxes is different from that which would be obtained by applying
the statutory US federal income tax rate to pretax loss before income taxes. The items causing this difference are as follows:



|                                         |  |                         |            |   |      |   |            |  
|---------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | -
|                                         |  | Year Ended December 31, |           
|                                         |  | 2006                    |            |   | 2005 |  
|Expected tax benefit at statutory rate   |  | $                       | 1,052,740  |   |      | $ | 1,449,505  |  
|                                         |  |                        
|State tax, net of federal                |  |                         | 119,657    |   |      |   | 165,983    |  
|                                         |  |                        
|Stock-based compensation, not deductible |  |                         | (4,002     | ) |      |   |           |  
|                                         |  |                        
|Other, net                               |  |                         | (22,148    | ) |      |   | (13,622    | )
|                                         |  |                        
|Increase in valuation allowance          |  |                         | (1,146,247 | ) |      |   | (1,601,866 | )
|                                         |  |                         |            |   |      |   |            |  
|Tax benefit                              |  | $                       |           |   |      | $ |           |  
|                                         |  |                         |            |   |      |   |            |  



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##### Table of Contents

Temporary differences and carry forwards that give rise to deferred tax assets and liabilities are as follows:



|                                                              |  |                         |             |   |      |   |             |  
|------------------------------------------------------------- |  | ----------------------- | ----------- | - | ---- | - | ----------- | -
|                                                              |  | Year Ended December 31, |            
|                                                              |  | 2006                    |             |   | 2005 |  
|Deferred tax assets:                                          |  |                         |             |   |      |   |             |  
|                                                              |  |                        
|Net operating loss and general business credits carryforwards |  | $                       | 49,997,491  |   |      | $ | 48,559,296  |  
|                                                              |  |                        
|Intangible assets                                             |  |                         | 2,285,786   |   |      |   | 2,272,669   |  
|                                                              |  |                        
|Accrued expenses                                              |  |                         |            |   |      |   | 94,750      |  
|                                                              |  |                        
|Deferred compensation                                         |  |                         | 1,192,601   |   |      |   | 1,227,836   |  
|                                                              |  |                        
|Allowance for doubtful accounts receivable                    |  |                         | 27,870      |   |      |   | 33,105      |  
|                                                              |  |                        
|Property and equipment                                        |  |                         | 29,964      |   |      |   | 199,809     |  
|                                                              |  |                         |             |   |      |   |             |  
|Total gross deferred tax assets                               |  |                         | 53,533,712  |   |      |   | 52,387,465  |  
|                                                              |  |                        
|Valuation allowance                                           |  |                         | (53,533,712 | ) |      |   | (52,387,465 | )
|                                                              |  |                         |             |   |      |   |             |  
|                                                              |  | $                       |            |   |      | $ |            |  
|                                                              |  |                         |             |   |      |   |             |  

In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or the entire amount of deferred tax assets will not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which temporary
differences become deductible and tax credit carry forwards are available. Management considers scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies that can be implemented by the Company in
making this assessment. Based upon the lack of historical taxable income, scheduled reversal of deferred tax liabilities, projections for future taxable income and uncertainty regarding ultimate realization of the tax benefits regarding the deferred
tax assets, the Company has established a valuation allowance of $53,534,000 as of December 31, 2006. The net change in the valuation allowance for the years ended December 31, 2006 and 2005 was an increase of $1,146,000 and $1,602,000,
respectively. The federal net operating loss is $131,410,000 as of December 31, 2006. The federal net operating loss carry forward period expires commencing in 2011 through the year 2022. Further, as a result of certain financing and capital
transactions, an annual limitation on the future utilization of a portion of the net operating loss may occur. As a result, the net operating loss carry forward may not be fully utilized before expiration.

(7) Convertible Promissory Notes

During the year
ended December 31, 2006, the Company issued three 10% convertible promissory notes with principal balances totaling $1,500,000 and one 4% convertible promissory note with a principal balance of $1,000,000 and during the year ended
December 31, 2005 the Company issued three 10% convertible promissory notes with principal balances totaling $4,500,000. As of December 31, 2006, the aggregate principal balance of $7,000,000 for the convertible promissory notes was
classified as short-term debt. As of December 31, 2006, approximately $626,000 of the interest and final payment fees payable balance included accrued interest associated with these convertible promissory notes. The terms of the 10% convertible
promissory notes and the 4% convertible promissory note include, among other things:



| |  |  | a 10% or 4% interest rate, respectively;
| | - |  | ----------------------------------------



| |  |  | a conversion feature, whereby the principal amount of and accrued interest on the note is convertible at the option of the holder at any time into shares of Series
C preferred stock at a conversion price of $4 per share;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ¡ |  | The Series C convertible preferred stock into which the convertible promissory notes are convertible has an issue price of $4.00 per share, has an 8% cumulative
dividend feature, is convertible into ten shares of common stock and has a liquidation feature providing for a payment of two times the initial purchase price upon a liquidation, dissolution, merger or sale of the company.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a redemption feature, whereby the note may be redeemed by the Company at any time by payment of the principal amount of and accrued interest on the note to the
holder; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a security interest in substantially all of the Companys assets.
| | - |  | -----------------------------------------------------------------

One of the 10% convertible promissory notes issued during the year ended December 31, 2005 has a one-time final payment charge of 8% of the
principal for each year that the principal is not repaid on or before each annual anniversary of the date the note was issued, with a maximum of 16%. At December 31, 2006, approximately $266,000 of the interest and final payment fees payable
balance included the accrual for the final payment charges associated with this 10% convertible promissory note. If the Company holds this 10% convertible promissory note to maturity, a final payment charge of $480,000 will be due.

During the period from May 2003 through January 2005, the Company issued 8% convertible promissory notes with principal balances totaling $11,000,000. On
March 31, 2005, 8% convertible promissory notes with principal balances totaling $9,750,000, along with accrued interest of approximately $709,000, were converted into 2,614,794 shares of Series C convertible preferred stock. As of
December 31, 2006, the aggregate remaining balance of $1,250,000 was classified as short-term debt and approximately $145,000 of the interest and final payment fees payable balance represents accrued interest associated with these convertible
promissory notes. The terms of the 8% convertible promissory notes include, among other things:



| |  |  | an 8% interest rate;
| | - |  | --------------------



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##### Table of Contents

| |  |  | an automatic conversion feature, whereby the notes automatically convert into shares of the Companys common stock at a conversion rate, as defined in the
notes, on the date when the average trading price on the SWX Swiss Exchange of the Companys common stock for 30 consecutive trading days has been equal to or greater than 2.75 CHF.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ¡ |  | the conversion price will be 2 CHF or lower in certain circumstances described below (as converted to U. S. dollars pursuant to a then recent exchange rate, as
calculated by the Company);
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ¡ |  | The number of shares of common stock to which the holders of the 8% convertible promissory notes will be entitled upon an automatic conversion would be equal to the
product of the principal amount outstanding under the convertible notes divided by the average trading price on the SWX Swiss Exchange of the common stock for the five previous trading days (but in no event higher than CHF 2). If all of the
aggregated principal amount of the 8% convertible promissory notes outstanding as of December 31, 2006 were to be converted into shares of common stock at the conversion price of 2 CHF (assuming an exchange rate of 1.2235 CHF per one
U.S. Dollar as of December 31, 2006), the aggregated number of shares issued upon such conversion would be approximately 764,700;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a one-time final payment charge of 10% of the principal for each year that the principal is not paid on or before each annual anniversary of the date the notes were
issued (with a maximum of 30%); and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a security interest in substantially all of the Companys assets.
| | - |  | -----------------------------------------------------------------

At December 31, 2006, approximately $374,000 of the interest and final payment fees payable balance included the accrual for the final payment
charges associated with the 8% convertible promissory notes. If the Company holds the 8% convertible promissory notes to maturity, a final payment charge of $375,000 will be due.

See below for a schedule of the Companys outstanding convertible promissory notes as of December 31, 2006:



|               |  |           |           |               |    |   |                    |    |      |           |                |    
|-------------- |  | --------- | --------- | ------------- | -- | - | ------------------ | -- | ---- | --------- | -------------- | ---
|Month Issued   |  | Principal |           | Interest Rate |    |   | Final Payment Rate |    |      | Month Due |               
|May-2003       |  | $         | 100,000   |               | 8  | % |                    | 10 | %(1) |           | September-2007 | (3)
|May-2003       |  | $         | 100,000   |               | 8  | % |                    | 10 | %(1) |           | September-2007 | (3)
|June-2003      |  | $         | 300,000   |               | 8  | % |                    | 10 | %(1) |           | September-2007 | (3)
|June-2003      |  | $         | 150,000   |               | 8  | % |                    | 10 | %(1) |           | September-2007 | (3)
|November-2003  |  | $         | 500,000   |               | 8  | % |                    | 10 | %(1) |           | September-2007 | (3)
|February-2004  |  | $         | 100,000   |               | 8  | % |                    | 10 | %(1) |           | February-2007  | (4)
|July-2005      |  | $         | 500,000   |               | 10 | % |                    |   |      |           | September-2007 | (3)
|September-2005 |  | $         | 1,000,000 |               | 10 | % |                    |   |      |           | September-2007 | (3)
|November-2005  |  | $         | 3,000,000 |               | 10 | % |                    | 8  | %(2) |           | September-2007 | (3)
|January-2006   |  | $         | 500,000   |               | 10 | % |                    |   |      |           | September-2007 | (3)
|June-2006      |  | $         | 500,000   |               | 10 | % |                    |   |      |           | September-2007 | (3)
|September-2006 |  | $         | 500,000   |               | 10 | % |                    |   |      |           | September-2007 |    
|October-2006   |  | $         | 1,000,000 |               | 4  | % |                    |   |      |           | September-2007 |    
|               |  |           |           |               |    |   |                    |    |      |           |                |    
|Total          |  | $         | 8,250,000 |               |    |   |                    |    |      |           |                |    
|               |  |           |           |               |    |   |                    |    |      |           |                |    

| | 
| | 

| | (1) | A final payment charge of 10% of the principal for each year that the principal is not paid on or before each annual anniversary of the date the note was issued (with a maximum of
30%).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | A final payment charge of 8% of the principal for each year that the principal is not paid on or before each annual anniversary of the date the note was issued (with a maximum of
16%).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Per an amendment to the convertible promissory note.
| | --- | ----------------------------------------------------

| | (4) | The Company is currently negotiating an extension to the maturity date of the convertible promissory note.
| | --- | ----------------------------------------------------------------------------------------------------------

The Company analyzes its convertible debt financings in accordance with FAS 133, Accounting for Derivative Instruments and Hedging Activities, to
determine if any embedded features should be bifurcated. If the conversion feature is not required to be bifurcated the Company applies EITF 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments. EITF 98-5 clarifies the
accounting for instruments with beneficial conversion features and adjustable conversion ratios. The beneficial conversion feature is calculated by allocating the proceeds received in the financing to the intrinsic value based on the effective
conversion price as a result of the allocated proceeds. The value of the beneficial conversion feature is recognized as a discount and is amortized to interest expense from the date of issuance to the stated redemption date.

(8) Guarantees and Indemnifications

The Company
adopted FIN 45 effective December 31, 2002. The initial recognition and measurement provisions of FIN 45 apply on a prospective basis to certain guarantees and indemnifications issued or modified after December 31, 2002. Accordingly, any
contractual guarantees or indemnifications the Company issues or modifies subsequent to December 31, 2002 will be evaluated and, if required, a liability for the fair value of the obligation undertaken will be recognized. The adoption of FIN 45
did not have a material effect on the Companys financial position or results of operations.



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The Company sometimes indemnifies certain of its customers against damages, if any, they might incur as a
result of a claim brought against them related to patent infringement from the use of the Companys products. The Company is unable to estimate the maximum exposure of such indemnifications due to the inherent uncertainty and the varying nature
of the contractual terms.

(9) Commitments and Contingencies

(a) Leases

As of December 31, 2006, the Company is not obligated under any capital leases, but did
have several capital leases for certain computer and office equipment that expired in early 2006. Payments under capital leases were approximately $5,000 and $123,000 for the years ended December 31, 2006 and 2005, respectively. Amounts related
to assets under non-cancelable capital leases that have been capitalized as property and equipment as of December 31, 2006 and 2005 are as follows:



|                               |  |              |          |   |      |   |          |  
|------------------------------ |  | ------------ | -------- | - | ---- | - | -------- | -
|                               |  | December 31, |         
|                               |  | 2006         |          |   | 2005 |  
|Computer equipment             |  | $            | 570,580  |   |      | $ | 570,580  |  
|Office equipment               |  |              | 23,789   |   |      |   | 23,789   |  
|Less: accumulated depreciation |  |              | (591,067 | ) |      |   | (553,327 | )
|                               |  |              |          |   |      |   |          |  
|                               |  | $            | 3,302    |   |      | $ | 41,042   |  
|                               |  |              |          |   |      |   |          |  

In addition, the Company is obligated under non-cancelable operating leases,
primarily for office space. Rent expense under operating leases was approximately $341,000 and $618,000 for the years ended December 31, 2006 and 2005, respectively. In February 2002 and in March 2004, the Company signed sub-lease agreements to
sublease portions of the Bethesda, Maryland facility. Both subleases expired in September 2005.

As of December 31, 2006, future
minimum lease payments are as follows:



|                              |  |                  |        
|----------------------------- |  | ---------------- | -------
|                              |  | Operating Leases
|Year Ending December 31, 2007 |  | $                | 391,380
|Year Ending December 31, 2008 |  |                  | 152,875
|                              |  |                  |        
|Total                         |  | $                | 544,255
|                              |  |                  |        

(b) Litigation

The Company is subject to legal proceedings and claims from time to time, which arise in the ordinary course of business. Other than the
matters described below, as of December 31, 2006, management is not aware of any asserted or pending litigation or claims against the Company that would have a material adverse effect on the Companys financial condition, results of
operations or liquidity.

On September 24, 2003, Trifocal, LLC (Trifocal) filed suit against the Company in
California Superior Court, County of Santa Clara, alleging, among other things, breach of contract, breach of statute, and intentional and negligent misrepresentation. Trifocal sought over $1 million in compensatory damages, plus interest, statutory
damages and attorneys fees and costs. In December 2003, the Company removed the case to the United States District Court for the Northern District of California, San Jose Division (the Court), denied any liability, and filed
counterclaims seeking damages of approximately $1.8 million. During trial proceedings held in January and February 2006, the Company withdrew its counterclaims and Trifocal reduced its damages claim to approximately $800,000, not including interest,
statutory damages, attorneys fees or costs. At the close of trial proceedings, the Court found in favor of the Company on $536,515 of Trifocals claims, and awarded Trifocal $50,937. In a subsequent decision of the Court on the remaining
open issues, the Court found in favor of the Company on all issues but the interest due on the original $50,937 award. The Court then entered judgment against the Company on April 19, 2006 for $83,417 (the Judgment). The total
amount of the Judgment, with interest and costs, of approximately $100,000 was paid in July 2006.

On November 14,
2002, the Company filed a joint patent infringement action with Black Diamond CCT Holding, LLC against Coupons, Inc. in the Federal District Court of Maryland. In this suit, the Company alleged infringement of two U.S. patents relating to online
coupons, rights to which the Company acquired from BrightStreet.com. On April 25, 2005 the companies reached a settlement, in which the Company will receive an aggregate of $1 million over the next two years (starting in May 2005), in exchange
for the release of all claims raised in the suit, including claims of lost profits



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##### Table of Contents

and past royalties. As part of the settlement, Coupons, Inc. has been granted a limited license to the two patents pursuant to which the Company may receive
royalty payments based on future revenue of Coupons, Inc. related to these patents. The $1 million is being recognized as Other Income on a cash receipts basis due to the uncertainty as to its collection.

On September 29, 2000, the Company settled all of the patent infringement litigation matters between the Company and CoolSavings.com,
Inc. (CoolSavings). The terms of the settlement provided for a cross-license between the Company and CoolSavings for each of the patents that were in dispute. Pursuant to this settlement, the Company paid $650,000 to CoolSavings on
September 29, 2000, at the signing of the settlement documents. The settlement agreement provided that the Company would make additional payments of up to $700,000, in certain circumstances. The Company accrued $250,000 for this contingency
during 2001 and has subsequently determined in the second quarter of 2006 that a reserve is no longer appropriate due to managements determination that the likelihood of the Company having to make this payment is remote.

(c) Employment Agreements

The
Company currently has no employment agreements with any of its officers and employees, but does have bonus agreements with certain officers and employees. The Company did not issue any bonuses during the years ended December 31, 2006 and 2005
and therefore no accrual for bonuses have been reflected in the financial statement.

(10) Capital Stock, Stock Plans and Warrants

(a) Authorized Capital

In November
2001, the Companys Board of Directors unanimously approved and holders of a majority of the outstanding shares of the Companys common stock executed a written stockholder consent approving (i) an amendment of the Companys
Restated Certificate of Incorporation, as amended (Restated Certificate of Incorporation), to increase the total authorized capital stock from 50,000,000 shares to 130,000,000 shares in connection with an increase in the authorized
common stock from 40,000,000 shares to 120,000,000 shares (this amendment did not effect a change to the 10,000,000 shares of authorized preferred stock); and (ii) an amendment to the Companys Amended and Restated Stock Option and
Incentive Plan, as amended (the Stock Option Plan), to increase the maximum number of shares available for issuance from 5,000,000 to 21,000,000.

(b) Preferred Stock

In November 2001, the Companys proposal to amend and restate its Articles of
Incorporation to authorize 10,000,000 shares of preferred stock was approved by a majority of the stockholders.

On
February 9, 2005, the Company was authorized to issue up to 5,000,000 shares of the Series C convertible preferred stock at an issue price of $4.00 per share. Associated with the Companys preferred stock financing, the Company received
$2,500,000 and issued 625,192 shares of Series C convertible preferred stock.

On March 31, 2005, 2,614,794 shares of
the Series C convertible preferred stock were issued in exchange for certain of the Companys 8% convertible promissory notes and associated accrued interest. If the Series C convertible preferred stock that was issued as part of the exchange
has not been converted to common stock pursuant to its terms prior to February 2, 2009, then, as additional consideration, the Company will issue to holder, a warrant to purchase shares of the Companys common stock. The exercise price for
each warrant will be equal to twenty percent below the average of the market prices for the five trading days prior to, but not including February 2, 2009.

As of December 31, 2006, there were 3,239,986 shares of Series C convertible preferred stock issued and outstanding. As of
December 31, 2006 the Series C convertible preferred stock is classified on the balance sheet as redeemable in accordance with EITF Topic D-98 Classification and Measurement of Redeemable Securities,due to the holders ability to
require redemption through a liquidation of the Company.

Voting: The Series C convertible preferred stock shall vote with the
shares of the common stock and any other class of capital stock of the Company having similar voting rights (and not as a separate class) at any annual or special meeting of stockholders of the Company, and may act by written consent in the same
manner as the common stock. Each holder of shares of Series C convertible preferred stock shall be entitled to such number of votes as shall be equal to the whole number of shares of common stock into which such holders aggregate number of
shares of Series C convertible preferred stock are convertible immediately after the close of business on the record date fixed for such meeting or the effective date of such written consent.

Rank: The Series C convertible preferred stock shall, with respect to dividend rights and rights on liquidation, winding-up and dissolution,
rank (i) senior to Series B convertible preferred stock, common stock and to each other class of capital stock of the Company or series of preferred stock of the Company established hereafter by the Board of Directors, the terms of which do



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##### Table of Contents

not expressly provide that such class or series ranks senior to, or on a parity with, the Series C convertible preferred stock as to dividend rights and
rights on liquidation, winding-up and dissolution of the Company (collectively referred to, together with the common stock of the Company, as Junior Securities); (ii) on a parity with each other class of capital stock of the Company
or series of preferred stock of the Company established hereafter by the Board of Directors, the terms of which expressly provide that such class or series shall rank on a parity with the Series C convertible preferred stock as to dividend rights
and rights on liquidation, winding-up and dissolution (collectively referred to as Parity Securities); and (iii) junior to each class of capital stock of the Company or series of preferred stock of the Company established hereafter
by the Board of Directors, the terms of which expressly provide that such class or series shall rank senior to the Series C convertible preferred stock as to dividend rights and rights on liquidation, winding-up and dissolution of the Company
(collectively referred to as Senior Securities).

Dividends: Subject to the preferential rights of the holders of
any class or series of Senior securities, when and if declared by the Board of Directors, the holders of shares of Series C convertible preferred stock shall be entitled to receive with respect to each share of Series C convertible preferred stock
dividends at the rate of 8% per annum of the original purchase price of $4.00 per share. Dividends shall accrue and shall be cumulative, whether or not declared, from the date of issue of such share of Series C convertible preferred stock.

Voluntary Conversion: Holders of Series C convertible preferred stock shall have the right at any time to convert any or all
outstanding shares of Series C convertible preferred stock together with any accrued but unpaid dividends into fully paid and non-assessable shares of common stock. Each outstanding share of Series C convertible preferred stock shall be convertible
into a number of shares of common stock equal to the original purchase price of $4.00 per share divided by the conversion price of $0.40 and all accrued but unpaid dividends shall convert into a number of shares of common stock equal to the amount
of such accrued but unpaid dividends as of the date of conversion divided by the conversion price of $0.40.

Mandatory
Conversion: If the market price per share of common stock is CHF 2.00 or higher for 30 consecutive trading days (such last trading day of such period being the Automatic Conversion Date) each share of Series C convertible
preferred stock shall automatically be converted (without any action required on the part of the holder thereof) into a number of shares of common stock equal to the original purchase price of $4.00 per share divided by the conversion price of $0.40
and all accrued but unpaid dividends shall be automatically converted into a number of shares of common stock equal to the amount of such accrued but unpaid dividends as of the Automatic Conversion Date divided by the conversion price of $0.40.

Liquidation: In the event of any liquidation, dissolution or winding-up of the Company, after payment or distribution of the
Companys assets shall be made to or set apart for the holders of Senior Securities, and before any payment or distribution of the Companys assets shall be made to or set apart for the holders of Junior Securities, the holders of shares
of Series C convertible preferred stock shall be entitled to receive, as to each share of Series C convertible preferred stock, an amount in cash equal to the sum of the $8.00 plus an amount equal to any accrued and unpaid dividends
(Liquidation Preference) of such share of Series C convertible preferred stock as of the date of liquidation (the aggregate of all such amounts, the Series C Liquidation Amount). If, upon any liquidation, dissolution or
winding-up of the Company, the Companys assets, or proceeds thereof, shall be insufficient to pay in full the Series C Liquidation Amount, then such assets, or proceeds thereof, shall be distributed among the shares of Series C convertible
preferred stock and all such other Parity Securities ratably in accordance with the respective amounts that would be payable on such shares of Series C convertible preferred stock and any such other Parity Securities if all amounts payable thereon
were paid in full. Any amounts distributed with respect to the Series C convertible preferred stock shall be allocated pro rata among the shares of Series C convertible preferred stock.

Subject to the rights of the holders of any Junior Securities other than the common stock, after the payment, in cash, to the holders of the shares of
Series C convertible preferred stock of the Series C Liquidation Amount and the payment to the holders of any Senior Securities and Parity Securities of the preference amounts payable to them upon such liquidation, dissolution or winding-up, the
holders of shares of Series C convertible preferred stock shall be entitled to participate in distributions of all remaining assets of the Company available for distribution to the holders of common stock, pro rata based on the number of shares of
common stock into which the shares of Series C convertible preferred stock were convertible immediately prior to the record date for such distribution.

(c) Stock Incentive and Option Plan

The Companys Amended and Restated Stock Incentive and Option Plan
provides for the grant of options, restricted stock and other stock-based compensation to its employees, consultants and advisors. As of December 31, 2006, there were 21,000,000 shares of common stock reserved for issuance and there were
6,750,103 options to purchase shares of common stock outstanding at a weighted average exercise price of $1.34 per share. Options granted under the plan typically vest over time, usually ratably over four years from the date of grant, with some
subject to acceleration in the event of a change of control of E-centives. Typically, an option granted under the plan expires ten years after it is granted. In addition, the plan allows for grants of options the vesting of which is tied to the
employees performance. The plan provides for the granting of both incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986 and non-statutory options.



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(d) Warrants

At December 31, 2006, the Company had outstanding warrants to purchase 6,355,000 shares of the Companys common stock with a weighted average exercise price of $0.20. During the year ended December 31,
2006, the Company did not issue or cancel any warrants and during the year ended December 31, 2005, the Company did not issue any warrants, but 619,485 warrants expired.



|          |  |               |      |                 |                  
|--------- |  | ------------- | ---- | --------------- | -----------------
|Warrants  |  | ExercisePrice |      | Expiration Date
|56,000    |  | $             | 0.10 |                 | December 31, 2008
|50,000    |  | $             | 4.50 |                 | December 31, 2008
|4,000     |  | $             | 6.00 |                 | December 31, 2008
|5,900,000 |  | $             | 0.14 |                 | April 7, 2008    
|345,000   |  | $             | 4.50 |                 | April 7, 2008    

(11) Stock-Based Compensation

The Companys Amended and Restated Stock Incentive and Option Plan provides for the grant of options, restricted stock and other stock-based compensation to its employees, consultants and advisors. Options
granted under the plan typically vest over time, usually ratably over four years from the date of grant, with some subject to acceleration in the event of a change of control of the Company. Typically, an option granted under the plan expires ten
years after it is granted. In addition, the plan allows for grants of options the vesting of which is tied to the employees performance. The plan provides for the granting of both incentive stock options within the meaning of Section 422
of the Internal Revenue Code of 1986 and non-statutory options.

In December 2004, the FASB issued FAS 123(R), Share-Based Payments.FAS 123(R) is a revision of FAS 123, Accounting for Stock-Based Compensation. FAS 123(R) supersedes APB Opinion No 25, Accounting for Stock Issued to Employees, and its related implementation guidance. FAS 123(R) addresses the
accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the companys equity instruments or that
may be settled by the issuance of such equity instruments. The statement eliminates the ability to account for share-based compensation transactions using the intrinsic value method and generally requires that such transactions be accounted for
using a fair-value-based method and recognized as expense in the statements of operations. In March 2005, the SEC issued SAB 107 regarding the Staffs interpretation of FAS 123(R). This interpretation provides the Staffs views
regarding interactions between FAS 123(R) and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public companies. The interpretive guidance is intended to assist companies in applying the
provisions of FAS 123(R) and investors and users of the financial statements in analyzing the information provided.

Following the guidance
prescribed in SAB 107, on January 1, 2006, the Company adopted FAS 123(R) using the modified prospective method, and accordingly, the Company has not restated the results of operations from prior interim periods and fiscal years. Under FAS
123(R), the Company is required to measure compensation cost for all stock-based awards at fair value on date of grant and recognize compensation expense on a straight-line basis over the service period over which the awards are expected to vest.
The Company recognized stock-based compensation expense associated with awards granted after January 1, 2006, and the unvested portion of previously granted awards that remain outstanding as of January 1, 2006.

Consistent with the valuation method of FAS 123, the Company is using the Black-Scholes model to value the stock-based compensation expense associated
with FAS 123(R). In addition, the Company estimates forfeitures when recognizing stock-based compensation expense. In estimating the grant date fair value calculations, the expected stock price volatility rates were based on historical volatilities
of the Companys common stock over a period commensurate with the expected life of the options. Since the Company does not pay dividends, the expected dividend yield used was 0%. The risk-free interest rates were based on the U.S. Treasury
yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The expected life of the options was determined using the simplified approach described under SAB 107.



|                    |  |              
|------------------- |  | -------------
|Expected volatility |  | 102% - 129%  
|Expected dividends  |  | 0%           
|Risk-free rate      |  | 2.46% - 5.10%
|Expected term       |  | 6.25 years   

The Company granted 448,000 options to employees during the year ended December 31, 2006 with
exercise prices ranging from $0.18 per share to $0.31 per share. These options were determined to have a total fair value of approximately $115,000 and a weighted average grant-date fair value per option of $0.26. For the year ended
December 31, 2006, the Company recognized stock-based compensation expense of approximately $140,000.



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A summary of option activity under the Companys plan, as of December 31, 2006 and changes
during the year then ended, is presented below:



|                               |  |           |   |  |                                 |      |                                              |           |                               |   |        
|------------------------------ |  | --------- | - |  | ------------------------------- | ---- | -------------------------------------------- | --------- | ----------------------------- | - | -------
|                               |  | Options   |   |  | Weighted- Average ExercisePrice |      | Weighted- Average Remaining Contractual Term |           | Aggregate Intrinsic Value
(1)
|Balance, January 1, 2006       |  | 7,425,353 |   |  | $                               | 1.25 |                                              | 5.1 years |                               |   |        
|Granted during the period      |  | 448,000   |   |  | $                               | 0.31 |                                              |           |                               |   |        
|Exercised during the period    |  | (316,000  | ) |  | $                               | 0.13 |                                              |           |                               | $ | 31,265 
|Cancelled during the period    |  | (837,250  | ) |  | $                               | 0.42 |                                              |           |                               |   |        
|Outstanding, December 31, 2006 |  | 6,720,103 |   |  | $                               | 1.34 |                                              | 3.9 years |                               | $ | 558,145
|                               |  |           |   | 
|Exercisable, December 31, 2006 |  | 6,315,603 |   |  | $                               | 1.41 |                                              | 3.6 years |                               | $ | 530,195

| | 
| | 

| | (1) | The aggregate intrinsic value is
the sum of the amounts by which the quoted market price of the Companys stock at December 29, 2006, $0.23 per share, exceeded the exercise price of the options, for those options for which the quoted market price exceeded the exercise
price (in-the-money-options).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A summary of the Companys non-vested options as of December 31,
2006, and changes during the year then ended, is presented below:



|                                |  |           |   |  |                                        |     
|------------------------------- |  | --------- | - |  | -------------------------------------- | ----
|                                |  | Options   |   |  | Weighted-Average Grant-Date Fair Value
|Non-vested at January 1, 2006   |  | 1,031,644 |   |  | $                                      | 0.40
|Granted                         |  | 448,000   |   |  | $                                      | 0.26
|Vested                          |  | (377,894  | ) |  | $                                      | 0.48
|Forfeited                       |  | (697,250  | ) |  | $                                      | 0.24
|Non-vested at December 31, 2006 |  | 404,500   |   |  | $                                      | 0.44

At December 31, 2006, the expected compensation cost of options outstanding but not yet
vested was approximately $136,000. The Company expects to recognize this cost over a weighted average period of approximately 2 years. The total fair value of options vested during the year ended December 31, 2006 was approximately $180,000.
The total intrinsic value of options exercised during the year ended December 31, 2006 was approximately $31,000.

Prior to January 1,
2006, the Company, as permitted under FAS 148, Accounting for Stock-Based CompensationTransition and Disclosure, which amended FAS 123, Accounting for Stock-Based Compensation, elected to continue to follow the intrinsic value
method in accounting for its stock-based employee compensation arrangement as defined by APB 25, Accounting for Stock Issued to Employees and related interpretations including FAS 44, Accounting for Certain Transactions involving Stock
Compensation. Under the intrinsic value method, the difference between the market price on the date of grant and the exercise price is charged to the results of operations over the vesting period on a straight-line method. Prior to the adoption
of FAS 123(R), the Company recognized stock-based compensation cost only for stock options issued with exercise prices set below market prices on the date of grant. For the year ended December 31, 2005, the Company recognized stock-based
compensation expense of approximately $182,000 for stock options issued with exercise prices set below market prices on the date of grant. Had the Company determined compensation cost based on the fair value at the grant date for its stock options
under FAS 123(R) and amortized such costs over the vesting period, the Companys net loss for the year ended December 31, 2005 would have been adjusted to the pro forma amounts presented below:



|                                                                                                                                               |  |                              |            |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | -
|                                                                                                                                               |  | Year ended December 31, 2005 |           
|Net loss applicable to common stockholders, as reported                                                                                        |  | $                            | (4,263,250 | )
|Add: Total stock-based employee compensation expense included in reported net loss, net of related tax effects                                 |  |                              | 182,444    |  
|Deduct: Total stock-based employee compensation expense as determined under fair value based method for all awards, net of related tax
effects |  |                              | (278,394   | )
|                                                                                                                                               |  |                              |            |  
|Pro forma net loss                                                                                                                             |  | $                            | (4,359,200 | )
|                                                                                                                                               |  |                              |            |  
|Basic and diluted net loss per share:                                                                                                          |  |                              |            |  
|As reported                                                                                                                                    |  | $                            | (0.07      | )
|Pro forma                                                                                                                                      |  |                              | (0.07      | )



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(12) Related Party Transactions

Peter Friedli, one of the Companys stockholders and directors, has relationships with several of the Companys investors and stockholders. He serves as the investment advisor to Venturetec, Inc., Pine,
Inc., InVenture, Inc., Joyce, Ltd., Nikatech, Inc., Spring Technology Corp. and USVentech, Inc. He also serves as President of US Venture 05, Inc. and Venturetec, Inc., as well as its parent corporation, New Venturetec AG. Mr. Friedli is also
the President of Friedli Corporate Finance, Inc., Belize, a consulting company that is utilized by the Company.

During the year ended
December 31, 2006, the Company issued three 10% convertible promissory notes with principal amounts totaling $1,500,000 and one 4% convertible promissory note with a principal amount of $1,000,000 to US Venture 05, Inc. and during the year
ended December 31, 2005 the Company issued one 10% convertible promissory note for $500,000 to Venturetec, Inc. and two 10% convertible promissory note with principal amounts totaling $4,000,000 to US Venture 05, Inc.

In July 1996, the Company entered into a consulting agreement with Friedli Corporate Finance, Inc., Belize, which has been renewed several times, with
the most recent expiring in November 2008. Under the agreement, Friedli Corporate Finance, Inc., Belize provides services to the Company in the form of consultation, advice and other assistance upon the Companys request. Such services may
include, but are not limited to, (a) providing general business, financial and investment advice to the Company during the term of the agreement, and (b) serving as liaison between Friedli Corporate Finance, Inc., Belize clients/investors
and the Company by disseminating information to such investors on behalf of the Company. Pursuant to this agreement, Friedli Corporate Finance, Inc., Belize is paid $4,000 per month plus reimbursement of expenses related to services. Consulting
expense under the Friedli Corporate Finance, Inc., Belize agreement was approximately $63,000 for each of the years ended December 31, 2006 and 2005. As a result of the help provided in securing the funds associated with the convertible
promissory notes and the preferred stock financing, Friedli Corporate Finance, Inc., Belize was paid $250,000 and $750,000 during the years ended December 31, 2006 and 2005, respectively, which Friedli Corporate Finance, Inc., Belize has
indicated to the Company will be distributed to a number of third party banks, affiliated entities and individuals who assisted in the financing effort.

(13) Segment Information

(a) Operating Segments

Starting in 2002, with the acquisition of substantially all of the assets of Consumer Review, Inc., the Company has two reportable
operating segments: Interactive Database Marketing division (IDBM) and ConsumerREVIEW.com. IDBM includes such services as data warehousing, online reporting, Internet couponing, e-mail marketing, strategic consulting and program
management, user experience design and development, and analytics and data mining; while ConsumerREVIEW.com includes on-line advertising and e-commerce services that are provided through its network of web communities.

Information as to the operations of the reportable operating segments as of and for the year ended December 31, 2006 and 2005 are set
forth below. The Companys chief operating decision maker evaluates performance based primarily on operating profit and cash generated from operations. The accounting policies of the operating segments are the same as those described in the
summary of significant accounting.



|                              |  |      |            |   |                    |   |           |                |  |   |                     |   |  |       |         |     |  |   |            |  
|----------------------------- |  | ---- | ---------- | - | ------------------ | - | --------- | -------------- |  | - | ------------------- | - |  | ----- | ------- | --- |  | - | ---------- | -
|2006                          |  | IDBM |            |   | ConsumerReview.com |   |           | Segment Totals |  |   | Unallocated Amounts |   |  | Total |        
|Operating revenue             |  | $    | 3,939,395  |   |                    | $ | 2,562,678 |                |  | $ | 6,502,073           |   |  | $     |        |     |  | $ | 6,502,073  |  
|Operating loss                |  |      | (1,591,827 | ) |                    |   | (133,814  | )              |  |   | (1,725,641          | ) |  |       |        |     |  |   | (1,725,641 | )
|Depreciation and amortization |  |      | 760,623    |   |                    |   | 10,134    |                |  |   | 770,757             |   |  |       |        |     |  |   | 770,757    |  
|Capital expenditures          |  |      | 330,322    |   |                    |   | 9,631     |                |  |   | 339,953             |   |  |       |        |     |  |   | 339,953    |  
|Assets                        |  |      | 3,402,595  |   |                    |   | 540,619   |                |  |   | 3,943,214           |   |  |       | 586,501 | (1) |  |   | 4,529,265  |  
|                              |  |      |            |   |                   
|2005                          |  | IDBM |            |   | ConsumerReview.com |   |           | Segment Totals |  |   | Unallocated Amounts |   |  | Total |        
|Operating revenue             |  | $    | 3,723,944  |   |                    | $ | 2,292,850 |                |  | $ | 6,016,794           |   |  | $     |        |     |  | $ | 6,016,794  |  
|Operating loss                |  |      | (2,404,637 | ) |                    |   | (801,674  | )              |  |   | (3,206,311          | ) |  |       |        |     |  |   | (3,206,311 | )
|Depreciation and amortization |  |      | 217,758    |   |                    |   | 546,154   |                |  |   | 763,912             |   |  |       |        |     |  |   | 763,912    |  
|Capital expenditures          |  |      | 66,542     |   |                    |   | 12,789    |                |  |   | 79,331              |   |  |       |        |     |  |   | 79,331     |  
|Assets                        |  |      | 3,627,200  |   |                    |   | 485,417   |                |  |   | 4,112,617           |   |  |       | 467,295 | (1) |  |   | 4,579,912  |  

| | 
| | 

| | (1) | The asset, unallocated amounts, represents corporate assets that consist of cash and cash equivalents.
| | --- | ------------------------------------------------------------------------------------------------------



F-19



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##### Table of Contents

(b) Customers

For the year ended December 31, 2006, two of the Companys Interactive Database Marketing division customers represented 10% or more of the Companys revenue.

Reckitt Benckiser contributed $1.8 million in revenue for both the years ended December 31, 2006 and 2005, or 28% and 31%, respectively, of the
Companys revenue for each of the years. This customers original agreement expired in October 2002, and the customer has subsequently entered into five renewal agreements, with the most recent one expiring on December 31, 2007.

TracFone Wireless, Inc. contributed $804,000 or 12% of the Companys revenue for the year ended December 31, 2006. This
customers original agreement began in late December 2005 and ended in March 2006. The customer has subsequently entered into additional agreements that end in May 2007.

No other customer represented 10% or more of the Companys revenue for the years ended December 31, 2006 and 2005.

(14) Selected Quarterly Financial Data (unaudited)

The following tables contain unaudited Statement of Operations information for each quarter of 2006 and 2005. The Company believes that the following information reflects all normal recurring adjustments necessary for a fair presentation of
the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.



|                                            |  |             |            |   |             |   |            |             |  |   |             |   |  |   |           |  
|------------------------------------------- |  | ----------- | ---------- | - | ----------- | - | ---------- | ----------- |  | - | ----------- | - |  | - | --------- | -
|                                            |  | 2006        |           
|                                            |  | 1st Quarter |            |   | 2nd Quarter |   |            | 3rd Quarter |  |   | 4th Quarter |  
|Revenues                                    |  | $           | 1,380,948  |   |             | $ | 1,449,386  |             |  | $ | 1,761,876   |   |  | $ | 1,909,863 |  
|Gross profit                                |  |             | 626,501    |   |             |   | 629,668    |             |  |   | 1,001,124   |   |  |   | 1,255,109 |  
|Operating (loss) profit                     |  |             | (950,878   | ) |             |   | (604,058   | )           |  |   | (291,945    | ) |  |   | 121,240   |  
|Loss before income tax                      |  |             | (1,354,486 | ) |             |   | (909,774   | )           |  |   | (602,445    | ) |  |   | (229,590  | )
|Net loss applicable to common stockholders  |  |             | (1,354,486 | ) |             |   | (909,774   | )           |  |   | (602,445    | ) |  |   | (229,590  | )
|Basic and diluted net loss per common share |  | $           | (0.02      | ) |             | $ | (0.01      | )           |  | $ | (0.01       | ) |  | $ | (0.00     | )
|                                            | 
|                                            |  | 2005        |           
|                                            |  | 1st Quarter |            |   | 2nd Quarter |   |            | 3rd Quarter |  |   | 4th Quarter |  
|Revenues                                    |  | $           | 1,484,718  |   |             | $ | 1,513,218  |             |  | $ | 1,319,028   |   |  | $ | 1,699,830 |  
|Gross Profit                                |  |             | 734,456    |   |             |   | 805,109    |             |  |   | 549,099     |   |  |   | 946,402   |  
|Operating loss                              |  |             | (892,350   | ) |             |   | (883,288   | )           |  |   | (931,922    | ) |  |   | (498,751  | )
|Loss before income tax                      |  |             | (1,323,337 | ) |             |   | (1,013,163 | )           |  |   | (1,102,770  | ) |  |   | (823,980  | )
|Net loss applicable to common stockholders  |  |             | (1,323,337 | ) |             |   | (1,013,163 | )           |  |   | (1,102,770  | ) |  |   | (823,980  | )
|Basic and diluted net loss per common share |  | $           | (0.02      | ) |             | $ | (0.02      | )           |  | $ | (0.02       | ) |  | $ | (0.01     | )



F-20



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##### Table of Contents

INDEX TO EXHIBITS



|               |  |                                                                                                                                                                                                                                                                         
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                             
|3.1(1)         |  | Restated Certificate of Incorporation of E-centives, Inc.                                                                                                                                                                                                               
|               | 
|3.3(1)         |  | Amended and Restated Bylaws of E-centives, Inc.                                                                                                                                                                                                                         
|               | 
|4.2(1)         |  | Registration Rights Agreement, dated February 18, 2000, by and among E-centives, Inc. and certain stockholders named therein.                                                                                                                                           
|               | 
|5.1(1)+        |  | 1996 Stock Incentive Plan.                                                                                                                                                                                                                                              
|               | 
|5.2+           |  | Amended and Restated Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 99.2 to the E-centives Registration Statement on Form S-8 (Registration No.
333-58244))                                                                              
|               | 
|10.1           |  | Amendment No. 1 to Convertible Promissory Note dated November 21, 2005 between E-centives, Inc. and US Venture 05, dated September 25, 2006 (incorporated herein by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K filed September 29, 2006).    
|               | 
|10.2           |  | Amendment No. 1 to Convertible Promissory Note dated June 15, 2006 between E-centives, Inc. and US Venture 05, dated September 25, 2006 (incorporated herein by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K filed September 29, 2006).        
|               | 
|10.3           |  | Amendment No. 2 to Convertible Promissory Note dated January 26, 2006 between E-centives, Inc. and US Venture 05, dated September 25, 2006 (incorporated herein by reference to Exhibit 10.3 to
the Companys Current Report on Form 8-K filed September 29, 2006).     
|               | 
|10.4           |  | Amendment No. 3 to Convertible Promissory Note dated September 30, 2005 between E-centives, Inc. and US Venture 05, dated September 25, 2006 (incorporated herein by reference to Exhibit 10.4 to
the Companys Current Report on Form 8-K filed on September 29, 2006).
|               | 
|10.5           |  | Amendment No. 4 to Convertible Promissory Note dated August 19, 2005 between E-centives, Inc. and Venturetec, dated September 25, 2006 (incorporated herein by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on September 29, 2006).      
|               | 
|10.6           |  | Amendment No. 2 to Convertible Promissory Note dated June 11, 2003 between E-centives, Inc. and LGT, dated September 26, 2006 (incorporated herein by reference to Exhibit 10.6 to the
Companys Current Report on Form 8-K filed on September 29, 2006).               
|               | 
|10.7           |  | Amendment No. 2 to Convertible Promissory Note dated June 11, 2003 between E-centives, Inc. and LGT, dated September 26, 2006 (incorporated herein by reference to Exhibit 10.7 to the
Companys Current Report on Form 8-K filed on September 29, 2006).               
|               | 
|10.8           |  | Amendment No. 2 to Convertible Promissory Note dated June 11, 2003 between E-centives, Inc. and LGT, dated September 26, 2006 (incorporated herein by reference to Exhibit 10.8 to the
Companys Current Report on Form 8-K filed on September 29, 2006).               
|               | 
|10.9           |  | Amendment No. 2 to Convertible Promissory Note dated June 20, 2003 between E-centives, Inc. and LGT, dated September 26, 2006 (incorporated herein by reference to Exhibit 10.9 to the
Companys Current Report on Form 8-K filed on September 29, 2006).               
|               | 
|10.10          |  | Amendment No. 2 to Convertible Promissory Note dated June 11, 2003 between E-centives, Inc. and LGT, dated September 26, 2006 (incorporated herein by reference to Exhibit 10.10 to the
Companys Current Report on Form 8-K filed on September 29, 2006).              
|               | 
|10.11          |  | Amendment No. 1 to Convertible Promissory Note dated May 28, 2003 between E-centives, Inc. and LGT, dated September 26, 2006 (incorporated herein by reference to Exhibit 10.11 to the
Companys Current Report on Form 8-K filed on September 29, 2006).               
|               | 
|10.12          |  | Amendment No. 1 to Convertible Promissory Note dated November 10, 2003 between E-centives, Inc. and Thomas Schmidheiny, dated October 16, 2006 (incorporated herein by reference to Exhibit 10.1
to the Companys Current Report on Form 8-K filed on October 19, 2006).
|               | 
|10.13          |  | Amendment No. 1 to Convertible Promissory Note dated June 20, 2003 between E-centives, Inc. and Franca Segre, dated October 16, 2006 (incorporated herein by reference to Exhibit 10.2 to the
Companys Current Report on Form 8-K filed on October 19, 2006).          
|               | 
|10.14          |  | Amendment No. 2 to Convertible Promissory Note dated May 28, 2003 between E-centives, Inc. and Union Bancaire Privée, dated October 17, 2006 (incorporated herein by reference to Exhibit
10.3 to the Companys Current Report on Form 8-K filed on October 19, 2006).  
|               | 
|10.15*         |  | Amendment No. 2 to Convertible Promissory Note dated June 11, 2003 between E-centives, Inc. and Bank Julius Baer & Co. dated October 17, 2006.                                                                                                                          
|               | 
|10.16*         |  | Convertible Promissory Note dated February 23, 2004 by and between E-centives, Inc. and Bank Julius Baer & Co.                                                                                                                                                          
|               | 
|10.17          |  | Convertible Promissory Note dated January 26, 2006 by and between E-centives, Inc. and US Venture 05, Inc. (incorporated by reference to Exhibit 4.1 to the Companys Quarterly Report on
Form 10-QSB filed on May 15, 2006).                                           
|               | 
|10.18          |  | Convertible Promissory Note dated June 15, 2006 by and between E-centives, Inc. and US Venture 05, Inc. (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K
filed on June 21, 2006).                                                  



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##### Table of Contents

|      |  |                                                                                                                                                                                                                                 
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.19 |  | Convertible Promissory Note dated September 19, 2006 by and between E-centives, Inc. and US Venture 05, Inc. (incorporated by reference to Exhibit 4.1 to the Companys Current Report
on Form 8-K filed on September 29, 2006).
|      | 
|10.20 |  | Convertible Promissory Note dated October 13, 2006 by and between E-centives, Inc. and US Venture 05, Inc. (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form
8-K filed on October 19, 2006).    
|      | 
|23.1* |  | Consent of BDO Seidman, LLP.                                                                                                                                                                                                    
|      | 
|31.1* |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                             
|      | 
|31.2* |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                             
|      | 
|32.1* |  | Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished under Exhibit 32 of Item 601 of Regulation S-K.                                                               
|      | 
|32.2* |  | Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished under Exhibit 32 of Item 601 of Regulation S-K.                                                               

---

|(1) | Incorporated by reference to the Registrants Registration Statement on Form S-1 (Registration No. 333-42574).
|--- | --------------------------------------------------------------------------------------------------------------

|* | Filed or furnished with this report.
|- | ------------------------------------

|+ | Management contract or compensatory plan or arrangement.
|- | --------------------------------------------------------