##### Table of Contents

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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, 2005

OR



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

For the transition period from  to

Commission File Number: 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 Employer Identification 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, 2005: $ 6,530,127.

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 17,2006 was $9,607,729(1).

(1)Assumes an exchange rate of
1.295 Swiss Francs per one U.S. Dollar as of March 17, 2006.

As of March 17, 2006, there were 62,185,256
shares of issuers common stock outstanding.

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



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##### Table of Contents

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 .                                                             |  | 15  
|           |  |          | 
|PART II    |  |          |  |                                                                                                                   |  |     
|           |  | Item 5.  |  | Market for Common Equity and Related Stockholder Matters .                                                        |  | 16  
|           |  | Item 6.  |  | Managements Discussion And Analysis or Plan of Operations .                                                      |  | 18  
|           |  | Item 7   |  | Financial Statements .                                                                                            |  | 25  
|           |  | Item 8.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .                            |  | 25  
|           |  | Item 8A. |  | Controls And Procedures .                                                                                         |  | 25  
|           |  | Item 8B. |  | Other Information .                                                                                               |  | 26  
|           |  |          | 
|PART III   |  |          |  |                                                                                                                   |  |     
|           |  | Item 9.  |  | Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(A) of The Exchange Act . |  | 26  
|           |  | Item 10. |  | Executive Compensation .                                                                                          |  | 29  
|           |  | Item 11. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .                  |  | 30  
|           |  | Item 12. |  | Certain Relationships and Related Transactions .                                                                  |  | 32  
|           |  | Item 13. |  | Exhibits .                                                                                                        |  | 34  
|           |  | Item 14. |  | Principal Accounting Fees and Services                                                                            |  | 34  
|           |  |          | 
|SIGNATURES |  |          |  |                                                                                                                   |  | 35  



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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 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Of our total net revenue of $6.0
million for the year ended December 31, 2005, one of our Interactive Database Marketing Division customers, Reckitt Benckiser, contributed $1.9 million, or 31%, 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, 2006. 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, 2005, 2004 and 2003, the Interactive Database Marketing Division generated 62%, 55%
and 56%, respectively, of our total revenue. Approximately 50%, 41% and 81% of the divisions revenue for the years ended December 31, 2005, 2004 and 2003, 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.

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



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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, 2005, 2004 and 2003, the ConsumerREVIEW.com division generated 38%, 45% and 44%, 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 2005, 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.

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



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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 $943,000, $1.3 million and $2.5 million in 2005, 2004 and 2003, respectively, 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.

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.



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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 below, 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 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.



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Employees

As of December 31, 2005, we employed a total of 46 employees, 45 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, 2005, we had an accumulated deficit of approximately $144.2 million. We incurred net losses in 2005, 2004,
and 2003 of $4.3 million, $10.8 million and $12.3 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 31%, 22% and 45% of our revenue for the years ended December 31, 2004, 2003 and 2002, respectively, was derived from one of our Interactive Database Marketing Division customers, Reckitt Benckiser.
Our contract with this customer expires on December 31, 2006. While this customer has renewed its contract for the past four 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 2007. This forecast is based on our plan to use the funds from the financing commitment described below.

Friedli Corporate Finance has provided us with a written commitment to provide us with debt or equity financing of up to $20 million in the aggregate. Of
the $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 have borrowed $11 million of the $12 million available pursuant to these
convertible promissory notes. In March 2005 we finalized the terms of a preferred stock financing with Friedli Corporate Finance that consists 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 third quarter of 2005, we issued two short-term 10% convertible promissory notes totaling $1.5 million and during the forth quarter of 2005 we issued one long-term 10% convertible
promissory notes for $3 million.



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Of the $20 million aggregate commitment, $2 million is remaining, which is not sufficient to sustain
operations through 2006. However, Friedli Corporate Finance has committed to providing our additional financing needs for 2006. If Friedli Corporate Finance is unable to fulfill its remaining financing commitment to us or we are not offered
financing by Friedli Corporate Finance 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 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.



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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.

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
| | - |  | -------------------------------



| |  |  | online 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.



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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.

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. For more information on pending intellectual property litigation, see Item 3Legal Proceedings for further details.

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.



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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.

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. We have gone from 60 employees at June 30, 1999 to 153 employees at December 31, 2001 to 45 employees at December 31, 2005. 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.

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



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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.

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,
2005, our Board of Directors owned directly or indirectly approximately 51.2% 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



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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.

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. The prior lease, which was renegotiated during 2002 and expired in September 2005, was for approximately 23,500 square feet with monthly rent payments
of approximately $72,000. In March 2002, we subleased approximately 10,000 square feet of the office space, with a monthly base rent of approximately $22,000. In February 2004, we signed another sublease agreement with a monthly base rent of
approximately $2,500. Both sub-leases expired in September 2005.

We also maintain an office in California. Through a lease that expired in
November 2004, we had approximately 11,000 square feet in Foster City with monthly rental payments of approximately $20,000. In December 2004, we entered into an 8,000-square-foot office space lease in San Mateo with monthly rent payments of
approximately $11,000.

ITEM 3  LEGAL PROCEEDINGS

On or about September 24, 2003, Trifocal, LLC (Trifocal)
filed suit against us in California Superior Court, County of Santa Clara, alleging, among other things, breach of contract, breach of statute, and intentional and negligent misrepresentation. Trifocal at one point claimed over $1 million in
compensatory money 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 about $1.8 million. These counterclaims were dismissed pursuant to our own request during trial proceedings held in January and February 2006. At trial, Trifocal also
revised its claims, reducing the damages sought to approximately $800,000 not including interest, statutory damages, attorneys fees and costs. At the close of trial proceedings, the Court issued a ruling on the predominant issues in the case.
The Court found in favor of us on approximately $536,515 of Trifocals claims, and awarded Trifocal approximately $50,937. This left some additional issues, including whether Trifocal is entitled to interest, statutory penalties, and/or
attorneys fees on any of the $50,937 awarded to Trifocal, which the Court took under submission pending further briefing. We filed briefs opposing any further recovery by Trifocal with the exception of $13,356 in interest. In its post-trial
brief, Trifocal claimed that it is entitled to not only interest, statutory penalties, and/or attorneys fees, but that it is also entitled to further damages not included in the Courts findings at the close of trial proceedings. In
total, Trifocal now seeks, exclusive of attorneys fees, approximately $200,000 in additional sums above the Courts original award of $50,937. In the April 2006 timeframe, a decision of the Court is expected as to what amount of these
additional damages will be awarded to Trifocal. Following this decision, either party, or both parties, may make a motion to obtain recoverable costs and attorneys fees as the prevailing party, which are estimated at approximately $60,000.
Trifocal will likely claim that it is the prevailing party because it received some recovery, and we will likely claim that it was the prevailing party because Trifocal only prevailed on a modest percentage of what it originally sought. Regarding
this suit, we have recorded a provision in the financial statements as of December 31, 2005.

On or about 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 mutually agreeable settlement. As a result of the settlement, the lawsuit was dismissed, we will receive an aggregate of $1 million over two years (starting in May 2005),
in exchange for a release from us of all claims raised in the litigation, including claims of lost profits and past royalties, and Coupons, Inc. has been granted a limited license to the two patents, pursuant to which we may receive future royalty
payments based on future revenue of Coupons, Inc. related to these patents as agreed to in the settlement agreement.



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There have been no material additions to, or changes in status of the settlement with CoolSavings.com,
Inc. (CoolSavings). The terms of the settlement with CoolSavings provided for a cross-license between CoolSavings and us for each of the patents in dispute. There are no royalties or other incremental payments involved in the
cross-license. Pursuant to this settlement, we paid $650,000 to CoolSavings on September 29, 2000, at the signing of the settlement documents. In addition, we may have to make payments of up to $700,000 to CoolSavings as follows:



| |  |  | $250,000, which was accrued for during 2001, was due if, within one year from the date of entry of the Stipulated Order of Dismissal filed on or about March 3, 2000, Catalina
Marketing Corporation prevailed in a motion for summary judgment in a separate litigation between it and CoolSavings, involving the CoolSavings patent currently in dispute. However, a dispute has arisen between the parties regarding whether
this portion of the license fee is actually due, despite Catalina Marketing Corporation not prevailing in its motion. This dispute is based in part on the fact that we may be entitled to a license under the CoolSavings patent at issue as a
result of our acquisition of the assets of BrightStreet.com, which acquisition included the settlement of infringement litigation between CoolSavings and BrightStreet.com regarding the same CoolSavings patent at issue in our settled litigation. In
2001, CoolSavings asserted that the $250,000 contingent payment was due. We disputed that the payment was due to CoolSavings and continue to believe that the claim is without merit. Although there has been no formal resolution to this dispute, there
have been no communications between the parties concerning this issue since 2002.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Up to $450,000 if and to the extent the CoolSavings patent in dispute survives the pending reexamination proceedings at the Patent and Trademark Office that were initiated by
a third party. This component of the settlement arrangement has not been accrued for because, in the opinion of management, the possibility of us having to make this payment continues to remain remote.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Depending on the amount and timing, an unfavorable resolution of some or all of these matters could materially adversely affect our business, financial
condition, results of operations and cash flow in a particular period.

In addition, from time to time, we are a party to various legal
proceedings incidental to our business. None of these proceedings is considered by management to be material to the conduct of our business, operations or financial condition.

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

We held our annual meeting of
stockholders on December 22, 2005 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.



|                                                                             |  |             |  |                 |  |                  |  |            
|---------------------------------------------------------------------------- |  | ----------- |  | --------------- |  | ---------------- |  | -----------
|MATTER DESCRIPTION                                                           |  | FOR Votes |  | AGAINST Votes |  | WITHHELD Votes |  | Abstentions
|Election of Directors:                                                       |  |             |  |                 |  |                  |  |            
|Kamran Amjadi                                                                |  | 52,354,156  |  |                |  |                 |  | 42,199,660 
|Mehrdad Akhavan                                                              |  | 52,354,156  |  |                |  |                 |  | 42,199,660 
|Peter Friedli                                                                |  | 52,354,156  |  |                |  |                 |  | 42,199,660 
|Sean Deson                                                                   |  | 52,354,156  |  |                |  |                 |  | 42,199,660 
|                                                                             |  |             |  |                
|Ratify BDO Seidman, LLP as our independent registered public accounting firm |  | 52,354,156  |  |                |  |                 |  | 42,199,660 



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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 |  | EXCHANGERATES
|                                 |  | HIGH         |  | LOW        |  | HIGH          |      | LOW |   | HIGH |  | LOW    
|2004                             |  |              |  |            |  |               |      |     |   |      |  |         |  |        
|Quarter ended March 31, 2004     |  | CHF 0.90     |  | CHF 0.61   |  | $             | 0.71 |     | $ | 0.48 |  | 0.78340 |  | 0.79450
|Quarter ended June 30, 2004      |  | CHF 0.79     |  | CHF 0.63   |  | $             | 0.63 |     | $ | 0.50 |  | 0.78950 |  | 0.80240
|Quarter ended September 30, 2004 |  | CHF 0.67     |  | CHF 0.51   |  | $             | 0.54 |     | $ | 0.40 |  | 0.81160 |  | 0.78410
|Quarter ended December 31, 2004  |  | CHF 0.65     |  | CHF 0.45   |  | $             | 0.54 |     | $ | 0.39 |  | 0.82850 |  | 0.86090
|                                 |  |              |  |            |  |              
|2005                             |  |              |  |            |  |               |      |     |   |      |  |         |  |        
|                                 |  |              |  |            |  |              
|Quarter ended March 31, 2005     |  | CHF 0.52     |  | CHF 0.43   |  | $             | 0.44 |     | $ | 0.37 |  | 0.84360 |  | 0.85920
|Quarter ended June 30, 2005      |  | CHF 0.51     |  | CHF 0.43   |  | $             | 0.43 |     | $ | 0.35 |  | 0.83840 |  | 0.82130
|Quarter ended September 30, 2005 |  | CHF 0.48     |  | CHF 0.40   |  | $             | 0.37 |     | $ | 0.32 |  | 0.77270 |  | 0.80960
|Quarter ended December 31, 2005  |  | CHF 0.43     |  | CHF 0.34   |  | $             | 0.33 |     | $ | 0.26 |  | 0.75860 |  | 0.77660

Holders

As of December 31, 2005, there were approximately 80 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.

Securities Authorized for Issuance Under Equity Compensation Plans

Below is information as of December 31, 2005 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 securityholders (1) |  | 7,335,353                                                                                | (2) |  | $                                                                        | 1.23 |                                                                                                                                        | 12,574,647 | (2)
|Equity compensation plans not approved by securityholders |  |                                                                                         |     |  |                                                                          |     |                                                                                                                                        |           |    
|                                                          |  |                                                                                          |     |  |                                                                          |      |                                                                                                                                        |            |    
|Total                                                     |  | 7,335,353                                                                                |     |  |                                                                          |      |                                                                                                                                        | 12,574,647 |    
|                                                          |  |                                                                                          |     |  |                                                                          |      |                                                                                                                                        |            |    

---

|(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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Recent Sale and Issuance of Unregistered Securities

Options

During the year ended December 31, 2005, we granted
options to purchase a total of 304,000 shares of common stock under our stock incentive plan to certain of our employees. During that period, 363,800 options were exercised and 486,750 options were cancelled due to the forfeiture of options
resulting from employees leaving the Company and unearned performance based options.

Convertible Promissory Notes

We issued the following convertible promissory notes during the year ended December 31, 2005:



| |  |  | An 8% convertible promissory note with a principal amount of $500,000 and a maturity date of January 28, 2008 was issued to InVenture, Inc. on January 24, 2005. On
March 31, 2005, this convertible promissory note (along with certain other of our outstanding convertible promissory notes issued in prior years) was converted into shares of newly created Series C convertible preferred stock (see below for
further details).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A 10% convertible promissory note with a principal amount of $500,000 and a maturity date of March 31, 2006 was issued to Venturetec, Inc. on July 25, 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A 10% convertible promissory note with a principal amount of $1,000,000 and a maturity date of March 31, 2006 was issued to US Venture 05, Inc. on September 30, 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A 10% convertible promissory note with a principal amount of $3,000,000 and a maturity date of November 21, 2007 was issued to US Venture 05, Inc. on November 22, 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



| |  |  | a 10% interest rate;
| | - |  | --------------------



| |  |  | 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 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

Series B Convertible Preferred Stock

In December 2002, in connection with our purchase of substantially all of the assets of Consumer Review, Inc., we issued 400,000 shares of our Series B
convertible preferred stock as part of the consideration for the acquisition. Upon the one year anniversary of the closing date, the conversion rate for each share of the Series B convertible preferred stock was determined based upon the achievement
of contractually defined revenue during the calculation period and was adjusted pursuant to a defined schedule. Based upon the revenue generated by the ConsumerREVIEW.com division during the calculation period, the conversion rate for each share of
the Series B convertible preferred stock was adjusted to 8 to 1. In May 2005, the 400,000 shares of Series B convertible preferred stock automatically converted into 3,200,000 shares of common stock.

Series C Convertible Preferred Stock

In March 2005, we finalized the terms of a preferred stock financing with Friedli Corporate Finance, which consists of an offering of shares of a newly created series of preferred stock designated Series C convertible preferred stock. The
Series C convertible preferred stock 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. Associated with the preferred stock financing, as of December 31, 2005, we received $2,500,000 and issued 625,192 shares of Series C convertible preferred stock.



17



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In connection with the preferred stock financing, on March 31, 2005, certain of our convertible
promissory noteholders (collectively, the Noteholders) agreed to exchange their existing convertible promissory notes for shares of the newly created Series C convertible preferred stock. Under these exchange agreements, we issued
2,614,793 shares of Series C convertible preferred stock in exchange for convertible promissory notes totaling $9,750,000, along with accrued interest of approximately $709,000. If the Series C convertible preferred stock has not been converted to
common stock pursuant to its terms prior to February 2, 2009, then, as additional consideration, we will issue to the Noteholder, a warrant to purchase shares of our 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.

On
December 31, 2005, the cumulative dividend value of the undeclared dividends was approximately $722,000.

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 $4.3 million and $10.8 million for the years ended December 31, 2005 and 2004, 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 decrease our losses over the past few years. These have 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 recover, marketers
will shift more of their marketing budgets online. We believe this will improve demand for Internet based marketing programs. According to Forrester Research, the interest of marketers in direct, digital marketing will push online marketing spending
to $15.6 billion by 2008.

During 2005, we expanded our list of clients and continued to focus on further building our products and
services through internal development and corporate acquisition. We gained additional new clients through our internal sales force, and expanded our relationship with existing clients through the provision of additional products and services. We
have recently 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 changed 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 revamped and expanded our
client services



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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, 2005 compared to year ended December 31, 2004:

Revenue. Revenue increased by $631,000 to $6,017,000 for the year ended December 31, 2005, compared to $5,386,000 for the year ended
December 31, 2004; this was a 12% increase over prior year. Approximately $14,000 of the increase relates to royalties associated with the settlement of our litigation with Coupons, Inc. Per the settlement, we are receiving royalties based upon
future revenue that Coupons, Inc. earns relating to the patents licensed to them. (See Item 3  Legal Proceedings, for further details.)

The Interactive Database Marketing divisions revenue of $3.7 million was higher by $737,000 when compared to the prior year. Approximately $650,000 of the increase can be attributed to our largest customer, Reckitt Benckiser. The
increase is primarily due to larger renewal agreement for the year ended December 31, 2005 and additional services provided to Reckitt Benckiser throughout the year. The ConsumerREVIEW.com divisions revenue of $2.3 million was lower by
$136,000 primarily due to lower e-commerce related revenue. To increase our future revenue, we are focusing 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 related personnel costs, depreciation of servers, content costs, network and hosting charges. For the year ended December 31, 2005, cost of revenue of $2,982,000 was $117,000 higher than the $2,865,000 for the year ended
December 31, 2004, this represented a 4% increase in expense. Although network and hosting charges and depreciation was lower for the year ended December 31, 2005, personnel related costs were higher due to the increase in staff in our
client services team.

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 expenses
decreased by $416,000 to $943,000 for the year ended December 31, 2005, compared to $1,359,000 for the year ended December 31, 2004. The reduction in cost can primarily be attributed to the reduction in staff. 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. For the year ended December 31, 2005, general
and administrative expenses decreased $4,185,000 to $4,007,000 when compared to $8,192,000 for the year ended December 31, 2004. Approximately $1 million of the decrease relates to lower amortization expense resulting from some of the
intangible assets associated with the BrightStreet.com acquisition being fully amortized by the end of 2004. The decrease in expense also reflects lower professional fees due to the settlement of the patent infringement litigation, lower
professional fees due to reversal of prior years expenses associated with payment agreements with several professional service vendors, as well as lower rent and depreciation.

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 of $1,442,000 for the year ended December 31, 2005 were lower by $149,000, a decrease from $1,591,000 over the year ended December 31,
2004. Approximately $43,000 of the decrease is the result of lower commissions associated with the lower revenue for the ConsumerREVIEW.com division. The remaining portion of the decrease can be attributed an overall reduction in marketing efforts.



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Stock-based Compensation. Stock-based compensation expense 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. Stock-based compensation expenses decreased by $267,000 to $182,000 for the year ended December 31, 2004, compared to $449,000 for the year ended December 31, 2004. The lower expense
was the result of options fully vesting and options being cancelled for employees who had not fully vested due to termination of employment.

Other Income. Other income for the year ended December 31, 2005 was $333,000, while there was no other income for the year ended December 31, 2004. Other income relates to payments associated with the settlement of our
litigation with Coupons, Inc. Per the settlement, we are receiving an aggregate of $1 million dollars over a two year period. (See Item 3  Legal Proceedings, for further details.)

Interest Expense. Interest expense primarily consists of interest related to the convertible promissory notes we began issuing in the second
quarter of 2003, deferred financing fee amortization and interest for financing agreements. Interest expense of $1,070,000 for the year ended December 31, 2005 was $662,000 lower than the interest expense of $1,732,000 for the year ended
December 31, 2004. This decrease is primarily related to the convertible promissory notes that were exchanged for Series C convertible preferred stock in March 2005. The exchange resulted in the reversal of $885,000 in accrued interest for
final payment charges that were no longer payable and $401,000 higher amortization of deferred financing fees associated with the exchanged convertible promissory notes.

Net Loss. Net loss decreased by $6.5 million to $4.3 million for the year ended December 31, 2005, compared to $10.8 million for the year ended December 31, 2004. This is the combined effect of higher
revenue of $631,000, decreased operating costs of $4.9 million, increased other income of $333,000 and lower interest expense of $662,000.

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 that consisted of an offering of shares of a newly created series of preferred stock designated Series C convertible preferred stock. As of December 31, 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.

In July 2005, September 2005 and November 2005 we issued 10% convertible promissory notes for
$500,000, $1,000,000 and $3,000,000 respectively.

On December 31, 2005, we held $467,000 in cash and cash equivalents. Cash used in
operating activities for the year ended December 31, 2005 was $4.6 million, a decrease of $1.5 million over the $6.1 million for the year ended December 31, 2004. A portion of the decrease in cash used in operating activities reflects the
decrease in net loss adjusted for non-cash operating expenses of $2 million for the year ended December 31, 2005 versus the $7.6 million for the year ended December 31, 2004. The lower net loss adjusted for non-cash operating expenses for
the year ended December 31, 2005 was offset by the large decrease in accounts payable and accrued expenses at December 31, 2005 versus December 31, 2004.

Investing activities for the year ended December 31, 2005 used $1,893,000, while investing activities for the year ended December 31, 2004 used $59,000 in cash. 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, $16,000 for the security deposit for the Bethesda office
lease and a decrease in restricted cash of $70,000 due to the return



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of the security deposit associated with prior lease for the Bethesda, MD office lease. Cash used in investing activities
for the year ended December 31, 2004 included $63,000 in transaction compensation for the patent related to the BrightStreet.com acquisition, $27,000 outflow for the purchase of property and equipment, $11,000 security deposit for the San Mateo
office lease, $15,000 for the purchase of substantially all of the assets of Collabrys, Inc, as well as a decrease in restricted cash of $57,000 due to the return of security deposit associated with the Foster City office lease.

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 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. For the year ended December 31, 2004, net cash provided by financing activities of $6.2 million reflects the $7.1 million in funding associated with issuance of
convertible promissory notes, $76,000 from the conversion of warrants, $16,000 from the exercise of options, offset by $705,000 in debt issuance costs and $244,000 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 into the first quarter of 2007. This forecast is based on our plan to use the funds from the financing commitment described below.

Friedli Corporate Finance has provided us with a written commitment to provide us with debt or equity financing of up to $20 million in the aggregate. Of
the $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 have borrowed $11 million of the $12 million available pursuant to these
convertible promissory notes. In March 2005 we finalized the terms of a preferred stock financing with Friedli Corporate Finance that consists 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 third quarter of 2005 we issued two short-term 10% convertible promissory notes totaling $1.5 million and during the forth quarter of 2005 we issued a long-term 10% convertible
promissory note for $3 million.

Of the $20 million aggregate commitment, $2 million is remaining, which is not sufficient to sustain
operations through 2006. However, Friedli Corporate Finance has committed to providing our additional financing needs for 2006. If Friedli Corporate Finance is unable to fulfill its remaining financing commitment to us or we are not offered
financing by Friedli Corporate Finance 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 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.

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 62% and 55%
of our revenue for the years ended December 31, 2005 and 2004, 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.

For the year ended December 31, 2005, one of our Interactive Database Marketing division customers, Reckitt Benckiser, contributed $1.8 million, or
31% of our total revenue. This customers original agreement expired in October 2002 and the customer entered into subsequent renewal agreements, with the most recent one expiring on December 31, 2006.

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 38% and 45% of our total revenue for years ended December 31, 2005 and 2004, 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 $14,000 and $30,000 for the years ended December 31, 2005 and 2004, respectively. As of December 31, 2005, our accounts receivable balance was approximately
$1.3 million, net of allowance for doubtful accounts of approximately $87,000.

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, 2005, 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 2005 and 2004.

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.



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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, 2005, we had no goodwill or intangible assets with indefinite useful lives.

Contractual Obligations and Commercial Commitments

As of December 31, 2005, our contractual obligations and commercial commitments, which consist of future minimum lease payments under non-cancelable leases and long-term debt, are as follows:



|                              |  |                  |           |           |   |               |  |       |   |  |   |          
|----------------------------- |  | ---------------- | --------- | --------- | - | ------------- |  | ----- | - |  | - | ---------
|Contractual Obligations       |  | less than 1 year |           | 1-3 years |   | after 3 years |  | total
|capital lease obligations (1) |  | $                | 5,285     |           | $ |              |  | $     |  |  | $ | 5,285    
|operating lease obligations   |  |                  | 349,573   |           |   | 352,255       |  |       |  |  |   | 701,828  
|long-term debt (2)            |  |                  | 3,669,976 |           |   | 3,326,997     |  |       |  |  |   | 6,996,973
|                              |  |                  |           |           |   |               |  |       |   |  |   |          
|total                         |  | $                | 4,024,834 |           | $ | 3,679,252     |  | $     |  |  | $ | 7,704,086
|                              |  |                  |           |           |   |               |  |       |   |  |   |          

---

|(1) | Includes approximately $77 in interest.
|--- | ---------------------------------------

|(2) | Includes approximately $872,000 in interest and $375,000 in final payment fees.
|--- | -------------------------------------------------------------------------------

Lease Obligations

We are obligated under several non-cancelable capital leases for certain computer and office equipment
that expire by early 2006. Payments under capital leases were approximately $123,000 and $244,000 for the years ended December 31, 2005 and 2004, respectively. In addition, we are obligated under non-cancelable operating leases for office space
in Maryland and California, which expire in September 2008 and in December 2006, respectively. Rent expense under operating leases was approximately $618,000 and $744,000 for the years ended December 31, 2005 and 2004, respectively.

In March 2002, we subleased approximately 10,000 square feet of the office space in our Bethesda, MD office, with a monthly base rent of approximately
$22,000 that increases 4% annually. This sublease commenced in March 2002 and expired in September 2005. In February 2004 we signed another sublease agreement with a monthly base rent of approximately $2,500 that commenced in February 2004 and
expired in September 2005.

Short-Term and Long-Term Debt

As of December 31, 2005, we had $4,500,000 in debt relating to the principal balance associated with three 10% convertible promissory notes issued during July 2005 through November 2005. Of the $4,500,000,
$1,500,000 was short-term. The terms of the notes include, among other things:



| |  |  | a 10% interest rate;
| | - |  | --------------------



| |  |  | 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.
| | - |  | -----------------------------------------------------------

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. The aggregate dollar amount of the convertible promissory notes that we 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



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$6 million commitment. During March 2004, the credit facility available to us was increased from $6 million to $12
million pursuant to amended notes. From May 2003 through January 24, 2005 we received an aggregate of $11,000,000 in connection with the issuance of 8% convertible promissory notes. On March 31, 2005, certain of our 8% convertible
promissory noteholders agreed to exchange their existing 8% convertible promissory notes for shares of newly created Series C convertible preferred stock. Under these exchange agreements, we issued 2,614,793 shares of Series C convertible preferred
stock in exchange for 8% convertible promissory notes totaling $9,750,000, along with accrued interest of approximately $709,000. As of December 31, 2005, we had $1,150,000 of short-term debt and $100,000 of long-term debt representing the
principal balances associated with remaining 8% convertible promissory notes. The terms of the notes include, among other things:



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



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



| |  |  | 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 the
us);
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -----------------------------------------------------------

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, 2005 were to be converted into shares of common stock at the conversion price of 2 CHF (assuming an exchange rate of 1.3123 CHF per one U.S. Dollar as of December 31, 2005), the aggregated number of shares issued
upon such conversion would be approximately 822,400.

If we hold the 8% convertible promissory notes to maturity, a final payment charge of
$375,000 will be due at various dates from May 2006 through February 2007.

Associated with all outstanding convertible promissory notes,
as of December 31, 2005, we had accrued interest of approximately $201,000.

Patent Assignment

On December 3, 2001, in conjunction with the acquisition of substantially all the assets of BrightStreet.com, we entered into a Patent Assignment
Agreement (the Assignment) with BrightStreet.com. Pursuant to the Assignment, BrightStreet.com agreed to assign to us all rights, title and interest in and to all the issued and pending BrightStreet.com patents, subject to certain
pre-existing rights granted by BrightStreet.com to third parties, provided we make a certain payment to BrightStreet.com by December 3, 2005 (the Payment).

In exchange for the rights granted under the Assignment, beginning December 2002, we were obligated to pay BrightStreet.com ten percent of revenues
received that are directly attributable to (a) the licensing or sale of products or functionality acquired from BrightStreet.com, (b) licensing or royalty fees received from enforcement or license of the patents covered by the Assignment,
and (c) licensing or royalty fees received under existing licenses granted by BrightStreet.com to certain third parties. If the total transaction compensation paid, at any time prior to December 3, 2005 exceeded $4,000,000, the Payment
would be deemed to have been made. We had the right, at any time prior to December 3, 2005, to satisfy the Payment by paying to BrightStreet.com the difference between the $4,000,000 and the total compensation already paid. Such payment was
made on December 2, 2005.

Off Balance Sheet Arrangements

We do not currently have any off balance sheet arrangements.

Recent New Accounting Pronouncements

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) establishes standards for the accounting for transactions in which an entity exchanges
its equity instruments for goods or services. FAS 123(R) is effective as of the beginning of the first interim or annual reporting period



24



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##### Table of Contents

that begins after June 15, 2005. However, during the first quarter of 2005, the SEC approved a new rule, Staff
Accounting Bulletin 107, that delays the adoption of this standard to the beginning the next fiscal year, instead of the next reporting period that begins after June 15, 2005. The rule does not change the accounting required by FAS 123(R), but
recognizes that preparers will need to use considerable judgment when valuing employee stock options under this statement. FAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the
income statement based upon their fair values. Pro forma disclosure is no longer an alternative upon adopting FAS 123(R). FAS 123(R) permits public companies to adopt its requirements using one of two methods:



| |  |  | A modified prospective method 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; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate
based on the amounts previously recognized under FAS 123(R) for purposed of pro forma disclosures either (a) for all prior periods presented or (b) for prior interim periods of the year of adoption.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We intend to implement FAS 123(R) in the first quarter of 2006 using the modified prospective method and the Black-Scholes options pricing
model. The ultimate impact of adopting FAS 123(R) is not yet known.

In October 2005, the FASB issued FSP 123 (R)-2 that provides guidance
on the application of grant date as defined in FAS 123 (R). The definition of grant date in FAS 123 (R) includes criteria for determining when a share-based payment awarded has been granted. One of the criteria is a mutual understanding by the
employer and employee of the key terms and conditions of a share-based payment awarded. FSP 123 (R)-2 clarifies that in determining of the grant date of the award, assuming all other criteria have been met, a mutual understanding of the key term and
conditions of an award to individual employees shall be presumed to exist at the date of the award approved in accordance with corporate governance requirements if both the following conditions are met (i) the recipient does not have the
ability to negotiate the key terms and conditions of the award with the employer and (ii) the key terms of the award are expected to be communicated to all of the recipients within a relatively short time period from the date of approval.

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

Not
applicable.

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, 2005. 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.



25



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##### Table of Contents

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.

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, 2005 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

Not applicable.

PART III

ITEM 9  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 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, 2005.



|                |  |     |  |                                                           
|--------------- |  | --- |  | ----------------------------------------------------------
|Name            |  | Age |  | Position(s) with Company                                  
|Kamran Amjadi   |  | 42  |  | Chief Executive Officer and Chairman                      
|Mehrdad Akhavan |  | 42  |  | Chief Marketing Officer, President, Secretary and Director
|Tracy Slavin    |  | 36  |  | Chief Financial Officer                                   
|Wendy Roberts   |  | 41  |  | Senior Vice President, Business Development               
|John Hoffman    |  | 46  |  | Vice President of Network Operations                      
|Amori Langstaff |  | 34  |  | Vice President of Client Services                         
|Paul Wassem     |  | 35  |  | President of ConsumerREVIEW.com                           
|Peter Friedli   |  | 51  |  | Director                                                  
|Sean Deson      |  | 42  |  | Director                                                  
|David Jodoin    |  | 41  |  | 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.



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##### Table of Contents

Wendy Roberts was promoted to Senior Vice President, Business Development in March 2003. She was hired as
our Vice President of Emerging Markets in May 2002. Wendy brings more than 18 years of experience in the areas of new business development, management consulting and strategic planning. From 1997 to 2001, she served as Senior Partner at ionStrategy
and served as Vice President of New Business Development and as Partner of Strategy at Agency.com, a leader in the development of Digital Relationship Management for Fortune 1000 companies. There she developed and grew vertical market strategies and
relationships in the areas of Pharmaceuticals, Financial Services and Insurance, High Technology, Retail and Travel. Through various senior roles in Sales, Marketing, Consulting and Client Management areas, Wendy has lead efforts to develop
Relationship Management strategies for many leading companies.

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, 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.

Paul Wassem is the President of our ConsumerREVIEW division. He joined us in December 2002, when we acquired ConsumerREVIEW, as Vice President and
General Manager. Prior to the acquisition, he was the President and CEO of ConsumerREVIEW, Inc. Before joining ConsumerREVIEW, Inc. in June 2000, he was a channel manager at BuyersEdge.com, an online marketplace backed by CMGI @ Ventures. From 1998
to 2000, Paul was vice president and general manager of GSS, Inc., a start-up staffing firm. Until 1998, he was a general manager at Borg-Warner Security Corporation. During his nine years at Borg-Warner, Paul was promoted from front-line sales and
consulting positions to executive general management.

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., a venture capital firm, since its inception in 1986. Prior to joining Friedli Corporate Finance, 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 VantageMed Corporation, a publicly traded provider of healthcare information services. He also serves as a Director in certain private companies.

Sean Deson was named as a Director in April 2004. He was appointed Chairman in June 2004 and held the position until April 2005, when Mr. Amjadi returned to the Company as the Chief Executive Officer and was
re-appointed Chairman. Mr. Deson is the foundeder of Deson & Co., and Deson Ventures, and Treeline Capital, all technology focused investment related firms. Prior to founding his investment firms, Mr. Deson was a Senior Vice
President at Donaldson, Lufkin & Jenrette, now Credit Suisse First Boston. Mr. Deson spent 10 years at Donaldson, Lufkin & Jenrette. Messrs. Friedli and Deson have co-invested in a number of 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, 2005, our
Board of Directors consisted of Kamran Amjadi, Mehrdad Akhavan, Peter Friedli, Sean Deson and David Jodoin, with Mr. Amjadi serving as Chairman of the Board. Mr. Amjadi served as Chairman until June 2004, when he resigned as Chief
Executive Officer and Chairman. Mr. Deson, who was named a Director in April 2004, was appointed Chairman on June 22, 2004. In April 2005, when Mr. Amjadi rejoined the Company as Chief Executive Officer, he was re-appointed Chairman.



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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, 2005, the Compensation Committee consisted of Mr. Friedli.

Director Compensation:We do not currently
compensate our directors who are also employees. Each non-employee director currently is reimbursed for reasonable travel expenses for each board meeting attended. In 2005, each non-employee director received 100,000 shares of our common stock.
Future years compensation for non-employee directors has not yet been decided.

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;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | 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.



28



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Beneficial Ownership Reporting Compliance under Section 16

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, 2005 all executive officers, directors and greater than 10% beneficial owners have complied with all applicable Section 16(a) filing
requirements, except that Tracy L. Slavin reported two transactions late.

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 paid during the years ended December 31, 2005, 2004 and 2003 to our Chief Executive Officer and our
other executive officers as of December 31, 2005, and two other most highly compensated employees for the year ended December 31, 2005 (collectively, the Named Executive Officers).



|                                                           |  |            |  |                     |           |     |                                                   |   |                        |  |   |        |     |  |           |  |   |        |    
|---------------------------------------------------------- |  | ---------- |  | ------------------- | --------- | --- | ------------------------------------------------- | - | ---------------------- |  | - | ------ | --- |  | --------- |  | - | ------ | ---
|Name and Principal Position(s)                             |  | Year       |  | Annual Compensation |           |     | Long-Term CompensationSecuritiesUnderlyingOptions |   | All Other Compensation | 
|                                                           |  | Salary ($) |  |                     | Bonus ($) |     | Other ($)                                         |   |                        | 
|Kamran Amjadi (1)                                          |  | 2005       |  | $                   | 184,659   | (5) |                                                   | $ |                       |  | $ |       |     |  |          |  | $ | 58,791 | (7)
|Chief Executive Officer and Chairman                       |  | 2004       |  | $                   | 98,077    | (5) |                                                   | $ |                       |  | $ |       |     |  |          |  | $ | 84,532 | (7)
|                                                           |  | 2003       |  | $                   | 160,083   | (5) |                                                   | $ | 25,000                 |  | $ |       |     |  | 3,311,971 |  | $ |       |    
|                                                           |  |            |  |                     |           |    
|Mehrdad Akhavan (2)                                        |  | 2005       |  | $                   | 189,167   | (5) |                                                   | $ |                       |  | $ |       |     |  |          |  | $ |       |    
|Chief Marketing Officer, President, Secretary and Director |  | 2004       |  | $                   | 135,000   | (5) |                                                   | $ |                       |  | $ |       |     |  |          |  | $ |       |    
|                                                           |  | 2003       |  | $                   | 141,250   | (5) |                                                   | $ | 25,000                 |  | $ |       |     |  | 1,868,256 |  | $ |       |    
|                                                           |  |            |  |                     |           |    
|Tracy Slavin (3)                                           |  | 2005       |  | $                   | 144,915   | (5) |                                                   | $ | 1,923                  |  | $ |       |     |  |           |  | $ |       |    
|Chief Financial Officer                                    |  | 2004       |  | $                   | 130,102   | (5) |                                                   | $ |                       |  | $ |       |     |  | 305,000   |  | $ |       |    
|                                                           |  | 2003       |  | $                   | 129,841   | (5) |                                                   | $ | 11,500                 |  | $ |       |     |  | 45,000    |  | $ |       |    
|                                                           |  |            |  |                     |           |    
|Wendy Roberts (4)                                          |  | 2005       |  | $                   | 193,333   | (5) |                                                   | $ | 30,000                 |  | $ | 14,462 | (6) |  |          |  | $ |       |    
|Senior Vice President, Business Development                |  | 2004       |  | $                   | 180,000   | (5) |                                                   | $ |                       |  | $ |       |     |  |          |  | $ |       |    
|                                                           |  | 2003       |  | $                   | 188,333   | (5) |                                                   | $ |                       |  | $ |       |     |  | 350,000   |  | $ |       |    
|                                                           |  |            |  |                     |           |    
|Amori Langstaff                                            |  | 2005       |  | $                   | 145,000   | (5) |                                                   | $ | 10,000                 |  | $ |       |     |  |          |  | $ |       |    
|Vice President of Client Services                          |  | 2004       |  | $                   | 119,448   | (5) |                                                   | $ | 10,000                 |  | $ |       |     |  |          |  | $ |       |    
|                                                           |  | 2003       |  | $                   | 85,828    | (5) |                                                   | $ |                       |  | $ |       |     |  | 350,000   |  | $ |       |    

---

|(1) | Kamran Amjadi resigned as our Chairman and Chief Executive Officer in June 2004 and worked for the Company as a consultant until April 2005, when he was re-appointed our Chairman
and Chief Executive Officer.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Mehrdad Akhavan served as our Chief Executive Officer from June 2004 until April 2005, when Mr. Amjadi was re-appointed our Chairman and Chief Executive Officer. He was
previously President and Chief Operating Officer.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Tracy Slavin joined E-centives in September 2000 as Controller and in June 2004 she was promoted to Chief Financial Officer.
|--- | ----------------------------------------------------------------------------------------------------------------------------

|(4) | Wendy Roberts joined E-centives in May 2002 as Vice President of Emerging Markets and in March 2003 she was promoted to Senior Vice President, Business Development.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(5) | Salaries included a 10% deferral that began in July 2003 and ended in April 2005.
|--- | ---------------------------------------------------------------------------------

|(6) | Commissions.
|--- | ------------

|(7) | Consulting fees and reimbursement of business expenses.
|--- | -------------------------------------------------------

Option Grants
in Last Fiscal Year

No grants of stock options were made to any of the Named Executive Officers during the year ended December 31,
2005.

Aggregated Option Exercises and Holdings

The following table presents information with respect to stock options exercised by each of our Named Executive Officers during the year ended December 31, 2005 and stock options owned by each of our Named Executive Officers at
December 31, 2005 on an aggregated basis.



|                |  |                                      |  |               |        |                                                                        |           |                                                               |         |             |   |               |  |   |       
|--------------- |  | ------------------------------------ |  | ------------- | ------ | ---------------------------------------------------------------------- | --------- | ------------------------------------------------------------- | ------- | ----------- | - | ------------- |  | - | ------
|Name            |  | Number of Shares Acquired onExercise |  | ValueRealized |        | Number of SecuritiesUnderlying Unexercised Options atDecember 31, 2005 |           | Value of Unexercised In-the-Money Options atDecember 31, 2005
|                |  |                                      |  |               |        | Exercisable                                                            |           | Unexercisable                                                 |         | Exercisable |   | Unexercisable
|Kamran Amjadi   |  |                                     |  | $             |       |                                                                        | 2,986,791 |                                                               |        |             | $ | 391,769       |  | $ |      
|Mehrdad Akhavan |  |                                     |  |               |       |                                                                        | 2,243,256 |                                                               |        |             |   | 280,238       |  |   |      
|Tracy Slavin    |  | 98,750                               |  |               | 32,489 |                                                                        | 15,000    |                                                               | 240,000 |             |   |              |  |   | 36,000
|Wendy Roberts   |  |                                     |  |               |       |                                                                        | 375,000   |                                                               | 125,000 |             |   | 39,375        |  |   | 13,125
|Amori Langstaff |  |                                     |  |               |       |                                                                        | 105,000   |                                                               | 150,000 |             |   | 15,000        |  |   | 22,500

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, 2006:



| |  |  | 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, 2006 are deemed outstanding. These shares, however, are not deemed outstanding for the purpose of
computing the percentage ownership of any other person.



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|                                                             |  |                           |  |                 
|------------------------------------------------------------ |  | ------------------------- |  | ----------------
|                                                             |  | Shares Beneficially Owned
|Name                                                         |  | Number                    |  | Percent of Class
|Kamran Amjadi (1)                                            |  | 4,582,791                 |  | 7.0             
|                                                             |  |                          
|Mehrdad Akhavan (2)                                          |  | 2,903,256                 |  | 4.5             
|                                                             |  |                          
|Sean Deson                                                   |  | 150,000                   |  | *               
|                                                             |  |                          
|David Jodoin                                                 |  |                          |  | *               
|                                                             |  |                          
|Peter Friedli (3)                                            |  | 63,829,721                |  | 66.1            
|c/o Friedli Corporate Finance AG                             |  |                           |  |                 
|Freigutstrasse 5                                             |  |                           |  |                 
|8002 Zürich, Switzerland                                     |  |                           |  |                 
|                                                             |  |                          
|Venturetec, Inc. (4)                                         |  | 19,282,253                |  | 26.6            
|c/o Friedli Corporate Finance AG                             |  |                           |  |                 
|Freigutstrasse 5                                             |  |                           |  |                 
|8002 Zürich, Switzerland                                     |  |                           |  |                 
|                                                             |  |                          
|New Venturetec AG (5)                                        |  | 19,282,253                |  | 26.6            
|c/o Friedli Corporate Finance AG                             |  |                           |  |                 
|Freigutstrasse 5                                             |  |                           |  |                 
|8002 Zürich, Switzerland                                     |  |                           |  |                 
|                                                             |  |                          
|InVenture, Inc. (6)                                          |  | 25,898,477                |  | 34.0            
|c/o Friedli Corporate Finance AG                             |  |                           |  |                 
|Freigutstrasse 5                                             |  |                           |  |                 
|8002 Zürich, Switzerland                                     |  |                           |  |                 
|                                                             |  |                          
|US Venture 05, Inc. (7)                                      |  | 3,750,000                 |  | 5.7             
|c/o Friedli Corporate Finance AG                             |  |                           |  |                 
|Freigutstrasse 5                                             |  |                           |  |                 
|8002 Zürich, Switzerland                                     |  |                           |  |                 
|                                                             |  |                          
|Bank J Vontobel & Co AG                                      |  | 5,000,000                 |  | 8.0             
|Bahnhofstrasse 3                                             |  |                           |  |                 
|8002 Zurich, Switzerland                                     |  |                           |  |                 
|                                                             |  |                          
|Tracy Slavin (8)                                             |  | 15,000                    |  | *               
|                                                             |  |                          
|Wendy Roberts (9)                                            |  | 375,000                   |  | *               
|                                                             |  |                          
|Amori Langstaff (10)                                         |  | 105,000                   |  | *               
|                                                             |  |                          
|Executive officers and directors as a group (6 persons) (11) |  | 71,840,768                |  | 70.2            

---

|* | 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;
Savetech, 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 15,000 shares issuable upon exercise of vested stock options.
|--- | ----------------------------------------------------------------------

|(9) | Includes 375,000 shares issuable upon exercise of vested stock options.
|--- | -----------------------------------------------------------------------

|(10) | Includes 105,000 shares issuable upon exercise of vested stock options.
|---- | -----------------------------------------------------------------------

|(11) | Includes 5,335,047 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.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



31



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##### Table of Contents

ITEM 12  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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., Savetech, 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. Mr. Friedli engaged in a number
of transactions with us, both directly and through companies with which he has affiliations, as follows:

Preferred Stock
Financing. In March 2005, we finalized the terms of a preferred stock financing with Friedli Corporate Finance, which consists of an offering of shares of a newly created series of preferred stock designated Series C convertible preferred
stock. The Series C convertible preferred stock has an issue price of $4.00 per share, has an 8% cumulative dividend feature, is convertible into ten shares of the 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. Associated with the preferred stock financing, as of September 30, 2005, we received $2,500,000 and issued 625,192 shares of Series C convertible
preferred stock to InVenture, Inc., US Venture 05, Inc. and Venturetec, Inc.

In connection with the preferred stock financing, on
March 31, 2005, each of InVenture, Inc., Pine, Inc. and Venturetec, Inc. (collectively, the Noteholders) agreed to exchange their existing convertible promissory notes (as described below) for shares of the newly created Series C
convertible preferred stock. Under these exchange agreements, we issued shares of Series C convertible preferred stock to each of the Noteholders in exchange for their convertible promissory notes. Upon the exchange, the convertible promissory notes
were immediately cancelled and we owe no further amounts thereunder. If the Series C convertible preferred stock 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 the Noteholder, 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.

Funding Commitment and Promissory Notes. In September 2002, Friedli Corporate Finance
committed to provide us with a capital infusion of up to $20 million for continued operations and future business expansion purposes. Of the $20 million aggregate commitment, $2 million is remaining, which is not sufficient to sustain operations
through 2006. In consideration for the commitment, we issued 6,000,000 warrants to four investors. Mr. Friedli and Venturetec, Inc. each received 1,000,000 warrants, and the remaining warrants were issued to unrelated third parties.

As part of this financing, 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 (as noted below). The aggregate dollar amount of the convertible promissory notes that were 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, was available to us under the initial $6 million commitment. During March 2004, the credit facility available to us was increased from $6 million to $12 million pursuant to amended notes.
Through January 2005 we received an aggregate of $11,000,000, in connection with the issuance of convertible promissory notes. The terms of the notes include, among other things:



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



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



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



| |  |  | 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 our assets.
| | - |  | -------------------------------------------------------

As noted above,
on March 31, 2005, convertible promissory notes totaling $9,750,000, along with associated accrued interest, were exchanged for Series C convertible preferred stock.



32



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##### Table of Contents

On August 19, 2005 we issued a convertible promissory note in the principal amount of $500,000 to
Venturetec, Inc. and on September 30, 2005 and November 21, 2005 we issued convertible promissory notes in the principal amounts of $1,000,000 and $3,000,000, respectively to US Venture 05, Inc. The terms of the note include, among other
things:



| |  |  | an 10% interest rate;
| | - |  | ---------------------



| |  |  | a maturity date of March 31, 2006 for the August 19, 2005 and September 30,2005 convertible promissory notes and a maturity date of November 21, 2007 for the
November 21, 2006 convertible promissory note;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 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 our assets.
| | - |  | -------------------------------------------------------

The note issued on August 19, 2005 began to accrue interest as of July 25, 2005, the date on which Venturetec, Inc. delivered the $500,000 purchase price for the convertible promissory note to us.

Conversion of Debt of Consumer Review. Venturetec, Inc. and Pine, Inc. were debentureholders in Consumer Review, Inc. Therefore, as a result
of our acquisition of substantially all of the assets of Consumer Review, Inc. in December 2002, Venturetec, Inc. and Pine, Inc. received 240,315 shares and 4,500 shares, respectively, of our Series B convertible preferred stock. Our shares of
Series B convertible preferred stock automatically converted into shares of common stock in May 2005 at a conversion ratio of eight shares of common stock for each one share of Series B convertible preferred stock.

Rights Offering. As part of our October 2001 rights offering, we sold shares of our common stock to Venturetec. Inc. and Pine, Inc.
Venturetec, Inc. and Pine, Inc. each delivered to us a promissory note dated as of October 19, 2001, with a maturity date of March 31, 2002, as consideration for the subscription price for the shares of common stock for which each company
subscribed under the rights offering. Venturetec, Inc.s note (which was only partial consideration for the purchase of the shares; the remainder was paid in cash) was in the principal amount of CHF 8,500,000 (approximately $5.2 million) and
Pine, Inc.s note was in the principal amount of CHF 8,687,530 (approximately $5.3 million). However, on January 22, 2002, Pine, Inc., Venturetec, Inc. and InVenture, Inc., all companies under common control, reallocated their share
purchases and/or related promissory notes associated with the rights offering. The CHF 2,500,000 (approximately $1.5 million) in cash originally indicated as originating from Venturetec, Inc. was reallocated as follows:



| |  |  | In a private sale, InVenture, Inc. purchased from Pine, Inc. 1,041,667 shares of common stock, originally purchased by Pine, Inc. pursuant to the rights offering, for CHF 2,083,334.
As part of this transaction, Pine, Inc. was credited with paying us CHF 2,083,334 (approximately $1.3 million) and delivered to us an amended and restated secured promissory note dated as of October 19, 2001, in the principal amount of CHF
6,604,196 (approximately $4.1 million), with 2% interest accruing from October 19, 2001 and a maturity date that was extended to May 15, 2002. We simultaneously returned Pine, Inc.s original CHF 8,687,530 promissory note. All of the
outstanding principal and interest under the promissory notes was fully received in April 2002.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Venturetec, Inc. paid us CHF 416,666 (approximately $256,000) and delivered to us an amended and restated secured promissory note dated as of October 19, 2001, in the principal
amount of CHF 10,583,334 (approximately $6.5 million), with 2% interest accruing from October 19, 2001 and a maturity date that was extended to June 30, 2002. This CHF 10,583,334 reflects an increase in Venturetec, Inc.s secured
promissory note to CHF 11,000,000 (approximately $6.8 million), reflecting Venturetec, Inc.s original subscription price for the shares of our common stock for which it subscribed under the rights offering, minus the CHF 416,666 payment. We
simultaneously returned Venturetec, Inc.s original CHF 8,500,000 promissory note. All of the outstanding principal and interest under the promissory notes was fully received in April 2002.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We engaged Friedli Corporate Finance to support us in connection with our 2001 rights offering. In association with this support, we reimbursed Friedli
Corporate Finance approximately $100,000 in expenses.

Consulting Agreement. In July 1996, we entered into a consulting
agreement with Friedli Corporate Finance, whereby Mr. Friedli provides us with financial consulting services and investor relations advice. There have been subsequent renewal agreements, with the most recent agreement expiring in December 2006.
Pursuant to this agreement, Friedli Corporate Finance is paid $4,000 per month plus reimbursement of expenses related to Mr. Friedlis services. Consulting expense under the Friedli Corporate Finance agreement was approximately $63,000 for
each of the years ended December 31, 2005, 2004, and 2003, respectively. In addition, under the original agreement, we granted:



| |  |  | a preemptive right to purchase any debt or equity securities issued by us in a financing transaction;
| | - |  | -----------------------------------------------------------------------------------------------------



33



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##### Table of Contents

| |  |  | a preemptive right to allocate 10% of the share offering in our initial public offering;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | a veto right on a single capital expenditure of $500,000 or more until our initial public offering; and
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | a seat on our board of Directors and its Compensation Committee.
| | - |  | ----------------------------------------------------------------

In October 2000, Friedli Corporate Finance permanently waived its rights to purchase shares of common stock in our initial public offering and our future offerings.

Funding Assistance. Mr. Friedli also earns fees for his help in raising funds for the Company. For help in securing the funds
associated with the convertible promissory notes and preferred stock financing, from May 2003 through November 2005, Mr. Friedli was paid $1,815,000, which he has indicated to us will be distributed to a number of third party banks and
individuals who assisted in financing efforts.

In addition, on December 8, 2003, Mr. Friedli was issued 345,000 warrants with an
exercise price of $0.50 and an expiration date of December 8, 2007 in connection with his continued support of the business and his assistance with fundraising.

ITEM 13  EXHIBITS

Exhibits

See Exhibit Index attached.

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, 2005 and 2004, respectively, are summarized in the table below.



|                   |  |      |         |      |   |        
|------------------ |  | ---- | ------- | ---- | - | -------
|                   |  | 2005 |         | 2004
|Audit fees(1)      |  | $    | 141,000 |      | $ | 128,000
|Audit Related fees |  |      | 0       |      |   | 0      
|Tax fees(2)        |  |      | 26,000  |      |   | 25,000 
|All Other fees     |  |      | 0       |      |   | 0      
|                   |  |      |         |      |   |        
|Total fees         |  | $    | 167,000 |      | $ | 153,000
|                   |  |      |         |      |   |        

---

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

|(2) | Tax fees consisted of fees for tax consultation and tax compliance services.
|--- | ----------------------------------------------------------------------------

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.
| | - |  | -------------------------------------------------------------------------------------



34



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##### Table of Contents

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 30, 2006.



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 Kamran
Amjadi     |  | Chief Executive Officer (Principal Executive Officer) and Chairman   |  | March 30, 2006
|                                    |  |                                                                     
|/s/ Tracy L. Slavin Tracy L.
Slavin |  | Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 30, 2006
|                                    |  |                                                                     
|/s/ Mehrdad Akhavan Mehrdad
Akhavan |  | Director                                                             |  | March 30, 2006
|                                    |  |                                                                     
|/s/ Peter Friedli Peter
Friedli     |  | Director                                                             |  | March 30, 2006
|                                    |  |                                                                     
|/s/ Sean Deson Sean
Deson           |  | Director                                                             |  | March 30, 2006
|                                    |  |                                                                     
|/s/ David Jodion David
Jodoin       |  | Director                                                             |  | March 30, 2006



35



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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



---

##### 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. as of December 31, 2005 and 2004 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.

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

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, 2005
and 2004, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO Seidman, LLP

Bethesda, MD

March 17, 2006



F-2



---

##### Table of Contents

E-CENTIVES, INC.

BALANCE SHEETS



|                                                                                                                                                                                                                                                     |  |                   |              |   |                   |   |              |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------------ | - | ----------------- | - | ------------ | -
|                                                                                                                                                                                                                                                     |  | December 31, 2005 |              |   | December 31, 2004 |  
|ASSETS                                                                                                                                                                                                                                               |  |                   |              |   |                   |   |              |  
|Current assets:                                                                                                                                                                                                                                      |  |                   |              |   |                   |   |              |  
|Cash and cash equivalents                                                                                                                                                                                                                            |  | $                 | 467,295      |   |                   | $ | 303,136      |  
|Accounts receivable, net of allowance for doubtful accounts of $87,350 and $64,081 at December 31, 2005 and December 31, 2004,
respectively.                                                                                                         |  |                   | 1,331,177    |   |                   |   | 1,370,240    |  
|Other receivables                                                                                                                                                                                                                                    |  |                   | 351,397      |   |                   |   | 28,848       |  
|Prepaid expenses                                                                                                                                                                                                                                     |  |                   | 54,456       |   |                   |   | 93,636       |  
|Restricted cash                                                                                                                                                                                                                                      |  |                   |             |   |                   |   | 70,000       |  
|Other                                                                                                                                                                                                                                                |  |                   | 11,000       |   |                   |   |             |  
|                                                                                                                                                                                                                                                     |  |                   |              |   |                   |   |              |  
|Total current assets                                                                                                                                                                                                                                 |  |                   | 2,215,325    |   |                   |   | 1,865,860    |  
|Property and equipment, net                                                                                                                                                                                                                          |  |                   | 153,075      |   |                   |   | 257,723      |  
|Other intangible assets, net                                                                                                                                                                                                                         |  |                   | 1,819,750    |   |                   |   | 534,286      |  
|Deferred financing fee                                                                                                                                                                                                                               |  |                   | 375,751      |   |                   |   | 1,088,455    |  
|Other assets                                                                                                                                                                                                                                         |  |                   | 16,011       |   |                   |   | 11,000       |  
|                                                                                                                                                                                                                                                     |  |                   |              |   |                   |   |              |  
|Total assets                                                                                                                                                                                                                                         |  | $                 | 4,579,912    |   |                   | $ | 3,757,324    |  
|                                                                                                                                                                                                                                                     |  |                   |              |   |                   |   |              |  
|LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS DEFICIT                                                                                                                                                                        |  |                   |              |   |                   |   |              |  
|Current liabilities:                                                                                                                                                                                                                                 |  |                   |              |   |                   |   |              |  
|Accounts payable                                                                                                                                                                                                                                     |  | $                 | 1,403,904    |   |                   | $ | 3,060,148    |  
|Accrued expenses                                                                                                                                                                                                                                     |  |                   | 499,737      |   |                   |   | 1,002,691    |  
|Deferred revenue                                                                                                                                                                                                                                     |  |                   | 75,042       |   |                   |   | 254,669      |  
|Current portion of capital leases                                                                                                                                                                                                                    |  |                   | 5,208        |   |                   |   | 122,710      |  
|Short term debt                                                                                                                                                                                                                                      |  |                   | 2,650,000    |   |                   |   |             |  
|Other liabilities                                                                                                                                                                                                                                    |  |                   | 220,240      |   |                   |   | 672,475      |  
|                                                                                                                                                                                                                                                     |  |                   |              |   |                   |   |              |  
|Total current liabilities                                                                                                                                                                                                                            |  |                   | 4,854,131    |   |                   |   | 5,112,693    |  
|Capital leases, net of current portion                                                                                                                                                                                                               |  |                   |             |   |                   |   | 5,208        |  
|Long-term debt                                                                                                                                                                                                                                       |  |                   | 3,100,000    |   |                   |   | 10,500,000   |  
|Other long-term liabilities                                                                                                                                                                                                                          |  |                   | 291,452      |   |                   |   | 814,452      |  
|                                                                                                                                                                                                                                                     |  |                   |              |   |                   |   |              |  
|Total liabilities                                                                                                                                                                                                                                    |  |                   | 8,245,583    |   |                   |   | 16,432,353   |  
|                                                                                                                                                                                                                                                     |  |                   |              |   |                   |   |              |  
|Commitments and contingencies                                                                                                                                                                                                                        |  |                   |              |   |                   |   |              |  
|Convertible redeemable preferred stock                                                                                                                                                                                                               |  |                   |              |   |                   |   |              |  
|Series B convertible preferred stock (voting), $.01 par value, 400,000 shares authorized, 0 and 400,000 shares issued and and outstanding at
December 31, 2005 and December 31, 2004.                                                                |  |                   |             |   |                   |   | 2,067,600    |  
|Series C convertible preferred stock (voting), $.01 par value, 5,000,000 shares authorized and 3,239,986 and 0 shares issued and outstanding
at December 31, 2005 and December 31,2004 (liquidation preference of $25,919,888 at December 31, 2005). |  |                   | 12,959,940   |   |                   |   |             |  
|                                                                                                                                                                                                                                                     |  |                   |              |   |                   |   |              |  
|Total convertible redeemable preferred stock                                                                                                                                                                                                         |  |                   | 12,959,940   |   |                   |   | 2,067,600    |  
|                                                                                                                                                                                                                                                     |  |                   |              |   |                   |   |              |  
|Stockholders deficit:                                                                                                                                                                                                                               |  |                   |              |   |                   |   |              |  
|Common stock, $.01 par value, 120,000,000 shares authorized, 62,165,256 and 58,388,946 shares issued and outstanding at December 31, 2005
and December 31, 2004, respectively.                                                                       |  |                   | 621,653      |   |                   |   | 583,889      |  
|Additional paid-in capital                                                                                                                                                                                                                           |  |                   | 126,906,002  |   |                   |   | 124,563,498  |  
|Accumulated deficit                                                                                                                                                                                                                                  |  |                   | (144,153,266 | ) |                   |   | (139,890,016 | )
|                                                                                                                                                                                                                                                     |  |                   |              |   |                   |   |              |  
|Total stockholders deficit                                                                                                                                                                                                                          |  |                   | (16,625,611  | ) |                   |   | (14,742,629  | )
|                                                                                                                                                                                                                                                     |  |                   |              |   |                   |   |              |  
|Total liabilities, convertible redeemable preferred stock and stockholders deficit                                                                                                                                                                  |  | $                 | 4,579,912    |   |                   | $ | 3,757,324    |  
|                                                                                                                                                                                                                                                     |  |                   |              |   |                   |   |              |  

See accompanying notes to financial statements.



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##### Table of Contents

E-CENTIVES, INC.

STATEMENTS OF OPERATIONS



|                                                                   |  |                         |            |   |      |   |             |  
|------------------------------------------------------------------ |  | ----------------------- | ---------- | - | ---- | - | ----------- | -
|                                                                   |  | Year ended December 31, |           
|                                                                   |  | 2005                    |            |   | 2004 |  
|Revenue                                                            |  |                         |            |   |      |   |             |  
|Product sales                                                      |  | $                       | 6,002,995  |   |      | $ | 5,386,193   |  
|Royalties                                                          |  |                         | 13,799     |   |      |   |            |  
|                                                                   |  |                         |            |   |      |   |             |  
|Total revenue                                                      |  |                         | 6,016,794  |   |      |   | 5,386,193   |  
|                                                                   |  |                         |            |   |      |   |             |  
|Operating expenses (income):                                       |  |                         |            |   |      |   |             |  
|Cost of revenue                                                    |  |                         | 2,981,728  |   |      |   | 2,865,216   |  
|Product development, exclusive of stock-based compensation         |  |                         | 943,400    |   |      |   | 1,359,355   |  
|General and administrative, exclusive of stock-based compensation  |  |                         | 4,007,067  |   |      |   | 8,192,374   |  
|Sales and marketing, exclusive of stock-based compensation         |  |                         | 1,441,799  |   |      |   | 1,591,263   |  
|Stock-based compensation:                                          |  |                         |            |   |      |   |             |  
|Product development                                                |  |                         | 24,748     |   |      |   | 16,830      |  
|General and administrative                                         |  |                         | 112,084    |   |      |   | 374,513     |  
|Sales and marketing                                                |  |                         | 45,612     |   |      |   | 57,232      |  
|Other income                                                       |  |                         | (333,333   | ) |      |   |            |  
|                                                                   |  |                         |            |   |      |   |             |  
|Total operating expenses (income)                                  |  |                         | 9,223,105  |   |      |   | 14,456,783  |  
|                                                                   |  |                         |            |   |      |   |             |  
|Loss from operations                                               |  |                         | (3,206,311 | ) |      |   | (9,070,590  | )
|Interest expense                                                   |  |                         | (1,070,123 | ) |      |   | (1,732,135  | )
|Interest income                                                    |  |                         | 13,184     |   |      |   | 3,529       |  
|                                                                   |  |                         |            |   |      |   |             |  
|Loss before income taxes                                           |  |                         | (4,263,250 | ) |      |   | (10,799,196 | )
|Income taxes                                                       |  |                         |           |   |      |   |            |  
|                                                                   |  |                         |            |   |      |   |             |  
|Net loss                                                           |  | $                       | (4,263,250 | ) |      | $ | (10,799,196 | )
|                                                                   |  |                         |            |   |      |   |             |  
|Basic and diluted net loss per common share                        |  | $                       | (0.07      | ) |      | $ | (0.19       | )
|Shares used to compute basic and diluted net loss per common share |  |                         | 60,723,903 |   |      |   | 57,881,791  |  

See accompanying notes to financial statements.



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##### Table of Contents

E-CENTIVES, INC.

STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)



|                                                       |  |              |  |        |         |                            |   |                    |  |   |                                    |   |  |   |             |  
|------------------------------------------------------ |  | ------------ |  | ------ | ------- | -------------------------- | - | ------------------ |  | - | ---------------------------------- | - |  | - | ----------- | -
|                                                       |  | Common Stock |  |        |         |                            |   |                    |  |  
|                                                       |  | Shares       |  | Amount |         | Additional paid-in Capital |   | AccumulatedDeficit |  |   | TotalStockholdersEquity (Deficit) |  
|Balance at January 1, 2004                             |  | 57,663,609   |  | $      | 576,636 |                            | $ | 124,010,611        |  | $ | (129,090,820                       | ) |  | $ | (4,504,173  | )
|                                                       |  |              |  |        |         |                            |   |                    |  |   |                                    |   |  |   |             |  
|Stock-based compensation                               |  |             |  |        |        |                            |   | 448,575            |  |   |                                   |   |  |   | 448,575     |  
|Exercise of stock options                              |  | 575,337      |  |        | 5,753   |                            |   | 70,184             |  |   |                                   |   |  |   | 75,937      |  
|Conversion of warrants to common stock                 |  | 100,000      |  |        | 1,000   |                            |   | 15,233             |  |   |                                   |   |  |   | 16,233      |  
|Issuance of common stock to Chairman of the Board      |  | 50,000       |  |        | 500     |                            |   | 19,495             |  |   |                                   |   |  |   | 19,995      |  
|Net loss                                               |  |             |  |        |        |                            |   |                   |  |   | (10,799,196                        | ) |  |   | (10,799,196 | )
|                                                       |  |              |  |        |         |                            |   |                    |  |   |                                    |   |  |   |             |  
|Balance at December 31, 2004                           |  | 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 | )
|                                                       |  |              |  |        |         |                            |   |                    |  |   |                                    |   |  |   |             |  

See accompanying notes to financial statements.



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##### Table of Contents

E-CENTIVES, INC.

STATEMENTS OF CASH FLOWS



|                                                                            |  |                         |            |   |      |   |             |  
|--------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ----------- | -
|                                                                            |  | Year ended December 31, |           
|                                                                            |  | 2005                    |            |   | 2004 |  
|Cash flows used in operating activities:                                    |  |                         |            |   |      |   |             |  
|Net loss                                                                    |  | $                       | (4,263,250 | ) |      | $ | (10,799,196 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                         |            |   |      |   |             |  
|Depreciation and amortization                                               |  |                         | 763,912    |   |      |   | 2,263,541   |  
|Loss on sale/disposal of property and equipment                             |  |                         | 2,705      |   |      |   |            |  
|Amortization of financing fees                                              |  |                         | 1,462,705  |   |      |   | 474,385     |  
|Stock-based compensation                                                    |  |                         | 182,444    |   |      |   | 448,575     |  
|Issuance of common stock for services                                       |  |                         | 82,010     |   |      |   | 19,995      |  
|Provision for doubtful accounts                                             |  |                         | 14,000     |   |      |   | 30,000      |  
|(Increase) decrease in:                                                     |  |                         |            |   |      |   |             |  
|Accounts receivable                                                         |  |                         | 25,063     |   |      |   | 182,522     |  
|Prepaid expenses and other current assets                                   |  |                         | 39,180     |   |      |   | (26,269     | )
|Other receivables                                                           |  |                         | (322,549   | ) |      |   | (28,848     | )
|Increase (decrease) in:                                                     |  |                         |            |   |      |   |             |  
|Accounts payable                                                            |  |                         | (1,606,244 | ) |      |   | 405,548     |  
|Deferred revenue                                                            |  |                         | (179,627   | ) |      |   | (399,072    | )
|Accrued expenses and other liabilities                                      |  |                         | (769,016   | ) |      |   | 1,312,841   |  
|                                                                            |  |                         |            |   |      |   |             |  
|Net cash used in operating activities                                       |  |                         | (4,618,667 | ) |      |   | (6,115,978  | )
|                                                                            |  |                         |            |   |      |   |             |  
|Cash flows from investing activities:                                       |  |                         |            |   |      |   |             |  
|Decrease in restricted cash                                                 |  |                         | 70,000     |   |      |   | 57,069      |  
|Acquisition of property and equipment                                       |  |                         | (79,331    | ) |      |   | (27,139     | )
|Sale of property and equipment                                              |  |                         | 3,640      |   |      |   |            |  
|Increase in security deposits                                               |  |                         | (16,011    | ) |      |   | (11,000     | )
|Acquisition of Collabrys                                                    |  |                         |           |   |      |   | (15,000     | )
|Purchase of intangible asset                                                |  |                         | (1,871,743 | ) |      |   | (62,637     | )
|                                                                            |  |                         |            |   |      |   |             |  
|Net cash used in investing activities                                       |  |                         | (1,893,445 | ) |      |   | (58,707     | )
|                                                                            |  |                         |            |   |      |   |             |  
|Cash flows from financing activities:                                       |  |                         |            |   |      |   |             |  
|Payments on obligations under capital lease                                 |  |                         | (122,710   | ) |      |   | (244,425    | )
|Proceeds from issuance of debt                                              |  |                         | 5,400,000  |   |      |   | 7,050,000   |  
|Payment of debt                                                             |  |                         | (400,000   | ) |      |   |            |  
|Debt issuance costs                                                         |  |                         | (750,000   | ) |      |   | (705,000    | )
|Issuance of Series C convertible preferred stock                            |  |                         | 2,500,767  |   |      |   |            |  
|Proceeds from conversion of warrants                                        |  |                         |           |   |      |   | 75,937      |  
|Exercise of stock options                                                   |  |                         | 48,214     |   |      |   | 16,233      |  
|                                                                            |  |                         |            |   |      |   |             |  
|Net cash provided by financing activities                                   |  |                         | 6,676,271  |   |      |   | 6,192,745   |  
|                                                                            |  |                         |            |   |      |   |             |  
|Net increase in cash and cash equivalents                                   |  |                         | 164,159    |   |      |   | 18,060      |  
|Cash and cash equivalents, beginning of period                              |  |                         | 303,136    |   |      |   | 285,076     |  
|                                                                            |  |                         |            |   |      |   |             |  
|Cash and cash equivalents, end of period                                    |  | $                       | 467,295    |   |      | $ | 303,136     |  
|                                                                            |  |                         |            |   |      |   |             |  
|Supplemental disclosure of cash flow information:                           |  |                         |            |   |      |   |             |  
|                                                                            |  |                         |            |   |      |   |             |  
|Cash paid for interest                                                      |  | $                       | 77,016     |   |      | $ | 15,775      |  
|                                                                            |  |                         |            |   |      |   |             |  

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.

During 2004, the
Company entered into capital leases totaling approximately $43,000.

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 31% and 22%, respectively, of the Companys revenue for the years ended December 31, 2005 and 2004.
The customers initial contract expired in October 2002 and the customer has subsequently signed four annual renewal agreements, with the most recent renewal expiring on December 31, 2006. Although the revenue generated by this customer
decreased from the year ended December 31, 2003 to the year ended December 31, 2004, it did increase for the year ended December 31, 2005. Revenue from this customer has the potential to increase for the year ended December 31,
2006 with the addition of new countries, brands and services, as it did for the year ended December 31, 2005. Loss of this customer could have a material adverse effect on the Companys business, financial condition, results of operations
and cash flow.

Friedli Corporate Finance provided a written commitment to provide the Company with debt or equity financing of up to $20
million in the aggregate. Of the $20 million, $2 million is remaining as of December 31, 2005, which may not be sufficient to sustain operations through 2006 and beyond. However, Friedli Corporate Finance has committed to providing the
Companys funding needs for 2006. If Friedli Corporate Finance is unable to fulfill its remaining financing commitment or the Company is not offered financing by Friedli Corporate Finance 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.



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##### Table of Contents

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) 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 6).

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.

(d)
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 supercedes 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, 2005 and 2004.

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, 2005 and December 31, 2004, consisted of patents, technology
and tradenames, which were acquired in connection with the BrightStreet.com and ConsumerREVIEW.com acquisitions. As of December 31, 2005, the Company had the following amortizable intangible assets:



|                                     |  |                      |           |                         |   |            |           |  |   |          
|------------------------------------ |  | -------------------- | --------- | ----------------------- | - | ---------- | --------- |  | - | ---------
|                                     |  | Gross CarryingAmount |           | AccumulatedAmortization |   |            | Net Value
|Amortizable intangible assets:       |  |                      |           |                         |   |            |           |  |   |          
|Patents                              |  | $                    | 2,345,679 |                         | $ | (525,929   | )         |  | $ | 1,819,750
|Technology                           |  |                      | 3,774,685 |                         |   | (3,774,685 | )         |  |   |         
|Tradenames                           |  |                      | 112,408   |                         |   | (112,408   | )         |  |   |         
|                                     |  |                      |           |                         |   |            |           |  |   |          
|Total amortizable intangible assets  |  | $                    | 6,232,772 |                         | $ | (4,413,022 | )         |  | $ | 1,819,750
|                                     |  |                      |           |                         |   |            |           |  |   |          
|Aggregate Amortization Expense:      |  |                      |           |                         |   |            |           |  |   |          
|For the year ended December 31, 2005 |  |                      |           |                         | $ | 586,279    |           |  |   |          
|Estimated Amortization Expense:      |  |                      |           |                         |   |            |           |  |   |          
|For the year ended December 31, 2006 |  |                      |           |                         | $ | 623,914    |           |  |   |          
|For the year ended December 31, 2007 |  |                      |           |                         | $ | 623,914    |           |  |   |          
|For the year ended December 31, 2008 |  |                      |           |                         | $ | 571,922    |           |  |   |          



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##### Table of Contents

(e) 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.

(f) 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 62% and 55% of the Companys revenue for the years ended
December 31, 2005 and 2004, 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 11c) 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 38%
and 45% of the Companys total revenue for years ended December 31, 2005 and 2004, respectively.

(g) 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.

(h) 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.

(i) 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.

(j) Advertising Costs

Advertising costs are expensed as incurred. The Company incurred no advertising expenses for the years ended
December 31, 2005 and 2004.



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##### Table of Contents

(k) Stock-Based Compensation

At December 31, 2005, the Company had one stock-based employee compensation plan, which is described more fully in Note 13c. As
permitted under FAS 148, Accounting for Stock-Based CompensationTransition and Disclosure, which amended FAS 123, Accounting for Stock-Based Compensation, the Company has 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 FASB Interpretation No. 44, Accounting for Certain Transactions
involving Stock Compensation.

(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.

(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) Fair Value of Financial Instruments

The Company considers the carrying value of
the Companys financial instruments, which include cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued expenses to approximate fair value at December 31, 2005 and 2004 because of the relatively short
period of time between origination of the instruments and their expected realization or settlement. The convertible promissory notes issued in connection with the Companys syndication process were recorded at their respective face values,
which are assumed to approximate fair value.

(o) Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and cash equivalents,
restricted cash and accounts receivable. The Company maintains its cash and cash equivalents and restricted cash 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, 2005, the Company incurred charges related to bad debts of approximately $14,000. While the Company
believes that its allowance for doubtful accounts as of December 31, 2005 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, 2005 and 2004, one customer accounted
for 31% and 22%, respectively, of the Companys total revenue.

(p) 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.



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##### Table of Contents

(q) Recent New Accounting Pronouncements

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) establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. FAS 123(R) is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. However, during the first quarter of 2005, the SEC approved a
new rule, Staff Accounting Bulletin 107, that delays the adoption of this standard to the beginning the next fiscal year, instead of the next reporting period that begins after June 15, 2005. The rule does not change the accounting required by
FAS 123(R), but recognizes that preparers will need to use considerable judgment when valuing employee stock options under this statement. FAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be
recognized in the income statement based upon their fair values. Pro forma disclosure is no longer an alternative upon adopting FAS 123(R). FAS 123(R) permits public companies to adopt its requirements using one of two methods:



| |  |  | A modified prospective method 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; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate
based on the amounts previously recognized under FAS 123(R) for purposed of pro forma disclosures either (a) for all prior periods presented or (b) for prior interim periods of the year of adoption.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company intends to implement FAS 123(R) in the first quarter of 2006 using the modified prospective method and the
Black-Scholes options pricing model. The ultimate impact of adopting FAS 123(R) is not yet known.

In October 2005, the FASB
issued FSP 123 (R)-2 that provides guidance on the application of grant date as defined in FAS 123 (R). The definition of grant date in FAS 123 (R) includes criteria for determining when a share-based payment awarded has been granted. One of
the criteria is a mutual understanding by the employer and employee of the key terms and conditions of a share-based payment awarded. FSP 123 (R)-2 clarifies that in determining of the grant date of the award, assuming all other criteria have been
met, a mutual understanding of the key term and conditions of an award to individual employees shall be presumed to exist at the date of the award approved in accordance with corporate governance requirements if both the following conditions are met
(i) the recipient does not have the ability to negotiate the key terms and conditions of the award with the employer and (ii) the key terms of the award are expected to be communicated to all of the recipients within a relatively short
time period from the date of approval.

(r) Reclassification

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

(3) Equity Offerings

(a) Initial Public Offering

On October 3, 2000, the Company completed its initial public offering (IPO) in which it sold 3,700,000
shares of its common stock to investors in Switzerland, resulting in proceeds to the Company of approximately $36.7 million, after deducting underwriters commissions and other offering-related expenses. In connection with the IPO, 1,700,000
shares of the Companys then-existing Series A convertible preferred stock, 2,500,000 shares of the Companys then-existing Series B convertible preferred stock, and 2,328,434 shares of the Companys then-existing Series C convertible
redeemable preferred stock were converted to common stock on a one-for-one basis.

(b) Rights Offering

On October 19, 2001, the Company closed a rights offering of common stock for approximately $24.6 million with subscriptions for
20,000,000 shares. Each subscriber in the rights offering also received, for no additional consideration, based upon the number of shares of common stock purchased by such subscriber in the rights offering, a pro-rata portion of 2,000,000 shares of
the Companys Series A convertible preferred stock, convertible on a 10-for-1 basis into 20,000,000 shares of common stock under certain circumstances. After deducting expenses, underwriting discounts and any foreign currency loss, the net
proceeds from this transaction were approximately $22.2 million, with $12.6 million of the net proceeds received by December 31, 2001 and the remaining net proceeds of $9.6 million, which related to promissory notes issued to the Company as
part of the consideration for the rights offering, was received during the second quarter of 2002.

During 2003, all of the
shares of the Companys Series A convertible preferred stock, that were issued in connection with the rights offering, were converted into 20,000,000 shares of the Companys common stock. Such shares of common stock have been listed on the
SWX Swiss Exchange since February 21, 2002.



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##### Table of Contents

(c) Series B Convertible Preferred Stock

During December 2002, the Company issued 400,000 shares of Series B convertible preferred stock as part of the Companys acquisition
of substantially all of the assets of Consumer Review, Inc.. During May 2005, the 400,000 shares of Series B convertible preferred stock automatically converted into 3,200,000 shares of common stock.

(d) Warrants

In December 2001, as
part of the purchase price for substantially all of BrightStreet.coms assets, the Company issued a warrant to purchase 500,000 shares of the Companys common stock and a contingent performance-based warrant to purchase up to 250,000
shares of the Companys common stock. The warrant for 500,000 had an exercise price of $0.5696 per share and was exercisable from June 3, 2002 through December 3, 2005. The warrant was never exercised and was therefore cancelled on
December 3, 2005 when it expired. The performance-based warrant was exercisable, in whole or in part, beginning June 4, 2003 until December 3, 2005 based upon the achievement of certain performance targets at an exercise price of
$2.44 per share. However, since the target revenue was not reached, the warrants were not earned and were deemed expired as of June 3, 2003.

On October 8, 2002, the Companys Board of Directors authorized the issuance of 6,000,000 warrants to four investors as consideration for a $20 million financing commitment, which was memorialized in a
letter to the Company, by Friedli Corporate Finance, dated September 12, 2002. In the commitment letter, Friedli Corporate Finance, agreed to provide the Company with the $20 million financing commitment, for continued operations and future
business expansion purposes, in both sales and marketing and merger and acquisition activities. The warrants were issued to the investors in January 2003 in connection with Friedli Corporate Finance agreeing to provide the financing commitment. The
warrants entitle each investor to purchase one share of the Companys common stock, $0.01 per value per share, for an initial exercise price of CHF 0.19 per share during the exercise period. Pursuant to an amendment to the warrants, the
exercise period began three months from January 6, 2003 and will end on April 7, 2008. The fair value of these warrants, using the Black-Scholes pricing model on the date they were granted, is estimated to be approximately $720,000 and was
recorded as a deferred financing fee. This deferred financing fee is being amortized, to interest expense, over the three-year life of the $6 million convertible promissory note, dated March 18, 2003, that was issued in relation to these
warrants.

On December 8, 2003, Peter Friedli was issued 345,000 warrants (of which 295,000 were transferred to other
parties during 2004) with an exercise price of $0.50 and an expiration date of December 8, 2007, in connection with his continued support of the business and his assistance with fundraising. The fair value of these warrants, using the
Black-Scholes pricing model on the date they were granted, was estimated to be approximately $155,000 and was included as a component of general and administrative costs in the accompanying statement of operations.

(4) Acquisitions

(a) Collabrys

On June 29, 2004, the Company entered into an Asset Purchase Agreement (Agreement) with Collabrys, Inc.
(Collabrys), whereby the Company acquired substantially all of the assets of Collabrys. The assets acquired primarily consisted of hardware, software, furniture and customer list, none of which are considered significant. Collabrys was
acquired for $15,000 in cash at closing, plus future royalty payments as defined in the Agreement. The acquisition was accounted for under the purchase method of accounting and, accordingly, the purchase price was allocated to the assets acquired
based on their estimated fair values at the acquisition date. The Company does not expect the royalty payments to be significant and are therefore expensing the royalty as it is incurred.

Collabrys is a provider of interactive marketing technologies and services to enable customer acquisition and retention. Similar to the
Companys E-mail Marketing System component of its Interactive Database Marketing division, Collabrys enables businesses to cost-effectively conduct e-marketing without having to acquire or develop their own e-mail infrastructure and manage the
process. This solution consists of list management and hosting, strategy and creative services, e-mail delivery and management, as well as tracking and reporting services. In addition, Collabrys enables a streamlined solution to source content from
third party publishers, content providers and creators, as well as to facilitate the content selection, approval, management and e-publication process through Web-based tools.

(b) BrightStreet.com

On December 3, 2001, the Company entered into an Asset
Purchase Agreement (the Agreement) with BrightStreet.com, Inc. (BrightStreet.com), whereby the Company acquired substantially all of BrightStreet.coms assets and certain of its liabilities. The Company acquired
BrightStreet.com for approximately $2.2 million, consisting of approximately $1.7 million in cash, a guaranteed warrant to purchase 500,000 shares of the Companys common stock valued at approximately $185,000, a contingent performance-based
warrant to purchase up to 250,000 shares of the Companys common stock (because the target revenue was not met, the performance-based warrant was not earned) and approximately $369,000 in acquisition costs.



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##### Table of Contents

In conjunction with the Agreement, the Company entered into a Patent Assignment Agreement
(the Assignment) with BrightStreet.com. Pursuant to the Assignment, BrightStreet.com agreed to assign to the Company all rights, title and interest in and to all the issued and pending BrightStreet.com patents (collectively, the
Patents), subject to certain pre-existing rights granted by BrightStreet.com to third parties (Pre-existing Rights), provided the Company made a certain payment to BrightStreet.com by December 3, 2005 (the
Payment). If the Company made such Payment by that date, the Company shall own all rights, title and interest in and to the Patents, subject to the Pre-existing Rights. Until such Payment was made, the Company had, subject to the
Pre-existing Rights, an exclusive, worldwide, irrevocable, perpetual, transferable, and sub-licensable right and license under the Patents, including the rights to control prosecution of the Patents and Patent applications and the right to sue for
the infringement of the Patents. Until the Company took formal title to the Patents, it could not grant an exclusive sublicense to the Patents to any unaffiliated third party. In the event the Company did not make the Payment by December 3,
2005, the Company would retain a license to the Patents, but the license would convert to a non-exclusive license, and other rights to the Patents and Patent applications shall revert to BrightStreet.com or its designee.

In exchange for the rights granted under the Assignment, beginning December 2002, the Company was obligated to pay BrightStreet.com ten
percent of revenues received that are directly attributable to (a) the licensing or sale of products or functionality acquired from BrightStreet.com, (b) licensing or royalty fees received from enforcement or license of the patents covered
by the Assignment, and (c) licensing or royalty fees received under existing licenses granted by BrightStreet.com to certain third parties. If the total transaction compensation paid at any time prior to December 3, 2005 exceeded
$4,000,000, the Payment will be deemed to have been made. The Company had the right, at any time prior to December 3, 2005, to satisfy the Payment by paying to BrightStreet.com the difference between the $4,000,000 and the total compensation
already paid, and did so on December 3, 2005.

Due to additional transaction compensation incurred during the years
ended December 31, 2004 and 2003, the Company subsequently recorded a patent intangible asset of $474,000. In December 2005, the Company recorded an addition to the patent intangible asset of $1,871,743 associated with additional transaction
compensation.

(5) Letters of Credit

The Companys restricted cash related to a letter of credit associated with their Bethesda, Maryland office. As part of the amended and modified lease agreement dated June 29, 2000, the Company was required to have an irrevocable
letter of credit as a security deposit throughout the lease term of five years. In accordance with a September 25, 2002 partial lease termination agreement, the required security deposit for the remaining office space was reduced to $70,000;
therefore, the letter of credit and the associated certificate of deposit was also reduced to that amount. The lease expired in September 2005 and the $70,000 was transferred to the Companys operating account. The Companys renewal lease
for the Bethesda, Maryland office does not require a letter of credit.

(6) Property and Equipment

Property and equipment consists of the following:



|                               |  |             |  |              |            |   |      |   |            |  
|------------------------------ |  | ----------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                               |  |             |  | December 31, |           
|                               |  | useful life |  | 2005         |            |   | 2004 |  
|Computer equipment             |  | 3 years     |  | $            | 6,683,927  |   |      | $ | 6,715,204  |  
|Furniture and equipment        |  | 5-7 years   |  |              | 107,795    |   |      |   | 195,562    |  
|Leasehold improvements         |  | 5 years     |  |              | 23,072     |   |      |   | 23,072     |  
|                               |  |             |  |              |            |   |      |   |            |  
|                               |  |             |  |              | 6,814,794  |   |      |   | 6,933,838  |  
|Less: accumulated depreciation |  |             |  |              | (6,661,719 | ) |      |   | (6,676,115 | )
|                               |  |             |  |              |            |   |      |   |            |  
|                               |  |             |  | $            | 153,075    |   |      | $ | 257,723    |  
|                               |  |             |  |              |            |   |      |   |            |  

Depreciation expense related to property and equipment was approximately $178,000 and $672,000 for
the years ended December 31, 2005 and 2004, respectively

(7) Intangible Assets

In December 2005, the Company recorded approximately $1,872,000 for a patent intangible asset related to the BrightStreet.com acquisition that occurred in
December 2001 (see Note 4b for further details). The intangible asset was recorded at its estimated fair value and is being amortized on a straight-line basis over three years.



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##### Table of Contents

As of December 31, 2005 and 2004, intangible assets consisted of the following:



|                               |  |              |            |   |      |   |            |  
|------------------------------ |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                               |  | December 31, |           
|                               |  | 2005         |            |   | 2004 |  
|Patent                         |  | $            | 2,345,679  |   |      | $ | 473,936    |  
|Technology                     |  |              | 3,774,685  |   |      |   | 3,774,685  |  
|Tradenames                     |  |              | 112,408    |   |      |   | 112,408    |  
|                               |  |              |            |   |      |   |            |  
|                               |  |              | 6,232,772  |   |      |   | 4,361,029  |  
|Less: accumulated amortization |  |              | (4,413,022 | ) |      |   | (3,826,743 | )
|                               |  |              |            |   |      |   |            |  
|                               |  | $            | 1,819,750  |   |      | $ | 534,286    |  
|                               |  |              |            |   |      |   |            |  

(8) 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, 2005 and 2004, 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, |           
|                                         |  | 2005                    |            |   | 2004 |  
|Expected tax benefit at statutory rate   |  | $                       | 1,449,505  |   |      | $ | 3,671,726  |  
|State tax, net of federal                |  |                         | 165,983    |   |      |   | 420,800    |  
|Stock-based compensation, not deductible |  |                         |           |   |      |   | (647       | )
|Other, net                               |  |                         | (2,473     | ) |      |   | (2,563     | )
|Increase in valuation allowance          |  |                         | (1,613,015 | ) |      |   | (4,089,316 | )
|                                         |  |                         |            |   |      |   |            |  
|Tax benefit                              |  | $                       |           |   |      | $ |           |  
|                                         |  |                         |            |   |      |   |            |  

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



|                                                              |  |                         |             |   |      |   |             |  
|------------------------------------------------------------- |  | ----------------------- | ----------- | - | ---- | - | ----------- | -
|                                                              |  | Year Ended December 31, |            
|                                                              |  | 2005                    |             |   | 2004 |  
|Deferred tax assets:                                          |  |                         |             |   |      |   |             |  
|Net operating loss and general business credits carryforwards |  | $                       | 48,559,296  |   |      | $ | 46,496,178  |  
|Intangible assets                                             |  |                         | 2,272,669   |   |      |   | 2,276,820   |  
|Accrued expenses                                              |  |                         | 94,750      |   |      |   | 94,750      |  
|Deferred compensation                                         |  |                         | 1,227,836   |   |      |   | 1,646,924   |  
|Allowance for doubtful accounts receivable                    |  |                         | 33,105      |   |      |   | 24,097      |  
|Property and equipment                                        |  |                         | 199,809     |   |      |   | 246,829     |  
|                                                              |  |                         |             |   |      |   |             |  
|Total gross deferred tax assets                               |  |                         | 52,387,465  |   |      |   | 50,785,598  |  
|Valuation allowance                                           |  |                         | (52,387,465 | ) |      |   | (50,785,598 | )
|                                                              |  |                         |             |   |      |   |             |  
|                                                              |  | $                       |            |   |      | $ |            |  
|                                                              |  |                         |             |   |      |   |             |  

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 $52,387,000 and $50,786,000 as of December 31, 2005 and 2004, respectively. The net change in the valuation allowance for the years ended December 31, 2005 and 2004 was an
increase of $1,602,000 and $3,863,000, respectively. The federal net operating loss is $127,615,000 as of December 31, 2005. 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.



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##### Table of Contents

(9) Convertible Promissory Notes

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, 2005, $1,500,000 was classified as short-term
debt and $3,000,000 was classified as long-term debt. As of December 31, 2005, $79,863 of the Companys other liability balance represents accrued interest associated with these convertible promissory notes. The terms of the 10%
convertible promissory notes include, among other things:



| |  |  | a 10% interest rate;
| | - |  | --------------------



| |  |  | 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 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.
| | - |  | -----------------------------------------------------------------

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 2,614,793 shares of Series C convertible preferred stock. As of December 31, 2005, of the remaining balance of 8% convertible
promissory notes, $1,150,000 was classified as short-term debt and $100,000 was classified as long-term debt. As of December 31, 2005, $121,162 of the Companys other liability balance represents accrued interest associated with these
convertible promissory notes. The terms of 8% convertible promissory notes include, among other things:



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



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



| |  |  | 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);
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -----------------------------------------------------------------

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, 2005 were to be converted into shares of common stock at the conversion price of 2 CHF (assuming an exchange rate of 1.3123 CHF per one U.S. Dollar as of December 31, 2005), the
aggregated number of shares issued upon such conversion would be approximately 822,400.

At December 31, 2005, the other long-term
liabilities balance of $291,452 represents the current 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 at various dates from May 2006 through February 2007.

(10) 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.

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.



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##### Table of Contents

(11) Commitments and Contingencies

(a) Leases

The Company is obligated under non-cancelable capital leases, for certain
computer and office equipment, all of which expire by mid 2006. Amounts related to assets under non-cancelable capital leases that have been capitalized as property and equipment as of December 31, 2005 and 2004 are as follows:



|                               |  |              |          |   |      |   |          |  
|------------------------------ |  | ------------ | -------- | - | ---- | - | -------- | -
|                               |  | December 31, |         
|                               |  | 2005         |          |   | 2004 |  
|Computer equipment             |  | $            | 570,580  |   |      | $ | 570,580  |  
|Office equipment               |  |              | 23,789   |   |      |   | 23,789   |  
|Less: accumulated depreciation |  |              | (553,327 | ) |      |   | (498,938 | )
|                               |  |              |          |   |      |   |          |  
|                               |  | $            | 41,042   |   |      | $ | 95,431   |  
|                               |  |              |          |   |      |   |          |  

In addition, the Company is obligated under non-cancelable operating leases,
primarily for office space. Rent expense under operating leases was approximately $618,000 and $744,000 for the years ended December 31, 2005 and 2004, respectively. In February 2002 and in March 2004, the Company signed sublease agreements to
sublease portions of the Bethesda, Maryland facility. Both subleases expired in September 2005.

As of December 31, 2005, future
minimum lease payments are as follows:



|                                                           |  |                |        |   |                  |   |        
|---------------------------------------------------------- |  | -------------- | ------ | - | ---------------- | - | -------
|Year Ending December 31,                                   |  | Capital Leases |        |   | Operating Leases
|2006                                                       |  | $              | 5,285  |   |                  | $ | 349,573
|2007                                                       |  |                |       |   |                  |   | 199,380
|2008                                                       |  |                |       |   |                  |   | 152,875
|                                                           |  |                |        |   |                  |   |        
|Total                                                      |  |                | 5,285  |   |                  | $ | 701,828
|                                                           |  |                |        |   |                  |   |        
|Less: amount representing interest                         |  |                | (77    | ) |                  |   |        
|                                                           |  |                |        |   |                  |   |        
|Present value of net minimum lease payments                |  |                | 5,208  |   |                  |   |        
|Less: current installments                                 |  |                | (5,208 | ) |                  |   |        
|                                                           |  |                |        |   |                  |   |        
|Obligation under capital leases, excluding current portion |  | $              |       |   |                  |   |        
|                                                           |  |                |        |   |                  |   |        

(b) Patent Assignment

On December 3, 2001, in conjunction with the acquisition of substantially all the assets of BrightStreet.com, the Company entered
into a Patent Assignment Agreement (the Assignment) with BrightStreet.com. Pursuant to the Assignment, BrightStreet.com agreed to assign to the Company all rights, title and interest in and to all the issued and pending BrightStreet.com
patents (collectively, the Patents), subject to certain pre-existing rights granted by BrightStreet.com to third parties, provided the Company made a certain payment to BrightStreet.com by December 3, 2005 (the Payment).

In exchange for the rights granted under the Assignment, beginning December 2002, the Company was obligated to pay
BrightStreet.com 10% of revenues received that were directly attributable to (a) the licensing or sale of products or functionality acquired from BrightStreet.com, (b) licensing or royalty fees received from enforcement or license of the
patents covered by the Assignment, and (c) licensing or royalty fees received under existing licenses granted by BrightStreet.com to certain third parties. If the total transaction compensation paid at any time prior to December 3, 2005
exceeded $4,000,000, the Payment would be deemed to have been made. Additionally, the Company had the right, at any time prior to December 3, 2005, to satisfy the Payment by paying to BrightStreet.com the difference between the $4,000,000 and
the total compensation already paid. The Company made such payment on December 3, 2005.

(c) 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, 2005, 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.



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##### Table of Contents

On or about 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 at one point claimed over $1 million in
compensatory money 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 about $1.8 million. These counterclaims were dismissed pursuant to E-centives own request during trial proceedings held in January and February 2006. At trial,
Trifocal also revised its claims, reducing the damages sought to approximately $800,000, not including interest, statutory damages, attorneys fees and costs. At the close of trial proceedings, the Court issued a ruling on the predominant
issues in the case. The Court found in favor of E-centives on approximately $536,515 of Trifocals claims, and awarded Trifocal approximately $50,937. This left some additional issues, including whether Trifocal is entitled to interest,
statutory penalties, and/or attorneys fees on any of the $50,937 awarded to Trifocal, which the Court took under submission pending further briefing. E-centives filed briefs opposing any further recovery by Trifocal with the exception of
$13,356 in interest. In its post-trial brief, Trifocal claimed that it is entitled to not only interest, statutory penalties, and/or attorneys fees, but that it is also entitled to further damages not included in the Courts findings at
the close of trial proceedings. In total, Trifocal currently seeks, exclusive of attorneys fees, approximately $200,000 in additional sums above the Courts original award of $50,937. In the April 2006 timeframe, a decision of the Court
is expected as to what amount of these additional damages will be awarded to Trifocal. Following this decision, either party, or both parties, may make a motion to obtain recoverable costs and attorneys fees as the prevailing party, which are
estimated at approximately $60,000. Trifocal will likely claim that it is the prevailing party because it received some recovery, and E-centives will likely claim that it was the prevailing party because Trifocal only prevailed on a modest
percentage of what it originally sought. Regarding this suit, the Company has recorded a provision in the financial statements as of December 31, 2005.

On or about 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 of which the Company acquired from BrightStreet.com. On April 25, 2005 the companies
reached a mutually agreeable settlement. As a result of the settlement, the lawsuit was dismissed, the Company will receive an aggregate of $1 million over the next two years in exchange for a release from us of all claims raised in the litigation,
including claims of lost profits and past royalties, and Coupons, Inc. has been granted a limited license to the two patents pursuant to which the Company may receive future royalty payments based on future revenue of Coupons, Inc. related to these
patents as agreed to in the settlement agreement.

There were no material additions to, or changes in status of the
settlement with CoolSavings.com, Inc. (CoolSavings). The terms of the settlement with CoolSavings provide for a cross-license between the Company and CoolSavings for each of the patents currently in dispute. There are no royalties or
other incremental payments involved in the cross-license. Pursuant to this settlement, the Company paid $650,000 to CoolSavings on September 29, 2000, at the signing of the settlement documents. The Company may have to make payments of up to
$700,000 to CoolSavings as follows:



| |  |  | $250,000, which was accrued for during 2001, was due if, within one year from the date of entry of the Stipulated Order of Dismissal filed on or about March 3, 2000, Catalina
Marketing Corporation prevailed in a motion for summary judgment in a separate litigation between it and CoolSavings, involving the CoolSavings patent currently in dispute. However, a dispute has arisen between the parties regarding whether
this portion of the license fee is actually due, despite Catalina Marketing Corporation not prevailing in its motion. This dispute is based in part on the fact that the Company may be entitled to a license under the CoolSavings patent at issue
as a result of the Companys acquisition of the assets of BrightStreet.com, which acquisition included the settlement of infringement litigation between CoolSavings and BrightStreet.com regarding the same CoolSavings patent at issue in the
Companys settled litigation. In 2001, CoolSavings asserted that the $250,000 contingent payment was due. The Company disputed that the payment was due to CoolSavings and continue to believe that the claim is without merit. Although there has
been no formal resolution to this dispute, there have been no communications between the parties concerning this issue since 2002.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Up to $450,000 if and to the extent the CoolSavings patent currently in dispute survives the pending reexamination proceedings at the Patent and Trademark Office that were
initiated by a third party. This component of the settlement arrangement has not been accrued for because the possibility of the Companys having to make this payment continues to remain remote.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(d) 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.



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##### Table of Contents

(12) 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 system, online reporting system, Internet
coupon system, e-mail marketing system, 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, 2005 and 2004 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.



|                              |  |      |            |   |                    |   |           |               |  |   |                    |   |  |       |         |     |  |   |            |  
|----------------------------- |  | ---- | ---------- | - | ------------------ | - | --------- | ------------- |  | - | ------------------ | - |  | ----- | ------- | --- |  | - | ---------- | -
|2005                          |  | IDBM |            |   | ConsumerReview.com |   |           | SegmentTotals |  |   | UnallocatedAmounts |   |  | 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  |  
|                              |  |      |            |   |                   
|2004                          |  | IDBM |            |   | ConsumerReview.com |   |           | SegmentTotals |  |   | UnallocatedAmounts |   |  | Total |        
|Operating revenue             |  | $    | 2,957,103  |   |                    | $ | 2,429,090 |               |  | $ | 5,386,193          |   |  | $     |        |     |  | $ | 5,386,193  |  
|Operating loss                |  |      | (8,319,798 | ) |                    |   | (750,792  | )             |  |   | (9,070,590         | ) |  |       |        |     |  |   | (9,070,590 | )
|Depreciation and amortization |  |      | 1,606,539  |   |                    |   | 657,002   |               |  |   | 2,263,541          |   |  |       |        |     |  |   | 2,263,541  |  
|Capital expenditures          |  |      | 18,804     |   |                    |   | 8,335     |               |  |   | 27,139             |   |  |       |        |     |  |   | 27,139     |  
|Assets                        |  |      | 2,306,918  |   |                    |   | 1,077,270 |               |  |   | 3,384,188          |   |  |       | 373,136 | (1) |  |   | 3,757,324  |  

---

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

(b) Customers

For the years ended
December 31, 2005 and 2004, one of the Companys Interactive Database Marketing Division customers, Reckitt Benckiser, contributed $1.8 million and $1.2 million, respectively, in revenue, or 31% and 22%, respectively, of the Companys
revenue. This customers original agreement expired in October 2002, and the customer has subsequently entered into four renewal agreements, with the most recent one expiring on December 31, 2006.

(13) Capital Stock, Stock Plans and Warrants

(a) Authorized
Capital

On November 7, 2001, the Companys Board of Directors unanimously approved, subject to stockholder
approval, (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 will 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. On November 30, 2001, holders of
a majority of the outstanding shares of the Companys common stock executed a written stockholder consent approving the amendment of the Companys Restated Certificate of Incorporation and the amendment to the Companys Stock Option
Plan. Under applicable federal securities laws, the amendments are not effective until at least 20 days after this information statement is sent or given to the Companys stockholders.



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##### Table of Contents

(b) Preferred Stock

On November 30, 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.

In addition, 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, 2005,
there were 3,239,986 shares of Series C convertible preferred stock issued and outstanding. As of December 31, 2005, 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 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



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##### Table of Contents

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, 2005, there
were 21,000,000 shares of common stock reserved for issuance and there were 7,425,353 options to purchase shares of common stock outstanding at a weighted average exercise price of $1.25 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.

From 1997 through 2005, the following performance-based option grants were issued:



|     |  |         |  |       |     
|---- |  | ------- |  | ----- | ----
|Year |  | Options |  | Price
|1997 |  | 65,618  |  | $     | 2.50
|1998 |  | 34,400  |  | $     | 2.50
|1999 |  | 50,000  |  | $     | 2.50
|1999 |  | 110,400 |  | $     | 3.50
|2001 |  | 25,000  |  | $     | 3.40
|2002 |  | 200,000 |  | $     | 0.50
|2003 |  | 10,000  |  | $     | 0.55
|2003 |  | 216,810 |  | $     | 0.14
|2003 |  | 16,500  |  | $     | 0.41

Compensation expense related to performance-based option grants of $0 and
($63,047) was recorded for the years ended December 31, 2005 and 2004, respectively. The credit for 2004 reflects the reversal of historical stock-based compensation expense related to terminated employees, that was recorded in excess of the
expense pertaining to their options vested through termination, as well as the reversal of historical stock-based compensation expense for unearned performance-based option grants.

As allowed by FAS 123, the Company applies the intrinsic value-based method of accounting prescribed by APB 25 and related interpretations
in accounting for its employee stock options, rather than the alternative fair value accounting method. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the
exercise price. For the years ended December 31, 2005 and 2004, the Company recorded equity-based compensation expense, exclusive of performance based stock option compensation expense, of $182,444 and $448,575, respectively. These expenses
relate to the difference between the fair value of the Companys common stock on the grant date and the exercise price of options granted during 2000 through 2005. Had compensation expense for the Companys stock option plan been
determined based upon the fair value methodology under FAS 123 the Companys net loss applicable to common stockholders would have been adjusted to the pro forma amounts presented below:



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##### Table of Contents

|                                                                                                                                               |  |                         |            |   |      |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ----------- | -
|                                                                                                                                               |  | Year ended December 31, |           
|                                                                                                                                               |  | 2005                    |            |   | 2004 |  
|Net loss applicable to common stockholders, as reported                                                                                        |  | $                       | (4,263,250 | ) |      | $ | (10,799,196 | )
|Add: Total stock-based employee compensation expense included in reported net loss, net of related tax effects                                 |  |                         | 182,444    |   |      |   | 448,575     |  
|Deduct: Total stock-based employee compensation expense as determined under fair value based method for all awards, net of related tax
effects |  |                         | (461,457   | ) |      |   | (1,918,302  | )
|                                                                                                                                               |  |                         |            |   |      |   |             |  
|Pro forma net loss                                                                                                                             |  | $                       | (4,542,263 | ) |      | $ | (12,268,923 | )
|                                                                                                                                               |  |                         |            |   |      |   |             |  
|Basic and diluted net loss per share:                                                                                                          |  |                         |            |   |      |   |             |  
|As reported                                                                                                                                    |  | $                       | (0.07      | ) |      | $ | (0.19       | )
|Pro forma                                                                                                                                      |  |                         | (0.07      | ) |      |   | (0.21       | )

The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for options issued during 2005 and 2004, respectively: volatility factors of 53% and 75%, risk-free interest rates of 3% and 3.6%, weighted-average expected life of 5 years, and
no dividend yields. The weighted-average fair value of stock options granted during 2005 and 2004 was $0.20 and $0.42, respectively.

A summary of the Companys stock option activity and weighted average exercise price is as follows:



|                           |  |                 |   |  |                               |     
|-------------------------- |  | --------------- | - |  | ----------------------------- | ----
|                           |  | Number ofshares |   |  | Weightedaverage exerciseprice
|Balance, January 1, 2004   |  | 9,798,222       |   |  | $                             | 1.10
|Granted                    |  | 847,000         |   |  |                               | 0.21
|Exercised                  |  | (575,337        | ) |  |                               | 0.13
|Canceled                   |  | (2,097,982      | ) |  |                               | 0.51
|                           |  |                 |   |  |                               |     
|Balance, December 31, 2004 |  | 7,971,903       |   |  |                               | 1.23
|Granted                    |  | 304,000         |   |  |                               | 0.33
|Exercised                  |  | (363,800        | ) |  |                               | 0.13
|Canceled                   |  | (486,750        | ) |  |                               | 1.15
|                           |  |                 |   |  |                               |     
|Balance, December 31, 2005 |  | 7,425,353       |   |  | $                             | 1.25
|                           |  |                 |   |  |                               |     

The following table summarizes information concerning currently outstanding and
exercisable options at December 31, 2005:



|                         |  |                               |  |                                           |  |                               
|------------------------ |  | ----------------------------- |  | ----------------------------------------- |  | ------------------------------
|                         |  | Options outstanding          
|Range of exercise prices |  | Numberoutstandingat12/31/2005 |  | Weighted-average remainingcontractuallife |  | Optionsexercisableat12/31/2005
|$0.13 - $0.50            |  | 6,437,103                     |  | 5.4 years                                 |  | 5,458,460                     
|$0.54 - $0.60            |  | 116,750                       |  | 7.5 years                                 |  | 63,750                        
|$2.50                    |  | 212,000                       |  | 2.5 years                                 |  | 212,000                       
|$3.50                    |  | 46,000                        |  | 4.0 years                                 |  | 46,000                        
|$5.53                    |  | 30,000                        |  | 5.2 years                                 |  | 30,000                        
|$6.50                    |  | 25,000                        |  | 4.6 years                                 |  | 25,000                        
|$8.02 - $8.17            |  | 5,500                         |  | 5.0 years                                 |  | 5,500                         
|$11.21                   |  | 3,000                         |  | 4.8 years                                 |  | 3,000                         
|$13.00                   |  | 550,000                       |  | 2.7 years                                 |  | 550,000                       
|                         |  |                               |  |                                           |  |                               
|                         |  | 7,425,353                     |  | 5.1 years                                 |  | 6,393,710                     
|                         |  |                               |  |                                           |  |                               



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##### Table of Contents

(d) Warrants

The Company has issued warrants to purchase common shares in connection with several equity issuances: during 1997 warrants were granted in connection with the issuance of Series A convertible preferred stock, during
1999 warrants were granted in connection with the issuance of Series B convertible preferred stock and during 2000 warrants were granted in connection with the issuance of Series C convertible redeemable preferred stock. The warrants granted in 2001
were in conjunction with the acquisition of the Commerce Division and BrightStreet.com, with rights to purchase common shares of 1,860,577 and 750,000, respectively. The warrants issued in 2002 were issued in consideration of a financing commitment
(see Note 3d). The warrants issued during 2003 were issued in connection with Peter Friedlis continued support of the business and his assistance with fundraising.

The warrant issued to Inktomi Corporation, in 2001, as part of the Commerce Division acquisition was a contingent performance-based
warrant that Inktomi was eligible to exercise based upon the achievement of revenue targets for the Commerce Division at the end of 12 months following the closing of the acquisition. Since revenue did not meet the contractually defined revenue
target, the right to exercise the earn-out warrant expired during 2002.

The warrants issued in conjunction with the
BrightStreet.com acquisition consist of a warrant to purchase 500,000 shares of the Companys common stock and a contingent performance-based warrant to purchase up to 250,000 shares of the Companys common stock. The performance-based
warrant was based upon the achievement of a revenue target of $7 million for BrightStreet.com during the 18 months following the closing of the acquisition. Since revenue did not meet the contractually defined revenue target, the right to exercise
the performance-based warrant expired during 2003.

The following table is a roll forward of the warrants outstanding, the
underlying common shares and the weighted average exercise price per share:



|                           |  |           |   |  |                              |     
|-------------------------- |  | --------- | - |  | ---------------------------- | ----
|                           |  | Warrants  |   |  | WeightedAverageExercisePrice
|Balance, January 01, 2004  |  | 7,074,485 |   |  | $                            | 0.39
|Exercised                  |  | (100,000  | ) |  |                              | 0.14
|                           |  |           |   |  |                              |     
|Balance, December 31, 2004 |  | 6,974,485 |   |  |                              | 0.40
|Expired                    |  | (619,485  | ) |  |                              | 2.43
|                           |  |           |   |  |                              |     
|Balance, December 31, 2005 |  | 6,355,000 |   |  | $                            | 0.20
|                           |  |           |   |  |                              |     

Of the 6,355,000 balance of warrants at December 31, 2005:



| |  |  | 110,000 warrants were issued during the period of October 1996 through February 1999, and all such warrants expire on December 31, 2008;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 6,000,000 warrants were issued during 2002, of which 100,000 were exercised during 2004, with an expiration date of April 7, 2008; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 345,000 warrants were issued during 2003 with an expiration date of December 8, 2007.
| | - |  | -------------------------------------------------------------------------------------

(14) 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., Savetech, 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., a consulting company that is utilized by the Company.

In July 2005, September 2005 and November 2005 the Company issued a 10% convertible promissory note for $500,000 to Venturetec, Inc.,
a 10% convertible promissory note for $1,000,000 to US Venture 05, Inc. and a 10% convertible promissory note for $3,000,000 to US Venture 05, Inc., respectively.

In March 2005, the Company finalized the terms of a preferred stock financing with Friedli Corporate Finance, which consists of an offering of shares of a newly created series of preferred stock designated Series C
convertible preferred stock. The Series C convertible preferred stock has an issue price of $4.00 per share, has an 8% cumulative dividend feature, is convertible into ten shares of the Companys 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. Associated with the preferred stock financing, as of December 31, 2005, the Company received $2,500,000 and issued
625,192 shares of Series C convertible preferred stock to InVenture, Inc., US Venture 05, Inc. and Venturetec, Inc.



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In connection with the preferred stock financing, on March 31, 2005, each of InVenture, Inc., Pine,
Inc. and Venturetec, Inc. (collectively, the Noteholders) agreed to exchange their existing convertible promissory notes for shares of the newly created Series C convertible preferred stock. Under these exchange agreements, the Company
issued shares of Series C convertible preferred stock to each of the Noteholders in exchange for their convertible promissory notes. Upon the exchange, the convertible promissory notes were immediately cancelled and the Company owes no further
amounts thereunder. If the Series C convertible preferred stock 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 the Noteholder, a warrant to
purchase shares of the Companys common stock. The exercise price for each warrant will equal twenty percent below the average of the market prices for the five trading days prior to, but not including, February 2, 2009. The following
table presents information regarding the amounts of outstanding principle and accrued but unpaid interest that the Company owed each Noteholder under their convertible promissory notes that were exchanged, as well as the number of shares of Series C
convertible preferred stock issued in the exchange and the number of shares of common stock underlying each of the warrants to be granted to each of the Noteholders.



|                 |  |                                              |           |                                     |           |                                                |          
|---------------- |  | -------------------------------------------- | --------- | ----------------------------------- | --------- | ---------------------------------------------- | ---------
|Noteholders      |  | Amount of Outstanding Principal and
Interest |           | Number of Shares of Preferred Stock |           | Shares of Common Stock Underlying the
Warrants
|InVenture, Inc.  |  | $                                            | 5,065,288 |                                     | 1,266,322 |                                                | 2,026,115
|Pine, Inc.       |  | $                                            | 2,195,090 |                                     | 548,773   |                                                | 878,035  
|Venturetec, Inc. |  | $                                            | 3,198,795 |                                     | 799,699   |                                                | 1,279,518

On March 29, 2005 the Company received a $400,000 bridge loan from Peter Friedli that was
paid back with interest of approximately $2,500 on April 27, 2005.

On October 8, 2002, the Companys Board of Directors
approved the issuance of 6,000,000 warrants to four investors as consideration for a $20 million financing commitment which was memorialized in a letter to the Company, by Friedli Corporate Finance, dated September 12, 2002. The warrants
entitle each investor to purchase one share of the Companys common stock, $0.01 per value per share, for an initial exercise price of CHF 0.19 per share during the exercise period. Pursuant to an amendment to the warrants, the exercise
period began three months from January 6, 2003 and ends on April 7, 2008. The fair value of these warrants, using the Black-Scholes pricing model on the date they were granted, was estimated to be approximately $720,000. Two of the
investors, Peter Friedli and Venturetec, are stockholders of the Company and pursuant to the terms of the private placement each received 1,000,000 warrants. As part of this financing, in March 2003, the Company executed convertible promissory notes
in favor of Friedli Corporate Finance and InVenture, Inc. The notes allow the Company to draw down against the available principal of up to $6 million at any time and in any amount during the first two years of the notes. All principal drawn upon
will be secured by substantially all of the Companys assets. Subsequent to the issuance of these promissory notes, the Company, Friedli Corporate Finance and InVenture, Inc. agreed to assemble a syndicate of third parties to whom the Company
would issue convertible promissory notes on terms similar to the March 2003 $6 million convertible promissory notes. The aggregate dollar amount of the convertible promissory notes that the Company issues to third parties through syndication will
reduce, on a dollar-for-dollar basis, the $6 million convertible promissory notes of Friedli Corporate Finance and InVenture, Inc. and the balance, if any, will continue to be available to the Company under the initial $6 million commitment. During
March 2004, the amount available to the Company under Friedli Corporate Finances and InVenture, Inc.s initial commitment was increased from $6 million to $12 million. As part of the syndication process the Company issued convertible
promissory notes totaling $11,000,000. As previously mentioned, on March 31, 2005, convertible promissory notes totaling $9,750,000, along with accrued interest, were exchanged for Series C convertible preferred stock.

Venturetec, Inc. and Pine, Inc. were debenture holders in Consumer Review, Inc. Therefore, as a result of the Companys acquisition of substantially
all the assets of Consumer Review, Inc. in December 2002, Venturetec, Inc. and Pine, Inc. received 240,315 shares and 4,500 shares, respectively, of the Companys Series B convertible preferred stock. In May 2005, all shares of Series B
convertible preferred stock automatically converted into shares of the Companys common stock (each 1 share of Series B convertible preferred stock converted into 8 shares of common stock).

In July 1996, the Company entered into a consulting agreement with Friedli Corporate Finance, which has been renewed several times, with the most recent
renewal occurring during 2004. Under the agreement, Friedli Corporate Finance 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 clients/investors and the Company by disseminating
information to such investors on behalf of the Company. In connection with his continued support of the business and his assistance with fundraising, on December 8, 2003, Peter Friedli was issued 345,000 warrants with an exercise price of $0.50
and an expiration date of December 8, 2007. As a result of the help provided in securing the funds associated with the convertible promissory notes and the preferred stock



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##### Table of Contents

financing, Friedli Corporate Finance, Inc. was paid $750,000 during the year ended December 31, 2005 and a total of $1,815,000 since May 2003, which
Friedli Corporate Finance, Inc. 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.

Through December 31, 2005, as non-employee members of the Companys Board of Directors, Peter Friedli has received 100,000 shares of common
stock and 90,000 options and Sean Deson has received 150,000 shares of common stock.

(15) Selected Quarterly Financial Data (unaudited)

The following tables contain unaudited Statement of Operations information for each quarter of 2005 and 2004. 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.



|                                            |  |             |            |   |             |   |            |             |  |   |             |   |  |   |            |  
|------------------------------------------- |  | ----------- | ---------- | - | ----------- | - | ---------- | ----------- |  | - | ----------- | - |  | - | ---------- | -
|                                            |  | 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      | )
|                                            | 
|                                            |  | 2004        |           
|                                            |  | 1st Quarter |            |   | 2nd Quarter |   |            | 3rd Quarter |  |   | 4th Quarter |  
|Revenues                                    |  | $           | 1,086,811  |   |             | $ | 1,292,747  |             |  | $ | 1,422,750   |   |  | $ | 1,583,885  |  
|Gross Profit                                |  |             | 400,345    |   |             |   | 603,870    |             |  |   | 606,943     |   |  |   | 909,819    |  
|Operating loss                              |  |             | (2,928,498 | ) |             |   | (2,902,709 | )           |  |   | (1,868,624  | ) |  |   | (1,370,759 | )
|Loss before income tax                      |  |             | (3,186,544 | ) |             |   | (3,272,165 | )           |  |   | (2,361,275  | ) |  |   | (1,979,212 | )
|Net loss applicable to common stockholders  |  |             | (3,186,544 | ) |             |   | (3,272,165 | )           |  |   | (2,361,275  | ) |  |   | (1,979,212 | )
|Basic and diluted net loss per common share |  | $           | (0.06      | ) |             | $ | (0.06      | )           |  | $ | (0.04       | ) |  | $ | (0.03      | )

(16) Subsequent Events

Convertible Promissory Notes

During January 2006, the Company issued a 10% convertible promissory note with
a principal amount of $500,000 and a maturity date of April 30, 2006. The terms are the same as those noted in Note 9.



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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.                                                                                                                                                                  
|               | 
|4.4(1)         |  | Warrant to Purchase Common Stock, dated as of December 3, 2001, between E-centives, Inc. and BrightStreet.com, Inc.                                                                                                                                                                            
|               | 
|4.5(1)         |  | Warrant to Purchase 500,000 shares of Common Stock, dated as of December 3, 2001, between E-centives, Inc. and BrightStreet.com, Inc.                                                                                                                                                          
|               | 
|4.6(2)         |  | Form of Warrant to Purchase shares of Common Stock between E-centives, Inc. and certain holders of such warrants.                                                                                                                                                                              
|               | 
|4.7(3)         |  | Amendment to Form of Warrant to Purchase shares of Common Stock between E-centives and certain holders of such warrants.                                                                                                                                                                       
|               | 
|4.8(4)         |  | Amendment No. 1 to Convertible Promissory Note dated October 31, 2005 by and between E-centives, Inc. and Venturetec, Inc.                                                                                                                                                                     
|               | 
|4.9(5)         |  | Certificate of Designations of the Powers, Preferences and Relative, Participating, Optional and other Special Rights of Series C Preferred Stock of E-centives, Inc. as filed in the Office of
the Secretary of State of Delaware on March 21, 2005.                                          
|               | 
|10.1(1)+       |  | 1996 Stock Incentive Plan.                                                                                                                                                                                                                                                                     
|               | 
|10.8+          |  | 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))                                                                                                     
|               | 
|10.12          |  | Modification, Assignment and Assumption Agreement, dated November 1, 2001, by and among E-centives, Inc., BrightStreet.com, Inc. and Pentech Financial Services, Inc. (incorporated herein by
reference to Exhibit 10.12 to the Annual Report Form 10-K filed by E-centives on March 31, 2003).
|               | 
|10.14(6)       |  | Convertible Promissory Note dated as of March 18, 2003 by E-centives to the order of Friedli Corporate Finance, Inc. and/or InVenture Inc.                                                                                                                                                     
|               | 
|10.15(7)       |  | Amendment to Convertible Promissory Note dated as of June 2003 by E-centives, Friedli Corporate Finance, Inc. and InVenture Inc.                                                                                                                                                               
|               | 
|10.16(7)       |  | Convertible Promissory Note dated as of March 25, 2004 by E-centives to the order of Friedli Corporate Finance, Inc. and/or InVenture Inc.                                                                                                                                                     
|               | 
|10.17(4)       |  | Convertible Promissory Note dated September 30, 2005 by and between E-centives, Inc. and US Venture 05, Inc.                                                                                                                                                                                   
|               | 
|10.18(5)       |  | Form of Exchange Agreement between the Company and Noteholder.                                                                                                                                                                                                                                 
|               | 
|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).
|--- | --------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to the Registrants Form 8-K filed on November 27, 2002 (Registration No. 000-31559).
|--- | ---------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to the Registrants Form 8-K/A filed on January 16, 2003 (Registration No. 000-31559).
|--- | ----------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to the Registrants Form 10-QSB filed on November 14, 2005 (Registration No. 000-31559).
|--- | ------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference to the Registrants Form 8-K filed on April 7, 2005.
|--- | ------------------------------------------------------------------------------

|(6) | Incorporated by reference to the Registrants 2003 Annual Report on Form 10-K (Registration No. 000-31559).
|--- | -----------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to the Registrants 2004 Annual Report on Form 10-KSB (Registration No. 000-31559).
|--- | -------------------------------------------------------------------------------------------------------------

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

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