10-K

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2006

OR

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

For the transition period from ____________ to ____________ .

Commission file number 000-27065

APTIMUS, INC.

(Exact name of registrant as specified in its charter)

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

199 Fremont St.

Suite 1800

San Francisco, CA 94105

(Address of principal executive offices)

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

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

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes oNo x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.Yes oNo x

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes oNo x

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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FORWARD LOOKING STATEMENTS

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

PART I

Item 1: Business

Overview

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

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

Company History

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

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

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

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

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

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

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

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

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

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

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

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Industry Background

Direct Marketing

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

Traditional Direct Marketing

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

Online Direct Marketing

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

·   facilitates instantaneous data and feedback on marketing campaigns;

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

·   enables highly customized marketing campaigns.

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

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

The Aptimus Solution

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

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

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

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

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Dynamic Revenue Optimization^TM

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

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

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

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

Benefits to Consumers

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

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Benefits to Advertisers

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

Benefits to Publishers

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

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

Strategy

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

Grow Web Site Publisher Base

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

Expand Client Base

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

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·   enhanced marketing programs,

·   new methods of presenting offers, and

·   expanded data-gathering and validation options.

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

Increase Revenues

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

Sales and Marketing

Client Base Development

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

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PublisherBase Development

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

Operations and Technology

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

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

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

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

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

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

Competition

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

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

Seasonality

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

Significant Customers

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

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

Intellectual Property

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

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

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

Financial Information About Geographic Areas

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

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Employees

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

Item 1A: Risk Factors

RISKS RELATED TO OUR BUSINESS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

·   spend significant amounts on our legal defense;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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·   changes in demand and pricing for our services;

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

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

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

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

·   changes in the health of the overall economy;

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

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

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

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

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

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

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

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

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

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

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

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

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

·   potential loss of key employees of acquired businesses;

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

·   increased fixed costs, which could affect profitability;

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

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

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

·   responsibility for liabilities of companies we acquire; and

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

RISKS RELATED TO OUR INDUSTRY

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

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

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

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

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

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

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

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

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

Item 1B. Unresolved Staff Comments

Not applicable

Item 2: Properties

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

Item 3: Legal Proceedings

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

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

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

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PART II

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

Price Range of Common Stock

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

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

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

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

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

Recent Sales of Unregistered Securities

None

Item 6: Selected Financial Data

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

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

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

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

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

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

OVERVIEW

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

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

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

Acquisition and Comparability of Operations

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

Focus in current year

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

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

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Concentrations

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

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

Other information

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

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

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RESULTS OF OPERATIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

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

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

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

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

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

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

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

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

OFF-BALANCE SHEET ARRANGEMENTS

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Revenue Recognition

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

·   There is persuasive evidence of an arrangement;

·   The service has been provided to the customer;

·   The collection of the fees is reasonably assured; and

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

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

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

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

·   Aptimus acts as a principal in these transactions;

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

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

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

·   Aptimus bears the risk of loss related to collections

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

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

Share-Based Compensation

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

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

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

Business Combinations

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

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

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

Goodwill

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

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

44

Long-lived Assets

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

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

Valuation Allowance for Deferred Tax Assets

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

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

Allowance for Doubtful Accounts

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

RECENT ACCOUNTING PRONOUNCMENTS

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

45

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

Item 7A: Quantitative and Qualitative Disclosures About Market Risk

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

46

Item 8: Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

47

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

Aptimus, Inc.

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

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

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

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

/s/ Moss Adams LLP

San Francisco, California

March 30, 2007

48

APTIMUS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

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

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

49

APTIMUS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

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

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

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

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

50

APTIMUS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)

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

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

51

APTIMUS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

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

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

52

APTIMUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and business

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

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

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

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

2. Summary of significant accounting policies

Principles of Consolidation

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

Reclassifications

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

Use of estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Significant accounting policies and estimates underlying the accompanying financial statements include:

53

·   the recognition of revenue

·   the determination of fair values of share awards;

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

·   assessing impairment of goodwill and long-lived assets;

·   determining allowances for doubtful accounts;

·   determining lives and recoverability of fixed assets;

·   determining reserves for deferred tax assets;

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

Cash and cash equivalents

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

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

Marketable securities

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

Accounts receivable

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

Fixed assets

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

54

Office furniture and equipment	Five years
Computer hardware and software	Three years
Leasehold improvements	Shorter of the estimated useful lives or the lease term

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

Intangible assets

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

Email names	Two years
Trademarks, logos and patents	Three years
Trade names	Fifteen years
Customer relationships	Eight years

Impairment of long-lived assets

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

Goodwill

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

Long-term investments

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

55

Fair value of financial instruments

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

Deferred revenues

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

Revenue recognition

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

·   There is persuasive evidence of an arrangement;

·   The service has been provided to the customer;

·   The collection of the fees is reasonably assured; and

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

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

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

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

·   the Company acts as a principal in these transactions;

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

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

56

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

·   the Company bears the risk of loss related to collections

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

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

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

Advertising costs

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

Research and development costs

Research and development costs are expensed as incurred.

Income taxes

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

Net income (loss) per share

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

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

57

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

Concentrations of credit risk and significant customers

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

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

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

Share-based compensation

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

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

Comprehensive income

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

Segment information

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

Recent accounting pronouncements

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

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

3. Acquisitions

High Voltage Interactive, Inc.

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

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

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

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

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

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

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

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

Neighbornet

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

4. Accounts receivable

Accounts receivable consist of the following (in thousands):

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

5. Fixed assets

Fixed assets consist of the following (in thousands):

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

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

6. Intangible assets

Intangible assets consist of the following (in thousands):

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

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

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

Year ending December 31,	Amortization
2007	$	277
2008		276
2009		273
2010		273
2011		273
Thereafter		634
Total expected future amortization	$	2,006

7. Notes Payable

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

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8. Accrued and other liabilities

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

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

9. Related party transactions

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

10. Commitments and contingencies

Commitments

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

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

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Year ending December 31,	Operating Leases		Sublease Income
2007	$	786	$	159
2008		470		-
2009		496		-
2010		523		-
2011		458		-
Total minimum lease payments	$	2,733	$	159

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

Litigation

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

Guarantees and Indemnifications

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

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

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

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11. Shareholders’ equity

Common stock

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

Options outstanding	2,076
Restricted stock	25
Warrants outstanding	495
Stock available for future grant:
1997 Stock Option Plan	43
2001 Stock Plan	601
Employee Stock Purchase Plan	1,932
Total	5,172

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

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

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

Warrants

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

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

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

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

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

Year of issue	Shares		Exercise price		Year of expiration
2003		27,085	$	0.50		2008
2003		43,125	$	2.05		2008
2003		5,634	$	5.00		2008
2005		70,216	$	20.22		2010
2005		21,065	$	18.15		2010
2006		327,500	$	7.50		2009
Total		494,625

Stock Option Plans

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

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

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

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

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

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

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

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

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

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

	Options outstanding						Options exercisable
Range of exercise prices	Number of shares		Weighted average remaining contractual life (in years)		Weighted average exercise price		Number of shares		Weighted average exercise price
$0.00		25		6.6	$	0.00		25	$	0.00
$0.28 - $0.68		827		5.3		0.45		827		0.45
$1.02 - $1.95		103		3.7		1.61		100		1.61
$4.27 - $4.75		213		9.0		4.58		28		4.59
$5.31 - $6.95		225		7.3		6.47		119		6.35
$7.00 - $14.88		683		8.5		8.64		525		8.92
		2,076		6.9	$	4.28		1,624	$	2.94

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

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

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

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

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

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

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

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

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

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

69

Employee stock purchase plan

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

12. Employee retirement plan

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

13. Income taxes

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

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

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

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

70

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

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

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

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

14. Quarterly financial information (unaudited)

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

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

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

71

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

Not applicable.

Item 9A: Controls And Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls

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

Inherent Limitations on Effectiveness of Controls

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

Item 9B: Other Information

None.

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PART III

Item 10: Directors and Executive Officers of the Registrant

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

Code of Ethics

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

Item 11: Executive Compensation

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

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

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

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

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

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

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

Item 13: Certain Relationships and Related Transactions

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

Item 14: Principal Accountant Fees and Services

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

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

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

II-3

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)1. Financial Statements

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

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

(a)2. Financial Statement Schedules

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

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

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

(a)3 Exhibits:

Exhibit Number	Description
3.1*	Second Amended and Restated Articles of Incorporation of registrant.
3.1.1(2)	Articles of Amendment filed September 16, 2000.
3.1.2(6)	Articles of Amendment filed March 29, 2002.
3.2*	Amended and Restated Bylaws of registrant.

II-4

4.1*	Specimen Stock Certificate.
4.3(3)	Rights Agreement dated as of March 12, 2002 between registrant and Mellon Investor Services LLC, as rights agent.
10.1*(7)	Form of Indemnification Agreement between the registrant and each of its directors.
10.2*(7)	1997 Stock Option Plan, as amended.
10.3*(7)	Form of Stock Option Agreement.
10.4(1)(7)	Aptimus, Inc. 2001 Stock Plan.
10.4.1(2)(7)	Form of Stock Option Agreement.
10.4.2(2)(7)	Form of Restricted Stock Agreement (for grants).
10.4.3(2)(7)	Form of Restricted Stock Agreement (for rights to purchase).
10.5(4)(7)	Change in Control Agreement, dated as of December 6, 2002, by and between registrant and Timothy C. Choate
10.6(4)(7)	Form of Change in Control Agreement, dated as of December 6, 2002, by and between registrant and each of certain executive managers of registrant
10.7(5)	Form of Common Stock Warrant, dated July 2003, by and between the Company and certain investors.
10.8(5)	Form of Registration Rights Agreement, dated as of July 1, 2003, by and between the Company and certain investors.
10.9(11)	Agreement of Lease, dated as of November 18, 2003, by and between 100 Spear Street Owner’s Corp. and the Company.
10.10(9)	Agreement of Lease, dated as of April 29, 2004, by and between Sixth and Virginia Properties and the Company.
10.11(8)	Stock Purchase Agreement, dated as of December 4, 2003, by and between the Company and certain investors.
10.12(10)	Stock Purchase Agreement, dated as of March 25, 2005, by and between the Company and certain investors.
10.13(10)	Form of Common Stock Warrant, dated March 25 2005, by and between the Company and certain investors and service providers.
10.14(7)	Form of Stock Resale Restriction Agreement, dated as of December 23, 2005, by and between registrant and each of certain executive managers and key employees of registrant.
23.1	Consent of Moss Adams LLP, Independent Registered Public Accounting Firm.
31.1	Rule 13a-14(a) Certification of the Chief Executive Officer
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer
32.1	Section 1350 Certification of the Chief Executive Officer
32.2	Section 1350 Certification of the Chief Financial Officer

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

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

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

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

II-5

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

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

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

(7) Management compensation plan or agreement.

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

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

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

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

II-6

SIGNATURES

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

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

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

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

II-7

EXHIBITS INDEX

Exhibit Number	Description
3.1*	Second Amended and Restated Articles of Incorporation of registrant.
3.1.1(2)	Articles of Amendment filed September 16, 2000.
3.1.2(6)	Articles of Amendment filed March 29, 2002.
3.2*	Amended and Restated Bylaws of registrant.
4.1*	Specimen Stock Certificate.
4.3(3)	Rights Agreement dated as of March 12, 2002 between registrant and Mellon Investor Services LLC, as rights agent.
10.1*(7)	Form of Indemnification Agreement between the registrant and each of its directors.
10.2*(7)	1997 Stock Option Plan, as amended.
10.3*(7)	Form of Stock Option Agreement.
10.4(1)(7)	Aptimus, Inc. 2001 Stock Plan.
10.4.1(2)(7)	Form of Stock Option Agreement.
10.4.2(2)(7)	Form of Restricted Stock Agreement (for grants).
10.4.3(2)(7)	Form of Restricted Stock Agreement (for rights to purchase).
10.5(4)(7)	Change in Control Agreement, dated as of December 6, 2002, by and between registrant and Timothy C. Choate
10.6(4)(7)	Form of Change in Control Agreement, dated as of December 6, 2002, by and between registrant and each of certain executive managers of registrant
10.7(5)	Form of Common Stock Warrant, dated July 2003, by and between the Company and certain investors.
10.8(5)	Form of Registration Rights Agreement, dated as of July 1, 2003, by and between the Company and certain investors.
10.9(11)	Agreement of Lease, dated as of November 18, 2003, by and between 100 Spear Street Owner’s Corp. and the Company.
10.10(9)	Agreement of Lease, dated as of April 29, 2004, by and between Sixth and Virginia Properties and the Company.
10.11(8)	Stock Purchase Agreement, dated as of December 4, 2003, by and between the Company and certain investors.
10.12(10)	Stock Purchase Agreement, dated as of March 25, 2005, by and between the Company and certain investors.
10.13(10)	Form of Common Stock Warrant, dated March 25 2005, by and between the Company and certain investors and service providers.
10.14(7)	Form of Stock Resale Restriction Agreement, dated as of December 23, 2005, by and between registrant and each of certain executive managers and key employees of registrant.
23.1	Consent of Moss Adams LLP, Independent Registered Public Accounting Firm.
31.1	Rule 13a-14(a) Certification of the Chief Executive Officer
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer
32.1	Section 1350 Certification of the Chief Executive Officer
32.2	Section 1350 Certification of the Chief Financial Officer

II-8

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

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

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

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

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

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

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

(7) Management compensation plan or agreement.

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

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

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

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

II-9

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements (Nos. 333-124403 and 333-114089) on Form S-3 and (Nos. 333-88074, 333-45854, and 333-92379) on Form S-8 pertaining to the of our report dated March 30, 2007, with respect to the consolidated financial statements and schedule of Aptimus, Inc. included in this Annual Report on Form 10-K for the year ended December 31, 2006.

/s/ Moss Adams LLP
San Francisco, California

March 30, 2007

EX-31.1

I, Robert W. Wrubel, certify that:

1.I have reviewed this annual report on Form 10-K of Aptimus, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrantand have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2007

/s/ Robert W. Wrubel

Robert W. Wrubel

Chief Executive Officer

EX-31.2

I, John A. Wade, certify that:

1.I have reviewed this annual report on Form 10-K of Aptimus, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrantand have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 30, 2007

/s/ John A. Wade

John A. Wade

Chief Financial Officer

EX-32.1

CERTIFICATION PURSUANT TO

18 U.S.C. ss. 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Aptimus, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert W. Wrubel, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Robert W. Wrubel

Robert W. Wrubel

Chief Executive Officer

March 30, 2007

EX-32.2

CERTIFICATION PURSUANT TO

18 U.S.C. ss. 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Aptimus, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John A. Wade, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John A. Wade

John A. Wade

Chief Financial Officer

March 30, 2007