Inuvo, Inc. - Annual Report: 2007 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

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

For the fiscal year ended: December 31, 2007

or

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

For the transition period from: _____________ to _____________

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THINK PARTNERSHIP INC.

(Exact name of registrant as specified in its charter)

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15550 Lightwave Drive, 3^rd Floor, Clearwater, Florida 33760

(Address of Principal Executive Office) (Zip Code)

(727) 324-0046

(Registrant’s telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨    No ý

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 ý    No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or  information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer ¨   Accelerated filer ý   Non-accelerated filer ¨   Smaller reporting company ¨

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

State 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, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.  

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2008 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed within 120 days of the end of the year ended December 31, 2007, are incorporated by reference in Part III hereof. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.

TABLE OF CONTENTS

Forward-Looking Statements

In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements, including statements regarding product plans, future growth and market opportunities, which involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this section under “Risk Factors.” You should carefully review the risks described herein and in other documents we file from time to time with the Securities and Exchange Commission (“SEC”), including the Quarterly Reports on Form 10-Q to be filed in 2008. When used in this report, the words “expects,” “could,” “would”, “may,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “targets,” “estimates,” “looks for,” “looks to,” and similar expressions, as well as statements regarding our focus for the future, are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

PART I

ITEM 1.

DESCRIPTION OF BUSINESS

We are a Nevada corporation headquartered in Clearwater, Florida.  We are currently doing business under the name Kowabunga!® Inc. and will seek formal shareholder approval to change our legal name to Kowabunga!® Inc. at our next shareholder meeting.  Through our wholly-owned direct and indirect subsidiaries we provide marketing and technology solutions to businesses and individuals. As of March 10, 2008 we employed 249 persons.  As of March 10, 2008 we operate in seven locations across the United Sates and one location in the United Kingdom. Our principal executive offices are located at 15550 Lightwave Drive, 3^rd floor, Clearwater, Florida 33760.  Our telephone number is (727) 324-0046. The address of our website is www.kowabunga.com.

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on our website, www.kowabunga.com. Any and all information found on our website is not part of this or any other report we file with or furnish to the SEC.

From 1993 until 1997 we had no operations.  In 1997, we acquired two private companies that were subsequently divested.  In March 2001, we acquired WorldMall.com which was reincorporated in June 2002 as WebSourced, Inc. and subsequently changed its name to MarketSmart Interactive, Inc.  Since 2002 we have acquired a total of fourteen companies which now serve as the platform for all of our business operations.  Our business is organized into three segments: Network, Direct and Advertising.

Summary of Products and Services

Our Network Segment provides performance-based marketing and technology solutions to assist advertisers in driving traffic, obtaining leads and increasing conversions through affiliate marketing, search engine marketing, lead generation and PPC ad networks. Our high profile brands include:

PrimaryAds™ (www.primaryads.com or www.primaryads.co.uk) is a leading CPA (cost per action) Affiliate Network matching high-converting, high-paying offers from advertisers to high-quality traffic and leads through a network of select affiliates. Our email, search and website affiliates earn some of the industry’s highest commissions while driving traffic to various types of offers, including many exclusive offers.

ValidClick AdExchange™ (www.validclick.com) is an open, quality controlled PPC (pay per click)marketplace where clicks are dynamically priced based on FeedPatrol Click Fraud Technology and Fair Isaac Click Conversion Scoring.  We expect this exclusive technology alliance to lead the way to fair market pricing for PPC advertisers based on quality and conversions.

ValidClick DirectAds is a PPC platform that allows publishers to offer keyword or category based PPC text ads on their web site through an interface that is branded to match the website’s look and feel.

Second Bite® (www.secondbite.com) is a unique patent-pending order abandonment recovery technology that provides a full circle solution to recover lost revenue due to shopping cart abandonment. Using automated email messages and phone calls from helpful customer service agents, Second Bite reaches out to shoppers who have abandoned their online shopping cart and encourages them to complete their purchases.

MyAP™ (www.myap.com) is a complete Affiliate Tracking and Management Software solution. It provides merchants the ability to sign up, manage and track the activities of their affiliates through a scalable, reliable, easy-to-use, and privately branded platform with full data transparency.

Kolimbo (www.kolimbo.com) is a traditional affiliate network that provides the ability to partner with top merchants in retail, B2B and niche categories.

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Ozona provides start-to-finish web design, customized web-based applications, database systems, managed and shared hosting solutions and e-commerce.  

Our Direct Segment provides lead generation services and develops and sells direct-to-consumer membership programs.

Morex is a life stages, lead generation business that focuses on marketing to expectant mothers and new parents through the Internet at www.babytobee.com.  As the leader in prenatal and new parent e-mail and direct mail distribution, Morex generates leads both online and over the phone, then markets those leads to Consumer Package Goods manufacturers and advertisers.

iLead Media (”iLead”) sells membership programs in the home based business sector.  These programs are sold directly to consumers through Company-owned ecommerce web sites.  Customers are acquired on a cost-per-acquisition basis through both our internal affiliate marketing networks as well as through third party affiliate marketing networks.

Cherish offers a wide variety of online dating communities designed to allow individuals to search for friends, partners and future spouses using interactive websites. Users specify the type of person or couple they are looking for by age, gender, hobbies and location, and then make contact with that individual or individuals in an online environment. Revenues are generated from a monthly membership fee, which allows users to obtain complete access to the individual community. Some of our online communities also display adult content, and encourage the exploration of alternative lifestyles, in addition to providing dating and relationship services.  

Real Estate School Online, Inc. sells accredited real estate licensing courses, real estate continuing education courses, and real estate exam prep courses online, on CD-ROM, or by correspondence in twenty-seven states through Company-owned ecommerce web sites. 

Our Advertising Segment provides online and off-line advertising, branding, and interactive marketing solutions.

Market Smart Advertising, Inc (“MSA”), is a full-service, integrated marketing and communications firm providing traditional and interactive advertising, broadcast production, public relations, branding services, research, Web development and mystery shopping. Ranked as the third largest agency in the Triangle region by the Triangle Business Journal, MSA’s diverse client list include UNC Health Care and SUBWAY® Restaurants among others.

Web Diversity, based in the UK, provides paid search management and organic search optimization services.

In 2006 we discontinued MarketSmart Interactive operations as a separate business and transferred its operations to MSA. We believe that this consolidation effort will allow us to realize significant improvements in operating efficiencies.

More comprehensive information about our products is available through our Internet website http://www.kowabunga.com. The information on our website is not incorporated by reference into this prospectus. 

Summary of Sales and Marketing

We use a variety of marketing methods to build awareness of our services and technologies in our target markets and to establish credibility and leadership in the marketplace. These methods include marketing materials, advertising, press coverage and other public relations efforts, direct marketing, trade shows, seminars and conferences, relationships with recognized industry analysts, partner programs and our websites.

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Network Segment 

Currently, two employees are dedicated to developing business for advertising clients and three employees devoted to recruiting affiliates to our PrimaryAds affiliate network. PrimaryAds participates in various industry trade shows and executes advertising on a limited basis.

Currently, three sales representatives manage both inbound and outbound sales efforts for our ValidClick search network. Leads are developed by recruiting for potential affiliates that meet criterion that will add value to allow a client to be successful. Incentive programs are offered to existing clients for referrals to our network.

Currently, there is one sales person focused on selling the MyAP product and services while four employees are dedicated to recruiting affiliates for the affiliate network. MyAP is marketed through a variety of channels by participating in industry trade shows, producing white papers, newsletters, web seminars, and advertising in niche publications.

Direct Segment

Morex employs a variety of techniques to develop business. Currently five employees actively sell its products and services to advertisers. Morex markets itself via E-mail, postal list retails, website banners, category sponsorships, pay-per-click directory marketing and telemarketing.

iLead develops business through internet advertising campaigns. iLead offers consistently rank among the top performers across all offers currently available from online advertisers by emphasizing conversion statistics and ultimate return on investment for affiliate networks and publishers. Primarily growing the business on a CPA (cost per acquisition) model, iLead is able to calculate the exact costs of advertising as well as the lifetime value of each customer.

Cherish and its subsidiaries employ a staff whose purpose is to foster activity on Cherish’s online dating websites and to provide persons with access to professional relationship and dating guidance, question and answer forums, as well as online games and events. The Cherish team continually strives to keep the online dating community interested and engaged by adding and enhancing products and services. It stresses customer care and retention as its primary focus.

Cherish markets its online dating services utilizing SEO (search engine optimization) and pay-per-click advertising, affiliate marketing, paid advertising, strategic partnerships and partner solutions and offers custom dating products/services to various niche and vertical markets including newspapers and radio stations across North America. 

Real Estate School Online currently employs four people who manage incoming leads and sales. Real Estate School Online utilizes online marketing campaigns including pay-per-click advertising, search engine optimization and banner advertising to develop sales.

Advertising Segment

MarketSmart Advertising currently employs eight people who are dedicated to facilitating business development and relationship management. MarketSmart Advertising belongs to a variety of state and local advertising, commerce, trade organizations and professional associations.  Additionally, it is a licensed vendor for state and local governments.  MarketSmart Advertising has begun marketing the online products previously offered by MarketSmart Interactive.

Web Diversity currently employs three people dedicated to facilitating business development and relationship management. Web Diversity belongs to a variety of advertising, commerce, trade organizations and professional associations.

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Overview of Industry

We believe the growth of online advertising has not shown any signs of slowing. We believe that companies both large and small are continuing to spend more and more money on their interactive strategies. According to The Interactive Advertising Bureau (IAB) and PricewaterhouseCoopers (PwC), Internet advertising revenues for 2007 are estimated at $21 billion. This represents a 25 percent increase over the previous revenue record of nearly $16.9 billion for full year 2006. Q4 2007 revenues totaled approximately $5.9 billion, making it the highest quarter ever reported and representing a 13 percent rise over the third quarter of 2007 and a 24 percent increase over the fourth quarter of 2006. All four quarters reported in 2007 include record level revenues.

We believe that our suite of interactive technologies and services are positioned to capitalize on this growth. We feel that our performance-based approach allows us a competitive edge in winning the bids for our target market’s online marketing budgets. We have positioned ourselves to be able to offer clients a guaranteed positive return on the money they spend with us.

We believe that our unique, differentiating technologies will emerge as leaders in the coming year as more emphasis is placed on the needs that they fulfill. This includes:

Our new ValidClick Ad Exchange and exclusive technology alliance with Fair Isaac Corporation was created to close the value-price gap in PPC advertising. The AdExchange provides advertisers with safe, consistent, profitable access to the diverse array of PPC traffic—search engines, comparison shopping, contextual implementations, widgets, domains, etc.—while offering web publishers displaying these advertisements top dollar for high-quality click traffic.

Paid search makes up the largest slice of the US online advertising market, as it has since 2003. With its 42.5% contribution to the online total in 2007, according to eMarketer estimates, paid search spending share has remained on the 40%-plus plateau since its spectacular rise early in the decade. Projections through 2011 indicate a similar, although no greater, dominance. Paid search is currently the key driver of US online advertising as a whole. Spending on paid search in 2008 will exceed the $9.6 billion that was spent on all online advertising in 2004.

The threat level in fraudulent clicks continues to rise and cost advertisers billions of dollars.  The overall industry average click fraud rate rose to 16.6 percent for Q4 2007. That's up from the 14.2 percent click fraud rate for the same quarter in 2006 and 16.2 percent for Q3 2007 according to Click Forensic’s clickfraudindex.com.  The average click fraud rate of PPC advertisements appearing on search engine content networks, including Google AdSense and the Yahoo Publisher Network, was 28.3 percent in Q4 2007. That’s up from the 19.2 percent average click fraud rate for the same quarter in 2006 and 28.1 percent for Q3 2007.

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We believe that advertiser awareness to this issue is growing as will their desire for a solution. When placing ads on traditional PPC Networks, advertisers generally pay a uniform keyword price per click to every web publisher that drives traffic to their site. It’s the same price regardless of how often click traffic from the publisher converts into a sale or other desirable result (requesting or downloading information, signing up for a mailing list or RSS feed, etc.). Thus in many instances, pricing is out of alignment with value.

To improve the alignment of price and value, ValidClick AdExchange combines our patent-pending FeedPatrol click fraud technology with the revolutionary “Click Conversion Scoring,” (developed in partnership with Fair Isaac Corporation) to analyze advertiser data in near real time and differentiate/compensate publishers by the conversion effectiveness of their click traffic.  This combination of technologies helps to ensure strong return on investment for advertisers participating in the AdExchange.  FeedPatrol detects clicks likely to be erroneous or fraudulent (those made, whether by real users or software bots/scripts, for the sole purpose of making the advertiser pay), and filters them prior to advertisers being charged.  Then, to address variations in quality within legitimate traffic and ensure fair pricing for advertisers and publishers alike, Fair Isaac’s click conversion scoring rates publishers by their ability to drive conversions for advertisers.  When a publisher makes a request to the AdExchange for the ads, the advertiser’s bid price is automatically adjusted downward for publishers with low conversion scores. Over time, if publishers improve their scores, their adjusted bid price will move upward, moving closer to the ceiling of the advertiser’s original bid price.

Affiliate Channel Transparency: The AffStat 2007 Report showed that affiliate marketers are continuing to seek further transparency into their affiliate channel. The chart on the right shows the challenges faced by traditional, pay per sale affiliate program managers. According to this report, recruiting remains the top single concern followed by several concerns related to better knowing each affiliate, their practices and how to best manage each relationship. We believe that our KowaBunga! platform is the only solution on the market that offers affiliate marketers the ability to recruit new affiliates through a network of 50,000 members – without requiring the advertisers to relinquish control of their affiliate relationships and data. We will concentrate on these factors as we market this platform in the coming year to veteran affiliate marketers who we believe are striving to find a solution that gives them the control and data they need to overcome these challenges.

Online Advertising Services: We believe the market for interactive consultancy based services such as search engine optimization, pay-per-click account management, affiliate management, and online creative development will become a more significant and common part of advertisers overall marketing strategy.  We believe that continuing to build the capacity to assist clients in being effective in those efforts will lead to a more holistic approach to our offerings and ultimately compliment our other services.

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The Offline/Online Exchange: We believe that the emergence of Web 2.0 sites like MySpace and YouTube are contributing to the blurring of the line between traditional offline marketing and interactive online marketing. 2007 was the first year in which all Super Bowl TV advertisements were placed online immediately following (if not prior to) their television debut. Marketers will be seeking holistic strategies that cover everything from TV, print and radio through to ads created specifically online and offline ads that are transferred online due to consumer demand. We believe that our Advertising division is in a position to adapt both online and offline strategies and present our clients with full circle strategies that span all media.

Internal Offers: Competition for online consumers subscribing for services has increased over the recent years.  We believe that our internal offers, including our business opportunity, online education, and online dating offers, marketed through our network as well as other online marketing channels, will continue to increase while amplified competition will help us better test out techniques, creative, and channels to better service our online clients.  

Competition

We compete with interactive advertising agencies, traditional advertising agencies that perform Internet advertising and marketing as part of their services to clients, and other companies that provide marketing services. We also compete in the digital marketing services market with several technology system integrators. We also compete with third-party advertising companies and campaign management technology companies.

We believe that the competitive factors affecting the Internet advertising market are data analysis capabilities, client service, strategy, ad serving technology, functionality and price. We believe we compete proficiently in each area. Our Network and Advertising segments provide a complete range of services designed to meet the needs of any business wanting to advertise and conduct business on the Internet. In particular, our digital marketing services include sophisticated data modeling techniques and dedicated client service teams that seek to employ the best methods, technologies and approaches to make client programs successful. Through our Network segment, we offer advertising agencies and direct advertisers an efficient solution for managing end-to-end online marketing campaigns.

Network Segment

PrimaryAds’ primary competitors include ValueClick, Advertising.com and AzoogleAds. We believe, however, that PrimaryAds is well positioned among these competitors because of its long-standing customer relationships and its commitment to provide superior customer service at competitive prices.

Litmus’ ValidClick Search Network primarily competes with Infospace, Google AdSense, and search engines such as Miva, LookSmart and SearchFeed. In the merchant solutions arena, currently Litmus’ Second Bite technology does not have any direct competitors. However, Litmus does compete indirectly with some web analytics companies that focus on shopping cart abandonment reporting and analytics, such as LivePerson.

Our subsidiary, KowaBunga! Marketing Inc’s main competitors are Commission Junction, LinkShare, Share a Sale and Direct Track. KowaBunga! positions itself among these competitors by providing solution-based products for a full spectrum of clients, from the do-it-yourself market to large clients seeking customized software and managed services tied to affiliate networks.

The competitive market in which Ozona Online Network operates is vast and it is very difficult to identify individual competitors. Providers range from small firms of one or two people to advertising agencies with very large staffs located in multiple locations nationally and internationally. In order to differentiate itself, the Ozona Online Network provides “single source” solutions. Ozona Online Network is able to evolve a mere idea into a website with the capability to host and manage hardware. By providing an end-to-end solution, Ozona Online Network is able to capture and retain business that a client might have had to work with multiple independent firms to accomplish.

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Direct Segment

Morex owns and operates the Internet website www.babytobee.com. We believe that Babytobee.com is uniquely positioned in the niche marketing industry as the leader in prenatal and new parent E-mail and postal name marketing. We believe Morex’s competitive first mover advantage presents a barrier to entry into this market. We also believe the development of line extensions and new niches will continue to provide Morex with a distinct competitive advantage.

iLead’s primary competitors include NeWave, Inc. (OnlineSupplier.com), Overstock.com, and Education Success, Inc. (ESIOffers.com). iLead believes it has a competitive advantage due to the fact that it implements best practices from three unique but related business models (Lead Generation, Home Based Business Training, and Paid Membership Programs) to generate revenue throughout the entire user process (making the purchase of home based business materials, learning the home business program, and implementing fee based tools in carrying out their learned strategy).

Real Estate School Online’s major competitors include Real Estate Express and CompuTaught. Real Estate School Online competes with these other companies by offering significant products and service differentiators, which include access to customer service and support all day, every day of the week, online and CD formats, content that is well-established with a proven track record of success in the industry, a glossary of terms, an outline of the courses, test-taking techniques and 522 online flash cards that help students prepare for the certification exam.

While there are dominant, large brands in the online dating industry, we believe that new entrants can become formidable competitors through innovation in both their offering of products and their target market. The most recent new approaches are psychological matching and social networking. These fresh new approaches have increased the size of the market. Cherish and its subsidiaries compete by offering innovative features and approaches to its customers, as well as customized dating solutions for its partners, all of which allows Cherish to reach untapped markets. Cherish also provides services with advanced search technologies, instant messaging, dating communities and dating-related commentary and advice.

Advertising Segment

MarketSmart Advertising competes with traditional advertising agencies in seven states and the District of Columbia. MarketSmart Advertising has positioned itself among its competitors by developing long-standing relationships with clients and increasing its business through referrals and new business derived from successful marketing campaigns.  MarketSmart Advertising recently added the services previously offered by MarketSmart Interactive.  These services are being treated as add-on services to the existing products being sold.  We believe the addition of online capabilities to the traditional offline advertising agency will be beneficial in attracting new customers and differentiating ourselves from more traditional agencies.

Web Diversity’s primary competitors include Latitude, The Search Works and Guava. We believe that Web Diversity can compete  because of its long-standing customer relationships, its commitment to provide superior customer service at competitive prices and its global and extensive service offering.

Recent Developments

On February 27, 2008, we amended and restated our loan agreements with Wachovia Bank, National Association (“Wachovia”). Pursuant to the amended and restated loan agreements, on February 27, 2008, the Company borrowed $15 million from Wachovia, evidenced by a revolving credit promissory note (the “Revolving Credit Note”), and $5.0 million, evidenced by a term promissory note (the “Term Note”). The Company’s obligations under the Loan Agreement and the Notes are secured by a first priority lien, in favor of Wachovia, on all of the assets of the Company, including the stock of each of the Company’s operating subsidiaries and are subject to certain financial covenants. Further, each of the Company’s operating subsidiaries has guaranteed the performance of the Company’s obligations under the Loan Agreement and the Notes (each, a “Guarantor”) and the guaranty is secured by a first priority lien on each Guarantor’s assets. Interest on the unpaid principal balance of the Revolving

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Credit Note accrues at a range from LIBOR Market Index Rate plus 1.50% to LIBOR Market Index Rate plus 2.50% as such rate may change from day to day dependent on the amounts drawn on the loan on the quarterly Calculation date compared to the Company’s trailing EBIDTA as defined in the agreement. Amounts due under the Revolving Credit Note are payable in consecutive monthly payments of accrued interest only until maturity at which time all principal and any accrued but unpaid interest is due and payable. The Revolving Credit Note matures on February 15, 2011. Interest on the unpaid principal balance of the Term Note accrues at the LIBOR Market Index Rate plus 2.50% as such rate may change from day to day. Amounts due under the Term Note are payable in 36 consecutive monthly payments with the final payment due on February 15, 2011, the Term Note’s maturity. Concurrently the Company entered into an interest rate swap agreement with Wachovia in which it effectively fixed the rate of the term note at 5.9%.

On February 29, 2008, Brady Whittingham, the President of our Direct Segment voluntarily resigned.  Operational management of this segment of our business is being provided by our Chief Operating Officer.

Employees

As of March 10, 2008 we employed, through our operating subsidiaries, 249 persons. None of these persons are covered by a collective bargaining agreement. We believe all relations with our employees are satisfactory.

ITEM 1A.

RISK FACTORS

An investment in our common stock involves a high degree of risk and should be considered only by those persons who are able to afford a loss of their entire investment.  In evaluating our business, prospective investors should carefully consider the following risk factors.

We are subject to risks frequently encountered by companies in the Internet marketing and advertising industry. Our prospects for financial and operational success must be considered in light of the risks frequently encountered by companies in the Internet marketing and advertising industry. These risks include the need to:

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attract new clients and maintain current client relationships;

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achieve effective advertising campaign results for our clients;

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continue to expand the number of services and technologies we offer;

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successfully implement our business model, which is evolving;

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respond to pricing pressure in some of our lines of business;

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maintain our reputation and build trust with our clients;

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identify, attract, retain and motivate qualified personnel;

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accurately measure impressions, searches, clicks, or other online actions for our advertisers, publishers,   or partners; and

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adapt to changes in online advertising, email, and other filtering software.

If we do not successfully address these risks, our business could suffer.

Our revenue, expenses and operating results could vary significantly from quarter to quarter for several reasons, including:

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addition of new clients or loss of current clients;

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seasonal fluctuations in advertising spending;

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timing variations on the part of advertisers with regard to implementing advertising campaigns;

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changes in the availability and pricing of advertising space;

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timing and amount of our costs;

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costs related to any possible future acquisitions of technologies or businesses;

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changes in revenue contribution by our business lines, which historically have had varying operating margins; and

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timing in the completion of web development projects or in the recognition of revenue on those projects;

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·

fluctuations in our stock price which may impact the amount of stock-based compensation expense we are required to record;

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the foreign currency effects of transactions denominated in currencies other than the U.S. dollar; and

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deterioration in the credit quality of our accounts receivable and an increase in the related provisions.

Our limited operating history and relatively new business model in emerging and rapidly evolving markets make it difficult to evaluate our future prospects.  We have only a limited operating history and have lost money during five of the last seven years ended December 31, 2007.  There is no assurance we will generate net income in future periods.  Failure to generate net income could have a material adverse effect on the trading price of our common stock.

We may be unable to successfully integrate acquired businesses or manage the growth of these businesses.  Since 2002, we have acquired a total of fourteen companies.  There is no assurance we will be able to integrate widely dispersed operations with different corporate cultures, operating margins, competitive environments, computer systems, compensation schemes, business plans and growth potential. Failure to successfully integrate acquired businesses could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Our Success Depends On Our Ability To Continue and Expand Relationships With Other Internet Media Content, Advertising And Product Providers. The Internet includes an ever-increasing number of businesses that offer and market consumer products and services. Advertising providers allow us to generate advertising revenue from our and our affiliates’ websites, as well as profit sharing arrangements for joint effort marketing programs. We expect that with the increasing number of entrants into the Internet commerce arena, advertising costs and joint effort marketing programs will become more competitive. This competitive environment might prevent us from satisfactorily executing profit generating advertising and joint effort marketing programs in the future. This competitive environment may also prevent us from providing content and product and service providers from marketing their products and services through our or our affiliates’ websites. If we fail to continue establishing new, and maintain and expand existing, profitable advertising and joint marketing arrangements, we may suffer substantial adverse consequences to our financial condition and results of operations.

Our loan agreement with Wachovia Bank, N.A., contains covenants that can restrict our ability to borrow funds. Our loan agreement with Wachovia Bank, N.A.(Wachovia) contains covenants that restricts our ability to borrow based on past financial results.  If our financial results deteriorate in the future it could reduce our borrowing base with Wachovia and force us to obtain funds at a higher cost.

We have agreed, and may agree in the future, to pay additional amounts in connection with acquisitions.  As part of the agreements to acquire certain of our operating subsidiaries, we agreed to pay the stockholders of these entities additional consideration, or contingent payments, if the financial performance of these respective entities satisfies certain financial hurdles.  As of December 31, 2007, the cash portion of these potential contingent payments totaled approximately $14.375 million. There is no assurance that we will have cash available to pay these amounts if these financial hurdles are satisfied.  Thus, we may have to borrow additional monies or sell additional equity to raise the needed funds, all of which may have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We lack long-term contracts with clients.  Few of our clients retain us under contracts longer than twelve months.  As a result, our revenues may be difficult to predict and may vary significantly.  Because we sometimes incur costs based on expectations of future revenues, our failure to predict future revenues accurately could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Our brands are not well known.  We have not been able to develop widespread awareness of our brands.  Moreover, our brands may be closely associated with the success or failure of some of our Internet clients, some of whom are pursuing unproven business models in competitive markets.  Lack of brand awareness or the failure or difficulty of one of our clients may damage our reputation, all of which could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

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The telecommunications industry is a regulated industry.  Amendments to current regulations could disrupt or adversely affect the profitability of our business.  In addition, if any of our current agreements with telecommunications providers are terminated, we may not be able to replace the terminated agreement on favorable terms and conditions, if at all.  There can be no assurance that we will be able to renew any of our current agreements when they expire or expand our agreements on favorable terms, if at all, all of which could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Growth of our business depends upon increased adoption of the Internet as a means for commerce.  The growth of our business depends heavily on the continued use and acceptance of the Internet as a means for commerce.  If commercial use of the Internet does not continue to grow, or grows more slowly than expected, our business and prospects would be seriously harmed.  Individuals and businesses may reject the Internet as a viable commercial medium or marketing tool.  Failure of the Internet to grow as a means of commerce would have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We compete with many companies, some of whom are more established and better capitalized.  We compete with a variety of companies on a worldwide basis both through the Internet and in traditional markets.  Some of these companies are larger and better capitalized.  There are also few barriers to entry in our markets and thus above average profit margins will likely attract additional competitors.  Our competitors may develop services that are superior to, or have greater market acceptance than our services. For example, many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources and larger customer bases.  These factors may allow our competitors to respond more quickly than we can to new or emerging technologies and changes in customer requirements.  Our competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies which may allow them to build larger registrant and membership bases.  In addition, current and potential competitors are making, and are expected to continue to make, strategic acquisitions or establish cooperative, and, in some cases, exclusive relationships with significant companies or competitors to expand their businesses or to offer more comprehensive products and services.  To the extent these competitors or potential competitors establish exclusive relationships with major portals, search engines and ISPs, our ability to reach potential members through online advertising may be restricted.  Any of these competitors could cause us difficulty in attracting and retaining registrants and converting registrants into members and could jeopardize our existing affiliate program and relationships with portals, search engines, ISPs and other Internet properties.  Failure to compete effectively including by developing and enhancing our services offerings would have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Increasing government regulations or taxation could adversely affect our business.  We are affected not only by regulations applicable to businesses generally, but also by federal, state, local and foreign laws, rules, regulations and taxes directly applicable to electronic communications, telecommunications and the Internet.  Laws and regulations related to the Internet are becoming more prevalent, and new laws and regulations are under consideration in various jurisdictions.  Many areas of law affecting the Internet remain unsettled, and it may take years to determine whether and how existing laws such as those governing consumer protection, intellectual property, libel and taxation apply to the Internet.  New, or amendments to existing laws and regulations, including laws and regulations that govern, restrict, tax or affect things such as user privacy, the pricing and taxation of goods and services offered over the Internet, the content of websites, access to websites, linking of websites, outgoing email solicitations, consumer protection and the characteristics and quality of products and services offered over the Internet could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

The ability of our online dating business to generate cash flow and operating profits depends on a number of factors that are difficult to predict.  The ability of our online dating business to generate cash flow and profits, if any, depends on acceptance of online dating services and our ability to, among other things, (1) create and increase brand awareness and attract and retain a large number of members and subscribers, including converting members into paying subscribers; (2) maintain current, and develop new, relationships with portals, search engines, ISPs and other Internet properties and entities capable of attracting individuals who might subscribe to our fee-generating services; (3) implement expansion plans or integrate newly acquired companies, including controlling the costs

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associated with expansion or acquisitions; (4) control general infrastructure costs including the amount and timing of operating and capital expenditures; (5) introduce new websites, features and functionality on a timely basis; (6) achieve economies of scale across our various websites; (7) protect our data from loss or electronic or magnetic corruption; (8) provide failure and disaster recovery programs; (9) upgrade our technology and protect our sites from technology failures; and (10) anticipate and adapt to changing Internet business strategies. Failure to accurately predict or respond to these factors could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We need to attract and retain a large number of paying members on an ongoing basis.  Our online dating business and other portions of our Direct segment must attract and retain a large number of paying members.  To do so, we must continue to invest significant resources in order to enhance our existing products and services and to introduce new high-quality products and services.  There is no assurance we will have the resources, financial or otherwise, required to enhance or develop services.  Further, if we are unable to predict user preferences or industry changes, or if we are unable to modify our products and services on a timely basis, we may lose existing members and may fail to attract new registrants.  Failure to enhance or develop services or to respond to the needs of our members in an effective or timely manner could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Our member acquisition costs may increase significantly.  The member acquisition costs of our online dating and direct marketing businesses depend in part upon our ability to purchase advertising at a reasonable cost.  Advertising costs vary over time, depending upon a number of factors, some of which are beyond our control.  Historically, we have used online advertising as the primary means of marketing our services.  In general, the costs of online advertising have increased substantially and are expected to continue to increase as long as the demand for online advertising remains robust.  We may not be able to pass these costs on in the form of higher user fees.  Continuing increases in advertising costs could thus have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Our business must keep pace with rapid technological change to remain competitive.  Our business operates in a market characterized by rapidly changing technology, evolving industry standards, frequent new product and service announcements, enhancements, and changing customer demands.  We must adapt to rapidly changing technologies and industry standards and continually improve the speed, performance, features, ease of use and reliability of our services.  Introducing new technology into our systems involves numerous technical challenges, requires substantial amounts of capital and personnel resources, and often takes many months to complete.  We may not successfully integrate new technology into our websites on a timely basis, which may degrade the responsiveness and speed of our websites.  Technology, once integrated, may not function as expected.  In addition, the number of people who access the Internet through devices other than desktop and laptop computers, including mobile telephones and other handheld computing devices, has increased dramatically in the past few years.  The lower resolution, functionality and memory currently associated with mobile devices makes the use of our online dating services through mobile devices more difficult and generally impairs the member experience relative to access via desktop and laptop computers.  Failure to attract and retain a substantial number of mobile device users to our services, or failure to develop services that are more compatible with mobile communications devices, or failure to generally keep pace with the rapid technological change could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Our services may be interrupted due to problems with our servers, our network hardware and software, or our inability to obtain network capacity.  The performance of our server and networking hardware and software infrastructure is critical to our business and reputation and our ability to attract Internet users, advertisers, members and e-commerce partners to our websites and to convert members to subscribers.  We have experienced occasional system interruptions as a result of unexpected increases in usage.  We cannot assure you we will not incur similar or more serious interruptions in the future.  An unexpected or substantial increase in the use of our websites could strain the capacity of our systems, which could lead to a slower response time or system failures.  Any slowdowns or system failures could adversely affect the speed and responsiveness of our websites and would diminish the experience for our members and visitors.  Further, if usage of our websites substantially increases, we may need to purchase additional servers and networking equipment to maintain adequate data transmission speeds, the

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availability of which may be limited or the cost of which may be significant.  Any system failure that causes an interruption in service or a decrease in the responsiveness of our websites could reduce traffic on our websites and, if sustained or repeated, could impair our reputation and the attractiveness of our brands all of which could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.  Furthermore, we rely on many different hardware and software systems.  Failure of these systems or inability to rapidly expand our transaction-processing systems and network infrastructure in response to a significant unexpected increase in usage could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock. The failure to establish and maintain affiliate agreements and relationships could limit the growth of business.  We have entered into, and expect to continue to enter into, arrangements with affiliates to increase our member base, increase traffic to our websites and enhance our brands.  If any of the current agreements are terminated, we may not be able to replace the terminated agreement with an equally beneficial arrangement.  We cannot assure you that we will be able to renew any of our current agreements when they expire on acceptable terms, if at all.  We also do not know whether we will be successful in entering into additional agreements or that any relationships, if entered into, will be on terms favorable to us.  Failure to establish and maintain affiliate agreements and relationships could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Our business relies on a number of third-party providers, and their failure to perform or termination of our relationships with them could harm our business.  We rely on third parties to provide important services and technologies to our online business, including Internet services providers and credit card processors.  In addition, we license technologies from third parties to facilitate our ability to provide our services.  Any failure on our part to comply with the terms of these licenses could result in the loss of our rights to continue using the licensed technology, and we could experience difficulties obtaining licenses for alternative technologies.  Furthermore, any failure of these third parties to provide these and other services, or errors, failures, interruptions or delays associated with licensed technologies, could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We depend on our merchant and banking relationships, as well as strategic relationships with third parties, who provide us with payment processing solutions.  From time to time, VISA and MasterCard increase the fees that they charge processors. We may attempt to pass these increases along to our merchant customers, but this might result in the loss of those customers to our competitors who do not pass along the increases. Our revenues from merchant account processing are dependant upon our continued merchant relationships which are highly sensitive and can be canceled if customer charge-backs escalate and generate concern that the company has held back sufficient funds in reserve accounts to cover these charge-backs. Cancellation by our merchant providers would most likely result in the loss of new customers and lead to a reduction in our revenues and increased costs.

We depend on credit card processing for a majority of our membership programs, to include but not be limited to Visa, Mastercard, American Express, and Discover. Significant changes to the merchant operating regulations, merchant rules and guidelines, card acceptance methods and or card authorization methods could significantly impact our revenues. Additionally our membership programs are accepted under a negative option billing term, change in regulation of negative option billing could significantly impact our revenue.

We are exposed to risks associated with credit card fraud and credit payment.  Many of our customers use credit cards to pay for our services.  We have suffered losses, and may continue to suffer losses, as a result of membership or purchase orders placed with fraudulent credit card data, even though the associated financial institution approved payment.  Under current credit card practices, a merchant is liable for fraudulent credit card transactions when the merchant does not obtain a cardholder’s signature.  A failure to adequately control fraudulent credit card transactions would result in significantly higher credit card-related costs and could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Our business may incur liability for information retrieved from or transmitted through its websites or websites linked to it.  Because our business publishes or makes various information available on its websites or though linked websites, we may be sued for, or incur liability related to, defamation, civil rights infringement, negligence, copyright or trademark infringement, invasion of privacy, personal injury, product liability or other legal claims. 

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Our business also offers email services subjecting us to liabilities or claims relating to unsolicited email or spamming, lost or misdirected messages, security breaches, illegal or fraudulent use of email or interruptions or delays in email service.  Our insurance may not specifically provide coverage for liability or expenses for these types of claims or losses.  Liability or expense relating to these types of claims could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Our business could be significantly impacted by the occurrence of natural disasters such as hurricanes and other catastrophic events.  Our primary data center, Network Division operations, and corporate headquarters are located in Clearwater, Florida and, are therefore, susceptible to damage from hurricanes or other tropical storms.  Although we believe we have adequate backup for this data in a secure location, we may not be able to prevent outages and downtime caused by these storms or other events out of our control, which could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We must continually seek new members to maintain or increase our current level of revenue.  Internet users, in general, freely navigate and switch among a large number of websites.  We cannot assure you that we will be able to add more members than we lose each month.  Failure to increase our membership on a cost-effective basis could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

The display of adult content on our websites could be restricted by regulation.  We display adult content on some of our websites.  The display of adult content is subject to significant regulation.  Changes or increases in these regulations could restrict our ability to provide adult content in various jurisdictions.  Any increase in these regulations or restrictions on the content that may be provided on our website could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We face certain risks related to the physical and emotional safety of the users of our online dating websites.  We cannot control the behavior of users of our websites.  There is a possibility that one or more of the users of our websites could be physically or emotionally harmed following interaction with another user of our websites.  We do not screen the users of our websites, and cannot ensure personal safety on a meeting arranged following contact initiated via our websites.  If an unfortunate incident were to occur in a meeting of people following contact initiated using one of our websites or any related website, any resulting negative publicity could materially and adversely affect the online dating industry in general and our business in particular and could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.  In addition, the affected users of our websites might initiate legal action against us, which could cause us to incur significant expense, regardless of whether liability is imposed on us which could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.  Further, legislation has been proposed in various jurisdictions that may require us to conduct background checks on the users of our online dating websites.  If legislation requiring us to perform background checks is enacted, we would incur additional costs and expenses to comply with these legislative requirements. These costs and expenses may be material, not transferrable to our customers and may have and adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We may incur liability if we fail to adequately protect personal information.  Our business handles personally identifiable information pertaining to our members and visitors residing in the United States as well as foreign countries.  Many jurisdictions have adopted privacy, security, and data protection laws and regulations intended to prevent improper use and disclosure of personally identifiable information.  In addition, some jurisdictions impose database registration requirements for which significant monetary and other penalties may be imposed for failure to comply.  These laws, which are subject to change and may be inconsistent, may impose costly administrative requirements, limit our handling of information, and subject us to increased government oversight and financial liabilities all of which could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Security breaches and inappropriate Internet use could damage our business.  Concerns over the security of transactions conducted on the Internet and the privacy of users may inhibit the growth of the Internet and other online services generally, and online commerce in particular.  Failure to successfully prevent security breaches could

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significantly harm our business and expose us to lawsuits.  Anyone who is able to circumvent our security measures could misappropriate proprietary information, including customer credit card and personal data, cause interruptions in our operations, or damage our brand and reputation.  Breach of our security measures could result in the disclosure of personally identifiable information and could expose us to legal liability.  We cannot assure you that our financial systems and other technology resources are completely secure from security breaches or sabotage.  We have experienced security breaches and attempts at “hacking.”  We may be required to incur significant costs to protect against security breaches or to alleviate problems caused by breaches.  Further, any well-publicized compromise of our security or the security of any other Internet provider could deter people from using our services or the Internet to conduct transactions that involve transmitting confidential information or downloading sensitive materials, which might adversely affect our online dating business.  All of these factors could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

Computer viruses could damage our business.  Computer viruses, worms and similar programs may cause our systems to incur delays or other service interruptions and could damage our reputation and ability to provide our services and expose us to legal liability, all of which could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

We may be unable to protect our intellectual property.  We cannot guaranty that we can safeguard or deter misappropriation of our intellectual property.  In addition, we may not be able to detect unauthorized use of our intellectual property and take appropriate steps to enforce our rights.  If former employees or third parties infringe or misappropriate our trade secrets, copyrights, trademarks or other proprietary information or intellectual property, our business could be seriously harmed.  In addition, although we believe that our proprietary rights do not infringe the intellectual property rights of others, other parties may assert infringement claims against us or claim that we have violated their intellectual property rights.  These claims, even if not true, could result in significant legal and other costs all of which could have a material adverse effect on our business, results of operations, financial condition and the trading price of our common stock.

The terms and conditions of any acquisition could require us to take actions that would not require your approval.  We may issue additional shares of common or preferred stock, borrow money or issue debt instruments including debt convertible into capital stock to complete future acquisitions.  Not all of these actions would require your approval even if these actions dilute your economic or voting interest as a shareholder.

We have not paid dividends to our common shareholders since our inception and do not expect to do so in the foreseeable future.  We have never paid dividends on our common stock and have no plans to do so for the foreseeable future.  We presently anticipate that all earnings, if any, will be retained to develop our business and acquire additional companies and assets. 

Certain provisions of Nevada corporate law may limit or discourage actions in your best interest.  Certain provisions of Nevada corporate law limit the circumstances under which a person or entity may acquire a controlling interest in the stock of a Nevada corporation or cause a merger, consolidation or other “combination” to occur involving a Nevada corporation.  These laws may discourage companies or persons interested in acquiring a significant interest in or control of us, or delay or make an acquisition or transaction more difficult or expensive to consummate, regardless of whether the acquisition or transaction is in the best interest of our stockholders, all of which may limit or prevent you from receiving a “control premium” for your common stock.

It may be difficult for a third party to acquire us and this could depress our stock price. We are a Nevada company which has adopted a Shareholder Rights Plan pursuant to which we issued one preferred stock purchase right for each outstanding share of common stock. The rights will cause substantial dilution to a person or group that attempts to acquire us in a manner or on terms not approved by our Board of Directors. Consequently, our Shareholder Rights Plan could make it difficult for a third party to acquire us, even if doing so would benefit security holders. Certain anti-takeover provisions under Nevada law to which we are subject and certain provisions of our charter could also make it more difficult for a third party to acquire us. The anti-takeover effects of these provisions and those of our Shareholder Rights Plan could depress our stock price and may result in the entrenchment of existing management, regardless of their performance.

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If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings.  Under generally accepted accounting principles in the United States of America, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization, future cash flows, and slower growth rates in our segments. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined resulting in an impact on our results of operations.

We may not realize the anticipated benefits of past or future acquisitions, and integration of these acquisitions may disrupt our business and management.  We have in the past and may in the future acquire additional companies, products or technologies. We may not realize the anticipated benefits of an acquisition and each acquisition has numerous risks. These risks include:

·

difficulty in assimilating the operations and personnel of the acquired company;

·

difficulty in effectively integrating the acquired technologies or products with our current products and technologies;

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difficulty in maintaining controls, procedures and policies during the transition and integration;

·

disruption of our ongoing business and distraction of our management and employees from other opportunities and challenges due to integration issues;

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difficulty integrating the acquired company's accounting, management information, human resources and other administrative systems;

·

inability to retain key technical and managerial personnel of the acquired business;

·

inability to retain key customers, distributors, vendors and other business partners of the acquired business;

·

inability to achieve the financial and strategic goals for the acquired and combined businesses;

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incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;

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potential impairment of our relationships with employees, customers, partners, distributors or third-party providers of technology or products;

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potential failure of the due diligence processes to identify significant issues with product quality, architecture and development, or legal and financial contingencies, among other things;

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incurring significant exit charges if products acquired in business combinations are unsuccessful;

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potential inability to assert that internal controls over financial reporting are effective;

·

potential inability to obtain, or obtain in a timely manner, approvals from governmental authorities, which could delay or prevent such acquisitions; and

·

potential delay in customer and distributor purchasing decisions due to uncertainty about the direction of our product offerings

Mergers and acquisitions of high technology companies are inherently risky, and ultimately, if we do not complete the integration of acquired businesses successfully and in a timely manner, we may not realize the anticipated benefits of the acquisitions to the extent anticipated, which could adversely affect our business, financial condition or results of operations.

Changes in, or interpretations of, accounting principles could result in unfavorable accounting charges. We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions. Our accounting principles that recently have been or may be affected by changes in the accounting principles are as follows:

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accounting for stock-based compensation;

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accounting for income taxes; and

·

accounting for business combinations and related goodwill

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In particular, in the first quarter of fiscal 2006, we adopted SFAS 123R which requires the measurement of all stock-based compensation to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of income. The adoption of SFAS 123R had a significant adverse effect on our reported financial results. It will continue to significantly adversely affect our reported financial results and may impact the way in which we conduct our business. Please refer to Notes 1 and 10 of our Notes to Consolidated Financial Statements for further information regarding the adoption of SFAS 123R.

We Depend On Key Personnel, The Loss Of Whom Could Harm Our Business. The success of the Company depends in part on the retention of personnel critical to our combined business operations due to, for example, unique technical skills, management expertise or key business relationships. We may be unable to retain existing management, finance, engineering, sales, customer support, and operations personnel that are critical to the success of the Company, which may result in disruption of operations, loss of key business relationships, information, expertise or know-how, unanticipated additional recruitment and training costs, and diminished anticipated benefits of acquisitions, including loss of revenue and profitability.

Our future success is substantially dependent on the continued service of our key senior management. Our employment agreements with our key personnel are short-term and on an at-will basis. We do not have key-person insurance on any of our employees. The loss of the services of any member of our senior management team, or of any other key employees, could divert management's time and attention, increase our expenses and adversely affect our ability to conduct our business efficiently. Our future success also depends on our continuing ability to attract, retain and motivate highly skilled employees. We may be unable to retain our key employees or attract, retain and motivate other highly qualified employees in the future. We have experienced difficulty from time to time in attracting or retaining the personnel necessary to support the growth of our business, and may experience similar difficulties in the future.

Demand For Our Services May Decline Due To The Proliferation Of "Spam" And Software Designed To Prevent Its Delivery. Our business may be adversely affected by the proliferation of "spam" and other unwanted Internet solicitations. In response to such proliferation, Internet Service Providers ("ISP's") have been adopting technologies, and individual computer users are installing software on their computers that are designed to prevent the delivery of certain Internet advertising, including legitimate solicitations such as those delivered by us. We cannot assure you that the number of ISP's and individual computer users who employ these or other similar technologies and software will not increase, thereby diminishing the efficacy of our services. In the case that one or more of these technologies are widely adopted or the software widely utilized, demand for our services would decline. During the Fourth Quarter of Fiscal 2006 and continuing through 2007 we recognized a decline in our email marketing revenue due to the factors mentioned above, and may continue experience declines despite our best efforts to maintain “Best Practices” in the execution of our email business.

Our stock price is likely to be volatile and could drop unexpectedly. The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices of securities, particularly securities of technology companies. As a result, the market price of our common stock may materially decline, regardless of our operating performance. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation of this type is often expensive and diverts management’s attention and resources.

Decreased effectiveness of equity compensation could adversely affect our ability to attract and retain employees and harm our business and recently adopted changed in accounting for equity compensation will adversely affect earnings.  We have historically used stock options as a key component of our 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, some of whom have been granted stock options, or to attract additional highly-qualified personnel. At any given time, a portion of our outstanding employee stock options may have exercise prices in excess of our then-current stock price. To the extent these circumstances occur, our ability to retain employees may be adversely affected. In addition, beginning January 1, 2006 the Company was required to record stock-based compensation expense related to stock options. This requirement has negatively impacted net

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income for the year ended December 31, 2006 and 2007 and will also negatively impact net income for future periods.  As a result, 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.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

DESCRIPTION OF PROPERTIES

The following table sets forth the location, approximate square footage and use of each of the principal properties used by Think Partnership Inc. during 2007. We lease or sublease all of these properties. All properties are leased under operating leases. Such leases expire at various times through 2015. The annual base rent expense for all facilities is currently approximately $1.4 million and is subject to annual adjustments.

In general, all facilities are in good condition and are currently adequate for the Company’s needs.

ITEM 3.

LEGAL PROCEEDINGS

None

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ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We held our Annual Meeting of Stockholders on May 30, 2007. At the meeting, our stockholders elected the following directors:  Scott P. Mitchell, Robert T. Geras, George Mellon, Joshua Metnick and Patrick W. Walsh. Our stockholders also ratified the appointment of our independent registered accountant, Blackman Kallick, LLP.

The following table states the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to each matter voted upon.

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PART II

ITEM 5.   

MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the American Stock Exchange under the symbol “THK”.  On March 10, 2008 the high and low sales prices for our common stock were $1.08 and $1.01 per share on the AMEX. Set forth below are the high and low sales prices for our common stock for each quarter during the last two years as listed by the American Stock Exchange.

As of March 10, 2008, we had 212 record holders of our common stock. Since inception, we have not paid any dividends on our common stock and do not anticipate paying dividends in the foreseeable future.

The following table presents certain information, as of December 31, 2007, with respect to compensation plans, including individual compensation arrangements, under which equity securities are authorized for issuance:

* On March 14, 2006, our shareholders approved our 2005 Long-Term Incentive Plan pursuant to which we may grant options, restricted stock and other stock-based awards with respect to up to 10,000,000 shares of our common stock.

Recent Sales of Unregistered Securities

The following sets forth securities sold by us in the last fiscal year without registration under the Securities Act and which we have not previously disclosed. Unless otherwise noted, in each case we sold shares of our common stock or warrants to acquire common stock in private transactions to persons we believed were “accredited investors” and/or “sophisticated investors” not affiliated with us unless otherwise noted, and purchasing the shares with an investment intent. Each of the transactions involved the offering of such securities to a substantially limited number of persons. Each person took the securities as an investment for his/her/its own account, and not with a view to distribution. We relied upon exemptions contained in Section 4(2) of the Securities Act or Regulation D promulgated thereunder in each of these instances. In each case, the company did not engage in general solicitation and advertising and the shares were purchased by investors with whom we, through our officers and directors, had

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preexisting relationships. Each person had access to information equivalent to that which would be included on a registration statement on the applicable form under the Securities Act. We did not use underwriters for any of the transactions described below; therefore, these transactions did not involve underwriter discounts or commissions.

None.

ITEM 6.

SELECTED FINANCIAL DATA

The following selected consolidated financial are derived from our consolidated financial statements. This data should be read in conjunction with the consolidated financial statements and notes thereto, and with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

* Beginning in fiscal 2006, net income and net income per share includes the impact of SFAS 123R stock-based compensation charges.  The performance for 2004, 2005 and 2006 include the results of all acquisitions from the respective dates of acquisition.  Refer to the Notes to our Consolidated Financial Statements.  Net income per common share includes dividends paid to preferred shareholders and accretion of convertible preferred stock in 2006.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this annual report on Form 10-K constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical, including statements regarding management’s intentions, beliefs, expectations, representations, plans or predictions of the future and are typically identified by words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “will,” “should” and “could.”  These forward-looking statements involve numerous risks and uncertainties that could cause our actual results to be materially different from those set forth in the forward-looking statements including, without limitation, our lack of profitable operating history, changes in our business, potential need for additional capital and the other additional risks and uncertainties identified under the caption “Risk Factors,” beginning on page 8 and elsewhere in this annual report or in any supplement we may file. The following discussion should also be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this annual report on Form 10-K.

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Overview

We are a Nevada corporation headquartered in Clearwater, Florida. Through our wholly-owned direct and indirect subsidiaries we provide world class marketing and technology solutions to businesses and individuals. Our business is organized into three segments:  Network, Direct, and Advertising.

We were incorporated in the State of Nevada in October 1987. As of March 10, 2008 we employed, through our operating subsidiaries, 249 persons. Our principal executive offices are located at 15550 Lightwave Drive, 3^rd Floor, Clearwater, Florida 33760. Our telephone number is (727) 324-0046. The address of our website is www.kowabunga.com.

Critical Accounting Policies and Estimates

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We evaluate estimates, including those related to bad debts, inventories, goodwill and amortizable intangibles and income taxes, on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies, among others, involve more significant judgments and estimates used in the preparation of our financial statements:

We recognize revenues in accordance with the following principles with respect to our different business services:

We recognize revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements.”  Under SAB, we recognize revenue when the following criteria have been met: persuasive evidence of an arrangement exists, the fees are fixed and determinable, no significant obligations remain and collection of the related receivable is reasonably assured.

Network Segment

Affiliate Network - consistent with the provisions of EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” (“EITF 99-19”) we recognize revenue as an agent in affiliate marketing transactions in which we are not the primary obligor. Accordingly, service fee revenue is recognized on a net basis because any affiliate expenses are the responsibility of our advertising customer. In certain instances we assume the position of primary obligor and thus recognize revenue on a gross basis.  Revenue is recognized when the related services are performed.

Search Network - In accordance with EITF 99-19, the Company records as revenue the gross amount received from advertisers and the amount paid to the publishers placing the advertisements as cost of revenue. Revenue from Company owned networks are based on a “per click” basis and is recognized once the action is taken.

Affiliate Software - We recognize revenue the month in which the software is utilized. Customers are invoiced on the first of the month for the monthly services. All overages for the month are billed at the end of the month and are included in our accounts receivable.

Hosting Arrangements – We recognize revenue through a monthly hosting fee and additional usage fees as provided.

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Direct Segment

Online Membership Income - We recognize revenue from online membership revenue when payment is received and the service date of providing membership benefits has taken place.

Lead Sales - For lead sales, our revenue recognition varies depending on the arrangement with the purchaser. Where the arrangement provides for delivery only, revenue is recognized when the lead information is provided to the purchaser. Where the arrangement provides for compensation based on sales generated by the purchaser from the lead, we recognize revenue in the period that the purchasing company makes a sale that was derived from the lead.

Product Sales - For product sales, we recognize revenue when payment is received and the goods are shipped.

List Management Services - Substantially all of our revenue is recorded at the net amount of its gross billings less pass-through expenses charged to a customer. In most cases, the amount that is billed to customers exceeds the amount of revenue that is earned and reflected in our financial statements, because of various pass-through expenses. In compliance with EITF 99-19, we assess whether we or a third-party supplier is the primary obligor. We have evaluated the terms of our customer agreements and considered other key indicators such as latitude in establishing price, discretion in supplier selection and credit risk to the vendor as part of this assessment. Accordingly, we generally record revenue net of pass-through charges.

Subscription Income - We recognize revenue on monthly and multi-monthly subscription contracts on a straight-line basis over the term of the contract.

Advertising Segment

Search Engine Enhancement Services - We recognize revenue in accordance with EITF Issue No. 00-21 “Revenue Arrangements with Multiple Deliverables.”  As such, each deliverable is treated as a separate product or deliverable. We therefore recognize revenue for each deliverable either on a straight line basis over the term of the contract, or when value is provided to the customer, as appropriate.

Pay Per Click Management Fees - We recognize revenue on pay per click management services in the month the services are performed.

Advertising Services - We recognize revenue in the period in which services are performed.

Other Critical Accounting Policies

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All assets are depreciated over their estimated useful life using the straight line method. Intangible assets are amortized over their estimated lives using the straight line method. Goodwill is tested for impairment annually per SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”).

·

We reserve for federal and state income taxes on items included in the Consolidated Statements of Operations regardless of the period when the taxes are payable. Deferred taxes are recognized for temporary differences between financial statement and income tax basis.

·

Additional consideration payable in connection with certain acquisitions, if earned, is accounted for using the following principles:

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In accordance with SFAS No. 141, Business Combinations (“SFAS 141”) contingent consideration is recorded when a contingency is satisfied and additional consideration is issued or becomes issuable. We record the additional consideration issued or issuable in connection with the relevant acquisition when the contingency is satisfied.

·

In accordance with EITF Issue No. 95-8, “Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination” (“EITF 95-8”) and FIN 44, the portion of additional consideration issuable to holders of unrestricted (i.e. not subject to risk of forfeiture) common stock and fully vested options as of the acquisition date is recorded as additional purchase price because the consideration is unrelated to continuing employment with us and is allocated to goodwill.

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·

In accordance with EITF 95-8, the intrinsic value associated with additional consideration related to stock or options that vest between the acquisition date and the date at which the contingency is satisfied is recorded as an immediate charge to stock-based compensation expense at the time of vesting because the consideration is related to continuing employment with us or the acquired subsidiary.

·

Prior to January 1, 2006, we accounted for employee stock-based awards under the intrinsic value method, which followed 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 adopted Statement of Financial Accounting Standard No. 123R, “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires measurement of compensation cost for employee stock-based awards based upon fair value over the requisite service period for awards expected to vest. Furthermore, under SFAS 123R, liability based awards are recorded at fair value through to their settlement date.

Pursuant to the provisions of SFAS 123R, we applied the modified-prospective transition method. Under this method, the fair value provision of SFAS 123R is applied to new employee share-based payment awards granted or awards modified, repurchased or cancelled after December 31, 2005. Measurement and attribution of compensation cost for unvested awards at December 31, 2005, granted prior to the adoption of SFAS 123R, are recognized based upon the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, after adjustment for estimated forfeitures. Accordingly, SFAS 123R no longer permits pro-forma disclosure for income statement periods after December 31, 2005 and compensation expense will be recognized for all share-based payments based on grant-date fair value.

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We have evaluated all freestanding instruments and embedded features embodied in the Series A Convertible Preferred Stock financing arrangement in accordance with current accounting standards for complex financing transactions. The following points illustrate the key considerations in our evaluation:

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The terms and features of the Series A Convertible Preferred Stock resulted in the our conclusion that the instrument was more akin to a debt security than an equity security. Therefore, embedded features that met the definition of derivative financial features were evaluated for their clear and close relationship with a debt instrument. Significant features included conversion features; contingent redemption (put) features and interest features. While conversion features, such as those included in the Series A Convertible Preferred Stock, are generally not clearly and closely related to debt instruments, we were afforded the “Conventional Convertible” exemption from derivative accounting. While put features and interest features are generally considered clearly and closely related to debt instruments, we determined that terms of the redemption put feature, in fact, resulted in its treatment as a derivative financial feature, subject to bifurcation from the hybrid instrument.

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The terms and features of the freestanding warrants and registration rights were evaluated under the guidance for equity classification set forth in EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to a Company’s Own Stock” and EITF Issue No. 05-04, “The Effect of a Liquidating Damages Clause on a Freestanding Financial Instrument Subject to EITF 00-19.” For purposes of this evaluation, we elected to consider the warrants and registration rights on a combined basis (View A; EITF Issue No. 05-04). As a result, we concluded that the combined arrangement did not rise to an uneconomic settlement. In addition, all other indicators of equity provided in EITF Issue No. 00-19 were present. Therefore, the warrants were afforded equity classification.

Liquidity and Capital Resources

This section describes our balance sheet and liquidity and capital commitments. Our most liquid asset is cash and cash equivalents, which consists of cash and short-term investments. Cash and cash equivalents as of December 31, 2007 and 2006 were approximately $2.6 million and $3.0 million, respectively. Cash and cash equivalents consist of cash and short-term investments with original maturities of 90 days or less. Our cash deposits exceeded FDIC-insured limits by approximately $1.35 million at various financial institutions. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk on cash.

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We expect that we will continue to invest significant resources in order to enhance our existing products and services and to introduce new high-quality products and services. Further, we may need to expend additional capital resources on member acquisition costs and integrating new technologies to improve the speed, performance, features, ease of use and reliability of our consumer services in order to adapt to rapidly changing industry standards. If usage of our websites substantially increases, we may need to purchase additional servers and networking equipment to maintain adequate data transmission speeds, the availability of which may be limited or the cost of which may be significant.

As part of the agreements to acquire certain of our subsidiaries, we agreed to pay the stockholders of these entities additional consideration, or contingent payments, if the financial performance of these respective subsidiaries satisfies certain financial hurdles. As of December 31, 2007, the cash portion of these potential contingent payments totaled approximately $14.375 million which, if and to the extent earned, will likely become payable starting the first quarter of 2009. We expect to fund these earnout payments through cash generated from operations. To the extent we do not have sufficient cash flow from operations to fund these payments, we would need to incur indebtedness or issue equity to satisfy these contingent payments.

In January 2006, we entered into a loan agreement with Wachovia Bank, National Association. Pursuant to the loan agreement, on January 20, 2006, we borrowed $15 million from Wachovia, evidenced by a revolving credit promissory note which bears interest at the LIBOR Market Index Rate plus 2.10% as such rate may change from day to day, and $2.5 million, evidenced by a term promissory note which bears interest at the LIBOR Market Index Rate plus 2.15% as such rate may change from day to day. Amounts due under the revolving credit note are payable in consecutive monthly payments of accrued interest only until January 19, 2009, the revolving credit note’s maturity, at which time all principal and any accrued but unpaid interest is due and payable. As of December 31, 2007 we had $12.4 million due under the revolving credit note. Amounts due under the term note are payable in 12 consecutive monthly payments of equal principal in the amount of $208,333 plus accrued interest with the final payment due on January 19, 2007, the term note’s maturity. The term note was paid in full in January of 2007. Our obligations under the Loan Agreement and the Notes are secured by a first priority lien, in favor of Wachovia, on all of our assets, including the stock of each of our operating subsidiaries and are subject to certain financial covenants. Further, each of our operating subsidiaries has guaranteed the performance of our obligations under the Loan Agreement and the Notes and the guaranty is secured by a first priority lien on each subsidiary’s assets.

On February 27, 2008, we amended and restated our loan agreements with Wachovia Bank, National Association (“Wachovia”). Pursuant to the amended and restated loan agreements, on February 27, 2008, we borrowed $15 million from Wachovia, evidenced by a revolving credit promissory note (the “Revolving Credit Note”), and $5.0 million, evidenced by a term promissory note (the “Term Note”). Our obligations under the Loan Agreement and the Notes are secured by a first priority lien, in favor of Wachovia, on all of our assets, including the stock of each of our operating subsidiaries and we are subject to certain financial covenants. Further, each of our operating subsidiaries has guaranteed the performance of our obligations under the Loan Agreement and the Notes (each, a “Guarantor”) and the guaranty is secured by a first priority lien on each Guarantor’s assets. Interest on the unpaid principal balance of the Revolving Credit Note accrues at a range from LIBOR Market Index Rate plus 1.50% to LIBOR Market Index Rate plus 2.50% as such rate may change from day to day dependent on the amounts drawn on the loan on the quarterly Calculation date compared to our trailing EBIDTA as defined in the agreement. Amounts due under the Revolving Credit Note are payable in consecutive monthly payments of accrued interest only until maturity at which time all principal and any accrued but unpaid interest is due and payable. The Revolving Credit Note matures on February 15, 2011. Interest on the unpaid principal balance of the Term Note accrues at the LIBOR Market Index Rate plus 2.50% as such rate may change from day to day. Amounts due under the Term Note are payable in 36 consecutive monthly payments with the final payment due on February 15, 2011, the Term Note’s maturity. Concurrently we entered into an interest rate swap agreement with Wachovia in which we effectively fixed the rate of the term note at 5.9%.  We used the proceeds from the term note to reduce amounts outstanding on the revolving line of credit.

On April 5, 2006, we completed the sale of 26,500 shares of $1,000 stated value Series A Convertible Preferred Stock (liquidation preference $33.1 million) and warrants to purchase 5.3 million shares of our common stock for gross proceeds of $26.5 million ($24.7 million, net of direct financing costs). Pursuant to the Certificate of

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Designations, Series A Convertible Preferred Stock was convertible into shares of our common stock at a fixed conversion rate of $2.00 and, if not converted by March 20, 2008, was redeemable for cash of $2.00 per share. Series A Convertible Preferred Stock was also redeemable for cash upon a change in control and certain other events at an amount equal to 110% of the greater of (i) the stated value or (ii) the number of indexed shares at the closing market price on the date of the redemption triggering event. The Series A Convertible Preferred Stock was non voting and carried a 10% cumulative dividend feature, reduced to 6% upon the registration of the underlying shares, which were registered on August 1, 2006.

Detachable warrants issued in connection with the Series A Convertible Preferred Stock financing arrangement have a strike price of $2.50 and a term of five years. Common shares indexed to the Series A Convertible Preferred Stock and warrants are subject to the conditions of a freestanding registration rights agreement that provides for monthly liquidating damages of 1.0% (not to exceed an aggregate of 10.0%) for non-filing, non-effectiveness and loss of effectiveness.

On August 31, 2006, 1,500 Shares of Series A Convertible Preferred Stock were converted to 750,000 shares of the Company’s common stock $.001 par value. The relative carrying value on the conversion date of the Series A Convertible Preferred Stock and Embedded Put was allocated to common stock and additional paid in capital.

During December 2006, 20,000 Shares of Series A Convertible Preferred Stock were converted to 10,000,000 shares of the Company’s common stock $.001 par value. The relative carrying value on the conversion date of the Series A Convertible Preferred Stock and Embedded Put was allocated to common stock and additional paid in capital.  On February 28, 2007 the remaining 5,000 Shares of Series A Convertible Preferred Stock were converted to 2,500,000 shares of the Company’s common stock $.001 par value.  As an inducement to convert the last 25,000 Shares we issued 2.0 million warrants to purchase our Common Stock at a price of $3.05 per share and 1.0 million warrants to purchase our Common Stock at a price of $4.00 per share.

Cash provided by operating activities primarily consists of net income adjusted for certain non-cash items such as depreciation and amortization, deferred income taxes, stock based compensation and changes in working capital. Cash provided by operating activities for the twelve months ended December 31, 2007 of approximately $4.0 million consisted primarily of a net loss of approximately $1.1 million adjusted for non-cash items of approximately $8.1 million, including depreciation, amortization of intangible assets, allowance for doubtful accounts, stock-based expenses, deferred income taxes, and approximately $3.0 million used by working capital and other activities.  Cash provided by operating activities for the twelve months ended December 31, 2006 of approximately $1.7 million consisted primarily of net profit of approximately $0.6 million adjusted for non-cash items of $4.6 million, including depreciation, amortization of intangible assets, allowance for doubtful accounts, stock-based expenses, deferred income taxes and approximately $3.5 million used by working capital and other activities. Cash provided by operating activities for the twelve months ended December 31, 2005 of approximately $0.2 million consisted primarily of a net income of approximately $0.00 million adjusted for non-cash items of approximately $2.8 million, including depreciation and amortization of intangible assets, allowance for doubtful accounts and deferred income taxes, and approximately $2.6 million used by working capital and other activities.  

We used cash in investing activities during the twelve months ended December 31, 2007, 2006 and 2005. During the twelve months ended December 31, 2007, 2006 and 2005, we used approximately $2.5 million, $1.5 million and $1.7 million, respectively, to acquire fixed assets. We also used approximately $27.0 million to fund acquisitions during the twelve months ended December 31, 2006 and approximately $19.3 million for the twelve months ended December 31, 2005 for acquisitions. An additional $3.4 million was used for other investing activities including potential acquisitions and the acquisition of databases during the twelve months ended December 31, 2007 versus approximately $2.0 million and $0.3 for the same periods in 2006 and 2005, respectively.

We generated approximately $1.3 million in cash from financing activities during the twelve months ended December 31, 2007, as compared to approximately $29.2 million and $6.5 million for the same periods in 2006 and 2005, respectively.  Sources of cash from financing activities in 2007 included proceeds of approximately $0.7 million from net draws on our line of credit with Wachovia.  In 2006 and 2005 we received net proceeds from our line of credit of approximately $4.3 million and $7.4, respectively.  In 2006, we also received proceeds from an

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installment note with Wachovia totaling $2.5 million.  Net proceeds from equity transactions were approximately $0.2 million, $24.9 million and ($0.1) million for the twelve months ended December 31, 2007, 2006 and 2005 respectively. These amounts were offset by principal repayments of approximately $0.3 million, $2.8 and $0.8 million for the twelve months ended December 31, 2007, 2006 and 2005, respectively.  We also paid preferred dividends of approximately $0.3 million and $1.1 million during the twelve months ended December 31, 2007 and 2006, respectively.  Also, during 2007 and 2006, the Company received tax savings of approximately $1.0 million and $1.4 million, respectively, in connection with the exercise of stock options.

Since 2002 we have acquired a total of fourteen companies which now serve as the platform for all of our business operations. We anticipate continuing to acquire companies that we believe will strategically fit into our business segments and to grow by expanding our current operations. We expect that we will incur future capital expenditures relating to this growth.

The following table summarizes our Consolidated Statement of Cash Flows for the fiscal years ended December 31, 2007, 2006 and 2005, respectively:

Results of Operations

This section describes and compares our results of operations for the twelve months ended December 31, 2007, 2006 and 2005.

Twelve Months Ended December 31, 2007 and 2006

Operating Revenues

Operating revenues by business segment are presented below.

Revenue for the twelve months ended December 31, 2007 increased over the prior year by approximately $1.7 million or 2% to approximately $73.6 million.

Revenue from our Network segment increased by approximately $2.4 million to approximately $19.0 million for the twelve months ended December 31, 2007.  Our search network contributed approximately $1.8 million more in revenue during the current year or approximately $8.8 million.  The revenue derived from our affiliate networks increased by approximately $0.5 million to approximately $9.0 million.  Revenue from hosting remained constant from year to year at approximately $1.2 million.

Revenue from our Direct segment contributed approximately $36.5 million during the twelve months ended December 31, 2007 an increase of approximately $5.9 million from the previous year.  We completed an acquisition in May of 2006 which broadened the scope of our internal offers revenue base.  Revenue from our internal offers contributed approximately $26.4 million during the twelve months ended December 31, 2007 as compared to approximately $21.4 million the prior year. Revenue from our Baby to Bee property contributed approximately $9.0

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million during the twelve months ended December 31, 2007, compared to approximately $7.8 million in 2006.  Revenue from our online education properties contributed approximately $1.1 million during the twelve months ended December 31, 2007 as compared to approximately $1.5 million during 2006.

Revenue from our Advertising segment was approximately $19.4 million for the twelve months ended December 31, 2007, compared to approximately $25.3 million for the same period last year.  Search engine enhancement revenue decreased by approximately $7.2 million to approximately $1.6 million during the current year as compared to last year.  Revenue from traditional offline advertising services increased slightly to approximately $10.4 million in 2007 as compared to approximately $10.3 million in 2006. This was offset by increased paid search revenue of approximately $1.2 million derived from our foreign operations.  Revenue from paid search totaled approximately $7.4 million during the twelve months ended December 31, 2007.

Gross Profit

Gross profits by business segment are presented below.

The gross profits for the twelve months ended December 31, 2007 were approximately $37.8 million, 51% of revenue.  In contrast the gross profits for the equivalent period in 2006 were approximately $44.2 million, 61% of revenue.

Gross profit from our Network segment for the twelve months ended December 31, 2007 was approximately $11.3 million, 60% of revenue compared to approximately $11.5 million or 69% of revenue for the twelve months ended December 31, 2006.  Gross profit from our affiliate network contributed approximately $7.3 million during the twelve months ended December 31, 2007, a decrease of $0.9 million from last year.  This decrease was due to a decline in margin in our PrimaryAds affiliate network as we work toward diversifying the offers within the network.  Gross profit from our search network contributed approximately $3.1 million during the twelve months ended December 31, 2007, an increase of $0.8 million from the prior year. Gross profit from our search network has increased from approximately $0.4 million in the first quarter of 2007 to approximately $1.1 million in the fourth quarter of 2007.  Historically we have realized much lower margins from our search network.  The margins within the search network were approximately 36% during 2007 while they were approximately 80% within our affiliate networks for the same period.  As the revenue mix between our networks changes so will our gross profit percentage for this segment.

Gross profit from our Direct segment for the twelve months ended December 31, 2007 was approximately $21.4 million, 59% of revenue compared to approximately $22.5 million or 74% of revenue for the twelve months ended December 31, 2006.  The decrease in gross profit percentage during the twelve months was mainly attributable to two factors.  First, revenue from our email marketing campaigns which has traditionally higher margins decreased significantly during 2007 as compared to last year.  Second, we completed an acquisition in May of 2006 which broadened the scope of our internal offers revenue base.  The internal offers added with this acquisition provide a slightly lower gross margin as customer acquisition costs and customer turnover are both slightly higher.  

Gross profit from our Advertising segment for the twelve months ended December 31, 2007 was approximately $5.4 million, 28% of revenue compared to approximately $10.7 million or 42% of revenue for the twelve months ended December 31, 2006.  Gross profit from our search engine enhancement services decreased by approximately $5.5

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million for the twelve months ended December 31, 2007 as compared to the same period last year.  These types of services had produced gross margins of approximately 66%.  As our revenue from this segment shifts to more traditional offline and paid search, the gross profit will decline. Gross profit from this revenue source were nominal in both the third and fourth quarters of 2007 which has stabilized our gross margin percentages.  Our traditional offline marketing services produce gross margins of approximately 35% while our paid search margins are approximately 15%.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were approximately $34.4 million, 47% of revenue for the twelve months ended December 31, 2007.  For the same period last year, these expenses totaled approximately $39.1 million, 54% of revenue.

Selling, general and administrative expenses in our Network segment for the twelve months ended December 31, 2007 were approximately $7.1 million, 38% of revenue as compared to approximately $6.1 million, 36% of revenue for the same period last year.  This change was due to the varying revenue mix within this segment.  In our Direct segment, selling, general and administrative expenses were approximately $14.7 million, 40% of revenue as compared to approximately $16.6 million, 54% of revenue for the same period last year. The revenue mix from the various products within this segment has shifted over the last year.  We have experienced significant growth in certain internal offers during the year that require less costs to support them.  This has caused a shift in the percentage of selling, general and administrative expenses as they relate to revenue.  Selling, general, and administrative expenses in our Advertising segment were approximately $6.3 million, 33% of revenue as compared to approximately $11.1 million, or 44% of revenue for the prior year.  The decline in these expenses is a result of the large reduction in revenue derived from search engine enhancement services.  Corporate overhead expenses increased to approximately $6.6 million from approximately $5.8 million for the twelve months ended December 31, 2007 and 2006 respectively.   Professional fees declined by approximately $0.9 million during 2007 as compared to 2006.  These savings were offset by increased corporate payroll expenses of approximately $0.7 million and increased stock based compensation costs of approximately $0.7 million.

Amortization of purchased intangibles was approximately $4.2 million and $3.5 for the twelve months ended December 31, 2007 and 2006 respectively.  Amortization has increased as compared to last year due to three acquisitions completed in the second quarter of 2006.

Interest expense for the twelve months ended December 31, 2007 and 2006 was approximately $0.9 million.  We will continue to incur the same levels of interest expense until we pay down our current and long term debt assuming interest rates remain consistent.

Net Loss Applicable to Common Stockholders

Net loss applicable to common stockholders was approximately $1.2 million, $0.02 per share, and $9.7 million, $0.20 per share, for the twelve months ended December 31, 2007 and 2006, respectively.  During the twelve months ended December 31, 2007 we incurred a charge of approximately $0.1 million for dividends and accretion of redeemable preferred stock as compared to $4.2 million in 2006.  We also incurred a charge of approximately $6.0 million during 2006 for warrants issued to effect the conversion of convertible preferred stock.

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Twelve Months Ended December 31, 2006 and 2005

Operating Revenues

Operating revenues by business segment are presented below.

Revenue for the twelve months ended December 31, 2006 increased approximately $31.4 million to approximately $71.9 million from the same period in the prior fiscal year. Revenue from our Network segment increased approximately $11.6 million to approximately $16.7 million from the same period last year. The acquisition of Litmus Media, Inc. contributed approximately $7.0 million in revenue during the current year. The remaining growth was due to increased revenue derived from our affiliate networks and affiliate software licensing. Revenue from our Direct segment contributed approximately $30.6 million during the twelve months ended December 31, 2006. We added to this segment in January 2006 with the acquisition of Morex Marketing Group, LLC and expanded further in May with the acquisition of iLead Media, Inc. Revenue from our Advertising segment decreased by approximately $1.8 million during the twelve months ended December 31, 2006, compared to the same period last year. In our Advertising segment, revenue from search engine enhancement services decreased by approximately $8.8 million during 2006 as compared to 2005. This was offset by increased revenue from the addition of Web Diversity Ltd. in April 2006 of approximately $6.2 million and increased revenue from our advertising agency of approximately $0.8 million in 2006 as compared to 2005.  Revenue from search engine enhancement services has continued to decline due to increased competition and low barriers to entry.

Gross Profit

Gross profits by business segment are presented below.

The gross profits for the twelve months ended December 31, 2006 were approximately $44.2 million, 61% of sales. In contrast, the gross profits for the equivalent period in 2005 were approximately $26.6 million, 66% of sales. During this period our gross profit percentages were changing as each of the acquisitions we completed had different cost structures. Our Network segment had gross profits of approximately $11.5 million, 69% of revenue, and approximately $4.6 million, 91% of revenue, for the twelve months ended December 31, 2006 and 2005, respectively. The change was due to an acquisition in this segment that was completed in April of 2006. Our gross profit for our Direct segment was approximately $22.5 million, or 74% of revenue as compared to approximately $6.9 million in 2005, or 79% of revenue. As in our network segment, we completed two acquisitions in 2006 that had an affect on the overall gross margin percentage for the segment.  Our Advertising segment had gross profit of approximately $10.7 million, 42% of revenue, and approximately $15.5 million, 57% of revenue, for the twelve

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months ended December 31, 2006 and 2005 respectively. This segment underwent a significant change in revenue mix over the past twelve months as was noted above. Revenue from search engine enhancement services has decreased by approximately 50% from the prior year. We have historically realized higher gross margins from these services. Due to this shift our gross margin percentage has decreased as revenue shifts to services and products with lower gross margins. We expect this to continue as these types of services become a minimal part of our business.   

 Selling, general and administrative expenses were approximately $39.1 million, 54% of sales for the twelve months ended December 31, 2006. For the same period last year, these expenses totaled approximately $24.9 million, 62% of sales. Our payroll related costs allocated to selling, general and administrative expenses were approximately $21.0 million for 2006, or 29% of revenue, as compared to approximately $14.7 million or 36% of revenue for 2005.  We have had many other changes in the composition of our selling, general and administrative expenses over the last twelve months. We currently report revenue for two of our operating subsidiaries net of costs as an agent. Due to this reporting, our selling, general and administrative expense percentage will be higher for these entities and, therefore, has the effect of increasing these expenses as a percentage of revenues.  Additionally, our corporate overhead costs increased by approximately $2.0 million during 2006 as compared to 2005. The increase in corporate overhead resulted primarily from increased legal and accounting fees associated with certain acquisitions that did not close, preparation of certain financial statements required for securities filings including our registration statement on Form SB-2, increased corporate payroll expenses, and fees incurred regarding the restatement of our financial statements. Professional fees increased by approximately $0.9 million in 2006 as compared to 2005.  We expect certain of these costs to decrease going forward. Further, corporate overhead increased due to our implementation of FAS 123R in the first quarter of 2006 which resulted in our expensing certain stock based compensation that was previously only a footnote disclosure.

Net (Loss) Income Applicable to Common Stockholders

Net loss applicable to common stockholders increased from a net loss of approximately $3,600 for the twelve months ended December 31, 2005 to net loss applicable to common shareholders of approximately $9.7 million for the twelve months ended December 31, 2006. The increase was primarily attributable to a one time charge for warrants issued to preferred shareholders as an inducement to convert their position to common stock, preferred stock dividends and accretion.  The one time charge for warrants issued was approximately $6.0 million.   The value of the warrants was calculated using the Black-Scholes model.  The increase in redeemable preferred stock dividends was approximately $1.4 million and accretion of redeemable preferred stock of approximately $2.8 million.  These charges will not be incurred in 2007. We also incurred additional stock-based compensation expense of approximately $0.3 million due to the adoption of SFAS 123R in 2006.  Other income increased by approximately $660,000 during 2006 as compared to 2005.  This increase consisted of approximately $280,000 associated with the fair value adjusted for derivatives, approximately $90,000 associated with gains realized from the sale of stock received as payment for services and approximately $250,000 received as part of the break up fee from the divestiture of our online dating properties.

Contractual Obligations

Segment Analysis

Our operations are divided into operating segments using individual products or services or groups of related products and services. During the second quarter of 2007, we consolidated our Direct and Consumer Services segments under one Executive Officer. All prior periods have been adjusted for the new presentation. The Chief Executive Officer of each of our subsidiaries reports to our Chief Operating Officer, who makes decisions about performance assessment and resource allocation for all segments.  We had three operating segments as of December

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31, 2007: network, direct and advertising.  We evaluate the performance of each segment using pre-tax income or loss from continuing operations.

Listed below is a presentation of revenue, gross profit and operating profit for all reportable segments.  We currently only track certain assets at the segment level and therefore assets by segment are not presented below.  The “corporate” category in the “(Loss) Income before Income Taxes by Industry Segment” table consists of corporate expenses not allocated to any segments.  A large portion of our revenue is derived on the internet and our clients span multiple geographic regions.  The presentation of sales by geographic region is not practical and is therefore not presented

Subsequent Events

On February 27, 2008, we amended and restated our loan agreements with Wachovia Bank, National Association (“Wachovia”). Pursuant to the amended and restated loan agreements, on February 27, 2008, we borrowed $15 million from Wachovia, evidenced by a revolving credit promissory note (the “Revolving Credit Note”), and $5.0 million, evidenced by a term promissory note (the “Term Note”). Our obligations under the Loan Agreement and the Notes are secured by a first priority lien, in favor of Wachovia, on all of our assets, including the stock of each of our operating subsidiaries and we are subject to certain financial covenants. Further, each of our operating subsidiaries has guaranteed the performance of our obligations under the Loan Agreement and the Notes (each, a “Guarantor”) and the guaranty is secured by a first priority lien on each Guarantor’s assets. Interest on the unpaid principal balance of the Revolving Credit Note accrues at a range from LIBOR Market Index Rate plus 1.50% to LIBOR Market Index Rate plus 2.50% as such rate may change from day to day dependent on the amounts drawn on the loan on the quarterly Calculation date compared to our trailing EBIDTA as defined in the agreement. Amounts due under the Revolving Credit Note are payable in consecutive monthly payments of accrued interest only until maturity at which time all principal and any accrued but unpaid interest is due and payable. The Revolving Credit Note matures on February 15, 2011. Interest on the unpaid principal balance of the Term Note accrues at the LIBOR Market Index Rate plus 2.50% as such rate may change from day to day. Amounts due under the Term Note are payable in 36 consecutive monthly payments with the final payment due on February 15, 2011, the Term Note’s

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maturity. Concurrently we entered into an interest rate swap agreement with Wachovia in which we effectively fixed the rate of the term note at 5.9%.

ITEM 7A.

 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relates to the fact that some of our debt consists of variable interest rate loans. We seek to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs by monitoring our variable rate debt and converting such debt to fixed rates when we deem such conversion advantageous.

Our interest rate risk is monitored by periodically evaluating fixed interest rate quotes on all variable rate debt and the costs associated with converting the debt to fixed rate debt. Also, existing fixed and variable rate loans which are scheduled to mature in the next year or two are evaluated for possible early refinancing and or extension due to consideration given to current interest rates. The table below presents the principal amount of the debt maturing each year, including monthly annual amortization of principal, through December 31, 2010 based on debt outstanding at December 31, 2007 and weighted average interest rates for the debt maturing in each specified period.

The table above does not reflect indebtedness incurred after December 31, 2007. Our ultimate exposure to interest rate fluctuations depends on the amount of indebtedness that bears interest at variable rates, the time at which the interest rate is adjusted, the amount of the adjustment, our ability to prepay or refinance variable rate indebtedness and hedging strategies used to reduce the impact of any increases in rates.

Foreign Exchange Risk

While our reporting currency is the U.S. Dollar, approximately 8% of our consolidated revenue and costs are denominated in British Pounds. As a result, we are exposed to foreign exchange risk as our results of operations may be affected by fluctuations in the exchange rate between U.S. Dollars and British Pounds. If the British Pound depreciates against the U.S. Dollar, the amount of our foreign income and expenses expressed in our U.S. Dollar financial statements will be affected. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk. Our foreign operations incurred a loss from operations of approximately $0.6 million during the twelve months ended December 31, 2007.  If the US Dollar weakens against the British Pound and we incur further losses in our foreign operations this will have an adverse affect on our financial statements.

ITEM 8.

FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

Our financial statements required by this item are submitted as a separate section of this Form 10-K. See Item 15 (a)(1) for a listing of financial statements provided in the section titled “Financial Statements.”

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

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ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In connection with the preparation of this Annual Report on Form 10-K, an evaluation was carried out by the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of December 31, 2007. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

During the evaluation of disclosure controls and procedures as of December 31, 2007 conducted during the preparation of the Company’s financial statements to be included in this Form 10-K, a material weakness in internal controls was identified.  As a result of this material weakness, described more fully below, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2007, our disclosure controls and procedures were ineffective.

In light of the material weakness described below, we performed additional analyses and other procedures to ensure that our consolidated financial statements included in this Annual Report were prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). Notwithstanding the existence of this material weakness in internal controls, the Company believes that the consolidated financial statements in this Annual Report on Form 10-K fairly present, in all material respects, our consolidated balance sheets as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2007, 2006 and 2005 in conformity with GAAP.

Management’s Report on Internal Control Over Financial Reporting

Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.  Internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with existing policies or procedures may deteriorate. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time.

Company management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2007 based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on this assessment, we have determined that we did not maintain effective internal controls over financial reporting as of December 31, 2007.

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A material weakness is “a deficiency, or a combination of deficiencies (within the meaning of PCAOB Auditing Standard No. 5), in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.”

Company management has concluded that, as of December 31, 2007, the following material weakness existed:

Formal processes over change management and end user access procedures related to our information technology systems including our Microsoft Great Plains Dynamics application and revenue producing financial applications.

We were unable to properly implement and maintain an effective information technology operating environment. In addition, we did not properly maintain access or program change controls related to our critical information technology systems including the General Ledger system and certain revenue producing financial applications.

The effectiveness of our internal control over financial reporting as of December 31, 2007 has been audited by Blackman Kallick, LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Remediation of Material Weaknesses in Internal Control Over Financial Reporting During 2007

Our management has undertaken the following actions to remediate this material weakness:

·

Recruited and hired additional information technology professionals to ensure that the information technology operating systems are operating effectively and to formalize user access issues noted.

·

Implemented additional change control procedures and an updated software development life cycle process,

·

Review current access rights for all users and develop and document detailed segregation of access.

Notwithstanding the existence of this material weakness in internal controls, we believe that the consolidated financial statements fairly present, in all material respects, our consolidated balance sheets as of December 31, 2007 and 2006 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the three years ended December 31, 2007 in conformity with GAAP.

Changes in Internal Controls

The Company maintains a system of internal controls that are designed to provide reasonable assurance that its books and records accurately reflect the Company’s transactions and that its established policies and procedures are followed. There was no change in our internal control over financial reporting identified in connection with such evaluation that occurred during our fiscal quarter ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Since December 31, 2007, the Company has implemented actions for the remediation of the identified material weakness, as described above

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Think Partnership Inc.
Clearwater, Florida

We have audited Think Partnership, Inc. and subsidiaries’  (“the Company”) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting (Item 9A(b)). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or consolidated interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified by the company: The company has no formal processes over change management and access procedures related to its information technology systems including its Microsoft Great Plains Dynamics application, end-user computing and revenue producing financial applications. As a result, the Company was unable to properly implement and maintain an effective information technology operating environment. In addition, the Company did not properly maintain access or program change controls related to its critical information technology systems including the General Ledger system, end-user computing and certain revenue producing financial applications. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the Company’s consolidated financial statements as of and for the year ended December 31, 2007, and this report does not affect our report dated March 30, 2008 on those consolidated financial statements.

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In our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Think Partnership Inc. has not maintained effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of December 31, 2007 and 2006, and for each of the years in the three-year period ended December 31, 2007, and our report dated March 30, 2008 expressed an unqualified opinion on those consolidated financial statements.

/s/ Blackman Kallick, LLP

Chicago, Illinois

March 30, 2008

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ITEM 9B.

OTHER INFORMATION

None

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, which we anticipate filing on or before April 30, 2008.

ITEM 11.

EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, which we anticipate filing on or before April 30, 2008.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, which we anticipate filing on or before April 30, 2008.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, which we anticipate filing on or before April 30, 2008.

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, which we anticipate filing on or before April 30, 2008.

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PART IV

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)

Documents filed as part of this report

 The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this report.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Think Partnership Inc.

We have audited the accompanying consolidated balance sheets of Think Partnership Inc. as of December 31, 2007 and 2006 and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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 Think Partnership Inc. as of December 31, 2007, and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of applying an accounting principle for the annual goodwill impairment test by changing the impairment test date effective December 31, 2007. As discussed in Note 10 to the consolidated financial statements, the Company has also changed its method of accounting for stock-based compensation effective January 1, 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 30, 2008, expressed an adverse opinion on the effectiveness of the  Company’s internal control over financial reporting.

/s/ Blackman Kallick, LLP

Chicago, Illinois

March 30, 2008

F-1

Think Partnership Inc.

Consolidated Balance Sheets

December 31, 2007 and 2006

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

F-2

Think Partnership Inc.

Consolidated Statements of Operations

Years Ended December 31, 2007, 2006 and 2005

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

F-3

Think Partnership Inc

Consolidated Statement of Shareholders’ Equity

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

F-4

Think Partnership Inc.

Consolidated Statements of Cash Flows

Years Ended December 31, 2007, 2006 and 2005