** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

| **x**      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE**                                       |
|------------|----------------------------------------------------------------------------------------------------|
| ** ** | **SECURITIES EXCHANGE ACT OF 1934**                                                                |
| ** ** | ** **                                                                                         |
| ** ** | **For the quarterly period  ended September 30, 2006**                                             |
| ** ** | ** **                                                                                         |
| ** ** | **OR**                                                                                             |
| ** ** | ** **                                                                                         |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**                                      |
| ** ** | **SECURITIES  EXCHANGE ACT OF 1934**                                                               |
| ** ** | ** **                                                                                         |
| ** ** | **For the transition  period from           to** |

 

**Commission File Number:1-14355**

** **

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**24/7 Real Media, Inc.**

(Exact name of registrant as specified in its charter)

** **

| **Delaware**                     |   | **13-3995672**                        |
|----------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)  |   |                                  |

 

| **132 West 31****st Street, New York, New York** |   | **10001**  |
|-------------------------------------------------------|--------|------------|
| (Address of principal  executive offices)             |   | (Zip Code) |

** **

**(212) 231-7100**

(Registrant’s telephonenumber, including area code)

**None**

(Former name, formeraddress and former fiscal year, if changed since last report)

Indicate by check mark whether theregistrant: (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No [  ]

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

Large Accelerated Filer     o    Accelerated Filer     x    Non-Accelerated Filer o

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

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

| **Class**                               |   | **Outstanding  At September 30, 2006** |
|-----------------------------------------|--------|----------------------------------------|
| Common Stock,  par value $.01 per share |   | 49,164,811  Shares                     |

 

 

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**24/7 REAL MEDIA, INC.FORM 10-Q****SEPTEMBER30****, 2006INDEX**

 
| Part I. Financial Information                                                                                                      |   |   |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Item 1. Condensed  Consolidated Financial Statements                                                                               |   |   |   |
| Condensed Consolidated Balance Sheets as of  September 30, 2006 (unaudited) and December 31, 2005                             |   |   |   |
| Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2006 and 2005 (unaudited) |   |   |   |
| Condensed  Consolidated Statements of Cash Flows for the nine months ended  September 30, 2006 and 2005 (unaudited)           |   |   |   |
| Notes to Unaudited  Interim Condensed Consolidated Financial Statements                                                            |   |   |   |
| Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                |   |   |   |
| Item 3. Quantitative  and Qualitative Disclosures about Market Risk                                                                |   |   |   |
| Item 4. Controls and  Procedures                                                                                                   |   |   |   |
|                                                                                                                               |   |   |   |
| Part II. Other Information                                                                                                         |   |   |   |
| Item 1. Legal Proceedings                                                                                                          |   |   |   |
| Item 1A. Risk Factors                                                                                                              |   |   |   |
| Item 2. Unregistered  Sales of Equity Securities and Use of Proceeds                                                               |   |   |   |
| Item 3. Defaults Upon  Senior Securities                                                                                           |   |   |   |
| Item 4. Submission of  Matters to a Vote of Security Holders                                                                       |   |   |   |
| Item 5. Other Information                                                                                                          |   |   |   |
| Item 6. Exhibits                                                                                                                   |   |   |   |
| Signatures                                                                                                                         |   |   |   |

 

Open AdStream®,Insight XE®, Insight ACT®, Open Advertiser® and 24/7 Search® are registered trademarks of 24/7Real Media, Inc. and Decide DNATM is a pending trademark of 24/7 RealMedia, Inc. All other brand names or trademarks appearing herein are theproperty of their respective holders.

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PART I. FINANCIALINFORMATION

ITEM 1. CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

**24/7 REAL MEDIA,INC.CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except share data)**
| ** **                                                                                                                           | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                           | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                           |       |                         |       |                        |       |
| ** **                                                                                                                           |       |                         |       |                        |       |
| Current assets:                                                                                                                      |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                                                           |       | $                            | 51,046     |                        | $          | 40,009 |   |
| Accounts  receivable, less allowances of $2,726 and $2,306, respectively                                                             |       | 48,053                       |       | 38,316                      |       |
| Prepaid expenses  and other current assets                                                                                           |       | 2,691                        |       | 2,369                       |       |
|                                                                                                                                 |       |                         |       |                        |       |
| Total current  assets                                                                                                                |       | 101,790                      |       | 80,694                      |       |
|                                                                                                                                 |       |                         |       |                        |       |
| Property and equipment,  net                                                                                                         |       | 7,782                        |       | 7,131                       |       |
| Goodwill                                                                                                                             |       | 39,573                       |       | 39,573                      |       |
| Intangible assets, net                                                                                                               |       | 8,126                        |       | 9,715                       |       |
| Other assets                                                                                                                         |       | 4,215                        |       | 5,691                       |       |
|                                                                                                                                 |       |                         |       |                        |       |
| Total assets                                                                                                                         |       | $                            | 161,486    |                        | $          | 142,804 |   |
|                                                                                                                                 |       |                         |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                       |       |                         |       |                        |       |
| ** **                                                                                                                           |       |                         |       |                        |       |
| Current liabilities:                                                                                                                 |       |                         |       |                        |       |
| Accounts payable                                                                                                                     |       | $                            | 23,309     |                        | $          | 19,396 |   |
| Accrued  liabilities                                                                                                                 |       | 20,210                       |       | 23,987                      |       |
| Deferred revenue                                                                                                                     |       | 3,051                        |       | 3,218                       |       |
| Subordinated  convertible debentures, 2%, due 2009                                                                                   |       | 7,500                        |       | 14,542                      |       |
|                                                                                                                                 |       |                         |       |                        |       |
| Total current  liabilities                                                                                                           |       | 54,070                       |       | 61,143                      |       |
|                                                                                                                                 |       |                         |       |                        |       |
| Subordinated  convertible debentures, 2%, due 2009                                                                                   |       | 7,500                        |       | —                      |       |
| Warrant liability                                                                                                                    |       | 585                          |       | 897                         |       |
| Other long-term  liabilities                                                                                                         |       | 876                          |       | 489                         |       |
|                                                                                                                                 |       |                         |       |                        |       |
| Total  liabilities                                                                                                                   |       | 63,031                       |       | 62,529                      |       |
|                                                                                                                                 |       |                         |       |                        |       |
| Commitments and  contingencies:                                                                                                      |       |                         |       |                        |       |
| Minority interests in  consolidated subsidiaries                                                                                     |       | 1,650                        |       | 1,556                       |       |
|                                                                                                                                 |       |                         |       |                        |       |
| Stockholders’ equity:                                                                                                           |       |                         |       |                        |       |
| Preferred stock;  $.01 par value; 10,000,000 shares authorized; no shares issued and none  outstanding                               |       | —                       |       | —                      |       |
| Common stock;  $.01 par value; 350,000,000 shares authorized; 49,164,811 and 46,227,772  shares issued and outstanding, respectively |       | 492                          |       | 462                         |       |
| Additional  paid-in capital                                                                                                          |       | 1,203,480                    |       | 1,177,715                   |       |
| Accumulated  other comprehensive income                                                                                              |       | 1,582                        |       | 896                         |       |
| Accumulated  deficit                                                                                                                 |       | (1,108,749                   | )          | (1,100,354                  | )          |
| Total stockholders’  equity                                                                                                     |       | 96,805                       |       | 78,719                      |       |
|                                                                                                                                 |       |                         |       |                        |       |
| Total liabilities and  stockholders’ equity                                                                                     |       | $                            | 161,486    |                        | $          | 142,804 |   |

 

See accompanying notes to unaudited interim condensedconsolidated financial statements.

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**24/7 REAL MEDIA,INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, expect share and per share data)**
| ** **                                                                                                           | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                           | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                           | ** ** | **(unaudited)**                                          | ** ** | **(unaudited)**                                         | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| Revenues:                                                                                                            |       |                                                     |       |                                                    |       |   |   |   |   |
| Media                                                                                                                |       | $                                                        | 19,082     |                                                    | $          | 15,547 |   | $ | 58,646 |   | $ | 46,460 |   |
| Search                                                                                                               |       | 22,669                                                   |       | 13,731                                                  |       | 60,247 |   | 35,063 |   |
| Technology                                                                                                           |       | 7,392                                                    |       | 5,839                                                   |       | 21,367 |   | 16,550 |   |
| Total revenues                                                                                                       |       | 49,143                                                   |       | 35,117                                                  |       | 140,260 |   | 98,073 |   |
|                                                                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Cost of revenues:                                                                                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Media                                                                                                                |       | 12,736                                                   |       | 10,516                                                  |       | 39,754 |   | 31,470 |   |
| Search                                                                                                               |       | 17,357                                                   |       | 10,026                                                  |       | 45,243 |   | 24,405 |   |
| Technology  (inclusive of $139, $7, $384 and $23 of stock-based compensation,  respectively)                         |       | 1,592                                                    |       | 1,005                                                   |       | 4,661 |   | 3,190 |   |
| Total cost of  revenues                                                                                              |       | 31,685                                                   |       | 21,547                                                  |       | 89,658 |   | 59,065 |   |
|                                                                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Gross profit                                                                                                         |       | 17,458                                                   |       | 13,570                                                  |       | 50,602 |   | 39,008 |   |
|                                                                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Operating expenses:                                                                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Sales and  marketing (inclusive of $1,109, $117, $3,269 and $323 of stock-based  compensation, respectively)         |       | 7,867                                                    |       | 5,723                                                   |       | 23,089 |   | 16,950 |   |
| General and administrative  (inclusive of $2,616, $318, $10,814 and $950 of stock-based compensation,  respectively) |       | 7,638                                                    |       | 5,203                                                   |       | 25,982 |   | 15,407 |   |
| Product  development (inclusive of $471, $51, $1,734 and $151 of stock-based  compensation, respectively)            |       | 2,425                                                    |       | 1,614                                                   |       | 7,327 |   | 4,322 |   |
| Amortization of  intangible assets and deferred financing costs                                                      |       | 882                                                      |       | 1,140                                                   |       | 2,661 |   | 3,419 |   |
| Restructuring  costs                                                                                                 |       | —                                                   |       | —                                                  |       | — |   | 973 |   |
|                                                                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Total operating  expenses                                                                                            |       | 18,812                                                   |       | 13,680                                                  |       | 59,059 |   | 41,071 |   |
|                                                                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Loss from  operations                                                                                                |       | (1,354                                                   | )          | (110                                                    | )          | (8,457 | ) | (2,063 | ) |
|                                                                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Interest income  (expense), net                                                                                      |       | 220                                                      |       | (48                                                     | )          | 428 |   | (190 | ) |
| Change in fair value of  warrant liability                                                                           |       | 22                                                       |       | (384                                                    | )          | (97 | ) | (344 | ) |
| Recovery of investment                                                                                               |       | —                                                   |       | —                                                  |       | — |   | 2,100 |   |
| Impairment of  marketable securities                                                                                 |       | —                                                   |       | —                                                  |       | — |   | (588 | ) |
| Loss on sale of  marketable securities                                                                               |       | —                                                   |       | (25                                                     | )          | — |   | (18 | ) |
| Other income (expense),  net                                                                                         |       | (27                                                      | )          | (55                                                     | )          | 97 |   | (95 | ) |
|                                                                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Loss before provision  for income taxes and minority interest in operations of consolidated  subsidiary              |       | (1,139                                                   | )          | (622                                                    | )          | (8,029 | ) | (1,198 | ) |
|                                                                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Provision for income  taxes                                                                                          |       | (126                                                     | )          | (164                                                    | )          | (268 | ) | (184 | ) |
| Minority interest in  operations of consolidated subsidiary                                                          |       | (103                                                     | )          | 21                                                      |       | (98 | ) | 21 |   |
|                                                                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Net loss                                                                                                             |       | $                                                        | (1,368     | )                                                       | $          | (765 | ) | $ | (8,395 | ) | $ | (1,361 | ) |
|                                                                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Dividends on preferred  stock                                                                                        |       | —                                                   |       | (3                                                      | )          | — |   | (25 | ) |
|                                                                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Net loss attributable  to common stockholders                                                                        |       | $                                                        | (1,368     | )                                                       | $          | (768 | ) | $ | (8,395 | ) | $ | (1,386 | ) |
|                                                                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic and diluted net  loss per share attributable to common stockholders                                            |       | $                                                        | (0.03      | )                                                       | $          | (0.02 | ) | $ | (0.17 | ) | $ | (0.03 | ) |
|                                                                                                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Weighted average shares outstanding used in basic and diluted net  loss per share                                    |       | 48,977,525                                               |       | 45,478,444                                              |       | 48,175,289 |   | 45,097,696 |   |

 

See accompanying notes to unaudited interim condensedconsolidated financial statements.

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**24/7 REALMEDIA, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)**
| ** **                                                                                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                                                                                           | ** ** | **(unaudited)**                                         | ** ** | **(unaudited)** | ** ** |
| Cash flows from  operating activities:                                                               |       |                                                    |       |   |   |
| Net loss                                                                                             |       | $                                                       | (8,395     | ) | $ | (1,361 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities:                     |       |                                                    |       |   |   |
| Depreciation and  amortization                                                                       |       | 2,772                                                   |       | 2,079 |   |
| Provision for doubtful  accounts and sales reserves                                                  |       | 1,721                                                   |       | 1,672 |   |
| Amortization of  intangible assets and deferred financing costs                                      |       | 2,661                                                   |       | 3,419 |   |
| Amortization of debt  discount                                                                       |       | 458                                                     |       | 458 |   |
| Non-cash compensation                                                                                |       | 16,201                                                  |       | 1,447 |   |
| Accrued interest on  note payable                                                                    |       | 76                                                      |       | 76 |   |
| Change in fair value of  warrant liability                                                           |       | 97                                                      |       | 344 |   |
| Minority interest in  operations of consolidated joint venture                                       |       | 98                                                      |       | (21 | ) |
| Loss on sale of  marketable securities                                                               |       | —                                                  |       | 18 |   |
| Impairment of  marketable securities                                                                 |       | —                                                  |       | 588 |   |
| Recovery of investment                                                                               |       | —                                                  |       | (2,100 | ) |
| Changes in operating  assets and liabilities, net of  effect  of acquisitions and dispositions: |       |                                                    |       |   |   |
| Accounts  receivable                                                                                 |       | (11,458                                                 | )          | (4,762 | ) |
| Prepaid expenses  and other current assets                                                           |       | (478                                                    | )          | 334 |   |
| Other assets                                                                                         |       | 325                                                     |       | (510 | ) |
| Accounts payable  and accrued liabilities                                                            |       | 4,660                                                   |       | 5,412 |   |
| Deferred revenue                                                                                     |       | (167                                                    | )          | (429 | ) |
|                                                                                                 |       |                                                    |       |   |   |
| Net cash  provided by operating activities                                                           |       | 8,571                                                   |       | 6,664 |   |
|                                                                                                 |       |                                                    |       |   |   |
| Cash flows from  investing activities:                                                               |       |                                                    |       |   |   |
| Capital expenditures,  including capitalized software                                                |       | (2,697                                                  | )          | (4,916 | ) |
| Recovery of investment                                                                               |       | —                                                  |       | 2,100 |   |
| Proceeds from sale of  marketable securities                                                         |       | —                                                  |       | 856 |   |
| Proceeds from sale /  maturities of short-term investments                                           |       | —                                                  |       | 648 |   |
|                                                                                                 |       |                                                    |       |   |   |
| Net cash used in  investing activities                                                               |       | (2,697                                                  | )          | (1,312 | ) |
|                                                                                                 |       |                                                    |       |   |   |
| Cash flows from  financing activities:                                                               |       |                                                    |       |   |   |
| Proceeds from exercise  of stock options                                                             |       | 5,790                                                   |       | 677 |   |
| Proceeds from note  receivable                                                                       |       | 200                                                     |       | — |   |
| Cash paid for  acquisitions                                                                          |       | (1,250                                                  | )          | — |   |
| Proceeds from minority  investor of consolidated subsidiary                                          |       | —                                                  |       | 1,729 |   |
| Payment of capital  lease obligations                                                                |       | (259                                                    | )          | (62 | ) |
|                                                                                                 |       |                                                    |       |   |   |
| Net cash  provided by financing activities                                                           |       | 4,481                                                   |       | 2,344 |   |
|                                                                                                 |       |                                                    |       |   |   |
| Net change in  cash and cash equivalents                                                             |       | 10,355                                                  |       | 7,696 |   |
| Effect of foreign  currency on cash                                                                  |       | 682                                                     |       | (483 | ) |
| Cash and cash  equivalents at beginning of year                                                      |       | 40,009                                                  |       | 27,690 |   |
|                                                                                                 |       |                                                    |       |   |   |
| Cash and cash  equivalents at end of period                                                          |       | $                                                       | 51,046     |   | $ | 34,903 |   |

 

See accompanying notes to unaudited interim condensedconsolidated financial statements.

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**NOTE 1 — ORGANIZATION AND NATURE OF OPERATIONS**

24/7 RealMedia, Inc. (the “Company”), together with its subsidiaries, providesadvertising services and software solutions for the online advertising needs ofWeb publishers and advertisers, including advertising sales, search enginemarketing (“SEM”) services, online advertisement serving, analytics andaudience management. As of September 30, 2006, the Company principally operatedin North America, Europe, South Korea, Japan and Australia and provided the followingproducts and services:

*Media*, collectively marketed asthe 24/7 Real Media Web Alliance, a global alliance of Web sites represented bythe Company, through which advertisers can place campaign orders directly withthe Company.

*Search,*primarily consisting offull budget management services, including paid-inclusion service andpay-per-click bid management, optimization services and search engine andconsulting services, including natural search engine optimization servicesdesigned to help advertisers promote their Web sites in or in association withrelevant search results displayed by the Company’s partner search engines andto optimize their search marketing budgets.

*Technology,*primarily consistingof the Open AdStream advertisement delivery and management platform andservices, which includes web analytics and audience management applications andservices and behavioral targeting applications and services. The Companylicenses software products to customers that are hosted locally and provides servicesfrom software hosted centrally on its servers as an application serviceprovider.

**NOTE2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

#### (a)Basis of Presentation

The accompanying condensed consolidated financial statements includethe accounts of the Company and its majority-owned and controlled subsidiariesfrom their respective dates of acquisition. The interest of shareholdersother than those of the Company is recorded as minority interest in theaccompanying consolidated statements of operations and consolidated balancesheets. When losses applicable to minority interest holders in a subsidiaryexceed the minority interest in the equity capital of the subsidiary, theselosses are included in the Company’s results, as the minority interest holderhas no obligation to provide further financing to the subsidiary. Allsignificant intercompany transactions and balances have been eliminated inconsolidation.

The accompanying interim consolidated financial statements areunaudited, except for the condensed consolidated balance sheet as of December31, 2005, which has been derived from audited financial statements. In theCompany’s opinion, the consolidated financial statements have been prepared onthe same basis as the annual consolidated financial statements and reflect alladjustments, which include only normal recurring adjustments, necessary topresent fairly the financial position and the results of the operations andcash flows of the Company for the interim periods presented. The financialstatements, financial data and other information disclosed in the notes to theconsolidated results are not necessarily indicative of the results expected forthe full fiscal year or any future period.

The accompanying unaudited condensed consolidated financial statementsshould be read in conjunction with the audited consolidated financialstatements for the year ended December 31, 2005. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance 

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with accounting principles generally accepted in the United States ofAmerica have been condensed or omitted pursuant to the rules and regulations ofthe Securities and Exchange Commission (“SEC”).

###### (b) Use ofEstimates

The preparation of interim consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the interim consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from those estimates. On anongoing basis, the Company evaluates its estimates, including those related torevenue recognition, accruals, allowance for doubtful accounts, fair value ofacquired intangible assets and goodwill, useful lives of intangible assets andproperty and equipment, among others. The Company bases its estimates onhistorical experience and on various other assumptions that are believed to bereasonable, the results of which form the basis for making judgments about thecarrying values of assets and liabilities.

###### (c) Cash andCash Equivalents

The Companyconsiders all highly liquid securities, with original maturities of threemonths or less from the balance sheet date, to be cash equivalents. Cash andcash equivalents consist principally of money market accounts and investmentsin short-term debt securities.

The Companymaintains letters of credit, secured by cash, related to its office leases.Cash secured by letters of credit with maturities of one year or less from thebalance sheet date is classified as other current assets, and cash secured byletters of credit with maturities greater than one year from the balance sheetdate is classified as other assets on the consolidated balance sheets.

(d) Investments

Investments consist of securities with statedmaturities of three months or more and marketable securities consisting ofregistered corporate equity securities. The Company classifies the marketablesecurities as available-for-sale in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*. Available-for-salesecurities are carried at fair value, with the unrealized gains or losses, netof tax, reported as a separate component of stockholders’ equity. Indetermining realized gains and losses, the cost of securities sold is basedupon specific identification. Realized gains and losses and declines in valuejudged to be other-than-temporary, are included in the consolidated statementsof operations.

Investments in non-marketable equity securities ofcompanies in which the Company owns less than 20% of a company’s stock and doesnot have the ability to exercise significant influence are accounted for on thecost basis. On an ongoing basis, the Company assesses the need to recordimpairment losses on investments and records such losses when the impairment isdetermined to be other-than-temporary.

(e) AccountsReceivable

Accountsreceivable are recorded at the invoiced amount net of allowance for doubtfulaccounts and sales allowance. The Company does not require collateral. The Companymaintains an allowance for doubtful accounts to reserve for potentiallyuncollectible receivables and a sales allowance to reserve for potentialcredits issued to customers. The allowances are estimates calculated based onan analysis of current business and economic risks, customer credit-worthiness,specific identifiable risks such as bankruptcies, terminations or discontinuedcustomers, or other factors that may indicate a potential loss.

7

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As a normal partof the business, the Company has receivables that are invoiced in the monthfollowing the completion of the earnings process. All unbilled receivables arebilled within 30 days after each month-end.

(f) Concentrationof Credit Risk

Financialinstruments that potentially subject the Company to concentrations of creditrisk consist principally of cash equivalents, accounts receivable anddebentures. The fair value of cash equivalents and accounts receivableinstruments approximate their financial statement amount because of theshort-term maturity of these instruments. The fair value of the debenturesapproximates their financial statement carrying value based on interest ratesfor similar borrowing.

At times, cash mayexceed the federally insured limits. In addition, the majority of the Company’scash is managed by a few financial institutions.

Accountsreceivable are typically unsecured. To appropriately manage credit risk, theCompany performs ongoing evaluations of customer credit and limits the amountof credit extended, but generally no collateral is required. The Companymaintains reserves for estimated credit losses and these losses have generallybeen within management’s expectations.

(g) SignificantCustomers and Suppliers

No single customer accounted for greater than 10% ofnet revenues for the three or nine month periods ended September 30, 2006 and2005.

Substantially allMedia revenue is generated from advertising inventory provided by partner Websites. Search revenue is generated from relationships with search enginedistribution partners, and substantially all Search revenue is derived from twosuch relationships. In each case, with the exception of Lycos,arrangements with the Company’s partners are often short-term or subject totermination upon short notice. The Company may not be successful in renewingany of these agreements, or if they are renewed, they may not be on terms asfavorable as current agreements. The Company may not be successful in enteringinto agreements with new distribution partners on commercially acceptableterms.

On a geographicbasis, the Company may also experience significant concentration among itscustomers or partners. The Company examines this concentration on acountry-by-country basis.

(h) Property andEquipment; Capitalized Software

Property andequipment are recorded at cost and are depreciated using the straight-linemethod over the shorter of the estimated useful life of the related asset,generally three to five years, and the lease term.

In accordance withStatement of Position (“SOP”) No. 98-1, *Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use*,software development costs incurred during the application development stageare capitalized. Costs incurred during the preliminary project and postimplementation stages of an internal use software project are expensed asincurred. The capitalized cost of internal use software is charged over theestimated useful life of two to three years.

As required bySFAS No. 86, *Accounting for the Costsof Computer Software To Be Sold, Leased, or Otherwise Marketed*, theCompany requires certain product development costs to be capitalized when aproduct’s technological feasibility has been established by completion of aworking model of the product, 

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and discontinuescapitalization when a product is available for general release to customers.Capitalized software is depreciated using the greater of the amount computedusing (a) the ratio that current gross revenues for a product bears to the sumof current and anticipated future gross revenue for that product and (b) thestraight-line method over the remaining estimated economic life of thesoftware, generally four years.

(i) Business Combinations

The Company’s acquisitions are accounted for as purchase businesscombinations in accordance with SFAS No. 141, *BusinessCombinations*, and SFAS No. 142, *Goodwilland Other Intangible Assets*. The Company allocates a portionof the purchase price to tangible and intangible assets based on theirrespective estimated fair values, and records as goodwill any remainingunallocated portion of the purchase price. Intangible assets include trademarks, customer relationships, acquiredtechnology and covenants not to compete. Such intangible assets are amortizedon a straight-line basis over their estimated useful lives, which are generallytwo to seven years, except for trademarks that have an indefinite life.

(j) Impairment of Long-Lived Assets

The Company evaluates goodwill and indefinite lived intangible assetson an annual basis and whenever events or changes in circumstances indicatethat the carrying amount may not be fully recoverable.  Long-lived assets, including propertyand equipment, long-term assets and amortizable intangible assets, are reviewedfor impairment whenever events or changes in circumstances indicate that thecarrying amount may not be fully recoverable. Conditions that would necessitatean impairment assessment include a significant decline in the observable marketvalue of an asset, a significant change in the extent to which or manner inwhich an asset is used, or a significant adverse change that indicates that thecarrying amount of an asset or group of assets is not recoverable. The Companyassesses impairment in accordance with the requirements of SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*. The Company assesses the impairment of goodwilland intangible assets in accordance with the provisions of SFAS No. 142, *Goodwill and Other Intangible Assets*. TheCompany determines the recoverability of the assets by comparing the carryingamount of the assets to net future cash flows that the assets are expected togenerate. The impairment recognized is the amount by which the carrying amountexceeds the fair market value of the assets.

(k) Income Taxes

The Company accounts forincome taxes using the asset and liability method. Under this method, deferredtax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases, and operatingloss and tax credit carryforwards. Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled. The effect on deferred tax assets and liabilities of a change in taxrates is recognized in results of operations in the period that the tax changeoccurs.

(l) Foreign Currency Translation

Assets and liabilitiesdenominated in foreign functional currencies are translated at the exchangerate as of the balance sheet date. Revenues, costs and expenses denominated inforeign functional currencies are translated at the weighted average exchangerate for each period. Translation adjustments are recorded as a separatecomponent of stockholders’ equity. Gains or losses from foreign currencytransactions are included in the consolidated statements of operations.

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(m)Revenue Recognition; Cost of Revenues; Deferred Revenue

*Media*

Media revenues are generated from fees paid by clientadvertisers for advertising impressions. The Company typically offersadvertisers a pricing model based on a cost-per-thousand impressions, or CPM,which enables a client advertiser to pay a fee based on the number of times itsadvertisement is displayed.  E-mail related revenue is derived fromdelivering advertisements to e-mail lists for advertisers.  Agreements are primarily short-term and revenues arerecognized as services are delivered, provided that no significant Companyobligations remain outstanding and collection of the resulting receivable isprobable. The Company becomes obligated to make royalty payments to Web sitesand e-mail lists that have contracted with the Company in the period in whichthe advertising impressions or e-mails are delivered. Such expenses areclassified as cost of revenues in the accompanying consolidated statements ofoperations.

*Search*

Search revenue is primarily based on either a percentage of media spendor a cost-per-click, or CPC, fee model paid by client advertisers. These feesare generated each time users click on Web site listings that the Companysubmitted into search engine databases and are directed to our clientadvertisers’ Web sites. To a lesser extent, the Company also generates revenuefrom fees paid by search engines that employ the Company to optimize thesubmission of Web site listings and report on advertising campaigns for theiradvertisers.  Agreements areprimarily short-term and revenues are recognized as services are delivered,provided that no significant Company obligations remain outstanding andcollection of the resulting receivable is probable. The Company becomesobligated to make payments to search engine distribution partners that havecontracted with the Company in the period in which the clicks occur. Suchexpenses are classified as cost of revenues in the accompanying consolidatedstatements of operations.

When the Companyprovides SEM services as an agent for a fixed commission, or otherwise intransactions in which it does not have principal risk and reward, the Companyrecognizes revenue on a net basis.

*Technology*

Technologyrevenues are derived primarily from licensing of the Company’s software, hostedadvertisement serving and software maintenance and technical support services. The Company recognizes revenue fromadvertisement serving hosted centrally on its servers upon delivery.  Revenue from software licensingagreements is recognized in accordance with SOP No. 97-2, *Software Revenue Recognition*, and StaffAccounting Bulletin (“SAB”) No. 104, *RevenueRecognition*, upon delivery of the software, which is generally whenthe software is made available for download, there is persuasive evidence of anarrangement, collection is reasonably assured, the fee is fixed or determinableand vendor-specific objective evidence exists to allocate the total fees to allelements of the arrangement. Contracts that bundle the software license withmaintenance and technical support are recognized ratably over the contractterm. Revenue from software maintenance and technical support contracts isrecognized ratably over the term of the agreement, which typically does notexceed one year.

Expenses fromTechnology revenues are primarily payroll costs incurred to deliver and supportthe software, hosting, bandwidth and license fees paid to third-party softwarevendors. These expenses are classified as cost of revenues in the accompanyingconsolidated statements of operations.

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*DeferredRevenue*

The Company defersrevenues billed or collected in advance of services being completed until theconclusion of the service period to which the advance billing or collectionrelates. Deferred revenues are included on the consolidated balance sheets as acurrent liability until the service is performed, and then recognized in theperiod in which the service is completed. The Company’s deferred revenuesprimarily consist of billings in advance for software license subscriptions andsoftware maintenance and technical support services.

(n)Stock-Based Compensation

Effective January 1, 2006, the Company adoptedthe revised SFAS No. 123, *Share-BasedPayment* (“SFAS No. 123R”), using the modified prospectivetransition method, and accordingly, prior periods have not been restated toreflect the impact of SFAS No. 123R. Under SFAS No. 123R, stock-basedawards granted prior to its adoption will be expensed over the remainingportion of their vesting period. These awards will be expensed using the samefair value measurements which were used in calculating pro forma stock-basedcompensation expense under SFAS No. 123. For stock-based awards granted onor after January 1, 2006, the Company will amortize the stock-basedcompensation over the requisite service period.

Prior to the adoption of SFAS123R, the Company accounted for stock-based awards using the intrinsic valuemethod under the provisions of Accounting Principles Board (“APB”) Opinion No.25, *Accounting for Stock Issued to Employees*,and Financial Accounting Standards Board (“FASB”) interpretation No. 44, *Accounting for Certain Transactions Involving Stock Compensation — aninterpretation of APB Opinion No. 25,*and complied with thedisclosure provisions of SFAS No. 123, *Accounting for Stock-BasedCompensation,*and SFAS No. 148, *Accounting for Stock-BasedCompensation — Transition and Disclosure.* Under APB Opinion No. 25,stock-based compensation cost is recognized based on the difference, if any, onthe date of grant between the fair value of the Company’s common stock and theamount an employee must pay to acquire the common stock.

(o) Restructuring Estimates

Restructuring activities are accounted for inaccordance with SFAS No. 146, *Accounting for Costs Associatedwith Exit or Disposal Activities*. Restructuring-related liabilitiesinclude estimates for, among other things, involuntary terminations ofemployees and disposition of lease obligations. Key variables in determiningsuch estimates include timing of sublease rentals, estimates of sublease rentalpayment amounts and tenant improvement costs, and estimates for brokerage andother related costs. The Company periodically evaluates and, if necessary,adjusts the estimates based on currently available information.

(p) Warrant Liability

Warrant liability is presented in accordance with EITF00-19, *Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock*.EITF 00-19 requires freestanding contracts that are settled in a company’s ownstock, including common stock warrants, to be designated as an equityinstrument, asset or liability. Under the provisions of EITF 00-19, a contractdesignated as an asset or a liability must be carried at fair value until exercisedor expired, with any changes in fair value recorded in the results ofoperations. A contract designated as an equity instrument must be includedwithin equity, and no fair value adjustments are required. The Company reviewsthe classification of its contracts at each balance sheet date.

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(q) Advertising Costs

Costs of advertising and promoting the Company’sproducts and services are expensed as incurred. Such costs are included insales and marketing on the statement of operations.

(r) Basic andDiluted Net Income (Loss) Per Share

Net loss per share ispresented in accordance with the provisions of SFAS No. 128, *Earnings Per Share* (“EPS”). Basic EPSexcludes dilution for potentially dilutive securities and is computed bydividing income (loss) available to common shareholders by the weighted averagenumber of common shares outstanding for the period. Diluted EPS reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted into common stock and resulted in theissuance of common stock. Potential common shares consist of incremental commonshares issuable upon the exercise of stock options and warrants and the vestingof restricted stock (using the treasury stock method) and the conversion ofsubordinated convertible debentures and preferred stock (using the if-convertedmethod).

Diluted EPS is equal to basic EPS for the three andnine month period ended September 30, 2006 since all potentially dilutivesecurities are antidilutive. The computation excludes outstanding options of7.7 million to purchase shares of common stock, 2.4 million shares of unvestedrestricted stock, the effects of 0.6 million shares issuable upon the exerciseor conversion of common stock warrants, and the effects of 1.7 million sharesissuable upon the conversion of the subordinated convertible debentures sincetheir inclusion would have an antidilutive effect.

Diluted EPS is equal to basic EPS for the three andnine month period ended September 30, 2005 since all potentially dilutivesecurities are antidilutive. The computation excludes outstanding options of7.4 million to purchase shares of common stock, 0.9 million shares of unvestedrestricted stock, the effects of 0.6 million shares issuable upon the exerciseor conversion of common stock warrants, and the effects of 1.7 million sharesissuable upon the conversion of the subordinated convertible debentures sincetheir inclusion would have an antidilutive effect.

(s) Recent Accounting Pronouncements

In July 2006 the FASB issued Financial InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes*(“FIN 48”), as an interpretation of SFAS No. 109, *Accounting for Income Taxes.* FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with SFAS No. 109 and prescribes arecognition threshold of more-likely-than-not to be sustained upon examination.Measurement of the tax uncertainty occurs if the recognition threshold has beenmet. FIN 48 also provides guidance on derecognition, classification,interest, penalties, accounting in interim periods, disclosure, and transition.FIN 48 will be effective beginning January 1, 2007. Differencesbetween the amounts recognized in the statements of financial position prior tothe adoption of FIN 48 and the amounts reported after adoption should beaccounted for as a cumulative-effect adjustment recorded to the beginningbalance of retained earnings. The Company is still evaluating the impact, ifany, the adoption of this interpretation will have on the Company’s financialposition, cash flows, and results of operations.

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements*, which clarifies the definition offair value, establishes guidelines for measuring fair value, and expandsdisclosures regarding fair value measurements. SFAS No. 157 does notrequire any new fair value measurements and eliminates inconsistencies inguidance found in various prior accounting pronouncements. SFAS No. 157will be effective for the Company on January 1, 2008. The Company iscurrently evaluating the impact of adopting SFAS No. 157 on the Company’sfinancial position, cash flows, and results of operations.

In September 2006, the SEC released SAB No. 108, *Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements*. SAB No. 108provides interpretive guidance on the SEC’s views on how the effects of thecarryover or reversal of prior year misstatements should be considered in quantifyinga current year misstatement. The provisions of SAB No. 108 will be effectivefor the Company for the fiscal year ended December 31, 2006. The Companyis currently evaluating the impact of applying SAB No. 108 but doesnot  believe that the application of SABNo. 108 will have a material effect on its financial position, cash flows,and results of operations.

**NOTE 3 — BALANCE SHEET COMPONENTS**

(a) Goodwill

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The $39.6 millionin goodwill at September 30, 2006 and December 31, 2005 related$25.0 million to Decide, $12.0 million to 24/7 Real Media Korea,$1.1 million to 24/7 Real Media Canada (formerly ClickThrough),$1.1 million to Real Media and $0.4 million to 24/7 Real Media Search(formerly Website Results).

(b) Intangible Assets, Net

The $8.1 million in intangible assets, net at September 30, 2006related $5.4 million to Decide and $2.7 million to 24/7 Real Media Korea. The $9.7 million in intangibleassets, net at December 31, 2005 related $6.6 million to Decide and$3.1 million to 24/7 Real Media Korea.

**NOTE 4 — RESTRUCTURING COSTS**

TheCompany’s restructuring reserve related to office closing costs decreased from$1.2 million at December 31, 2005 to $0.9 million at September 30, 2006.  The amount is included in accrued liabilitiesin the consolidated balance sheet.

**NOTE 5 — 2%SUBORDINATED CONVERTIBLE DEBENTURES**

On September 26, 2003, the Company completed theplacement of $15.0 million of subordinated convertible debentures due September2006 (“Debentures”). The Debentures are convertible into shares of the Company’scommon stock at $8.75 per share, which is subject to adjustment. In September2006, on the terms and conditions set forth in the Debentures, the holderelected to extend the maturity of the Debentures until September 2009. TheDebentures continue to bear interest at the rate of 2% to be paidsemi-annually. The Company may elect to pay the principal of, and interest on,the debentures in cash, shares of its common stock or a combination of cash andshares of its common stock.

If the Company elects to pay all or a portion of theprincipal amount due under the Debentures at maturity in shares of its commonstock, rather than in cash, the maturity date conversion price will be equal to90% of the average of the daily volume-weighted average prices of the Company’scommon stock on the NASDAQ Global Market (or such other market on which thecommon stock are then listed or quoted) for the fifteen consecutive tradingdays immediately preceding the maturity date. If the Company elects to makeinterest payments due under the Debentures in shares of its common stock, theinterest conversion price will be equal to 90% of the average of the dailyvolume-weighted average prices of the Company’s common stock on the NASDAQGlobal Market (or such other market on which the common stock are then listedor quoted) for the five consecutive trading days immediately preceding theinterest payment date. Interest expense on the Debentures amounted toapproximately $0.1 million and $0.2 million for the three and nine monthperiods ended September 30, 2006, respectively, and $0.1 million and $0.2million for the three and nine month periods ended September 30, 2005,respectively.

If specific conditions set forth in the Debentures aresatisfied, the Company may require the holder to convert the Debentures intoshares of the Company’s common stock at the conversion rate then in effect, orthe Company may prepay the Debentures prior to the maturity date, for an amountin cash equal to 150% of the amount prepaid. In addition, based on conditionsmet, the holder has the right, in its sole discretion, to require the Companyto immediately redeem up to $7.5 million principal amount of the Debentures incash. The redemption right constitutes an embedded derivative. The value ofthis embedded derivative at September 30, 2006 is immaterial to the financial positionof the Company. The Company reviews the value of the derivative on a quarterlybasis, in accordance with SFAS No. 149, *Amendmentof Statement 133 on Derivative Instruments and Hedging Activities*.

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The holder of the Debentures also acquired a five-yearwarrant (the “Warrants”) to purchase 0.4 million shares of the Company’s commonstock at $9.5685 per share. The Company valued the Warrants at$1.8 million using a Black-Scholes pricing model with the followingfactors: risk free interest rate of 1.48%, volatility of 143%, dividend yieldof 0% and a life of 2.5 years. The aggregate fair market value of theWarrants was reflected as a reduction of the face amount of the Debentures onthe consolidated balance sheet and was amortized over the initial term of theDebentures, using the effective interest method. Accordingly, the carryingvalue of the Debentures was increased over three years beginning October 2003.Pursuant to EITF Issue No. 00-19, since the effective registration of thesecurities underlying the warrants was an event outside the control of theCompany, the Company recorded the fair value of the warrants as long-termliabilities. In connection with the amendment to the registration rightsagreement entered into during 2004, the Company reclassified the fair value ofthe warrants, approximately $1.0 million, on the amendment date to additionalpaid in capital. Interest expense attributable to the amortization of thewarrants amounted to approximately $0.1 million and $0.4 million for the threeand nine month periods ended September 30, 2006, respectively, and $0.1 millionand $0.4 million for the three and nine month periods ended September 30, 2005,respectively.

In connection with the issuance of the Debentures andWarrants, the Company incurred placement agent fees, legal fees and otherexpenses of approximately $1.2 million and issued warrants to theplacement agent. The warrants to purchase 86,000 shares of common stock at anexercise price of $10.068 are in the same form and on the same terms andconditions as the Warrants issued to the investor. The Company included thevalue of the warrants, approximately $0.4 million, using the factorsabove, and the cash placement fees of $1.2 million in other assets on theconsolidated balance sheet. Collectively, the debt issuance costs of $1.6million were amortized over three years, the initial term of the Debentures.Approximately $0.1 million and $0.4 million for the three and nine monthperiods ended September 30, 2006, respectively, and approximately $0.1 millionand $0.4 million for the three and nine month periods ended September 30, 2005,respectively, of the deferred financing costs are included in amortizationexpense.

**NOTE 6 -****EQUITY INSTRUMENTS**

Common Stock

*Additional Paid-in Capital*

*Duringthe nine month period ended September 30, 2006, the Company’s additionalpaid-in capital increased by $25.7 million, primarily due to $15.8 million inemployee stock-based compensation, $5.8 million from exercise of stock options,$3.7 million related to earn-out provisions in a prior acquisition and $0.4million related to cashless exercises of warrants.*

**NOTE7 - STOCK PLANS**

The Companymaintains the 1998 Stock Incentive Plan, 2001 Equity Compensation Plan, 2001Stock Incentive Plan for Non-Officers, 2002 Equity Compensation Plan, 2002Stock Incentive Plan and plans assumed through acquisitions which arecollectively referred to as the “Stock Plans.” The Stock Plans provide for thegrant of any or all of the following types of awards: (i) stock options, includingincentive and non-qualified stock options; (ii) stock appreciation rights, intandem with stock options or free standing; and (iii) restricted stock toeligible participants. The awards must generally be priced to be at least 85%of the fair market value of the Company’s common stock at the date of the grant(100% in the 

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case of incentivestock options). The majority of the Company’s awards vest over three yearperiods contingent upon employment with the Company on the dates of vesting.

*(a) StockOptions*

Effective January 1, 2006, the Company adoptedSFAS No. 123R, using the modified prospective transition method, andaccordingly, prior periods have not been restated to reflect the impact of SFASNo. 123R. Under SFAS No. 123R, stock-based awards granted prior toits adoption will be expensed over the remaining portion of their vestingperiod. These awards will be expensed using the same fair value measurementswhich were used in calculating pro forma stock-based compensation expense underSFAS No. 123. For stock-based awards granted on or after January 1, 2006,the Company will amortize the stock-based compensation over the requisiteservice period.

The fair value of each option grant is estimated onthe date of grant using the Black-Scholes option pricing model. The expectedlife selected for options granted during the quarter represents the period oftime that the options are expected to be outstanding based on historical dataof option holder exercise and termination behavior. Expected volatilities arebased upon historical volatility of the Company’s monthly stock closing pricesover a period equal to the expected life of each option grant. The risk-freeinterest rate was selected based on yields from U.S. Treasury zero-couponissues with a remaining term equal to the expected term of the options beingvalued. The Company historically has not paid dividends.

The following tablerepresents the weighted-average assumptions used to estimate fair values of thestock options granted in the periods presented:
| ** **                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                      |       |                             |       |                            |       |   |   |   |   |
| Expected  dividend yield  |       | 0                                | %          | 0                               | %          | 0 | % | 0 | % |
| Risk-free  interest rate  |       | 4.72                             | %          | 4.22                            | %          | 4.38 | % | 3.09 | % |
| Expected life  (in years) |       | 3.0                              |       | 3.0                             |       | 3.0 |   | 2.5 |   |
| Expected  volatility      |       | 56                               | %          | 99                              | %          | 62 | % | 103 | % |

 

The weighted average fair value per option at thedate of grant for options granted during the three and nine months endedSeptember 30, 2006 were $3.55 and $3.46, respectively, and $2.74 and $2.51during the three and nine months ended September 30, 2005, respectively. Stockoption activity for the nine month period ended September 30, 2006 issummarized as follows (in thousands, except share amounts and as noted):

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| ** **                                    | ** ** | **Options** | ** ** | **Weighted**Average  Exercise Price | ** ** | **Weighted  Average**Remaining    Contractual Life    (in years) | ** ** | **Aggregate**Intrinsic  Value | ** ** |
|-----------------------------------------------|------------|-------------|------------|------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| Outstanding at  December 31, 2005             |       | 9,595       |       | $                                        | 5.74       |                                                                                           |       |                          |       |   |
| Granted                                       |       | 429         |       | $                                        | 6.91       |                                                                                           |       |                          |       |   |
| Exercised                                     |       | (1,577      | )          | $                                        | 3.67       |                                                                                           |       |                          |       |   |
| Forfeited                                     |       | (703        | )          | $                                        | 6.01       |                                                                                           |       |                          |       |   |
| Outstanding at  September 30, 2006            |       | 7,744       |       | $                                        | 6.26       |                                                                                           | $          | 7.4                           |       | 28,539 |   |
| Vested and exercisable  at September 30, 2006 |       | 3,398       |       | $                                        | 7.16       |                                                                                           | $          | 6.1                           |       | 15,444 |   |

 

The aggregate intrinsic value in the table aboverepresents the total pretax intrinsic value (the aggregate difference between theclosing stock price of the Company common stock on September 30, 2006 and theexercise price for in-the-money options) that would have been received by theoption holders if all in-the-money options had been exercised on September 30,2006. The intrinsic value for options exercised during the three and nine monthperiods ended September 30, 2006 was $1.5 million and $8.9 million,respectively.

Thefollowing table summarizes additional information regarding outstanding andexercisable stock options at September 30, 2006 (in thousands, except shareamounts as noted):
| **Range of Exercise  Prices (in dollars)** | ** ** | **Number  Outstanding** | ** ** | **Weighted Average**RemainingContractual Life   (in years) | ** ** | **Weighted Average   Exercise Price** | ** ** | **Number   Exercisable** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------|------------|------------------------------------------------|------------|
| 0.00 - 2.00                                                    |       | 1,129                   |       | 5.1                                                                            |       | $                                                    | 1.12       |                          | 1,128      |                                           | $          | 1.12 |   |
| 2.01 - 5.00                                                    |       | 3,134                   |       | 7.6                                                                            |       | $                                                    | 4.20       |                          | 1,224      |                                           | $          | 4.15 |   |
| 5.01 - 10.00                                                   |       | 3,335                   |       | 8.1                                                                            |       | $                                                    | 6.60       |                          | 955        |                                           | $          | 6.82 |   |
| 10.01 - 320.00                                                 |       | 146                     |       | 5.3                                                                            |       | $                                                    | 82.35      |                          | 91         |                                           | $          | 126.45 |   |
|                                                           |       | 7,744                   |       | 7.4                                                                            |       | $                                                    | 6.26       |                          | 3,398      |                                           | $          | 7.16 |   |

 

The following table summarizes the activityfor unvested stock option activity for the nine months ended September 30, 2006(in thousands, except share amounts and as noted):
| ** **                       | ** ** | **Options** | ** ** | **Weighted**Average Grant  Date Fair Value | ** ** |
|----------------------------------|------------|-------------|------------|-----------------------------------------------------------|------------|
| Nonvested at  December 31, 2005  |       | 5,470       |       | $                                                         | 2.95       |   |
| Granted                          |       | 429         |       | $                                                         | 3.27       |   |
| Vested                           |       | (925        | )          | $                                                         | 3.01       |   |
| Forfeited                        |       | (628        | )          | $                                                         | 3.03       |   |
| Nonvested at September  30, 2006 |       | 4,346       |       | $                                                         | 2.97       |   |

 

The total fair value of shares vested duringthe three and nine month periods ended September 30, 2006 was $0.8 million and$2.8 million, respectively.

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As a result of adopting SFAS No. 123R, theCompany recorded pretax compensation expense of $2.5 million and $5.5 millionfor the three and nine month periods ended September 30, 2006, respectively.Stock-based compensation is included in each expense category that includessalary expense. The Company has recorded a full valuation allowance on thedeferred tax asset related to stock-based compensation and therefore, no taxbenefit is recognized for the three and nine month periods ended September 30,2006.

During 2006, the Company modified certain agreements to issue optionsto purchase the Company’s common stock in conjunction with the separation ofcertain employees. As a result of the modifications, shares of options werevested or cancelled as of modification date. In accordance with SFAS No. 123R,the Company recognized approximately $0.1 million in incremental stock-basedcompensation costs, or the excess of the fair value of the replacement awardover the fair value of the original award which was cancelled as of themodification date.

SFAS 123R requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthe initial forecast. For the nine months ended September 30, 2006, the Companyrecorded additional expense of $1.2 million related to a revision in forecastedforfeitures. As of September 30, 2006, there were $4.8 million of unrecognizedcompensation costs related to outstanding stock option awards, net offorecasted forfeitures, expected to be recognized through the year 2010.

Prior to the adoption of SFAS No. 123R, theCompany accounted for stock-based awards using the intrinsic value method underthe provisions of APB Opinion No. 25*.*Underthis method, stock-based compensation was recognized to the extent that theexercise price is less than the market price for the underlying stock on thedate of grant. The following table illustrates the effects on net lossattributable to common shareholders and net loss per share attributable tocommon shareholders if the Company had applied the fair value recognitionprovisions of SFAS No. 123R to stock-based compensation (inthousands, except per share amounts):
| ** **                                                                                                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                           | ** ** | **September 30, 2005** | ** ** | **September 30, 2005** | ** ** |
| Net loss attributable  to common shareholders:                                                                                       |       |                             |       |                             |       |
| As reported                                                                                                                          |       | $                                | (768       | )                                | $          | (1,386 | ) |
| Deduct: Total  stock-based compensation expense determined under fair value based method for  all awards, net of related tax effects |       | 1,383                            |       | 4,298                            |       |
| Pro forma                                                                                                                            |       | $                                | (2,151     | )                                | $          | (5,684 | ) |
| Earnings per share:                                                                                                                  |       |                             |       |                             |       |
| Basic, as  reported                                                                                                                  |       | $                                | (0.02      | )                                | $          | (0.03 | ) |
| Basic, pro forma                                                                                                                     |       | $                                | (0.05      | )                                | $          | (0.13 | ) |

* *

*(b)  Restricted Stock*

17

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During 2005 and 2006, theCompany entered into agreements to issue shares of restricted stock to certainemployees. The awards vest over various periods, generally three years,contingent upon employment with the Company on the dates of vesting. Therestricted stock awards have a fair value equal to the respective market priceof the Company’s common stock at the date of grant. The restricted stock awardsrequire no payment from the employee and compensation cost is valued based onthe market price on the grant date and is expensed over the vesting period.

*Restrictedstock awards activity for the nine month period ended September 30, 2006 issummarized as follows*(inthousands, except share amounts and as noted):
| ** **                      | ** ** | ** ** | ** ** | **Weighted Average** | ** ** | **Weighted Average**      | ** ** |
|---------------------------------|------------|------------|------------|---------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | ** ** | ** ** | **Grant Date**       | ** ** | **Remaining Contractual** | ** ** |
| ** **                      | ** ** | **Shares** | ** ** | **Fair Value**       | ** ** | **Life (in years)**  | ** ** |
| Unvested at  December 31, 2005  |       | 3,054      |       | $                         | 4.96       |                           |       |   |
| Granted                         |       | 563        |       | $                         | 7.82       |                           |       |   |
| Vested                          |       | (890       | )          | $                         | 3.48       |                           |       |   |
| Forfeited                       |       | (342       | )          | $                         | 5.84       |                           |       |   |
| Unvested at September  30, 2006 |       | 2,385      |       | $                         | 6.07       |                           | $          | 1.5 |   |
|                                 |            |            |            |                           |            |                                |            |  |  |

* *

*Compensation expense related to vesting of restricted stock awardstotaled $1.8 million and $10.5 million for the three and nine month periodsended September 30, 2006, respectively, and $0.4 million and $1.4 million forthe three and nine month periods ended September 30, 2005, respectively. As ofSeptember 30, 2006, there were $7.0 million of unrecognized compensation costsrelated to unvested restricted stock awards, net of forecasted forfeitures,expected to be recognized through the year 2009.*

During 2006, the Company modified certain agreements to issuerestricted stock originally expected to vest on January 1, 2007 in conjunctionwith the separation of an employee. As a result of the modification, shares ofrestricted stock were vested as of June 27, 2006. In accordance with SFAS No. 123R,the Company recognized approximately $0.1 million in incremental stock-basedcompensation costs, or the excess of the fair value of the replacement awardover the fair value of the original award which was cancelled as of themodification date.

SFAS No. 123R requires forfeitures to be estimated at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from the initial forecast. For the nine months ended September 30, 2006,the Company recorded a benefit of $0.3 million related to a revision inforecasted forfeitures.

**NOTE 8 — RECOVERYOF INVESTMENT**

In the firstquarter of 2005, the Company received $2.1 million as a recovery of aninvestment in Bidland Systems, Inc. (“Bidland”), and subsequently receivedanother $0.2 million in the fourth quarter of 2005. The recovery of theinvestment was a result of the settlement of pending litigation between Bidlandand another party and the subsequent dissolution and liquidation of Bidland. In2000, Bidland ceased operations and, accordingly, the Company recorded animpairment charge related to the cost-based investment.

**NOTE 9 -SUPPLEMENTAL CASH FLOW INFORMATION**

18

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Cash paid for interest was$0.3 million for each of the nine month periods ended September 30, 2006 and2005.

Capitallease obligations incurred during the nine month period ended September 30,2006 amounted to approximately $1.0 million.

Warrantsto purchase 64,161 shares of the Company’s common stock at an average price of$1.21 per share were exercised in the nine month period ended September 30,2006 in exchange for 55,718 shares of the Company’s common stock in cashlessexercises of warrants. As a result of the exercises, approximately $0.4 millionof the related warrant liability was reclassified as equity.

**NOTE10 — SEGMENTS**

TheCompany’s business is comprised of three reportable segments: Media, Search andTechnology.  Revenueis attributed to individual countries primarily based on where sales aregenerated.  The Company adjusted prior period segmentdisclosures to conform to the current presentation. The summarizedsegment information at and for the three and nine month periods ended September30, 2006 and 2005, is as follows:
| ** **                                                     | ** ** | **Three Month Period Ended September 30, 2006** | ** ** | **Nine Month Period Ended September 30, 2006** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **Media**                                                                     | ** ** | **Search**                                                                   | ** ** | **Technology** | ** ** | **Total** | ** ** | **Media** | ** ** | **Search** | ** ** | **Technology** | ** ** | **Total** | ** ** |
| ** **                                                     | ** ** | ** **                                                                    | ** ** | **(in thousands)**                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** |
| Revenues                                                       |       | $                                                                             | 19,082     |                                                                         | $          | 22,669 |   | $ | 7,392 |   | $ | 49,143 |   | $ | 58,646 |   | $ | 60,247 |   | $ | 21,367 |   | $ | 140,260 |   |
| Depreciation                                                   |       | 132                                                                           |       | 260                                                                          |       | 591 |   | 983 |   | 579 |   | 890 |   | 1,303 |   | 2,772 |   |
| Amortization of intangible assets and deferred financing costs |       | 284                                                                           |       | 387                                                                          |       | 211 |   | 882 |   | 1,008 |   | 1,177 |   | 476 |   | 2,661 |   |
| Income (loss) from operations                                  |       | 197                                                                           |       | (1,708                                                                       | )          | 157 |   | (1,354 | ) | (1,047 | ) | (6,680 | ) | (730 | ) | (8,457 | ) |
|                                                                |            |                                                                               |            |                                                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                     | ** ** | **Three Month Period Ended September 30, 2005** | ** ** | **Nine Month Period Ended September 30, 2005** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **Media**                                                                     | ** ** | **Search**                                                                   | ** ** | **Technology** | ** ** | **Total** | ** ** | **Media** | ** ** | **Search** | ** ** | **Technology** | ** ** | **Total** | ** ** |
| ** **                                                     | ** ** | **(in thousands)**                                                       | ** ** | **(in thousands)**                                                      | ** ** |
| Revenues                                                       |       | $                                                                             | 15,547     |                                                                         | $          | 13,731 |   | $ | 5,839 |   | $ | 35,117 |   | $ | 46,460 |   | $ | 35,063 |   | $ | 16,550 |   | $ | 98,073 |   |
| Depreciation                                                   |       | 81                                                                            |       | 176                                                                          |       | 504 |   | 761 |   | 323 |   | 516 |   | 1,240 |   | 2,079 |   |
| Amortization of intangible assets and deferred financing costs |       | 495                                                                           |       | 395                                                                          |       | 250 |   | 1,140 |   | 1,485 |   | 1,185 |   | 749 |   | 3,419 |   |
| Restructuring                                                  |       | —                                                                        |       | —                                                                       |       | — |   | — |   | 252 |   | 228 |   | 493 |   | 973 |   |
| Income (loss) from operations                                  |       | 313                                                                           |       | (838                                                                         | )          | 415 |   | (110 | ) | 892 |   | (2,513 | ) | (442 | ) | (2,063 | ) |
|                                                           |       |                                                                          |       |                                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets (1):                                              |       |                                                                          |       |                                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| September 30, 2006                                             |       | 49,484                                                                        |       | $                                                                            | 61,038     |   | $ | 11,508 |   | $ | 122,030 |   | — |   | — |   | — |   | — |   |
| December  31, 2005                                             |       | $                                                                             | 47,316     |                                                                         | 53,352     |   | 14,325 |   | 114,993 |   | — |   | — |   | — |   | — |   |
|                                                                |            |                                                                               |            |                                                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)                                  Notinclusive of corporate segment assets of $39,456 and $27,811, respectively.
| ** **                                                    | ** ** | **United**              | ** ** | **United**  | ** ** | **South** | ** ** | **Other-**        | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|-------------|------------|-----------|------------|-------------------|------------|------------|------------|
| ** **                                                    | ** ** | **States**              | ** ** | **Kingdom** | ** ** | **Korea** | ** ** | **International** | ** ** | **Total**  | ** ** |
| ** **                                                    | ** ** | **(in thousands)** | ** ** |
| Revenues for the  three month period ended September 30, 2006 |       | $                       | 18,970     |        | $          | 10,715    |       | $                 | 6,307      |       | $          | 13,151 |   | $ | 49,143 |   |
| Revenues for the  nine month period ended September 30, 2006  |       | 56,047                  |       | 28,853      |       | 19,631    |       | 35,729            |       | 140,260    |       |
| Long-lived  assets as of September 30, 2006                   |       | 11,297                  |       | 713         |       | 15,294    |       | 32,392            |       | 59,696     |       |
| Revenues for the  three month period ended September 30, 2005 |       | $                       | 15,343     |        | $          | 7,141     |       | $                 | 3,489      |       | $          | 9,144 |   | $ | 35,117 |   |
| Revenues for the  nine month period ended September 30, 2005  |       | 44,575                  |       | 20,450      |       | 9,349     |       | 23,699            |       | 98,073     |       |
| Long-lived assets as of  December 31, 2005                    |       | 11,747                  |       | 762         |       | 15,738    |       | 33,863            |       | 62,110     |       |

** **

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**NOTE 11 -COMMITMENTS AND CONTINGENCIES**

(a) Commitments

*Lycos, Inc.Services Agreements*

TheCompany pre-paid a total of $2.0 million of royalties to Lycos during 2004 and2005 and will retain an additional 25% of quarterly royalties due to Lycosuntil the date on which the full amount of pre-paid royalties has been recoupedor otherwise paid in cash by Lycos.  Accordingly, at September 30, 2006the Company had a net $0.6 million in prepaid royalties, of which $0.5 millionis included in prepaid expenses and other current assets and the remainingportion of $0.1 million is included in other assets.

In addition to the royalties, the Company paid Lycos a$4.5 million transition fee, which the Company recorded as an other assetand is amortizing the fee over the term of the agreement of five years.Amortization related to the transition fee was $0.2 million for each of thethree month periods ended September 30, 2005 and 2006 and $0.7 million for eachof the nine month periods ended September 30, 2005 and 2006. In accordance withSFAS No. 144, the Company periodically evaluates the recoverabilityof this asset.

*AcquisitionEarn-Out Liability*

The Company had contingent obligations related to itsAugust 2004 acquisition of Decide. The former Decide stockholders could receiveup to an additional $10.0 million, consisting of up to $2.5 million incash and up to $7.5 million in common stock, subject to achievement of earn-outtargets relating to Decide’s operating performance in 2005. In March 2006, theCompany paid $1.3 million and issued 0.4 million shares of common stock, valuedat $3.7 million, related to the achievement of 2005 earn-out targets. Thepayment was accrued at December 31, 2005.

*Indemnifications*

Inconnection with the Company’s commercial agreements, it providesindemnifications of varying scope and terms to customers, business partners andother parties with respect to certain matters, including, but not limited to,losses arising out of the Company’s breach of such agreements and out ofintellectual property infringement claims made by third parties.

(b)Litigation

The Company is notinvolved in any material pending legal proceedings at this time.

**NOTE** 12 — SUBSEQUENT EVENTS

*Denstu24/7 Search Holdings*

On November 1, 2006, theCompany and Dentsu, theminority investor of the existing joint venture, K.K. 24-7 Search,expanded their search engine marketing partnership. Through a new holdingcompany, tentatively to be called “Dentsu 24/7 Search Holdings”, the Companyand Dentsu will establish new operations within other strategically importantadvertising markets throughout Asia and the Pacific Rim, including China,India, Korea, Thailand, and Taiwan. Under the terms of the agreement, theCompany and Dentsu will each provide initial capital of $5.0 million, whichwill be used to fund operations in the identified expansion countries. TheCompany will license its Decide DNA technology to the new operatingsubsidiaries. Initial management of the new venture will be fully-supported byK.K. 24-7 Search.

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ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q includesforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. This Act provides a “safe harbor” forforward-looking statements to encourage companies to provide prospectiveinformation about themselves so long as they identify these statements asforward-looking and provide meaningful cautionary statements identifyingimportant factors that could cause actual results to differ from the projectedresults. All statements other than statements of historical fact, includingstatements regarding industry prospects and future results of operations orfinancial position, made in this Quarterly Report on Form 10-Q areforward-looking. We use words such as “anticipates,” “believes,” “expects,” “future”and “intends” and similar expressions to identify forward-looking statements. Forward-lookingstatements also include any other passages that relate to expected futureevents or trends that can only be evaluated by events or trends that will occurin the future. Forward-lookingstatements reflect management’s current subjective opinions, expectations,plans or projections and are inherently uncertain. Our actual results maydiffer significantly from management’s current expectations, plans orprojections. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date hereof. Certainrisks and uncertainties that could cause our actual results to differsignificantly from management’s expectations are described in the sectionentitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.Except as required by law, we undertake no obligation to update anyforward-looking or other statements, whether as a result of new information,future events or otherwise. Readers are urged, however, to review the riskfactors set forth in reports that we file from time to time with the Securitiesand Exchange Commission (“SEC”). Unless the context requires otherwise in thisQuarterly Report on Form 10-Q, the terms “24/7 Real Media,” the “Company,” “we,”“us” and “our” refer to 24/7 Real Media, Inc. and its consolidatedsubsidiaries, references to “24/7 Real Media Search” refer to 24/7Search, Inc., formerly 24/7 Website Results, Inc., and references to “Decide”refer to Decide Holdings Pty Limited, each a wholly owned subsidiary of 24/7Real Media, Inc.

### **GENERAL**

24/7 Real Media is a leading global digitalmarketing company, providing online advertising and search engine marketing (“SEM”)strategies since 1995, and has been publicly traded since 1998. Wehave three distinct lines of business, Media, Search and Technology, andoperate in twelve countries. Our Media business helps advertisers increasetheir reach through sophisticated targeting and a network of over 1,500affiliated Web sites. Our Search business enables marketers to maximize theirSEM spending and achieve optimum returns on their investments. Our Technologybusiness develops and licenses our powerful technology, which serves as theunderlying engine for everything we do.

*Media*

We sell advertising spacefor Web publishers through the 24/7 Real Media Web Alliance, a global allianceof Web sites with brand names, quality content and global reach. Web publishersjoin the Web Alliance to increase advertising revenues from the availableadvertising space on their Web sites, and we pay them a royalty for theiradvertising space. We solicit advertisers seeking online strategies to targetaudiences, build their brands and generate greater customer response.Advertisers purchase space through the Web Alliance to make one purchase acrossseveral Web sites and to increase the return on their advertising spending. Wealso use targeting technology to best select advertising space made availablethrough the Web Alliance for advertisers and to improve the performance ofunder-utilized advertising space for Web publishers.

21

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We generate Media revenuefrom fees paid by client advertisers for advertising space. We typically selladvertising space on a cost-per-thousand-impressions (“CPM”) basis, enabling aclient advertiser to pay a fee based on the number of times its advertisementis displayed. We typically count an advertising impression each time a user’sWeb browser requests that our computer servers transmit the advertisement. Wemay charge higher CPMs to advertisers that purchase our advanced targetingsolutions, such as our behavioral targeting solution, in comparison to thosethat purchase advertising space that requires less specific targeting. We havealso generated limited media revenue from e-mail advertisements and marketingservices.

*Search*

We provide SEM servicesthat connect advertisers with consumers using search engines to findinformation, products and services. We leverage our relationships with searchengines and our understanding of search engine algorithms to help advertisersoptimize their Web pages and achieve better placement in algorithmic searchengines. We also create Web site listings for advertisers and submit theirlistings into the databases of pay-for-placement (“P4P”) and paid-inclusion (“PI”)search engine platforms. We help advertisers determine the keywords mostrelevant to their products and services and use advanced technology to managekeyword bidding simultaneously across P4P search platforms. Our technologyshows advertisers which keywords lead users from search engines to their Websites and helps them optimize their advertising spending to convertclick-throughs (users who click on their advertisement and are directed totheir Web site) into sales.

Search revenue is primarilybased on either a percentage of media spend or a cost-per-click, or CPC, feemodel paid by client advertisers. These fees are generated each timesearch engine users click Web site listings submitted by us into search enginedatabases and are directed to our client advertisers’ Web sites. To a lesserextent, we also generate revenue from fees paid by advertisers for consultingservices and search engine optimization services, and from fees paid by searchengines that employ us to optimize the relevancy of Web site listings andreport on advertising campaigns for their advertisers. We develop direct relationshipswith P4P and algorithmic search engines in order to enhance the services weprovide to our client advertisers. We refer to search engines we work with assearch engine distribution partners.

*Technology*

We provide onlineadvertisement serving and analytics software to customers from software hostedlocally on the customers’ servers or from software hosted centrally on ourservers. Our technology products and services are all based on our proprietaryOpen AdStream platform. We generate Technology revenue in the following ways:

*Open AdStream Central Service.*We charge service fees to Web publishers for operating our Open AdStream (“OAS”)online advertisement serving software centrally from our servers. We typicallycharge a service fee determined by multiplying an agreed CPM by the number ofadvertising impressions served using OAS. The service fee may vary based on theforecasted number of advertising impressions a Web publisher will serve usingour software and the service term, among other factors. We typically billservice fees monthly.

*Open AdStream Local Software.* Wecharge fees to Web publishers for operating our OAS software locally from theirown servers. Our license agreements typically provide for a license fee, asoftware maintenance and technical support services fee and a training fee. Weoften base license fees on the forecasted number of advertising impressions aWeb publisher will serve using our software, the use of advanced softwaremodules and the license term.

22

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*Open Advertiser Service.* Wecharge service fees to advertisers and agencies for operating our OpenAdvertiser (“OAD”) advertisement serving software centrally from our servers.We determine our service fee by multiplying the CPM by the number ofadvertising impressions delivered. We typically bill service fees monthly. Theservice fee may vary based on the forecasted number of advertising impressionsa Web publisher will serve using our software and the service term, among otherfactors.

*Open AdStream Analytics Applicationand Service.*  Our analytics application offers Webpublishers active campaign reporting and marketing intelligence and helpsadvertisers measure, analyze and manage online audiences. We charge servicefees to Web publishers for operating our analytics application centrally on ourservers. We determine the service fees by multiplying an agreed CPM by thenumber of page views measured by our analytics application.

*Open AdStream Behavioral TargetingApplication and Service.* Our behavioral targetingapplications, which reside on our Open AdStream platform, enables Webpublishers to identify and target segments of their audiences based on useractivity. We generate revenue from behavioral targeting on the same basis asthe associated OAS and analytics arrangements.

We upgrade and issue new releases of our OAStechnologies from time to time.  We recently released a new version, 6.0,of our Decide DNA platform for search marketers.  We also recently released a new version, 6.0,of our OAS platform targeted at publishers, which builds on the previous 5.8version, and also incorporates our analytics and behavioral targetingapplications, resulting in better integration of these previously stand alonetechnologies. Future versions of our OAS platform may also incorporate ourDecide DNA technology, as well as functionalities of our OAD solution targetingadvertisers.

To a lesser extent, we generate revenue by providingprofessional services charged at an hourly rate and from fees paid by Webpublishers for trafficking their advertisements. Trafficking advertisementsrefers to entering advertisement creative material and campaign specificationsinto our OAS software.

# **RECENT DEVELOPMENTS**

On November 1, 2006, theCompany and Dentsu, ourminority investor of the existing joint venture, K.K. 24-7 Search,expanded our search engine marketing partnership. Through a new holdingcompany, tentatively to be called “Dentsu 24/7 Search Holdings”, the Companyand Dentsu will establish new operations within other strategically important advertisingmarkets throughout Asia and the Pacific Rim, including China, India, Korea,Thailand, and Taiwan. Under the terms of the agreement, the Company and Dentsuwill each provide initial capital of $5.0 million, which will be used to fundoperations in the identified expansion countries. We will license our DecideDNA technology to the new operating subsidiaries. Initial management of the newventure will be fully-supported by K.K. 24-7 Search.

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**RESULTSOF OPERATIONS**

### Thefollowing table compares the results of operations for the three and nine monthperiods ended September 30, 2006 to the results of operations for the three andnine month periods ended September 30, 2005 (in thousands):

| ** **                                                                                                          | ** ** | **Three Months Ended September 30,** | ** ** | ** **      | ** ** | **Nine Months Ended September 30,** | ** ** | ** **      | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-----------------|------------|---------------------------------------------------------|------------|-----------------|------------|
| ** **                                                                                                          | ** ** | **2006**                                                 | ** ** | **2005**        | ** ** | **$Var**                                                | ** ** | **2006**        | ** ** | **2005** | ** ** | **$Var** | ** ** |
| ** **                                                                                                          | ** ** | **(unaudited)**                                          | ** ** | **(unaudited)** | ** ** | ** **                                              | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** | ** ** | ** ** |
| **Revenues:**                                                                                                       |       |                                                     |       |            |       |                                                    |       |            |       |   |   |   |   |
| Media                                                                                                               |       | $                                                        | 19,082     |            | $          | 15,547                                                  |       | $               | 3,535      |   | $ | 58,646 |   | $ | 46,460 |   | $ | 12,186 |   |
| Search                                                                                                              |       | 22,669                                                   |       | 13,731          |       | 8,938                                                   |       | 60,247          |       | 35,063 |   | 25,184 |   |
| Technology                                                                                                          |       | 7,392                                                    |       | 5,839           |       | 1,553                                                   |       | 21,367          |       | 16,550 |   | 4,817 |   |
| Total revenues                                                                                                      |       | 49,143                                                   |       | 35,117          |       | 14,026                                                  |       | 140,260         |       | 98,073 |   | 42,187 |   |
|                                                                                                                |       |                                                     |       |            |       |                                                    |       |            |       |   |   |   |   |
| Cost of revenues:                                                                                                   |       |                                                     |       |            |       |                                                    |       |            |       |   |   |   |   |
| Media                                                                                                               |       | 12,736                                                   |       | 10,516          |       | 2,220                                                   |       | 39,754          |       | 31,470 |   | 8,284 |   |
| Search                                                                                                              |       | 17,357                                                   |       | 10,026          |       | 7,331                                                   |       | 45,243          |       | 24,405 |   | 20,838 |   |
| Technology (inclusive of $139, $7, $384 and $23 of  stock-based compensation, respectively)                         |       | 1,592                                                    |       | 1,005           |       | 587                                                     |       | 4,661           |       | 3,190 |   | 1,471 |   |
| Total cost of revenues                                                                                              |       | 31,685                                                   |       | 21,547          |       | 10,138                                                  |       | 89,658          |       | 59,065 |   | 30,593 |   |
|                                                                                                                |       |                                                     |       |            |       |                                                    |       |            |       |   |   |   |   |
| Gross profit                                                                                                        |       | 17,458                                                   |       | 13,570          |       | 3,888                                                   |       | 50,602          |       | 39,008 |   | 11,594 |   |
|                                                                                                                |       |                                                     |       |            |       |                                                    |       |            |       |   |   |   |   |
| Operating  expenses:                                                                                                |       |                                                     |       |            |       |                                                    |       |            |       |   |   |   |   |
| Sales and marketing (inclusive of $1,109, $117,  $3,269 and $323 of stock-based compensation, respectively)         |       | 7,867                                                    |       | 5,723           |       | 2,144                                                   |       | 23,089          |       | 16,950 |   | 6,139 |   |
| General and administrative (inclusive of $2,616, $318,  $10,814 and $950 of stock-based compensation, respectively) |       | 7,638                                                    |       | 5,203           |       | 2,435                                                   |       | 25,982          |       | 15,407 |   | 10,575 |   |
| Product development (inclusive of $471, $51, $1,734 and  $151 of stock-based compensation, respectively)            |       | 2,425                                                    |       | 1,614           |       | 811                                                     |       | 7,327           |       | 4,322 |   | 3,005 |   |
| Amortization of intangible assets and deferred  financing costs                                                     |       | 882                                                      |       | 1,140           |       | (258                                                    | )          | 2,661           |       | 3,419 |   | (758 | ) |
| Restructuring costs                                                                                                 |       | —                                                   |       | —          |       | —                                                  |       | —          |       | 973 |   | (973 | ) |
|                                                                                                                |       |                                                     |       |            |       |                                                    |       |            |       |   |   |   |   |
| Total operating expenses                                                                                            |       | 18,812                                                   |       | 13,680          |       | 5,132                                                   |       | 59,059          |       | 41,071 |   | 17,988 |   |
|                                                                                                                |       |                                                     |       |            |       |                                                    |       |            |       |   |   |   |   |
| Loss from operations                                                                                                |       | (1,354                                                   | )          | (110            | )          | (1,244                                                  | )          | (8,457          | )          | (2,063 | ) | (6,394 | ) |
|                                                                                                                |       |                                                     |       |            |       |                                                    |       |            |       |   |   |   |   |
| Interest income  (expense), net                                                                                     |       | 220                                                      |       | (48             | )          | 268                                                     |       | 428             |       | (190 | ) | 618 |   |
| Change in fair  value of warrant liability                                                                          |       | 22                                                       |       | (384            | )          | 406                                                     |       | (97             | )          | (344 | ) | 247 |   |
| Recovery of  investment                                                                                             |       | —                                                   |       | —          |       | —                                                  |       | —          |       | 2,100 |   | (2,100 | ) |
| Impairment of  marketable securities                                                                                |       | —                                                   |       | —          |       | —                                                  |       | —          |       | (588 | ) | 588 |   |
| Loss on sale of  marketable securities                                                                              |       | —                                                   |       | (25             | )          | 25                                                      |       | —          |       | (18 | ) | 18 |   |
| Other income  (expense), net                                                                                        |       | (27                                                      | )          | (55             | )          | 28                                                      |       | 97              |       | (95 | ) | 192 |   |
|                                                                                                                |       |                                                     |       |            |       |                                                    |       |            |       |   |   |   |   |
| Loss before  provision for income taxes and minority interest in operations of  consolidated subsidiary        |       | (1,139                                                   | )          | (622            | )          | (517                                                    | )          | (8,029          | )          | (1,198 | ) | (6,831 | ) |
|                                                                                                                |       |                                                     |       |            |       |                                                    |       |            |       |   |   |   |   |
| Provision for  income taxes                                                                                         |       | (126                                                     | )          | (164            | )          | 38                                                      |       | (268            | )          | (184 | ) | (84 | ) |
| Minority interest  in operations of consolidated subsidiary                                                         |       | (103                                                     | )          | 21              |       | (124                                                    | )          | (98             | )          | 21 |   | (119 | ) |
|                                                                                                                |       |                                                     |       |            |       |                                                    |       |            |       |   |   |   |   |
| Net loss                                                                                                            |       | $                                                        | (1,368     | )               | $          | (765                                                    | )          | $               | (603       | ) | $ | (8,395 | ) | $ | (1,361 | ) | $ | (7,034 | ) |

 

**Revenues; Cost of Revenues andGross Profit**

*Media*

*Revenue*. We generateMedia revenue primarily from our 24/7 Real Media Web Alliance. Web Alliancerevenue was $18.8 million and $57.7 million for the three and nine monthperiods ended September 30, 2006, respectively, as compared to $15.3 millionand $45.5 million for the three and nine month periods ended September 30,2005, respectively, an increase of 23.8% and 26.7%, respectively. The increaseis primarily related to an increase in the number of advertising impressionssold. The remaining Media revenue related to our e-mail services.

*Cost ofRevenues*.****Media cost of revenues consisted primarilyof fees paid to Web publishers in our Web Alliance. Cost of revenues alsoincluded advertisement serving costs, which are intercompany charges from ourTechnology segment based on a fixed CPM.

*GrossProfit*. Gross profitmargins for Media were 33.3% and 32.2% for the three and nine month periodsended September 30, 2006, respectively, as compared to 32.4% and 32.3% for thethree and nine month periods ended September 30, 2005, respectively. The grossprofit margin were consistent although there is a slight upward trend due toincreases in the percentage of revenue retained from

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Web sites in the 24/7 RealMedia Web Alliance offset by a downward trend due to the increased contributionfrom regions with a lower gross profit percentage, particularly Korea.

Advertisement serving costswere $0.4 million and $1.3 million for the three and nine month periods endedSeptember 30, 2006, respectively. Advertisement serving costs were $0.5 millionand $1.3 million for the three and nine month periods ended September 30, 2005,respectively.

*Search*

*Revenue*. Search revenue was $22.7 million and $60.2million for the three and nine month periods ended September 30, 2006,respectively, as compared to $13.7 million and $35.1 million for the three andnine month periods ended September 30, 2005, respectively, an increase of 65.1%and 71.8%, respectively.  The increasewas due to an increase in the number of accounts under management and anincrease in the average revenue per advertiser account.

*Cost ofRevenues*. Search costof revenues consisted primarily of fees paid to our search engine distributionpartners, which are calculated as a percentage of revenues for algorithmicsearch engines and a fixed CPC for pay-for-placement search engines.

*Gross Profit*.Gross profit margins for Search were 23.4% and 24.9% for the three and ninemonth periods ended September 30, 2006, respectively, and 27.0% and 30.4% forthe three and nine month periods ended September 30, 2005, respectively.  The decrease in gross profit margin wasprimarily due to a decrease in margin in our Managed Account Service offeringas a result of competition in the marketplace as well as the addition of highervolume accounts, which usually command a better price.  Adding to the decline is the faster pace ofgrowth of our lower margin Managed Account Service offering relative to othersearch product offerings. These decreases were partially offset by an increasein revenue from Dentsu which is at a higher margin.

*Technology*

*Revenue*.****Technologyrevenue was $7.4 million and $21.4 million for the three and nine month periodsended September 30, 2006, respectively, as compared to $5.8 million and $16.6million for the three and nine month periods ended September 30, 2005,respectively, representing an increase of 26.6% and 29.1%, respectively. Theincrease primarily reflects expanded usage of OAS by existing customers and theaddition of new customers.

*Cost of Revenues*.Technology cost of revenues consisted of costs for hosting, bandwidth,third-party license and support fees, support and maintenance of theinfrastructure, and salaries and benefits of related technical personnel, andis inclusive of stock-based compensation. The cost of revenues was offset byintercompany fees charged to our Media segment for advertisement serving.

*Gross Profit*.Gross profit margins were 78.5% and 78.2% during the three and nine monthperiods ended September 30, 2006, respectively, and 82.8% and 80.7% for thethree and nine month periods ended September 30, 2005, respectively.  The margin decrease is due to increases inthe cost of advertisement serving equipment and facilities and the increase instock-based compensation.  Stock-basedcompensation was $0.1 million and $0.4 million for the three and nine monthperiods ended September 30, 2006, respectively, and approximately $7,000 and$23,000 for the three and nine month periods ended September 30, 2005,respectively.

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**Sales and Marketing Expenses**

Salesand marketing expenses consisted primarily of compensation and personnelrelated expenses for sales, account management, business development, affiliaterelations and marketing, and marketing costs such as advertising, trade showsand public and investor relations firms.

Sales and marketing expenses were $7.9 million and $23.1 million forthe three and nine month periods ended September 30, 2006, respectively, and$5.7 million and $17.0 million for the three and nine month periods endedSeptember 30, 2005, respectively. The increase was primarily due to additionalpersonnel costs and the inclusion of stock-based compensation of $1.1 millionand $3.3 million for the three and nine month periods ended September 30, 2006,respectively, and $0.1 million and $0.3 million for the three and nine monthperiods ended September 30, 2005, respectively. Excluding stock-basedcompensation, sales andmarketing expenses decreased as a percentage of revenue from 16.0% to 13.8% forthe three month periods ended September 30, 2005 and 2006, respectively, andfrom 17.0% to 14.1% for the nine month periods ended September 30, 2005 and2006, respectively, as we continued to gain operating leverage.

**General and Administrative Expenses**

General and administrative expenses consisted primarily of compensationand related expenses for executive and administrative personnel, costs relatedto leasing, maintaining and operating our facilities and systems, insurance,bad debts, fees for professional services, fees associated with the reportingand other obligations of a public company, depreciation and other general andadministrative costs. Feesfor professional services included payments to external lawyers, accountantsand other professionals in connection with operating our business, complianceand evaluating and pursuing new opportunities.

General and administrative expenses were $7.6 million and $26.0 millionfor the three and nine month periods ended September 30, 2006, respectively,and $5.2 million and $15.4 million for the three and nine month periods endedSeptember 30, 2005, respectively. The increase was primarily due to theinclusion of stock-based compensation of $2.6 million and $10.8 million for thethree and nine month periods ended September 30, 2006, respectively, and $0.3million and $1.0 million for the three and nine month periods ended September30, 2005 and 2006, respectively. The remaining increase was due primarily toincreased depreciation due to the improvement and expansion of ourinfrastructure, additional professional fees as a result of increasedcompliance costs and additional personnel related costs. Excluding stock-basedcompensation, as a percentage of revenue, the expenses decreased from 13.9% to10.2% for the three month periods ended September 30, 2005 and 2006,respectively, and from 14.7% to 10.8% for the nine month periods endedSeptember 30, 2005 and 2006, respectively.

**Product Development Expenses**

Productdevelopment expenses consisted primarily of compensation and relatedexpenses for personnel responsible for the development and maintenance offeatures, enhancements and functionality and quality assurance for our software and services and developmentof new products.

Product development expenses were $2.4 million and $7.3 million for thethree and nine month periods ended September 30, 2006, respectively, and $1.6million and $4.3 million for the three and nine month periods ended September30, 2005, respectively. These amounts are inclusive of stock-basedcompensation of $0.5 million and $1.7 million for the three and nine monthperiods ended September 30, 2006, respectively, and $0.1 million and $0.2million for the three and nine month periods ended September 30, 2005,respectively.  The increase reflects ourcontinued investment in the development and

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enhancement of our existing products and services, as well as ourexploration of new markets and product offerings.

**Amortization of Intangible Assets and Deferred FinancingCosts**

Amortizationexpense related to intangible assets acquired with Real Media in October 2001,24/7 Real Media Korea in January 2004 and Decide in August 2004; deferredfinancing costs associated with our subordinated convertible debenture offeringin September 2003; and a transition payment to Lycos in connection with astrategic business relationship that we entered into in February 2004.

For the nine month period ended September 30, 2006, amortizationexpense related $1.1 million to acquired technology, $0.5 million to otherintangible assets, $0.4 million to deferred financing costs, and $0.7 millionto the transition payment to Lycos. For the nine month period ended September30, 2005, amortization expense related $1.7 million to acquiredtechnology, $0.6 million to other intangible assets, $0.4 million to deferredfinancing costs and $0.7 million to the transition payment to Lycos.

**Restructuring Costs**

During the nine month period ended September 30, 2005, we recorded arestructuring charge of $1.0 million relating to our former New Yorkheadquarters.

**Interest Income (Expense), Net**

Interest income (expense), net relates to our long-term debt andcapital lease obligations offset by interest income related to our cash andcash equivalents. Interest income (expense), net for 2006 and 2005 primarilyrelated to the $15.0 million of subordinated convertible debentures initiallydue September 2006, of which a portion of the interest incurred relates to cashpayments due and a portion relates to the amortization of warrants issued withthe debentures, offset by interest income from cash in overnight deposits andmoney market accounts. In September 2006, on the terms and condition set forthin the debentures, the holder elected to extend the maturity of the debenturesuntil September 2009.

**Change in Fair Value of Warrant Liability**

Our liability relates to warrants outstanding from our preferred stockoffering, and is adjusted to fair value at the end of each reporting period.The expense for the nine month period ended September 30, 2006 was due to anincrease in the fair market value of the warrants outstanding, which increasedthe corresponding liability. The increase in the fair market value wasprimarily due to the higher fair market value of our common stock compared tothe fair market value of our common stock at December 31, 2005.

**Recovery of Investment**

In January 2005, we received $2.1 million as arecovery of an investment in Bidland Systems, Inc. (“Bidland”), andsubsequently received another $0.2 million in the fourth quarter of 2005. Therecovery was a result of the settlement of pending litigation between Bidlandand another party and the subsequent dissolution and liquidation of Bidland.

**Impairment of Marketable Securities**

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During the first quarter of 2005, we wrote down our available-for-saleinvestment in chinadotcom and recognized an impairment charge of approximately$0.6 million for other-than-temporary declines in the value of theinvestment.

**Loss on Sale of Marketable Securities**

Duringthe nine month period ended September 30, 2005, the Company sold 278,700 sharesof its chinadotcom common stock, which resulted in proceeds of approximately$0.9 million and an immaterial realized loss.

**Other Income (Expense), Net**

Other income (expense), net for the nine month period ended September30, 2006 consisted of earn-out payments received in excess of amounts recorded,offset by legal fees associated with a former subsidiary that we shut down andrealized foreign currency losses. Other income (expense), net for the ninemonth period ended September 30, 2005 consisted primarily of legal feesassociated with a former subsidiary that we shut down.

**Provision for Income Taxes**

The increase in the provision for income taxes fromthe nine month period ended September 30, 2005 to the nine month period endedSeptember 30, 2006 was primarily a result of increases in taxes, driven byhigher pretax income.

**Minority Interest in Operations of Consolidated Subsidiary**

Minority interest in operations of consolidated subsidiary representsthe percentage share of income (losses) attributable to holders who have aminority interest in subsidiaries in which we hold an interest that is greaterthan fifty percent, but less than 100 percent, and the results of which weconsolidate in our consolidated financial statements. This amount relatesto the activity of K.K. 24-7 Search, our joint venture with Dentsu.

**LIQUIDITY AND CAPITAL RESOURCES**

Cash flows for the nine month periods ended September 30, 2006 and 2005 were asfollows (in thousands):
| ** **                                 | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Net cash  provided by operating activities |       | $                                                       | 8,571      |   | $ | 6,664 |   |
| Net cash used in  investing activities     |       | $                                                       | (2,697     | ) | $ | (1,312 | ) |
| Net cash provided by  financing activities |       | $                                                       | 4,481      |   | $ | 2,344 |   |

 

Historically we have financed our operations through equity financingsand long-term debt and more recently through cash generated by operations. Netcash provided by operating activities was $8.6 million and $6.7 million duringthe nine month periods ended September 30, 2006 and 2005, respectively. Netcash provided by operating activities is generally due to our net operatinglosses, adjusted for certain non-cash items included in our net operatingresults, as well as changes in various components of working capital, particularlyfluctuations in accounts receivable.

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Net cash used in investing activities was approximately $2.7 millionduring the nine month period ended September 30, 2006, and consisted of capitalexpenditures for operational purposes. Net cash used in investing activitieswas approximately $1.3 million during the nine month period ended September 30,2005, and consisted of $0.6 million of proceeds from maturities of short-terminvestments, $0.9 million of proceeds from the sale of marketable securitiesand $2.1 million from the recovery of an investment, offset by $4.9 million incapital expenditures for operational purposes.

Financing activities provided $4.5 million and $2.3 million in the ninemonth periods ended September 30, 2006 and 2005, respectively. Financingactivities during the nine month period ended September 30, 2006 wereattributed as follows: $0.2 million of proceeds from the note receivable fromIMAKE and $5.8 million from the exercise of common stock options offset by $1.3million earn-out payment to the former shareholders of Decide and $0.2 millionin payments of capital lease obligations. Financing activities during the ninemonth period ended September 30, 2005 were attributed as follows: $1.7 millionfrom proceeds received from Dentsu, the minority investor of our consolidatedsubsidiary, K.K. 24-7 Search, and $0.7 million from the exercise of commonstock options offset by $0.1 million in payments of capital lease obligations.

OnSeptember 26, 2003, we completed the placement to an institutionalaccredited investor of $15.0 million of our subordinated convertible debenturesdue September 2006. In September 2006, on the terms and conditions set forth inthe Debentures, the holder elected to extend the maturity date of thedebentures until September 2009. If at any time on or after September 26, 2005,the second anniversary of the initial issuance date, the weighted average priceof our common stock is less than $8.75 on any five consecutive trading days,the holder has the right, in its sole discretion, to require that we redeem upto $7.5 million in principal amount of the debentures. This condition has beenmet, and management believes the holder may exercise its right to requireredemption. Management believes existing cash and investments will besufficient to meet the obligation to redeem, should the holder exercise itsright.

The Companymaintains cash balances at the subsidiary level to meet short-term capitalrequirements and to satisfy local statutory liquidity requirements. Theserequirements, as well as local tax implications, may limit the amount ofcapital that can be repatriated from certain subsidiaries. These funds arefreely available to the subsidiaries for operationalpurposes. Specifically, K.K. 24-7 Search has $3.0 million in cash as of September 30, 2006 that must be keptin Japan for operational purposes.

We continue toincrease capital expenditures and operating lease commitments, which isconsistent with our increased staffing and operational expansion, and weanticipate this will continue in the future as business conditionsmerit. Additionally, we will continue to evaluate possible acquisitionsof, or investments in businesses, products and technologies that arecomplementary to our business, which may require the use of cash. Managementbelieves existing cash and investments will be sufficient to meet operatingrequirements for at least the next twelve months; however, we may selladditional equity or debt securities or obtain credit facilities to furtherenhance our liquidity position. The sale of additional securities could resultin further dilution to our stockholders.

We are subjected to routine tax examinations by taxing authorities atthe federal, state and local levels in the United States and by various taxingauthorities in foreign countries.  As of September 30, 2006, there areseveral reviews being conducted and Management is of the opinion that theultimate outcome of these examinations will not have a material adverse impacton our financial position or results of operations.

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**OFF-BALANCESHEET ARRANGEMENTS**

We did not haveany relationships with unconsolidated entities or financial partnerships, suchas entities often referred to as structured finance or special purposeentities, which would have been established for the purpose of facilitatingoff-balance sheet financial arrangements or other contractually narrow orlimited purposes at September30, 2006. Accordingly, we are not materially exposed to any financing,liquidity, market or credit risk that could arise if we had engaged in suchrelationships.

Common stock warrants issued in conjunction with our subordinatedconvertible debentures are equity-linked derivatives and accordingly representoff-balance sheet arrangements. In addition, the conversion and redemptionfeatures of the subordinated convertible debentures constitute an embeddedderivative.  Some of the common stock warrants and the conversion andredemption features meet the scope exception in paragraph 11(a) of theStatement of Financial Accounting Standards (“SFAS”) No. 133, *Accounting for Derivative Instruments and HedgingActivities*, and are accordingly not accounted for as derivatives forpurposes of SFAS No. 133, but instead are accounted for as equity.

**CRITICAL ACCOUNTING POLICIES**

***General***

Ourinterim consolidated financial statements are prepared in conformity withaccounting principles generally accepted in the United States of America. Assuch, management is required to make certain estimates, judgments andassumptions that it believes are reasonable based upon the information available.These estimates, judgments and assumptions affect the reported amounts ofassets and liabilities and the disclosure of contingent assets and liabilitiesat the dates of the consolidated financial statements and the reported amountsof revenues and expenses during the reporting periods.

The significant accounting policies that we believe are the mostcritical to aid in fully understanding and evaluating the reported consolidatedfinancial results are the following:

***Revenue Recognition;Cost of Revenue; Deferred Revenue***

*Media*

Our Media revenueis generated from fees paid by client advertisers for advertising impressions.We typically offer advertisers a pricing model based on CPM, which enables aclient advertiser to pay a fee based on the number of times its advertisementis displayed. E-mail related revenue is derived from delivering advertisementsto e-mail lists for advertisers. Agreements are primarily short-term andrevenue is recognized as services are delivered, provided that no significantobligations remain outstanding and collection of the resulting receivable isprobable. We become obligated to make royalty payments to Web sites and e-maillists that have contracted with us in the period in which the advertisingimpressions or e-mails are delivered. Such expenses are classified as cost ofrevenue in the consolidated statements of operations.

*Search*

Our revenue fromour Search segment is primarily based on CPC fees paid by client advertisers.CPC fees are generated each time users click on Web site listings that wesubmitted into search engine databases and are directed to our clientadvertisers’ Web sites. To a lesser extent, we also generate revenue from feespaid by search engines that employ us to optimize the submission of Web sitelistings and report on advertising campaigns for their advertisers. Agreementsare primarily short-term and revenue is recognized as services are delivered,provided that no significant obligations remain outstanding and collection ofthe resulting receivable is probable. We become obligated to make payments tosearch

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enginedistribution partners that have contracted with us in the period in which theclicks occur. Such expenses are classified as cost of revenue in theconsolidated statements of operations. When we provide SEM services as an agentfor a fixed commission or in other transactions in which we do not haveprincipal risk and reward, we recognize revenue on a net basis.

*Technology*

Our Technologyrevenue is derived primarily from licensing of our software, hostedadvertisement serving and software maintenance and technical support services.Revenue from advertisement serving hosted centrally on our servers isrecognized upon delivery. Revenue from software licensing agreements isrecognized in accordance with Statement of Position (“SOP”) No. 97-2, *Software Revenue Recognition*, and SECStaff Accounting Bulletin (“SAB”) No. 104, *RevenueRecognition*, upon delivery of the software, which is generally whenthe software is made available for download, there is persuasive evidence of anarrangement, collection is reasonably assured, the fee is fixed or determinableand vendor-specific objective evidence exists to allocate the total fees to allelements of the arrangement. Contracts that bundle the software license withsoftware maintenance and technical support are recognized ratably over thecontract term. Revenue from software maintenance and technical supportcontracts is recognized ratably over the life of the agreement, which typicallydoes not exceed one year.

Expenses relatedto our Technology revenue are primarily payroll costs incurred to deliver andsupport the software, and hosting, bandwidth and license fees paid tothird-party software vendors. These expenses are classified as cost of revenuein the consolidated statements of operations.

*DeferredRevenue*

We defer revenuebilled or collected in advance of services being completed until the conclusionof the service period to which the advance billing or collection relates.Deferred revenue is included on the consolidated balance sheets as a currentliability until the service is performed, and then recognized in the period inwhich the service is completed. Our deferred revenue primarily consist ofadvance billings for software license subscriptions and software maintenanceand technical support services.

***Allowance forDoubtful Accounts; Sales Allowance***

We maintain anallowance for doubtful accounts to reserve for potentially uncollectiblereceivables and a sales allowance to reserve for potential credits issued tocustomers. The allowances are estimates calculated based on an analysis ofcurrent business and economic risks, customer credit-worthiness, specificidentifiable risks such as bankruptcies, terminations or discontinuedcustomers, or other factors that may indicate a potential loss.

***Impairment ofLong-Lived Assets***

We evaluategoodwill and indefinite lived intangible assets on an annual basis and wheneverevents or changes in circumstances indicate that a carrying amount may not befully recoverable. Long-lived assets, including property and equipment,long-term assets and amortizable intangible assets, are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountmay not be fully recoverable. Conditions that would necessitate an impairmentassessment include a significant decline in the observable market value of anasset, a significant change in the extent to which or manner in which an assetis used or a significant adverse change that would indicate that the carryingamount of an asset or group of assets is not recoverable. We assess impairmentin accordance with the requirements of SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*. We assess the impairment ofgoodwill and intangible assets in accordance with the provisions of SFASNo. 142,

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*Goodwilland Other Intangible Assets*. We determine the recoverability of the assets by comparing thecarrying amount of the assets to net future cash flows that the assets areexpected to generate. The impairment we recognize is the amount by which the carryingamount exceeds the fair market values of the assets.

***Business Combinations***

Our acquisitionsare accounted for as purchase business combinations in accordance with SFAS No.141, *Business Combinations*, and SFAS No. 142,*Goodwill and Other Intangible Assets*. Weallocate a portion of the purchase price to identifiable tangible andintangible assets based on their respective fair values, and record as goodwillany remaining unallocated portion of the purchase price. Intangible assetsinclude trademarks, customer relationships, acquired technology and covenantsnot to compete. Such intangible assets are amortized on a straight-line basisover their estimated useful lives, which are generally two to seven years,except for trademarks that have an indefinite life.

***Contingencies and Litigation***

We evaluatecontingent liabilities, including threatened or pending litigation, inaccordance with SFAS No. 5, *Accountingfor Contingencies*, and record accruals when the outcome of thesematters is deemed probable and the potential liability is reasonably estimable.We make these assessments based on the facts and circumstances and in someinstances based in part on the advice of outside legal counsel.

***RestructuringEstimates***

We account for restructuring activities in accordancewith SFAS No. 146, *Accounting for CostsAssociated with Exit or Disposal Activities*. Restructuring-relatedliabilities include estimates for, among other things, involuntary terminationsof employees and disposition of lease obligations. Key variables in determiningsuch estimates include timing of sublease rentals, estimates of sublease rentalpayment amounts and tenant improvement costs, and estimates for brokerage andother related costs. We periodically evaluate and, if necessary, adjust theestimates based on currently available information.

***Investments***

Investments consist of securities with statedmaturities of three months or more and marketable securities consisting ofregistered corporate equity securities. We classify the marketable securitiesas available-for-sale in accordance with SFAS No. 115, *Accounting for Certain Investments in Debt and Equity Securities*.Available-for-sale securities are carried at fair value, with the unrealizedgains or losses, net of tax, reported as a separate component of stockholders’equity. In determining realized gains and losses, the cost of securities soldis based upon specific identification. Realized gains and losses and declinesin value judged to be other-than-temporary, are included in the consolidatedstatements of operations.

Investments in non-marketable equity securities ofcompanies in which we own less than 20% of a company’s stock and do not havethe ability to exercise significant influence are accounted for on the costbasis. On an ongoing basis, we assess the need to record impairment losses oninvestments and record such losses when the impairment is determined to beother-than-temporary.

***Stock-BasedCompensation***

EffectiveJanuary 1, 2006, we adopted the revised SFAS No. 123, *Share-Based Payment*(“SFAS No. 123R”), using themodified prospective transition method, and accordingly, prior periods have notbeen restated to reflect the impact of SFAS No. 123R. Under SFAS No. 123R,stock-based awards granted prior to its adoption 

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willbe expensed over the remaining portion of their vesting period. These awardswill be expensed using the same fair value measurements which were used incalculating pro forma stock-based compensation expense under SFAS No. 123. Forstock-based awards granted on or after January 1, 2006, we will amortize thestock-based compensation over the requisite service period. We determine thefair value of these awards using the Black-Scholes option pricing model.

Prior to the adoption of SFAS No. 123R, we accounted forstock-based awards using the intrinsic value method under the provisions ofAccounting Principles Board (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees*, and Financial Accounting StandardsBoard (“FASB”) Interpretation No. 44, *Accounting for CertainTransactions Involving Stock Compensation — an interpretation of APB OpinionNo. 25,*and complied with the disclosure provisions of SFAS No. 123,*Accounting for Stock-Based Compensation,*andSFAS No. 148, *Accounting for Stock-Based Compensation —Transition and Disclosure.* Under APB Opinion No. 25, stock-based compensation cost is recognizedbased on the difference, if any, on the date of grant between the fair value ofthe Company’s common stock and the amount an employee must pay to acquire thecommon stock.

**MARKET FOR COMPANY’S COMMON EQUITY**

From our initial public offering on August 13, 1998until June 2002, our common stock was traded on the NASDAQ Global Market underthe symbol “TFSM.”  In June 2002, wetransferred our common stock to the NASDAQ SmallCap Market, where it continuedto trade under the same symbol. Our common stock was approved for re-listing onthe NASDAQ Global Market effective November 3, 2005, where it continues totrade under the symbol “TFSM.”

We have not declared or paid any dividends on ourcapital stock since our inception and do not anticipate paying dividends in theforeseeable future. Our current policy is to retain earnings, if any, tofinance the expansion of our business. In addition, our debentures restrict ourability to pay cash dividends on our capital stock. The future payment ofdividends will depend on the results of operations, financial condition,capital expenditure plans and other factors that we deem relevant and will beat the sole discretion of our Board of Directors.

ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.

We are exposed to the impactof interest rate changes and foreign currency fluctuations.

*Interest Rate Risk*

The primary objective of our investment activitiesis to preserve capital. Cash and cash equivalents are investments with originalmaturities of three months or less. Therefore, changes in the market’s interestrates do not affect the value of the investments as recorded by 24/7 RealMedia.

*Foreign Currency Risk*

International revenuesaccounted for approximately 60% of our total revenues during the nine monthperiod ended September 30, 2006, as compared to 55% for the fiscal year endedDecember 31, 2005. The growth in our international operations has increased ourexposure to foreign currency fluctuations. Revenues and related expensesgenerated from our international subsidiaries are generally denominated in thefunctional currencies of the local countries. Primary currencies include Euros,British Pounds Sterling, Japanese Yen, Korean Won, Canadian Dollars andAustralian Dollars. The income statements of our international operations aretranslated into U.S. Dollars at the average exchange rates in each applicable 

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period. To the extent theU.S. Dollar weakens against foreign currencies, the translation of theseforeign currency denominated transactions results in increased revenues,operating expenses and net income (loss) for our foreign operations. Similarly,our revenues, operating expenses and net income (loss) will decrease for ourinternational segments when the U.S. Dollar strengthens against foreigncurrencies. Realized foreign currency transaction gains (losses) included inother income in the consolidated statements of operations were immaterial forthe nine month period ended September 30, 2006. We expect to use the assetsdenominated in foreign currencies for project execution expenditures in thecurrency in which they are held as the risk of realized translation losses ismitigated.

We considered the historicaltrends in currency exchange rates and determined that it was reasonablypossible that changes in exchange rates of 10% for all currencies could beexperienced in the near term.  These changes would have resulted in animmaterial impact on income (loss) before provision for income taxes andminority interest in operations of consolidated subsidiary for the nine monthperiod ended September 30, 2006.

ITEM 4. CONTROLS AND PROCEDURES

*Evaluationof Controls and Procedures*

As of the end of theperiod covered by this Quarterly Report on Form 10-Q, an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures was carried out by us under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Operating Officer. Based on that conclusion, our Chief Executive Officerand Chief Operating Officer concluded that our disclosure controls andprocedures have been designed and are being operated in a manner that providesreasonable assurance that the information required to be disclosed in reportsfiled pursuant to the Securities Exchange Act of 1934, as amended (the “ExchangeAct”) is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms, and that such information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Operating Officer, as appropriate, to allow timely decisionsregarding required disclosure. In designing and evaluating the disclosurecontrols and procedures, our management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, and ourmanagement necessarily is required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

In 2006, as a complementto our existing overall program of internal control, we initiated acompany-wide review of our internal control over financial reporting as part ofthe process for compliance with Section 404 of the Sarbanes-Oxley Act of2002. As a result of the review, we have made improvements to the design andeffectiveness of our internal controls through the nine month period ended September 30, 2006.  Weanticipate that improvements will continue to be made.

*Disclosure Controls andProcedures*

We have establisheddisclosure controls and procedures to ensure that material information relatingto the Company, including its consolidated subsidiaries, is made known to theofficers who certify the Company’s financial reports and to other members ofsenior management and the Board of Directors.

Our management, with theparticipation of our Chief Executive Officer and Chief Operating Officer, hasevaluated the effectiveness of our “disclosure controls and procedures” (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the endof the period covered by this report.  Based on such 

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evaluation, our ChiefExecutive Officer and Chief Operating Officer have concluded, as of September30, 2006, that the Company’s disclosure controls and procedures are effectiveto ensure that the information required to be disclosed by the Company in thereports that it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in SEC rules andforms, and to ensure that information is accumulated and communicated to ourmanagement, including the Chief Executive Officer and Chief Operating Officer,as appropriate to allow timely decisions regarding required disclosure.

Dueto its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies and procedures may deteriorate.

*Changesin Internal Control over Financial Reporting*

There has been no change in our internal control overfinancial reporting (as defined in Exchange Act Rules 13a — 15(f) and 15d —15(f)) during our most recent fiscal quarter that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II. OTHER INFORMATION**

**ITEM 1.  LEGALPROCEEDINGS**

Weare not involved in any material pending legal proceedings at this time, andmanagement is not aware of any contemplated proceeding by any governmentalauthority.

ITEM 1A.  RISK FACTORS

**RISKS RELATED TO24/7 REAL MEDIA, INC.**

WE MAY NOT BE ABLE TO SUSTAIN OUR PROFITABILITY.

We have achievedprofitability in accordance with generally accepted accounting principles inthe United States, or GAAP, in certain reporting periods; however, we have alsoincurred net losses in other periods. We may not achieve profitability infuture quarterly or annual reporting periods. We may incur net losses for theforeseeable future. Even if we do achieve profitability in future periods, wemay not be able to sustain or increase our profitability in the short-term orlong-term, on a quarterly or an annual basis, in subsequent periods.

WE MAY NOT BE ABLETO SUCCESSFULLY UPGRADE AND INTEGRATE OUR EXISTING PRODUCTS AND TECHNOLOGY.

Our ability to compete depends, in part, on our success at upgradingand integrating our existing products and technology globally. From time totime we upgrade and issue new releases of our existing technology to integratenew functionalities and respond to industry developments. For example, we recentlyreleased a new version, 6.0, of our Decide DNA platform for search marketersand a new version, 6.0, of our OAS platform targeted at publishers. OAS 6.0builds on the previous 5.8 version, and also incorporates our analytics andbehavioral targeting applications as modules; a limited number of our customersare now running on OAS 6.0 and we will transition the balance of our centraladserving customers to it over the remainder of 2006 and in 2007. Futureversions of OAS 6.0 may incorporate our Decide DNA technology. We may alsobuild functionalities of our existing OAD solution and create a version of OAStargeted at advertisers. We may experience delays, difficulties or increasedcosts that could hinder or prevent the successful design, integration, development,introduction, implementation or marketing of new releases of our technologyglobally. In addition, we must ensure that the performance levels and capacityof our technology remain steady when we release new versions to our customersand that we are able to migrate customers onto new technology promptly. Anymaterial delays in introducing or implementing a new release or performanceproblems could cause us to lose customers and cause our revenue to decline.

OUR INTERNATIONALOPERATIONS FACE LEGAL AND CULTURAL CHALLENGES AND SUBJECT US TO ADDITIONALRISKS.

We have operationsin a number of international markets, including Australia, Canada, Europe,Japan and South Korea, and we currently derive over half of our revenue fromnon-U.S. markets. To date, we have limited experience in marketing, selling anddistributing our solutions internationally in certain regions. Ourinternational operations are subject to additional risks, including:

·                  changes inregulatory requirements;

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·                  potentiallyadverse tax consequences and restrictions on cash flow resulting from, amongother things:

·                  local statutoryliquidity requirements for businesses operating in certain foreign countries;

·                  the need to maintaincash balances to meet short-term capital requirements;

·                  operations inforeign countries with higher tax rates than the United States;

·                  application ofwithholding taxes at a high rate on intercompany royalty and other payments;

·                  the inability toutilize certain foreign tax credits; and

·                  the inability toutilize some or all of losses generated in one or more foreign countries;

·                  difficulties andcosts of staffing and managing foreign operations;

·                  reducedprotection for intellectual property rights in some countries;

·                  generalimport/export restrictions relating to encryption technology and/or privacymatters;

·                  local lawrequirements governing employment contracts, which may impose, among otherthings, minimum notice periods and minimum severance payments for involuntaryterminations;

·                  political andeconomic instability;

·                  fluctuations incurrency exchange rates; and

·                  seasonalreductions in business activity during the summer months in Europe and certainother parts of the world.

Any or all of theserisks could affect our business outside of the United States and negativelyimpact our results of operations.

OUR SEARCHBUSINESS IS CURRENTLY OUR FASTEST GROWING BUSINESS SEGMENT, AND WE MAY HAVEINEFFICIENCIES IN OUR BUSINESS MODEL OR MAY BE UNABLE TO CAPITALIZE ON CURRENTOR FUTURE SEARCH TRENDS.

Our Search segmenthas been growing faster than our other business segments. The search industryis still relatively new, competition is high and there are no set parametersamong service providers as to how to run campaigns, track data or include morecomplex features, such as behavioral targeting. We are working to develop setstandards as our Search business grows, but our current strategies may not besuccessful in the long-run. As a result, it is difficult to predict how ourSearch segment will perform in the future. For example, revenue in the segmenthas increased significantly in recent periods, while margins have decreased asour lower gross margin managed SEM services business performed better than othersearch areas. Further, we have and may continue to encounter inefficiencies,such as the under or over-

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delivery ofcampaigns due to programming difficulties or set-backs, such as outdatedmethodologies and tools that must be reconfigured or replaced. Furthermore, oursuccess in SEM is dependent in part on our ability to develop and maintain goodrelationships with our search engine distribution partners, who both cooperateand compete with us for search clients and who change the requirements as to howexternal software must interact with their software on an on-going basis andare unwilling to negotiate those terms and conditions. There is no guaranteethat our current or future Search software and techniques will meet our clients’needs and the demands of search engine partners, successfully manageincreasingly complex campaigns or be profitable for our business.

STRATEGIC BUSINESSVENTURES, WHICH HAVE BEEN CRITICAL TO OUR GROWTH, MAY NOT BE SUCCESSFUL ORAVAILABLE TO US IN THE FUTURE.

We were formed inFebruary 1998 to consolidate three Internet advertising companies, andhave since acquired or entered into joint ventures with many other companies.Most recently, in November 2006, we announced the planned expansion of ourjoint venture with Dentsu to provide our SEM services throughout Asia. We maycontinue pursuing selective acquisitions of businesses, technologies andproduct lines and additional joint ventures as a key component of our growthstrategy. If we are unable to enter into new strategic business ventures in thefuture, our ability to grow and adapt in our industry may be impaired and ourrevenue may suffer.

If we are ableacquire new companies or expand our business lines through joint ventures, anysuch business venture may result in the use of significant amounts of cash,potentially dilutive issuances of equity securities and the incurrence of debtand amortization expenses related to intangible assets. In addition, any suchbusiness venture may involve numerous risks, including:

·                  the difficultyand cost of implementing new processes and procedures, integrating andassimilating any existing operations, technologies, products and personnel, andexpanding, training and managing the work force;

·                  implementingnew, or remediating existing, financial and management controls, reportingsystems, procedures and policies appropriate for a U.S. public company;

·                  the dedicationof global resources, personnel and members of management, on a short orlong-term basis, which take a significant period of time and may distractmanagement’s attention from our other operations;

·                  the availabilityof favorable acquisition or other financing for the venture; and

·                  the potentialloss of key senior managers or employees of any acquired business.

Ourinability to successfully integrate any acquired company, or failure to achieveany expected synergies of an acquisition or joint venture, could adverselyaffect our business.

OUR FUTUREREVENUES AND RESULTS OF OPERATIONS MAY BE DIFFICULT TO FORECAST AND RESULTS INPRIOR PERIODS MAY NOT BE INDICATIVE OF FUTURE RESULTS.

At times ourglobal revenue and revenue in certain segments and operating units has grownsignificantly and has decreased significantly. Accurate predictions of futurerevenues are difficult, among other things, because of the rapid changes in themarkets and regulatory environment in which we operate.

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Our results ofoperations have fluctuated and may continue to fluctuate significantly in thefuture as a result of a variety of factors, many of which are beyond ourcontrol. These factors include:

·                  the addition ofnew clients or the loss of existing clients;

·                  changes in feespaid by advertisers or other clients;

·                  changes in theamount of royalties payable by us to owners of Web sites or the imposition ofnew charges or fees by Web site owners;

·                  changes in theamount of our liability for our customers’ bad debt in our full service searchbusiness;

·                  the introductionof new Internet marketing services by us or our competitors;

·                  variations inthe levels of capital or operating expenditures, accounts receivable andpayable, and other costs relating to the maintenance or expansion of ouroperations, including personnel costs;

·                  seasonality,which tends to result in lower revenue during the summer months of the thirdquarter and higher revenue in the fourth quarter of each year;

·                  changes inresults of operations brought about by newly acquired businesses or new jointventures, which may be exceedingly difficult to predict due to management’slack of history with such businesses or joint ventures;

·                  changes ingovernmental regulation of the Internet or other regulatory requirements;

·                  changes inaccounting principles or any determination that one or more of the estimates orassumptions underlying our financial statements is faulty; and

·                  general economicconditions.

Our futurerevenues and results of operations may be difficult to forecast due to theabove factors and the time we may need to adequately respond to any changes inthem. For example, certain of the search engines that we partner with in the managementof SEM services plan to impose additional charges for using their technologyinterfaces to assist our clients. Our profit margins may suffer if we areunable to pass some of these types of costs on to our customers. In addition,our expense levels are based in large part on our investment plans andestimates of future revenues. Any increased expenses may precede or may not befollowed by increased revenues, as we may be unable to, or may elect not to,adjust spending in a timely manner to compensate for any unexpected revenueshortfall. As a result, we believe that period-to-period and year-to-yearcomparisons of our results of operations may not be meaningful.

OUR TECHNOLOGYPRODUCTS AND SERVICES ARE BASED ON OUR PROPRIETARY OPEN ADSTREAM PLATFORM, ANDOUR BUSINESS WOULD SUFFER IF OPEN ADSTREAM WAS DISRUPTED.

Open AdStream isour proprietary advertisement serving technology and serves as our soleadvertisement serving solution. We have incorporated a variety offunctionalities and modules into this platform, and

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our Media businessalso utilizes Open AdStream technology. We must, among other things, ensurethat the technology will continue to function efficiently at high volumes,interact properly with our database, offer the functionality demanded by ourcustomers and assimilate our sales and reporting functions. Customers maybecome dissatisfied by any system failure that interrupts our ability toprovide our services to them, including failures affecting our ability todeliver advertisements or report on advertisement delivery without significantdelay. Sustained or repeated system failures would reduce the attractiveness ofour solutions to advertisers, advertising agencies and Web publishers andresult in contract terminations, fee rebates and make-goods, thereby reducingour revenue.  Slower response time orsystem failures may also result from straining the capacity of our deployedsoftware or hardware due to an increase in the volume of advertising deliveredthrough our servers. To the extent that we do not effectively address anycapacity constraints or system failures, our business, results of operationsand financial condition could be materially and adversely affected.

OUR REVENUE COULDDECLINE IF WE FAIL TO EFFECTIVELY ACQUIRE AND MANAGE ADVERTISING INVENTORY.

Our successdepends in part on our ability to effectively obtain web publisher advertisinginventory and sell it to advertisers. The Web publishers that currently listtheir unsold advertising inventory with us, including a small number of largeWeb publishers that provide us with a sizable amount of inventory, are notbound by long-term contracts and can change the amount of inventory they makeavailable to us at any time. If a Web publisher reduces or cancels theadvertising space from its Web sites available to us, we may not be able tolocate replacement advertising space from other Web sites with comparabletraffic patterns and user demographics quickly enough to fulfill ouradvertisers’ requests. If we fail to manage our existing advertising spaceeffectively to anticipate or meet our customers’ changing requirements, ourrevenue could decline.

We expect that ourcustomers’ requirements will become increasingly sophisticated as the Webcontinues to mature as an advertising medium. Our growth depends on our abilityto attract and retain advertisers by providing high quality advertisinginventory with attractive demographics, innovative and quality content andlarge audiences. Our ability to provide such inventory is dependant on our capacityto screen out illegitimate or unreliable Web sites and attract and retaintrustworthy, quality Web publishers.  Webpublisher retention depends on a number of factors, some of which are beyondour control, including our ability to introduce new and innovative productlines and services, our ability to efficiently manage our existing advertisinginventory, our pricing policies and the cost-efficiency to Web publishers ofoutsourcing all or part of their advertising sales. In addition, the number ofcompeting intermediaries that purchase advertising inventory from Webpublishers continues to increase. The amount of our inventory may not increaseor even remain constant in the future, which could cause our advertisingrevenue to decline significantly.

WE COULD LOSECUSTOMERS OR ADVERTISING INVENTORY IF WE FAIL TO MEASURE IMPRESSIONS, CLICKSAND ACTIONS ON ADVERTISEMENTS IN A MANNER THAT IS ACCEPTABLE TO OUR ADVERTISERSAND WEB PUBLISHERS.

We earnadvertising revenue and make payments to Web publishers based on the number ofimpressions, clicks and actions from advertisements delivered on our network.Advertisers’ and Web publishers’ willingness to use our services and join ournetwork will depend on the extent to which they perceive our delivery of advertisementsand our measurements of clicks to be accurate and reliable. Advertisers and Webpublishers often maintain their own technologies and methodologies for countingclicks, and from time to time we have had to resolve differences between ourmeasurements and theirs or regarding over-delivery of advertising impressions.Further, search and media advertisers are paying much closer attention toallegations of click fraud — which can occur when a user intentionally clickson an

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advertisementdisplayed on a Web site for a reason other than to view the related content orwhere a “clickbot” software program is used to artificially inflate clickthroughs — in the industry generally and have become more willing to inquireabout or challenge click counts related to SEM and media services. Searchengine robots that are masked as valid browser agents could bypass industrystandard robot and spider lists and our filters and also cause artificialinflation in click results.  Anysignificant dispute over the proper measurement of clicks or other userresponses to advertisements could cause us to lose customers, advertisinginventory and revenue, could substantially reduce the gross profit margin wegenerate in our media and search businesses and could lead to a class action orother litigation.

WE ARE UNDERTAKINGSEVERAL GLOBAL INITIATIVES IN ORDER TO BETTER LEVERAGE OUR BUSINESS, AND OUREFFORTS MAY NOT BE SUCCESSFUL OR MAY NOT BE BENEFICIAL TO EACH OF THE OFFICESIN WHICH WE OPERATE.

In order torealign and better leverage our business we have commenced several globalinitiatives, including harmonizing our global product lines across the officesin which we operate, creating global standards for product management,development and marketing and implementing global databases for our salespersonnel, which we will continue during the remainder of 2006 and 2007. Inorder to synchronize our various offices and create a uniform worldwidebusiness model we will need to, among other things, set up uniform processes,formalize and build out training courses, set up global information sharing andcommunication processes, identify and track productivity and cost measurementsand identify areas of inefficiency and develop global recovery plans.  While we anticipate that the global realignmentwill have cost and efficiency savings for our business, there is no guaranteethat our global efforts will be successful over the long run. Additionally, theglobal business model that we implement for each of our business segments maynot be the ideal standard for each of our offices, and may result in increasedcosts and decreased savings for particular offices and lines of businessthroughout our organization.

CHANGES IN THEACCOUNTING RULES FOR STOCK-BASED COMPENSATION MAY ADVERSELY AFFECT OUROPERATING RESULTS, OUR STOCK PRICE AND OUR ABILITY TO ATTRACT AND RETAINEMPLOYEES.

We have a history of usingemployee stock options and other stock-based compensation to attract, motivateand retain our staff. In December 2004, the Financial Accounting StandardsBoard issued the revised SFAS No. 123(R), *Share-BasedPayment*, which required us, as of January 1, 2006, to measurecompensation costs for all stock-based compensation (including stock options)at fair value and to recognize these costs as expenses in our statements ofoperations. The recognition of these expenses in our statements of operationshas had a negative effect on our earnings per share since the adoption of SFASNo. 123(R) and is likely to have a negative effect on our earnings per share infuture periods, which could negatively impact our stock price. In addition, ifwe reduce or alter our use of stock-based compensation to minimize therecognition of these expenses, our ability to attract, motivate and retainqualified personnel may be impaired, which could be detrimental to ourbusiness.

OUR NET OPERATINGLOSS CARRYFORWARDS MAY BE LIMITED.

Due to the “changein ownership” provisions of the Internal Revenue Code, the availability of ournet operating loss and credit carryforwards may be subject to an annuallimitation against taxable income in future periods, which could substantiallylimit the eventual utilization of these carryforwards.

WE COULD BEADVERSELY AFFECTED BY AN IMPAIRMENT OF A SIGNIFICANT AMOUNT OF GOODWILL AND/ORINTANGIBLE ASSETS ON OUR BALANCE SHEET.

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In the course ofour operating history, we have acquired and disposed of numerous assets andbusinesses. Some of our acquisitions have resulted in the recording of asignificant amount of goodwill and/or intangible assets on our balance sheet.The goodwill and/or intangible assets were recorded because the fair value ofthe net assets acquired was less than the purchase price. We may not realizethe full value of the goodwill and/or intangible assets. As such, we evaluate onat least an annual basis whether events and circumstances indicate that all orsome of the carrying value of goodwill and/or intangible assets are no longerrecoverable, in which case we would write off the unrecoverable portion as acharge to our earnings.

To improve ouroperating performance, we may decide to acquire other assets or businessescomplementary to our business and, as a result, we may record additionalgoodwill and/or intangible assets on our balance sheet in the future. Thepossible write-off of the goodwill and/or intangible assets could negativelyimpact our future earnings. We will also be required to allocate a portion ofthe purchase price of any acquisition to the value of any intangible assetsthat meet the criteria specified in the Statement of Financial AccountingStandards No. 141, “*BusinessCombinations*,” such as marketing, customer or contract-basedintangibles. The amount allocated to these intangible assets could be amortizedover a fairly short period. As a result, our earnings and the market price ofour common stock could be negatively affected.

THE SUCCESS OF OUR24/7 REAL MEDIA SEARCH OPERATIONS DEPENDS ON A FEW SEARCH ENGINE DISTRIBUTIONPARTNERS, AND THE LOSS OF ONE OF THEM COULD RESULT IN A SUBSTANTIAL DECREASE INOUR SEARCH REVENUE.

We have generatedthe majority of our global Search revenue from clicks originating on Google andYahoo! Search Marketing, through relationships in many countries in which weoperate. We expect that these search engines will continue to generate amajority or more of our 24/7 Real Media Search revenue for the foreseeablefuture. The interruption, loss or deterioration of our relationship with Googleor Yahoo! would cause a significant decrease in our Search revenue. As a resultof consolidation among search engines, and other SEM companies, we could loseone or more of our clients or face increased competition from clients thatinternally develop or acquire capabilities similar to our service. In addition,as our search engine clients’ operations continue to evolve, we may be requiredto adjust our business strategy to maintain relationships with our clients. Theloss of, or a change in, one or more of these relationships could have amaterial adverse effect on our Search revenue.

OUR MAJOR BUSINESSPARTNERS MAY EXPERIENCE ADVERSE BUSINESS CONDITIONS THAT COULD ADVERSELY AFFECTOUR BUSINESS.

We have a jointventure with Dentsu to promote SEM services in Japan, the expansion of which werecently announced, a strategic business relationship with Lycos, we have majorsearch engine distribution partners, such as Google and Yahoo! SearchMarketing, and we may enter into similar relationships with other companies. Asubstantial portion of our revenue is, directly or indirectly, attributable tothese major relationships. If one or more of these companies experiencesadverse business conditions that may render them unable to meet ourexpectations for the strategic business relationship or to fulfill theircontractual obligations to us, such an event could have a material adverseimpact on our business, financial condition and results of operations.

IF WE LOSE ANY KEYPERSONNEL, OUR BUSINESS WILL BE ADVERSELY AFFECTED.

Our successdepends, to a significant extent, upon our senior management and key sales and technicalpersonnel, particularly our Chief Executive Officer, our Chief OperatingOfficer, our Chief Financial Officer and our Chief Technical Officer. Thecompetition for experienced and talented executives, senior

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managers andtechnical and sales personnel has become intense in our industry. The loss ofthe services of one or more of these persons, other similarly positionedmembers of management or other key personnel could materially and adverselyaffect our ability to develop our business.

IN ORDER TOCONTINUE TO OPERATE EFFICIENTLY AND TO GROW OUR BUSINESS, WE WILL NEED TOATTRACT AND RETAIN QUALIFIED PERSONNEL AND MANAGE OUR COSTS, WHICH WE MAY BEUNABLE TO DO.

Our successdepends on our ability to attract and retain qualified technical, sales and marketing,customer support, financial and accounting, and managerial personnel. We mayexpand our total workforce and will need to continue to attract qualifiedpersonnel in order to grow our business successfully. Additionally, as ourbusiness has escalated, we have increased our reliance on contractors andoutside firms for development. We may not be able to attract, integrate andretain the numbers and types of candidates that we desire, and we may not beable to retain our contractors and outside firms and may not be able to replacethem. Even if we are successful in attracting new staff and retaining existingstaff, we may not be able to increase revenue quickly enough to offset thecosts of the additional personnel or increased cost of retainingpersonnel.  Any of these contingenciescould cause our business to suffer.

We haveexperienced, are experiencing and may continue to experience, particulardifficulty in hiring and retaining qualified staff. Competition for staffthroughout all our business segments and geographies is very high, and trainingis difficult because the required skill set is complex and there is no industrystandard. If we are unable to attract, train and retain qualified staff, we maynot remain competitive in and could lose business and our customers, whichcould have an adverse effect on revenue.

OUR OPERATIONS AREVULNERABLE TO NATURAL DISASTERS AND OTHER EVENTS, INCLUDING TERRORIST ATTACKS,BECAUSE WE HAVE LIMITED BACKUP SYSTEMS.

We have limitedbackup systems and have experienced system failures and electrical outages fromtime to time in the past, which have disrupted our operations. We have alimited disaster recovery plan in the event of damage from fire, floods,typhoons, earthquakes, power loss, telecommunications failures, break-ins andsimilar events. Our operations are dependent on our ability to protect ourcomputer systems against these unexpected adverse events.

If any of theforegoing occurs, we may experience a complete system shutdown. Any businessinterruption insurance that we carry is unlikely to be sufficient to compensateus for loss of business in the event of a significant catastrophe.

In addition,interruptions in our services could result from the failure of ourtelecommunications providers to provide the necessary data communicationscapacity in the time frame we require. Our Open AdStream technology resides oncomputer systems located in our data centers housed by Equinix, Switch andData, and Savvis in the United States and Level 3 Communications in Europe.These systems’ continuing and uninterrupted performance is critical to oursuccess, as a substantial portion of the revenue depend on the continuingavailability of these systems. Despite precautions that we have taken,unanticipated problems affecting our systems have from time to time in the pastcaused, and in the future could cause, interruptions in the delivery of oursolutions. Our business, results of operations and financial condition could bematerially and adversely affected by any damage or failure that interrupts ordelays our operations. To improve the performance and to prevent disruption ofour services, we may have to make substantial investments to deploy additionalservers or one or more copies of our Web sites to mirror our online resources.Although we believe we carry property insurance with adequate coverage limits,our coverage may not be adequate to compensate us for all losses, particularlywith respect to loss of business and reputation that may occur.

 

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In addition,terrorist acts or acts of war may cause damage to our employees, facilities,clients, our clients’ customers and vendors, which could significantly impactour revenues, costs and expenses and financial position. The potential forfuture terrorist attacks, the national and international responses to terroristattacks or perceived threats to national security, and other acts of war orhostility have created many economic and political uncertainties that couldadversely affect our business and results of operations in ways that cannot bepresently predicted. We are predominantly uninsured for losses andinterruptions caused by terrorist acts and acts of war.

OUR NETWORKOPERATIONS MAY BE VULNERABLE TO HACKING, VIRUSES AND OTHER DISRUPTIONS, WHICH MAYMAKE OUR PRODUCTS AND SERVICES LESS ATTRACTIVE AND RELIABLE.

Internetusage could decline if any well-publicized compromise of security occurs. “Hacking”involves efforts to gain unauthorized access to information or systems or tocause intentional malfunctions or loss or corruption of data, software,hardware or other computer equipment. Hackers have made many attempts to breachthe security of our network operations, with minimal disruption to date. Ifhackers are successful in the future, they could misappropriate proprietaryinformation or cause substantial disruptions in our service. We may be requiredto expend capital and other resources to protect our Web site against hackers.Any measures we may take may not be effective. In addition, the inadvertenttransmission of computer viruses could expose us to a material risk of loss orlitigation and possible liability, as well as materially damage our reputationand decrease our user traffic.

WE DEPEND ONPROPRIETARY RIGHTS, AND WE FACE THE RISK OF INFRINGEMENT.

Our success andability to compete are substantially dependent on our internally developedtechnologies and trademarks, which we protect through a combination of patent,copyright, trade secret and trademark law. We own three patents in the UnitedStates, and have filed and intend to file additional patent applications in theUnited States. In addition, we apply to register our trademarks in the UnitedStates and internationally. Our patent applications and trademark applicationsmay not be approved. Even if they are approved, such patents or trademarks maybe successfully challenged by others or invalidated. If our trademarkregistrations are not approved because third parties own such trademarks, ouruse of such trademarks will be restricted unless we enter into arrangementswith such third parties that may be unavailable on commercially reasonableterms.

We generally enterinto confidentiality or license agreements with our employees, consultants andcorporate partners, and generally control access to and distribution of ourtechnologies, documentation and other proprietary information. Despite ourefforts to protect our proprietary rights from unauthorized use or disclosure,parties may attempt to disclose, obtain or use our solutions or technologies.The steps we have taken may not prevent misappropriation of our solutions ortechnologies, particularly in many foreign countries in which we operate, wherelaws or law enforcement practices may not protect our proprietary rights asfully as in the United States.

We have from timeto time licensed, and we may license in the future, elements of our trademarks,trade dress and similar proprietary rights to third parties. While we attemptto ensure that the quality of our brand is maintained by these businesspartners, such partners may take actions that could materially and adverselyaffect the value of our proprietary rights or our reputation. The value of ourproprietary rights could decline in the future since the validity,enforceability and scope of protection of certain proprietary rights inInternet-related industries is uncertain and still evolving.

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We have, from timeto time, been, and may in the future be, subject to claims of allegedinfringement of the trademarks and other intellectual property rights of thirdparties by us or by Web publishers with Web sites in our Web Alliance, or bycustomers who employ our Technology solutions. We may be required, or mayelect, to indemnify these parties against such claims. Such claims and anyresultant litigation could subject us to significant liability for damages andcould result in the invalidation of our proprietary rights. In addition, evenif we prevail, such litigation could be time-consuming and expensive to defend,and could result in the diversion of our time and attention, any of which couldmaterially and adversely affect our business, results of operations andfinancial condition. Any claims or litigation from third parties may alsoresult in limitations on our ability to use the trademarks and otherintellectual property subject to such claims or litigation unless we enter intoarrangements with the third parties responsible for such claims or litigation,which may be unavailable on commercially reasonable terms, if at all.

From time to time,we may selectively pursue claims of infringement of our patents and otherintellectual property rights by third parties. Such claims and any resultantlitigation present the risk that a court could determine, either preliminarilyor finally, that some of our patents or other intellectual property rights arenot valid, which may make it difficult to sell our technology solutions and maylead to a loss of and an inability to generate licensing revenue from ourpatents. In addition, even if we prevail, such litigation could betime-consuming and expensive to pursue, and could result in the diversion ofour time and attention, any of which could materially and adversely affect ourbusiness, results of operations and financial condition.

**RISKS RELATED TO OUR COMMON STOCK AND THE MARKETFOR OUR COMMON STOCK.**

THETRADING PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE HISTORICALLY AND MAYCONTINUE TO BE VOLATILE IN RESPONSE TO VARIOUS INTERNAL AND EXTERNAL FACTORS.

The trading price of ourcommon stock has been volatile historically and may continue to be unstable.For example, during the past twelve months, the closing sales price of ourcommon stock on the NASDAQ Global Market has ranged from a high of $11.61 pershare to a low of $5.62 per share. The trading price of our common stock mayfluctuate widely in response to various events and factors, some of which arebeyond our control, such as quarterly or annual variations in the operatingresults and stock price performance of the Company, our competitors or our businesspartners; announcements by us or our competitors of acquisitions, new orimproved products or services or business relationships; the initiation ordiscontinuation of coverage by securities analysts; guidance and reports bysecurities analysts, including changes in their financial earnings estimatesand recommendations; announcements about our earnings estimates or earningsthat are not in line with analyst expectations or prior Company guidance;announcements by our competitors about their earnings, especially if they arenot in line with analyst expectations; sales of stock by us or by ourstockholders; and new reports relating to trends in our markets and generaleconomic conditions.

In addition, the stockmarket in general, and the market prices for technology or Internet-relatedcompanies in particular, have experienced extreme price and volume fluctuationsthat have often been unrelated or disproportionate to the operating performanceof those companies. These broad market and industry fluctuations may negativelyimpact the market price for our common stock, regardless of our actualoperating performance. In the past, following periods of volatility in theoverall market and the market price of a company’s securities, securities classaction litigation has often been instituted against these companies. Thislitigation, if instituted against us, could result in substantial costs and adiversion of our management’s attention and resources. Additionally, volatilityor a lack of positive performance in 

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our stock price mayadversely affect our ability to retain key employees, all of whom have beengranted stock options or other equity-based awards.

WE HAVE A VERY SUBSTANTIALOVERHANG OF COMMON STOCK AND FUTURE SALES OF OUR COMMON STOCK WILL CAUSESUBSTANTIAL DILUTION AND MAY NEGATIVELY AFFECT THE MARKET PRICE OF OUR COMMONSTOCK.

As of September 30, 2006, there wereapproximately 49.2 million shares of our common stock outstanding. As of thatdate, we also had an aggregate of approximately 12.4 million shares ofcommon stock that may be sold into the market in the future, includingapproximately 7.7 million shares of our common stock issuable uponexercise of options, approximately 0.1 million shares of our common stockissuable upon the exercise of the warrants related to our preferred stock,approximately 2.4 million shares of our common stock issuable upon vesting ofrestricted shares, and approximately 2.2 million shares of our common stockissuable upon conversion of the debentures and exercise of the relatedwarrants. In addition, if we undertake an additional acquisition or financinginvolving securities convertible into shares of our common stock, the aggregatenumber of shares into which those securities are convertible will furtherincrease our overhang.

We cannot predictthe effect, if any, that future sales of shares of our common stock into themarket, or the availability of shares of common stock for future sale, willhave on the market price of our common stock. Sales of substantial amounts of commonstock (including the sale of securities convertible into shares of our commonstock), or the perception that such sales could occur, or the grant of a largenumber of options, may materially and adversely affect prevailing market pricesfor our common stock.

WE DISCLOSE PROFORMA INFORMATION, WHICH MAY EXCLUDE ITEMS THAT ARE IMPORTANT TO AN INVESTOR’SUNDERSTANDING OF OUR RESULTS OF OPERATIONS.

We prepare andrelease quarterly financial statements prepared in accordance with GAAP. Wealso disclose and discuss certain pro forma and other non-GAAP information inthe related earnings releases and investor conference calls. This pro formafinancial information excludes or may exclude certain special charges and othercosts. We believe the disclosure of the pro forma financial information helpsinvestors more meaningfully evaluate the results of our ongoing operations.However, we urge investors to carefully review the GAAP financial informationincluded as part of our Quarterly Reports on Form 10-Q, our Annual Reportson Form 10-K, and our quarterly earnings releases, and to compare the GAAPfinancial information to the pro forma financial results disclosed in ourquarterly earnings releases and investor calls.

OUR ABILITY TOGENERATE SUFFICIENT CASH FLOW TO REPAY OUR INDEBTEDNESS DEPENDS ON MANYFACTORS, SOME OF WHICH ARE BEYOND OUR CONTROL.

OnSeptember 26, 2003, we issued to a single holder $15.0 million inprincipal amount of our 2% subordinated convertible debentures dueSeptember 2006, subsequently extended to September 2009 at the election ofthe holder. On January 1, 2004, we began making semi-annual interest payments,which, thus far, we have elected to pay with cash flow from operations. We needto ensure that we have sufficient cash on hand to cover any portion of thebalance that we elect to pay in cash at maturity, or, if the holder elects toexercise its redemption right with respect to $7.5 million in principal amountof the debentures, any amount thereof that we elect to redeem in cash. Our abilityto generate cash flow is subject to economic, financial, competitive,regulatory and other factors beyond our control. If we are unable to generatesufficient cash flow to meet our debt service obligations, we may need to,among other things, seek additional financing, refinance or restructure ourdebt or reduce or issue a large amount of common stock, which, if possible,would be very dilutive or delay planned expenditures.

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THE TERMS OF THEDEBENTURES HAVE ANTI-DILUTION PROVISIONS FAVORING THE HOLDER, WHICH DISCOURAGEUS FROM ENGAGING IN TRANSACTIONS IN WHICH THE ISSUANCE OF COMMON STOCK MIGHT BEREQUIRED AND WHICH OTHERWISE MIGHT BE BENEFICIAL TO OUR BUSINESS.

The terms of thedebentures provide that, subject to certain exceptions, if, for financingpurposes, we issue or sell any shares of our common stock at a price less thanthe conversion price of the debentures, which is $8.75 per share of our commonstock, the conversion price of the debentures will be reduced to the price atwhich we issue new shares. This device, which is anti-dilutive for thedebenture holder, may discourage us from engaging in a transaction that mightotherwise be beneficial to our security holders, if we would be required toissue common stock at a price below $8.75 per share.

THE POWER OF OURBOARD OF DIRECTORS TO DESIGNATE AND ISSUE SHARES OF STOCK COULD HAVE AN ADVERSEEFFECT ON HOLDERS OF OUR COMMON STOCK.

Our Board ofDirectors is authorized to issue up to 350,000,000 shares of common stock forsuch consideration as they may consider sufficient, without seeking stockholderapproval. The issuance of additional shares of common stock in the future wouldreduce the proportionate ownership and voting power of current stockholders.Our Amended and Restated Certificate of Incorporation also authorizes our Boardof Directors to issue up to 10,000,000 shares of preferred stock, the rightsand preferences of which our Board of Directors may designate withoutstockholder approval. The designation and issuance of preferred stock in thefuture could create additional securities with dividend and liquidationpreferences prior in right of payment to the outstanding shares of commonstock.

EFFECTS OFANTI-TAKEOVER PROVISIONS COULD INHIBIT THE ACQUISITION OF OUR COMPANY.

Some of the provisionsof our Amended and Restated Certificate of Incorporation, our By-laws andDelaware law could, among other things, together or separately:

·                  discourage,delay or prevent potential acquisition proposals;

·                  discourage,delay or prevent transactions involving an actual or threatened change incontrol;

·                  impede theability of our stockholders to change the composition of our board of directorsin any one year; and

·                  limit the pricethat investors might be willing to pay for shares of our common stock.

These provisionsmay apply even if the action that is limited or prevented might be in the bestinterest of our shareholders.

WE DO NOT INTENDTO PAY FUTURE CASH DIVIDENDS.

We currently donot anticipate paying cash dividends on our common stock at any time in thenear future. We may never pay cash dividends or distributions on our commonstock. In addition, the terms of our debentures restrict our ability to paycash dividends on our common stock. Whether we pay cash dividends in the futurewill be at the discretion of our Board of Directors and will be dependent uponour 

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financialcondition, results of operations, capital requirements, contractualrestrictions and any other factors that the Board of Directors decides isrelevant.

**RISKSRELATED TO OUR INDUSTRY.**

OUR FAILURE TOCOMPETE SUCCESSFULLY MAY HINDER OUR GROWTH.

The markets forInternet advertising and related products and services are intenselycompetitive and such competition is expected to increase. Our failure tocompete successfully may hinder our growth. We believe that our ability tocompete depends upon many factors both within and beyond our control,including:

·                  the developmentof new online advertising media and methods;

·                  the timing andmarket acceptance of new products and enhancements of existing servicesdeveloped by us and our competitors;

·                  the ability toattract and retain qualified personnel;

·                  changing demandsregarding customer service and support;

·                  shifts in salesand marketing efforts by us and our competitors; and

·                  the ease of use,performance, price and reliability of our services and products.

Some of ourcompetitors have longer operating histories, greater name recognition, largercustomer bases and significantly greater financial, technical and marketingresources than ours. In addition, current and potential competitors haveestablished or may establish cooperative relationships among themselves or withthird parties to increase the ability of their products or services to addressthe needs of our prospective clients.  Inaddition, most online advertising companies are seeking to broaden theirbusiness models, so that companies that do not currently compete directly withus may decide to compete more directly with us in the future. We may be unableto compete successfully against current or future competitors.

CHANGES INGOVERNMENT REGULATION COULD DECREASE OUR REVENUES AND INCREASE OUR COSTS.

Laws andregulations directly applicable to Internet communications, commerce andadvertising are becoming more prevalent, and new laws and regulations are underconsideration by the United States Congress and state legislatures. Anylegislation enacted or restrictions arising from current or future governmentinvestigations or policy could dampen the growth in use of the Internetgenerally and decrease the acceptance of the Internet as a communications,commercial and advertising medium. State governments or governments of foreigncountries might attempt to regulate our transmissions or levy sales or othertaxes relating to our activities. The laws governing the Internet, however,remain largely unsettled, even in areas where there has been some legislative action.It may take years to determine whether and how existing laws such as thosegoverning intellectual property, privacy, libel and taxation apply to theInternet and Internet advertising. In addition, the growth and development ofInternet commerce may prompt calls for more stringent consumer protection laws,both in the United States and abroad, which may impose additional burdens oncompanies conducting business over the Internet. Our 

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business, resultsof operations and financial condition could be materially and adverselyaffected by the adoption or modification of laws or regulations relating to theInternet.

CHANGES INDOMESTIC OR INTERNATIONAL LAWS AND STANDARDS RELATING TO DATA COLLECTION ANDUSE PRACTICES AND THE PRIVACY OF INTERNET USERS, OR RELATED LITIGATION, COULDHARM OUR BUSINESS.

The U.S. federaland various state governments have recently proposed limitations on thecollection and use of information regarding Internet users. In 2004 and 2005,the U.S. Congress proposed several new pieces of legislation that would limitthe use of technologies deemed to be “spyware,” which some bills have definedto include cookies, Web beacons and javascript, which are required by ourproducts and services. The effectiveness of our Open AdStream products andservices could be significantly limited by federal and state regulationslimiting the collection or use of information regarding Internet users that areinconsistent with our policies and practices. Since many of the proposedfederal and state laws or regulations are being developed, we cannot yetdetermine the impact these regulations may have on our business. In addition,growing public concern about privacy and the collection, distribution and useof personal information has led to self-regulation of these practices by theInternet advertising and direct marketing industry, and to increased federaland state regulation.  Lastly, a numberof civil actions have been brought by federal and state authorities againstcompanies alleged to have distributed “spyware” without the proper consent ofusers. The Network Advertising Initiative, of which we are a member, hasdeveloped self-regulatory principles for online preference marketing. We arealso subject to various federal and state regulations concerning thecollection, distribution and use of personal information. These laws includethe Children’s Online Privacy Protection Act and state laws that limit orpreclude the use of voter registration and drivers license information, as wellas other laws that govern the collection and use of consumer creditinformation. While we monitor legislative initiatives, in the event that moreonerous federal or state laws or regulations are enacted or applied to us or toour clients, our business, financial condition and results of operations couldbe materially and adversely affected.

We also face risks associated with international data and privacyprotection. The interpretation and application of data protection laws inEurope and elsewhere are still uncertain and subject to change. It is possiblethat one or more of these laws may be interpreted and applied in a manner thatis inconsistent with our policies on data collection and use, or that new lawsmay be enacted that conflict with our data collection and use. If so, we couldbe subjected to fines, face increased compliance costs, be required to changeour data practices or be exposed to lawsuits, any one of which could have amaterial adverse effect on our business and results of operations.

PRIVACY CONCERNSMAY PREVENT US FROM COLLECTING USER DATA.

Growing concernsabout the use of cookies and data collection may limit our ability to developuser profiles. Web sites typically place small files of information, commonlyknown as “cookies,” on a user’s hard drive, generally without the user’sknowledge or consent. Cookie information is passed to the Web site through theInternet user’s browser software. Our Open AdStream technology enables the useof cookies and other non-personally-identifying information to deliver targetedadvertising and to limit the frequency with which an advertisement is shown toa user. Most currently available Internet browsers allow users to modify theirbrowser settings to prevent cookies from being stored on their hard drive, andMicrosoft Corporation changed the design and instrumentation of its Web browserto give users the option to accept or reject third-party cookies. A smallminority of users are currently choosing to prevent certain cookies. Users canalso delete cookies from their hard drive or modify them at any time. SomeInternet commentators and privacy advocates have suggested limiting oreliminating the use of cookies. Any reduction or limitation in the use ofcookies or increase in the number of users blocking cookies could limit theeffectiveness of our sales and marketing efforts and impair our profiling andtargeting 

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capabilities. Suchchanges also could adversely affect our ability to determine the reach ofadvertising campaigns sold and delivered by us and the frequency with whichusers of sites in the Web Alliance see the same advertisement.

If the use oreffectiveness of cookies is limited, we would likely have to switch to othertechnology that would allow us to gather demographic and behavioralinformation. While such technology currently exists, it is substantially lesseffective than cookies. Replacement of cookies could require significantengineering time and resources, might not be completed in time to avoidnegative consequences to our business, financial condition or results ofoperations, and might not be commercially feasible.

WE FACE RISKSASSOCIATED WITH TECHNOLOGICAL CHANGE.

The Internet andInternet advertising markets are characterized by rapidly changingtechnologies, evolving industry standards, frequent new product and serviceintroductions and changing customer demands. Our future success will depend onour ability to adapt to rapidly changing technologies and to enhance existingsolutions and develop and introduce a variety of new solutions to address our customers’changing demands. We may experience difficulties that could delay or preventthe successful design, development, introduction or marketing of our solutions.In addition, our new solutions or enhancements must meet the requirements ofour current and prospective customers and must achieve significant marketacceptance. Material delays in introducing new solutions and enhancements maycause customers to forego purchases of our solutions and purchase those of ourcompetitors.

In addition, the development of commercial softwareand technology that blocks, eliminates or otherwise screens out Internetadvertising may reduce the value of advertising inventory on our Web Allianceand the benefits of our technology solutions to our customers. We cannot guaranteethat a new commercial software or technology, for end-users or enterprises,will not be capable of eliminating a portion or all of the advertisementformats, including banners, pop-ups, pop-unders and other formats, that we utilizethrough our Web Alliance or that we currently deliver through our technologysolutions. To the extent that our customers refuse to pay for advertisementsthat are blocked, or if the use of blocking software exceeds our expectations,our business, results of operations and financial condition may be materiallyand adversely affected.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5.  OTHERINFORMATION

None.

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ITEM 6. EXHIBITS

**Exhibits**
|         |   |                                                                                                                                                                                   |
|--------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 31.1 |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.*                                                                                  |
|         |   |                                                                                                                                                                                   |
| Exhibit 31.2 |   | Certification of Chief Operating Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.*                                                                                  |
|         |   |                                                                                                                                                                                   |
| Exhibit 32.1 |   | Certification of Chief Executive Officer and Chief  Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.† |

________________________

*              Filed herewith.

†              Furnished herewith.

 

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** **

SIGNATURES

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.
|                        | 24/7 REAL MEDIA, INC. |
|------------------------|-----------------------|
| * *               | *(Registrant)*        |
| * *               | * *              |   |   |
| Date: November 9, 2006 | By:                   |   | /s/ DAVID J. MOORE |   |
|                   |                  |   | David J. Moore |
| * *               | * *              |   | Chairman and Chief Executive Officer*(Principal Executive Officer)* |

 

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