**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

**FORM10-Q**
| **x**                                                                                                                                                                                                                                      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                 | ** **                                                                                     |
| **For the  quarterly period ended March 31, 2007**                                                                                                                                                                                         |
| ** **                                                                                                                                                                                                                                 | ** **                                                                                     |
| **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**

**24/7REAL 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, NY** |   | **10001**                             |
| (Address of  principal executive offices)        |   | (Zip Code)                            |

 

**(212) 231-7100**

(Registrant’s telephone number, including area code)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes x  No o

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

| Large accelerated filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|--------------------------------|--------|---------------------------|--------|--------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o  No x

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

|        | **CLASS**                               | ** ** | ** ** | ** ** | **OUTSTANDING  AT March 31, 2007** | ** ** |
|--------|-----------------------------------------|------------|------------|------------|------------------------------------|------------|
|   | Common Stock,  par value $.01 per share |       |       |       | 50,998,632  Shares                 |       |

 

 

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

**March 31, 2007**

**FORM 10-Q**

**INDEX**
| Part I. Financial  Information                                                                                   |   |
|------------------------------------------------------------------------------------------------------------------|--------|
| Item 1. Condensed Consolidated Financial Statements                                                              |   |
| Condensed Consolidated Balance Sheets as of March 31,  2007 (unaudited) and  December 31, 2006                   | 3      |
| Condensed Consolidated Statements of Operations for  the three months ended  March 31, 2007 and 2006 (unaudited) | 4      |
| Condensed Consolidated Statements of Cash Flows for  the three months ended  March 31, 2007 and 2006 (unaudited) | 5      |
| Notes to Unaudited Interim Condensed Consolidated  Financial Statements                                          | 6      |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results  of Operations             | 19     |
| Item 3. Quantitative and Qualitative Disclosures about  Market Risk                                              | 31     |
| Item 4. Controls and Procedures                                                                                  | 31     |
|                                                                                                             |   |
| Part  II. Other Information                                                                                      |   |
| Item  1. Legal Proceedings                                                                                       | 33     |
| Item 1A. Risk Factors                                                                                            | 33     |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                             | 47     |
| Item 3. Defaults Upon Senior Securities                                                                          | 47     |
| Item 4. Submission of Matters to a Vote of Security  Holders                                                     | 47     |
| Item  5. Other Information                                                                                       | 47     |
| Item 6. Exhibits                                                                                                 | 48     |
| Signatures                                                                                                       | 49     |

 

Open AdStream®, InsightXE®, Insight ACT®, Open Advertiser®, 24/7 Search® and Decide DNA® areregistered trademarks, and 24/7 Real Media 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. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

**24/7 REAL MEDIA, INC.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(in thousands, except share data)**
| ** **                                                                                                                                  | ** ** | **March 31,** | ** ** | **December 31, ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                  | ** ** | **2007**           | ** ** | **2006**                    | ** ** |
| **ASSETS**                                                                                                                                  | ** ** | **(unaudited)**    | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                             |       |               |       |                        |       |
| Cash and cash  equivalents                                                                                                                  |       | $                  | 62,613     |                        | $          | 59,390 |   |
| Accounts  receivable, less allowances of $2,630 and $2,755, respectively                                                               |       | 53,988             |       | 55,490                      |       |
| Prepaid expenses  and other current assets                                                                                                  |       | 1,927              |       | 2,687                       |       |
|                                                                                                                                        |       |               |       |                        |       |
| Total current  assets                                                                                                                       |       | 118,528            |       | 117,567                     |       |
|                                                                                                                                        |       |               |       |                        |       |
| Property and equipment,  net                                                                                                                |       | 8,643              |       | 8,072                       |       |
| Goodwill                                                                                                                                    |       | 39,573             |       | 39,573                      |       |
| Intangible assets, net                                                                                                                      |       | 7,092              |       | 7,609                       |       |
| Investment in  unconsolidated subsidiaries                                                                                                  |       | 4,988              |       | —                      |       |
| Other assets                                                                                                                                |       | 3,674              |       | 3,837                       |       |
|                                                                                                                                        |       |               |       |                        |       |
| Total assets                                                                                                                                |       | $                  | 182,498    |                        | $          | 176,658 |   |
|                                                                                                                                        |       |               |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                              |       |               |       |                        |       |
| Current liabilities:                                                                                                                        |       |               |       |                        |       |
| Accounts payable                                                                                                                            |       | $                  | 29,671     |                        | $          | 31,981 |   |
| Accrued  liabilities                                                                                                                        |       | 24,336             |       | 19,961                      |       |
| Deferred revenue                                                                                                                            |       | 3,446              |       | 3,609                       |       |
| Subordinated  convertible debentures                                                                                                        |       | 7,500              |       | 7,500                       |       |
|                                                                                                                                        |       |               |       |                        |       |
| Total current  liabilities                                                                                                                  |       | 64,953             |       | 63,051                      |       |
|                                                                                                                                        |       |               |       |                        |       |
| Subordinated  convertible debentures                                                                                                        |       | 7,500              |       | 7,500                       |       |
| Other long-term  liabilities                                                                                                                |       | 626                |       | 776                         |       |
|                                                                                                                                        |       |               |       |                        |       |
| Total  liabilities                                                                                                                          |       | 73,079             |       | 71,327                      |       |
|                                                                                                                                        |       |               |       |                        |       |
| Commitments and  contingencies                                                                                                              |       |               |       |                        |       |
| Minority interests in  consolidated subsidiaries                                                                                            |       | 1,757              |       | 1,673                       |       |
|                                                                                                                                        |       |               |       |                        |       |
| 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; 50,998,632 and 49,778,970  shares issued and outstanding, respectively   |       | 510                |       | 498                         |       |
| Additional  paid-in capital                                                                                                                 |       | 1,215,499          |       | 1,210,046                   |       |
| Accumulated  other comprehensive income                                                                                                     |       | 2,109              |       | 2,090                       |       |
| Accumulated  deficit                                                                                                                        |       | (1,110,456         | )          | (1,108,976                  | )          |
| Total  stockholders’ equity                                                                                                            |       | 107,662            |       | 103,658                     |       |
|                                                                                                                                        |       |               |       |                        |       |
| Total liabilities and  stockholders’ equity                                                                                            |       | $                  | 182,498    |                        | $          | 176,658 |   |

 

See accompanying notes to unaudited interim condensed consolidatedfinancial statements.

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**24/7 REAL MEDIA, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(in thousands, expect share and per share data)**
| ** **                                                                                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                                                                                              | ** ** | **(unaudited)**                                      | ** ** | **(unaudited)** | ** ** |
| Revenues:                                                                                                               |       |                                                 |       |   |   |
| Media                                                                                                                   |       | $                                                    | 20,620     |   | $ | 18,230 |   |
| Search                                                                                                                  |       | 28,701                                               |       | 17,833 |   |
| Technology                                                                                                              |       | 8,342                                                |       | 6,878 |   |
| Total revenues                                                                                                          |       | 57,663                                               |       | 42,941 |   |
|                                                                                                                    |       |                                                 |       |   |   |
| Cost of revenues:                                                                                                       |       |                                                 |       |   |   |
| Media                                                                                                                   |       | 14,674                                               |       | 12,576 |   |
| Search                                                                                                                  |       | 22,599                                               |       | 13,092 |   |
| Technology(a)                                                                                                           |       | 1,780                                                |       | 1,599 |   |
| Total cost of  revenues                                                                                                 |       | 39,053                                               |       | 27,267 |   |
|                                                                                                                    |       |                                                 |       |   |   |
| Gross profit                                                                                                            |       | 18,610                                               |       | 15,674 |   |
|                                                                                                                    |       |                                                 |       |   |   |
| Operating expenses:                                                                                                     |       |                                                 |       |   |   |
| Sales and  marketing (a)                                                                                                |       | 8,316                                                |       | 7,985 |   |
| General and  administrative (a)                                                                                         |       | 7,075                                                |       | 11,298 |   |
| Product  development (a)                                                                                                |       | 2,636                                                |       | 2,758 |   |
| Amortization of  intangible assets and deferred financing costs                                                         |       | 742                                                  |       | 890 |   |
|                                                                                                                    |       |                                                 |       |   |   |
| Total operating  expenses                                                                                               |       | 18,769                                               |       | 22,931 |   |
|                                                                                                                    |       |                                                 |       |   |   |
| Loss from  operations                                                                                                   |       | (159                                                 | )          | (7,257 | ) |
|                                                                                                                    |       |                                                 |       |   |   |
| Interest income, net                                                                                                    |       | 584                                                  |       | 65 |   |
| Change in fair value of  warrant liability                                                                              |       | —                                               |       | (252 | ) |
| Other income (expense),  net                                                                                            |       | (13                                                  | )          | 110 |   |
|                                                                                                                    |       |                                                 |       |   |   |
| Income (loss) before  provision for income taxes and minority interest in operations of  consolidated subsidiary   |       | 412                                                  |       | (7,334 | ) |
|                                                                                                                    |       |                                                 |       |   |   |
| Provision for income  taxes                                                                                             |       | (398                                                 | )          | (230 | ) |
| Minority interest in  operations of consolidated subsidiary                                                             |       | (70                                                  | )          | 48 |   |
|                                                                                                                    |       |                                                 |       |   |   |
| Net loss                                                                                                                |       | $                                                    | (56        | ) | $ | (7,516 | ) |
|                                                                                                                    |       |                                                 |       |   |   |
| Basic and diluted net  loss per share                                                                                   |       | $                                               | —     |   | $  | (0.16 | ) |
|                                                                                                                    |       |                                                 |       |   |   |
| Weighted average shares outstanding used in basic and diluted net loss  per share                                       |       | 50,645,526                                           |       | 46,848,231 |   |

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(a)             Stock-basedcompensation included in the following expense categories:
| Cost of revenues           |   | $     | 124    |   | $      | 179   |   |
|----------------------------|--------|-------|--------|--------|--------|-------|--------|
| Sales and marketing        |   | 719   |   | 1,545  |   |
| General and administrative |   | 1,732 |   | 6,338  |   |
| Product development        |   | 220   |   | 977    |   |
|                       |   | $     | 2,795  |   | $      | 9,039 |   |

 

See accompanying notes to unaudited interim condensed consolidatedfinancial statements.

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**24/7 REAL MEDIA, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(in thousands)**
| ** **                                                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                                                                    | ** ** | **(unaudited)**                                      | ** ** | **(unaudited)** | ** ** |
| Cash flows from  operating activities:                                                        |       |                                                 |       |   |   |
| Net loss                                                                                      |       | $                                                    | (56        | ) | $ | (7,516 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities:              |       |                                                 |       |   |   |
| Depreciation and  amortization                                                                |       | 1,107                                                |       | 832 |   |
| Provision for doubtful  accounts and sales reserves                                           |       | 86                                                   |       | 459 |   |
| Amortization of  intangible assets and deferred financing costs                               |       | 742                                                  |       | 890 |   |
| Amortization of debt  discount                                                                |       | —                                               |       | 152 |   |
| Non-cash compensation                                                                         |       | 2,795                                                |       | 9,039 |   |
| Accrued interest on  notes payable                                                            |       | 74                                                   |       | 74 |   |
| Change in fair value of  warrant liability                                                    |       | —                                               |       | 252 |   |
| Minority interest in  operations of consolidated subsidiary                                   |       | 70                                                   |       | (48 | ) |
| Changes in operating  assets and liabilities, net of effect of acquisitions and dispositions: |       |                                                 |       |   |   |
| Accounts  receivable                                                                          |       | 1,416                                                |       | (3,693 | ) |
| Prepaid expenses  and other current assets                                                    |       | 760                                                  |       | (1,120 | ) |
| Other assets                                                                                  |       | (257                                                 | )          | 57 |   |
| Accounts payable  and accrued liabilities                                                     |       | 1,548                                                |       | 699 |   |
| Deferred revenue                                                                              |       | (163                                                 | )          | 277 |   |
|                                                                                          |       |                                                 |       |   |   |
| Net cash  provided by operating activities                                                    |       | 8,122                                                |       | 354 |   |
|                                                                                          |       |                                                 |       |   |   |
| Cash flows from  investing activities:                                                        |       |                                                 |       |   |   |
| Capital expenditures,  including capitalized software                                         |       | (2,431                                               | )          | (795 | ) |
| Investment in  unconsolidated subsidiary                                                      |       | (4,988                                               | )          | — |   |
|                                                                                          |       |                                                 |       |   |   |
| Net cash used in  investing activities                                                        |       | (7,419                                               | )          | (795 | ) |
|                                                                                          |       |                                                 |       |   |   |
| Cash flows from  financing activities:                                                        |       |                                                 |       |   |   |
| Proceeds from exercise  of stock options                                                      |       | 2,550                                                |       | 2,856 |   |
| Proceeds from note  receivable                                                                |       | 195                                                  |       | 200 |   |
| Payment of capital  lease obligations                                                         |       | (261                                                 | )          | (3 | ) |
| Cash paid for  acquisitions                                                                   |       | —                                               |       | (1,250 | ) |
|                                                                                          |       |                                                 |       |   |   |
| Net cash  provided by financing activities                                                    |       | 2,484                                                |       | 1,803 |   |
|                                                                                          |       |                                                 |       |   |   |
| Net change in  cash and cash equivalents                                                      |       | 3,187                                                |       | 1,362 |   |
| Effect of foreign  currency on cash                                                           |       | 36                                                   |       | 191 |   |
| Cash and cash  equivalents at beginning of year                                               |       | 59,390                                               |       | 40,009 |   |
|                                                                                          |       |                                                 |       |   |   |
| Cash and cash equivalents at end of period                                                    |       | $                                                    | 62,613     |   | $ | 41,562 |   |

 

See accompanying notes to unaudited interim condensed consolidatedfinancial statements.

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

24/7 Real Media, Inc., together with its subsidiaries,(the “Company”) provides online advertising and search engine marketing (“SEM”)strategies to meet the needs of a broad range of Web publishers and advertiserssince 1995.  As of March 31, 2007, the Company principally operated inNorth America, Europe, Asia and Australia and provided the following productsand services:

·                  *Media*, consisting of Web site representation servicesprovided through the Global Web Alliance, a global alliance of Web sitesrepresented by the Company, and web advertising services, through whichadvertisers can purchase ad inventory and run ad campaigns on the Global WebAlliance.

·                  *Search*, primarilyconsisting of managed search engine marketing services, including keyword bidmanagement and paid-inclusion services provided using the Company’s proprietaryDecide DNA technology, and Web site optimization services, each of which isdesigned to help advertisers promote their Web sites in or in association withrelevant search results displayed by search engines and to maximize theirsearch marketing budgets.

·                  *Technology*,**primarily consisting of the Company’s proprietary OpenAdStream (“OAS”) platform, the foundation of our proprietary onlineadvertisement delivery and management technology. The Company licenses the OASplatform to customers that host it locally on their servers and providesservices from software hosted centrally on its servers as an applicationservice provider.

**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, 2006, 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 to presentfairly the financial position and the results of the operations and cash flowsof the Company for the interim periods presented. The financial statements,financial data and other information disclosed in the notes to the consolidatedresults are not necessarily indicative of the results expected for the fullfiscal 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, 2006. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted pursuant to the rules and regulationsof the Securities and Exchange Commission (“SEC”).

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###### (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 short-termcommercial paper.

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

*Investmentsin Marketable Securities*

The Company classifies its investments in 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.

In accordance with SFAS No. 115 and Staff AccountingBulletin (“SAB”) No. 59, *Accounting for Non-CurrentMarketable Equity Securities*, the Company assesses, on an ongoingbasis, the need to record impairment losses on investments and records suchlosses when the impairment is determined to be other-than-temporary.

*Investments in Non-Marketable Equity Securities*

Investments in non-marketable equity securities ofentities in which the Company owns less than 20% and does not have the abilityto exercise significant influence are accounted for using the cost method. Theinvestments are at historical costs and are included as Investments inunconsolidated subsidiaries on the consolidated balance sheets.

Investments in non-marketable equity securities ofentities in which the Company has the ability to exercise significant influence,but does not own a majority equity interest or otherwise control the entity areaccounted for under the equity method and are included as Investments inunconsolidated subsidiaries on the

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consolidated balance sheets. The Company records itsshare of the results of these entities within equity earnings fromunconsolidated subsidiaries on the consolidated statements of operations.

The investments are subject to periodic impairmentreview. To the extent any impairment is considered other-than-temporary, theinvestment is written down to its fair value and the loss is recorded as otherincome (expense), net on the consolidated statements of operations.

(e) AccountsReceivable

Accountsreceivable are recorded at the invoiced amount net of allowance for doubtfulaccounts and sales allowance. The Company does not require collateral. TheCompany maintains 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.

As a normal partof the business, the Company has receivables that are invoiced in the month followingthe completion of the earnings process. All unbilled receivables are billedwithin 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 month periods ended March 31, 2007 or 2006.

Substantially allMedia revenue is generated from advertising inventory provided by partner Websites. Two of the Company’s partner Web sites collectively representedapproximately 31.8% and 30.4% of the Company’s Media revenue for the threemonth periods ended March 31, 2007 and 2006, respectively. Search revenue isgenerated from relationships with search engines, and substantially all Searchrevenue is derived from two such relationships. These arrangements areoften short-term or subject to termination upon short notice.

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

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(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, and discontinues capitalization when a product isavailable for general release to customers. Capitalized software is depreciatedusing the greater of the amount computed using (a) the ratio that current grossrevenues for a product bears to the sum of current and anticipated future grossrevenue for that product and (b) the straight-line method over the remainingestimated economic life of the software, 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.

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(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.

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

*Media*

Media revenue is generated from fees paid by clientadvertisers for the advertising impressions they purchase. The Companytypically offer advertisers a pricing model based on a cost-per-thousand impressions,or CPM, which enables an advertiser to pay a fee based on the number of timesits advertisement is displayed.  E-mailrelated revenue is derived from delivering advertisements to e-mail lists foradvertisers. Agreements are primarily short-term and revenue is recognized asservices are delivered, provided that no significant Company obligations remainoutstanding and collection of the resulting receivable is probable. The Companybecomes obligated to make royalty payments to Web sites and e-mail lists thathave contracted with the Company in the period the advertising impressions ore-mails are delivered. Such expenses are classified as cost of revenue in theaccompanying consolidated statements of operations.

*Search*

Search revenue isprimarily based on either a percentage of a client’s spend with the searchengines or cost-per-click, or CPC, fees paid by client advertisers. CPC feesare generated each time users click on Web site listings that the Companysubmitted into search engine databases and are directed to the clientadvertisers’ Web sites. Agreements are primarily short-term and revenue isrecognized as services are delivered, provided that no significant Companyobligations remain outstanding and collection of the resulting receivable isprobable. The Company becomes obligated to make payments to search engines thathave contracted with the Company in the period in which the clicks occur. Suchexpenses are classified as cost of revenue in the accompanying consolidatedstatements of operations.

When the Companyprovides search engine marketing services as an agent for a fixedcommission, or in other transactions in which it does not have principal riskand reward, the Company recognizes revenue on a net basis. To a lesser extent,the Company also generates revenue from fees paid by search engines that employthe Company to optimize the submission of Web site listings and report onadvertising campaigns for their advertisers. The Company typically charges afee based on a percentage of the revenue generated by the search engine fromadvertisers that have Web site listing submissions built and optimized by theCompany.

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*Technology*

Technology revenueis derived primarily from licensing of the Company’s software, hostedadvertisement serving, and software maintenance and technical support services.The Company recognizes revenue from advertisement serving hosted centrally onits servers upon delivery. The Company recognizes revenue from softwarelicensing agreements in accordance with SOP No. 97-2, *Software Revenue Recognition*, and SAB No.104, *Revenue Recognition*, upondelivery of the software, which is generally when the software is madeavailable for download, there is persuasive evidence of an arrangement,collection is reasonably assured, the fee is fixed or determinable, andvendor-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. The Company recognizes revenue from software maintenance and technicalsupport contracts ratably over the term of the agreement, which typically doesnot exceed one year.

Expenses relatedto the Company’s Technology revenue are primarily payroll costs incurred todeliver and support the software, and hosting, bandwidth and license fees paidto third-party software vendors. These expenses are classified as cost ofrevenue in the accompanying consolidated statements of operations.

*DeferredRevenue*

The Company defersrevenue billed or collected in advance of services being completed until theconclusion of the service period to which the advance billing or collectionrelates. Deferred revenue is 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 revenueprimarily consists of advance billings 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-basedcompensation related to awards granted prior to its adoption is expensed overthe remaining portion of the requisite service period using the same fair valuemeasurements which were used in calculating pro forma stock-based compensationexpense under SFAS No. 123. For awards granted on or after January 1, 2006,stock-based compensation is expensed over the requisite service period.

Prior to the adoption of SFASNo. 123R, the Company accounted for stock-based compensation using theintrinsic value method 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 is recognized based on the difference, if any, on thedate 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 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

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determining such estimates include timing of subleaserentals, estimates of sublease rental payment amounts and tenant improvementcosts, and estimates for brokerage and other related costs. The Companyperiodically evaluates and, if necessary, adjusts the estimates based oncurrently 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 equity instrument,asset or liability. Under the provisions of EITF 00-19, a contract designatedas an asset or a liability must be carried at fair value until exercised orexpired, with any changes in fair value recorded in the results of operations.A contract designated as an equity instrument must be included within equity,and no fair value adjustments are required. The Company reviews theclassification of its contracts at each balance sheet date.

(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 income (loss) per shareis presented 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 or loss available to common shareholders by the weightedaverage number of common shares outstanding for the period. Diluted EPSreflects the potential dilution that could occur if securities or othercontracts to issue common stock were exercised or converted into common stockand resulted in the issuance of common stock. Potential common shares consistof incremental common shares issuable upon the exercise of stock options andwarrants and the vesting of restricted stock (using the treasury stock method)and the conversion of subordinated convertible debentures and preferred stock(using the if-converted method).

Diluted EPS is equal to basic EPS for the three monthperiods ended March 31, 2007 and 2006 since all potentially dilutive securitiesare anti-dilutive. The computation of net loss per share for the three monthperiods ended March 31, 2007 and 2006 excludes outstanding options to purchase6.6 million and 8.8 million shares of common stock, respectively; 3.2 millionand 2.2 million shares of unvested restricted stock, respectively; 0.5 millioncommon stock warrants and 1.7 million shares of common stock related to thesubordinated convertible debentures, on an “as if” converted basis, as theeffect of the inclusion is anti-dilutive during such periods.

**NOTE 3 — GOODWILL AND INTANGIBLE ASSETS**

(a) Goodwill

The$39.6 million in goodwill at March 31, 2007 and December 31, 2006related $25.0 million to Decide, $12.0 million to 24/7 Real MediaKorea, $1.1 million to 24/7 Real Media (Canada) (formerly ClickThrough),$1.1 million to Real Media and $0.4 million to 24/7 Search (formerlyWebsite Results).

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(b) Intangible Assets, Net

The $7.1 million in intangible assets, net at March 31, 2007 related$4.7 million to Decide and $2.4 million to 24/7 Real Media Korea. The $7.6 million in intangibleassets, net at December 31, 2006 related $5.0 million to Decide and$2.6 million to 24/7 Real Media Korea.

**NOTE 4 — JOINT VENTURE PARTNERSHIPS**

*K.K.24-7 Search*

On September 5, 2005, the Company signed a jointventure agreement with Dentsu, Inc. to deliver search engine marketing (“SEM”)services to the Japanese market. The partnership, K.K. 24-7 Search, in whichDentsu owns a significant minority interest, simultaneously entered into anagreement to be the exclusive provider of SEM services to Dentsu’s extensiveclient base. Under the terms of the agreement, Dentsu will contribute itsextensive Japanese marketing industry knowledge and connections to the jointventure, and will consign to the joint venture all SEM services provided to itsclients. The Company will license its Decide DNA technology to the joint venture,as well as provide SEM expertise and operational management.

Upon inception, the Company made an initial investmentof $1.9 million, representing a 51% ownership interest in the joint venture,and therefore, has consolidated the financial results of the joint venture.Minority interest is presented separately on the consolidated balance sheetsand statements of operations.

*Denstu24/7 Search Holdings, B.V.*

On November 1, 2006, the Company and Dentsu expandedtheir search engine marketing partnership. Through the new holding company,Dentsu 24/7 Search Holdings, B.V., the Company and Dentsu will establish newoperations within other strategically important advertising markets throughoutAsia and the Pacific Rim, including China, India, Korea, Thailand and Taiwan.Under the terms of the agreement, the Company and Dentsu each provided initialcapital of $5.0 million, which will be used to fund operations in theidentified expansion countries. The Company shares controlling interest withDentsu and accordingly the investment is accounted for under the equity method.Under the equity method, the investment in the subsidiary is reflected in thefinancial statements at cost. The Company will record its share of the earningsof the subsidiary as equity earnings from unconsolidated subsidiary on thestatements of operations.

**N****OTE 5 — ACCOUNTING AND REPORTINGOF UNCERTAIN INCOME TAX POSITIONS**

Effective January 1, 2007, the Company adopted FIN No. 48 (“FIN 48”),Accounting for Uncertainty in Income Taxes. FIN No. 48 prescribes amore-likely-than-not threshold for financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.This interpretation also provides guidance on derecognition of income taxassets and liabilities, classification of current and deferred income taxassets and liabilities, accounting for interest and penalties associated withtax positions, accounting for income taxes in interim periods and income taxdisclosures.

Asa result of the implementation of FIN No. 48, the Company performed acomprehensive review of its portfolio of uncertain tax positions in accordancewith recognition standards established by FIN No. 48. In this regard, anuncertain tax position represents the Company’s expected treatment of a taxposition taken in a filed tax return, or planned to be taken in a future taxreturn, that has not been reflected in

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measuringincome tax expense for financial reporting purposes. As a result of this reviewthe Company recorded an estimated value of its uncertain tax positions byrecognizing additional liabilities, inclusive of penalties andinterest, totaling $1.4 million through a charge to accumulateddeficit.  The amount of unrecognized tax positions is includedin accrued liabilities on the consolidated balance sheet andincreased to $1.5 million as of March 31, 2007.  The Companydoes not believe there will be any material changes in our unrecognized taxpositions over the next 12 months.

Penaltiesand tax-related interest expense are reported as a component of income taxexpense.   The total amount of accrued income tax-relatedinterest and penalties was $0.3 million.  The liability for thepayment of interest and penalties did not materially change as of March 31,2007.

TheCompany files federal income tax returns, as well as multiple state, local andforeign jurisdiction tax returns. The income tax returns are subject toexaminations by tax authorities. A number of years may elapse before our taxpositions are audited and finally resolved. While it is often difficult topredict the final outcome or the timing of resolution of any particularuncertain tax position, the Company believes its reserves for income taxesreflect the most probable outcome. The Company adjusts these reserves, as well asthe related interest, in light of changing facts and circumstances. Theresolution of a matter would be recognized as an adjustment to its provisionfor income taxes in the period of resolution.

**NOTE 6 — 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) for the fifteen consecutive trading daysimmediately preceding the maturity date. If the Company elects to make interestpayments due under the Debentures in shares of its common stock, the interestconversion 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 listed)for the five consecutive trading days immediately preceding the interestpayment date. Interest expense on the Debentures amounted to approximately $0.1million for each of the three month periods ended March 31, 2007 and 2006.

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 March 31, 2007 is immaterial to the financialposition of the Company. The Company

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reviews the value of the derivative on a quarterlybasis, in accordance with SFAS No. 149, *Amendmentof Statement 133 on Derivative Instruments and Hedging Activities*.

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, which the Company valued at $1.8 million usinga Black-Scholes pricing model with the following factors: risk free interestrate of 1.48%, volatility of 143%, dividend yield of 0% and a life of2.5 years. The aggregate fair market value of the Warrants was reflectedas a reduction of the face amount of the Debentures on the consolidated balancesheet and was amortized over the initial term of the Debentures, using theeffective interest method. Accordingly, the carrying value of the Debentureswas increased over three years beginning October 2003. Pursuant to EITF IssueNo. 00-19, since the effective registration of the securities underlying thewarrants was an event outside the control of the Company, the Company recordedthe fair value of the warrants as long-term liabilities. In connection with theamendment to the registration rights agreement entered into during 2004, theCompany reclassified the fair value of the warrants, approximately $1.0million, on the amendment date to additional paid in capital. Interest expenseattributable to the amortization of the warrants amounted to approximately $0.2million for the three month period ended March 31, 2006.  The warrants were fully amortized atSeptember 30, 2006.

In connection with theissuance of the Debentures and Warrants, the Company incurred placement agentfees, legal fees and other expenses of approximately $1.2 million andissued warrants to the placement agent. The warrants to purchase 86,000 sharesof common stock at an exercise price of $10.068 are in the same form and on thesame terms and conditions as the Warrants issued to the investor. The Companyincluded the value of the warrants, approximately $0.4 million, using thefactors above, and the cash placement fees of $1.2 million in other assets onthe consolidated 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 of deferred costs are included in amortizationexpense for the three month period ended March 31, 2006. Deferred costs werefully amortized at September 30, 2006.

**NOTE 7****—****EQUITY**

*Additional Paid-in Capital*

*Duringthe three month period ended March 31, 2007, the Company’s additional paid-incapital increased by $5.5 million primarily due to $2.6 million in employeestock-based compensation, $2.5 million from exercise of stock options and $0.4million for stock issued for services and settlement of accrued expenses.*

**NOTE8****— STOCK PLANS AND STOCK-BASED COMPENSATION**

The Company maintains the 1998 Stock Incentive Plan,2001 Equity Compensation Plan, 2001 Stock Incentive Plan for Non-Officers, 2002Equity Compensation Plan, 2002 Stock Incentive Plan and plans assumed throughacquisitions which are collectively referred to as the “Stock Plans.” The StockPlans provide for the grant of any or all of the following types of awards: (i)stock options, including incentive and non-qualified stock options; (ii) stockappreciation rights, in tandem with stock options or free standing; and (iii)restricted stock to eligible participants. The awards must generally be pricedto be at least 85% of the fair market value of the Company’s common stock atthe date of the grant (100% in the case of incentive stock options). The vesting of these awards vary subject tothe participant’s period of future service or to the Company’s or the optionholder’s attainment of designated performance goals, or otherwise at thediscretion of the Board of Directors. The majority of the Company’s awards vestover three years.

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Effective January 1, 2006, the Company adoptedthe SFAS No. 123R, using the modified prospective transition method andtherefore has not restated prior periods’ results. Under the fair valuerecognition provisions of SFAS No. 123R, the Company recognizes stock-basedcompensation net of an estimated forfeiture rate, and therefore only recognizesstock-based compensation cost for those shares expected to vest over therequisite service period of the award. Stock-based compensation is included ineach expense category that includes salary expense. The Company recorded a fullvaluation allowance on the deferred tax asset related to stock-basedcompensation and therefore, no tax benefit is recognized.

Prior to the adoption of SFASNo. 123R, the Company accounted for awards using the intrinsic value methodunder APB Opinion No. 25 and FIN 44,**andaccordingly, only recognized stock-based compensation related to restrictedstock awards and accounted for forfeitures as they occurred. The Company alsocomplied with the disclosure provisions of SFAS No. 123 and SFAS No. 148.

*(a) StockOptions*

Compensation expense related to stock option awards totaled $0.6million and $1.6 million for the three month periods ended March 31, 2007 and2006, respectively. SFAS 123R requires forfeitures to be estimated at the timeof grant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from the initial forecast. For the three month period ended March 31,2007, the Company reversed approximately $0.2 million related to forfeitures.

*(b)  Restricted Stock*

The Company has entered into agreements to issue shares of restrictedstock to certain employees. The awards vest over various periods, generallythree years, contingent upon employment with the Company on the dates ofvesting. The restricted stock awards have a fair value equal to the respectivemarket price of the Company’s common stock at the date of grant. The restrictedstock awards require no payment from the employee and compensation cost isvalued based on the market price on the grant date and is expensed over thevesting period.

Compensation expense related to restricted stock awards totaled $2.0million and $7.3 million for the three month periods ended March 31, 2007 and2006, respectively. SFAS 123R requires forfeitures to be estimated at the timeof grant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from initial forecast. For the three month period ended March 31. 2007,the Company reversed approximately $0.4 million related to forfeitures.

**NOTE9 —****SUPPLEMENTAL CASH FLOW INFORMATION**

Approximately $0.8 millionof the cash paid for capital expenditures during the three month period endedMarch 31, 2007 related to assets capitalized as of December 31, 2006.

For each of the three monthperiods ended March 31, 2007 and 2006, the amount of cash paid for interest was$0.2 million.

Warrants to purchase 62,091shares of the Company’s common stock at an average price of $1.21 per sharewere exercised in the first quarter of 2006 in exchange for 53,884 shares ofthe Company’s common stock in cashless exercises of warrants.

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**NOTE10 — SEGMENTS**

The Company’s business iscomprised of three reportable segments: Media, Search and Technology. As aresult of the acquisition of Decide, the Company has been reporting Search as aseparate segment from Media. Management of the Company relies on an internalmanagement reporting process that provides revenue and segment operating income(loss) before depreciation, amortization, stock-based compensation,restructuring charges and impairment expense (“segment operating income (loss)”)for making financial decisions and allocating resources among segments. Segmentoperating income (loss) is an appropriate measure of evaluating the operationalperformance of the Company’s segments. However, this measure should beconsidered in addition to, and not as a substitute for, or superior to, income(loss) from operations or other measures of financial performance prepared inaccordance with GAAP. The Company has adjusted prior period segment disclosureto conform to the current presentation. The summarized segment information atand for the three month periods ended March 31, 2007 and 2006, is as follows:
| ** **                                                      | ** ** | **Three Month Period Ended March 31, 2007** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **Media**                                                                 | ** ** | **Search** | ** ** | **Technology** | ** ** | **Total** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**                                                   | ** ** |
| Revenues                                                        |       | $                                                                         | 20,620     |   | $ | 28,701 |   | $ | 8,342 |   | $ | 57,663 |   |
| Segment  operating income                                       |       | 875                                                                       |       | 679 |   | 2,931 |   | 4,485 |   |
| Depreciation                                                    |       | 190                                                                       |       | 140 |   | 777 |   | 1,107 |   |
| Amortization of  intangible assets and deferred financing costs |       | 336                                                                       |       | 380 |   | 26 |   | 742 |   |
| Income (loss) from  operations                                  |       | (380                                                                      | )          | (790 | ) | 1,011 |   | (159 | ) |
|                                                                 |            |                                                                           |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                      | ** ** | **Three Month Period Ended March 31, 2006** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **Media**                                                                 | ** ** | **Search** | ** ** | **Technology** | ** ** | **Total** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**                                                   | ** ** |
| Revenues                                                        |       | $                                                                         | 18,230     |   | $ | 17,833 |   | $ | 6,878 |   | $ | 42,941 |   |
| Segment  operating income                                       |       | 1,068                                                                     |       | 460 |   | 1,976 |   | 3,504 |   |
| Depreciation                                                    |       | 318                                                                       |       | 375 |   | 139 |   | 832 |   |
| Amortization of  intangible assets and deferred financing costs |       | 495                                                                       |       | 395 |   | 890 |   |   |   |
| Loss from  operations                                           |       | (2,415                                                                    | )          | (3,363 | ) | (1,479 | ) | (7,257 | ) |
|                                                            |       |                                                                      |       |   |   |   |   |   |   |
| **Total  assets: (1)**                                          |       |                                                                      |       |   |   |   |   |   |   |
| March 31, 2007                                                  |       | $                                                                         | 50,290     |   | $ | 66,485 |   | $ | 12,170 |   | $ | 128,945 |   |
| December 31, 2006                                               |       | 53,622                                                                    |       | 62,768 |   | 11,740 |   | 128,130 |   |

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(1)             Notinclusive of corporate segment assets of $53,553 and $48,528, respectively.
| ** **                                                | ** ** | **United**              | ** ** | **United**  | ** ** | **South** | ** ** | **Other —** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|-------------|------------|-----------|------------|-----------------------|------------|------------|------------|
| ** **                                                | ** ** | **States**              | ** ** | **Kingdom** | ** ** | **Korea** | ** ** | **International**     | ** ** | **Total**  | ** ** |
| ** **                                                | ** ** | **(in thousands)** | ** ** |
| Revenues for the  three month period ended March 31, 2007 |       | $                  | 20,892     |        | $     | 10,198    |       | $                | 9,299      |       | $     | 17,274 |   | $  | 57,663 |   |
| Long-lived  assets as of March 31, 2007                   |       | 16,191                  |       | 623         |       | 15,021    |       | 32,135                |       | 63,970     |       |
| Revenues for the  three month period ended March 31, 2006 |       | $                  | 18,004     |        | $     | 8,294     |       | $                | 6,065      |       | $     | 10,578 |   | $  | 42,941 |   |
| Long-lived assets as of  December 31, 2006                |       | 11,253                  |       | 675         |       | 15,150    |       | 32,013                |       | 59,091     |       |

 

**NOTE 11 — COMMITMENTS AND CONTINGENCIES**

(a) Commitments

*Lycos, Inc.Services Agreements*

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The Company pre-paid a total of $2.0 million of royalties to Lycosduring 2004 and 2005 and retained 25% of quarterly royalties due to Lycos untilthe date on which the full amount of pre-paid royalties has been recouped orotherwise paid in cash by Lycos.  As of December 31, 2006, the Company hada net amount of $0.5 million in prepaid royalties, all of which was recoupedduring the first quarter of 2007.

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 five year term of the agreement with Lycos.Amortization related to the transition fee was $0.2 million for each of thethree month periods ended March 31, 2007 and 2006. In accordance withSFAS No. 144, the Company periodically evaluates the recoverability ofthis asset.

*AcquisitionEarn-Out Liability*

At December 31, 2005, the Company had contingentobligations related to its acquisition of Decide. The former Decidestockholders could receive up to an additional $10.0 million, consistingof up to $2.5 million in cash and up to $7.5 million in common stock, subjectto achievement of earn-out targets relating to Decide’s operating performancein 2005. In March 2006, the Company paid $1.3 million and issued 0.4 millionshares of common stock related to the achievement of 2005 earn-out targetswhich were 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.

**NOTE12 —****SUBSEQUENT EVENTS**

On April 30, 2007,upon the agreement of the Company and Dentsu, K.K. 24-7 Search issuedadditional shares, as a result of which the Company and Dentsu now each own afifty percent interest in the joint venture. 

 

In April 2007, Dentsu24/7 Search Holding, B.V., the Company's expanded joint venture with Dentsu,opened its first office in Seoul, South Korea.

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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, and references to “Decide” refer to Decide Holdings Pty Limited.

### **GENERAL**

24/7 Real Media isa leading global digital marketing company, providing online advertising andsearch engine marketing (“SEM”) strategies to meet the needs of a broad rangeof Web publishers and advertisers since 1995. We work closely with our clientsto implement integrated solutions to sell and deliver advertising on Web sitesand manage online campaign planning, execution, measurement and analysis. Wesell our products and services worldwide from 20 sales locations in twelvecountries throughout North America, Europe, Asia and Australia.

 

We generaterevenue primarily through our three principal lines of business, Media, Searchand Technology. Our Media business help advertisers increase the reach of theirad campaigns through the Global Web Alliance, a group of affiliated Web siteswith brand names, quality content and a global scope, and sophisticatedcampaign targeting options within the Global Web Alliance. Our Search businessservices, which are powered by our proprietary Search software, Decide DNA(r),allow advertisers to maximize their SEM spending and achieve optimum returns ontheir investments. Through our Technology business, we provide onlineadvertisement serving, analytics and behavioral targeting services topublishers using our proprietary Open AdStream(r) (“OAS”) online advertisementdelivery and management software. Our Media and Search segments eachcontributed approximately 42% of our revenue in 2006, while our Technologysegment contributed approximately 16% to 2006 revenue. See Note 16 to theConsolidated Financial Statements for financial information about each of ourbusiness segments, including revenue, income (loss) from operations and totalassets, as well as revenue and long-lived asset information by geographic area.

 

We were organized under the laws of the State ofDelaware on January 23, 1998, and have been a publicly traded company sinceAugust 1998. Our corporate headquarters are located at 132 West 31st Street,New York, NY 10001, and our telephone number is (212) 231-7100. Our corporateWeb site address is www.247realmedia.com.

***Media***

Through our Global WebAlliance, an alliance of affiliated Web sites, we provide Web siterepresentation services to Web publishers seeking to increase advertisingrevenue from their Web sites and maximize revenue from their existingadvertising inventory. We represent Web sites with brand names, quality contentand global reach. By entering into revenue sharing agreements with us, ouraffiliated Web publishers allow us to sell their premium and under-utilizedadvertising inventory, as well as inventory that might otherwise go unsold toadvertisers, and we pay them a fixed royalty for the advertising inventory thatwe sell. We use OAS, our proprietary ad serving technology, to serveadvertisements on behalf of the Web sites in the Global Web Alliance.

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We sell ad inventory inthe Global Web Alliance to advertisers seeking to target broad or specificaudiences, build their brands and generate greater customer response andgreater return from their advertising spending. We generate Media revenue from fees paid by client advertisers foradvertising space. We typically sell advertising space on a cost-per-thousandimpressions (“CPM”) basis, enabling a client advertiser to pay a fee based onthe number of times its advertisement is displayed. We typically count anadvertising impression each time a user’s Web browser requests that ourcomputer servers transmit the advertisement. We may charge higher CPMs toadvertisers that purchase our advanced targeting solutions, such as ourbehavioral targeting solution, in comparison to those that purchase advertisingspace that requires less specific targeting. We have also generated limited Media revenue from e-mail advertisementand marketing services.

***Search***

We provide SEM servicesto advertisers using our proprietary Decide DNA technology through threemethods:  keyword bid management, whichinvolves auctioned bidding on search terms, or keywords, to ensure that a Web site’sadvertising shows up in a search engine’s sponsored listings, paid inclusion,which ensures that a Web site shows up in a search engine’s natural listings,and Web site search engine optimization, which involves improving a Web site’scontent and structure to improve the site’s rankings in the natural results ofa keyword search on a search engine.

We generate Search revenue for our keyword bidmanagement services and paid inclusion (“PI”) services by charging our clientseither based on a percentageof the client’s spend with the search engines or an agreed cost-per-click (“CPC”).CPC fees are generated each time search engine users click Web site listingssubmitted by us into search engine databases and are directed to our clientadvertisers’ Web sites. We typically generate revenue from Web siteoptimization by charging advertisers an initial fixed fee and a monthlymaintenance fee for our services.  To alesser extent we also generate revenue from fees paid by search engines for “trustedfeed generation”- building and optimizing advertiser Web site listings andreporting on advertising campaigns for their advertisers. We typically charge afee based on a percentage of the revenue generated by the search engine fromadvertisers that have Web site listing submissions built and optimized by us.

***Technology***

Through our proprietaryOAS advertisement delivery and management technology, we allow our customers toactively monitor and manage their advertising campaigns.  OAS fully integrates ad serving, as well asapplications that allow clients to perform analytics (campaign reporting,marketing intelligence and revenue information), behavioral and other targeting(targeting Web site visitors based on their online behavior), and management ofad campaign contracts in one piece of software.

Our OAS platform isavailable to customers from software hosted centrally on our servers (“OASCentral”) or from software hosted locally on the customers’ servers (“OAS Local”).  We license OAS Central to Web publishers andwe typically charge them a service fee determined by multiplying an agreed CPMby the number of advertising impressions served using OAS. We charge additionalfees to Web publishers that opt to purchase our analytics application andservice, our behavior targeting application and service or our contractmanagement services.  Service fees foruse of the analytics and behavioral targeting applications and services arecalculated by multiplying an agreed CPM by the number of page views measured bythe respective application, while fees for contract management are calculatedon the same basis as the associated OAS service fees.  We license OAS Local to Web publishers and wetypically charge them a license fee, a software maintenance and technicalsupport services fee and a training fee. We often base license fees on theforecasted number of advertising impressions a Web publisher will serve usingour software, the use of advanced software modules and the license term.

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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.

# **RESULTS OF OPERATIONS**

### Thefollowing table compares the results of operations for the three month periodended March 31, 2007 to the results of operations for the three month periodended March 31, 2006:

| ** **                                                             | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                                             | ** ** | **(unaudited)**                                      | ** ** | **(unaudited)** | ** ** |
| Revenues:                                                              |       |                                                 |       |   |   |
| Media                                                                  |       | $                                                    | 20,620     |   | $ | 18,230 |   |
| Search                                                                 |       | 28,701                                               |       | 17,833 |   |
| Technology                                                             |       | 8,342                                                |       | 6,878 |   |
| Total revenues                                                         |       | 57,663                                               |       | 42,941 |   |
|                                                                   |       |                                                 |       |   |   |
| Cost of  revenues:                                                     |       |                                                 |       |   |   |
| Media                                                                  |       | 14,674                                               |       | 12,576 |   |
| Search                                                                 |       | 22,599                                               |       | 13,092 |   |
| Technology                                                             |       | 1,780                                                |       | 1,599 |   |
| Total cost of revenues                                                 |       | 39,053                                               |       | 27,267 |   |
|                                                                   |       |                                                 |       |   |   |
| Gross profit                                                           |       | 18,610                                               |       | 15,674 |   |
|                                                                   |       |                                                 |       |   |   |
| Operating  expenses:                                                   |       |                                                 |       |   |   |
| Sales and marketing                                                    |       | 8,316                                                |       | 7,985 |   |
| General and administrative                                             |       | 7,075                                                |       | 11,298 |   |
| Product development                                                    |       | 2,636                                                |       | 2,758 |   |
| Amortization of intangible assets and deferred  financing costs        |       | 742                                                  |       | 890 |   |
|                                                                   |       |                                                 |       |   |   |
| Total operating expenses                                               |       | 18,769                                               |       | 22,931 |   |
|                                                                   |       |                                                 |       |   |   |
| Loss from operations                                                   |       | (159                                                 | )          | (7,257 | ) |
|                                                                   |       |                                                 |       |   |   |
| Interest income,  net                                                  |       | 584                                                  |       | 65 |   |
| Change in fair  value of warrant liability                             |       | —                                               |       | (252 | ) |
| Other income  (expense), net                                           |       | (13                                                  | )          | 110 |   |
|                                                                   |       |                                                 |       |   |   |
| Income (loss)  before provision for income taxes and minority interest |       |                                                 |       |   |   |
| in operations of  consolidated subsidiary                              |       | 412                                                  |       | (7,334 | ) |
|                                                                   |       |                                                 |       |   |   |
| Provision for  income taxes                                            |       | (398                                                 | )          | (230 | ) |
| Minority  interest in operations of consolidated subsidiary            |       | (70                                                  | )          | 48 |   |
|                                                                   |       |                                                 |       |   |   |
| Net loss                                                               |       | $                                                    | (56        | ) | $ | (7,516 | ) |

 

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**Revenues; Cost of Revenues andGross Profit**

*Media*

*Revenue*. Media revenuewas $20.6 million for the three months ended March 31, 2007, as compared to$18.2 million for the three months ended March 31, 2006. We generate Mediarevenue primarily from our Global Web Alliance. Global Web Alliance revenue was$20.2 million for the three month period ended March 31, 2007, as compared to$17.8 million for the three month period ended March 31, 2006, an increase of13.7%. The remaining Media revenue related to our e-mail services.

*Cost of Revenues*.****Mediacost of revenues consisted primarily of fees paid to Web publishers in theGlobal Web Alliance. Cost of revenues also included advertisement servingcosts, which are intercompany charges from our Technology segment based on afixed CPM.

*Gross Profit*. Gross profit increased $0.3 million or 5.2%, however, gross profitmargin decreased to 28.8% for the three month period ended March 31, 2007 from31.0% for the three month period ended March 31, 2006. The decrease in grossprofit margin was due to the increased contribution from regions with a lowergross profit percentage, particularly Korea, partially offset by an increase inthe percentage of revenue we keep from Web sites.  Advertisement serving costs were $0.6 millionand $0.4 million for the three month periods ended March 31, 2007 and 2006,respectively.

*Search*

*Revenue*. Search revenue was $28.7 million for the three month period endedMarch 31, 2007, as compared to $17.8 million for the three month period endedMarch 31, 2006, an increase of 60.9%. The increase was primarily due to an increase in the number of accountsunder management.

*Cost of Revenues*. Search cost of revenues consisted primarilyof fees paid to our search engines, which are calculated as a percentage ofrevenues for algorithmic search engines and a fixed CPC for pay-for-placementsearch engines.

*GrossProfit*. Gross profit increased $1.4 million or 28.7%; however,gross profit margins decreased to 21.3% for the three month period ended March31, 2007 from 26.6% for the three month period ended March 31, 2006.  The decrease in gross profit margin wasprimarily due to a decrease in margin in our managed SEM service offering as aresult 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 SEM service offering relative to otherSearch product offerings.

*Technology*

*Revenue*.****Technology revenue was$8.3 million for the three month period ended March 31, 2007, as compared to$6.9 million for the three month period ended March 31, 2006, an increase of21.3%. The increase primarily reflected expanded usage of OAS Central byexisting customers and the addition of new customers.

*Costof Revenues*. Technology cost of revenues consisted of costsfor hosting, bandwidth, third-party license and support fees, support andmaintenance of the infrastructure, and includes salaries and benefits ofrelated technical personnel, and is inclusive of stock-based compensation. Thecost of revenues is offset by intercompany fees charged to our Media segmentfor advertisement serving.

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*GrossProfit*. Gross profit increased $1.3 million or 24.3% andgross profit margin increased to 78.7% for the three month period ended March31, 2007 from 76.8% for the three month period ended March 31, 2006. Theincrease in the gross profit margin is due to lower stock-based compensationand leveraging increased revenue over the existing cost base as the cost ofadvertisement serving equipment and facilities is decreasing.

**Sales and Marketing Expenses**

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

Sales and marketing expenses were $8.3 million for the three monthperiod ended March 31, 2007 and $8.0 million for the three month period endedMarch 31, 2006. Excluding stock-based compensation, sales and marketing expensesincreased $1.2 million or 18.0%. The increase was primarily due to personnel-relatedcosts, increased commissions as a result of higher sales and an increase inmarketing activities. Excluding stock-based compensation, the expenses decreased as a percentage ofrevenue from 15.0% for the three month period ended March 31, 2006 to 13.2% forthe three month period ended March 31, 2007, as we continued to gain operatingleverage.

**General and Administrative Expenses**

General and administrative expenses consisted primarily ofcompensation and related expenses for executive and administrative personnel,costs related to leasing, maintaining and operating our facilities and systems,insurance, bad debts, fees for professional services, fees associated with thereporting and other obligations of a public company, depreciation and othergeneral and administrative costs.Fees for professional services included payments to external lawyers,accountants and other professionals in connection with operating our business,compliance and evaluating and pursuing new opportunities.

General and administrative expenses were $7.1 million for the threemonth period ended March 31, 2007 as compared to $11.3 million for the threemonth period ended March 31, 2006.  Thedecrease was primarily due to a decrease of $4.6 million in stock-basedcompensation. During the first quarter of 2006, an additional charge of $4.1million of stock-based compensation was recorded as result of market pricecontingent shares that vested during the quarter. Excluding stock-basedcompensation, general and administrative expense increased $0.4 million or7.7%. The increase was primarily due to increased depreciation due to theimprovement and expansion of our infrastructure, increased rent and utilitiesdue to the increase in office facilities and increased repairs and maintenancecosts related to our existing infrastructure. Excluding stock-based compensation, as a percentage of revenue, theexpenses decreased from 11.6% to 9.3% for the three month period ended March31, 2006 as compared to the three month period ended March 31, 2007.

**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 $2.6 million for the three monthperiod ended March 31, 2007 as compared to $2.8 million for the three monthperiod ended March 31, 2006. Excluding stock-based compensation, productdevelopment expense was $2.4 million for the three month period ended March 31,2007, as compared to $1.8 million for the three month period ended March 31,2006. The increase reflects our continued investment in the development andenhancement of our existing products and services, as well 

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as our exploration of new markets and product offerings. Excludingstock-based compensation, as a percentage of revenue, the expenses increasedfrom 4.1% for the three month period ended March 31, 2006 to 4.2% for the threemonth period ended March 31, 2007.

**Amortization of Intangible Assets and Deferred FinancingCosts**

Amortizationexpense related to intangible assets acquired with 24/7 Real Media Korea inJanuary 2004 and Decide in August 2004; deferred financing costs associatedwith our subordinated convertible debenture offering in September 2003; and atransition payment to Lycos, Inc. in connection with a strategic businessrelationship that we entered into in February 2004.

For the three month period ended March 31, 2007, amortization expenserelated $0.3 million to acquired technology, $0.2 million to other intangibleassets and $0.2 million to Lycos. For the three month period ended March 31,2006, amortization expense related $0.4 million to acquired technology, $0.2million to other intangible assets, $0.1 million to deferred financing costs,and $0.2 million to the transition payment to Lycos.

**Interest Income, Net**

Interestincome, net, was $0.6 million and $0.1 million for the three month period endedMarch 31, 2007 and 2006, respectively. Interest expense for the three monthperiods ended March 31, 2007 and 2006 was primarily related to interest paid incash on the subordinated convertible debentures that we issued on September 26,2003, the maturity date of which has been extended to September 2009, andinterest paid in cash on the capital lease obligations. Interest expense forthe three month period ended March 31, 2006 also included amortization of thewarrants that we issued with the debentures, which were fully amortized atSeptember 30, 2006. Interest income for both years was generated primarily fromour cash and cash equivalents.

**Change in Fair Value of Warrant Liability**

In connection with our preferred stock offering, we issued warrants toinvestors to purchase shares of our common stock. We agreed to register theshares issuable upon exercise of the warrants and agreed to pay penalties for adelayed filing or a failure to file a registration statement prior to theagreed deadline. We also agreed to pay penalties if the registration statementbecomes temporarily or permanently unavailable for use by the warrant holders.Pursuant to EITF 00-19, we reflected the value of the warrants as a warrantliability on our consolidated balance sheets and the liability is reclassifiedto equity upon exercise or conversion. The fair value of the outstandingwarrants is evaluated at each reporting period with any resulting change infair value reflected in the consolidated statements of operations.

Our requirement to maintain the registration statement expired duringSeptember 2006 and accordingly, the remaining liability at expiration date wasreclassified to equity.

The expense for the three month period ended March 31, 2006 was due toan increase in the fair market value of the warrants outstanding, whichincreased the corresponding liability. The increase in the fair market valuewas primarily due to the higher fair market value of our common stock at March31, 2006 compared to the fair market value of our common stock at December 31,2005.

**Other Income (Expense), Net**

Other income (expense), net for the three months ended March 31, 2007consisted primarily of realized foreign currency losses.

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Other income (expense), net for the three months ended March 31, 2006consisted of earn-out payments received in excess of amounts recorded, offsetby legal fees associated with a former subsidiary that we shut down andrealized foreign currency losses.

**Provision for Income Taxes**

Approximately $0.1 million of the increase inprovision for income taxes was driven by our higher pretax income.Approximately $1.0 million of the increase was due to an increase in theestimated value of our uncertain tax positions in accordance with FIN 48.

**Minority Interest in Operations of Consolidated Subsidiary**

Minority interest in operations of consolidated subsidiary representsthe percentage share of income or 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 three month periods ended March 31,2007 and 2006 were as follows (in thousands):

|                                            | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Net cash  provided by operating activities |       | $                                                    | 8,122      |   | $ | 354 |   |
| Net cash used in  investing activities     |       | $                                                    | (7,419     | ) | $ | (795 | ) |
| Net cash provided by  financing activities |       | $                                                    | 2,484      |   | $ | 1,803 |   |

 

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 $8.1 million and $0.4 million duringthe three month periods ended March 31, 2007 and 2006, respectively. Net cashprovided by operating activities is generally due to our net operating income(losses), adjusted for certain non-cash items included in our net operatingresults, as well as changes in various components of working capital,particularly fluctuations in accounts receivable.

Netcash used in investing activities was approximately $7.4 million for the threemonths ended March 31, 2007 and consisted of a $5.0 million investment inDentsu 24/7 Search Holdings, B.V., of which we own fifty percent and $2.4million for capital expenditures. Net cash used in investment activities wasapproximately $0.8 million during the three month period ended March 31, 2006and consisted of capital expenditures for operational purposes.

Cash provided by financing activities was $2.5 million in the threemonth period ended March 31, 2007 and consisted of $0.2 million of proceedsfrom the note receivable due from IMAKE and $2.6 million in proceeds from theexercise of common stock options offset by $0.3 million related to capitallease obligations. Financing activities provided $1.8 million in the threemonth period ended March 31, 2006 and consisted of $0.2 million of proceedsfrom the note receivable due from IMAKE, and $2.9 million from the exercise ofcommon stock options, offset by a $1.3 million earn-out payment related to the2004 acquisition of Decide.

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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 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 file federal income tax returns, as well as multiple state, localand foreign jurisdiction tax returns. The income tax returns are subject toexaminations by tax authorities. A number of years may elapse before our tax positionsare audited and finally resolved. While it is often difficult to predict thefinal outcome or the timing of resolution of any particular uncertain taxposition, we believe our reserves for income taxes reflect the most probableoutcome.

**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 March 31, 2007. Accordingly, we are not materially exposedto any financing, liquidity, market or credit risk that could arise if we hadengaged in such relationships.

Common stock warrants issued in conjunction with our subordinatedconvertible debentures are equity-linked derivatives and accordingly representoff-balance sheet arrangements.  In addition, the conversion andredemption features of the subordinated convertible debentures constitute anembedded derivative.  Some of the common stock warrants and the conversionand redemption features meet the scope exception in paragraph 11(a) of theStatement of Financial Accounting Standards No. 133, *Accounting for Derivative Instruments and HedgingActivities*(“SFAS 133”), and are accordingly not accounted for asderivatives for purposes of SFAS 133, but instead are accounted for asequity.  See note 6 to the consolidated financial statements for moreinformation.

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

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***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 informationavailable. These estimates, judgments and assumptions affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities at the dates of the consolidated financial statements and thereported amounts of 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:

**RevenueRecognition; 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 either a percentage of a client’sspend with the search engines or the CPC fees paid by client advertisers. CPCfees are generated each time users click on Web site listings that we submittedinto search engine databases and are directed to our client advertisers’ Websites. Agreements are primarily short-term and revenue is recognized asservices are delivered, provided that no significant obligations remainoutstanding and collection of the resulting receivable is probable. We becomeobligated to make payments to search engines that have contracted with us inthe period in which the clicks occur. Such expenses are classified as cost ofrevenue in the consolidated statements of operations. When we provide SEMservices as an agent for a fixed commission or in other transactions in whichwe do not have principal risk and reward, we recognize revenue on a net basis.To a lesser extent, we also generate revenue from fees paid by search enginesthat employ us to optimize the submission of Web site listings and report onadvertising campaigns for their advertisers. We typically charge a fee based ona percentage of the revenue generated by the search engine from advertisersthat have Web site listing submissions building and optimized by us.

*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 

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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.

***AccountsReceivable***

 

Accountsreceivable are recorded at the invoiced amount net of allowance for doubtfulaccounts and sales allowance. We do not require collateral.

 

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.

 

As a normal partof our business, we have receivables that are invoiced in the month followingthe completion of the earnings process. All unbilled receivables are billedwithin 30 days after each month-end.

***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 impairment in accordance with therequirements of SFAS 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*.  We assess theimpairment of goodwill and intangible assets in accordance with the provisionsof SFAS No. 142, *Goodwill and OtherIntangible Assets*.We determine the recoverability of the assets by comparing the carrying amountof the assets to net future cash flows that the assets are expected togenerate.  The impairment we recognize isthe amount by which the carrying amount exceeds the fair market value of theassets.

***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 

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assets areamortized on a straight-line basis over their estimated useful lives, which aregenerally two to seven years, except for trademarks that have an indefinitelife.

***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***

*Investmentsin Marketable Securities*

We classify our investments in marketable securitiesas available-for-sale in accordance with Statement of Financial AccountingStandards (“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.

In accordance with SFAS No. 115 and Staff AccountingBulletin (“SAB”) No. 59, *Accounting for Non-CurrentMarketable Equity Securities*, we assess, on an ongoing basis, theneed to record impairment losses on investments and record such losses when theimpairment is determined to be other-than-temporary.

*Investments in Non-Marketable Equity Securities*

We account for investments in non-marketable equitysecurities of entities in which we own less than 20% and do not have the abilityto exercise significant influence using the cost method. The investments are athistorical costs and are included as Investments in unconsolidated subsidiarieson the consolidated balance sheets.

Investments in non-marketable equity securities of entitiesin which we have the ability to exercise significant influence, but do not owna majority equity interest or otherwise control the entity are accounted forunder the equity method and included as Investments in unconsolidatedsubsidiaries on the consolidated balance sheets. We record our share of theresults of these entities within equity earnings from unconsolidatedsubsidiaries on the consolidated statements of operations.

Theinvestments are subject to periodic impairment review. To the extent anyimpairment is considered other-than-temporary, we write the investment down toits fair value and record the loss as other income (expense), net on theconsolidated statements of operations.

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***Stock-BasedCompensation***

Effective January 1,2006, we adopted SFAS No. 123R, using the modified prospective transitionmethod and therefore have not restated prior periods’ results. Under the fairvalue recognition provisions of SFAS No. 123R, we recognize stock-basedcompensation net of an estimated forfeiture rate and therefore only recognizestock-based compensation cost for those shares expected to vest over therequisite service period of the award. Prior to the adoption of SFAS No. 123R, we accounted for awards usingthe intrinsic value method under Accounting Principles Board (“APB”) OpinionNo. 25, *Accounting for Stock Issued to Employees*,and FASB interpretation No. 44, *Accounting for CertainTransactions Involving Stock Compensation — an interpretation of APB OpinionNo. 25,*and accordingly, only recognized stock-based compensationrelated to restricted stock awards and accounted for forfeitures as theyoccurred. We also complied with the disclosure provisions of SFAS No. 123, *Accounting for Stock-Based Compensation,*and SFAS No. 148, *Accounting for Stock-Based Compensation — Transition and Disclosure*.

Calculating stock-based compensation requires the input of highlysubjective assumptions, including the expected term of the stock-based awards,stock price volatility, and the pre-vesting options forfeiture rate. Weestimate the expected life of stock options granted based on the vesting periodof the awards and on historical exercise patterns, which we believe arerepresentative of future behavior. We estimate the volatility of our commonstock on the date of grant based on the historical volatility of the Company’scommon stock over a period equal to the expected life of the award, adjustedfor a historical trend. We selected the risk-free interest rate based on yieldsfrom United States Treasury zero-coupon issues for a term consistent withthe expected life of the awards in effect at the time of grant. We estimate theexpected forfeiture rate based on historical experience of our stock-basedawards that are granted, exercised and canceled.

***IncomeTaxes and Uncertain Income Tax Positions***

We account for income taxesusing the asset and liability method. Under this method, deferred tax assetsand liabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases, and operating loss and taxcredit carryforwards. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. The effecton deferred tax assets and liabilities of a change in tax rates is recognizedin results of operations in the period that the tax change occurs.

Effective January 1, 2007, we adopted FIN No. 48 (“FIN 48”), A*ccounting for Uncertainty in Income Taxes*. FIN No. 48prescribes a more-likely-than-not threshold for financial statement recognitionand measurement of a tax position taken or expected to be taken in a tax return.This interpretation also provides guidance on derecognition of income taxassets and liabilities, classification of current and deferred income taxassets and liabilities, accounting for interest and penalties associated withtax positions, accounting for income taxes in interim periods and income taxdisclosures.

**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 National Marketunder the symbol “TFSM.”  In June 2002,we transferred our common stock to the NASDAQ SmallCap Market, where itcontinued to trade under the same symbol. Our common stock was approved forre-listing on the NASDAQ National Market effective November 3, 2005, where itcontinues to trade under the symbol “TFSM.”

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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 ourinvestment activities is to preserve capital. Cash and cash equivalents areinvestments with original maturities of three months or less. Therefore,changes in the market’s interest rates do not affect the value of theinvestments as recorded by 24/7 Real Media.

*Foreign Currency Risk*

International revenuesaccounted for approximately 63.8% of our total revenues during the firstquarter of 2007, as compared to 58.1% of our total revenues during the firstquarter of 2006. 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, Japanese Yen, Korean Won, Canadian Dollars and AustralianDollars. The income statements of our international operations are translatedinto U.S. dollars at the average exchange rates in each applicable period. To theextent the U.S. dollar weakens against foreign currencies, the translation ofthese foreign currency denominated transactions results in increased revenues,operating expenses and net income for our foreign operations. Similarly, ourrevenues, operating expenses and net income will decrease for our internationalsegments when the U.S. dollar strengthens against foreign currencies. Realizedforeign currency transaction gains (losses) included in other income in theconsolidated statements of operations were immaterial for the quarters endedMarch 31, 2007 and 2006. We expect to use the assets denominated inforeign currencies for project execution expenditures in the currency in whichthey are held as the risk of realized translation losses is mitigated.

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 quartersended March 31, 2007 and 2006.

ITEM 4. CONTROLS AND PROCEDURES

*Evaluationof Disclosure Controls and Procedures*

As of the end of the period covered by this QuarterlyReport on Form 10-Q, we carried out an evaluation of the effectiveness of thedesign and operation of our disclosure controls and procedures (as defined inRules 13a-15(e) 15d-15(e) of the Securities Exchange Act of 1934, as amended(the “Exchange Act”)) under the supervision and with the participation of ourmanagement, including our Chief Executive Officer and Chief Operating Officer.Based on that evaluation, our Chief Executive Officer and Chief OperatingOfficer concluded that, as of the end of the period covered by this QuarterlyReport on Form 10-Q, our disclosure controls and procedures have been designedand are 

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being operated in amanner that provides reasonable assurance that the information required to bedisclosed in our Exchange Act reports is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms, andthat such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Operating Officer, asappropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, our managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and our management necessarily is required to apply itsjudgment in evaluating the cost-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 of 2002.As a result of the review, we have made improvements to the design andeffectiveness of our internal control through the three month period endedMarch 31, 2007.  We anticipate that improvements will continue to be made.

*DisclosureControls and Procedures*

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 evaluation, our ChiefExecutive Officer and Chief Operating Officer have concluded, as of March 31,2007, that the Company’s disclosure controls and procedures are effective toensure 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, or isreasonably likely to materially affect, our internal control over financialreporting.

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PARTII.  OTHER INFORMATION

ITEM 1.  LEGALPROCEEDINGS

Weare not involved in any material pending legal proceedings at this time, andmanagement is not aware of any contemplated material pending legal proceedingby any governmental authority.

ITEM 1A.  RISK FACTORS

**RISKS RELATED TO 24/7 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 and transitioningour customers onto the upgraded products. From time to time we upgrade andissue new releases of our existing technology to integrate new functionalitiesand respond to industry developments. For example, in 2006 we released newversions of our Decide DNA platform for search marketers and our OAS platformtargeted at publishers. 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 ourtechnology globally. In addition, we must ensure that the performance levelsand capacity of our technology remain steady when we release new versions toour customers and migrate customers onto new technology promptly. Any materialdelays in introducing or implementing a new release or migration 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, we sell our products and services into many additionalinternational markets, and we currently derive more than 60% of our revenuefrom non-U.S. markets. We have also begun to expand our operations in Asia andthe Pacific Rim through our expanded joint venture with Dentsu. To date, wehave limited experience in marketing, selling and distributing our solutionsinternationally in certain regions. Our international operations are subject toadditional risks, including:

·                  changesin regulatory requirements;

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

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·                  localstatutory liquidity requirements for businesses operating in certain foreigncountries;

·                  theneed to maintain cash balances to meet short-term capital requirements;

·                  operationsin foreign countries with higher tax rates than the United States;

·                  applicationof withholding taxes at a high rate on intercompany royalty and other payments;

·                  theinability to utilize certain foreign tax credits; and

·                  theinability to utilize some or all of losses generated in one or more foreigncountries;

·                  difficultiesand costs of staffing and managing foreign operations;

·                  reducedprotection for intellectual property rights in some countries;

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

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

·                  politicaland economic instability;

·                  fluctuationsin currency exchange rates; and

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

Any or all ofthese risks could affect our business outside of the United States andnegatively impact our results of operations.

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. InNovember 2006, we announced the planned expansion of our joint venture withDentsu to provide our SEM services throughout Asia and the Pacific Rim and weopened the first such office in Seoul, South Korea in April 2007. We maycontinue pursuing selective acquisitions of businesses, technologies andproduct lines and additional strategic ventures as a key component of ourgrowth strategy. If we are unable to enter into new strategic business venturesin the future, our ability to grow and adapt in our industry may be impairedand our revenue may suffer.

If we are ableacquire new companies or expand our business lines through strategic ventures,any such 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:

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·                  thedifficulty and cost of implementing new processes and procedures, integratingand assimilating any existing operations, technologies, products and personnel,and expanding, 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;

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

·                  theavailability of favorable acquisition or other financing for the venture; and

·                  thepotential loss of key senior managers or employees of any acquired business.

Our inability to successfully integrate any acquiredcompany, or failure to achieve any expected synergies of an acquisition orstrategic business venture, could adversely affect 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. Additionally, ourglobal Media business contracts for a substantial protion of its revenue in themonth in which it runs.

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:

·                  theaddition of new clients or the loss of existing clients;

·                  changesin fees paid to us by advertisers or publishers;

·                  changesin the amount of royalties payable by us to our Global Web Alliance affiliates;

·                  changesin the amount of our liability for our customers’ bad debt when we extendcredit to customers;

·                  theintroduction of new Internet marketing services by us or our competitors;

·                  variationsin the 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;

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·                  changesin results of operations brought about by newly acquired businesses orstrategic partnerships, the success of which may be difficult to predict;

·                  changesin governmental regulation of online marketing or other regulatoryrequirements;

·                  changesin accounting principles or any determination that one or more of the estimatesor assumptions underlying our financial statements is faulty; and

·                  generaleconomic conditions.

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, the search engines that we interface with in the provisionof our SEM services may impose additional charges on us for using theirtechnology interfaces to assist our clients. Our profit margins may suffer ifwe are unable to pass some of these types of costs on to our customers. Inaddition, our expense levels are based in large part on our investment plansand estimates of future revenues. Any increased expenses may precede or may notbe followed 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.

WE MAY HAVEINEFFICIENCIES IN OUR SEARCH BUSINESS MODEL OR MAY BE UNABLE TO CAPITALIZE ONCURRENT OR FUTURE SEARCH MARKETING TRENDS.

The searchindustry is still relatively new, competition is high and there are no setparameters among SEM providers as to how to run campaigns, track data orinclude more complex features, such as behavioral targeting. We are working todevelop set standards as our Search business grows, but our current strategiesmay not be successful in the long-run. As a result, it is difficult to predicthow our Search segment will perform in the future. For example, revenue in thesegment has increased significantly in recent periods, while margins havedecreased as our lower gross margin managed SEM services business performedbetter than other search areas. Further, we have and may continue to encounterinefficiencies, such as the under or over-delivery of campaigns due toprogramming difficulties or set-backs and tools that must be reconfigured orreplaced. Furthermore, our success in SEM is dependent in part on our abilityto develop and maintain good relationships with the major search engines, whoboth cooperate and compete with us for search clients, and who change therequirements as to how external software must interact with their software onan on-going basis and are unwilling to negotiate those terms and conditions.There is no guarantee that our current or future Search software and techniqueswill meet our clients’ needs and the demands of search engines, successfullymanage increasingly complex SEM campaigns or be profitable for our business.

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 our Media business alsoutilizes Open AdStream technology. We must, among other things, ensure that thetechnology will continue to function efficiently at high volumes, interactproperly with our database, offer the functionality demanded by our customersand assimilate our sales and reporting functions. Customers may becomedissatisfied by any system failure that interrupts our ability to provide ourservices to them, including failures affecting our ability to deliveradvertisements or report on 

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advertisementdelivery without significant delay. Sustained or repeated system failures wouldreduce the attractiveness of our solutions to advertisers, advertising agenciesand Web publishers and result in contract terminations, fee rebates andmake-goods, thereby reducing our revenue. Slower response time or system failures may also result from strainingthe capacity of our deployed software or hardware due to an increase in thevolume of advertising delivered through our servers. To the extent that we donot effectively address any capacity constraints or system failures, ourbusiness, results of operations and financial condition could be materially andadversely 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. There is competition for Web site inventory amongad networks, and a Web publisher can easily reduce or cancel the advertisingspace from its Web sites available to us and provide it to a competitor.  If this occurs, we may not be able to locatereplacement advertising space from other Web sites with comparable trafficpatterns and user demographics quickly enough to fulfill our advertisers’requests. If we fail to manage our existing advertising space effectively toanticipate or meet our customers’ changing requirements, our revenue coulddecline.

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 and ad agencies by providing high qualityadvertising inventory with attractive demographics, innovative and qualitycontent and large audiences. Our ability to provide such inventory is dependanton our capacity to screen out illegitimate or unreliable Web sites and attractand retain trustworthy, quality Web publishers. Web publisher retention depends on a number of factors, some of whichare beyond our control, including our ability to introduce new and innovativeproduct lines and services, our ability to efficiently manage our existingadvertising inventory, our pricing policies and the cost-efficiency to Webpublishers of outsourcing all or part of their advertising sales. In addition,the number of competing intermediaries that purchase advertising inventory fromWeb publishers 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 ofadvertisements and our measurements of clicks to be accurate and reliable.Advertisers and Web publishers often maintain their own technologies and methodologiesfor counting clicks, and from time to time we have had to resolve differencesbetween our measurements and theirs, or regarding over-delivery of advertisingimpressions. Further, search and media advertisers are paying much closerattention to allegations of click fraud and impression fraud.  Click fraud can occur when a user, manuallyor using a computer program (including internet “clickbots” or “zombie”computers)  intentionally clicks on anadvertisement displayed on a Web site for any reason other than a legitimateinterest in the related content. Impression fraud, a variant of click fraud, can occur when a user,either manually or using a computer program, searches multiple times on asearch engine for a keyword without clicking on the 

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results of thesearches. This can cause search engines to automatically disable the relevantkeywords, knocking out high bidders on the keywords and increasing the displayof advertisements for low bidders. As a result, search and media advertisershave become more willing to inquire about or challenge click counts related toSEM and media services. Search engine robots that are masked as valid browseragents could bypass industry standard robot and spider lists and our filtersand also cause artificial inflation in click results.  Any significant dispute over the propermeasurement of clicks or impressions or other user responses to advertisementscould cause us to lose customers, advertising inventory and revenue, couldsubstantially reduce the gross profit margin we generate in our media andsearch businesses and could lead to a class action or other 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 2007. In order tosynchronize our various offices and create a uniform worldwide business model wewill need to, among other things, set up uniform processes, formalize and buildout training courses, set up global information sharing and communicationprocesses, identify and track productivity and cost measurements and identifyareas of inefficiency and develop global recovery plans.  While we anticipate that the globalrealignment will have cost and efficiency savings for our business, there is noguarantee that our global efforts will be successful over the long run.Additionally, the global business model that we implement for each of ourbusiness segments may not be the ideal standard for each of our offices, andmay result in increased costs and decreased savings for particular offices andlines of business throughout 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 (“FASB”) issued the revised Statement of Financial Accounting Standards (“SFAS”)No. 123, *Share-Based Payment* (“SFAS No.123R”), which required us, as of January 1, 2006, to measure compensationcosts for all stock-based compensation (including stock options) at fair valueand to recognize these costs as expenses in our statements of operations. Therecognition of these expenses in our statements of operations has had anegative effect on our earnings per share since the adoption of SFAS No. 123Rand is likely to have a negative effect on our earnings per share in futureperiods, which could negatively impact our stock price. In addition, if wereduce or alter our use of stock-based compensation to minimize the recognitionof these expenses, our ability to attract, motivate and retain qualifiedpersonnel may be impaired, which could be detrimental to our business.

 

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 evaluateon at least an annual basis whether events and circumstances indicate that allor some of the carrying value of goodwill and/or intangible assets are nolonger recoverable, in which case we would write off the unrecoverable portionas a charge 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 SFAS No. 141, *Business Combinations*, such as marketing,customer or contract-based intangibles. The amount allocated to theseintangible assets could be amortized over a fairly short period. As a result,our earnings and the market price of our common stock could be negativelyaffected.

THE SUCCESS OF OURSEARCH OPERATIONS DEPENDS ON OUR RELATIONSHIPS WITH A SMALL NUMBER OF SEARCHENGINES, 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 with these search engines inmany countries in which we operate. We expect that these search engines willcontinue to generate a majority or more of our Search revenue for theforeseeable future. The interruption, loss or deterioration of our relationshipwith Google or Yahoo! would cause a significant decrease in our Search revenue.As a result of consolidation among search engines, and other SEM companies, wecould lose one or more of our clients or face increased competition fromclients that internally develop or acquire capabilities similar to our service.In addition, as our search clients’ operations continue to evolve, we may berequired to adjust our business strategy to maintain relationships with ourclients. The loss of, or a change in, one or more of these relationships couldhave a material 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, we have major search engine distribution partners, such asGoogle and Yahoo! Search Marketing, and we may enter into similar relationshipswith other companies. A substantial portion of our revenue is, directly orindirectly, attributable to these major relationships. If one or more of thesecompanies experiences adverse business conditions that may render them unableto meet our expectations for the strategic business relationship or to fulfilltheir contractual obligations to us, such an event could have a materialadverse impact 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 andtechnical personnel, particularly our Chief Executive Officer, our ChiefOperating Officer and Chief Financial Officer, our Chief Technical Officer andour Chief Infrastructure Officer. The competition for experienced and talentedexecutives, senior managers and technical and sales personnel has become 

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intense in ourindustry. The loss of the services of one or more of these persons, othersimilarly positioned members of management or other key personnel couldmaterially and adversely affect 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 andmarketing, customer support, financial and accounting, and managerialpersonnel. We may expand our total workforce and will need to continue toattract qualified personnel in order to grow our business successfully.Additionally, as our business has escalated, we have increased our reliance oncontractors and outside firms for development. We may not be able to attract,integrate and retain the numbers and types of candidates that we desire, and wemay not be able to retain our contractors and outside firms and may not be ableto replace them. Even if we are successful in attracting new staff andretaining existing staff, we may not be able to increase revenue quickly enoughto offset the costs 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 and could lose business and our customers, which couldhave 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 our revenue depends 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, WHICHMAY MAKE 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 Global Web Alliance,or by customers 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 National Market has ranged from a high of $11.61 pershare to a low of $6.75 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 ourbusiness partners; announcements by us or our competitors of acquisitions, newor improved 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-related companiesin particular, have experienced extreme price and volume fluctuations that haveoften been unrelated or disproportionate to the operating performance of thosecompanies. These broad market and industry fluctuations may negatively impactthe market price for our common stock, regardless of our actual operatingperformance. In the past, following periods of volatility in the overall marketand the market price of a company’s securities, securities class actionlitigation has often been instituted against these companies. This litigation,if instituted against us, could result in substantial costs and a diversion ofour management’s attention and resources. Additionally, volatility or a lack ofpositive 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 March 31, 2007, there wereapproximately 51.0 million shares of our common stock outstanding. As of thatdate, we also had an aggregate of approximately 12.0 million shares ofcommon stock that may be sold into the market in the future, includingapproximately 6.6 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 3.2 million shares of our common stock issuable upon vesting ofrestricted shares, and approximately 2.1 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 ofcommon stock (including the sale of securities convertible into shares of ourcommon stock), or the perception that such sales could occur, or the grant of alarge number of options, may materially and adversely affect prevailing marketprices for 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 any amendmentsthereto, and to compare the GAAP financial information to the pro formafinancial results disclosed in our quarterly earnings releases and investorcalls.

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. Ourability to 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 theprovisions of our Amended and Restated Certificate of Incorporation, ourBy-laws and Delaware 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;

·                  impedethe ability of our stockholders to change the composition of our board ofdirectors in any one year; and

·                  limitthe price that investors might be willing to pay for shares of our commonstock.

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:

·                  thedevelopment of new online advertising media and methods;

·                  thetiming and market acceptance of new products and enhancements of existing servicesdeveloped by us and our competitors;

·                  theability to attract and retain qualified personnel;

·                  changingdemands regarding customer service and support;

·                  shiftsin sales and marketing efforts by us and our competitors; and

·                  theease 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, including any legislation that does not have adequateprovisions to protect net neutrality, could dampen the growth in use of theInternet generally and decrease the acceptance of the Internet as acommunications, commercial and advertising medium. State governments orgovernments of foreign countries might attempt to regulate our transmissions orlevy sales or other taxes relating to our activities. The laws governing theInternet, however, remain largely unsettled, even in areas where there has beensome legislative action. It may take years to determine whether and how existinglaws such as those governing intellectual property, privacy, libel and taxationapply to the Internet and Internet advertising. In addition, the growth anddevelopment of Internet commerce may prompt calls for more stringent consumerprotection laws, both in the United States and abroad, which may imposeadditional burdens on companies conducting business over the Internet. Ourbusiness, results

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of operations andfinancial condition could be materially and adversely affected by the adoptionor modification of laws or regulations relating to the Internet.

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 founding member,has developed self-regulatory principles for online preference marketing. Weare also 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. There is alsothird-party software available that blocks the storage of cookies on a user’shard drive.  A small minority of usersare currently choosing to prevent certain cookies. Users can also deletecookies from their hard drive or modify them at any time. Some Internetcommentators and privacy advocates have suggested limiting or eliminating theuse of cookies. Any reduction or limitation in the use of cookies or increasein the number of users blocking cookies 

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could limit theeffectiveness of our sales and marketing efforts and impair our profiling andtargeting capabilities. Such changes also could adversely affect our ability todetermine the reach of advertising campaigns sold and delivered by us and thefrequency with which users of sites in the Global Web Alliance see the sameadvertisement.

If the use or effectivenessof cookies is limited, we would likely have to switch to other technology thatwould allow us to gather demographic and behavioral information. While suchtechnology currently exists, it is substantially less effective than cookies.Replacement of cookies could require significant engineering time andresources, might not be completed in time to avoid negative consequences to ourbusiness, financial condition or results of operations, and might not becommercially 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 ourcustomers’ changing demands. We may experience difficulties that could delay orprevent the successful design, development, introduction or marketing of oursolutions. In addition, our new solutions or enhancements must meet therequirements of our current and prospective customers and must achievesignificant market acceptance. Material delays in introducing new solutions andenhancements may cause customers to forego purchases of our solutions andpurchase those of our competitors.

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 Global WebAlliance and the benefits of our technology solutions to our customers. Wecannot guarantee that a new commercial software or technology, for end-users orenterprises, will not be capable of eliminating a portion or all of theadvertisement formats, including banners, pop-ups, pop-unders and otherformats, that we utilize through our Global Web Alliance or that we currentlydeliver through our technology solutions. To the extent that our customersrefuse to pay for advertisements that are blocked, or if the use of blockingsoftware exceeds our expectations, our business, results of operations andfinancial condition may be materially and 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

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None.

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

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*              Filed herewith.

†              Furnished herewith.

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SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                    | 24/7 REAL MEDIA, INC. |
|--------------------|-----------------------|
| * *           | *(Registrant)*        |
| * *           | * *              | * * |
| Date: May 10, 2007 | By:                   | /s/ DAVID J. MOORE |
|               |                  | David J. Moore |
| * *           | * *              | *Chairman and Chief Executive Officer  (Principal Executive Officer)* |

 

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