** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****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 June 30, 2006**                                                  |
| ** **                                                                                        |                                                          |
| **OR**                                                                                            |
| ** **                                                                                        |                                                          |
| **o**                                                                                             | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE** |
| ** **                                                                                        | **SECURITIES EXCHANGE ACT OF 1934**                           |
| ** **                                                                                        |                                                          |
| **For the transition period from           to** |

** **

**Commission File Number: 1-14355**

----

 

**24/7Real Media, Inc.**(Exact name ofregistrant as specified in its charter)

----

 
| **Delaware**                                          | **13-3995672**       |
|-------------------------------------------------------|----------------------|
| (State or other jurisdiction of                       | (I.R.S. Employer     |
| incorporation or organization)                        | Identification  No.) |
|                                                  |                 |
| **132 West 31****st Street, New York, New York** | **10001**            |
| (Address of principal executive offices)              | (Zip Code)           |

** **

**(212) 231-7100**(Registrant’stelephone number, including area code)

**None**(Former name, formeraddress and former fiscal year, if changed since last report)

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         AcceleratedFiler   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 June 30, 2006** |
|----------------------------------------|------------|-----------------------------------|
| Common Stock, par value $.01 per share |       | 48,867,185  Shares                |

 

 

----

**24/7 Real Media, Inc.FORM 10-Q****June30****, 2006INDEX**
| Part I.                                                                                                                 | Financial Information                                                                        |   | 3      |
|-------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------|--------|--------|
| Item 1.                                                                                                                 | Condensed  Consolidated Financial Statements                                                 |   | 3      |
| Condensed Consolidated Balance Sheets as of June 30,  2006 (unaudited)  and December 31, 2005                           |                                                                                         | 3      |
| Condensed Consolidated Statements of Operations for  the three and six months ended  June 30, 2006 and 2005 (unaudited) |                                                                                         | 4      |
| Condensed Consolidated Statements of Cash Flows for  the six months ended  June 30, 2006 and 2005 (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 |   | 21     |
| Item 3.                                                                                                                 | Quantitative  and Qualitative Disclosures about Market Risk                                  |   | 33     |
| Item 4.                                                                                                                 | Controls and  Procedures                                                                     |   | 33     |
|                                                                                                                    |                                                                                         |   |   |
| Part II.                                                                                                                | Other Information                                                                            |   | 35     |
| Item 1.                                                                                                                 | Legal Proceedings                                                                            |   | 35     |
| Item 2.                                                                                                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                 |   | 49     |
| Item 3.                                                                                                                 | Defaults Upon  Senior Securities                                                             |   | 49     |
| Item 4.                                                                                                                 | Submission of  Matters to a Vote of Security Holders                                         |   | 49     |
| Item 5.                                                                                                                 | Other Information                                                                            |   | 49     |
| Item  6.                                                                                                                | Exhibits                                                                                     |   | 49     |
| Signatures                                                                                                              |                                                                                         | 50     |

 

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

2

----

**PART I.  FINANCIALINFORMATION**

**ITEM 1. CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**24/7 REAL MEDIA,INC.CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except share data)**
| ** **                                                                                                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                           | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                                                           | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                           |       |              |       |                  |       |
| Current assets:                                                                                                                      |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                           |       | $                 | 46,695     |                  | $          | 40,009 |   |
| Accounts  receivable, less allowances of $2,942 and $2,306, respectively                                                             |       | 46,093            |       | 38,316                |       |
| Prepaid  expenses and other current assets                                                                                           |       | 3,066             |       | 2,369                 |       |
|                                                                                                                                 |       |              |       |                  |       |
| Total current  assets                                                                                                                |       | 95,854            |       | 80,694                |       |
|                                                                                                                                 |       |              |       |                  |       |
| Property and equipment,  net                                                                                                         |       | 8,024             |       | 7,131                 |       |
| Goodwill                                                                                                                             |       | 39,573            |       | 39,573                |       |
| Intangible assets, net                                                                                                               |       | 8,651             |       | 9,715                 |       |
| Other assets                                                                                                                         |       | 4,830             |       | 5,691                 |       |
|                                                                                                                                 |       |              |       |                  |       |
| Total assets                                                                                                                         |       | $                 | 156,932    |                  | $          | 142,804 |   |
|                                                                                                                                 |       |              |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                       |       |              |       |                  |       |
| Current liabilities:                                                                                                                 |       |              |       |                  |       |
| Accounts payable                                                                                                                     |       | $                 | 23,325     |                  | $          | 19,396 |   |
| Accrued  liabilities                                                                                                                 |       | 19,974            |       | 23,987                |       |
| Deferred revenue                                                                                                                     |       | 3,213             |       | 3,218                 |       |
| Subordinated  convertible debentures, 2%, due 2006                                                                                   |       | 14,847            |       | 14,542                |       |
|                                                                                                                                 |       |              |       |                  |       |
| Total current  liabilities                                                                                                           |       | 61,359            |       | 61,143                |       |
|                                                                                                                                 |       |              |       |                  |       |
| Warrant liability                                                                                                                    |       | 607               |       | 897                   |       |
| Other long-term  liabilities                                                                                                         |       | 1,026             |       | 489                   |       |
|                                                                                                                                 |       |              |       |                  |       |
| Total  liabilities                                                                                                                   |       | 62,992            |       | 62,529                |       |
|                                                                                                                                 |       |              |       |                  |       |
| Commitments and  contingencies                                                                                                       |       |              |       |                  |       |
|                                                                                                                                 |       |              |       |                  |       |
| Minority interests in  consolidated subsidiaries                                                                                     |       | 1,584             |       | 1,556                 |       |
|                                                                                                                                 |       |              |       |                  |       |
| Stockholders’  equity:                                                                                                          |       |              |       |                  |       |
| Preferred stock;  $.01 par value; 10,000,000 shares authorized; no shares issued and none  outstanding                               |       | —            |       | —                |       |
| Common stock;  $.01 par value; 350,000,000 shares authorized; 48,867,185 and 46,227,772  shares issued and outstanding, respectively |       | 489               |       | 462                   |       |
| Additional  paid-in capital                                                                                                          |       | 1,197,780         |       | 1,177,715             |       |
| Accumulated  other comprehensive income                                                                                              |       | 1,468             |       | 896                   |       |
| Accumulated  deficit                                                                                                                 |       | (1,107,381        | )          | (1,100,354            | )          |
| Total  stockholders’ equity                                                                                                     |       | 92,356            |       | 78,719                |       |
|                                                                                                                                 |       |              |       |                  |       |
| Total liabilities and  stockholders’ equity                                                                                     |       | $                 | 156,932    |                  | $          | 142,804 |   |

 

See accompanyingnotes to unaudited interim condensed consolidated financial statements.

3

----

**24/7 REAL MEDIA,INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except share and per share data)**
| ** **                                                                                                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                          | ** ** | **(unaudited)**                                     | ** ** | **(unaudited)**                                   | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
|                                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Revenues:                                                                                                           |       |                                                |       |                                              |       |   |   |   |   |
| Media                                                                                                               |       | $                                                   | 21,334     |                                              | $          | 16,684 |   | $ | 39,564 |   | $ | 30,913 |   |
| Search                                                                                                              |       | 19,745                                              |       | 11,710                                            |       | 37,578 |   | 21,332 |   |
| Technology                                                                                                          |       | 7,097                                               |       | 5,492                                             |       | 13,975 |   | 10,711 |   |
| Total revenues                                                                                                      |       | 48,176                                              |       | 33,886                                            |       | 91,117 |   | 62,956 |   |
|                                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Cost of revenues:                                                                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Media                                                                                                               |       | 14,442                                              |       | 11,327                                            |       | 27,018 |   | 20,954 |   |
| Search                                                                                                              |       | 14,794                                              |       | 7,747                                             |       | 27,886 |   | 14,379 |   |
| Technology  (inclusive of $66, $8, $245 and $15 of stock-based compensation,  respectively)                         |       | 1,470                                               |       | 1,185                                             |       | 3,069 |   | 2,184 |   |
| Total cost of  revenues                                                                                             |       | 30,706                                              |       | 20,259                                            |       | 57,973 |   | 37,517 |   |
|                                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Gross profit                                                                                                        |       | 17,470                                              |       | 13,627                                            |       | 33,144 |   | 25,439 |   |
|                                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Operating expenses:                                                                                                 |       |                                                |       |                                              |       |   |   |   |   |
|                                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Sales and  marketing (inclusive of $615, $86, $2,160 and $206 of stock-based  compensation, respectively)           |       | 7,237                                               |       | 5,817                                             |       | 15,221 |   | 11,227 |   |
| General and  administrative (inclusive of $1,859, $297, $8,198 and $632 of stock-based  compensation, respectively) |       | 7,046                                               |       | 5,285                                             |       | 18,345 |   | 10,204 |   |
| Product  development (inclusive of $287, $50, $1,263 and $101 of stock-based  compensation, respectively)           |       | 2,144                                               |       | 1,416                                             |       | 4,902 |   | 2,709 |   |
| Amortization of  intangible assets and deferred financing costs                                                     |       | 889                                                 |       | 1,139                                             |       | 1,779 |   | 2,279 |   |
| Restructuring  costs                                                                                                |       | —                                              |       | —                                            |       | — |   | 973 |   |
|                                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Total operating  expenses                                                                                           |       | 17,316                                              |       | 13,657                                            |       | 40,247 |   | 27,392 |   |
|                                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Income (loss)  from operations                                                                                      |       | 154                                                 |       | (30                                               | )          | (7,103 | ) | (1,953 | ) |
|                                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Interest income  (expense), net                                                                                     |       | 143                                                 |       | (54                                               | )          | 208 |   | (142 | ) |
| Change in fair value of  warrant liability                                                                          |       | 133                                                 |       | (110                                              | )          | (119 | ) | 40 |   |
| Recovery of investment                                                                                              |       | —                                              |       | —                                            |       | — |   | 2,100 |   |
| Impairment of  marketable securities                                                                                |       | —                                              |       | —                                            |       | — |   | (588 | ) |
| Gain on sale of  marketable securities                                                                              |       | —                                              |       | 7                                                 |       | — |   | 7 |   |
| Other income (expense),  net                                                                                        |       | 14                                                  |       | 6                                                 |       | 124 |   | (40 | ) |
|                                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Income (loss) before  provision for income taxes and minority interest in operations of  consolidated subsidiary    |       | 444                                                 |       | (181                                              | )          | (6,890 | ) | (576 | ) |
|                                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Benefit (provision) for  income taxes                                                                               |       | 88                                                  |       | (9                                                | )          | (142 | ) | (20 | ) |
| Minority interest in  operations of consolidated subsidiary                                                         |       | (43                                                 | )          | —                                            |       | 5 |   | — |   |
|                                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Net income (loss)                                                                                                   |       | 489                                                 |       | $                                                 | (190       | ) | $ | (7,027 | ) | $ | (596 | ) |
|                                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Dividends on preferred  stock                                                                                       |       | —                                              |       | (10                                               | )          |   |   | (22 | ) |
|                                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Net income (loss)  attributable to common stockholders                                                              |       | $                                                   | 489        |                                              | $          | (200 | ) | $ | (7,027 | ) | $ | (618 | ) |
|                                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Basic net income (loss)  per share attributable to common stockholders                                              |       | $                                                   | 0.01       |                                              | $          | — |   | $ | (0.15 | ) | $ | (0.01 | ) |
|                                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average shares  outstanding used in basic net  income (loss) per share                                     |       | 48,676,713                                          |       | 44,976,378                                        |       | 47,767,523 |   | 44,904,167 |   |
|                                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Diluted net income  (loss) per share attributable to common stockholders                                            |       | $                                                   | 0.01       |                                              | $          | — |   | $ | (0.15 | ) | $ | (0.01 | ) |
|                                                                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average shares outstanding used in diluted net income (loss) per share                                     |       | 53,556,036                                          |       | 44,976,378                                        |       | 47,767,523 |   | 44,904,167 |   |

 

See accompanying notes to unaudited interim condensed consolidatedfinancial statements.

4

----

**24/7 REAL MEDIA,INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)**
| ** **                                                                                    | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                                                    | ** ** | **(unaudited)**                                   | ** ** | **(unaudited)** | ** ** |
| Cash flows from  operating activities:                                                        |       |                                              |       |   |   |
| Net loss                                                                                      |       | $                                                 | (7,027     | ) | $ | (596 | ) |
| Adjustments to reconcile  net loss to net cash provided by operating activities:              |       |                                              |       |   |   |
| Depreciation and  amortization                                                                |       | 1,789                                             |       | 1,318 |   |
| Provision for doubtful  accounts and sales reserves                                           |       | 1,492                                             |       | 1,122 |   |
| Amortization of  intangible assets and deferred financing costs                               |       | 1,779                                             |       | 2,279 |   |
| Amortization of debt  discount                                                                |       | 305                                               |       | 305 |   |
| Non-cash compensation                                                                         |       | 11,866                                            |       | 954 |   |
| Accrued interest on  notes payable                                                            |       | —                                            |       | 149 |   |
| Change in fair value of  warrant liability                                                    |       | 119                                               |       | (40 | ) |
| Minority interest in  operations of consolidated joint venture                                |       | (5                                                | )          | — |   |
| Gain on sale of  marketable securities                                                        |       | —                                            |       | (7 | ) |
| Impairment of  marketable securities                                                          |       | —                                            |       | 588 |   |
| Recovery of investment                                                                        |       | —                                            |       | (2,100 | ) |
| Changes in operating  assets and liabilities, net of effect of acquisitions and dispositions: |       |                                              |       |   |   |
| Accounts receivable                                                                           |       | (9,269                                            | )          | (2,819 | ) |
| Prepaid expenses  and other current assets                                                    |       | (714                                              | )          | (164 | ) |
| Other assets                                                                                  |       | (53                                               | )          | (466 | ) |
| Accounts payable  and accrued liabilities                                                     |       | 4,077                                             |       | 1,557 |   |
| Deferred revenue                                                                              |       | (5                                                | )          | (304 | ) |
|                                                                                          |       |                                              |       |   |   |
| Net cash  provided by operating activities                                                    |       | 4,354                                             |       | 1,776 |   |
|                                                                                          |       |                                              |       |   |   |
| Cash flows from  investing activities:                                                        |       |                                              |       |   |   |
| Capital expenditures,  including capitalized software                                         |       | (1,637                                            | )          | (3,893 | ) |
| Recovery of investment                                                                        |       | —                                            |       | 2,100 |   |
| Proceeds from sale of  marketable securities                                                  |       | —                                            |       | 211 |   |
| Proceeds from sale / maturities  of short-term investments                                    |       | —                                            |       | 648 |   |
|                                                                                          |       |                                              |       |   |   |
| Net cash used in  investing activities                                                        |       | (1,637                                            | )          | (934 | ) |
|                                                                                          |       |                                              |       |   |   |
| Cash flows from  financing activities:                                                        |       |                                              |       |   |   |
| Proceeds from exercise  of stock options                                                      |       | 4,422                                             |       | 143 |   |
| Proceeds from note  receivable                                                                |       | 200                                               |       | — |   |
| Cash paid for  acquisitions                                                                   |       | (1,250                                            | )          | — |   |
| Payment of capital  lease obligations                                                         |       | (5                                                | )          | (16 | ) |
|                                                                                          |       |                                              |       |   |   |
| Net cash  provided by financing activities                                                    |       | 3,367                                             |       | 127 |   |
|                                                                                          |       |                                              |       |   |   |
| Net change in  cash and cash equivalents                                                      |       | 6,084                                             |       | 969 |   |
| Effect of foreign  currency on cash                                                           |       | 602                                               |       | (312 | ) |
| Cash and cash  equivalents at beginning of year                                               |       | 40,009                                            |       | 27,690 |   |
|                                                                                          |       |                                              |       |   |   |
| Cash and cash equivalents at end of period                                                    |       | $                                                 | 46,695     |   | $ | 28,347 |   |

 

See accompanying notes to unaudited interim condensed consolidatedfinancial statements.

5

----

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

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

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

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

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

**NOTE2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

#### (a)Basis of Presentation

The accompanyingcondensed consolidated financial statements include the accounts of the Companyand its majority-owned and controlled subsidiaries from their respective datesof acquisition. The interest of shareholders other than those of the Company isrecorded as minority interest in the accompanying consolidated statements ofoperations and consolidated balance sheets. When losses applicable to minorityinterest holders in a subsidiary exceed the minority interest in the equitycapital of the subsidiary, these losses are included in the Company’s results,as the minority interest holder has no obligation to provide further financingto the subsidiary. All significant intercompany transactions and balances havebeen eliminated in consolidation.

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

6

----

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

###### (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 on historicalexperience and on various other assumptions that are believed to be reasonable,the results of which form the basis for making judgments about the carryingvalues 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.

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

(d) Investments

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

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

7

----

(e) Accounts Receivable

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 monthfollowing the completion of the earnings process. All unbilled receivables arebilled within 30 days after each month-end.

(f) Concentrationof Credit Risk

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

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

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

(g) SignificantCustomers and Suppliers

No single customer accounted for greater than 10% ofnet revenues for the three or six month periods ended June 30, 2006 and 2005.

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

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

(h) Property andEquipment; Capitalized Software

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

8

----

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’sacquisitions are accounted for as purchase business combinations in accordancewith SFAS No. 141, *Business Combinations*,and SFAS No. 142, *Goodwill and Other Intangible Assets*.The Company allocates a portion of the purchase price to tangible andintangible assets based on their respective estimated fair values, and recordsas goodwill any remaining unallocated portion of the purchase price.  Intangible assets include trademarks,customer relationships, acquired technology and covenants not to compete. Suchintangible assets are amortized on a straight-line basis over their estimateduseful lives, which are generally two to seven years, except for trademarksthat have an indefinite life.

(j) Impairment of Long-Lived Assets

The Companyevaluates goodwill and indefinite lived intangible assets on an annual basisand whenever events or changes in circumstances indicate that the carryingamount may not be fully recoverable. Long-lived assets, including property and equipment, long-term assetsand amortizable intangible assets, are reviewed for impairment whenever eventsor changes in circumstances indicate that the carrying amount may not be fullyrecoverable. Conditions that would necessitate an impairment assessment includea significant decline in the observable market value of an asset, a significantchange in the extent to which or manner in which an asset is used, or asignificant adverse change that indicates that the carrying amount of an assetor group of assets is not recoverable. The Company assesses impairment inaccordance with the requirements of SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*. The Company assessesthe impairment of goodwill and intangible assets in accordance with theprovisions of SFAS No. 142, *Goodwill and OtherIntangible Assets*. The Company determines the recoverability of theassets by comparing the carrying amount of the assets to net future cash flowsthat the assets are expected to generate. The impairment recognized is theamount by which the carrying amount exceeds the fair market value of theassets.

(k) Income Taxes

The Company accounts for income taxes using theasset and liability method. Under this method, deferred tax assets andliabilities 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

9

----

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.

(l) Foreign Currency Translation

Assets and liabilities denominated in foreignfunctional currencies are translated at the exchange rate as of the balancesheet date. Revenues, costs and expenses denominated in foreign functionalcurrencies are translated at the weighted average exchange rate for eachperiod. Translation adjustments are recorded as a separate component ofstockholders’ equity. Gains or losses from foreign currency transactions areincluded in the consolidated statements of operations.

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

*Media*

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

*Search*

Search revenue isprimarily based on either a percentage of media spend or a cost-per-click, orCPC, fee model paid by client advertisers. These fees are generated each timeusers click on Web site listings that the Company submitted into search enginedatabases and are directed to our client advertisers’ Web sites. To a lesserextent, the Company also generates revenue from fees paid by search enginesthat employ the Company to optimize the submission of Web site listings andreport on advertising campaigns for their advertisers.  Agreements are primarily short-term andrevenues are recognized as services are delivered, provided that no significantCompany obligations remain outstanding and collection of the resultingreceivable is probable. The Company becomes obligated to make payments tosearch engine distribution partners that have contracted with the Company inthe period in which the clicks occur. Such expenses are classified as cost ofrevenues in the accompanying consolidated statements of operations.

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

*Technology*

Technologyrevenues are derived primarily from licensing of the Company’s software, hostedadvertisement serving and software maintenance and technical support services. The Company recognizes revenue fromadvertisement serving hosted centrally on its servers upon delivery.  Revenue from software licensingagreements is recognized in accordance with SOP No. 97-2, *Software Revenue Recognition*, and StaffAccounting Bulletin (“SAB”) No. 104, *RevenueRecognition*, upon delivery of the software, which is generally whenthe software is made available for download, there is persuasive evidence of an

10

----

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. Revenue from software maintenance and technical support contracts isrecognized ratably over the term of the agreement, which typically does notexceed one year.

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

*DeferredRevenue*

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

(n)Stock-Based Compensation

EffectiveJanuary 1, 2006, the Company adopted Statement of Financial AccountingStandards No. 123 (revised 2004) (“SFAS No. 123R”), “*Share-Based Payment*,” using the modifiedprospective transition method and accordingly prior periods have not beenrestated to reflect the impact of SFAS 123R. Under SFAS 123R, stock-basedawards granted prior to its adoption will be expensed over the remainingportion of their vesting period. These awards will be expensed using the samefair value measurements which were used in calculating pro forma stock-basedcompensation expense under SFAS 123. For stock-based awards granted on or afterJanuary 1, 2006, the Company will amortize the stock-based compensation overthe requisite service period. The Company determines the fair value of theseawards using the Black-Scholes option pricing model.

Prior to January 1, 2006, the Company accountedfor stock-based employee compensation arrangements in accordance withprovisions of Accounting Principles Board (“APB”) Opinion No. 25, “*Accounting for Stock Issued to Employees,*” and FinancialAccounting 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, “*Accountingfor Stock-Based Compensation*” and SFAS No. 148, “*Accounting for Stock-Based Compensation—Transition and Disclosure*.”Under APB No. 25, compensation cost is recognized based on the difference,if any, on the date of grant between the fair value of the Company’s commonstock and the amount 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 determiningsuch estimates include timing of sublease rentals, estimates of sublease rentalpayment amounts and tenant improvement costs, and estimates for brokerage andother related costs. The Company periodically evaluates and, if necessary,adjusts the estimates based on currently available information.

(p) Warrant Liability

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

11

----

(q) Advertising Costs

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

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

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

The computation of diluted net income per share forthe three month period ended June 30, 2006 excludes outstanding options ofapproximately 0.2 million to purchase shares of common stock, the effects of0.4 million shares issuable upon the exercise or conversion of common stockwarrants and the effects of 1.7 million shares of common stock, related tosubordinated convertible debentures, on an “as-if” converted basis, as the effectof their inclusion would have an antidilutive effect.  For the six month period ended June 30, 2006,diluted EPS is equal to basic EPS since all potentially dilutive securities areantidilutive. The computation excludes outstanding options of approximately 8.3million to purchase shares of common stock, 2.3 million shares of unvestedrestricted stock, the effects of 0.5 million shares issuable upon the exerciseor conversion of common stock warrants, and the effects of 1.7 million sharesof common stock, related to subordinated convertible debentures, on an “as-if”converted basis, as the effect of their inclusion would have an antidilutiveeffect.

Diluted EPS is equal to basic EPS for the three andsix month period ended June 30, 2005 since all potentially dilutive securitiesare antidilutive. The computation of net loss per share for the three and sixmonth periods ended June 30, 2005 excludes outstanding options of 7.9 millionto purchase shares of common stock, the effects of 0.6 million shares issuableupon the exercise or conversion of common stock warrants, 0.4 million sharesissuable upon the conversion of preferred stock, 1.7 million shares issuableupon the conversion of the subordinated convertible debentures, and 0.9 millionshares of unvested restricted stock, since their inclusion would have anantidilutive effect.

(s) Recent Accounting Pronouncements

In June 2006, the FASB issued InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes—anInterpretation of FASB Statement No. 109* (FIN 48), whichclarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with SFAS 109, *Accounting for Income Taxes*. FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition. FIN 48 is effective for fiscal years beginningafter December 15, 2006. The Company has not completed its evaluation ofthe impact of the adoption of FIN 48.

**NOTE 3 — BALANCE SHEET COMPONENTS**

(a) Goodwill

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

(b) Intangible Assets, Net

12

----

The $8.7 million in intangible assets, net at June 30, 2006 related$5.8 million to Decide and $2.9 million to 24/7 Real Media Korea. The $9.7million in intangible assets, net at December 31, 2005 related $6.6 million toDecide and $3.1 million to 24/7 Real Media Korea.

**NOTE 4 — RESTRUCTURING COSTS**

TheCompany’s restructuring reserve related to office closing costs decreased from$1.2 million at December 31, 2005 to $1.0 million at June 30, 2006.  The amount is included in accrued liabilitiesin the consolidated balance sheet.

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

OnSeptember 26, 2003, the Company completed the placement to aninstitutional accredited investor of $15.0 million of subordinatedconvertible debentures due September 2006 (“Debentures”). The Debenturesare convertible into shares of the Company’s common stock at $8.75 per share.Interest on the Debentures at the rate of 2% has been due semi-annually as ofJanuary 2004. The investor also acquired a five-year warrant (the “Warrants”)to purchase 0.4 million shares of the Company’s common stock at $9.5685 pershare.

The maturity date of the Debentures is subject toextension, and the conversion price is subject to adjustment, on the terms andconditions set forth in the Debentures. In addition, on the maturity date theCompany may elect to pay the principal of and interest on the Debentures incash, shares of its common stock or a combination of cash and shares of itscommon stock. If the Company elects to pay all or a portion of the principalamount due under the Debentures at maturity in shares of its common stock,rather than in cash, the maturity date conversion price will be equal to 90% ofthe average of the daily volume-weighted average prices of the Company’s commonstock on the NASDAQ Global Market (or such other market on which the commonstock are then listed or quoted) for the fifteen consecutive trading daysimmediately preceding the maturity date. The Company may elect to make interestpayments on the Debentures in cash or shares of its common stock.  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 listedor quoted) for the five consecutive trading days immediately preceding theinterest payment date. Interest expense on the Debentures amounted toapproximately $0.1 million and $0.2 million for the three and six monthperiods ended June 30, 2006, respectively, and $0.1 million and $0.2 millionfor the three and six month periods ended June 30, 2005, respectively.

Additionally, if the specific conditions set forth inthe Debentures are satisfied, the Company may require the holder to convert theDebentures into shares of the Company’s common stock at the conversion ratethen in effect, or the Company may prepay the Debentures prior to the maturitydate, for an amount in cash equal to 150% of the amount prepaid. In addition,if at any time on or after the second anniversary of the initial issuance date,the weighted average price of the common stock is less than $8.75 on any fiveconsecutive trading days, the holder shall have the right, in its solediscretion, to require that the Company immediately redeem up to $7.5 millionprincipal amount of the Debentures in cash. The redemption right constitutes an embedded derivative. The value ofthis embedded derivative at June 30, 2006 is immaterial to the financialposition of the Company. The Company reviews the value of the derivative on aquarterly basis, in accordance with SFAS No. 149, *Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities*.

13

----

The Company valued the Warrants at $1.8 millionusing a Black-Scholes pricing model with the following factors: risk freeinterest rate 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 is being amortized over three years, the initial term of theDebentures, using the effective interest method. Accordingly, the carryingvalue of the Debentures will be increased over the initial term. Pursuant toEITF Issue No. 00-19, since the effective registration of the securitiesunderlying the warrants was an event outside the control of the Company, theCompany recorded the fair value of the warrants as long-term liabilities. Inconnection with the amendment to the registration rights agreement entered intoduring 2004, the Company reclassified the value of the warrants (approximately$1.0 million) on the amendment date to additional paid in capital. Interestexpense attributable to the amortization of the warrants amounted toapproximately $0.1 million and $0.3 million for the three and six month periodsended June 30, 2006, respectively, and $0.1 million and $0.3 million for thethree and six month periods ended June 30, 2005, respectively.

In connection with the issuance of the Debentures andWarrants, the Company incurred placement agent fees, legal fees and otherexpenses of approximately $1.2 million. In addition to the placement fees,the Company issued warrants to the placement agent. The warrants to purchase86,000 shares of common stock at an exercise price of $10.068 are in the sameform and on the same terms and conditions as the Warrants issued to theinvestor. The Company included the value of the warrants, $0.4 million,using the factors above, and the cash placement fees of $1.2 million in otherassets on the consolidated balance sheet. Collectively, the debt issuance costsof $1.6 million are being amortized over three years, the initial term of theDebentures. Approximately $0.1 million and $0.2 million for the three and sixmonth periods ended June 30, 2006, respectively, and approximately $0.1 millionand $0.2 million for the three and six month periods ended June 30, 2005, respectivelyof the deferred financing costs are included in amortization expense,respectively.

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

Common Stock

*Additional Paid-in Capital*

*Duringthe six month period ended June 30, 2006, the Company’s additional paid-incapital increased by $20.1 million, primarily due to $11.6 million in employeestock-based compensation, $4.4 million from exercise of stock options, $3.7million related to the earn-out provisions in a prior acquisition and $0.4million related to the cashless exercise of warrants.*

**NOTE7 - STOCK INCENTIVE PLANS**

*(a)  Restricted Stock*

InJanuary 2005, the Company entered into agreements to issue 1.7 million sharesof restricted stock to certain employees, subsequently adjusted to 1.4 millionfor forfeitures. Approximately 0.3 million shares were vested and issued inJanuary 2006 and 0.3 million and 0.2 million will be vested and issued in eachof January 2007 and 2008 contingent upon employment with the Company on thedates of vesting.  Approximately 0.6million were vested and issued in March 2006 upon the attainment of a marketcondition of the Company’s stock. Upon the attainment of the market conditionin March 2006, the Company incurred a stock-based compensation expense of $5.8million.

14

----

InNovember 2005, the Company entered into agreements to issue 0.8million shares of restricted stock to certain employees over threeyears.  Approximately 0.1 million shareswill be issued in each of November 2006 and 2007; and approximately 0.6 millionwill be issued in November 2008 contingent upon employment with the Company onthe dates of issuance.  The Company alsoentered into agreements to issue 0.8 million fully vested shares of restrictedstock to executives in November 2013. The restricted shares may be issued earlier if certain performancetargets are met for the year ended December 31, 2006 and the three-year periodended December 31, 2008.

*In 2006,the Company entered into agreements to issue 0.3 million shares of restrictedstock to senior managers.  The majorityof the shares will vest over 3.5 years, but some will vest upon the seniormanagers reaching certain performance targets. The shares were valued at $7.30 per share or approximately $2.3 million,which was the stock price on the date of agreement.  This amount is being amortized over therespective vesting period.*

*In June2006, the Company modified agreements to issue restricted stock originallyexpected to vest on January 1, 2007. As a result of the modification,shares of restricted stock were vested as of June 27, 2006. In accordancewith SFAS 123R, the Company recognized approximately $0.1 million inincremental stock-based compensation costs, or the excess of the fair value ofthe replacement award over the fair value of the original award which wascancelled as of modification date.*

*Therestricted stock awards of Company common stock has a fair value equal to therespective market price of the stock at the date granted. The restricted stockawards require no payment from the employee and compensation cost was valuedbased on the market price on the grant date and is expensed equally over thevesting period, generally three years. Compensation expense related to vestingof restricted stock awards totaled $1.4 million and $8.7 million for the threeand six month periods ended June 30, 2006, respectively, and $0.4 million and$0.9 million for the three and six month periods ended June 30, 2005,respectively. The following table summarizes the restricted share unit awards*:
| ** **                     | ** ** | **Restricted  Shares** | ** ** | **Weighted Average  Grant Date Fair  Value** | ** ** | **Weighted Average  Remaining Contractual  Life (Years)** | ** ** |
|--------------------------------|------------|------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| Unvested at  December 31, 2005 |       | 3,053,500              |       | $                                                           | 4.96       |                                                                     |       |   |
| Granted                        |       | 346,000                |       | 7.39                                                        |       |                                                                     |       |
| Vested                         |       | (890,000               | )          | 3.35                                                        |       |                                                                     |       |
| Cancelled                      |       | (258,500               | )          | 6.01                                                        |       |                                                                     |       |
| Unvested at June 30,  2006     |       | 2,251,000              |       | $                                                           | 5.85       |                                                                     | 1.7        |   |

 

As of June 30,2006, there were $7.6 million of total unrecognized compensation costs relatedto unvested restricted stock awards, net of forecasted forfeitures. The $7.6million is expected to vest over the weighted average of 1.7 years.

SFAS 123R requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from the initial estimated. TheCompany recorded a benefit of $0.3 million related to a revision inestimated forfeitures related to the Company’s restricted stock awards.

*(b) StockOptions*

EffectiveJanuary 1, 2006, the Company adopted Statement of Financial AccountingStandards No. 123 (revised 2004) (“SFAS No. 123R”), “*Share-Based Payment*,” using the modifiedprospective transition method and accordingly prior periods have not beenrestated to reflect the impact of SFAS 123R. Under SFAS 123R, stock-basedawards granted prior to its adoption will be expensed over the remainingportion of their vesting period. These awards will be expensed using the samefair value measurements which were used in calculating pro forma stock-basedcompensation expense under SFAS 123. For stock-based awards granted on or afterJanuary 1, 2006, the Company will amortize the stock-based compensation overthe requisite service period.

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option pricing model. The expected life selected for optionsgranted during the quarter represents the period of time that the options areexpected to be outstanding based on historical data of option holder exerciseand termination behavior. Expected volatilities are based upon historicalvolatility of the Company’s monthly stock closing prices over a period equal tothe expected life of each option grant. The risk-free interest

15

----

ratewas selected based on yields from U.S. Treasury zero-coupon issues with aremaining term equal to the expected term of the options being valued. TheCompany historically has not paid dividends.
| ** **                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                      |       |                                                |       |                                              |       |   |   |   |   |
| Expected  dividend yield  |       | 0                                                   | %          | 0                                                 | %          | 0 | % | 0 | % |
| Risk-free  interest rate  |       | 4.82                                                | %          | 3.33                                              | %          | 4.31 | % | 3.05 | % |
| Expected life  (in years) |       | 3.0                                                 |       | 3.0                                               |       | 3.0 |   | 2.5 |   |
| Expected volatility       |       | 59                                                  | %          | 124                                               | %          | 63 | % | 103 | % |

 

Asa result of adopting the standard, the Company recorded pretax compensationexpense of $1.5 million and $3.0 million for the three and six month periodsended June 30, 2006, respectively. Share based compensation is included in eachexpense category that includes salary expense. The Company has recorded a fullvaluation allowance on the deferred tax asset related to share basedcompensation and therefore, no tax benefit is recognized for the three and sixmonth periods ended June 30, 2006.

Thefollowing table summarizes the stock options outstanding:
| ** **                               | ** ** | **Options** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Life  (Years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------------------|------------|-------------|------------|------------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding at  December 31, 2005        |       | 9,595,378   |       | $                                              | 5.74       |                                                                 |       |                                |       |   |
| Granted                                  |       | 354,500     |       | $                                              | 5.40       |                                                                 |       |                                |       |   |
| Exercised                                |       | (1,279,558  | )          | $                                              | 3.46       |                                                                 |       |                                |       |   |
| Cancelled                                |       | (333,833    | )          | $                                              | 2.20       |                                                                 |       |                                |       |   |
| Outstanding at June 30,  2006            |       | 8,336,487   |       | $                                              | 6.22       |                                                                 | 8.4        |                                | $          | 33,735,080 |   |
|                                     |       |        |       |                                           |       |                                                                 |       |                                |       |
| Vested and exercisable  at June 30, 2006 |       | 3,546,936   |       | $                                              | 7.05       |                                                                 | 7.5        |                                | $          | 17,746,507 |   |

 

The weighted average fair value per option atthe date of grant for options granted during the three and six month periodsended June 30, 2006 were $3.92 and $3.44, respectively.  The weighted average fair value per option atthe date of grant for options granted during the three and six month periodsended June 30, 2005 were $3.04 and $2.50, respectively.  The intrinsic value for the options exercisedduring the three and six month periods ended June 30, 2006 was $2.1 million and$7.4 million, respectively.

In June 2006, the Company modified agreementsto issue options to purchase the Company’s common stock. As a result of themodification, shares of options were vested or cancelled as of June 27,2006. In accordance with SFAS 123R, the Company recognized a net benefitof approximately $25,000 in incremental stock-based compensation costs, or theexcess of the fair value of the replacement award over the fair value of the originalaward which was cancelled as of modification date.
| ** **     | **Range of  Exercise  Prices** | ** ** | ** ** | **Number  Outstanding** | ** ** | **Weighted Average  Remaining Contractual  Life** | ** ** | **Weighted  Average Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|----------------|-------------------------------------|------------|------------|-------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|
|           |                                |       |       |                    |       |                                                        |       |                                       |       |                    |       |
| $0.00 - 2.00   |                                | 1,179,678  |       | 6.2                     | years      |                                                        | $          | 1.12                                       |       | 1,177,755               |       | $                                          | 1.12       |   |
| 2.01 - 5.00    |                                | 3,354,923  |       | 8.5                     |       |                                                        | 4.20       |                                       | 1,235,836  |                    | 4.17       |                                       |
| 5.01 - 10.00   |                                | 3,655,719  |       | 9.1                     |       |                                                        | 6.70       |                                       | 1,042,525  |                    | 6.81       |                                       |
| 10.01 - 323.00 |                                | 146,167    |       | 5.7                     |       |                                                        | 82.55      |                                       | 90,820     |                    | 126.45     |                                       |
|           |                                | 8,336,487  |       | 8.4                     |       |                                                        | $          | 6.22                                       |       | 3,546,936               |       | $                                          | 7.05       |   |

 

Asof June 30, 2006, there were $5.8 million of total unrecognized compensationcosts related to unvested stock option awards, net of forecastedforfeitures.  This amount is expected tobe recognized through the year 2010.

16

----

 
| ** **                      | ** ** | **Options** | ** ** | **Weighted Average  Grant Date Fair  Value** | ** ** |
|---------------------------------|------------|-------------|------------|-------------------------------------------------------------|------------|
| Nonvested at  December 31, 2005 |       | 5,470,277   |       | $                                                           | 2.95       |   |
| Granted                         |       | 354,500     |       | $                                                           | 3.11       |   |
| Vested                          |       | (672,420    | )          | $                                                           | 2.96       |   |
| Forfeited                       |       | (362,139    | )          | $                                                           | 3.57       |   |
| Nonvested at June 30,  2006     |       | 4,790,218   |       | $                                                           | 3.25       |   |

 

Thetotal fair value of shares vested during the three and six month periods endedJune 30, 2006 was $0.1 million and $2.0 million, respectively.

Priorto adoption, the Company accounted for stock-based compensation arrangementsusing the intrinsic value method under the provisions of Accounting PrinciplesBoard Opinion No. 25 (“APB 25”), *“Accountingfor Stock Issued to Employees.”*Under this method, stockcompensation was recognized to the extent that the exercise price is less thanthe market price for the underlying stock on the date of grant. The followingtable illustrates the effect on net loss and net loss per share if the Companyhad applied the fair value recognition provisions of SFAS No. 123”,to stock-based employee compensation. SFAS No. 123R requires theCompany to present pro forma information for periods prior to the adoption asif it had accounted for all stock-based compensation under the fair valuemethod. Had compensation costs under the Company’s stock option plans beenrecorded for the three and six month periods ended June 30, 2005, the effect onthe Company’s net loss and earnings per share would have been as follows:
| ** **                                                                                                                            | ** ** | **Three Months Ended  June 30, 2005**         | ** ** | **Six Months Ended  June 30, 2005**           | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **(in thousands, except per  share amounts)** | ** ** | **(in thousands, except per  share amounts)** | ** ** |
| Net income  (loss) attributable to common shareholders:                                                                               |       |                                                              |       |                                                              |       |
| As reported                                                                                                                           |       | $                                                                 | (200       | )                                                                 | $          | (618 | ) |
| Deduct: Total  stock-based compensation expense  determined under fair value based method for  all awards, net of related tax effects |       | (1,428                                                            | )          | (2,916                                                            | )          |
|                                                                                                                                  |       |                                                              |       |                                                              |       |
| Pro forma                                                                                                                             |       | (1,628                                                            | )          | $                                                                 | (3,534     | ) |
|                                                                                                                                  |       |                                                              |       |                                                              |       |
| Earnings per  share:                                                                                                                  |       |                                                              |       |                                                              |       |
| Basic, as reported                                                                                                                    |       | $                                                                 | —     |                                                              | $          | (0.01 | ) |
| Basic, pro forma                                                                                                                      |       | (0.04                                                             | )          | (0.08                                                             | )          |

** **

**NOTE8 — RECOVERY OF INVESTMENT**

In the firstquarter of 2005, the Company received $2.1 million as a recovery of on aninvestment in Bidland Systems, Inc. (“Bidland”), and subsequently receivedanother $0.2 million in the fourth quarter of 2005. The recovery of theinvestment was a result of the settlement of pending litigation between Bidlandand another party and the subsequent dissolution and liquidation of Bidland. In2000, Bidland ceased

17

----

operations and,accordingly, the Company recorded an impairment charge related to thecost-based investment.

**NOTE9 -****SUPPLEMENTAL CASH FLOW INFORMATION**

We capitalized approximately$1.4 million of assets received but unpaid at June 30, 2006.

For the six month periodsended June 30, 2006 and 2005, the amount of cash paid for interest was $0.3million and $0.2 million, respectively.

Warrants to purchase 64,161shares of the Company’s common stock at an average price of $1.21 per sharewere exercised during the six month period ended June 30, 2006 in exchangefor 55,718 shares of the Company’s common stock in cashless exercises ofwarrants. As a result of the exercises, approximately $0.4 million of thewarrant liability was reclassified as equity.

**NOTE10 — SEGMENTS**

TheCompany’s business is comprised of three reportable segments: Media, Search andTechnology.  Revenueis attributed to individual countries primarily based on where sales aregenerated.  The Company adjusted prior period segmentdisclosures to conform to the current presentation. The summarizedsegment information at and for the three and six month periods ended June 30,2006 and 2005, is as follows:

18

----

 
| ** **                                                      | ** ** | **Three Month Period Ended June 30, 2006** | ** ** | **Six Month Period Ended June 30, 2006** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                      | ** ** | **Media**                                  | ** ** | **Search**                               | ** ** | **Technology** | ** ** | **Total** | ** ** | **Media** | ** ** | **Search** | ** ** | **Technology** | ** ** | **Total** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**                         | ** ** | **(in thousands)**                       | ** ** |
|                                                            |       |                                       |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                        |       | $                                          | 21,334     |                                     | $          | 19,745 |   | $ | 7,097 |   | $ | 48,176 |   | $ | 39,564 |   | $ | 37,578 |   | $ | 13,975 |   | $ | 91,117 |   |
| Depreciation                                                    |       | 129                                        |       | 255                                      |       | 573 |   | 957 |   | 447 |   | 630 |   | 712 |   | 1,789 |   |
| Amortization of  intangible assets and deferred financing costs |       | 362                                        |       | 395                                      |       | 132 |   | 889 |   | 724 |   | 790 |   | 265 |   | 1,779 |   |
| Income (loss) from  operations                                  |       | 1,039                                      |       | (1,609                                   | )          | 724 |   | 154 |   | (1,244 | ) | (4,972 | ) | (877 | ) | (7,103 | ) |
|                                                                 |            |                                            |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                      | ** ** | **Three Month Period Ended June 30, 2005** | ** ** | **Six Month Period Ended June 30, 2005** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                      | ** ** | **Media**                                  | ** ** | **Search**                               | ** ** | **Technology** | ** ** | **Total** | ** ** | **Media** | ** ** | **Search** | ** ** | **Technology** | ** ** | **Total** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**                         | ** ** | **(in thousands)**                       | ** ** |
|                                                            |       |                                       |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                        |       | $                                          | 16,684     |                                     | $          | 11,710 |   | $ | 5,492 |   | $ | 33,886 |   | $ | 30,913 |   | $ | 21,332 |   | $ | 10,711 |   | $ | 62,956 |   |
| Depreciation                                                    |       | 117                                        |       | 166                                      |       | 437 |   | 720 |   | 242 |   | 340 |   | 736 |   | 1,318 |   |
| Amortization of  intangible assets and deferred financing costs |       | 495                                        |       | 395                                      |       | 249 |   | 1,139 |   | 990 |   | 790 |   | 499 |   | 2,279 |   |
| Restructuring                                                   |       | —                                     |       | —                                   |       | — |   | — |   | 252 |   | 228 |   | 493 |   | 973 |   |
| Income (loss) from  operations                                  |       | 851                                        |       | (464                                     | )          | (417 | ) | (30 | ) | 579 |   | (1,675 | ) | (857 | ) | (1,953 | ) |
|                                                            |       |                                       |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total assets:(1)**                                            |       |                                       |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| June 30, 2006                                                   |       | $                                          | 48,342     |                                     | $          | 59,953 |   | $ | 11,004 |   | 119,299 |   |   |   |   |   |   |   |   |   |
| December 31, 2005                                               |       | 47,316                                     |       | 53,352                                   |       | 14,325 |   | 114,993 |   |   |   |   |   |   |   |   |   |
|                                                                 |            |                                            |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1) Not inclusive ofcorporate segment assets of $37,633 and $27,811, respectively.
| ** **                                             | ** ** | **United  States**      | ** ** | **United  Kingdom** | ** ** | **South  Korea** | ** ** | **Other-  International** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|---------------------|------------|------------------|------------|---------------------------|------------|------------|------------|
| ** **                                             | ** ** | **(in thousands)** | ** ** |
| ** **                                             | ** ** | ** **              | ** ** | ** **          | ** ** | ** **       | ** ** | ** **                | ** ** | ** ** | ** ** |
| Revenues for the  three month ended June 30, 2006      |       | $                       | 19,073     |                | $          | 9,844            |       | $                         | 7,259      |       | $          | 12,000 |   | $ | 48,176 |   |
| Revenues for the  six month period ended June 30, 2006 |       | $                       | 37,077     |                | $          | 18,138           |       | $                         | 13,324     |       | $          | 22,578 |   | $ | 91,117 |   |
| Long-lived  assets as of June 30, 2006                 |       | 12,039                  |       | 721                 |       | 15,448           |       | 32,870                    |       | 61,078     |       |
|                                                   |       |                    |       |                |       |             |       |                      |       |       |       |
| Revenues for the  three month ended June 30, 2005      |       | $                       | 15,364     |                | $          | 7,178            |       | $                         | 3,501      |       | $          | 7,843 |   | $ | 33,886 |   |
| Revenues for the  six month period ended June 30, 2005 |       | 29,232                  |       | 13,309              |       | 5,860            |       | 14,555                    |       | 62,956     |       |
| Long-lived assets as of  June 30, 2005                 |       | 11,747                  |       | 762                 |       | 15,738           |       | 33,863                    |       | 62,110     |       |

 

**NOTE 11 - COMMITMENTS AND CONTINGENCIES**

(a) Commitments

*Lycos, Inc.Services Agreements*

TheCompany pre-paid a total of $2.0 million of royalties to Lycos during 2004 and2005 and will retain an additional 25% of quarterly royalties due to Lycosuntil the date on which the full amount of pre-paid royalties has been recoupedor otherwise paid in cash by Lycos.  Accordingly, at June 30, 2006 theCompany has a net $0.7 million in prepaid royalties of which $0.4 million isincluded in prepaid expenses and other current assets and the remaining portionof $0.3 million is included in other assets.

In addition to the royalties, the Company paid Lycos a$4.5 million transition fee, which the Company recorded as an other assetand is amortizing the fee over the term of the agreement of five years.Amortization related to the transition fee was $0.2 million and $0.5 million foreach of the three and six month periods ended June 30, 2005 and 2006. Inaccordance with SFAS 144, the Company periodically evaluates therecoverability of this asset.

19

----

*AcquisitionEarn-Out Liability*

The Company had contingent obligations related to itsacquisition of Decide. The former Decide stockholders could receive up to anadditional $10.0 million, consisting of up to $2.5 million in cash and upto $7.5 million in common stock, subject to achievement of earn-out targetsrelating to Decide’s operating performance in 2005. In March 2006, the Companypaid $1.3 million and issued 0.4 million shares of common stock related to theachievement of 2005 earn-out targets which 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 of intellectualproperty infringement claims made by third parties.

(b)Litigation

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

20

----

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

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

### **GENERAL**

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

*Media*

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

21

----

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

*Search*

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

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

*Technology*

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

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

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

22

----

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

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

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

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

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

# **RESULTS OF OPERATIONS**

### Thefollowing table compares the results of operations for the three and six monthperiods ended June 30, 2006 to the results of operations for the three and sixmonth periods ended June 30, 2005 (in thousands):

23

----

###  

| ** **                                                                                                         | ** ** | **Three Months Ended June 30,** | ** ** | ** **      | ** ** | **Six Months Ended June 30,** | ** ** | ** **      | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------|------------|---------------------------------------------------|------------|-----------------|------------|
| ** **                                                                                                         | ** ** | **2006**                                            | ** ** | **2005**        | ** ** | **$ Var**                                    | ** ** | **2006**        | ** ** | **2005** | ** ** | **$ Var** | ** ** |
| ** **                                                                                                         | ** ** | **(unaudited)**                                     | ** ** | **(unaudited)** | ** ** | ** **                                        | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** | ** ** | ** ** |
| Revenues:                                                                                                          |       |                                                |       |            |       |                                              |       |            |       |   |   |   |   |
| Media                                                                                                              |       | $                                                   | 21,334     |            | $          | 16,684                                            |       | $               | 4,650      |   | $ | 39,564 |   | $ | 30,913 |   | $ | 8,651 |   |
| Search                                                                                                             |       | 19,745                                              |       | 11,710          |       | 8,035                                             |       | 37,578          |       | 21,332 |   | 16,246 |   |
| Technology                                                                                                         |       | 7,097                                               |       | 5,492           |       | 1,605                                             |       | 13,975          |       | 10,711 |   | 3,264 |   |
| Total revenues                                                                                                     |       | 48,176                                              |       | 33,886          |       | 14,290                                            |       | 91,117          |       | 62,956 |   | 28,161 |   |
|                                                                                                               |       |                                                |       |            |       |                                              |       |            |       |   |   |   |   |
| Cost of  revenues:                                                                                                 |       |                                                |       |            |       |                                              |       |            |       |   |   |   |   |
| Media                                                                                                              |       | 14,442                                              |       | 11,327          |       | 3,115                                             |       | 27,018          |       | 20,954 |   | 6,064 |   |
| Search                                                                                                             |       | 14,794                                              |       | 7,747           |       | 7,047                                             |       | 27,886          |       | 14,379 |   | 13,507 |   |
| Technology (inclusive of $66, $8, $245 and $15 of  stock-based compensation, respectively)                         |       | 1,470                                               |       | 1,185           |       | 285                                               |       | 3,069           |       | 2,184 |   | 885 |   |
| Total cost of revenues                                                                                             |       | 30,706                                              |       | 20,259          |       | 10,447                                            |       | 57,973          |       | 37,517 |   | 20,456 |   |
|                                                                                                               |       |                                                |       |            |       |                                              |       |            |       |   |   |   |   |
| Gross profit                                                                                                       |       | 17,470                                              |       | 13,627          |       | 3,843                                             |       | 33,144          |       | 25,439 |   | 7,705 |   |
|                                                                                                               |       |                                                |       |            |       |                                              |       |            |       |   |   |   |   |
| Operating  expenses:                                                                                               |       |                                                |       |            |       |                                              |       |            |       |   |   |   |   |
| Sales and marketing (inclusive of $615, $86, $2,160  and $206 of stock-based compensation, respectively)           |       | 7,237                                               |       | 5,817           |       | 1,420                                             |       | 15,221          |       | 11,227 |   | 3,994 |   |
| General and administrative (inclusive of $1,859,  $297, $8,198 and $632 of stock-based compensation, respectively) |       | 7,046                                               |       | 5,285           |       | 1,761                                             |       | 18,345          |       | 10,204 |   | 8,141 |   |
| Product development (inclusive of $287, $50, $1,263  and $101 of stock-based compensation, respectively)           |       | 2,144                                               |       | 1,416           |       | 728                                               |       | 4,902           |       | 2,709 |   | 2,193 |   |
| Amortization of intangible assets and deferred  financing costs                                                    |       | 889                                                 |       | 1,139           |       | (250                                              | )          | 1,779           |       | 2,279 |   | (500 | ) |
| Restructuring costs                                                                                                |       | —                                              |       | —          |       |                                              |       | —          |       | 973 |   | (973 | ) |
|                                                                                                               |       |                                                |       |            |       |                                              |       |            |       |   |   |   |   |
| Total operating expenses                                                                                           |       | 17,316                                              |       | 13,657          |       | 3,659                                             |       | 40,247          |       | 27,392 |   | 12,855 |   |
|                                                                                                               |       |                                                |       |            |       |                                              |       |            |       |   |   |   |   |
| Income (loss) from operations                                                                                      |       | 154                                                 |       | (30             | )          | 184                                               |       | (7,103          | )          | (1,953 | ) | (5,150 | ) |
|                                                                                                               |       |                                                |       |            |       |                                              |       |            |       |   |   |   |   |
| Interest income  (expense), net                                                                                    |       | 143                                                 |       | (54             | )          | 197                                               |       | 208             |       | (142 | ) | 350 |   |
| Change in fair  value of warrant liability                                                                         |       | 133                                                 |       | (110            | )          | 243                                               |       | (119            | )          | 40 |   | (159 | ) |
| Recovery of  investment                                                                                            |       | —                                              |       | —          |       | —                                            |       | —          |       | 2,100 |   | (2,100 | ) |
| Impairment of  marketable securities                                                                               |       | —                                              |       | —          |       | —                                            |       | —          |       | (588 | ) | 588 |   |
| Gain on sale of  maketable securities                                                                              |       | —                                              |       | 7               |       | (7                                                | )          | —          |       | 7 |   | (7 | ) |
| Other income  (expense), net                                                                                       |       | 14                                                  |       | 6               |       | 8                                                 |       | 124             |       | (40 | ) | 164 |   |
|                                                                                                               |       |                                                |       |            |       |                                              |       |            |       |   |   |   |   |
| Income (loss)  before provision for income taxes and minority interest in operations of  consolidated subsidiary   |       | 444                                                 |       | (181            | )          | 625                                               |       | (6,890          | )          | (576 | ) | (6,314 | ) |
|                                                                                                               |       |                                                |       |            |       |                                              |       |            |       |   |   |   |   |
| Benefit (provision)  for income taxes                                                                              |       | 88                                                  |       | (9              | )          | 97                                                |       | (142            | )          | (20 | ) | (122 | ) |
| Minority  interest in operations of consolidated subsidiary                                                        |       | (43                                                 | )          | —          |       | (43                                               | )          | 5               |       | — |   | 5 |   |
|                                                                                                               |       |                                                |       |            |       |                                              |       |            |       |   |   |   |   |
| Net income (loss)                                                                                                  |       | $                                                   | 489        |            | $          | (190                                              | )          | 679             |       | $ | (7,027 | ) | $ | (596 | ) | (6,431 | ) |
|                                                                                                               |       |                                                |       |            |       |                                              |       |            |       |   |   |   |   |
| Dividends on  preferred stock                                                                                      |       | —                                              |       | (10             | )          | 10                                                |       | —          |       | (22 | ) | 22 |   |
|                                                                                                               |       |                                                |       |            |       |                                              |       |            |       |   |   |   |   |
| Net income (loss)  attributable to common stockholders                                                             |       | $                                                   | 489        |            | $          | (200                                              | )          | 689             |       | $ | (7,027 | ) | $ | (618 | ) | (6,409 | ) |
|                                                                                                                    |            |                                                     |            |                 |            |                                                   |            |                 |            |  |  |  |  |  |  |  |  |  |  |

 

**Revenues; Cost of Revenues andGross Profit**

*Media*

***Revenue*****. Wegenerate Media** revenue primarily from our 24/7 Real Media WebAlliance. Web Alliance revenue was $21.0 million and $38.8 million for thethree and six month periods ended June 30, 2006, respectively, as compared to$16.7 million and $30.9 million for the three and six month periods ended June30, 2005, respectively, an increase of 25.7% and 25.6%, respectively. Theremaining Media revenue related to our e-mail services.

24

----

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

*GrossProfit*. Gross profitmargins for Media were 32.3% and 31.7% for the three and six month periodsended June 30, 2006, respectively, as compared to 32.1% and 32.2% for the threeand six month periods ended June 30, 2005, respectively.  The gross profit margin were consistentalthough there is an upward trend due to increases in the percentage of revenueretained from Web sites in the 24/7 Real Media Web Alliance offset by adownward trend due to the increased contribution from regions with a lower grossprofit percentage, particularly Korea.

Advertisement serving costswere $0.4 million and $0.9 million for the three and six month periods endedJune 30, 2006, respectively. Advertisement serving costs were $0.4 million and $0.8 million for thethree and six month periods ended June 30, 2005, respectively.

*Search*

*Revenue*. Search revenue was $19.7 million and $37.6million for the three and six month periods ended June 30, 2006, respectively,as compared to $11.7 million and $21.3 million for the three and six monthperiods ended June 30, 2005, respectively, an increase of 68.6% and 76.2%,respectively.  The increase was due to anincrease in the number of accounts under management and an increase in theaverage revenue per advertiser account.

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

*Gross Profit*. Grossprofit margins for Search were 25.1% and 25.8% for the three and six monthperiods ended June 30, 2006, respectively, and 33.8% and 32.6% for the threeand six month periods ended June 30, 2005, respectively.  The decrease in gross profit margin was primarilydue to a decrease in margin in our Managed Account Service offering as a resultof competition in the marketplace as well as the addition of higher volumeaccounts, which usually command a better price. This decrease was partially offset by a higher growth rate in our other,higher margin products primarily as a result of geographic expansion intoJapan.

*Technology*

*Revenue*.****Technologyrevenue was $7.1 million and $14.0 million for the three and six month periodsended June 30, 2006, respectively, as compared to $5.5 million and $10.7million for the three and six month periods ended June 30, 2005, respectively,representing an increase of 29.2% and 30.5%, respectively. The increaseprimarily reflects expanded usage of OAS by existing customers and the additionof new customers.

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

*Gross Profit*.Gross profit margins were 79.3% and 78.0% during the three and six month periodsended June 30, 2006, respectively, and 78.4% and 79.6% for the three and sixmonth periods ended June 20, 2005, respectively.  The margin increases due to leveragingincreased revenue over the

25

----

existing cost base as the cost of advertisementserving equipment and facilities is decreasing. The margin decrease was due to the increase in Stock-based compensationfor the three and six month periods ended June 30, 2006 was $0.1 million and $0.2 million,respectively.  Stock-based compensationfor the three and six month periods ended June 30, 2005 was $8,000 and $15,000,respectively.

**Sales and Marketing Expenses**

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

Sales and marketing expenses were $7.2 million and $15.2 million forthe three and six month periods ended June 30, 2006, respectively, and $5.8million and $11.2  million for the threeand six month periods ended June 30, 2005, respectively. The increase wasprimarily due to the inclusion of stock-based compensation of $0.6 million and$2.2 million for the three and six month periods ended June 30, 2006,respectively.  Stock-based compensationfor the three and six month periods ended June 30, 2005 was $0.1 million and$0.2 million, respectively. Excluding stock-based compensation, sales and marketing expenses decreased as a percentage of revenue from16.9% to 13.7% for the three month periods ended June 30, 2005 and 2006,respectively, and from 18.0% to 14.3% for the six month periods ended June 30,2005 and 2006, respectively, as we continued to gain operating leverage.

**General and Administrative Expenses**

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

General and administrative expenses were $7.0 million and $18.3 millionfor the three and six month periods ended June 30, 2006, respectively, and $5.3million and $10.2 million for the three and six month periods ended June 30,2005, respectively.  The increase wasprimarily due to the inclusion of stock-based compensation of $1.9 million and$8.2 million for the three and six month periods ended June 30, 2006,respectively.  Stock-based compensationfor the three and six month periods ended June 30, 2005 was $0.3 million and$0.6 million, respectively.  Theremaining increase was due primarily to increased depreciation due to theimprovement and expansion of our infrastructure, additional professional feesas a result of increased compliance costs and additional personnel relatedcosts.  Excluding stock-basedcompensation, as a percentage of revenue, the expenses decreased from 14.7% to10.8% for the three month periods ended June 30, 2005 and 2006, respectively,and from 15.0% to 11.1% for the six month periods ended June 30, 2005 and 2006,respectively.

**Product Development Expenses**

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

Product development expenses were $2.1 million and $4.9 million for thethree and six month periods ended June 30, 2006, respectively, and $1.4 millionand $2.7 million for the three and six month periods

26

----

ended June 30, 2005, respectively. These amounts are inclusive ofstock-based compensation of $0.3 million and $1.3 million for the three and sixmonth periods ended June 30, 2006, respectively. Stock-based compensation forboth of the three and six month periods ended June 30, 2005 was $0.1 million.  The increase reflects our continuedinvestment in the development and enhancement of our existing products andservices, as well as our exploration of new markets and product offerings.

**Amortization of Intangible Assets and Deferred FinancingCosts**

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

For the six month period ended June 30, 2006, amortization expense wasattributed to $0.7 million to acquired technology, $0.3 million to otherintangible assets, $0.3 million to deferred financing costs, and $0.5 millionto the transition payment to Lycos. For the six month period ended June 30,2005, amortization expense related to $1.2 million to acquired technology, $0.4million to other intangible assets, $0.2 million to deferred financing costsand $0.5 million to the transition payment to Lycos.

**Restructuring Costs**

During the three month period ended March 31, 2005, we recorded arestructuring charge of $1.0 million relating to our former New York headquarters.

**Interest Income (Expense), Net**

Interest income (expense), net, relates to our long-term debt andcapital lease obligations offset by interest income related to our cash andcash equivalents. Interest income (expense), net for both period in 2005 and2005 primarily related to the $15.0 million of subordinated convertibledebentures due September 2006 that we issued on September 26, 2003, of which aportion of the interest incurred relates to a cash payment due and a portionrelated to the amortization of warrants issued with the debentures offset byinterest income from cash in overnight deposits and money market accounts.

**Change in Fair Value of Warrant Liability**

Our liability relates to warrants outstanding from our preferred stockoffering, and is adjusted to fair value at the end of each reporting period.The expense for the six month period ended June 30, 2006 was due to an increasein the fair market value of the warrants outstanding, which increased thecorresponding liability. The increase in the fair market value was primarilydue to the higher fair market value of our common stock compared to the fairmarket value of our common stock at December 31, 2005.

**Recovery of Investment**

InJanuary 2005, we received $2.1 million as a recovery of an investment inBidland Systems, Inc. (“Bidland”), and subsequently received another $0.2million in the fourth quarter of 2005. The recovery was a result of thesettlement of pending litigation between Bidland and another party and thesubsequent dissolution and liquidation of Bidland.

27

----

**Minority Interest in Operations of Consolidated Subsidiary**

Minority interest in operations of consolidated subsidiary representsthe percentage share of income (losses) attributable to holders who have aminority interest in subsidiaries in which we hold an interest that is greaterthan fifty percent, but less than 100 percent, and the results of which weconsolidate in our consolidated financial statements.  This amount relatesto the activity of K.K. 24-7 Search, our joint venture with Dentsu. The carryingvalue of the investment was approximately $1.6 million for both periodsended June 30, 2006 and December 31, 2005.

**Other Income (Expense), Net**

Other income (expense), net for the three and six months ended June 30,2006 consisted of earn-out payments received in excess of amounts recorded,offset by legal fees associated with a former subsidiary that we shut down andrealized foreign currency losses.

Other income (expense), net for the three and six months ended June 30,2005 consisted primarily of legal fees associated with a former subsidiary thatwe shut down.

**LIQUIDITY AND CAPITAL RESOURCES**

Cash flows for the six month periods ended June 30, 2006 and 2005 were as follows(in thousands):
| ** **                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| Net cash  provided by operating activities |       | $                                                 | 4,354      |   | $ | 1,776 |   |
| Net cash used in  investing activities     |       | $                                                 | (1,637     | ) | $ | (934 | ) |
| Net cash provided by  financing activities |       | $                                                 | 3,367      |   | $ | 127 |   |

 

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 $4.4 million and $1.8 million duringthe six month periods ended June 30, 2006 and 2005, respectively. Net cashprovided by operating activities is generally due to our net operating losses,adjusted for certain non-cash items included in our net operating results, aswell as changes in various components of working capital, particularlyfluctuations in accounts receivable.

Net cash used in investing activities was approximately $1.6 millionduring the six month period ended June 30, 2006, and consisted of capitalexpenditures for operational purposes. Net cash used in investing activitieswas approximately $0.9 million during the six month period ended June 30,2005, and consisted of $0.6 million of proceeds from maturities of short-terminvestments, $0.2 million of proceeds from the sale of marketable securitiesand $2.1 million from the recovery of an investment, offset by $3.8 million incapital expenditures for operational purposes.

Financing activities provided $3.4 and $0.1 million in the six monthperiods ended June 30, 2006 and 2005, respectively. Financing activities duringthe six month period ended June 30, 2006 were attributed as follows: $0.2 millionof proceeds from the note receivable due from IMAKE and $4.4 million from theexercise of common stock options, offset by a $1.3 million earn-outpayment related to our 2004 

28

----

acquisition of Decide. Financing activities during the six month periodended June 30, 2005 related to proceeds from exercise of common stock options.

OnSeptember 26, 2003, we completed the placement to an institutionalaccredited investor of $15.0 million of our subordinated convertibledebentures. If at any time on or after September 26, 2005, the secondanniversary of the initial issuance date, the weighted average price of ourcommon stock is less than $8.75 on any five consecutive trading days, theholder has the right, in its sole discretion, to require that we redeem up to $7.5million in principal amount of the debentures. This condition has been met, andmanagement believes the holder may exercise its right to require redemption.Management believes existing cash and investments will be sufficient to meetthe obligation to redeem, should the holder exercise its right.

The Companymaintains cash balances at the subsidiary level to meet short-term capitalrequirements and to satisfy local statutory liquidity requirements. Theserequirements, as well as local tax implications, may limit the amount ofcapital that can be repatriated from certain subsidiaries. These funds arefreely available to the subsidiaries for operationalpurposes. Specifically, K.K. 24-7 Search has $2.8 million in cash as of June 30, 2006 that must be kept inJapan 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.

The Company is subjected to routine tax examinations by taxingauthorities at the federal, state and local levels in the United States and byvarious taxing authorities in foreign countries.  As of June 30, 2006,there are several reviews being conducted and Management is of the opinion thatthe ultimate outcome of these examinations will not have a material adverseimpact on the financial position of the Company or the results of itsoperations.

**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 June30, 2006. Accordingly, we are not materially exposed to any financing,liquidity, market or credit risk that could arise if we had engaged in suchrelationships.

Common stock warrants issued in conjunction with our subordinatedconvertible debentures are equity-linked derivatives and accordingly representoff-balance sheet arrangements.  In addition, the conversion 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 5 to the consolidated financial statements for more information.

29

----

**CRITICAL ACCOUNTING POLICIES**

***General***

Ourinterim consolidated financial statements are prepared in conformity withaccounting principles generally accepted in the United States of America. Assuch, management is required to make certain estimates, judgments andassumptions that it believes are reasonable based upon the 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:

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

*Media*

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

*Search*

Our revenue fromour Search segment is primarily based on CPC fees paid by client advertisers.CPC fees are generated each time users click on Web site listings that wesubmitted into search engine databases and are directed to our clientadvertisers’ Web sites. To a lesser extent, we also generate revenue from feespaid by search engines that employ us to optimize the submission of Web sitelistings and report on advertising campaigns for their advertisers. Agreementsare primarily short-term and revenue is recognized as services are delivered,provided that no significant obligations remain outstanding and collection ofthe resulting receivable is probable. We become obligated to make payments tosearch engine distribution partners that have contracted with us in the periodin which the clicks occur. Such expenses are classified as cost of revenue inthe consolidated statements of operations. When we provide SEM services as anagent for a fixed commission or in other transactions in which we do not haveprincipal risk and reward, we recognize revenue on a net basis.

*Technology*

Our Technologyrevenue is derived primarily from licensing of our software, hostedadvertisement serving and software maintenance and technical support services.Revenue from advertisement serving hosted centrally on our servers is recognizedupon delivery. Revenue from software licensing agreements is recognized inaccordance with Statement of Position (“SOP”) No. 97-2, *Software Revenue Recognition*, and SECStaff Accounting Bulletin (“SAB”) No. 104, *RevenueRecognition*, upon delivery of the software, which is generally whenthe software is made available for download, there is persuasive evidence of anarrangement, collection is reasonably assured, the fee is fixed or determinableand vendor-specific objective evidence exists to allocate the total fees to allelements of the arrangement. Contracts 

30

----

that bundle thesoftware license with software maintenance and technical support are recognizedratably over the contract term. Revenue from software maintenance and technicalsupport contracts is recognized ratably over the life of the agreement, whichtypically does not exceed one year.

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

*DeferredRevenue*

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

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

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

***Impairment ofLong-Lived Assets***

We evaluategoodwill and indefinite lived intangible assets on an annual basis and wheneverevents or changes in circumstances indicate that a carrying amount may not befully recoverable. Long-lived assets, including property and equipment,long-term assets and amortizable intangible assets, are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountmay not be fully recoverable. Conditions that would necessitate an impairmentassessment include a significant decline in the observable market value of anasset, a significant change in the extent to which or manner in which an assetis used or a significant adverse change that would indicate that the carryingamount of an asset or group of assets is not recoverable.  We assess 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 amount ofthe 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 assets are amortized on a straight-line basisover their estimated useful lives, which are generally two to seven years,except for trademarks that have an indefinite life.

31

----

***Contingencies and Litigation***

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

***RestructuringEstimates***

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

***Investments***

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

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

***Stock-BasedCompensation***

EffectiveJanuary 1, 2006, we adopted Statement of Financial Accounting StandardsNo. 123 (revised 2004) (“SFAS No. 123R”), “*Share-Based Payment*,” using the modifiedprospective transition method and accordingly prior periods have not beenrestated to reflect the impact of SFAS 123R. Under SFAS 123R, stock-basedawards granted prior to its adoption will be expensed over the remainingportion of their vesting period. These awards will be expensed using the samefair value measurements which were used in calculating pro forma stock-basedcompensation expense under SFAS 123. For stock-based awards granted on or afterJanuary 1, 2006, we will amortize the stock-based compensation over the requisiteservice period. We determines the fair value of these awards using theBlack-Scholes option pricing model.

Prior to January 1,2006, we accounted for stock-based employee compensation arrangements inaccordance with provisons of Accounting Principles Board (“APB”) OpinionNo. 25, “*Accounting for Stock Issued to Employees*,”and Financial Accounting Standards Board (“FASB”) interpetation No. 44, “*Accounting for Certain Transactions Involving Stock Compensation—aninterpretation of APB Opinion No. 25*,” and complied with thedisclosure provision of SFAS No. 123, “*Accounting for Stock-BasedCompensation*” and SFAS No. 148, “*Accountingfor Stock-Based Compensation—Transition and Disclosure*.” Under APBNo. 25, compensation cost is recognized based on the difference, if any,on the date of grant between the fair value of the Company’s common stock andthe amount an employee must pay to acquire the common stock.

**MARKET FOR COMPANY’S COMMON EQUITY**

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

32

----

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

ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.

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

*Interest Rate Risk*

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

*Foreign Currency Risk*

International revenuesaccounted for approximately 59% of our total revenues during the six monthperiod ended June 30, 2006, as compared to 55% for the fiscal year endedDecember 31, 2005. The growth in our international operations has increased ourexposure to foreign currency fluctuations. Revenues and related expensesgenerated from our international subsidiaries are generally denominated in thefunctional currencies of the local countries. Primary currencies include Euros,British Pounds Sterling, Japanese Yen, Korean Won, Canadian Dollars andAustralian Dollars. The income statements of our international operations aretranslated into U.S. Dollars at the average exchange rates in each applicableperiod. To the extent the U.S. Dollar weakens against foreign currencies, thetranslation of these foreign currency denominated transactions results inincreased revenues, operating expenses and net income for our foreignoperations. Similarly, our revenues, operating expenses and net income willdecrease for our international segments when the U.S. Dollar strengthensagainst foreign currencies. Realized foreign currency transaction gains(losses) included in other income in the consolidated statements of operationswere immaterial for the six month period ended June 30, 2006. We expect to usethe assets denominated in foreign currencies for project execution expendituresin the currency in which they are held as the risk of realized translationlosses 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 six monthperiod ended June 30, 2006.

ITEM 4. CONTROLS AND PROCEDURES

*Evaluationof Controls and Procedures*

As of the end of theperiod covered by this Quarterly Report on Form 10-Q, an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures was carried out by us under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Operating Officer. Based on that conclusion, our Chief Executive Officerand Chief 

33

----

Operating Officerconcluded that our disclosure controls and procedures have been designed andare being operated in a manner that provides reasonable assurance that theinformation required to be disclosed in reports filed pursuant to theSecurities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicated toour management, including our Chief Executive Officer and Chief OperatingOfficer, as appropriate, to allow timely decisions regarding requireddisclosure. In designing and evaluating the disclosure controls and procedures,our management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and our management necessarily is required to applyits judgment in evaluating the cost-benefit relationship of possible controlsand procedures.

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

*Disclosure Controls andProcedures*

We have established disclosure controls andprocedures to ensure that material information relating to the Company,including its consolidated subsidiaries, is made known to the officers whocertify the Company’s financial reports and to other members of seniormanagement and the Board of Directors.

Our management, with the participation of our ChiefExecutive Officer and Chief Operating Officer, has evaluated the effectivenessof our “disclosure controls and procedures” (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) as of the end of the period covered bythis report.  Based on such evaluation, our Chief Executive Officer andChief Operating Officer have concluded, as of June 30, 2006, that the Company’sdisclosure controls and procedures are effective to ensure that the informationrequired to be disclosed by the Company in the reports that it files or submitsunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in SEC rules and forms, and to ensure thatinformation is accumulated and communicated to our management, including theChief Executive Officer and Chief Operating Officer, as appropriate to allowtimely decisions regarding required disclosure.

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

*Changesin Internal Control over Financial Reporting*

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

34

----

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 proceeding by any governmentalauthority.

ITEM 1A.  RISK FACTORS

**RISKS RELATED TO 24/7 REAL MEDIA, INC.**

WE MAY NOT BE ABLE TO SUSTAIN OUR PROFITABILITY.

We achievedprofitability in accordance with generally accepted accounting principles inthe United States, or GAAP, for the full year ended December 31, 2005 and forthe three month period ended June 30, 2006; however, we incurred net losses of$7.0 million for the six month period ended June 30, 2006 and $0.2 million and$0.6 million for the three and six month periods ended June 30, 2005, respectively. We may not achieve profitabilityfor future quarterly or annual reporting periods.  We may incur net losses for the foreseeablefuture.  Even if we do maintainprofitability, we may not be able to sustain or increase profitability in theshort-term or long-term on a quarterly or an annual basis.

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

Our ability to compete depends, in part, on our success at upgradingand integrating our existing products and technology globally.  From time to time we upgrade and issue newreleases of our existing technology to integrate new functionalities andrespond to industry developments.  Forexample, we recently released a new version, 6.0, of our Decide DNA platformfor search marketers and a new version, 6.0, of our OAS platform targeted atpublishers.  OAS 6.0 builds on theprevious 5.8 version, and also incorporates Insight XE and Insight ACT products(now known as our analytics and behavioral targeting applications) as modules;a small number of our customers have implemented OAS 6.0 and we will transitionthe balance of our central adserving customers to it over the remainder of2006. Future versions of OAS 6.0 may incorporate our Decide DNA technology. Wemay also build functionalities of our existing OAD solution and create aversion of OAS targeted at advertisers. We may experience delays, difficulties or increased costs that couldhinder or prevent the successful design, integration, development, introduction,implementation or marketing of new releases of our technology globally.  In addition, we must ensure that theperformance levels and capacity of our technology remain steady when we releasenew versions to our customers.  Anymaterial delays in introducing a new release or performance problems couldcause us to lose customers and cause our revenue to decline.

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

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

·                  changesin regulatory requirements;

35

----

·                  reducedprotection for intellectual property rights in some countries;

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

·                  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;

·                  theinability to utilize certain foreign tax credits; and

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

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

·                  difficultiesand costs of staffing and managing foreign operations;

·                  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 and negativelyimpact our results of operations.

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

Our Search segmenthas been growing faster than our other business segments. The search industryis still relatively new, competition is high and there are no set parametersamong service providers as to how to run campaigns, track data or include morecomplex features, such as behavioral targeting. We are working to develop setstandards as our Search business grows, but our current strategies may not besuccessful in the long-run. As a result, it is difficult to predict how ourSearch segment will perform in the future. For example, revenue in the segmenthas increased significantly in recent periods, while margins have decreased asour lower gross margin managed SEM services business performed better thanother search areas. Further, we have and may continue to encounter inefficiencies,such as the under or over-delivery of campaigns due to programming difficultiesor set-backs, such as outdated methodologies and tools that must bereconfigured or replaced. Furthermore, our success in SEM is dependent in parton our ability to develop and maintain good relationships with our searchengine distribution partners, who both 

36

----

cooperate andcompete with us for search clients and who change the requirements as to howexternal software must interact with their software on an on-going basis. Thereis no guarantee that our current or future Search software and techniques willmeet our clients’ needs, successfully manage increasingly complex campaigns orbe profitable for our business.

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 and creating global standards for product management,development and marketing, which we will continue during the remainder of 2006and 2007. In order to synchronize our various offices and create a uniformworldwide business model we will need to, among other things, set up uniformprocesses, formalize and build out training courses, set up global informationsharing and communication processes, identify and track productivity and cost measurementsand identify areas 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.

OUR ACQUISITIONS,WHICH HAVE BEEN CRITICAL TO OUR GROWTH, MAY NOT BE SUCCESSFUL AND COULDADVERSELY AFFECT OUR ABILITY TO PROJECT RESULTS.

We were formed inFebruary 1998 to consolidate three Internet advertising companies, andhave since acquired or entered into joint ventures with many other companies.Most recently, in September 2005, we formed a joint venture with theadvertising company Dentsu to provide our SEM services in Japan. We maycontinue pursuing selective acquisitions of businesses, technologies andproduct lines and additional joint ventures as a key component of our growthstrategy. If we acquire additional companies or expand our business linesthrough joint ventures, we will continue to face risks of integrating andimproving our financial and management controls, advertisement servingtechnology, reporting systems, infrastructure and procedures, and expanding,training and managing our work force. This process of integration may take asignificant period of time and may require the dedication of global resources,personnel and members of management, on a short or long-term basis, which maydistract management’s attention from our other operations. Any futureacquisition, investment or joint venture may result in the use of significantamounts of cash, potentially dilutive issuances of equity securities, theincurrence of debt and amortization expenses related to intangible assets. Inaddition, acquisitions involve numerous risks, including:

·                  thedifficulties in the integration and assimilation of the operations,technologies, products and personnel of an acquired business and unexpectedexpenses related to the integration and assimilation;

·                  theneed to implement or remediate controls, procedures and policies appropriatefor a U.S. public company at an acquired business that, prior to theacquisition, lacked such controls, procedures and policies;

·                  thediversion of management’s attention from other business concerns;

37

----

·                  theavailability of favorable acquisition financing for future acquisitions; and

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

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

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

At times in thepast and in certain segments, our revenues have grown significantly and havedecreased significantly. Accurate predictions of future revenues are difficult,among other things, because of the rapid changes in the markets and regulatoryenvironment in which we operate.

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 by advertisers or other clients;

·                  changesin the amount of royalties payable by us to owners of Web sites or theimposition of new charges or fees by Web site owners;

·                  thedemand by advertisers and Web publishers for our advertising and publishingsolutions;

·                  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;

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

·                  changesin governmental regulation of the Internet or other regulatory requirements;

·                  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 the abovefactors and the time we may need to adequately respond to any changes in them.For example, certain of the search engines that we partner with in themanagement of SEM services plan to impose additional charges for 

38

----

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.

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 developed a variety of products to workon or with this platform, and our Media business also utilizes Open AdStreamtechnology. We must, among other things, ensure that the technology willcontinue to function efficiently at high volumes, interact properly with ourdatabase, offer the functionality demanded by our customers and assimilate oursales and reporting functions. Customers may become dissatisfied by any systemfailure that interrupts our ability to provide our services to them, includingfailures affecting our ability to deliver advertisements or report onadvertisement delivery without significant delay. Sustained or repeated systemfailures would reduce the attractiveness of our solutions to advertisers,advertising agencies and Web publishers and result in contract terminations,fee rebates and make-goods, thereby reducing our revenue.  Slower response time or system failures mayalso result from straining the capacity of our deployed software or hardwaredue to an increase in the volume of advertising delivered through our servers.To the extent that we do not effectively address any capacity constraints orsystem failures, our business, results of operations and financial conditioncould be materially and adversely affected.

OUR REVENUE COULDDECLINE IF WE FAIL TO EFFECTIVELY MANAGE ADVERTISING INVENTORY MADE AVAILABLETO US, AND OUR GROWTH COULD BE IMPEDED IF WE FAIL TO ACQUIRE ACCESS TO NEWADVERTISING INVENTORY.

Our successdepends in part on our ability to effectively manage advertising inventory madeavailable to us. The Web publishers that list their unsold advertisinginventory with us, including a small number of large Web publishers thatprovide us with a sizable amount of inventory, are not bound by long-termcontracts. In addition, Web publishers can change the amount of inventory theymake available to us at any time. If a Web publisher decides not to makeadvertising space from its Web sites available to us, we may not be able toreplace this advertising space with advertising space from other Web sites thathave comparable traffic patterns and user demographics quickly enough tofulfill our advertisers’ requests. This would result in lost revenue. We expectthat our customers’ requirements will become increasingly sophisticated as theWeb continues to mature as an advertising medium. If we fail to manage ourexisting advertising space effectively to anticipate or meet our customers’changing requirements, our revenue could decline. Our growth also depends onour ability to expand our advertising inventory. To attract new advertisers, wemust maintain a consistent supply of attractive advertising space. We intend toexpand our advertising inventory by selectively adding to our network new Webpublishers that offer attractive demographics, innovative and quality contentand large audiences. Our ability to attract new Web publishers to our networkand to retain Web publishers currently in our network will depend on variousfactors, some of which are beyond our control. These factors include ourability to introduce new and innovative product lines and services, our abilityto efficiently manage our existing advertising inventory, our pricing policies andthe cost-efficiency to Web publishers of outsourcing all or part of theiradvertising sales. In addition, the number of competing intermediaries thatpurchase advertising inventory from Web publishers continues to increase. Thesize of our inventory may not increase or even remain constant in the future,which could cause our advertising revenue to decline significantly.

39

----

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 andmethodologies for counting clicks, and from time to time we have had to resolvedifferences between our measurements and theirs or regarding over-delivery ofadvertising impressions. Further, search advertisers are paying much closerattention to allegations of click fraud — which can occur when a userintentionally clicks on an advertisement displayed on a Web site for a reasonother than to view the related content — in the industry generally and havebecome more willing to inquire about or challenge click counts related to SEMservices. Any significant dispute over the proper measurement of clicks orother user responses to advertisements could cause us to lose customers,advertising inventory and revenue, could substantially reduce the gross profitmargin we generate in our media and search businesses and could lead to a classaction or other litigation.

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 using employee stock optionsand other stock-based compensation to attract, motivate and retain our staff.In December 2004, the Financial Accounting Standards Board issued the revisedSFAS No. 123, *Share-Based Payment*,which required us, as of January 1, 2006, to measure compensation costsfor all stock-based compensation (including stock options) at fair value and torecognize these costs as expenses in our statements of operations. Therecognition of these expenses in our statements of operations for the fiscalquarter ended June 30, 2006 had a negative effect on our earnings per share andis 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 DISCLOSE PROFORMA INFORMATION, WHICH MAY EXCLUDE ITEMS THAT ARE IMPORTANT TO AN INVESTOR’SUNDERSTANDING OF OUR RESULTS OF OPERATIONS.

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

40

----

OUR NET OPERATINGLOSS CARRYFORWARDS MAY BE LIMITED.

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

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

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 Statement of Financial AccountingStandards No. 141, “*BusinessCombinations*,” such as marketing, customer or contract-basedintangibles. The amount allocated to these intangible assets could be amortizedover a fairly short period. As a result, our earnings and the market price ofour common stock could be negatively affected.

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

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

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

We have a joint venturewith Dentsu to promote SEM services in Japan, a strategic business relationshipwith Lycos, we have major search engine distribution partners, such as Googleand Yahoo! Search Marketing, and we may enter into similar relationships withother companies. A substantial portion of our revenue is, directly orindirectly, attributable to these major relationships.  If one or more of these companies experiencesadverse business conditions that may render them unable to meet ourexpectations for the strategic business relationship or to fulfill theircontractual obligations to us, such an event could have a material adverseimpact on our business, financial condition and results of operations.

41

----

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, our Chief Financial Officer, our Chief Technical Officer andour Managing Director of Europe.  Thecompetition for experienced and talented executives, senior managers andtechnical and sales personnel has become intense in our industry.  The loss of the services of one or more ofthese persons, other similarly positioned members of management or other keypersonnel could materially and adversely affect our ability to develop ourbusiness.

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 totalworkforce and will need to continue to attract qualified personnel in order togrow our business successfully. Additionally, as our business has escalated, we have increased ourreliance on contractors and outside firms for development.  We may not be able to attract, integrate andretain the numbers and types of candidates that we desire, and we may not beable to retain our contractors and outside firms and may not be able to replacethem.  Even if we are successful inattracting new staff and retaining existing staff, we may not be able toincrease revenue quickly enough to offset the costs of the additional personnelor increased cost of retaining personnel. Any of these contingencies could 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 may not remain competitive in and couldlose business and our customers, which could have an adverse effect on revenue.

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

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

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

In addition,interruptions in our services could result from the failure of ourtelecommunications providers to provide the necessary data communicationscapacity in the time frame we require. Our Open AdStream technology resides oncomputer systems located in our data centers housed by Equinix, Switch andData, and Savvis in the United States and Level 3 Communications in Europe.These systems’ continuing and uninterrupted performance is critical to oursuccess, as a substantial portion of the revenue depend on the continuingavailability of these systems. Despite precautions that we have taken,unanticipated problems affecting our systems have from time to time in the pastcaused, and in the future could cause, 

42

----

interruptions inthe delivery of our solutions. Our business, results of operations andfinancial condition could be materially and adversely affected by any damage orfailure that interrupts or delays our operations. To improve the performanceand to prevent disruption of our services, we may have to make substantialinvestments to deploy additional servers or one or more copies of our Web sitesto mirror our online resources. Although we believe we carry property insurancewith adequate coverage limits, our coverage may not be adequate to compensateus for all losses, particularly with respect to loss of business and reputationthat may occur.

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 breach the security of our networkoperations, with minimal disruption to date. If hackers are successful in thefuture, they could misappropriate proprietary information or cause substantialdisruptions in our service. We may be required to expend capital and otherresources to protect our Web site against hackers. Any measures we may take maynot be effective. In addition, the inadvertent transmission of computer virusescould expose us to a material risk of loss or litigation and possibleliability, as well as materially damage our reputation and decrease our usertraffic.

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 or technologies,particularly in many foreign countries in which we operate, where laws or lawenforcement practices may not protect our proprietary rights as fully as in theUnited States.

43

----

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.

We have, from timeto time, been, and may in the future be, subject to claims of allegedinfringement of the trademarks and other intellectual property rights of thirdparties by us or by Web publishers with Web sites in our Web Alliance, or bycustomers who employ our Technology solutions. We may be required, or may elect, to indemnify these parties againstsuch claims. Such claims and any resultant litigation could subject us tosignificant liability for damages and could result in the invalidation of ourproprietary rights. In addition, even if we prevail, such litigation could betime-consuming and expensive to defend, 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. Any claims orlitigation from third parties may also result in limitations on our ability touse the trademarks and other intellectual property subject to such claims orlitigation unless we enter into arrangements with the third parties responsiblefor such claims or litigation, which may be unavailable on commerciallyreasonable 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 our common stock has beenvolatile historically and may continue to be unstable. For example, during thepast twelve months, the closing sales price of our common stock on the NASDAQGlobal Market has ranged from a high of $11.91 per share to a low of $3.93 pershare. The trading price of our common stock may fluctuate widely in responseto various events and factors, some of which are beyond our control, such asquarterly or annual variations in our statements of operations or the operatingresults  and stock price performance ofour competitors or business partners; announcements by us or our competitors ofacquisitions, new or improved products or services or business relationships;guidance and reports by securities analysts and changes in financial earningsestimates and recommendations; announcements about our earnings that are not inline with analyst expectations or prior Company guidance; announcements by ourcompetitors about their earnings, especially if they are not in line withanalyst expectations; sales of stock by us or by our stockholders; and newreports relating to trends in our markets and general economic conditions.

In addition, the stock market in general, and themarket prices for technology or Internet-related companies in particular, haveexperienced extreme price and volume fluctuations that have often beenunrelated or disproportionate to the operating performance of those companies.These broad market and 

44

----

industry fluctuations may negatively impact themarket 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 of positive performance in our stockprice may adversely affect our ability to retain key employees, all of whomhave been granted 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 June 30, 2006, there wereapproximately 48.9 million shares of our common stock outstanding. As of thatdate, we also had an aggregate of approximately 12.9 million shares ofcommon stock that may be sold into the market in the future, includingapproximately 8.3 million shares of our common stock issuable uponexercise of options, approximately 0.1 million shares of our common stockissuable upon the exercise of the warrants related to our preferred stock,approximately 2.3 million shares of our common stock issuable upon vesting ofrestricted shares, and approximately 2.2 million shares of our common stockissuable upon conversion of the debentures and exercise of the relatedwarrants. In addition, if we undertake an additional acquisition or financinginvolving securities convertible into shares of our common stock, the aggregatenumber of shares into which those securities are convertible will furtherincrease our overhang.

We cannot predictthe effect, if any, that future sales of shares of our common stock into themarket, or the availability of shares of common stock for future sale, willhave on the market price of our common stock. Sales of substantial amounts 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.

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 due 2006.On January 1, 2004, we began making semi-annual interest payments, which, thusfar, we have elected to pay with cash flow from operations. The entireprincipal amount of the debentures matures on September 26, 2006. We needto ensure that we will 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.

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, 

45

----

which is $8.75 pershare of our common stock, the conversion price of the debentures will bereduced to the price at which we issue new shares. This device, which isanti-dilutive for the debenture holder, may discourage us from engaging in atransaction that might otherwise be beneficial to our security holders, if wewould be required to issue 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 financial condition, results of operations, capital requirements,contractual restrictions and any other factors that the Board of Directorsdecides is relevant.

**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 

46

----

believe that ourability to compete depends upon many factors both within and beyond ourcontrol, including:

·                  thedevelopment of new online advertising media and methods;

·                  thetiming and market acceptance of new products and enhancements of existingservices developed 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 could dampen the growth in use of the Internetgenerally and decrease the acceptance of the Internet as a communications,commercial and advertising medium. State governments or governments of foreigncountries might attempt to regulate our transmissions or levy sales or othertaxes relating to our activities. The laws governing the Internet, however,remain largely unsettled, even in areas where there has been some legislative action.It may take years to determine whether and how existing laws such as thosegoverning intellectual property, privacy, libel and taxation apply to theInternet and Internet advertising. In addition, the growth and development ofInternet commerce may prompt calls for more stringent consumer protection laws,both in the United States and abroad, which may impose additional burdens oncompanies conducting business over the Internet. Our business, results ofoperations and financial condition could be materially and adversely affectedby the adoption or modification of laws or regulations relating to theInternet.

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

The U.S. federaland various state governments have recently proposed limitations on thecollection and use of information regarding Internet users. In 2004 and 2005,the U.S. Congress proposed several new pieces of legislation that would limitthe use of technologies deemed to be “spyware”, which some bills 

47

----

have defined toinclude cookies, Web beacons and javascript, which are required by our productsand services. The effectiveness of our Open AdStream products and servicescould be significantly limited by federal and state regulations limiting thecollection or use of information regarding Internet users that are inconsistentwith our policies and practices. Since many of the proposed federal and statelaws or regulations are being developed, we cannot yet determine the impactthese regulations may have on our business. In addition, growing public concernabout privacy and the collection, distribution and use of personal informationhas led to self-regulation of these practices by the Internet advertising anddirect marketing industry, and to increased federal and state regulation.  Lastly, a number of civil actions have beenbrought by federal and state authorities against companies alleged to havedistributed “spyware” without the proper consent of users. The NetworkAdvertising Initiative, of which we are a member, has developed self-regulatoryprinciples for online preference marketing. We are also subject to variousfederal and state regulations concerning the collection, distribution and useof personal information. These laws include the Children’s Online PrivacyProtection Act and state laws that limit or preclude the use of voterregistration and drivers license information, as well as other laws that governthe collection and use of consumer credit information. While we monitorlegislative initiatives, in the event that more onerous federal or state lawsor regulations are enacted or applied to us or to our clients, our business,financial condition and results of operations could be materially and adverselyaffected.

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 could be subjected to fines, faceincreased compliance costs, be required to change our data practices or beexposed to lawsuits, any one of which could have a material adverse effect onour business and results of operations.

PRIVACY CONCERNSMAY PREVENT US FROM COLLECTING USER DATA.

Growing concernsabout the use of cookies and data collection may limit our ability to developuser profiles. Web sites typically place small files of information, commonlyknown as “cookies,” on a user’s hard drive, generally without the user’sknowledge or consent. Cookie information is passed to the Web site through theInternet user’s browser software. Our Open AdStream technology enables the useof cookies and other non-personally-identifying information to deliver targetedadvertising and to limit the frequency with which an advertisement is shown toa user. Most currently available Internet browsers allow users to modify theirbrowser settings to prevent cookies from being stored on their hard drive, andMicrosoft Corporation changed the design and instrumentation of its Web browserto give users the option to accept or reject third-party cookies.  A small minority of users are currentlychoosing to prevent certain cookies. Users can also delete cookies from theirhard drive or modify them at any time. Some Internet commentators and privacyadvocates have suggested limiting or eliminating the use of cookies. Anyreduction or limitation in the use of cookies or increase in the number ofusers blocking cookies could limit the effectiveness of our sales and marketingefforts and impair our profiling and targeting capabilities. Such changes alsocould adversely affect our ability to determine the reach of advertisingcampaigns sold and delivered by us and the frequency with which users of sitesin the Web Alliance see the same advertisement.

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

48

----

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 Web Allianceand the benefits of our technology solutions to our customers. We cannotguarantee 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 Web Alliance or that we currently deliverthrough our technology solutions. To the extent that our customers refuse topay for advertisements that are blocked, or if the use of blocking softwareexceeds our expectations, our business, results of operations and financialcondition 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

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

----

*              Filed herewith.

†              Furnished herewith.

49

----

SIGNATURES

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

 

50

----