**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark one)**

 
| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|------------|-----------------------------------------------------------------------------------------------|

 

**For the quarterly period ended March 31, 2003**

 

**or**

 
| **o** | **TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|-------------------------------------------------------------------------------------------------|

 

**For the transition periodfrom                                  to**

 

**Commission file number 1-14355**

 

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

(Exact name of registrant as specified in its charter)

 

| **DELAWARE**                                                    |   | **13-3995672**                     |
|-----------------------------------------------------------------|--------|------------------------------------|
| (STATE OR OTHER JURISDICTION OF  INCORPORATION OR ORGANIZATION) |   | (IRS EMPLOYER  IDENTIFICATION NO.) |
|                                                            |   |                               |
| **7319**                                                        |
| (STANDARD INDUSTRIAL  CLASSIFICATION CODE)                      |
|                                                            |   |                               |
| **1250 BROADWAY, NEW YORK, NY**                                 |   | **10001**                          |
| (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                        |   | (ZIP CODE)                         |
|                                                            |   |                               |
| **(212) 231-7100**                                              |
| (REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)       |

 

Indicateby check mark whether the registrant has filed all reports required to be filedby Section 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 ý  NO o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

| **CLASS**                              |   | **OUTSTANDING AT May 12, 2003** |
|----------------------------------------|--------|---------------------------------|
| Common Stock, par value $.01 per share |   | 69,368,612 Shares               |

 

 

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

**March 31, 2003**

**FORM 10-Q**

**INDEX**

 
| Part I.  Financial Information                                                                         |
|-------------------------------------------------------------------------------------------------------------|
| Item 1.  Consolidated Financial Statements                                                             |
| Consolidated Balance Sheets  as of March 31, 2003 (unaudited) and December 31, 2002                         |
| Consolidated  Statements of Operations for the three months ended March 31, 2003 and  2002 (unaudited) |
| Consolidated  Statements of Cash Flows for the three months ended March 31, 2003 and 2002  (unaudited)      |
| Notes  to Unaudited Interim Consolidated Financial Statements                                               |
| Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations         |
| Item  3.  Quantitative and Qualitative  Disclosure about Market Risk                                   |
| Item  4.  Changes In and Disagrements with  Accountants on Accounting and Financial Disclosure         |
| Item 5.  Controls and Procedures                                                                       |
| Part II.  Other Information                                                                            |
| Item 1.  Legal Proceedings                                                                             |
| Item  2. Changes in Securities and Use of Proceeds                                                          |
| Item 3.  Defaults Upon Senior Securities                                                               |
| Item  4.  Submission of Matters to a Vote of  Security Holders                                         |
| Item 5.  Other Information                                                                             |
| Item 6.  Exhibits and Reports on Form 8-K                                                              |
| Signatures                                                                                                  |

 

2

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PARTI. FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATEDFINANCIAL STATEMENTS

 

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

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except share data)**

** **
|                                                                                                                                                                        |   | **March 31,****2003** |   | **December 31,****2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|--------|--------------------------|--------|
|                                                                                                                                                                        |   | **(unaudited)**       |   |                     |   |
| **ASSETS**                                                                                                                                                                  |   |                  |   |                     |   |
| Current  assets:                                                                                                                                                            |   |                  |   |                     |   |
| Cash  and cash equivalents                                                                                                                                                  |   | $                     | 4,575  |                     | $      | 7,674 |   |
| Accounts  receivable, less allowances of $1,475 and $1,369, respectively                                                                                                    |   | 11,124                |   | 9,799                    |   |
| Notes  and amounts receivable from disposition                                                                                                                              |   | 720                   |   | 720                      |   |
| Prepaid  expenses and other current assets                                                                                                                                  |   | 1,076                 |   | 1,565                    |   |
|                                                                                                                                                                        |   |                  |   |                     |   |
| Total  current assets                                                                                                                                                       |   | 17,495                |   | 19,758                   |   |
|                                                                                                                                                                        |   |                  |   |                     |   |
| Property  and equipment, net                                                                                                                                                |   | 3,699                 |   | 3,988                    |   |
| Goodwill                                                                                                                                                                    |   | 2,621                 |   | 2,621                    |   |
| Intangible  assets, net                                                                                                                                                     |   | 6,618                 |   | 6,007                    |   |
| Notes  and amounts receivable from disposition                                                                                                                              |   | 975                   |   | 1,045                    |   |
| Other  assets                                                                                                                                                               |   | 649                   |   | 548                      |   |
|                                                                                                                                                                        |   |                  |   |                     |   |
| Total  assets                                                                                                                                                               |   | $                     | 32,057 |                     | $      | 33,967 |   |
|                                                                                                                                                                        |   |                  |   |                     |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                              |   |                  |   |                     |   |
| Current  liabilities:                                                                                                                                                       |   |                  |   |                     |   |
| Accounts  payable                                                                                                                                                           |   | $                     | 4,655  |                     | $      | 4,039 |   |
| Accrued  liabilities                                                                                                                                                        |   | 9,855                 |   | 12,015                   |   |
| Current  installments of obligations under capital leases                                                                                                                   |   | 53                    |   | 47                       |   |
| Deferred  revenue                                                                                                                                                           |   | 3,124                 |   | 2,748                    |   |
|                                                                                                                                                                        |   |                  |   |                     |   |
| Total  current liabilities                                                                                                                                                  |   | 17,687                |   | 18,849                   |   |
|                                                                                                                                                                        |   |                  |   |                     |   |
| Obligations  under capital leases, excluding current installments                                                                                                           |   | 48                    |   | 66                       |   |
| Loan  payable - related party                                                                                                                                               |   | 7,975                 |   | 7,876                    |   |
| Other  long term liabilities                                                                                                                                                |   | 313                   |   | 292                      |   |
|                                                                                                                                                                        |   |                  |   |                     |   |
| Total  liabilities                                                                                                                                                          |   | 26,023                |   | 27,083                   |   |
|                                                                                                                                                                        |   |                  |   |                     |   |
| Commitments  and contingencies                                                                                                                                              |   |                  |   |                     |   |
|                                                                                                                                                                        |   |                  |   |                     |   |
| Stockholders’  equity:                                                                                                                                                 |   |                  |   |                     |   |
| Preferred  stock; $.01 par value; 10,000,000 shares authorized, 825,000 and 925,000  shares issued and outstanding, respectively (liquidation preference of $10  per share) |   | 8                     |   | 9                        |   |
| Common  stock; $.01 par value; 140,000,000 shares authorized; 69,258,688 and  59,219,844 shares issued and outstanding, respectively                                        |   | 693                   |   | 592                      |   |
| Additional  paid-in capital                                                                                                                                                 |   | 1,090,919             |   | 1,089,575                |   |
| Deferred  stock compensation                                                                                                                                                |   | (162                  | )      | (209                     | )      |
| Accumulated  other comprehensive income                                                                                                                                     |   | 314                   |   | 358                      |   |
| Accumulated  deficit                                                                                                                                                        |   | (1,085,738            | )      | (1,083,441               | )      |
| Total  stockholders’ equity                                                                                                                                            |   | 6,034                 |   | 6,884                    |   |
|                                                                                                                                                                        |   |                  |   |                     |   |
| Total  liabilities and stockholders’ equity                                                                                                                            |   | $                     | 32,057 |                     | $      | 33,967 |   |

 

Seeaccompanying notes to unaudited interim consolidated financial statements.

 

3

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

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, expect share and per share data)**

** **
|                                                                                                               |   | **Three months ended March 31,** |   |
|--------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                               |   | **2003**                         |   | **2002** |   |
|                                                                                                               |   | **(unaudited)**                  |   | **(unaudited)** |   |
|                                                                                                               |   |                             |   |   |   |
| Revenues:                                                                                                          |   |                             |   |   |   |
| Integrated  media solutions                                                                                        |   | $                                | 8,343  |   | $ | 7,516 |   |
| Technology  solutions                                                                                              |   | 3,481                            |   | 3,235 |   |
| Total  revenues                                                                                                    |   | 11,824                           |   | 10,751 |   |
|                                                                                                               |   |                             |   |   |   |
| Cost  of revenues:                                                                                                 |   |                             |   |   |   |
| Integrated  media solutions                                                                                        |   | 5,510                            |   | 5,236 |   |
| Technology  solutions (exclusive of $7 in 2002 reported below as stock-based compensation)                         |   | 1,165                            |   | 852 |   |
| Total  cost of revenues                                                                                            |   | 6,675                            |   | 6,088 |   |
|                                                                                                               |   |                             |   |   |   |
| Gross  profit                                                                                                      |   | 5,149                            |   | 4,663 |   |
|                                                                                                               |   |                             |   |   |   |
| Operating  expenses:                                                                                               |   |                             |   |   |   |
| Sales  and marketing (exclusive of $8 and $41, respectively, reported below as  stock-based compensation)          |   | 3,144                            |   | 3,044 |   |
| General  and administrative (exclusive of $38 and $186, respectively, reported below  as stock-based compensation) |   | 2,922                            |   | 3,970 |   |
| Product  development (exclusive of $1 and $36, respectively, reported below as  stock-based compensation)          |   | 588                              |   | 1,338 |   |
| Amortization  of intangible assets                                                                                 |   | 647                              |   | 542 |   |
| Stock-based  compensation                                                                                          |   | 47                               |   | 270 |   |
| Gain  on sale of non-core assets, net                                                                              |   | —                           |   | (874 | ) |
|                                                                                                               |   |                             |   |   |   |
| Total  operating expenses                                                                                          |   | 7,348                            |   | 8,290 |   |
|                                                                                                               |   |                             |   |   |   |
| Loss  from operations                                                                                              |   | (2,199                           | )      | (3,627 | ) |
|                                                                                                               |   |                             |   |   |   |
| Interest  income (expense), net                                                                                    |   | (91                              | )      | (38 | ) |
|                                                                                                               |   |                             |   |   |   |
| Loss  before provision for income taxes                                                                            |   | (2,290                           | )      | (3,665 | ) |
|                                                                                                               |   |                             |   |   |   |
| Provision  for income taxes                                                                                        |   | 7                                |   | — |   |
|                                                                                                               |   |                             |   |   |   |
| Net  loss                                                                                                          |   | (2,297                           | )      | (3,665 | ) |
|                                                                                                               |   |                             |   |   |   |
| Dividends  on preferred stock                                                                                      |   | (129                             | )      | — |   |
| Net  loss attributable to common stockholders                                                                      |   | $                                | (2,426 | ) | $ | (3,665 | ) |
|                                                                                                               |   |                             |   |   |   |
| Loss  per common share - basic and diluted                                                                         |   |                             |   |   |   |
| Net  loss                                                                                                          |   | (0.04                            | )      | (0.07 | ) |
| Net  loss attributable to common stockholders                                                                      |   | $                                | (0.04  | ) | $ | (0.07 | ) |
|                                                                                                               |   |                             |   |   |   |
| Weighted  average shares outstanding                                                                               |   | 64,473,316                       |   | 49,873,034 |   |

 

See accompanying notes to unaudited interim consolidated financialstatements.

 

4

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

** **
|                                                                                              |   | **Three months ended March 31,** |   |
|---------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                              |   | **2003**                         |   | **2002** |   |
|                                                                                              |   | **(unaudited)**                  |   | **(unaudited)** |   |
| Cash  flows from operating activities:                                                            |   |                             |   |   |   |
| Net  loss                                                                                         |   | $                                | (2,297 | ) | $ | (3,665 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities:                      |   |                             |   |   |   |
| Depreciation  and amortization                                                                    |   | 658                              |   | 1,041 |   |
| Provision  for doubtful accounts and sales reserves                                               |   | 213                              |   | 388 |   |
| Amortization  of intangible assets                                                                |   | 647                              |   | 542 |   |
| Non-cash  compensation                                                                            |   | 47                               |   | 270 |   |
| Accrued  interest on notes payable                                                                |   | 99                               |   | 66 |   |
| Gain  on sale of non-core assets, net                                                             |   | —                           |   | (874 | ) |
| Loss  on disposal of fixed assets                                                                 |   | —                           |   | 80 |   |
| Changes  in operating assets and liabilities, net of effect of acquisitions and  dispositions:    |   |                             |   |   |   |
| Accounts  receivable                                                                              |   | (1,538                           | )      | 415 |   |
| Prepaid  assets and other current assets                                                          |   | 490                              |   | (21 | ) |
| Other  assets                                                                                     |   | (57                              | )      | 795 |   |
| Accounts  payable and accrued liabilities                                                         |   | (1,226                           | )      | (3,811 | ) |
| Deferred  revenue                                                                                 |   | 334                              |   | (288 | ) |
|                                                                                              |   |                             |   |   |   |
| Net  cash used in operating activities                                                            |   | (2,630                           | )      | (5,062 | ) |
|                                                                                              |   |                             |   |   |   |
| Cash  flows from investing activities:                                                            |   |                             |   |   |   |
| Proceeds  from notes and amounts receivable from disposition of non-core assets, net of  expenses |   | 70                               |   | — |   |
| Cash  paid for acquisitions, net                                                                  |   | (150                             | )      | — |   |
| Capital  expenditures, including capitalized software                                             |   | (325                             | )      | (32 | ) |
| Cash  paid for investments                                                                        |   | (50                              | )      | — |   |
|                                                                                              |   |                             |   |   |   |
| Net  cash used in investing activities                                                            |   | (455                             | )      | (32 | ) |
|                                                                                              |   |                             |   |   |   |
| Cash  flows from financing activities:                                                            |   |                             |   |   |   |
| Proceeds  from exercise of stock options                                                          |   | 42                               |   | — |   |
| Payment  of capital lease obligations                                                             |   | (12                              | )      | (10 | ) |
| Issuance  of notes payable                                                                        |   | —                           |   | 1,500 |   |
| Proceeds  from sale of non-core assets                                                            |   | —                           |   | 1,272 |   |
|                                                                                              |   |                             |   |   |   |
| Net  cash provided by financing activities                                                        |   | 30                               |   | 2,762 |   |
|                                                                                              |   |                             |   |   |   |
| Net  change in cash and cash equivalents                                                          |   | (3,055                           | )      | (2,332 | ) |
| Effect  of foreign currency on cash                                                               |   | (44                              | )      | 26 |   |
| Cash  and cash equivalents at beginning of year                                                   |   | 7,674                            |   | 6,974 |   |
|                                                                                              |   |                             |   |   |   |
| Cash  and cash equivalents at end of year                                                         |   | $                                | 4,575  |   | $ | 4,668 |   |

 

See accompanying notes tounaudited interim consolidated financial statements.

 

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**(1)  SUMMARY OFOPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES**

 

**Summary of Operations**

 

24/7Real Media, Inc. (the “Company”) together with its subsidiaries is a developerand global provider of solutions for interactive marketing.  The Company is organized into two principallines of business: Integrated Media Solutions and Technology Solutions.

 

IntegratedMedia Solutions connects advertisers to audiences through the followingsources:

 

•  24/7 Web Alliance - a global alliance of Websites where advertisers can place a global ad campaign or geographically selectregions of the world to target

 

•  24/7 Website Results - performance basedsearch marketing services

 

•  Other services including an interactivedesktop information and messaging tool, known as 24/7 Messenger, brokerageservices for online promotions and e-mail.

 

TechnologySolutions provides advertising delivery and management to Web sites, adagencies and advertisers.  The Company’spropriety technology, Open AdStream ®, can be hosted locally by customers ontheir servers or centrally by the Company.

 

TheCompany’s business is characterized by rapid technological change, new productdevelopment and evolving industry standards. The Company’s success may depend, in part, upon the continued expansionof the Internet as a communications medium, prospective product developmentefforts and the acceptance of the Company’s solutions by the marketplace.

 

**Factors Affecting Comparability of 2003 and2002**

 

InMay 2002, the Company completed the sale of certain assets related to the USe-mail management product which had approximately $1.3 million in revenueduring the first quarter of 2002.

 

InJanuary 2003, the Company sold a majority stake in iPromotions, Inc.  iPromotions revenue was approximately $0.2million in the first quarter of 2002 and $0.1 million in 2003 (see note 3).

 

InJanuary 2003, the Company acquired Insight First, Inc., a web analyticscompany.  The impact on the firstquarter of 2003 was not significant (see note 2).

 

Dueto restructuring initiatives adopted in the fourth quarter of 2002, we reducedour headcount by approximately 26 employees during the first quarter of 2003.The headcount has decreased 74 from 300 at March 31, 2002 to 226 at the March31, 2003.

 

**Organization and Basis of Presentation**

 

*Principles of Consolidation*

 

Theaccompanying consolidating financial statements include the accounts of theCompany and its majority-owned and controlled subsidiaries from theirrespective dates of acquisition.  Allsignificant intercompany transactions and balances have been eliminated.

 

6

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Theaccompanying interim consolidated financial statements are unaudited.  In the Company’s opinion, the unauditedconsolidated financial statements have been prepared on the same basis as theannual consolidated financial statements and reflect all adjustments, whichinclude only normal recurring adjustments, necessary to present fairly thefinancial position and the results of the Company’s operations and cash flowsfor the interim periods presented.  Thefinancial statements, financial data and other information disclosed in thesenotes to the consolidated results are not necessarily indicative of the resultsexpected for the full fiscal year or any future period.

 

Theaccompanying consolidated financial statements should be read in conjunctionwith the audited consolidated financial statements for the year ended December31, 2002.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America  have been condensed oromitted pursuant to the Securities and Exchange Commission’s rules andregulations.

 

*Use of Estimates*

 

Thepreparation of consolidated financial statements in accordance with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect that reported amountsof assets and liabilities and the disclosure of contingent assets and liabilitiesat the date of the consolidated financial statements and the reported amountsof revenue and expenses during the reporting period.  These estimates and assumptions related to estimates ofcollectibility of accounts receivable, the realization of goodwill and otherintangible assets, accruals and other factors. Actual results could differ from those estimates.

 

###### *Cash andCash Equivalents*

 

TheCompany considers all highly liquid securities, with original maturities ofthree months or less, to be cash equivalents. Cash and cash equivalents consisted principally of money marketaccounts.

######  

*Concentration of Credit Risk*

 

TheCompany maintains cash in bank deposit accounts which, at times, exceed thefederally insured limits.  The Companyhas not experienced any losses in these accounts.

 

###### *UnbilledReceivables*

######  

AtMarch 31, 2003 and December 31, 2002, accounts receivable includedapproximately $5.3 million and $5.1 million, respectively, of earned butunbilled receivables, which are a normal part of the Company’s business.  Advertising contracts are typically invoicedmonthly, in the period subsequent to when the revenue has been earned.

 

*Capitalized Software*

 

In accordance with American Institute of Certified Public Accountants’Statement of Position No. 98-1, Accounting for the Cost of Computer SoftwareDeveloped or Obtained for Internal Use (“SOP No. 98-1”), the Company requiresall costs related to the development of internal use software other than thoseincurred during the application development stage to be expensed as 

 

7

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incurred. SOP No. 98-1 also provides guidance on the capitalization ofcosts incurred during the application development stage for computer softwaredeveloped or obtained for internal use. As of March 31, 2003, the Company had capitalized approximately $1.1million in connection with the Open Advertiser ad serving product.  Depreciation will be calculated under thestraight-line method over the estimated useful life of the software, or 4 yearsand begin when the product is available for general release, which is expectedin the summer of 2003.

 

*Revenue and ExpenseRecognition*

 

*Integrated MediaSolutions*

 

24/7 Web Alliance revenues are generated by delivering advertisingimpressions for a fixed fee to third-party Web sites.  24/7 Website Results revenues are derived from driving traffic toa client Web sites.  Email relatedrevenues are derived from delivering advertisements to email lists foradvertisers and Web sites.  Agreementsare primarily short term and revenues are recognized as services are deliveredprovided that no significant Company obligations remain outstanding andcollection of the resulting receivable is probable.

 

*Technology Solutions*

 

Technology Solutions revenues are derived from licensing the Company’ssoftware, ad serving, and maintenance and technical support contracts.  Revenue from software licensing agreementsis recognized in accordance with Statements of Position (“SOP”) 97-2, “SoftwareRevenue Recognition,” and Staff Accounting Bulletin No. 101, “RevenueRecognition in Financial Statements.”  Generally, the Company recognizesrevenue from software license arrangements upon delivery of thesoftware, and there is pervasive evidence of an arrangement, collection isreasonably assured, the fee is fixed or determinable, and vendor-specificobjective evidence exists to allocate the total fees to all elements of thearrangement.

 

The Company recently refined its OAS Local strategy to offer customersthe flexibility to adapt to rapidly changing enterprise requirements whilereducing the risks and costs associated with traditional software licensingmodels.  The Company has also adjusted its software arrangements, whichbundle a software license with maintenance and technical supportservices.  As a result, the Company changed the revenue recognition methodfor OAS Local sales, resulting in the deferral of a portion of OAS localrevenue to future periods.  Using thismethod, the Company recognizes as revenue the total value of its softwarearrangements ratably over the term of the software license.  This change will have the effect ofmodestly reducing license fee revenue in 2003 and deferring a portion ofrevenue to future periods.  The Company will recapture the reductionin upfront license fee revenue in subsequent years as it recognizes deferredrevenue on its software arrangements. Under the prior arrangements, the Company typically recognizedsoftware license revenue immediately upon delivery of the software andrecognized revenue related to maintenance and technical support servicesratably as earned.

 

Revenue from ad serving is recognized upon delivery.  The contracts are usually for a one-yearperiod and are billed on a monthly basis.

 

Expense from the Company’s licensing, maintenance and technical supportrevenues are primarily payroll costs incurred to deliver and support thesoftware.  These expenses are classifiedas cost of revenues in the accompanying consolidated statements of operations.

 

8

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###### *Stock-BasedCompensation*

 

The Company accounts for stock-based employee compensation arrangementsin accordance with provisions of APB No. 25, “Accounting for Stock Issued toEmployees,” and FASB interpretation No. 44, “Accounting for CertainTransactions Involving Stock Compensation – an interpretation of APB OpinionNo. 25,” and complies with the disclosure provisions of SFAS No. 123,“Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting forStock-Based Compensation – Transition and Disclosure.”  Under APB No. 25, compensation cost isrecognized based on the difference, if any, on the date of grant between thefair value of the Company’s common stock and the amount an employee must pay toacquire the common stock.  SFAS No. 148requires more prominent and more frequent disclosures in both interim andannual financial statements about the method of accounting for stock-basedcompensation and the effect of the method used on reported results.  We adopted the disclosure provisions of SFASNo. 148 as of December 31, 2002 and continue to apply the measurementprovisions of APB No. 25.

 

Had the Company determined compensation cost based on the fair value atthe grant date for its stock options under SFAS No. 123, the Company’s net losswould have been increased to the pro forma amounts indicated below:

 
|                                                                                                                                 |   | **For the Three Months Ended March 31,**     |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                                                                                                 |   | **2003**                                     |   | **2002** |   |
|                                                                                                                                 |   | **(in thousands, except per share amounts)** |   |
| Net loss:                                                                                                                            |   |                                         |   |   |   |
| As reported                                                                                                                          |   | $                                            | (2,297 | ) | $ | (3,665 | ) |
| Deduct: Total stock-based employee compensation  expense determined under fair-value-based method for all awards, net of tax  effect |   | 2,210                                        |   | 4,485 |   |
| Pro forma                                                                                                                            |   | $                                            | (4,507 | ) | $ | (8,150 | ) |
| Net loss per share:                                                                                                                  |   |                                         |   |   |   |
| As reported                                                                                                                          |   | $                                            | (0.04  | ) | $ | (0.07 | ) |
| Pro forma                                                                                                                            |   | (0.07                                        | )      | (0.16 | ) |

 

The per share weighted-average fair value of stock options granted forthe three months ended March 31, 2003 and 2002 is $0.17 and $0.20,respectively, on the date of grant using the Black-Scholes method with thefollowing weighted-average assumptions: 2003 - risk free interest rate 2.47%,an expected life of 4 years and volatility of 103%; and 2002 – risk freeinterest rate 4.59%, an expected life of 4 years and volatility of 97%.

 

The Company accounts for non-employee stock-based awards in which goodsor services are the consideration received for the equity instruments issuedbased on the fair value of the equity instruments issued in accordance with theEITF 96-18, Accounting For Equity Instruments That Are Issued To Other ThanEmployees For Acquiring, or in Conjunction With Selling Goods or Services.

 

9

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###### *PreferredStock*

 

| **Series** |   | **Shares  Authorized** |   | **Price Per  Share** |   | **Conversion  Rate**  |   | **Ouststanding at** |   |
|------------|--------|------------------------|--------|----------------------|--------|-----------------------|--------|---------------------|--------|
|       |   |                   |   | **March 31, 2003**   |   | **December 31, 2002** |   |
| A          |   | 800,000                |   | $                    | 10.00  |                  | $      | 0.20535             |   | 800,000 |   | 800,000 |   |
| B          |   | 125,000                |   | 10.00                |   | 0.20660               |   | 25,000              |   | 125,000 |   |
|       |   |                   |   |                 |   |                  |   | 825,000             |   | 925,000 |   |
|            |        |                        |        |                      |        |                       |        |                     |        |  |  |  |  |

 

On February 14, 2003, 100,000 shares of Series B Preferred Stock wereconverted into 4,840,271 shares of common stock.  The Preferred Stock accrues and cumulates dividends at a rate of6% per year, compounded monthly, payable when, as and if declared by theCompany’s Board of Directors.  Allaccrued dividends must be paid before any dividends may be declared or paid onthe Common Stock, and shall be paid as an increase in the liquidationpreference payable upon the sale, merger, liquidation, dissolution or windingup of the Company.  Accrued but unpaiddividends are cancelled upon conversion. As of March 31, 2003, there are approximately $0.3 million of accruedbut unpaid dividends.

 

In the event of a liquidation, dissolution or winding up of theCompany, the holders of the Preferred Stock are entitled to a liquidationpreference payment per share equal to the purchase price, plus any dividendsaccrued but unpaid as of such date before any payment to holders of CommonStock.  After payment of the foregoingpreference, the holders of each share of Preferred Stock would then participate*pro rata* with the holders of theCommon Stock, on an as converted basis, in the distribution of the proceedsfrom such a liquidation event to the holders of the Common Stock until suchtime as the holders of Preferred Stock shall have received an amount equal tothree times the purchase price (inclusive of their liquidationpreference).  A merger, consolidation orsale of the Company will be treated as a liquidation event unless suchtransaction has been approved by the holders of a majority of the outstandingPreferred Stock.

 

###### *ComprehensiveLoss*

 

Totalcomprehensive loss for the three months ended March 31, 2003 and 2002 was$(2.3) million and $(3.7) million, respectively.  Comprehensive loss resulted primarily from net losses of $(2.3)million and $(3.7) million.

 

### *Loss PerShare*

 

Lossper share is presented in accordance with the provisions of SFAS No. 128,“Earnings Per Share” (“EPS”).  Basic EPSexcludes dilution for potentially dilutive securities and is computed bydividing loss available to common shareholders by the weighted average numberof common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur ifsecurities or other contracts to issue common stock were exercised or convertedinto common stock and resulted in the issuance of common stock.  Diluted net loss per share is equal to basicnet loss per share since all potentially dilutive securities are anti-dilutivefor each of the periods presented. Diluted net loss per common share for the three months ended March 31,2003 and 2002 does not include the effects of options to purchase 19.3 millionand 8.3 million shares of common stock, respectively; 5.6 million and 4.0million common stock warrants, respectively, and 40.2 million shares ofPreferred Stock in 2003, on an “as if” converted basis, as the effect of theirinclusion is anti-dilutive during each period.

 

10

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### *Reclassifications*

 

Certainreclassifications have been made to prior year consolidated financialstatements to conform to current year’s presentation.

 

**(2)  BUSINESSCOMBINATIONS**

 

*Acquisition of Now Marketing*

 

OnSeptember 19, 2002, the Company acquired certain assets of Vflash d/b/a NowMarketing (“Now Marketing”), a New York-based marketing services firm.  The acquisition agreement required Now Marketing’sultimate parent, Elron Electronic Industries Ltd. and Gilbridge, Inc.,(together “Now Marketing’s Parent”), to make a $1.25 million investment in theCompany in exchange for 125,000 shares of Series B Preferred Stock.  Accordingly, the total purchaseconsideration of $4.3 million consists of 4.1 million shares of Common Stockvalued at $1.7 million, 125,000 shares of Series B Preferred Stock valued at$2.5 million and $60,000 of transaction costs. The Series B Preferred Stock is convertible into Common Stock of theCompany at any time at the option of the holder thereof at a conversion priceof $0.2066 per share of Common Stock, or 6,050,339 shares of Common Stock on anas-if converted basis.

 

Theexcess purchase price (excluding the $1.25 million Series B Preferred Stockdiscount) over the fair market value of net tangible assets of approximately$1.8 million has been allocated to acquired technology which is being amortizedover 4 years.  The acquisition wasaccounted for as a purchase business combination in accordance with SFAS No.141, ‘‘Business Combinations’’ and SFAS No. 142, ‘‘Goodwill and OtherIntangible Assets’’.

 

Thenet tangible assets acquired consist of the following:

 

| **Asset/ Liability** |   | **Amount** |   |
|----------------------|--------|------------|--------|
|                 |   |       |   |
| Cash                 |   | $          | 1,250  |   |
| Accrued liabilities  |   | (18        | )      |
|                 |   | $          | 1,232  |   |

 

*Acquisition of Insight First*

 

OnJanuary 21, 2003, the Company acquired certain assets of Insight First, Inc.(“Sellers”), including specific contracts, intangibles and employeerelationships, related to the Seller’s Web analytics solutions, including theintellectual property relating to specific products in exchange for 3,526,093shares of the Company’s common stock valued at approximately $1.0 million, plus$150,000 in cash.  In addition, theCompany has a contingent obligation to pay additional earn-out consideration ofup to $2.2 million, in either cash or common stock, at the Company’sdiscretion, subject to achievement of earn-out targets relating to revenuegenerated by the acquired business in fiscal years 2003 and 2004.  The Company agreed to register for resaleall of the Company’s common stock issued at closing.  In the event that such registration has not been effected priorto the 90th business day following the closing, the Company may berequired to repurchase from the Sellers up to an aggregate $114,160 of theCompany’s Common Stock issued at closing.

 

Thepurchase price in excess of fair value of net tangible assets and liabilitiesacquired of $1.3 million has been allocated to acquired technology.  The acquired technology is being amortizedover the expected benefit period of four years.  The acquisition was accounted for as a purchase 

 

11

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businesscombination in accordance with SFAS No. 141, “Business Combinations” and SFASNo. 142, “Goodwill and Other Intangible Assets”.

 

Thenet tangible assets acquired consist of the following:

 

| **Asset/ Liability** |   | **Amount** |   |
|----------------------|--------|------------|--------|
|                 |   |       |   |
| Current Assets       |   | $          | 1      |   |
| Fixed assets         |   | 44         |   |
| Accrued liabilities  |   | (41        | )      |
|                 |   | $          | 3      |   |

 

Thefollowing pro forma consolidated amounts give effect to the Company’sacquisition of Now Marketing and Insight First accounted for by the purchasemethod of accounting as if it had occurred at the beginning of the period byconsolidating the results of operations of the acquired entity for the threemonths ended March 31, 2003 and 2002.

 

Thepro forma consolidated statements of operations are not necessarily indicativeof the operating results that would have been achieved had the transactionsbeen in effect as of the beginning of the periods presented and should not beconstrued as being representative of future operating results.

 
|                                                                |   | **Three Months Ended****March 31,** |       |
|---------------------------------------------------------------------|--------|-------------------------------------|------------|
|                                                                |   | **2003**                            |       | **2002** |   |
|                                                                |   |                                | ** ** |   | ** ** |
| Total revenues                                                      |   | $                                   | 11,845     |   | $ | 10,949 |   |
| Net loss                                                            |   | (2,340                              | )          | (6,158 | ) |
| Loss per share                                                      |   | $                                   | (0.04      | ) | $ | (0.11 | ) |
| Weighted average shares used in net loss per share  calculation (1) |   | 65,296,071                          |       | 57,499,127 |   |

 

----

(1)  The weighted average shares used to computepro forma basic and diluted net loss per share for the three months ended March31, 2003 and 2002 includes the 4,100,000 and 3,526,093 common shares issued forNow Marketing and Insight First, respectively, as if the shares were issued onJanuary 1, 2002.

 

**(3)  DISPOSAL OFNON-CORE ASSETS**

 

*Sale of iPromotions, Inc.*

 

OnJanuary 31, 2003, the Company entered into an Asset Purchase Agreement withiPromotions, Inc., a corporation formed by private investors including some ofthe Company’s employees.  Pursuant tothe terms of the Asset Purchase Agreement, the Company sold to the investors,specific contracts, equipment, intangibles, and employee relationships relatedto our iPromotions business, including the intellectual property relating tospecific products and gave $50,000 in cash in exchange for shares of preferredstock representing a 19.9% interest in iPromotions, Inc. on a convertedbasis.  Accordingly, the Companyeffectively sold a majority stake in its iPromotions business.  Prior to the sale, the carrying value of iPromotionswas $0, therefore, there was no gain or loss on the transaction.  The cash payment was recorded as aninvestment.

 

12

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**(4)  INTANGIBLEASSETS, NET**

 

The$2.6 million in goodwill as of March 31, 2003 and December 31, 2002 relates$1.1 million to Canada (formerly ClickThrough), $0.4 million to WSR and $1.1million to Real Media.

 

The$6.6 million in Intangible assets, net at March 31, 2003 relates $1.2 millionto WSR, $2.6 million to Real Media, $1.6 million to Now Marketing and $1.2million to Insight First.  The $6.0million in Intangible assets, net at December 31, 2002 relates $1.4 million toWSR, $2.8 million to Real Media and $1.8 million to Now Marketing.

 

|                          |   | **March 31,  2003** |   | **December  31,  2002** |   | **Estimated  Useful Lives** |   |
|-------------------------------|--------|---------------------|--------|-------------------------|--------|-----------------------------|--------|
|                          |   | **(in  thousands)** |   |                    |   |
|                          |   |                |   |                    |   |                        |   |
| Goodwill                      |   | $                   | 2,621  |                    | $      | 2,621                       |   |   |   |
|                          |   |                |   |                    |   |                        |   |
| Technology (1)                |   | 9,127               |   | 7,869                   |   | 4                           |   |
| Less accumulated amortization |   | (2,828              | )      | (2,216                  | )      |                        |   |
| Net Technology                |   | 6,299               |   | 5,653                   |   |                        |   |
|                          |   |                |   |                    |   |                        |   |
| Trademark                     |   | 500                 |   | 500                     |   | 4                           |   |
| Less accumulated amortization |   | (181                | )      | (146                    | )      |                        |   |
| Net Other intangible assets   |   | 319                 |   | 354                     |   |                        |   |
|                          |   |                |   |                    |   |                        |   |
| Gross Intangible assets       |   | 9,627               |   | 8,369                   |   |                        |   |
| Less accumulated amortization |   | (3,009              | )      | (2,362                  | )      |                        |   |
| Net Intangible assets         |   | 6,618               |   | 6,007                   |   |                        |   |
|                               |        |                     |        |                         |        |                             |        |  |  |

 

----

(1)Technology increased $1.3 million due to the acquisition of Insight First,Inc..

 

**(5)  RESTRUCTURING**

 

Thefollowing sets forth the activities in the Company’s restructuring reserve forthe three months ended March 31, 2003, which is included in accrued liabilitiesin the consolidated balance sheet (in thousands):

 
|                          |   | **Beginning  Balance** |   | **Current year  utilization** |   | **Current year  reversal** |   | **Ending  Balance** |   |
|-------------------------------|--------|------------------------|--------|-------------------------------|--------|----------------------------|--------|---------------------|--------|
| Employee termination benefits |   | $                      | 1,139  |                          | $      | (795                       | )      | $                   | — |   | $ | 344 |   |
| Office closing costs          |   | 709                    |   | (161                          | )      | —                     |   | 548                 |   |
| Disposal of assets            |   | 72                     |   | (12                           | )      | —                     |   | 60                  |   |
| Other exit costs              |   | 12                     |   | (12                           | )      | —                     |   | —              |   |
|                          |   | $                      | 1,932  |                          | $      | (980                       | )      | $                   | — |   | $ | 952 |   |

 

13

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**(6)  RELATED PARTYTRANSACTIONS**

 

The Company has three Promissory Notes with PubliGroupe, a significantshareholder, totaling $7.5 million.  Onenote for $4.5 million bears an interest rate of 4.5% with principal andinterest due on October 30, 2006.  Twonotes for $1.5 million each bears an interest rate of 6% with principal andinterest due in January 2005 and May 2005.

 

Interest expense related to these notes is accrued and added to theloan principal, as it is due at maturity. Interest expense related to these notes for the three months ended March31, 2003 and 2002 was approximately $99,000 and $66,000, respectively.

 

**(7) COMMON STOCK**

 

On March 17, 2003, the Company issued 1,466,249 shares, valued atapproximately $0.3 million, to employees in lieu of cash for achievingcontractual performance-based 2002 target bonuses.  The bonuses were accrued as of December 31, 2002.

 

From January to July 2002, approximately 58 employees including membersof senior management volunteered to receive between 5 and 20% of theircompensation in the form of the Company’s common stock in lieu of cash. As a result, approximately 1.1 million shares, valued at $0.2 million, wereissued.

 

In April 2002, the Company issued 416,784 shares, valued at $0.1million, principally to the CEO, for 2001 bonuses as reported in the Company’s10-K and accrued as of December 31, 2001.

 

*Additional Paid-in Capital*

 

During the three months ended March31, 2003, the Company’s additional paid-in capital increased by $1.3 millionprimarily due to $1.1 million of common stock issued in connection with theInsight First acquisition, $0.3 in other stock-based compensation issued toemployees offset by ($50,000) related to the conversion of preferred stock.

 

**(8) STOCK INCENTIVE PLANS**

 

For the three months ended March 31, 2003, the Company grantedapproximately 1.8 million stock options under the 1998 Stock Incentive Plan,0.8 million stock options under the 2001 Incentive Plan for Non-officers and4.7 million stock options under the 2002 Stock Incentive Plan to employees atexercise prices based on the fair market value of the Company’s common stock atthe respective dates of grant.

 

On January 1, 2003, in accordance with the terms of the 2002 StockIncentive Plan, shares reserved for issuance under the Plan were increased by3,000,000.

 

**(9)  SUPPLEMENTAL CASHFLOW INFORMATION**

 

Forthe three months ended March 31, 2003 and 2002, the amount of cash paid forinterest was $3,000 and $4,000, respectively.

 

14

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**(10) SEGMENTS**

 

TheCompany’s business is comprised of two reportable segments:  Integrated Media Solutions and TechnologySolutions.  The Integrated MediaSolutions segment generates the majority of its revenues by deliveringadvertisements and promotions to affiliated Web sites and search engine trafficdelivery and marketing services.  TheTechnology Solutions segment generates revenue by providing third-party adserving and other technology services. The Company’s management periodically reviews corporate assets andoverhead expenses for each segment.  Thesummarized segment information as of and for the three months ended March 31,2003 and 2002, are as follows:

 
|                          |   | **Three months ended March 31, 2003** |   | **Three months ended March 31, 2002** |   |
|-------------------------------|--------|---------------------------------------|--------|---------------------------------------|--------|
|                          |   | **Integrated  Media  Solutions**      |   | **Technology  Solutions**             |   | **Total** |   | **Integrated  Media  Solutions** |   | **Technology  Solutions** |   | **Total** |   |
|                          |   | **(in thousands)**                    |   |
|                          |   |                                  |   |                                  |   |   |   |   |   |   |   |   |   |
| Revenues                      |   | $                                     | 8,343  |                                  | $      | 3,481 |   | $ | 11,824 |   | $ | 7,516 |   | $ | 3,235 |   | $ | 10,751 |   |
| Segment  loss from operations |   | (2,056                                | )      | (143                                  | )      | (2,199 | ) | (3,551 | ) | (76 | ) | (3,627 | ) |
| Amortization  of intangibles  |   | 335                                   |   | 312                                   |   | 647 |   | 292 |   | 250 |   | 542 |   |
| Stock-based  compensation     |   | 47                                    |   | —                                |   | 47 |   | 270 |   | — |   | 270 |   |
| Gain  on sale of assets, net  |   | —                                |   | —                                |   | — |   | 874 |   | — |   | 874 |   |
|                          |   |                                  |   |                                  |   |   |   |   |   |   |   |   |   |
| Total  assets:                |   |                                  |   |                                  |   |   |   |   |   |   |   |   |   |
| March  31, 2003               |   | 19,553                                |   | 12,504                                |   | 32,057 |   |   |   |   |   |   |   |
| December  31, 2002            |   | 22,930                                |   | 11,037                                |   | 33,967 |   |   |   |   |   |   |   |
|                               |        |                                       |        |                                       |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                         |   | **US**             |   | **International** |   | **Total** |   |
|----------------------------------------------|--------|--------------------|--------|-------------------|--------|-----------|--------|
|                                         |   | **(in thousands)** |   |
| **Three months ended March 31, 2003**   |   |               |   |              |   |      |   |
| Revenues                                     |   | $                  | 7,440  |              | $      | 4,384     |   | $ | 11,824 |   |
| Long-lived  assets                           |   | 12,654             |   | 1,908             |   | 14,562    |   |
|                                         |   |               |   |              |   |      |   |
| **Three months ended March 31, 2002**   |   |               |   |              |   |      |   |
| Revenues                                     |   | $                  | 7,549  |              | $      | 3,202     |   | $ | 10,751 |   |
| Long-lived  assets at December 31, 2002 |   | 12,249             |   | 1,960             |   | 14,209    |   |

 

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ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Thisreport includes forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. This Act provides a “safe harbor” for forward-looking statements toencourage companies to provide prospective information about themselves so longas they identify these statements as forward looking and provide cautionarystatements identifying important factors that could cause actual results todiffer from the projected results.  Allstatements other than statements of historical fact, including statementsregarding industry prospects and future results of operations or financialposition, made in this report are forward looking.  We use words such as “anticipate”, “believe”, “expect”, “future”and “intend”, and similar expressions to identify forward-lookingstatements.  Forward-looking statementsreflect management’s current expectations, plans or projections and areinherently uncertain.  Our actualresults may differ significantly from management’s expectations, plan orprojections.  Readers are cautioned notto place undue reliance on these forward-looking statements, which speak onlyas of the date hereof.  This section,along with other sections of this report, describes some, but not all, of thefactors that could cause actual to differ significantly from management’sexpectations.  We undertake noobligation to publicly release any revisions to these forward-lookingstatements that may be made to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.  Readers are urged, however, to review thefactors set forth in reports that we file from time to time with the Securitiesand Exchange Commission.  Unless thecontext requires otherwise in this report the terms “24/7 Real Media,” the“Company,” “we,” “us,” and “our” refer to 24/7 Real Media, Inc. and itssubsidiaries, and references to “24/7 Website Results” refer to 24/7 WebsiteResults, Inc., a wholly owned subsidiary of 24/7 Real Media.

 

### **GENERAL**

 

We are a gateway to the full spectrum of solutions for interactivemarketing.  Our Open AdSystemTM platform,based on our patent-protected technology, empowers Internet marketers totarget, convert and retain their best online customers and manage and protectcustomer relationships.  We work closelywith our customers to implement integrated, value-enhancing solutions to managecritical aspects of Internet marketing from ad sales and media representationto campaign planning, execution and optimization as well as audiencemeasurement and analysis.  We believeour technology solutions, and our media and marketing services, offercontrollable and cost-effective methods for generating advertising revenueconsistent with the goal of building and protecting customer relationships.

 

We generate revenue in two business segments:  Integrated Media Solutions and Technology Solutions.

 

*Integrated Media Solutions*

 

Our Media Solutions consist of the following services: (i) the 24/7 WebAlliance, a global alliance of Web sites where advertisers can place a globalrun-of-network ad campaign, or target ads by content, by geography, by time orby part of day; (ii) 24/7 Website Results, a performance-based search enginepaid inclusion service where we perform a custom buildout containing allrelevant keywords and keyword phrases and advertisers pay only when userssearch on one of those phrases and click-through to the advertiser’s Web sitefrom search listings; and (iii) other services including: desktop messagingservices and brokerage activities for internet promotions 

 

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and e-mail marketing.  Our 24/7Web Alliance includes the 24/7 Network of Web sites, which uses our OpenAdStream technology solutions to deliver and manage Internet advertisements,and our 24/7 Portfolio, which comprises Web sites with whom we provide servicesindependent of our 24/7 Network.

 

We generate revenue through the 24/7 Web Alliance from fees paid byclient advertisers.  We typically offeradvertisers a pricing model based on cost-per-thousand-impressions (“CPM”)enabling a client advertiser to pay a fee based on the number of times its adis viewed.  We may also offeradvertisers performance-based pricing models that may include cost-per-click(“CPC”) pricing allowing a client advertiser to pay us only when a user clickson the advertiser’s ad or performs a specific action, such as a clicking on auniform resource link (“URL”), downloading software, registering for membershipor other transactions.

 

We share the revenue generated through the 24/7 Web Alliance with Web sitesincluded in the 24/7 Web Alliance.  Withrespect to our 24/7 Network Web sites, our revenue share generally rangesbetween 40% and 50% depending on, among other things, our Web site partner’saudience size, number of unique visitors, impressions and page views, and theprominence of our partner’s brand name. With respect to our 24/7 Portfolio Web sites, our revenue share rangesbetween 35% and 45% depending on similar factors.

 

The following table shows by quarter the number of active advertiseraccounts and the number of paid impressions since January 1, 2002.

 

|    |   | **Number of  Active  Client Accounts** |   | **Number of  Paid  Impressions** |   |
|---------|--------|----------------------------------------|--------|----------------------------------|--------|
|    |   |                                   |   | **(in  billions)**               |   |
| Q1 2003 |   | 617                                    |   | 6.1                              |   |
| Q4 2002 |   | 518                                    |   | 4.8                              |   |
| Q3 2002 |   | 502                                    |   | 3.0                              |   |
| Q2 2002 |   | 529                                    |   | 3.3                              |   |
| Q1 2002 |   | 558                                    |   | 4.2                              |   |

 

24/7Website Results operates a paid inclusion service for advertisers.  Paid inclusion is also known as “TrustedFeed” and generally operates by converting an advertiser’s dynamicallygenerated and/or poorly optimized Web pages into an XML data feed that isspecifically designed to address the individual search engine algorithm.  This data feed is then fed directly into thedatabases of our search engine partners as if their spider had in factcollected the data.  Our 24/7 WebsiteResults strategy focuses, in part, on helping advertisers more preciselydevelop and expand the range of terms and phrases they can use to drive searchengine traffic to their Web sites.

 

Wegenerate revenue through 24/7 Website Results from performance-based fees paidby advertisers to have their Web sites included in our search engine partnerdatabases via our XML feed. We use proprietary technology to help Internetmarketers determine a set of keyword phrases most relevant to their site andagree on a CPC fee they will pay for traffic directed to their Web sites.Through our search engine relationships, we help ensure that our clients arewell represented in 

 

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thesearch results for the selected keyword phrases. We do not guarantee a positionin search results for our advertisers, only inclusion and frequent refreshcycles.

 

24/7Website Results offers advertisers important advantages to other forms of paidinclusion.  In particular, theadvertiser, with our assistance, controls which information on a Web page issubmitted and assures that the most pertinent content is indexed within thesearch engine database.  Further, ourtrusted feeds are updated more regularly than typical results obtained byautomated search engine spiders, which reduces the time lag for inclusion ofWeb sites that have frequently changing content.  In addition, our trusted feeds provide advertisers with theability to quickly edit or remove poorly performing listings.  Overall, for advertisers with Web pages thatchange regularly, our paid inclusion service combines a pay for performancemodel with the benefits of control, freshness and coverage.

 

We share the revenue generated through Website Results with our searchengine partners.  Our revenue share mayrange between 35% and 45% depending on, among other things, our distributionpartner’s size, number of unique visitors, impressions and the number ofsearches conducted, and the prominence of our partner’s brand.

 

The following table shows by quarter the number of active advertiseraccounts and the number of valid visitors for 24/7 Website Results sinceJanuary 1, 2002.

 

|    |   | **Number of  Active Client Accounts** |   | **Number of  Valid Visitors** |   |
|---------|--------|---------------------------------------|--------|-------------------------------|--------|
|    |   |                                  |   | **(in  millions)**            |   |
| Q1 2003 |   | 626                                   |   | 16.5                          |   |
| Q4 2002 |   | 472                                   |   | 12.5                          |   |
| Q3 2002 |   | 358                                   |   | 9.6                           |   |
| Q2 2002 |   | 294                                   |   | 10.7                          |   |
| Q1 2002 |   | 298                                   |   | 8.4                           |   |

 

In order to increase our revenue, we must continue to increase thenumber of advertisers we service, the number of paid ad impressions andclick-throughs on the 24/7 Web Alliance and our portfolio Web sites, the numberof valid visitors to Web sites of our search marketing clients and the CPM orCPC fees that we earn.  We drive adimpressions and click-throughs by increasing the number of Web sites in the 24/7Web Alliance and other Web sites for whom we provide services, and by buildingrelationships with Web sites that have deep, high-quality content and largeaudiences.  We drive traffic to ourWebsite Results clients primarily by adding new search engine distributionpartners and improving our placement with existing distribution partners.

 

*Technology Solutions*

 

Our Technology Solutions consist of the following products andservices:  (i) the Open AdStream®software (“OAS Local”), a turnkey Internet advertising delivery and managementsolution installed locally on our clients’ servers; (ii) the Open AdStreamservice (“OAS Central”), an Internet advertising delivery and managementservice for website publishers using our Open AdStream software distributedcentrally from our servers on an application service provider basis; (iii) theOpen InsightTM service, a service that uses our proprietary software to measureand analyze audience behavior for client Web sites; and (iv) the OpenAdvertiserTM service (“OAD”), an Internet advertising delivery and managementservice for advertisers and ad agencies distributed centrally from our serverson an application service provider basis.

 

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We generate revenue from licensing our Open AdStream software to clientWeb sites.  Our license agreementstypically provide for an upfront license fee and a software maintenance andservice fee.  We negotiate license feesbased on, among other things, the forecasted number of impressions a client Website will deliver using our software and several other factors.  To a lesser extent, we also generate revenueby providing professional services charged at an hourly rate.

 

We generate revenue from our Open AdStream service from fees paid byclient Web sites.  We typically offerWeb sites a CPM based pricing model allowing the client Web site to pay usbased on ad impressions.  For theseclient Web sites, an “impression” includes the delivery by us at their requestof any advertisement or other marketing material.  Our OAS Central revenue is determined by multiplying the CPM rateby the number of impressions delivered and is typically billed on a monthlybasis.  To a lesser extent, we alsogenerate revenue from fees paid to us by our client Web sites for traffickingtheir advertisements.  Traffickingadvertisements typically refers to entering advertisement creative material andcampaign specifications into our software engine.

 

We generate revenue from our Open Insight service from fees paid byclient Web sites.  We typically offer Websites page-view-based pricing enabling the client website to pay us based onhow many page views are measured.  Ourservice revenue is calculated by multiplying the CPM rate by the number of pageviews delivered.  To a lesser extent, wealso generate revenue by providing professional services charged at an hourlyrate.

 

We generate revenue from our Open Advertiser service from fees paid byclient advertisers and agencies.  Wehave been generating revenue from Open Advertiser in Europe since mid-2001.  Domestically, we have not generatedsignificant revenue from our Open Advertiser service because it is indevelopment and existing customers are in the beta implementation process.  We expect to launch our Open Advertiserservice in the United States during the summer of 2003.

 

The following table shows by quarter certain metrics for our TechnologySolutions since 2002.  We believe thatmetrics for periods prior to 2002 are not comparable because our TechnologySolutions then included a different product mix.

 

|    |   | **OAS Local**                               |   | **OAS Central and OAD**                     |   |
|---------|--------|---------------------------------------------|--------|---------------------------------------------|--------|
|    |   | **Number of  Active Client  Contracts (1)** |   | **Number of  Active Client  Contracts (1)** |   | **Number of  Paid  Impressions** |   |
|    |   |                                        |   |                                        |   | **(in  billions)** |   |
| Q1 2003 |   | 235                                         |   | 151                                         |   | 8.8 |   |
| Q1 2002 |   | 258                                         |   | 162                                         |   | 7.5 |   |
| Q3 2002 |   | 273                                         |   | 159                                         |   | 6.4 |   |
| Q2 2002 |   | 271                                         |   | 153                                         |   | 5.1 |   |
| Q3 2002 |   | 274                                         |   | 152                                         |   | 4.9 |   |

 

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(1)          A client contract mayrepresent multiple clients and websites utilizing Open Adstream products andservices.

 

In order to increase our revenue from our Open AdStream solutions, andour Open Insight and Open Advertiser solutions, we must continue to increasethe number of client web publishers and advertisers we service, the number ofpaid ad impressions delivered using our services, and the licensing or CPM feethat we earn.  We believe we can increasethe number of clients to whom we provide technology and services, and thelicense fees and CPM fees we charge, by developing and providing nextgeneration technology products and services, including launching our Open

 

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Advertiser service, and by leveraging the design features of ourtechnology and services to increase our ability to target high-quality audiencesegments.

 

# **CRITICALACCOUNTING POLICIES**

 

###### ***General***

 

Theconsolidated financial statements of the Company are prepared in conformitywith accounting principles generally accepted in the United States ofAmerica.  As such, the Company isrequired to make certain estimates, judgments and assumptions that managementbelieves are reasonable based upon the information available.  These estimates and assumptions affect thereported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the dates of the consolidated financial statementsand the reported amounts of revenues and expenses during the reporting periods.

 

Thesignificant accounting policies which the Company believes are the mostcritical to aid in fully understanding and evaluating the reported consolidatedfinancial results include the following:

 

***Revenue Recognition***

 

*Integrated MediaSolutions*

 

24/7 Web Alliance revenues are generated by delivering advertisingimpressions for a fixed fee to third-party Web sites.  24/7 Website Results revenues are derived from driving traffic toa client Web sites.  Email relatedrevenues are derived from delivering advertisements to email lists foradvertisers and Web sites.  Agreementsare primarily short term and revenues are recognized as services are deliveredprovided that no significant Company obligations remain outstanding andcollection of the resulting receivable is probable.

 

*Technology Solutions*

 

Technology Solutions revenues are derived from licensing the Company’ssoftware, ad serving, and maintenance and technical support contracts.  Revenue from software licensing agreementsis recognized in accordance with Statements of Position (“SOP”) 97-2, “SoftwareRevenue Recognition,” and Staff Accounting Bulletin No. 101, “RevenueRecognition in Financial Statements.”  Generally, the Company recognizesrevenue from software license arrangements upon delivery of thesoftware, and there is pervasive evidence of an arrangement, collection isreasonably assured, the fee is fixed or determinable, and vendor-specificobjective evidence exists to allocate the total fees to all elements of thearrangement.

 

The Company recently refined its OAS Local strategy to offer customersthe flexibility to adapt to rapidly changing enterprise requirements whilereducing the risks and costs associated with traditional software licensingmodels.  The Company has also adjusted its software arrangements, whichbundle a software license with maintenance and technical supportservices.  As a result, the Company changed the revenue recognition methodfor OAS Local sales, resulting in the deferral of a portion of OAS localrevenue to future periods.  Using thismethod, the Company recognizes as revenue the total value of its softwarearrangements ratably over the term of the software license.  This change will have the effect ofmodestly reducing license fee revenue in 2003 and deferring a portion ofrevenue to future periods.  The Company will recapture the reductionin 

 

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upfront license fee revenue in subsequent years as it recognizesdeferred revenue on its software arrangements. Under the prior arrangements, the Company typically recognizedsoftware license revenue immediately upon delivery of the software andrecognized revenue related to maintenance and technical support servicesratably as earned.

 

Revenue from ad serving is recognized upon delivery.  The contracts are usually for a one-yearperiod and are billed on a monthly basis.

 

Expense from the Company’s licensing, maintenance and technical supportrevenues are primarily payroll costs incurred to deliver and support thesoftware.  These expenses are classifiedas cost of revenues in the accompanying consolidated statements of operations.

 

###### ***Accounts Receivable***

 

Weperform ongoing credit evaluations of our customers and adjust credit limits basedupon payment history and the customer’s current credit worthiness, asdetermined by a review of their current credit information.  We continuously monitor collections andpayments from our customers and maintain a provision for estimated credit lossesbased upon historical experience and any specific customer collection issuesthat have been identified.  While suchcredit losses have historically been within our expectations and the provisionsestablished, we cannot guarantee that we will continue to experience the samecredit loss rates that have been experienced in the past.

 

###### ***Impairment of Long-Lived Assets***

 

EffectiveJanuary 1, 2002, we adopted SFAS No. 142, ‘‘Goodwill and Other IntangibleAssets’’ and SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Asset’’.  SFAS 142 eliminatesthe amortization of goodwill and indefinite-lived intangible assets, addressesthe amortization of intangible assets with finite lives and addressesimpairment testing and recognition for goodwill and intangible assets.  SFAS No. 144 establishes a single model forthe impairment of long-lived assets.

 

We assess goodwill for impairment annually unless events occur thatrequire more frequent reviews. Long-lived assets, including amortizable intangibles, are tested forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable.  Discounted cash flow analyses are used to assess nonamortizableintangible impairment while undiscounted cash flow analyses are used to assesslong-lived asset impairment.  If anassessment indicates impairment, the impaired asset is written down to its fairmarket value based on the best information available.  Estimated fair market value is generally measured with discountedestimated future cash flows. Considerable management judgment is necessary to estimate undiscountedand discounted future cash flows. Assumptions used for these cash flows are consistent with internalforecasts.

 

Onan on-going basis, management reviews the value and period of amortization ordepreciation of long-lived and other intangible assets. During this review, wereevaluate the significant assumptions used in determining the original cost oflong-lived assets. Although the assumptions may vary from transaction totransaction, they generally include revenue growth, operating results, cashflows and other indicators of value. Management then determines whether therehas been an impairment of the value of long-lived assets based upon events or circumstances,which have occurred since acquisition. The impairment policy is consistentlyapplied in evaluating impairment for each of our wholly owned subsidiaries andinvestments.

 

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# ***Contingencies and Litigation***

 

We evaluate contingent liabilities including threatened or pendinglitigation in accordance with SFAS No. 5, “Accounting for Contingencies”and record accruals when the outcome of these matters is deemed probable andthe liability is reasonably estimable. We make these assessments based on thefacts and circumstances and in some instances based in part on the advice ofoutside legal counsel.

 

# **RESULTS OFOPERATIONS**

 

# **FACTORSAFFECTING COMPARABILITY OF 2003 TO 2002**

 

InMay 2002, we completed the sale of certain assets related to the US e-mailmanagement product, which had approximately $1.3 million in revenue during thefirst quarter of 2002.

 

InJanuary 2003, we sold a majority stake in iPromotions, Inc.  iPromotions revenue was approximately $0.2 millionin the first quarter of 2002 and $0.1 million in 2003.

 

InJanuary 2003, we acquired Insight First, Inc., a web analytics company.  The impact on the first quarter of 2003 wasnot significant.

 

Dueto restructuring initiatives adopted in the fourth quarter of 2002, we reducedour headcount by approximately 26 employees during the first quarter of 2003.The headcount has decreased 74 from 300 at March 31, 2002 to 226 at the March31, 2003.

 

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### The following table comparesthe results of operations for the three months ended March 31, 2003 to theresults of operations for the three months ended March 31, 2002 (in thousands):

 
|                                    |   | **Three months ended March 31,** |   | **Dollar  Variance** |   | **Percentage  Variance** |   |
|-----------------------------------------|--------|----------------------------------|--------|----------------------|--------|--------------------------|--------|
|                                    |   | **2003**                         |   | **2002**             |   |                     |   |
|                                    |   |                             |   | **(in thousands)**   |   |                     |   |   |   |
|                                    |   | **(unaudited)**                  |   | **(unaudited)**      |   |                     |   |   |   |
| Revenues:                               |   |                             |   |                 |   |                     |   |   |   |
| Integrated  media solutions             |   | $                                | 8,343  |                 | $      | 7,516                    |   | $ | 827 |   | 11.0 | % |
| Technology  solutions                   |   | 3,481                            |   | 3,235                |   | 246                      |   | 7.6 | % |
| Total  revenues                         |   | 11,824                           |   | 10,751               |   | 1,073                    |   | 10.0 | % |
|                                    |   |                             |   |                 |   |                     |   |   |   |
| Cost  of revenues:                      |   |                             |   |                 |   |                     |   |   |   |
| Integrated  media solutions             |   | 5,510                            |   | 5,236                |   | 274                      |   | 5.2 | % |
| Technology  solutions                   |   | 1,165                            |   | 852                  |   | 313                      |   | 36.7 | % |
| Total  cost of revenues                 |   | 6,675                            |   | 6,088                |   | 587                      |   | 9.6 | % |
|                                    |   |                             |   |                 |   |                     |   |   |   |
| Gross  profit                           |   | 5,149                            |   | 4,663                |   | 486                      |   | 10.4 | % |
|                                    |   |                             |   |                 |   |                     |   |   |   |
| Operating  expenses:                    |   |                             |   |                 |   |                     |   |   |   |
| Sales  and marketing                    |   | 3,144                            |   | 3,044                |   | 100                      |   | 3.3 | % |
| General  and administrative             |   | 2,922                            |   | 3,970                |   | (1,048                   | )      | -26.4 | % |
| Product  development                    |   | 588                              |   | 1,338                |   | (750                     | )      | -56.1 | % |
| Amortization  of intangible assets      |   | 647                              |   | 542                  |   | 105                      |   | 19.4 | % |
| Stock-based  compensation               |   | 47                               |   | 270                  |   | (223                     | )      | -82.6 | % |
| Gain  on sale of non-core assets, net   |   | —                           |   | (874                 | )      | 874                      |   | 100.0 | % |
|                                    |   |                             |   |                 |   |                     |   |   |   |
| Total  operating expenses               |   | 7,348                            |   | 8,290                |   | (942                     | )      | -11.4 | % |
|                                    |   |                             |   |                 |   |                     |   |   |   |
| Loss  from operations                   |   | (2,199                           | )      | (3,627               | )      | 1,428                    |   | 39.4 | % |
|                                    |   |                             |   |                 |   |                     |   |   |   |
| Interest  income (expense), net         |   | (91                              | )      | (38                  | )      | (53                      | )      | -139.5 | % |
|                                    |   |                             |   |                 |   |                     |   |   |   |
| Loss  before provision for income taxes |   | (2,290                           | )      | (3,665               | )      | 1,375                    |   | 37.5 | % |
|                                    |   |                             |   |                 |   |                     |   |   |   |
| Provision  for income taxes             |   | 7                                |   | —               |   | 7                        |   | -100.0 | % |
|                                    |   |                             |   |                 |   |                     |   |   |   |
| Net  loss                               |   | (2,297                           | )      | (3,665               | )      | 1,368                    |   | 37.3 | % |
|                                         |        |                                  |        |                      |        |                          |        |  |  |  |  |  |

 

### **REVENUES**

 

**INTEGRATED MEDIA SOLUTIONS.**Revenue is derived from three sources: 24/7Web Alliance, 24/7 Website Results and Other Media Services.  24/7 Web Alliance revenue was $4.7 million and$4.3 million in the three months ended March 31, 2003 and 2002, respectively,an increase of 11.3%.  The increase isdue to increasing the size of the 24/7 Network which allowed impressions soldto increase from 4.2 billion in 2002 to 6.1 billion in 2003.

 

24/7Website Results revenue was $3.1 million and $1.7 million in the three monthsended March 31, 2003 and 2002, respectively, an increase of 82.2%.  We generate a significant portion of our24/7 Website Results revenue from relationships with a small number of searchengines, particularly at our largest traffic provider, Inktomi, which accountedfor approximately 55% of our 24/7 Web site results revenue in the first quarterof 2003.  Inktomi was recently acquiredand has implemented certain changes that has caused the revenue we generatefrom Inktomi to decline.   Our contract with Inktomi is scheduledto expire at the end of May 2003, although we are in the process ofnegotiating a renewal.  Depending on theoutcome of these discussions, we expect this contract to generate substantiallyless revenue in subsequent quarters.  Weare pursuing new relationships with a number of other searchengines that we believe could proved significant traffic in the U.S. and inEurope, and also working on new products with significant revenue potential.

 

Other Media Services revenue isgenerated primarily from e-mail and iPromotions.  E-mail revenue decreased from $1.3 million for the three monthsended March 31, 2002 to $0.5 million 

 

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for the three months endedMarch 31, 2003.  The decrease is due tothe sale of our US e-mail management product known as 24/7 Mail, to Naviant onMay 3, 2002 offset by the growth in international email.  We maintain the ability to sell e-maildomestically as a broker through Naviant’s 24/7 Mail and internationally,without restriction.  In January 2003,we sold our iPromotions unit, which accounted for $0.1 million and $0.2 millionin the three months ended March 31, 2003 and 2002, respectively.

 

Excluding the disposed USe-mail management product and iPromotions, Integrated Media Solutions revenueincreased $2.2 million or 36.8% from $6.0 million in the first quarter of 2002to $8.2 million in first quarter of 2003.

 

**TECHNOLOGY SOLUTIONS.**Our Technology Solutions revenue was $3.5million and $3.2 million for the three months ended March 31, 2003 and 2002,respectively, representing an increase of 7.6%.  Revenue from our products that we host, including OAS Central andOAD, grew as impressions delivered climbed from 4.9 billion to 8.8billion.  OAS Central continuesto be an attractive solution as it requires minimal upfront cost and does notrequire the customer to dedicate their assets to hosting the software.  In 2003, we changed to a subscription basedcontract model for new customers for our OAS Local software.  Total contract value is recognized ratablyover the term of the contract whereas in 2002 the revenue related to thesoftware license was recognized upon delivery. Had we changed contracts in 2002, approximately $0.4 million in firstquarter revenue would have been deferred until future periods and reportedrevenue would have been approximately $2.8 million.  On this comparable basis, revenue increased 25.0% versus theprior year.

 

**COST OF REVENUE AND GROSS PROFIT**

 

**INTEGRATED MEDIA SOLUTIONS COST OF REVENUES AND GROSS PROFIT.**The cost of revenuesconsists primarily of fees paid to affiliates, whether it is a Web site (24/7Web Alliance), a list provider (for e-mail) or a traffic provider (for 24/7Website Results), which is usually calculated as a percentage of revenues.  Cost of revenues also includes adservingcosts, which is an intercompany charge from the Technology Solutions segmentbased on a fixed CPM.  Gross profitincreased from $2.3 million or 30.3% for the three months ended March 31, 2002to $2.8 million or 34.0% for the three months ended March 31, 2003.  Excluding the disposed US e-mail managementproduct and iPromotions, gross profit increased from 26.8% to 33.6%.  This increase is due to increased revenue onthe 24/7 Network which has a higher margin.

 

**TECHNOLOGY SOLUTIONS COST OF REVENUES AND GROSS PROFIT.**The cost of technology revenues consists ofthe costs of operating equipment and broadband capacity for our third partyadserving solutions and payroll costs to deliver, modify and support softwareoffset by the portion charged to Integrated Media Solutions for adserving.  Gross margins were 66.5% and 73.7% for thethree months ended March 31, 2003 and 2002, respectively.  Had we changed the OAS Local contracts in2002, gross margin would have been 69.4%. The decrease is due to an increase in impressions served for OASCentral, which has a lower margin than OAS Local.

 

**SALES AND MARKETING EXPENSES.** Sales and marketing expenses consistprimarily of sales force salaries and commissions, advertising and marketingexpenditures.  Sales and marketingexpenses were $3.1 million and $3.0 million for the three months ended March31, 2003 and 2002, respectively.  As apercentage of revenue, the expense decreased from 28.3% to 26.6% for the threemonths ended March 31, 2002 and 2003, respectively.  This decrease is due to our rationalization efforts and reductionof discretionary expenses.  The numberof employees included in sales and marketing decreased from 152 atMarch 31, 2002 to 129 at March 31, 2003.

 

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**GENERAL AND ADMINISTRATIVE EXPENSES**. General and administrative expenses consistprimarily of compensation, facilities expenses and other overhead expensesincurred to support the business. General and administrative expenses were $2.9 million and $4.0 millionfor the three months ended March 31, 2003 and 2002, respectively.  As a percentage of revenue, the expensedecreased from 36.9% to 24.7% for the three months ended March 31, 2002 and2003, respectively.  The significantdecrease is due to our rationalization efforts in eliminating office space, areduction in personnel and unnecessary expenses.  The number of general and administrative employees at March 31,2003 and 2002 was 45 and 68, respectively.

 

**PRODUCT DEVELOPMENT EXPENSES.** Product development expenses consistprimarily of compensation and related costs incurred to further enhance our adserving and other technology capabilities. Product development expenses were $0.6 million and $1.3 million for thethree months ended March 31, 2003 and 2002, respectively.  As a percentage of revenue, the expensedecreased from 12.4% to 5.0% for the three months ended March 31, 2002 and2003, respectively.  This decrease isdue to our successful rationalization efforts and reduction of discretionaryexpenses.  Also, the expense decreasedas the costs related to developing our Open Advertiser (OAD) product are beingcapitalized.  We capitalizedapproximately $0.2 million in the three months ended March 31, 2003 and willcontinue to capitalize costs until OAD is ready for general release which isexpected during summer of 2003.  Thenumber of employees included in product development decreased from 52 at March31, 2002 to 31 at March 31, 2003.

 

**AMORTIZATION OF INTANGIBLE ASSETS.** Amortization of intangible assets were $0.6million and $0.5 million for the three months ended March 31, 2003 and 2002,respectively.  The increase is due tothe amortization of acquired technology related to the Now Marketingacquisition in September 2002 and the Insight First acquisition in January2003.

 

**STOCK-BASED COMPENSATION**. Stock based compensation was $47,000 and$0.3 million for the three months ended March 31, 2003 and 2002,respectively.  The expense for the threemonths ended March 31, 2003 represent the amortization of deferred compensationfor restricted shares issued to certain employees.  The expense for the three months ended March 31, 2002 consists of$0.2 million in salary for certain employees who elected to receive stockinstead of cash and $0.1 million in amortization of deferred compensation forrestricted shares issued to certain employees.

 

**GAIN ON SALE OF NON-CORE ASSETS, NET.**The $0.9 million gain for the three monthsended March 31, 2002 relates to the sale of Exactis in May 2001.  As part of the sale of Exactis, therewere approximately $1.5 million in deferred gains related to an escrow balanceand $1.75 million in deferred gains related to prepaid service amounts.  The gains were recognized as the escrowbalance was released and the prepaid services were utilized.  During the first quarter of 2002, we agreedto pay Experian, the acquirer of Exactis, $0.75 million of the escrow balance,with the remainder paid to the Company immediately.  Therefore, $0.75 million of the deferred gain was recognized and$0.75 million was reversed against the escrow balance.  The remaining amount of the gain related tothe use of prepaid services.

 

**INTEREST INCOME (EXPENSE), NET**. Interest income, net includes interestincome from our cash and cash equivalents and short-term investments andinterest expense, net related to our long term debt and capital leaseobligations.  Interest expense, net was$0.9 million and $0.4 million for the three months ended March 31, 2003 and2002, respectively.  The net increasewas due to the addition of debt.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

Sinceour inception we have financed our operations through equity financings andlong-term debt.  We used approximately$2.6 million and $5.1 million of cash in operating activities during the firstquarter of 2003 and 2002, respectively, generally as a result of our netoperating losses, adjusted for certain non-cash items included in our operatingresults as well as changes in various components of working capital.

 

Netcash used by investing activities was approximately $0.5 million and $32,000 inthe three months ended March 31, 2003 and 2002, respectively.  During 2003, we paid $150,000 as part of theacquisition of Insight First, Inc., $325,000 for capital expenditures,including capitalized software, and $50,000 as an investment in iPromotions,Inc.  Approximately $70,000 was receivedfor earn-outs related to the sale of a former subsidiary.  During 2002, the net cash used related tocapital expenditures.

 

The Company has variousemployment agreements with employees in the U.S., the majority of which are forone year with an automatic renewal.  Thepotential obligation under these contracts is approximately $1.6 million for2003 including salary and performance based target bonuses.  These contracts call for severance paymentsin the event of involuntary termination which generally range in amount fromthree months to one years’ salary.  Allnon-U.S. employees have employment contracts as required by local law.  The majority of these contracts allow forresignation or termination by either party at any time, according to the noticeperiod provisions contained in the employment contracts, or according to theminimum notice period as mandated by local law.  The contracts, or if no expressed provision is included in thecontract, local law, also require severance for involuntary terminationsranging from one to six months.  As ofMay 1, 2003, there were approximately 66 employees in Europe whose annualizedbase salaries were approximately $2.7 million.

 

Asof March 31, 2003, we had approximately $0.8 million remaining of cash outlay obligationsrelating to restructuring and exit costs. These amounts consist primarily of office closing costs, which we expectto settle by December 2003.

 

Our capital requirements depend on numerous factors, including marketdemand of our services, the capital required to maintain our technology, andthe resources we devote to marketing and selling our services.  Management believes that the support of ourvendors, customers, stockholders, and employees, among others, continue to bekey factors affecting our future success. Moreover, management’s plans to continue as a going concern rely heavilyon achieving revenue and other income targets and controlling our operatingexpenses.  Management is currentlyexploring a number of strategic alternatives and is also continuing to identifyand implement internal actions to improve our liquidity. To the extent weencounter additional opportunities to raise cash, we may sell additional equitysecurities, which would result in significant further dilution of our commonstockholders.  Stockholders mayexperience extreme dilution due to both our current stock price and thesignificant amount of financing we may raise. These securities may have rights senior to those of holders of ourcommon stock and, in the case of preferred stock, may have liquidationpreference and participation rights that could diminish or eliminate theproceeds available to our common stockholders, if any, upon a sale of theCompany. We do not have any contractual restrictions on our ability to incurdebt.  Any indebtedness could containcovenants which would restrict our operations.

 

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Webelieve, based on successful execution of our business plan, that we havesufficient liquidity to finance our needs at least through 2003.

 

MARKETFOR COMPANY’S COMMON EQUITY

 

We have not declared or paid any dividends on our capital stock sinceour inception and do not anticipate paying dividends in the foreseeable future.Our current policy is to retain earnings, if any, to finance the expansion ofour business. The future payment of dividends will depend on the results ofoperations, financial condition, capital expenditure plans and other factorsthat we deem relevant and will be at the sole discretion of our Board ofDirectors.

 

Since our initial public offering on August 13, 1998 until June 2002,our common stock traded on the Nasdaq National Market under the symbol“TFSM.”  In June 2002, we transferredour common stock to the Nasdaq SmallCap Market.

 

**RISK FACTORS**

 

RISKS RELATED TO 24/7 REAL MEDIA, INC.

 

WE ANTICIPATE CONTINUED LOSSES AND WE MAY NEVER BE PROFITABLE.

 

We have not achieved profitability in any period and we may not be ableto achieve or sustain profitability in the future.  We incurred net losses of $2.3 million and $3.7 million for thethree months ended March 31, 2003 and 2002, respectively.  Each of our predecessors had net losses inevery year of their operation.  We mayincur operating losses for the foreseeable future.  Even if we do achieve profitability, we may not sustain orincrease profitability on a quarterly or annual basis in the future.

 

WE MAY NEED TO RAISE ADDITIONAL FUNDS TO CONTINUE OPERATIONS.

 

While management believes the Company’s current financial resources aresufficient to fund our operations for the balance of 2003, an unforeseenreduction in our revenues, an impairment of our receivables, or an increase inexpenses may require us to raise additional funds to continue operations.  To the extent we encounter additional opportunitiesto raise cash, we may sell additional equity or debt securities, which wouldresult in further dilution of our stockholders.  Stockholders may experience extreme dilution due to our currentstock price and the amount of financing we may need to raise and thesesecurities may have rights senior to those of holders of our common stock.  We do not have any contractual restrictionson our ability to incur debt.  Anyindebtedness could contain covenants, which restrict our operations.

 

We have limited access to the capital markets to raise capital.  The capital markets have been unpredictablein the past, especially for unprofitable companies such as ours.  In addition, it is difficult to raisecapital in the current market conditions. The amount of capital that a company such as ours is able to raise oftendepends on variables that are beyond our control, such as the share price ofour stock and its trading volume.  As aresult, there is no guarantee that efforts to secure financing on termsattractive to us will be successful, or that we will be able to secureadditional financing on any terms.  Dueto our operating losses, it may be difficult to obtain debt financing.  If we are able to consummate a financingarrangement, there is no guarantee that the 

 

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amount raised will be sufficient to meet our future needs.  If adequate funds are not available onacceptable terms, or at all, our business, results of operation, financialcondition and continued viability will be materially and adversely affected.

 

WE HAVE A LIMITED OPERATING HISTORY ON WHICH AN INVESTOR CAN EVALUATEOUR BUSINESS.

 

We have a limited operating history. You must consider the risks, expenses and difficulties typicallyencountered by companies with limited operating histories, particularlycompanies in new and rapidly expanding markets such as Internetadvertising.  These risks include ourability to:

 

•                  developnew relationships and maintain existing relationships with our Web sites, advertisers,and other third parties;

 

•                  furtherdevelop and upgrade our technology;

 

•                  respondto competitive developments;

 

•                  implementand improve operational, financial and management information systems; and

 

•                  attract,retain and motivate qualified employees.

 

At times in the past and in certain segments, our revenues have grownsignificantly.  Our limited operatinghistory makes prediction of future revenue growth difficult.  Accurate predictions of future revenuegrowth are also difficult because of the rapid changes in our markets and thepossible need by us to sell assets to fund operations.  Accordingly, investors should not rely onpast revenue growth rates as a prediction of future revenue growth.

 

OUR FUTURE REVENUES AND RESULTS OF OPERATIONS MAY BE DIFFICULT TOFORECAST AND RESULTS IN PRIOR PERIODS MAY NOT BE INDICATIVE OF FUTURE RESULTS.

 

Our results of operations have fluctuated and may continue to fluctuatesignificantly in the future as a result of a variety of factors, many of whichare beyond our control. These factors include:

 

•                  theaddition of new or loss of existing clients;

 

•                  changesin fees paid by advertisers and direct marketers or other clients;

 

•                  changesin service fees payable by us to owners of Web sites or email lists, or adserving fees payable by us to third parties;

 

•                  thedemand by advertisers, Web publishers and direct marketers for our advertisingsolutions;

 

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

 

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•                  variationsin the levels of capital or operating expenditures and other costs relating tothe maintenance or expansion of our operations, including personnel costs;

 

•                  changesin governmental regulation of the Internet; and

 

•                  generaleconomic conditions.

 

Our future revenues and results of operations may be difficult toforecast due to the above factors.  Inaddition, our expense levels are based in large part on our investment plansand estimates of future revenues.  Anyincreased expenses may precede or may not be followed by increased revenues, aswe may be unable to, or may elect not to, adjust spending in a timely manner tocompensate for any unexpected revenue shortfall.  As a result, we believe that period-to-period comparisons of ourresults of operations may not be meaningful. You should not rely on past periods as indicators of futureperformance.  In future periods, ourresults of operations may fall below the expectations of securities analystsand investors, which could adversely affect the trading price of our commonstock.

 

WE DISCLOSE PRO FORMA INFORMATION.

 

We prepare and release quarterly unaudited financial statementsprepared in accordance with generally accepted accounting principles(“GAAP”).  We also disclose and discusscertain pro forma information in the related earnings release and investorconference call.  This pro formafinancial information excludes or may exclude certain special charges and othercosts.  We believe the disclosure of thepro forma financial information helps investors more meaningfully evaluate theresults of our ongoing operations. However, we urge investors to carefully review the GAAP financialinformation included as part of our Quarterly Reports on Form 10-Q, our AnnualReports on Form 10-K, and our quarterly earnings releases, and to compare theGAAP financial information with the pro forma financial results disclosed inour quarterly earnings releases and investor calls.

 

RECENTLY ENACTED AND PROPOSED CHANGES IN SECURITIES LAWS AND REGULATIONSARE LIKELY TO INCREASE OUR COSTS.

 

The Sarbanes-Oxley Act of 2002 that became law in July 2002 requireschanges in some of our corporate governance and securities disclosure orcompliance practices.  That Act alsorequires the SEC to promulgate new rules on a variety of subjects, in additionto rule proposals already made, and Nasdaq has proposed revisions to itsrequirements for companies that are Nasdaq-listed.  We expect these developments to increase our legal compliancecosts.  We expect these developments tomake it more difficult and more expensive for us to obtain director and officerliability insurance, and we may be required to accept reduced coverage or incursubstantially higher costs to obtain coverage. These developments could make it more difficult for us to attract andretain qualified members of our board of directors, or qualified executiveofficers.  We are presently evaluatingand monitoring regulatory developments and cannot estimate the timing ormagnitude of additional costs we may incur as a result.

 

OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO SUCCESSFULLY IMPLEMENT OURBUSINESS MODEL.

 

A significant part of our business model is to generate revenue byproviding interactive marketing solutions to advertisers, ad agencies and Webpublishers.  The profit potential forthis business model is unproven.  To besuccessful, both Internet advertising and our solutions will need to 

 

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achieve broad market acceptance by advertisers, ad agencies and Webpublishers.  Our ability to generatesignificant revenue from advertisers will depend, in part, on our ability tocontract with Web publishers that have Web sites with adequate available adspace inventory.  Further, these Websites must generate sufficient user traffic with demographic characteristicsattractive to our advertisers.  Theintense competition among Internet advertising sellers has led to the creationof a number of pricing alternatives for Internet advertising.  These alternatives make it difficult for usto project future levels of advertising revenue and applicable gross marginthat can be sustained by us or the Internet advertising industry in general.

 

Intensive marketing and sales efforts may be necessary to educate prospectiveadvertisers regarding the uses and benefits of, and to generate demand for, ourproducts and services, including our newer products and services such asWebsite Results, Open Advertiser and Open Insight.  Enterprises may be reluctant or slow to adopt a new approach thatmay replace, limit or compete with their existing direct marketingsystems.  In addition, since onlinedirect marketing is emerging as a new and distinct business apart from onlineadvertising, potential adopters of online direct marketing services willincreasingly demand functionality tailored to their specific requirements.  We may be unable to meet the demands ofthese clients.  Acceptance of our newsolutions will depend on the continued emergence of Internet commerce, communicationand advertising, and demand for its solutions. We cannot assure you that demand for its new solutions will emerge orbecome sustainable.

 

WE HAVE GROWN OUR BUSINESS THROUGH ACQUISITION.

 

We were formed in February 1998 to consolidate three Internetadvertising companies and have since acquired thirteen more companies.  In combining these entities, we have facedrisks and continue to face risks of integrating and improving our financial andmanagement controls, ad serving technology, reporting systems and procedures,and expanding, training and managing our work force.  This process of integration may take a significant period of timeand will require the dedication of management and other resources, which may distractmanagement’s attention from our other operations.  We may continue pursuing selective acquisitions of businesses,technologies and product lines as a key component of our growth strategy.  Any future acquisition or investment mayresult in the use of significant amounts of cash, potentially dilutiveissuances of equity securities, incurrence of debt and amortization expensesrelated to goodwill and other intangible assets. In addition, acquisitionsinvolve numerous risks, including:

 

•                  thedifficulties in the integration and assimilation of the operations,technologies, products and personnel of an acquired business;

 

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

 

•                  theavailability of favorable acquisition financing for future acquisitions; and

 

•                  thepotential loss of key employees of any acquired business.

 

Our inability to successfully integrate any acquired company couldadversely affect our business.

 

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WE COULD BE ADVERSELY AFFECTED BY AN IMPAIRMENT OF A SIGNIFICANT AMOUNTOF GOODWILL AND INTANGIBLE ASSETS ON OUR BALANCE SHEET.

 

In the course of our operating history, we have acquired and disposedof numerous assets and businesses.  Someof our acquisitions have resulted in the recording of a significant amount ofgoodwill and/or intangible assets on our financial statements.  The goodwill and/or intangible assets wasrecorded because the fair value of the net assets acquired was less than thepurchase price. We may not realize the full value of the goodwill and/orintangible 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 potionas a charge to our earnings.

 

To improve our operating performance, we may determine to acquire otherassets or businesses complementary to our business and, as a result, we mayrecord additional goodwill and/or intangible assets in the future.  The possible write-off of the goodwilland/or intangible assets could negatively impact our future earnings.  We will also be required to allocate aportion of the purchase price of any acquisition to the value of any intangibleassets that meet the criteria specified in the Statement of FinancialAccounting Standards No. 141, “Business Combinations,” such as marketing,customer or contract-based intangibles. The amount allocated to these intangible assets could be amortized overa fairly short period.  As a result, ourearnings and the market price of our common stock could be negatively affected.

 

THE SUCCESS OF OUR 24/7 WEBSITE RESULTS OPERATIONS DEPEND ON A SMALLNUMBER OF SEARCH ENGINE AFFILIATES FOR A SIGNIFICANT PORTION OF OUR 24/7 WEBSITERESULTS REVENUE, THE LOSS OF A SINGLE SEARCH ENGINE AFFILIATE COULD RESULT IN ASUBSTANTIAL DECREASE IN OUR 24/7 WEBSITE RESULTS REVENUE.

 

We have generated a significant portion of our 24/7 Website Resultsrevenue from relationships with a small number of search engines, includingInktomi, Alta Vista, Look Smart and Yellow Pages.com.  We expect that a small number of search engine affiliates willcontinue to generate a majority or more of our 24/7 Website Results revenue forthe foreseeable future.  Due to recentchanges at Inktomi, the revenue we generate from this relationship has declinedrecently.  The interruption or loss ofany of our primary search engine relationships, and, in particular, ourrelationship with Inktomi, could cause a significant decrease in 24/7 WebsiteResults revenue.  As a result ofconsolidation among search engines, and other search marketing companies, wecould lose one of more of our affiliates or face increased competition fromaffiliates that internally develop or acquire capabilities similar to ourservice.  In addition, as our searchengine affiliates’ operations continue to evolve, we may be required to adjustour business strategy to maintain relationships with our affiliates which couldhave a material adverse effect on our 24/7 Website Results revenue.

 

OUR FINANCIAL CONDITION MAY AFFECT OUR ABILITY TO ENTER INTO NEWBUSINESS RELATIONSHIPS.

 

Our financial condition may negatively affect our business partners’and other market participants’ perception of our Company.  If we are unable to maintain existingrelationships and develop new ones, our revenues could suffer materially.

 

OUR FINANCIAL PERFORMANCE AND REDUCTION OF OUR WORKFORCE MAY AFFECT THEMORALE AND PERFORMANCE OF OUR PERSONNEL.

 

We have incurred significant net losses since our inception.  In an effort to reduce our cash expenses, wehave implemented certain restructuring initiatives and headcount and other cost

 

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reductions.  In addition,trading levels of our common stock have decreased the value of the stockoptions granted to employees pursuant to our stock option plan.  As a result of these factors, our remainingpersonnel may seek employment with larger, more stable companies they perceiveto have better prospects.  Our failureto retain qualified employees to fulfill our current and future needs couldimpair our future growth and have a material adverse effect on our business.

 

IF WE LOSE OUR CEO OR OTHER SENIOR MANAGERS OUR BUSINESS WILL BEADVERSELY AFFECTED.

 

Our success depends, to a significant extent, upon our seniormanagement and key sales and technical personnel, particularly David J. Moore,Chief Executive Officer.  The loss ofthe services of one or more of these persons could materially and adverselyaffect our ability to develop our business. Our success also depends on our ability to attract and retain qualifiedtechnical, sales and marketing, customer support, financial and accounting, andmanagerial personnel.  We cannot becertain that we will be able to retain our key personnel or that we canattract, integrate or retain other highly qualified personnel in thefuture.  We have experienced in thepast, and may continue to experience in the future, difficulty in hiring andretaining candidates with appropriate qualifications, especially in sales andmarketing positions.

 

OUR CUSTOMERS AND PARTNERS MAY EXPERIENCE ADVERSE BUSINESS CONDITIONSTHAT COULD ADVERSELY AFFECT OUR BUSINESS.

 

As a result of unfavorable conditions in the public equity markets,some of our customers may have difficulty raising sufficient capital to supporttheir long-term operations.  As aresult, these customers have reduced their spending on Internet advertising,which has materially and adversely affected our business, financial conditionand results of operations.  In addition,from time to time, we have entered into strategic business relationships withother companies, the nature of which varies, but generally in the context ofcustomer relationships.  These companiesmay experience similar adverse business conditions that may render them unableto meet our expectations for the strategic business relationship or to fulfilltheir contractual obligations to us. Such an event could have a material adverse impact on our business,financial condition and results of operations.

 

OUR TECHNOLOGY SOLUTIONS MAY NOT BE SUCCESSFUL AND MAY CAUSE BUSINESSDISRUPTION.

 

OAS is our proprietary next generation ad serving technology that isintended to serve as our sole ad serving solution.  We must, among other things, ensure that this technology willfunction efficiently at high volumes, interact properly with our database,offer the functionality demanded by our customers and assimilate our sales andreporting functions.  This developmenteffort could fail technologically or could take more time than expected.  Customers may become dissatisfied by anysystem failure that interrupts our ability to provide our services to them,including failures affecting our ability to deliver advertisements withoutsignificant delay to the viewer. Sustained or repeated system failures would reduce the attractiveness ofour solutions to advertisers, ad agencies and Web publishers and result incontract terminations, fee rebates and make goods, thereby reducingrevenue.  Slower response time or systemfailures may also result from straining the capacity of our deployed softwareor hardware due to an increase in the volume of advertising delivered throughour servers.  To the extent that we donot effectively address any capacity constraints or system failures, ourbusiness, results of operations and financial condition could be materially andadversely affected.

 

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WE MIGHT EXPERIENCE SIGNIFICANT DEFECTS IN OUR PRODUCTS.

 

Software products frequently contain errors or failures, especiallywhen first introduced or when new versions are released.  We might experience significant errors orfailures in our products, or they might not work with other hardware orsoftware as expected, which could delay the enhancement of our products, orwhich could adversely affect market acceptance of our products.  Any significant product errors or designflaws would slow the adoption of our products and cause damage to our reputation,which would seriously harm our business. If customers were dissatisfied with product functionality orperformance, we could lose revenue or be subject to liability for service orwarranty costs and claims, and our business, operating results and financialcondition could be adversely affected.

 

SOME OF SOFTWARE IS LICENSED FROM THIRD PARTIES.

 

Some of our products, including one or more modules for our OASplatform, contain software licensed from third parties.  Some of these licenses may not be availableto us in the future or on terms that are acceptable or allow our products toremain competitive.  Our inability touse any of this third party software could result in shipment delays, delays inthe development of future products or enhancements of existing products, orother disruptions in our business, which could materially and adversely affectour business, financial condition and operating results.

 

OUR OPERATIONS ARE VULNERABLE TO NATURALDISASTERS AND OTHER EVENTS, INCLUDING, TERRORIST ATTACKS, BECAUSE WE ONLY HAVELIMITED BACKUP SYSTEMS.

 

We have limited backup systems and have experienced system failures andelectrical outages from time to time in the past, which have disrupted ouroperations.  We have a limited disasterrecovery plan in the event of damage from fire, floods, typhoons, earthquakes,power loss, telecommunications failures, break-ins and similar events.  Our operations are dependent on our abilityto protect our computer systems against these unexpected adverse events.   If any of the foregoing occurs, we mayexperience a complete system shutdown.  Any business interruption insurance that we carry is unlikely to besufficient to compensate us for loss of business in the event of a significantcatastrophe.

 

In addition, interruptions in our services could result from thefailure of our telecommunications providers to provide the necessary datacommunications capacity in the time frame we require.  Our OAS technology resides on computer systems located in ourdata centers housed by Exodus Communications in the United States and Level3Communications in Europe.  Thesesystems’ continuing and uninterrupted performance is critical to oursuccess.  Despite precautions that wehave taken, unanticipated problems affecting our systems have from time to timein the past caused, and in the future could cause, interruptions in thedelivery of our solutions.  Ourbusiness, results of operations and financial condition could be materially andadversely affected by any damage or failure that interrupts or delays ouroperations.  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.  Althoughwe believe we carry property insurance with adequate coverage limits, ourcoverage may not be adequate to compensate us for all losses, particularly withrespect to loss of business and reputation, that may occur.

 

In addition, terrorist acts or acts of war may cause damage to ouremployees, facilities, clients, our clients’ customers, and vendors, whichcould significantly impact our revenues, costs and

 

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expenses and financial position. The potential for future terrorist attacks, the national andinternational responses to terrorist attacks or perceived threats to nationalsecurity, and other acts of war or hostility have created many economic andpolitical uncertainties that could adversely affect our business and results ofoperations in ways that cannot be presently predicted.  We are predominantly uninsured for lossesand interruptions caused by terrorist acts and acts of war.

 

OUR REVENUES ARE SUBJECT TO SEASONAL FLUCTUATIONS.

 

We believe that our revenues are subject to seasonal fluctuationsbecause advertisers generally place fewer advertisements during the first andthird calendar quarters of each year and direct marketers mail substantiallymore marketing materials in the third quarter each year.  Furthermore, Internet user traffic typicallydrops during the summer months, which reduces the number of advertisements tosell and deliver.  Expenditures byadvertisers and direct marketers tend to vary in cycles that reflect overalleconomic conditions as well as budgeting and buying patterns.  Our revenue could be materially reduced by adecline in the economic prospects of advertisers, direct marketers or theeconomy in general, which could alter current or prospective advertisers’spending priorities or budget cycles or extend our sales cycle.  Due to such risks, you should not rely onquarter-to-quarter comparisons of our results of operations as an indicator ofour future results.

 

# OUR INTERNATIONAL OPERATIONS MAY POSE LEGALAND CULTURAL CHALLENGES.

 

We have operations in a number of international markets, includingCanada and Europe.  To date, we havelimited experience in marketing, selling and distributing our solutionsinternationally.  Internationaloperations are subject to other risks, including changes in regulatoryrequirements, reduced protection for intellectual property rights in somecountries, potentially adverse tax consequences, general import/exportrestrictions relating to encryption technology and/or privacy, difficulties andcosts of staffing and managing foreign operations, political and economicinstability, fluctuations in currency exchange rates; and seasonal reductionsin business activity during the summer months in Europe and certain other partsof the world.

 

OUR NET OPERATING LOSS CARRYFORWARDS MAY BE LIMITED.

 

Due to the “change in ownership” provisions of the Internal RevenueCode, the availability of 24/7 Real Media’s net operating loss and creditcarryforwards may be subject to an annual limitation against taxable income infuture periods, which could substantially limit the eventual utilization ofthese carryforwards.

 

*RISKS RELATED TO THE MARKET FOR OUR COMMONSTOCK.*

 

THE LOW PRICE OF OUR COMMON STOCK COULD RESULT IN ITS DELISTING FROMTHE NASDAQ SMALLCAP MARKET.

 

From 1998 to 2002, our common stock traded on the Nasdaq NationalMarket.  Under Nasdaq rules, our commonstock is required to maintain a bid price of at least $1.00 per share to remainlisted on the Nasdaq SmallCap Market. Our common stock has traded below $1.00 since February 2001.  However, in October 2001 Nasdaq suspendedthe bid price requirement in the aftermath of the September 2001 terroristattacks.  When Nasdaq reinstituted thebid price

 

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requirement in January 2002, it provided for fresh and extended graceperiods.  In order to benefit from themaximum grace period, we transitioned our common stock listing to the NasdaqSmallCap Market in May 2002.  Nasdaqrecently extended the grace periods for companies whose common stock is listedon the Nasdaq SmallCap Market by an additional 90 days, and is seeking theapproval of the Securities and Exchange Commission to extend the grace periodby up to an additional 270 days.  Weunderstand that the SEC has not yet commented on Nasdaq’s request to extend thegrace periods.  As a result, we receiveda letter from Nasdaq dated May 13, 2003 stating that we no longer complywith the $1.00 minimum bid price requirement for continued listing and that ourcommon stock is, therefore, subject to delisting from the Nasdaq SmallCapMarket, pursuant to Nasdaq Marketplace Rule 4310(c)(4).  The letter advised that our common stockwill be delisted as of the opening of trading on May 22, 2003, unless werequest a hearing by May 20, 2003. Under Nasdaq rules, if we request sucha hearing, the scheduled delisting will be stayed pending the outcome of thehearing. Until then, our common stock will remain listed and will continue totrade on the Nasdaq SmallCap Market. Our management and Board of Directors are reviewing the letter andconsidering their options.  At ourAnnual Meeting of Stockholders in September 2002, the stockholders of theCompany granted the Board of Directors the authority to effect a reverse splitof our common stock without further approval from the stockholders of theCompany; the Board may in its discretion approve a reverse split, at one offive ratios between 1 for 10 and 1 for 30, at any time prior to the next AnnualMeeting of Stockholders.  The Board hasnot made any determination as to whether, when and at what ratio it may approvea reverse split.

 

Our failure to meet NASDAQ’s maintenance criteria may result in thedelisting of our common stock from Nasdaq. In such event, trading, if any, in the securities may then continue tobe conducted in the non-NASDAQ over-the-counter market in what are commonlyreferred to as the electronic bulletin board and the “pink sheets.”  As a result, an investor may find it moredifficult to dispose of or obtain accurate quotations as to the market value ofthe securities. In addition, we would be subject to a Rule promulgated by theSecurities and Exchange Commission that, if we fail to meet criteria set forthin such Rule, imposes various practice requirements on broker-dealers who sellsecurities governed by the Rule to persons other than established customers andaccredited investors.  For these typesof transactions, the broker-dealer must make a special suitability determinationfor the purchaser and have received the purchaser’s written consent to thetransactions prior to sale. Consequently, the Rule may have a material adverse effect on the abilityof broker-dealers to sell the securities, which may materially affect theability of shareholders to sell the securities in the secondary market.

 

Delisting could make trading our shares more difficult for investors,potentially leading to further declines in share price.  It would also make it more difficult for usto raise additional capital.  We wouldalso incur additional costs under state blue sky laws to sell equity if we aredelisted.

 

WE MAY IMPLEMENT A REVERSE STOCK SPLIT OF OUR COMMON STOCK.

 

Our stockholders approved a series of amendments to our certificate ofincorporation at our September 10, 2002 stockholders meeting.  These amendments authorized our board ofdirectors to effect a reverse split of all outstanding shares of our commonstock at an exchange ratio of either one-to-10, one-to-15, one-to-20, one-to-25or one-to-30.  At any time prior to the2003 annual meeting of stockholders, the board of directors has the solediscretion to elect, as it determines to be in the best interests of ourcompany and our stockholders, whether or not to effect a reverse stock split,and if so at which of the approved ratios. If the board of directors elects to implement one of the approvedreverse stock splits, the number of issued and outstanding shares of commonstock would be reduced in accordance with the exchange ratio for the selectedreverse stock split.  The par value ofthe common stock would remain unchanged at $.01 per share and the number ofauthorized shares of common stock would also remain unchanged.  In determining whether or not to implement areverse stock split, and the appropriate exchange ratio, the board would assessa variety of factors, including but not limited to analysis of our most recentfiscal quarter and general conditions, as well as the trading price of ourcommon stock on the days leading up to the date of the reverse stock split.

 

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The effect of any reverse stock split upon the market price of ourcommon stock cannot be predicted, and the history of reverse stock splits forcompanies in similar circumstances is varied. The trading price of our common stock may not rise in exact proportionto the reduction in the number of shares of our common stock outstanding as aresult of the reverse stock split and there may not be a sustained increase inthe trading prices of our common stock after giving effect to the reverse stocksplit.  Moreover, the trading price maynot remain above the thresholds required by the Nasdaq Stock Market and we maynot be able to continue to meet the other continued listing requirements of theNasdaq Stock Market.

 

THE POWER OF OUR BOARD OF DIRECTORS TO DESIGNATE AND ISSUE SHARES OFPREFERRED STOCK COULD HAVE AN ADVERSE EFFECT ON HOLDERS OF OUR COMMON STOCK.

 

Our certificate of incorporation authorizes our board of directors todesignate and issue one or more series of preferred stock, having rights andpreferences as the board may determine, and any such designations and issuancescould have an adverse effect on the rights of holders of common stock.

 

FUTURE SALES OF OUR COMMON STOCK MAY AFFECT THE MARKET PRICE OF OURCOMMON STOCK.

 

There were 69,368,612 shares of common stock outstanding as of May 12,2003, as well as options to purchase an additional approximately 19.3 shares ofour common stock.  In addition, thereare 40,167,944 shares of our common stock issuable upon conversion of ouroutstanding preferred stock.  We cannotpredict the effect, if any, that future sales of common stock, or theavailability of shares of common stock for future sale, will have on the marketprice of our common stock. Sales of substantial amounts of common stock(including shares issued upon the exercise of stock options or conversion ofshares of Preferred Stock), or the perception that such sales could occur, maymaterially and adversely affect prevailing market prices for our common stock.

 

OUR MAJOR STOCKHOLDERS WILL LIKELY BE ABLE TO INFLUENCE CERTAINAPPROVAL MATTERS AND PREVENT A CHANGE OF CONTROL.

 

Sunra Capital Holdings Ltd. and affiliated parties are currentlythe beneficial owner of 42.8 million shares of our common stock.  PubliGroupeUSA Holdings is the beneficial owner of 7.7 million shares of our common stockand has entered into an agreement to vote on all matters in accordancewith the recommendations of our Board of Directors.  Additionally,the terms of the Series A Preferred Stock, owned principally by Sunra,contain certain protective provisions that provide such holdersan effective veto right over certain corporate matters.

 

Based on their voting power, Sunra and PubliGroupe may effectivelybe able to determine the outcome of all matters requiring stockholder approval,including the election of directors, amendment of our charter and approvalof significant corporate transactions, and will likely be in a position toprevent a change in control of 24/7 Real Media even if the otherstockholders were in favor of the transaction.

 

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OUR PREFERRED STOCK HAS LIQUIDATION PREFERENCE AND PARTICIPATION RIGHTSTHAT COULD REDUCE OR ELIMINATE ANY PROCEEDS AVAILABLE TO OUR COMMONSTOCKHOLDERS UPON A SALE OF OUR COMPANY.

 

In addition, under certain circumstances, upon the sale, liquidation ordissolution of the Company, our Series A and Series B preferred stockholdersmaybe entitled to receive an aggregate liquidation preference of $8.25 million,before our common stockholders received any payment.  After receipt of this payment, the preferred stockholders mayalso have the right to participate in receiving proceeds payable to the commonstockholders on an as-converted basis. As result, in the event of a sale, liquidation or dissolution of theCompany, including one in which the total proceeds represent a premium to thethen prevailing price per share of our common stock, our common stockholdersmay experience substantial dilution in the amount payable to them, and if totalproceeds are less than or equal to the liquidation preference, then our commonstockholders will not receive any proceeds.

 

EFFECTS OF ANTI-TAKEOVER PROVISIONS COULD INHIBIT THE ACQUISITION OFOUR COMPANY.

 

Some of the provisions of our certificate of incorporation, our bylawsand Delaware law could, together or separately:

 

•                  discouragepotential acquisition proposals;

 

•                  delayor prevent a change in control;

 

•                  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 in the future for shares ofour common stock.

 

HIGH VOLATILITY OF STOCK PRICE.

 

The market price of our common stock has fluctuated in the past and maycontinue to be volatile.  In addition,the stock market has experienced extreme price and volume fluctuations.  The market prices of the securities ofInternet-related companies have been especially volatile.  Investors may be unable to resell theirshares of our common stock at or above the purchase price.  In the past, following periods of volatilityin the market price of a particular company’s securities, securities classaction litigation has often been brought against that company.  Many companies in our industry have beensubject to this type of litigation in the past.  We may also become involved in this type of litigation.  Litigation is often expensive and divertsmanagement’s attention and resources, which could materially and adverselyaffect our business, financial condition and results of operations.

 

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*RISKS RELATED TO OUR INDUSTRY.*

 

OUR FAILURE TO SUCCESSFULLY COMPETE MAY HINDER OUR GROWTH.

 

The markets for Internet advertising and related products and servicesare intensely competitive and such competition is expected to increase.  Our failure to successfully compete mayhinder our growth.  We believe that ourability to compete depends upon many factors both within and beyond ourcontrol, including:

 

•                  thetiming and market acceptance of new products and enhancements of existingservices developed by us and our competitors;

 

•                  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.

 

Many of our competitors have longer operating histories, greater namerecognition, larger customer bases and significantly greater financial, technicaland marketing resources than ours.   Inaddition, current and potential competitors have established or may establishcooperative relationships among themselves or with third parties to increasethe ability of their products or services to address the needs of ourprospective clients.  We cannot becertain that we will be able to successfully compete against current or futurecompetitors.  In addition, the Internetmust compete for a share of advertisers’ total budgets with traditionaladvertising media, such as television, radio, cable and print, as well ascontent aggregation companies and other companies that facilitate Internetadvertising.  To the extent that theInternet is perceived to be a limited or ineffective advertising or directmarketing medium, advertisers and direct marketers may be reluctant to devote asignificant portion of their advertising budgets to Internet marketing, whichcould limit the growth of Internet marketing.

 

OUR BUSINESS MAY NOT GROW IF THE INTERNET ADVERTISING MARKET DOES NOTCONTINUE TO DEVELOP.

 

The Internet as a marketing medium has not been in existence for asufficient period of time to demonstrate its effectiveness.  Our business would be adversely affected ifthe Internet advertising continues to remain soft or fails to develop in thenear future.  There are currently nowidely accepted standards to measure the effectiveness of Internet marketingother than clickthrough rates, which generally have been declining.  We cannot be certain that such standardswill develop to sufficiently support Internet marketing as a significantadvertising medium.  Actual or perceivedineffectiveness of online marketing in general, or inaccurate measurements ordatabase information in particular, could limit the long-term growth of onlineadvertising and cause our revenue levels to decline.

 

PRIVACY CONCERNS MAY PREVENT US FROM COLLECTING USER DATA.

 

Growing concerns about the use of “cookies” and data collection maylimit our ability to develop user profiles. Web sites typically place small files of information commonly known as“cookies” on a user’s hard drive, generally without the user’s knowledge orconsent.  Cookie information is passedto the Web site through the Internet user’s browser software.  Our OAS technology targets advertising tousers through the use of identifying data, or “cookies” and othernon-personally-identifying information. OAS enables the use of cookies to deliver targeted advertising and tolimit the frequency with which an advertisement is shown to the user.  Most currently available Internet browsersallow users to modify their browser settings to prevent cookies from being

 

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stored on their hard drive, and a small minority of users are currentlychoosing to do so.  Users can alsodelete cookies from their hard drive at any time.  Some Internet commentators and privacy advocates have suggestedlimiting or eliminating the use of cookies. Any reduction or limitation in the use of cookies could limit the effectivenessof our sales and marketing efforts and impair our targeting capabilities.  Microsoft Corporation has changed the designand instrumentation of its Web browser in such a way as to give users theoption to accept or reject third party cookies.  Giving users the option to decline such cookies could result in areduction of the number of Internet users we are capable of profilinganonymously.  Such changes also could adverselyaffect our ability to determine the reach of advertising campaigns sold anddelivered by us and the frequency with which users of sites in the 24/7 Networksee the same advertisement.

 

If the use or effectiveness of cookies is limited, we would likely haveto switch to other technology that would allow us to gather demographic andbehavioral information.  While suchtechnology currently exists, it is substantially less effective thancookies.  Replacement of cookies couldrequire significant reengineering time and resources, might not be completed intime to avoid negative consequences to our business, financial condition orresults of operations, and might not be commercially feasible.

 

CHANGES IN LAWS AND STANDARDS RELATING TO DATA COLLECTION AND USEPRACTICES AND THE PRIVACY OF INTERNET USERS AND OTHER INDIVIDUALS COULD HARMOUR BUSINESS.

 

The U.S. federal and various state governments have recently proposedlimitations on the collection and use of information regarding Internetusers.  In October 1998, the EuropeanUnion adopted a directive that may limit our collection and use of informationregarding Internet users in Europe.  Theeffectiveness of our OAS technology could be limited by any regulation limitingthe collection or use of information regarding Internet users.  Since many of the proposed laws orregulations are just being developed, we cannot yet determine the impact theseregulations may have on its business. In addition, growing public concern aboutprivacy and the collection, distribution and use of information aboutindividuals has led to self-regulation of these practices by the Internetadvertising and direct marketing industry and to increased federal and stateregulation.  The Network AdvertisingInitiative, or NAI, of which 24/7 Real Media is a member along with otherInternet advertising companies, has developed self-regulatory principles foronline preference marketing.  We arealso subject to various federal and state regulations concerning thecollection, distribution and use of information regarding individuals.  These laws include the Children’s OnlinePrivacy Protection 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.  Although our compliance with the NAI’s guidelinesand applicable federal and state laws and regulations has not had a materialadverse effect on us, we cannot assure you that additional, more burdensomefederal or state laws or regulations, including antitrust and consumer privacylaws, will not be enacted or applied to us or our clients, which couldmaterially and adversely affect our business, financial condition and resultsof operations.

 

CHANGES IN GOVERNMENT REGULATION COULD DECREASE OUR REVENUES ANDINCREASE OUR COSTS.

 

Laws and regulations directly applicable to Internet communications,commerce and advertising are becoming more prevalent, and new laws andregulations are under consideration by the United States Congress and statelegislatures.  Any legislation enactedor restrictions arising from current or future government investigations orpolicy could dampen the growth in use of the

 

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Internet generally and decrease the acceptance of the Internet as acommunications, commercial and advertising medium.  State governments or governments of foreign countries mightattempt to regulate our transmissions or levy sales or other taxes relating toour activities.  The European Union hasenacted its own privacy regulations that may result in limits on the collectionand use of certain user information by us. The laws governing the Internet, however, remain largely unsettled, evenin areas where there has been some legislative action.  It may take years to determine whether andhow existing laws such as those governing intellectual property, privacy, libeland taxation apply to the Internet 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, that may impose additional burdens oncompanies conducting business over the Internet.  Our business, results of operations and financial condition couldbe materially and adversely affected by the adoption or modification of laws orregulations relating to the Internet.

 

OUR NETWORK OPERATIONS MAY BE VULNERABLE TO HACKING, VIRUSES AND OTHERDISRUPTIONS, WHICH MAY MAKE OUR PRODUCTS AND SERVICES LESS ATTRACTIVE ANDRELIABLE.

 

Internet usage could decline if any well-publicized compromise ofsecurity occurs.  “Hacking” involvesefforts to gain unauthorized access to information or systems or to causeintentional malfunctions or loss or corruption of data, software, hardware orother computer equipment.  Hackers, ifsuccessful, could misappropriate proprietary information or cause disruptionsin our service.  We may be required toexpend capital and other resources to protect our Web site against hackers. Wecannot assure you that any measures we may take will be effective.  In addition, the inadvertent transmission ofcomputer viruses could expose us to a material risk of loss or litigation andpossible liability, as well as materially damage our reputation and decreaseour user traffic.

 

DEPENDENCE ON PROPRIETARY RIGHTS AND RISK OF INFRINGEMENT.

 

Our success and ability to compete are substantially dependent on ourinternally developed technologies and trademarks, which we protect through acombination of patent, copyright, trade secret and trademark law.  We have received two patents in the UnitedStates, and have filed and intend to file additional patent applications in theUnited States.  In addition, we apply toregister our trademarks in the United States and internationally.  We cannot assure you that any of our patentapplications or trademark applications will be approved.  Even if they are approved, such patents ortrademarks may be successfully challenged by others or invalidated.  If our trademark registrations are notapproved because third parties own such trademarks, our use of such trademarkswill be restricted unless we enter into arrangements with such third partiesthat may be unavailable on commercially reasonable terms.

 

We generally enter into confidentiality or license agreements with ouremployees, consultants and corporate partners, and generally control access toand distribution of our technologies, documentation and other proprietaryinformation.  Despite our efforts toprotect our proprietary rights from unauthorized use or disclosure, parties mayattempt to disclose, obtain or use our solutions or technologies.  We cannot assure you that the steps we havetaken will prevent misappropriation of our solutions or technologies,particularly in foreign countries where laws or law enforcement practices maynot protect our proprietary rights as fully as in the United States.

 

We have licensed, and we may license in the future, elements of ourtrademarks, trade dress and similar proprietary rights to third parties.  While we attempt to ensure that the qualityof our brand

 

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is maintained by these business partners, such partners may takeactions that could materially and adversely affect the value of our proprietaryrights or our reputation.  We cannotassure you that any of our proprietary rights will be of value in the futuresince the validity, enforceability and scope of protection of certainproprietary rights in Internet-related industries is uncertain and stillevolving.

 

We may be subject to claims of alleged infringement of the trademarksand other intellectual property rights of third parties by us or the Webpublishers with Web sites in the 24/7 Network. Such claims and any resultant litigation could subject us to significantliability for damages and could result in the invalidation of our proprietaryrights.  In addition, even if weprevail, such litigation could be time-consuming and expensive to defend, andcould result in the diversion of our time and attention, any of which couldmaterially and adversely affect our business, results of operations andfinancial condition.  Any claims 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.

 

In addition to our ongoing litigation against, Avenue A, from time totime, we may selectively pursue claims of infringement of our patents and otherintellectual property rights by third parties. Such claims and any resultant litigation present the risk that a courtcould determine, either preliminarily or finally, that some of our patent orother intellectual property rights are not valid.  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.

 

INTELLECTUAL PROPERTY LIABILITY.

 

We may be liable for content available or posted on the Web sites ofour publishers.  We may be liable tothird parties for content in the advertising we serve if the music, artwork,text or other content involved violates the copyright, trademark or otherintellectual property rights of such third parties or if the content isdefamatory.  Any claims or counterclaimscould be time consuming, result in costly litigation or divert management’sattention.

 

RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE.

 

The Internet and Internet advertising markets are characterized byrapidly changing technologies, evolving industry standards, frequent newproduct and service introductions, and changing customer demands.  Our future success will depend on ourability 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 mayexperience difficulties that could delay or prevent the successful design,development, introduction or marketing of our solutions.  In addition, our new solutions orenhancements must meet the requirements of our current and prospectivecustomers and must achieve significant market acceptance.  Material delays in introducing new solutionsand enhancements may cause customers to forego purchases of our solutions andpurchase those of our competitors.

 

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ITEM 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

INTEREST RATE RISK

 

The primary objective of our investment activities is to preservecapital.  Cash and cash equivalents areinvestments with original maturities 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.  The following table presents theamounts of our financial instruments that are subject to interest rate risk byexpected maturity and average interest rates as of March 31, 2003 (inthousands):

 
|                      |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **Thereafter** |   | **TOTAL** |   |
|---------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|
| Cash and cash equivalents |   | $        | 4,575  |     | $      | —   |   | $        | — |           | $      | —    |   | $ | — |   | $ | 4,575 |   |
| Average interest rate     |   | 0.80     | %      |     |   |     |   |     |   |           |   | 0.80      | %      |
|                      |   |     |   |     |   |     |   |     |   |           |   |      |   |
| Loan payable              |   | —   |   | —   |   | 3,573    |   | 5,608    |   | —         |   | 9,181     |   |
| Average interest rate     |   |     |   |     |   | 4.50     | %      | 6.00     | %      |           |   | 5.42      | %      |
|                           |        |          |        |          |        |          |        |          |        |                |        |           |        |  |  |  |  |  |  |

 

We did not hold any derivative financial instruments as of March 31,2003.

 

FOREIGN CURRENCY RISK

 

We transact business in a variety of foreign countries and are thussubject to exposure from adverse movements in foreign currency exchangerates.  This exposure is primarilyrelated to revenue and operating expenses denominated in European currencies.  The effect of foreign exchange ratefluctuations for the three months ended March 31, 2003 and 2002 were notmaterial.  We do not use derivativefinancial instruments to limit our foreign currency risk exposure.  As of March 31, 2003, we had $1.2 million incash and cash equivalents denominated in foreign currencies.

 

ITEM 4.  CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

*Termination of previous independentaccountants*

 

On January 29, 2003, we dismissed KPMG LLP (“KPMG”) as ourindependent public accountants.  Theaudit reports issued by KPMG on our consolidated financial statements as of andfor the years ended December 31, 2001 and December 31, 2000, did notcontain an adverse opinion or a disclaimer of opinion, and were not qualifiedor modified, as to uncertainty, audit scope or accounting principles, except asfollows:

 

“KPMG’sreport, dated March 29, 2002, except for footnotes 3 and 4(b), which areas of October 15, 2002, contains two explanatory paragraphs. This reportappears in the Form 8-K/A of 24/7 Real Media, Inc. datedDecember 19, 2002. The first explanatory paragraph states that the Companyhas suffered recurring losses from operations since inception and has a workingcapital deficiency that raise substantial doubt about its ability to continueas a going concern. The consolidated financial statements do not include anyadjustments that might result from the outcome of that uncertainty. The secondexplanatory paragraph states that the Company revised the consolidatedfinancial statements and footnotes to reflect the sale of its IMAKE subsidiaryas a discontinued operation in accordance with Statement of FinancialAccounting Standards No. 144, Accounting for the Impairment or Disposal ofLong-Lived Assets.”

 

Duringthe two most recent fiscal years ended December 31, 2001 andDecember 31, 2000, and the subsequent interim period from January 1,2002 through dismissal of KPMG on January 29,

 

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2003,there have been no disagreements between us and KPMG on any matter ofaccounting principles or practices, financial statement disclosure, or auditingscope or procedure, which disagreements, if not resolved to the satisfaction ofKPMG, would have caused KPMG to make reference to the subject matter thereof inits report on our consolidated financial statements for such periods.

 

During the two most recent fiscal years and through January 29,2003, there were no reportable events as defined in Item 304(a)(1)(v) ofRegulation S-K.

 

We requested KPMG to furnish a letter addressed to the Securities andExchange Commission stating whether it agrees with the above statements.  A copy of such letter was filed asExhibit 16.1 to our Current Report on Form 8-K, dated January 31,2003.

 

*Engagement of new independent accountants*

 

We appointed Goldstein Golub Kessler LLP as our new independent publicaccountants effective as of January 29, 2003.  The selection of Goldstein Golub Kessler LLP was conditionallyapproved by the Audit Committee of our Board of Directors on January 14,2003 subject to agreement on the terms of the engagement, which action wascompleted on January 29, 2003. During the fiscal years ended December 31, 2001 andDecember 31, 2000 and through January 29, 2003, we did not consultwith Goldstein Golub Kessler LLP regarding any matters described in, andrequired to be disclosed pursuant to, Item 304(a)(2)(i) and (ii) ofRegulation S-K.

 

ITEM 5.  CONTROLS AND PROCEDURES

 

Within the 90 days prior to the date of this report, the Company’sChief Executive Officer and Chief Financial Officer, evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures.  Based upon this evaluation,the Chief Executive Officer and Chief Financial Officer concluded that thedisclosure controls and procedures are effective in ensuring that informationrequired to be disclosed by the Company in the reports that it files or submitsunder the Securities and Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time period specified by theSecurities and Exchange Commission’s rules and forms.

 

Additionally, there were no significant changes in the Company’sinternal controls that could significantly affect the Company’s disclosurecontrols and procedures subsequent to the date of their evaluation, nor werethere any significant deficiencies or material weaknesses in the Company’sinternal controls.  As a result, nocorrective actions were required or undertaken.

 

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**PARTII.  OTHER INFORMATION**

 

**Item1.  Legal Proceedings**

 

*Chinadotcom Corp.*

 

On February19, 2003, the Company filed a complaint against Chinadotcom Corporation forbreach of contract, unjust enrichment, breach of duty of good faith and fairdealing, and promissory estoppel arising out of a certain equity exchangeagreement dated August 16, 2000 between the Company and Chinadotcom. Thecomplaint sought monetary damages in excess of $6 million as well as certainequitable relief.  Chinadotcom thenfiled a motion seeking to compel arbitration of the matter, which the courtgranted on May 12, 2003.  We intend tofile promptly an arbitration claim relating to both the equity exchangeagreement and other claims that we may have against chinadotcom.  We believe that chinadotcom may assertcounterclaims.

 

Chinadotcomrecently filed an action in court in Hong Kong against David Moore, our ChiefExecutive Officer, alleging, among other things, breach of fiduciary duty byMr. Moore in connection with his serving as a director of Chinadotcom and itssubsidiary, 24/7 Media Asia Ltd.  TheCompany will indemnify Mr. Moore and assume his defense.  We believe that the charges are utterlywithout merit and that the action was brought solely in retaliation against theCompany for asserting its rights in the matter discussed above.

 

*Avenue A, Inc.*

 

On April 19,2002, Avenue A, Inc. filed a complaint against the Company seeking adeclaratory judgment that U.S. Patent No. 6,206,368 is invalid and notinfringed by Avenue A.  The complaintalso seeks injunctive relief and recovery of attorney's fees.  On May 10, 2002, the Company filed itsanswer to the complaint, in which the Company denied the material allegationsof the complaint and asserted a counterclaim for infringement of the '368patent.  On January 2, 2003, Avenue Afiled a motion for summary judgment of non-infringement, to which the Companyfiled papers in opposition on April 28, 2003: a decision on this motion ispending.  The parties are presently indiscovery.

 

*Beate Uhse*

 

In January2002, the Company’s German subsidiary Real Media Germany filed suit in thecommercial court of Flensburg, Germany for breach of contract.  The Company alleges that under Article 87 ofthe Handelsgeserzbuch (Commercial Code) Beate Uhse owes Real Media for allrevenue generated on Beate Uhse’s behalf for the calendar year 2002 prior tothe cancellation of the contract by Beate Uhse.  The sum in dispute is approximately $800,000.  We have retained $400,000 of revenuegenerated by Beate Uhse in January 2002. Beate Uhse has counterclaimed for this amount.  The matter is pending before the Flensburg court.

 

*Brian Anderson*

 

On July 5,2001, Brian Anderson, former Chief Executive of our AwardTrack, Inc.subsidiary, served us with notice of a lawsuit filed in Superior Court for theState of California in and for the County of Santa Cruz, alleging breach ofcontract, fraud, intentional infliction of emotional distress and breach offiduciary duty, in connection with the acquisition of AwardTrack and subsequentevents.  The Company has removed thelawsuit to federal court in California and has moved to dismiss the complaintin its entirety; this motion was granted in part, with leave to remand, anddenied in part.  The plaintiff hassubsequently refiled the complaint and the Company has filed a counterclaim.

 

**Item2.  Changes in Securities and Use ofProceeds**

 

None.

 

**Item3.  Defaults Upon Senior Securities**

 

None.

 

**Item4.  Submission of Matters to a Vote ofSecurities Holders**

 

None.

 

**Item5.  Other Information**

 

In March 2003, the Nasdaq StockMarket made certain proposals to the Securities and Exchange Commission tofurther extend the grace periods that exempted the Company from compliance withNasdaq’s $1.00 per share minimum bid price requirement.  We understand that the SEC has not yetcommented on Nasdaq’s request to extend the grace periods.   As a result, the Company received a letterfrom Nasdaq dated May 13, 2003 stating that the Company no longer complieswith the $1.00 minimum bid price requirement for continued listing and that theCompany’s common stock is, therefore, subject to delisting from theNasdaq SmallCap Market, pursuant to Nasdaq Marketplace Rule4310(c)(4).  The letter advised that theCompany’s common stock will be delisted as of the opening of tradingon May 22, 2003, unless the Company requests a hearing by May 20,2003. Under Nasdaq rules, if the Company requests such a hearing, the scheduleddelisting will be stayed pending the outcome of the hearing. Until then, theCompany’s common stock will remain listed and will continue to trade on theNasdaq SmallCap Market.  TheCompany’s management and Board of Directors are reviewing the letter andconsidering their options.  If theCompany requests a hearing, it is expected to be held within 45 days of thedate that the request for a hearing is filed with Nasdaq.

 

If the SEC fails to grant therequest of Nasdaq to further extend the grace periods, and if any relief thatCompany may seek at a hearing is denied and the Company’s common stock fails totrade above $1.00 per share for a consecutive 10 day period, the Company’scommon stock will be delisted from the Nasdaq SmallCap Market. In suchevent, the Company’s common stock will trade on the OTC Bulletin Board’selectronic quotation system, or another quotation system or exchange on whichthe shares of the Company may qualify. The Company’s shareholders will still beable to obtain current trading information, including the last trade bid andask quotations and share volume.

 

**Item6.  Exhibits and Reports on Form 8-K**

 

(a)                                  Exhibits.

 

None.

 

(b)                                 Reports on Form 8-K.

 

Reporton Form 8-K dated January 9, 2003 (file no. 0-29768).  The report contained our issuance of a press release announcingthat the Company has amicably settled an action the Company brought against,and entered into a license agreement with, ValueClick, Inc. andMediaplex, Inc.

 

Reporton Form 8-K dated January 21, 2003 (file no. 1-14355).  The report contained information regardingour acquisition of Insight First, Inc.

 

Reporton Form 8-K dated January 29, 2003 (file no. 1-14355).  The report contained information regardingthe termination of our previous independent accountants, KPMG LLC.

 

**Item7.  SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

24/7 Real Media, Inc.

 

Date: May 13, 2003

 
|   | By:    | /s/  David J. Moore              |
|--------|--------|---------------------------------------|
|   |   | David J.  Moore                       |
|   |   | Chairman and  Chief Executive Officer |
|   |   |                                  |
|   | By:    | /s/  Norman M. Blashka           |
|   |   | Norman M.  Blashka                    |
|   |   | EVP and  Chief Financial Officer      |

 

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CERTIFICATION PURSUANT TO SECTION 302OF THE SARBANES-OXLEY ACT OF 2002

 

I, David J. Moore, certify that:

 

1.   I have reviewed this quarterlyreport on Form 10-Q of 24/7 Real Media, Inc.;

 

2.   Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

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

 

4.   The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

(a)        designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

(b)        evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the “**Evaluation Date**”); and

 

(c)        presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.   The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent functions):

 

(a)        allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)        anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.   The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| Date: May 13, 2003 |                                                                |
|--------------------|---------------------------------------------------------------------|
|               |                                                                |
|               | /s/  David J. Moore                                            |   |
|               | Chairman and Chief Executive Officer  (Principal Executive Officer) |

 

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CERTIFICATION PURSUANT TO SECTION 302OF THE SARBANES-OXLEY ACT OF 2002

 

I, Norman M. Blashka, certify that:

 

1.   I have reviewed thisquarterly report on Form 10-Q of 24/7 Real Media, Inc.;

 

2.   Based on my knowledge, thisquarterly report does not contain any untrue statement of a material fact oromit to state a material fact necessary to make the statements made, in lightof the circumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

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

 

4.   The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have:

 

(a)        designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

(b)        evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the “**Evaluation Date**”); and

 

(c)        presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.   The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent functions):

 

(a)        allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)        anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.   The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date: May 13, 2003 |                                                                                               |
|--------------------|----------------------------------------------------------------------------------------------------|
|               |                                                                                               |
|               | /s/  Norman M. Blashka                                                                        |   |
|               | Executive Vice President and Chief Financial Officer  (Principal Financial and Accounting Officer) |

 

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