**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 thequarterly period ended September 30, 2002**

 

**or**

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

 

**For thetransition periodfrom                          to                          **

 

**Commission file number 1-14355**

 

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

(Exactname of registrant as specified in its charter)

 

| **DELAWARE**                                               |   | **13-3995672**       |
|------------------------------------------------------------|--------|----------------------|
| (STATE  OR OTHER JURISDICTION OF                           |   | (IRS  EMPLOYER       |
| INCORPORATION  OR ORGANIZATION)                            |   | 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) |

 

Indicate by check mark whetherthe registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. YES  ýNO  o

 

APPLICABLEONLY TO CORPORATE ISSUERS:

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

 

| CLASS                                   |   | OUTSTANDING  AT November 11, 2002 |
|-----------------------------------------|--------|-----------------------------------|
| Common  Stock, par value $.01 per share |   | 58,474,109  Shares                |

 

 

----

 

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

**September 30, 2002**

**FORM 10-Q**

**INDEX**

 
| Part I.  Financial Information                                                                                               |
|-----------------------------------------------------------------------------------------------------------------------------------|
| Item 1.  Consolidated Financial Statements                                                                                   |
| Consolidated Balance Sheets  as of September 30, 2002 (unaudited) and December 31, 2001                                           |
| Consolidated  Statements of Operations for the three and nine month periods ended  September 30, 2002 and  2001  (unaudited) |
| Consolidated  Statements of Cash Flows for the nine month periods ended  September 30, 2002 and 2001 (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.  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                                                                                    |
| Item  7.  Signatures                                                                                                         |

 

1

----

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATEDFINANCIAL STATEMENTS

 

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

**CONSOLIDATEDBALANCE SHEETS**

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

 
|                                                                                                                                 |   | **September 30,  2002** |   | **December 31,  2001** |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                                                                                                 |   | **(unaudited)**         |   | **(notes 1 and 3)**    |   |
| **ASSETS**                                                                                                                           |   |                    |   |                   |   |
| Current assets:                                                                                                                      |   |                    |   |                   |   |
| Cash and cash equivalents                                                                                                            |   | $                       | 10,625 |                   | $      | 6,974 |   |
| Restricted cash                                                                                                                      |   | —                  |   | 1,500                  |   |
| Accounts receivable, less  allowances of $1,232 and $2,493, respectively                                                             |   | 6,742                   |   | 9,623                  |   |
| Notes and amounts  receivable from dispositions                                                                                      |   | 1,775                   |   | —                 |   |
| Net current assets of  discontinued operation                                                                                        |   | —                  |   | 1,546                  |   |
| Prepaid expenses and other  current assets                                                                                           |   | 1,285                   |   | 1,931                  |   |
|                                                                                                                                 |   |                    |   |                   |   |
| Total current assets                                                                                                                 |   | 20,427                  |   | 21,574                 |   |
|                                                                                                                                 |   |                    |   |                   |   |
| Property and equipment, net                                                                                                          |   | 4,081                   |   | 6,308                  |   |
| Intangible assets, net                                                                                                               |   | 10,675                  |   | 14,518                 |   |
| Notes and amounts  receivable from dispositions                                                                                      |   | 1,331                   |   | —                 |   |
| Net long-term assets of  discontinued operation                                                                                      |   | —                  |   | 1,136                  |   |
| Receivable from related party                                                                                                        |   | —                  |   | 600                    |   |
| Other assets                                                                                                                         |   | 711                     |   | 1,452                  |   |
|                                                                                                                                 |   |                    |   |                   |   |
| Total assets                                                                                                                         |   | $                       | 37,225 |                   | $      | 45,588 |   |
|                                                                                                                                 |   |                    |   |                   |   |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**                                                                                             |   |                    |   |                   |   |
| Current liabilities:                                                                                                                 |   |                    |   |                   |   |
| Accounts payable                                                                                                                     |   | $                       | 6,755  |                   | $      | 8,781 |   |
| Accrued liabilities                                                                                                                  |   | 9,489                   |   | 15,750                 |   |
| Net current liabilities of  discontinued operations                                                                                  |   | —                  |   | 244                    |   |
| Current installments of  obligations under capital leases                                                                            |   | 50                      |   | 42                     |   |
| Deferred revenue                                                                                                                     |   | 2,971                   |   | 2,422                  |   |
| Deferred gain on sale of  subsidiary                                                                                                 |   | 87                      |   | 2,308                  |   |
|                                                                                                                                 |   |                    |   |                   |   |
| Total current liabilities                                                                                                            |   | 19,352                  |   | 29,547                 |   |
|                                                                                                                                 |   |                    |   |                   |   |
| Obligations under capital  leases, excluding current installments                                                                    |   | 74                      |   | 112                    |   |
| Loan payable - related  party, including interest                                                                                    |   | 7,779                   |   | 4,534                  |   |
| Other long-term liabilities                                                                                                          |   | 455                     |   | 522                    |   |
| Minority interest                                                                                                                    |   | 21                      |   | 21                     |   |
|                                                                                                                                 |   |                    |   |                   |   |
| Commitments and  contingencies                                                                                                       |   |                    |   |                   |   |
|                                                                                                                                 |   |                    |   |                   |   |
| Stockholders' equity:                                                                                                                |   |                    |   |                   |   |
| Preferred stock, $.01 par  value; 10,000,000 shares authorized 925,000 and 0 shares issued and  outstanding, respectively            |   | 9                       |   | —                 |   |
| Common stock, $.01 par  value; 140,000,000 shares authorized; 58,474,109 and 49,532,127 shares issued  and outstanding, respectively |   | 585                     |   | 495                    |   |
| Additional paid-in capital                                                                                                           |   | 1,082,938               |   | 1,070,403              |   |
| Deferred stock compensation                                                                                                          |   | (298                    | )      | (670                   | )      |
| Accumulated other  comprehensive income (loss)                                                                                       |   | 84                      |   | (62                    | )      |
| Accumulated deficit                                                                                                                  |   | (1,073,774              | )      | (1,059,314             | )      |
| Total stockholders' equity                                                                                                           |   | 9,544                   |   | 10,852                 |   |
|                                                                                                                                 |   |                    |   |                   |   |
| Total liabilities and  stockholders' equity                                                                                          |   | $                       | 37,225 |                   | $      | 45,588 |   |

 

Seeaccompanying notes to unaudited interim consolidated financial statements.

 

2

----

 

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

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
|                                                                                                                                  |   | **Three months ended September 30,** |    | **Nine months ended September 30,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|---------|-------------------------------------|--------|
|                                                                                                                                  |   | **2002**                             |    | **2001**                            |   | **2002** |   | **2001** |   |
|                                                                                                                                  |   | **(unaudited)**                      |    | **(unaudited)**                     |   |
| Revenues:                                                                                                                             |   |                                 |    |                                |   |   |   |   |   |
| Integrated media solutions                                                                                                            |   | $                                    | 6,379   |                                | $      | 7,039 |   | $ | 21,224 |   | $ | 28,269 |   |
| Technology solutions                                                                                                                  |   | 3,340                                |    | —                              |   | 9,825 |   | 8,062 |   |
| Total revenues                                                                                                                        |   | 9,719                                |    | 7,039                               |   | 31,049 |   | 36,331 |   |
|                                                                                                                                  |   |                                 |    |                                |   |   |   |   |   |
| Cost of revenues:                                                                                                                     |   |                                 |    |                                |   |   |   |   |   |
| Integrated media solutions                                                                                                            |   | 4,334                                |    | 7,495                               |   | 14,435 |   | 24,814 |   |
| Technology solutions  (exclusive of $0, $0, $7 and $0, respectively, reported below as stock-based  compensation)                     |   | 847                                  |    | —                              |   | 2,586 |   | 2,145 |   |
| Total cost of revenues                                                                                                                |   | 5,181                                |    | 7,495                               |   | 17,021 |   | 26,959 |   |
|                                                                                                                                  |   |                                 |    |                                |   |   |   |   |   |
| Gross profit                                                                                                                          |   | 4,538                                |    | (456                                | )      | 14,028 |   | 9,372 |   |
|                                                                                                                                  |   |                                 |    |                                |   |   |   |   |   |
| Operating expenses:                                                                                                                   |   |                                 |    |                                |   |   |   |   |   |
| Sales and marketing  (exclusive of $13, $27, $68 and $471, respectively, reported below as  stock-based compensation)                 |   | 3,178                                |    | 3,353                               |   | 9,456 |   | 15,693 |   |
| General and administrative  (exclusive of $2,169, $140, $2,484 and $1,081, respectively, reported below  as stock-based compensation) |   | 3,509                                |    | 5,158                               |   | 10,954 |   | 27,838 |   |
| Product technology  (exclusive of $8, $27, $50 and ($76), respectively, reported below as  stock-based compensation)                  |   | 807                                  |    | 1,370                               |   | 3,251 |   | 9,601 |   |
| Amortization of goodwill  and intangible assets                                                                                       |   | 466                                  |    | 2,196                               |   | 1,475 |   | 12,557 |   |
| Stock-based compensation                                                                                                              |   | 2,190                                |    | 194                                 |   | 2,609 |   | 1,476 |   |
| Restructuring costs                                                                                                                   |   | —                               |    | 521                                 |   | — |   | 952 |   |
| Loss (gain) on sale of  non-core assets, net                                                                                          |   | 856                                  |    | (647                                | )      | 550 |   | (1,529 | ) |
| Impairment of intangible  assets                                                                                                      |   | —                               |    | 9,600                               |   | — |   | 56,707 |   |
|                                                                                                                                  |   |                                 |    |                                |   |   |   |   |   |
| Total operating expenses                                                                                                              |   | 11,006                               |    | 21,745                              |   | 28,295 |   | 123,295 |   |
|                                                                                                                                  |   |                                 |    |                                |   |   |   |   |   |
| Loss from operations                                                                                                                  |   | (6,468                               | )       | (22,201                             | )      | (14,267 | ) | (113,923 | ) |
|                                                                                                                                  |   |                                 |    |                                |   |   |   |   |   |
| Interest income (expense),  net                                                                                                       |   | (85                                  | )       | 135                                 |   | (193 | ) | 750 |   |
| Gain on sale of  investments, net                                                                                                     |   | —                               |    | 882                                 |   | — |   | 4,985 |   |
| Impairment of investments                                                                                                             |   | —                               |    | —                              |   | — |   | (3,089 | ) |
|                                                                                                                                  |   |                                 |    |                                |   |   |   |   |   |
| Loss from continuing  operations                                                                                                      |   | (6,553                               | )       | (21,184                             | )      | (14,460 | ) | (111,277 | ) |
| Loss from discontinued  operations                                                                                                    |   | —                               |    | (9,669                              | )      | — |   | (52,086 | ) |
| Net loss                                                                                                                              |   | (6,553                               | )       | (30,853                             | )      | (14,460 | ) | (163,363 | ) |
|                                                                                                                                  |   |                                 |    |                                |   |   |   |   |   |
| Dividends on preferred  stock                                                                                                         |   | (50                                  | )       | —                              |   | (50 | ) | — |   |
| Preferred stock conversion  discount                                                                                                  |   | (6,628                               | )       | —                              |   | (6,628 | ) | — |   |
|                                                                                                                                  |   |                                 |    |                                |   |   |   |   |   |
| Net loss attributable to  common stockholders                                                                                         |   | $                                    | (13,231 | )                                   | $      | (30,853 | ) | $ | (21,138 | ) | $ | (163,363 | ) |
|                                                                                                                                  |   |                                 |    |                                |   |   |   |   |   |
| Loss per common share -  basic and diluted                                                                                            |   |                                 |    |                                |   |   |   |   |   |
| Loss from continuing  operations                                                                                                      |   | $                                    | (0.12   | )                                   | $      | (0.48 | ) | $ | (0.28 | ) | $ | (2.55 | ) |
| Loss from discontinued  operations                                                                                                    |   | —                               |    | (0.22                               | )      | — |   | (1.19 | ) |
| Preferred stock dividends  and conversion discount                                                                                    |   | (0.13                                | )       |                                |   | (0.13 | ) |   |   |
| Net loss attributable to  common stockholders                                                                                         |   | $                                    | (0.25   | )                                   | $      | (0.70 | ) | $ | (0.41 | ) | $ | (3.74 | ) |
|                                                                                                                                  |   |                                 |    |                                |   |   |   |   |   |
| Weighted average shares  outstanding                                                                                                  |   | 52,540,206                           |    | 44,363,935                          |   | 51,051,525 |   | 43,630,239 |   |

 

Seeaccompanying notes to unaudited interim consolidated financial statements.

 

3

----

 

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

 
|                                                                                          |   | **Nine Months Ended September 30,** |    |
|-----------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|
|                                                                                          |   | **2002**                            |    | **2001** |   |
|                                                                                          |   | **(unaudited)**                     |    | **(unaudited)** |   |
| Cash flows from operating  activities:                                                        |   |                                |    |   |   |
| Net loss                                                                                      |   | $                                   | (14,460 | ) | $ | (163,363 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities:                  |   |                                |    |   |   |
| Loss from discontinued  operations                                                            |   | —                              |    | 52,086 |   |
| Depreciation and  amortization                                                                |   | 2,881                               |    | 10,058 |   |
| Provision for doubtful  accounts and sales reserves                                           |   | (162                                | )       | (5,303 | ) |
| Amortization of goodwill  and other intangible assets                                         |   | 1,475                               |    | 12,557 |   |
| Non-cash compensation                                                                         |   | 2,609                               |    | 1,476 |   |
| Gain on sale of  investments, net                                                             |   | —                              |    | (4,985 | ) |
| Loss (gain) on sale of  non-core assets, net                                                  |   | 550                                 |    | (1,529 | ) |
| Common stock issued for  services                                                             |   | 47                                  |    | — |   |
| Warrants issued for  services                                                                 |   | —                              |    | 100 |   |
| Impairment of investments                                                                     |   | —                              |    | 3,089 |   |
| Impairment of intangible  assets                                                              |   | —                              |    | 56,707 |   |
| Non-cash restructuring  costs                                                                 |   | —                              |    | (549 | ) |
| Changes in operating assets  and liabilities, net of effect of acquisitions and dispositions: |   |                                |    |   |   |
| Accounts receivable                                                                           |   | 3,066                               |    | 30,012 |   |
| Prepaid assets and other  current assets                                                      |   | 748                                 |    | 826 |   |
| Other assets                                                                                  |   | 690                                 |    | 2,556 |   |
| Accounts payable, accrued  and other liabilities                                              |   | (7,905                              | )       | (19,796 | ) |
| Deferred revenue                                                                              |   | 549                                 |    | (1,518 | ) |
|                                                                                          |   |                                |    |   |   |
| Net cash used in operating  activities                                                        |   | (9,912                              | )       | (27,576 | ) |
|                                                                                          |   |                                |    |   |   |
| Cash flows from investing  activities:                                                        |   |                                |    |   |   |
| Proceeds from sale of  non-core assets, net of expenses                                       |   | 2,416                               |    | 16,807 |   |
| Cash acquired from  acquistion of Now Marketing, net                                          |   | 1,190                               |    | — |   |
| Proceeds from sale of  investments                                                            |   | —                              |    | 6,858 |   |
| Capital expenditures,  including capitalized software                                         |   | (587                                | )       | (185 | ) |
|                                                                                          |   |                                |    |   |   |
| Net cash provided by  investing activities                                                    |   | 3,019                               |    | 23,480 |   |
|                                                                                          |   |                                |    |   |   |
| Cash flows from financing  activities:                                                        |   |                                |    |   |   |
| Proceed from issuance of  Series A preferred stock and warrants, net                          |   | 7,355                               |    | — |   |
| Proceeds from issuance of  loan payable - related party                                       |   | 3,000                               |    | — |   |
| Proceeds from exercise of  stock options                                                      |   | 73                                  |    | 12 |   |
| Payment of capital lease  obligations                                                         |   | (30                                 | )       | (88 | ) |
| Cash paid in settlement for  treasury stock                                                   |   | —                              |    | (275 | ) |
|                                                                                          |   |                                |    |   |   |
| Net cash provided by (used  in) financing activities                                          |   | 10,398                              |    | (351 | ) |
| Net change in cash and cash  equivalents                                                      |   | 3,505                               |    | (4,447 | ) |
| Effect of foreign currency  on cash                                                           |   | 146                                 |    | 36 |   |
| Cash used by discontinued  operations                                                         |   | —                              |    | (13,905 | ) |
| Cash and cash equivalents  at beginning of period                                             |   | 6,974                               |    | 25,653 |   |
|                                                                                          |   |                                |    |   |   |
| Cash and cash equivalents  at end of period                                                   |   | $                                   | 10,625  |   | $ | 7,337 |   |

 

Seeaccompanying notes to unaudited interim consolidated financial statements.

 

4

----

 

**(1)  SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTINGPOLICIES**

 

**Summaryof Operations and Going Concern**

 

24/7 Real Media provides marketing solutions to the digital advertisingindustry.  Through its suite of onlinemarketing and technology services, 24/7 Real Media connects media buyers andmedia sellers across multiple digital platforms and works closely withindividual clients to develop comprehensive, customized, value-enhancingsolutions.  The Company focuses on theUnited States, Canada and Europe and is organized into two principal lines ofbusiness: Integrated Media Solutions and Technology Solutions.

 

•           Integrated Media Solutions connects advertisers to audiences throughthree products: (i) the 24/7 Network of branded and niche Web sites; (ii)promotions; and (iii) a leading search engine results listing service.  The Company also acts as a broker forpermission based email lists.

 

•           Technology Solutions, through Open AdStream, the Company’s proprietarytechnology, provides advertising delivery and management.

 

The Company’s business is characterized by rapid technological change,new product development and evolving industry standards. Inherent in theCompany’s business are various risks and uncertainties, including its limited operating history,unproven business model and the limited history of commerce and advertising onthe Internet. The Company’s success may depend, in part, upon the continuedexpansion of the Internet as a communications medium, prospective productdevelopment efforts and the continued acceptance of the Company’s solutions bythe marketplace.

 

The Company’s independent public accountants have included a ‘‘goingconcern’’ explanatory paragraph in their audit report accompanying the 2001consolidated financial statements which have been prepared assuming that theCompany will continue as a going concern. The explanatory paragraph states thatthe Company’s recurring losses from operations since inception and workingcapital deficiency raise substantial doubt about the Company’s ability tocontinue as a going concern and that the consolidated financial statements donot include any adjustments that might result from the outcome of thisuncertainty.

 

**FactorsAffecting Comparability of 2002 and 2001**

 

On October 30, 2001, theCompany acquired Real Media, Inc.  Themerger created cost synergies for the combined company, one of which was tofocus on Real Media’s proprietary Open AdStream technology and abandon theexisting ad serving technology, 24/7 Connect. The transition of the networkbusiness onto the Open AdStream platform began in December 2001 and wascompleted in February 2002, resulting in the elimination of redundant personneland operating costs associated with having two ad serving platforms. Throughout2001 and into 2002, in accordance with its business plan, the Company divestedor discontinued many non-core assets and operations, including:

 

•              In May 2001,the Company completed the sale of certain technology assets and intellectualproperty of Sabela and completed the shut down of Sabela operations on June 30,2001.

 

•              In May 2001,the Company completed the sale of Exactis, an email service bureau.

 

•              In August2001, the operations of 24/7 Europe were shut down and the consolidatedfinancial statements have been revised to reflect this international segment asa discontinued operation.

 

•              In January2002, the Company completed the sale of its IMAKE subsidiary.  The financial statements of prior periodshave been revised to reflect the disposition of IMAKE as a discontinuedoperation.

 

•              In May 2002,the Company completed the sale of certain assets related to the US emailmanagement product.

 

5

----

 

The revenue attributed to thedisposition of these non-core assets for the three and nine month periods endedSeptember 30, 2002 was approximately $0 and $1.6 million, respectively, all ofwhich related to the US email management product within the Integrated MediaSolutions segment.  For the three andnine month periods ended September 30, 2001 revenue related to disposition ofnon-core assets was  $1.5 million and$13.9 million, respectively, of which $1.5 million and $5.8 million,respectively, related to the US email management product within the IntegratedMedia Solutions segment and $0 and $8.1 million related to the TechnologySolutions segment.  The TechnologySolutions segment is not comparable as the revenue in 2002 is derived solelyfrom operations that were acquired with Real Media in October 30, 2001, whilethe revenue in 2001 relates to operations that have been sold or shut down,including Exactis and Sabela.  This doesnot include $1.3 million and $15.3 million for the three and nine month periodsended September 30, 2001, respectively, related to 24/7 Europe and IMAKE, whichare shown as part of discontinued operations in the 2001 consolidated statementof operations.

 

As aresult of the cost-cutting and divestiture efforts, which began in November2000 through December 31, 2001, the Company reduced its headcount byapproximately 1,000 and closed several offices, both domestic and international(see notes 2, 3 and 4 for additional information).

 

On September 19, 2002, theCompany acquired certain assets of Elbit Vflash Inc. and Elbit Vflash Ltd.d/b/a Now Marketing (see note 2) that did not have a material impact on theCompany’s results of operation for the third quarter of 2002.

 

**Organizationand Basis of Presentation**

 

*Principles of Consolidation*

 

The Company’s consolidated financial statements as of September 30, 2002and December 31, 2001 and for the three and nine month periods ended September30, 2002 and 2001 include the accounts of the Company and its majority-ownedand controlled subsidiaries from their respective dates of acquisition (seenote 2).  When losses applicable to minorityinterest holders in a subsidiary exceed the minority interest in the equitycapital of the subsidiary, these losses are included in the Company’s results,as the minority interest holderhas no obligation to providefurther financing to the subsidiary.  Allsignificant intercompany transactions and balances have been eliminated inconsolidation.

 

*Interim Results*

 

The consolidated financial statements as ofSeptember 30, 2002 and for the three and nine month periods ended September 30,2002 and 2001 have been prepared by 24/7 Real Media and 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 as of September 30, 2002 and the results of the Company’soperations and cash flows for the interim periods ended September 30, 2002 and2001.  The financial data and otherinformation disclosed in these notes to the consolidated results for the threeand nine month periods ended September 30, 2002 and 2001 are not necessarilyindicative of the results to be expected for any subsequent quarter or theentire fiscal year ending December 31, 2002.

 

Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted pursuant to theSecurities and Exchange Commission’s rules and regulations.

 

In addition, the Company revised the 2001financial statement information included in this Form 10-Q in order to reflectthe January 2002 sale of IMAKE as a discontinued operation in accordance with theStatement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets” (see note 3).

 

It is suggested that these unauditedconsolidated financial statements be read in conjunction with our revisedaudited consolidated financial statements and notes thereto for the year endedDecember 31, 2001

 

6

----

 

as included in the Company’s report on Form8-K dated October 15, 2002 which reflects the sale of IMAKE as a discontinuedoperation.

 

*Cash and Cash Equivalents*

 

The Company considers allhighly liquid securities, with original maturities of three months or less, tobe cash equivalents.  Cash and cashequivalents consisted principally of money market accounts.

 

*Unbilled Receivables*

 

At September 30, 2002 andDecember 31, 2001, accounts receivable included approximately $3.9 million and$2.4 million, respectively, of earned but unbilled receivables, which are anormal part of the Company’s business, as receivables are generally invoicedonly after the revenue has been earned. The terms of the related advertising contracts typically require billingat the end of each month.  The increaseis due to the increase in technology revenue from $1.7 million in the fourthquarter of 2001 to $3.3 million in the third quarter of 2002.  All unbilled receivables as of September 30,2002 have been subsequently billed.

 

*Capitalized Software*

 

In accordance with SFAS No. 86,“Accounting for the Costs of Computer Software to Be Sold, Leased, or OtherwiseMarketed”, the Company capitalizes internal production costs for software uponreaching technological feasibility.  Asof September 30, 2002, the Company capitalized approximately $0.3 million inconnection with the Open Advertiser ad-serving product.  Depreciation will be on the straight-linemethod over the estimated useful life of the software, or 4 years and beginwhen the product is available for general release, which is expected in thefourth quarter of 2002.

 

*Comprehensive Loss*

 

Total comprehensive loss forthe nine month periods ended September 30, 2002 and 2001 was $(21.0) millionand $(167.2) million, respectively. Comprehensive loss resulted primarily fromnet losses attributable to common stockholders of $(21.1) million and $(163.4)million, respectively, as well as a change in unrealized gains (losses)(net oftax), of marketable securities of $0 and $(3.8) million, respectively, andforeign currency translation adjustments of $0.1 and $0, respectively.  The net change in unrealized gains (losses)of ($3.8) million for the nine months ended September 30, 2001 is comprised ofnet unrealized holding losses arising during the period of $5.4 million relatedto chinadotcom, a reclassification adjustment of $4.1 million for net gains onthe sale of investments in marketable securities and a reclassificationadjustment of $2.5 million for other-than-temporary losses related toavailable-for-sale securities of Network Commerce and i3Mobile.

 

*Loss Per Share*

 

Loss pershare is presented in accordance with the provisions of SFAS No. 128, “EarningsPer Share” (“EPS”). Basic EPS excludes dilution for potentiallydilutive securities and is computed by dividing net loss attributable to commonstockholders by the weighted average number of common shares outstanding forthe 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 netloss per share is equal to basic net loss per share since all potentiallydilutive securities are anti-dilutive for each of the periods presented.Diluted net loss per common share for the periods ended September 30, 2002 and2001 does not include the effects of options to purchase 12.6 million and 7.3million shares of common stock, respectively; 8.3 million and 3.0 millioncommon stock warrants; 32,000 and 0.1 million shares of unvested restrictedstock, respectively, and in 2002, 45.0 million shares from convertible preferredstock on an “as if” converted basis, as the effect of their inclusion isanti-dilutive during each period.

 

7

----

 

*Reclassifications*

 

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

 

*Recent Accounting Pronouncements*

 

In July 2002, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associatedwith Exit or Disposal Activities.” SFAS No. 146 addresses financial accountingand reporting for costs associated with exit or disposal activities andnullifies Emerging Issues Task Forces (“EITF”) 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).”  The principal difference between SFAS No.146 and EITF 94-3 relates to the timing of liability recognition. Under SFASNo. 146, a liability for a cost associated with an exit or disposal activity isrecognized when the liability is incurred. Under EITF 94-3, a liability for anexit cost was recognized at the date of an entity’s commitment to an exit plan.The provisions of SFAS No. 146 are effective for exit or disposal activitiesthat are initiated after December 31, 2002. The adoption of SFAS No. 146 is notexpected to have a material impact on the Company’s financial position orresults of operations.

 

**(2)  BUSINESS COMBINATIONS**

 

*Acquisition of Real Media*

 

On October 30, 2001, the Company entered intoa merger agreement with Real Media, Inc. (‘‘Real Media’’), a privately-heldDelaware corporation. Pursuant to the Agreement and Plan of Merger, the Companyacquired all the outstanding common and preferred shares of Real Media in amerger transaction whereby an indirect subsidiary of the Company was mergedwith and into Real Media, in exchange for approximately 8.2 million shares ofthe Company’s common stock, valued at $2.2 million, equal to 19.9 percent ofthe Company’s common stock prior to the merger. The total purchase price of$6.4 million also included acquisition and transaction costs of $0.9 millionand assumption of $3.3 million in net liabilities. The merger createdopportunities for cost reductions for the combined Company, a significantportion of which resulted from the Company’s decision to fully adopt RealMedia’s proprietary Open AdStream technology (‘‘OAS’’) and abandon theCompany’s existing ad-serving technology, 24/7 Connect. Other cost reductionswere achieved through the elimination of redundant personnel, renegotiatingaffiliate contracts with low split rates on the Real Media network,renegotiation of supplier contracts at better rates due to increased volume andthe consolidation of numerous offices. The Company also adopted a new name‘‘24/7 Real Media, Inc.’’ to capitalize on the Real Media and 24/7 Media brandnames. The purchase price in excess of the fair value of net tangible assetsand liabilities acquired of $6.4 million has been allocated $3.5 million toacquired technology, $0.5 million to trade name and $2.4 million to goodwill.The acquired technology and trade name are being amortized over the expectedperiod of benefit of four years. The acquisition was accounted for as apurchase business combination in accordance with SFAS No. 141, ‘‘BusinessCombinations’’ and SFAS No. 142, ‘‘Goodwill and Other Intangible Assets’’.  Accordingly, goodwill was not amortized.

 

The Company also guaranteed a Promissory Notefor $4.5 million issued by Publigroupe USA Holding, Inc. (‘‘Publigroupe’’),former principal shareholder of Real Media, as of the acquisition date, whichwas to be used primarily to finance Real Media’s restructuring plan. The notebears interest at 4.5% and principal and interest are due on October 30, 2006.The restructuring plan provided for office closings of $0.2 million, workforcereduction of approximately 120 employees for $3.1 million and other relatedobligations of $1.2 million (see note 9). In addition, certain key executives had clauses in their Real Mediaemployment agreements that called for transactional bonuses to be paid in thecase of a change in control. These bonuses of $0.5 million were assumed as partof the acquisition and were paid by the Company in November 2001.  Publigroupe also promised to provideadditional funding in the form of two three-year notes of $1.5 million each,the first of which was received in January 2002 and the second funding of $1.5

 

8

----

 

million, based on the Company achievingcertain target operating results for the three months ended March 31, 2002, wasreceived on May 13, 2002 (see note 12).

 

The net liabilities acquired consist of thefollowing:

 

| **Asset/Liability**                       |   | **Amount** |   |
|-------------------------------------------|--------|------------|--------|
| Cash                                      |   | $          | 6,343  |   |
| Accounts  receivable                      |   | 6,405      |   |
| Fixed assets                              |   | 2,248      |   |
| Receivable—Publigroupe               |   | 600        |   |
| Other assets                              |   | 1,411      |   |
| Accounts  payable and accrued liabilities |   | (13,550    | )      |
| Deferred  revenue                         |   | (2,249     | )      |
| Note  payable—Publigroupe            |   | (4,500     | )      |
|                                      |   | $          | (3,292 | ) |

* *

*Acquisitionof Now Marketing*

 

On September 19, 2002, the Company acquiredcertain assets of Elbit Vflash Inc. and Elbit Vflash Ltd. d/b/a Now Marketing(“Now Marketing”), a New York-based marketing services firm.  The acquisition agreement required NowMarketing’s parent, Elbit Ltd. and Gilbridge, Inc., together (“Now Marketing’sParent”), to make a $1.25 million investment in exchange for 125,000 shares ofSeries B Preferred Stock.  Accordingly,the total purchase consideration of $4.3 million consists of 4.1 million sharesof Common Stock valued at $1.7 million, 125,000 shares of Series B PreferredStock valued at $2.5 million and $60,000 of transaction costs.  The Series B Preferred Stock is convertibleinto shares of Common Stock of the Company at any time at the option of theholder thereof at a conversion price of $0.2066 per share, or 6,050,339 sharesof Common Stock on an as-if converted basis.

 

Substantially all of the initial terms of theagreement were reached when the price of the Company’s Common Stockapproximated the conversion price of $0.2066 per share of Common Stock.  By the time the transaction closed onSeptember 19, 2002 and the terms were agreed to and announced to the public,the price of the Company’s Common Stock rose to $0.44 per share. Accordingly,the 125,000 shares of Series B Preferred Stock issued in connection with NowMarketing’s Parent’s $1.25 million investment contained an embedded beneficialconversion feature which was required to be valued separately as of the date ofthe business combination.  The intrinsicvalue of the beneficial conversion feature was calculated as the differencebetween the conversion price of $0.2066 per share of Common Stock and the fairvalue of the Common Stock into which the Series B Preferred Stock wasconvertible into on the closing date of $0.44 per share, or an intrinsic valueof approximately $0.23 per share, however, the amount of the discount waslimited to the amount of cash acquired that was allocable to the Series BPreferred Stock.  Therefore, the Companyrecorded a non-cash charge of $1.25 million in the third quarter of 2002,representing the number of common shares into which the Series B PreferredStock is convertible (6,050,339 shares of Common Stock) multiplied by theconversion price of $0.2066 per share of Common Stock.  The non-cash charge of $1.25 million isincluded in the “Preferred stock conversion discount” on the consolidatedstatement of operations in a manner similar to a Preferred Stock dividend.

 

The excess purchase price (excluding the $1.25million Series B Preferred Stock discount) over the fair market value of nettangible assets of approximately $1.8 million has initially been allocated togoodwill pending a final allocation of such amount during the fourth quarter of2002.  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’’.

 

9

----

 

The net assets acquired consist of thefollowing:

 

| **Asset/  Liability** |   | **Amount** |   |
|-----------------------|--------|------------|--------|
|                  |   |       |   |
| Cash                  |   | $          | 1,250  |   |
| Accounts receivable   |   | 23         |   |
| Fixed assets          |   | 85         |   |
| Accrued liabilities   |   | (18        | )      |
|                  |   | $          | 1,340  |   |

 

The following unaudited pro forma consolidatedamounts give effect to the Company’s acquisition of Real Media and Now Marketingaccounted for by the purchase method of accounting as if it had occurred at thebeginning of the period by consolidating the results of operations of theacquired entity for the three and nine month periods ended September 30, 2002and 2001.

 

The unaudited pro forma consolidatedstatements of operations are not necessarily indicative of the operatingresults that would have been achieved had the transactions been in effect as ofthe beginning of the periods presented and should not be construed as beingrepresentative of future operating results.

 
|                                              |   | **Three Months Ended****September 30,**             |       | **Nine Months Ended****September 30,** |       |
|---------------------------------------------------|--------|-----------------------------------------------------|------------|----------------------------------------|------------|
|                                              |   | **2002**                                            |       | **2001**                               |       | **2002** |   | **2001** |   |
|                                              |   | **(In  Thousand, Except Share and Per Share Data)** |       |
|                                              |   |                                                | ** ** |                                   | ** ** |   | ** ** |   | ** ** |
| Total revenues                                    |   | $                                                   | 9,730      |                                   | $          | 15,046 |   | $ | 31,529 |   | $ | 60,352 |   |
| Loss from continuing operations                   |   | (7,090                                              | )          | (28,650                                | )          | (23,697 | ) | (133,676 | ) |
| Loss from discontinued operations                 |   | —                                              |       | (9,669                                 | )          | — |   | (52,086 | ) |
| Dividends on preferred stock                      |   | (50                                                 | )          | —                                 |       | (50 | ) | — |   |
| Preferred stock conversion discount               |   | (6,628                                              | )          | —                                 |       | (6,628 | ) | — |   |
| Net loss available to common stockholders         |   | $                                                   | (13,768    | )                                      | $          | (38,319 | ) | $ | (30,375 | ) | $ | (185,762 | ) |
|                                              |   |                                                |       |                                   |       |   |   |   |   |
| Loss per common share -  basic and diluted        |   |                                                |       |                                   |       |   |   |   |   |
| Loss from continuing operations                   |   | $                                                   | (0.13      | )                                      | $          | (0.51 | ) | $ | (0.43 | ) | $ | (2.39 | ) |
| Loss from discontinued operations                 |   | —                                              |       | (0.17                                  | )          | — |   | (0.93 | ) |
| Preferred stock dividends and conversion discount |   | (0.13                                               | )          | —                                 |       | (0.13 | ) | — |   |
| Net loss available to common stockholders         |   | $                                                   | (0.26      | )                                      | $          | (0.68 | ) | $ | (0.56 | ) | $ | (3.32 | ) |

 

----

(1)  The weighted average shares used to compute pro forma basic anddiluted net loss per share for the three and nine month periods ended September30, 2001 includes the 8,216,868 and 4,100,000 common shares issued for RealMedia and Now Marketing, respectively, as if the shares were issued on January1, 2001.

 

**(3)  DISCONTINUED OPERATIONS**

 

*Europe*

 

On August 6, 2001, the Company ceased fundingits European subsidiaries and communicated that to 24/7 Europe NV’s managementteam and Board of Directors. Subsequently, management of 24/7

 

10

----

 

Europe advised the Company that 24/7 Europe NVwas insolvent and shut down all operations in the third quarter of 2001.  During the second quarter of 2001,the Company reduced the carrying value of the net assets of the Europeanoperations to zero.  The write downincluded $12.3 million in impairment charges related to goodwill and otherintangible assets, which was included in loss from discontinued operations inthe second quarter of 2001 statements of operations.

 

STATEMENT OFOPERATIONS DATA

 

|     |   | **Nine months ended********September 30, 2001** |   |
|----------|--------|-------------------------------------------------|--------|
| Revenue  |   | $                                               | 10,555 |   |
| Net loss |   | (30,540                                         | )      |
|          |        |                                                 |        |  |

 

*IMAKE*

 

In accordance with SFAS No. 144, operationsmeeting the definition of a component of an entity are treated as discontinuedoperations when sold.  On January 22,2002, the Company completed the sale of its wholly owned subsidiary, IMAKESoftware & Services, Inc., to Schaszberger Corporation, the previous owner,and an officer of IMAKE. Under the terms of the sale, the purchase price payableby the buyer was approximately $6.5 million for the stock of IMAKE of which$2.0 million was in the form of a 6% four year secured note, approximately$500,000 in cash consideration, a potential earn out of up to $4.0 million overthe next three years based on gross revenue as defined in the agreement andSeries A preferred stock of Schaszberger Corporation, which as of the closingdate represented 19.9% of the buyer. The Note is secured by certain assets ofIMAKE and is guaranteed by Schaszberger Corporation. In the event that the earnout is not met within the three year period, the Company is entitled to receivea $1.00 Warrant for common stock equal to the difference between $3.0 millionand the amount of the actual earn out paid to date. The shares to be receivedare based on a third-party outside valuation of the buyer at December 31, 2005and a ratio set forth in the agreement. The consideration paid to the Companywas determined as a result of arms length negotiations between the buyer andthe Company. The Company has discounted the note receivable and recorded thenet present value of the earn out based on its estimates of projected revenuesand reflected $0.5 million and $1.5 million, respectively.  In January 2002, the Company received theupfront cash consideration of $0.5 million and has been receiving the monthlyearn out payments as scheduled.  As ofSeptember 30, 2002, there are approximately $0.5 million in short term and $1.3million in long term notes and amounts receivable from the disposition relatedto IMAKE on the consolidated balance sheet.

 

During the fourth quarter of2001, the Company wrote down the carrying value of the net assets ofIMAKE.  The write down included $5.9million in impairment charges related to goodwill and intangible assets, whichwas included in loss from discontinued operations in the fourth quarter of 2001statement of operations.

 

The consolidated financial statements andrelated footnotes of the Company have been revised to reflect the sale of theIMAKE subsidiary as a discontinued operation in accordance with SFAS No.144.  Accordingly, revenues, costs andexpenses, assets, liabilities, and cash flows of IMAKE have been excluded fromthe footnotes and the respective captions in the Consolidated Statements.

 

 

11

----

Summarized financialinformation for the discontinued operations is as follows (in thousands):

 

| STATEMENT  OF OPERATIONS DATA |   |                                              |   |                                             |   |
|-------------------------------|--------|---------------------------------------------------|--------|--------------------------------------------------|--------|
|                          |   | **Three  months ended********September 30, 2001** |   | **Nine  months ended********September 30, 2001** |   |
| Revenue                       |   | $                                                 | 1,271  |                                             | $      | 4,728 |   |
| Net loss                      |   | (9,669                                            | )      | (21,546                                          | )      |
|                               |        |                                                   |        |                                                  |        |  |  |

 

| BALANCE SHEET DATA  |       |                   |       |
|---------------------|------------|------------------------|------------|
|                | ** ** | **December  31, 2001** | ** ** |
| Current assets      |       | $                      | 1,546      |   |
| Long-term assets    |       | 1,136                  |       |
| Total assets        |       | 2,682                  |       |
| Current liabilities |       | $                      | (244       | ) |

 

**(4)  DISPOSAL OF NON-CORE ASSETS**

 

On May 23, 2001, the Company completed thesale of Exactis to Direct Marketing Technologies, Inc., a subsidiary ofExperian Marketing Solutions, Inc. (‘‘Experian’’).  The purchase price was $15.25 million of which $12.0 million waspaid in cash, $1.5 million was deposited into escrow until August 2002 assecurity for the Company’s indemnification obligations under the Stock PurchaseAgreement and $1.75 million was retained as a prepayment for future servicesthat are available to be purchased by the Company from Experian pursuant to aservices agreement that expires on December 31, 2002.  During the second quarter of 2001, the $1.5 million in escrow and$1.75 million prepayment had been reflected as deferred gain on sale ofnon-core assets on the consolidated balance sheet.  As the prepaid services are used, the deferred gain isrecognized.

 

In September 2001, the Company received aletter from Experian alleging that the Company made certain misrepresentationsand omissions in connection with the Stock Purchase Agreement relating to thesale of Exactis.  On March 27, 2002, theCompany and Experian reached a settlement agreement whereby the Companyauthorized the escrow agent to release $750,000 to Experian, and Experianauthorized the escrow agent to release the remaining balance of approximately$780,000 to the Company.  On March 28,2002, the funds were released to the Company. Upon release of the escrow balance, the Company recognized $750,000 ofthe deferred gain related to the sale as gain on sale of non-core assets in the2002 statement of operations and $30,000 as interest income.

 

During the nine month period ended September30, 2002, the Company has been billed approximately $197,000 in services whichhave been reflected as cost of revenues and gain on sale of non core assets inthe statement of operations.  ThroughSeptember 30, 2002, the sale has resulted in a loss of $3.5 million, notincluding the remainder of the aforementioned deferred gains of $0.1 million.  The Company has reflected the remaining $0.1million of prepaid services in prepaid and other current assets on theconsolidated balance sheet.

 

*Sale ofcertain US email assets*

 

On May 3, 2002, the Company completed the saleof certain assets related to its US email management product, includingcustomer contracts, certain intangibles and employee relationships, to 24/7Mail, Inc., a wholly owned subsidiary of Naviant, Inc.  Under the terms of the sale, the purchaseprice payable is up to $4.5 million. The purchase price is comprised of (i) $1.0 million that was paid atclosing; (ii) $1.0 million in the form of a non-interest bearing installmentnote with $350,000 due in ninety days, $350,000 due in one hundred and eightydays and $300,000 due in two hundred seventy days from closing; (iii) anearn-out payable quarterly over the next 45 months, based on 5% of Net Revenue(as defined in the Asset Purchase Agreement), with minimum quarterly paymentsof $50,000 and a maximum of $2.0 million, through 2005.  Lastly, pursuant to a $500,000 non-interestbearing installment note, half of which is payable on each of April 30, 2004and April 30, 2005, Naviant has the option either to (i) issue to the Company anumber of

 

12

----

 

shares currently comprising 19.9% of 24/7Mail, Inc., or (ii) pay the Company cash in lieu of the shares.  The consideration paid to the Company wasdetermined as a result of arms-length negotiations between the buyer and theCompany.  The Company initially recordeda loss of $0.8 million on the sale in the second quarter of 2002.

 

On July 30, 2002, the Company received aletter from Naviant alleging a breach of that certain of the Company’swarranties regarding the assets. Naviant claimed damages of approximately $2.3 million, which it intendedto offset against the amounts due to the Company.  On October 3, 2002, the parties agreed to resolve the disputethrough immediate payment of $1.25 million by Naviant to the Company in lieu ofall future amounts due to the Company. Naviant agreed to waive further claims with regard to the specificwarranty in dispute, however, certain representations made by the Company underthe Purchase Agreement dated as of April 30, 2002 among the Company, 24/7 MailInc and Naviant, Inc. continue in effect and Naviant may have the right tobring claims with respect to such representations until June 30, 2003.  As a result of the settlement, the Companywrote off approximately $0.9 million remaining amount due from Naviant in thethird quarter of 2002.  The $1.25million settlement amount is included in the current portion of notes andamounts receivable from dispositions at September 30, 2002 and was received bythe Company on October 4, 2002.

 

*Summary*

 

For the three months ended September 30, 2002,the $0.9 million loss on the sale of non-core assets primarily relates to thesale of US email management product. For the nine months ended September 30, 2002, the $0.5 million loss onsale of non-core assets consists of a $1.7 million loss related to the sale ofcertain assets related to US email management product offset by $0.8 millionrecognized as a gain from the release of the Exactis escrow amount, $0.3million related to the recognition of the deferred gain related to the Exactissale and $0.1 million related to the reversal of an accrual related to the saleof Exactis that was deemed unnecessary.

 

**(5)  INTANGIBLE ASSETS, NET**

 

During 2001, the Company****performedon-going business reviews and, based on quantitative and qualitative measures,assessed the need to record impairment losses on long-lived assets used inoperations when impairment indicators were present. Where impairment indicatorswere identified, the Company determined the amount of the impairment charge bycomparing the carrying values of goodwill and other long-lived assets to theirfair values.

 

ThroughAugust 2000, the Company completed numerous acquisitions that were financedprincipally with shares of the Company’s common stock and were valued based onthe price of the common stock at that time. Starting with the fourth quarter of 2000 through December 31, 2001, theCompany reevaluated the carrying value of its businesses on a quarterlybasis.  The revaluation was triggered bythe continued decline in the Internet advertising and marketing sectorsthroughout 2000 and 2001. In addition, each of these entities experienceddeclines in operating and financial metrics over several quarters in 2001,primarily due to the continued weak overall demand of on-line advertising andmarketing services, in comparison to the metrics forecasted at the time oftheir respective acquisitions.  Thesefactors significantly impacted current projected revenue generated from thesebusinesses.  The Company’s evaluation ofimpairment was also based on achievement of the unit’s business plan objectivesand milestones, the fair value of each business unit relative to its carryingvalue, the financial condition and prospects of each business unit and otherrelevant factors. The business plan objectives and milestones that wereconsidered included, among others, those related to financial performance, suchas achievement of planned financial results, and other non-financial milestonessuch as successful deployment of technology or launching of new products andthe loss of key employees.  Theimpairment analysis also considered when these properties were acquired andthat the intangible assets recorded at the time of acquisition were beingamortized over useful lives of 2 - 4 years. The amount of the impairment chargewas determined by comparing the carrying value of goodwill and other long-livedassets to fair value at each respective period end.

 

13

----

 

Whereimpairment was indicated, the Company determined the fair value of its businessunits based on a market approach, which included an analysis of market pricemultiples of companies engaged in similar businesses.  To the extent that market comparables were not available, theCompany used discounted cash flows in determining the value. The market pricemultiples are selected and applied to the business based on the relativeperformance, future prospects and risk profile of the business in comparison tothe guideline companies.  Themethodology used to test for and measure the amount of the impairment chargewas based on the same methodology used during the initial acquisitionvaluations.  As a result, during theCompany’s review of the value and periods of amortization of both goodwill andcertain other intangibles it was determined that the carrying value of goodwilland certain other intangible assets were not recoverable.  The other intangible assets that weredetermined to be impaired related to the decline in fair market value ofacquired technology, a significant reduction in the acquired customer bases andturnover of workforce that was in place at the time of the acquisition of thesecompanies.

 

As aresult, the Company determined that the fair value of goodwill and otherintangible assets attributable to several of its operating units were less thantheir recorded carrying values. Accordingly, the Company recognized $35.5 million in impairment chargesto adjust the carrying values in the first quarter of 2001, $11.6 million inthe second quarter of 2001 and $9.6 million in the third quarter of 2001.  Of this amount $26.9 million related toWebsite Results, $25.3 million related to Mail and $4.5 million related toExactis.

 

Theimpairment factors evaluated may change in subsequent periods, given that theCompany’s business operates in a highly volatile business environment.  This could result in significant additionalimpairment charges in the future.

 

As of September 30, 2002, thegoodwill and other intangibles assets, net was $10.7 million: $5.7 millionrelated to Real Media, $2.1 million related to Website Results, $1.8 millionrelated to Now Marketing and $1.1 million related to ClickThrough.

 
|                                          |   | **September  30,  2002** |   | **December  31,  2001** |   | **Estimated  Useful Lives** |   |
|-----------------------------------------------|--------|--------------------------|--------|-------------------------|--------|-----------------------------|--------|
|                                          |   | **(in  thousands)**      |   |                    |   |
| Unamortized intangible assets                 |   |                     |   |                    |   |                        |   |
| Goodwill(1)(2)                                |   | $                        | 5,949  |                    | $      | 7,901                       |   |   |   |
|                                          |   |                     |   |                    |   |                        |   |
| Amortized Intangible assets with finite lives |   |                     |   |                    |   |                        |   |
| Technology                                    |   | 6,005                    |   | 6,001                   |   | 4                           |   |
| Assembled Workforce(2)                        |   | —                   |   | 730                     |   | 2                           |   |
| Trademark                                     |   | 500                      |   | 500                     |   | 4                           |   |
|                                          |   | 6,505                    |   | 7,231                   |   |                        |   |
| Less accumulated amortization                 |   | (1,779                   | )      | (614                    | )      |                        |   |
|                                          |   | 4,726                    |   | 6,617                   |   |                        |   |
|                                          |   |                     |   |                    |   |                        |   |
| Total                                         |   | $                        | 10,675 |                    | $      | 14,518                      |   |   |   |

 

----

(1)  On May 3, 2002, the Company sold certain assets related to the USemail management product which had $3.8 million of goodwill.  On September 19, 2002, the Company acquiredNow Marketing and initially allocated $1.8 million to goodwill pending finalallocation of such amount during the fourth quarter of 2002.  During the second quarter of 2002, theCompany reversed $0.3 million of restructuring reserves acquired againstgoodwill, as they were no longer deemed necessary.

 

(2)  In connection with the adoption of SFAS No. 142, on January 1,2002, the Company reclassified $420 ($730 gross less $310 in accumulatedamortization) in net book value associated with its assembled workforce togoodwill.

 

Effective January 1, 2002, theCompany adopted SFAS No. 142, ‘‘Goodwill and Other Intangible Assets’’ and SFASNo. 144, “Accounting for the Impairment or Disposal of Long-Lived Asset.  SFAS No. 142

 

14

----

 

eliminates the amortization ofgoodwill and indefinite-lived intangible assets, addresses the amortization ofintangible assets with finite lives and addresses impairment testing andrecognition for goodwill and intangible assets.  SFAS No. 144 establishes a single model for the impairment oflong-lived assets and broadens the presentation of discontinued operations toinclude more disposal transactions.  TheCompany completed its initial transitional goodwill impairment assessment in thesecond quarter of 2002 and determined that there was no impairment of goodwill.

 

The Company assesses goodwillfor impairment annually unless events occur that require more frequentreviews.  Long-lived assets, includingamortizable intangibles, are tested for impairment if impairment triggersoccur.  Discounted cash flow analysesare used to assess nonamortizable intangible impairment while undiscounted cashflow analyses are used to assess long-lived asset impairment.  If an assessment indicates impairment, theimpaired asset is written down to its fair market value based on the bestinformation available.  Estimated fairmarket value is generally measured with discounted estimated future cash flows.  Considerable management judgment isnecessary to estimate undiscounted and discounted future cash flows.  Assumptions used for these cash flows areconsistent with internal forecasts.

 

The amortization expense andnet loss for the three and nine month periods ended September 30, 2002 and 2001had SFAS No. 142 been applied for both periods is as follows:

 
|                                                       |   | **For the  three  months ended** |   | **For the  nine  months ended** |   |
|------------------------------------------------------------|--------|----------------------------------|--------|---------------------------------|--------|
|                                                       |   | **2002**                         |   | **2001**                        |   | **2002** |   | **2001** |   |
| Loss from continuing  operations                           |   | $                                | (6,553 | )                               | $      | (21,184 | ) | $ | (14,460 | ) | $ | (111,277 | ) |
| Add back: goodwill  amortization                           |   | —                           |   | 1,148                           |   | — |   | 6,716 |   |
| Adjusted loss from  continuing operations                  |   | $                                | (6,553 | )                               | $      | (20,036 | ) | $ | (14,460 | ) | $ | (104,561 | ) |
|                                                       |   |                             |   |                            |   |   |   |   |   |
| Basic and diluted loss per  common share:                  |   |                             |   |                            |   |   |   |   |   |
| Loss per share from  continuing operations                 |   | $                                | (0.12  | )                               | $      | (0.48 | ) | $ | (0.28 | ) | $ | (2.55 | ) |
| Add back: goodwill  amortization                           |   | —                           |   | 0.03                            |   | — |   | 0.15 |   |
| Adjusted loss per common  share from continuing operations |   | $                                | (0.12  | )                               | $      | (0.45 | ) | $ | (0.28 | ) | $ | (2.40 | ) |

 

Although SFAS No. 142 requiresdisclosure of these amounts to reflect the impact of adoption on 2001 results,there can be no assurance that the add back of amortization expense would nothave resulted in additional impairment charges in prior periods.

 

**(6)  INVESTMENTS**

 

The fair value of the available-for-salemarketable securities is based on the quoted market values reported onNASDAQ.  As of September 30, 2001, theCompany has sold all of its marketable and cost-based securities.

 

During 2001, the Company soldall its remaining shares of chinadotcom stock at prices ranging from $2.00 to$7.69 per share.  The shares had a costbasis of $1.7 million, which resulted in a gain of approximately $4.6million.  The Company also sold all ofits investments in Network Commerce and i3Mobile, which resulted in proceeds of$0.6 million and a loss of approximately $0.5 million.  In September 2001, the Company sold itsinterest in idealab! for $2.5 million resulting in a gain of approximately $0.9million.  The Company’s net gain on thesale of these investments is included in “Gain on sale of investments, net” inthe Company’s consolidated statement of operations.

 

During 2001, the Company wrotedown certain of its investments and recognized impairment charges ofapproximately $3.1 million for other-than-temporary declines in value ofcertain investments.  The

 

15

----

 

Company’s management made anassessment of the carrying value of its cost-based investments and determinedthat they were in excess of their carrying values due to the significance andduration of the decline in valuations of comparable companies operating in theInternet and technology sectors. The write down of cost-based investments was$0.6 million related to Media-Asia.  TheCompany’s management also recognized that the decline in value of its available-for-saleinvestments in Network Commerce and i3Mobile were other-than-temporary andrecorded an impairment of $2.3 million and $0.2 million, respectively.  These impairment charges are included in“Impairment of investments” in the Company’s 2001 consolidated statement ofoperations.

 

**(7)  COMMON AND PREFERRED STOCK**

 

On September 19, 2002, the Company issued125,000 shares of Series B Preferred Stock in conjunction with the acquisitionof Now Marketing, which are convertible into 6,050,339 shares of common stock(see note 2).  The Series B PreferredStock will accrue and cumulate dividends commencing October 1, 2002 at a rateof 6% per year, compounded monthly, payable when, as and if declared by theCompany’s Board of Directors.

 

*Sunra*

 

On July 2, 2002, the Company entered into aSeries A and Series A-1 Preferred Stock and Common Stock Warrant PurchaseAgreement with Sunra Capital Holdings Limited (“Sunra”), a newly formedinvestment fund advised by Merchant’s Group International.

 

On July 2, 2002, Sunra purchased $1.6 millionof the Company’s newly created Series A Preferred Stock, $3.4 million of itsnewly created Series A-1 Non Voting Convertible Preferred Stock, and on August8, 2002 Sunra and affiliated parties agreed to purchase an additional $3.0million of the Series A Preferred Stock, for a total investment of $8.0million.  Upon receipt of stockholderapproval on September 10, 2002, the outstanding shares of Series A-1 PreferredStock converted into shares of Series A Preferred Stock and Sunra consummatedthe purchase of an additional $3.0 million of the Series A Preferred Stock (the“September 10, 2002 Series A Preferred Stock transactions”).

 

Each share of Series A Preferred Stock isconvertible into Common Stock of the Company at any time at the option of theholder thereof at a conversion price of $0.20535 per share of common stock, or38,957,876 shares of Common Stock on an as-if converted basis.  The Company also issued at total of3,895,788 warrants to Sunra to purchase shares of Common Stock at an exerciseprice of $0.20535.  All of the warrantsissued may be exercised through a cashless exercise and have a five yearterm.  Sunra is the beneficial owner ofapproximately 42,853,664 shares of Common Stock, or approximately 42.3% of theCompany’s outstanding Common Stock at September 30, 2002 on a fully dilutedbasis.   The Company also issued 400,000warrants to Merchant’s Group International as partial payment of a placementfee and incurred approximately $0.7 million in other related fees.  The Series A Preferred Stock accrue andcumulate dividends at a rate of 6% per year, compounded monthly, payable when,as and if declared by the Company’s Board of Directors.  Accordingly, the $50,000 cumulativedividends are reflected as “Preferred stock dividends” on the consolidatedstatement of operations.

 

The Company definitively agreed to the initialterms of the September 10, 2002 Series A Preferred Stock transactions when theprice of the Company’s Common Stock was approximately $0.21 per share.  However, Sunra’s conversion of theoutstanding shares of Series A-1 Preferred Stock into shares of Series APreferred Stock and purchase of an additional $3.0 million of the Series APreferred Stock, and associated warrants were subject to stockholder approvalwhich was approved on September 10, 2002, at which time the price of theCompany’s Common Stock was $0.46 per share.

 

Accordingly, the July 2, 2002and September 10, 2002 Series A Preferred Stock transactions contained embeddedbeneficial conversion features, which were required to be valuedseparately.  Accordingly, the Companyallocated the proceeds received in each of the transactions to the Series APreferred Stock and detachable warrants based on a relative fair valuebasis.  The value ascribed to thefive-year detachable warrants was determined using a Black-Scholes pricingmodel (100% volatility factor, $0.46 fair value at September 10, 2002, $0.21fair value at July 2, 2002, and $0.20535 exercise price).  The intrinsic value of

 

16

----

 

the beneficial conversionfeature associated with the July 2, 2002 Series A Preferred Stock transactionwas approximately $0.2 million.  Theintrinsic value of the beneficial conversion feature associated with the September10, 2002 Series A Preferred Stock transactions was calculated as the differencebetween the conversion price of $0.20535 per share of Common Stock and the fairvalue of the Common Stock into which the Series A Preferred Stock wasconvertible into on the stockholder approval date of $0.46 per share, or anintrinsic value of approximately $0.25465 per share, which is greater than theproceeds allocated to the September 10, 2002 Series A Preferred Stocktransactions.  Accordingly, the amountof the discount was limited to the amount of cash allocable to the September10, 2002 Series A Preferred Stock transactions.  Therefore, the Company recorded a non-cash charge of $5.2 millionin the third quarter of 2002, representing the number of common shares into whichthe September 10, 2002 Series A Preferred Stock transactions were convertibleinto (31,166,302 shares of Common Stock) multiplied by the effective conversionprice of $0.1675 per share of Common Stock. The total non-cash charge of $5.4 million is included in the “Preferredstock conversion discount” on the consolidated statement of operations similarto a Preferred Stock dividend.

 

*Restructuring of Executive Compensation Agreements*

 

In conjunction with the Sunrainvestment on July 2, 2002, four executives each agreed to modify theirrespective employment agreements with the Company to reduce the amount ofseverance payable to such executive officers by 50% payable in one lump sum,and to reduce the notice period for termination or non-renewal from 180 days to30 days.  In exchange, such executiveswould receive, in the aggregate, approximately 2.1 million shares of CommonStock of which the initial conversion value was based on the approximate fairmarket value of the Company’s Common Stock as of the date of the July 2, 2002,Sunra investment, or $0.20 per share in consideration of approximately $0.4million, out of a total of approximately $0.8 million future severance benefitsforfeited.  In addition, such executiveswould also receive fully-vested stock options to acquire approximately 2.1million shares of the Company’s Common Stock with an exercise price of $0.20per share.  The issuance of the sharesand options were subject to stockholder approval of the 2002 Stock IncentivePlan and the Sunra Series A Preferred Stock transactions.  For accounting purposes, the shares andoptions are being valued at $0.46 per share, based on their fair market valueusing the closing price of the Company’s Common Stock as of the stockholderapproval date on September 10, 2002.  Inaccordance with FASB Interpretation No. 44, “Accounting for CertainTransactions Involving Stock Stock-Based Compensation”, this approval resultedin a non-cash stock-based compensation charge of approximately $1.5 million inthe aggregate.  The compensation chargerelated to the options is based on their intrinsic value of $0.26 per option,that is, the fair market value of the Company’s Common Stock on the stockholderapproval date of $0.46 per share less the exercise price of $0.20 per sharewhich resulted in $0.6 million of the $1.5 million charge.

 

In addition, the fourexecutives also agreed to receive the Earnings Before Interest, Taxes andAmortization (“EBITA”) portion of their 2002 target bonus, if earned, in sharesof the Company’s Common Stock.  Thenumber of shares to be issued in connection with the award is based upon EBITAportion of their 2002 target bonus award divided by $0.20 per share.  Accordingly, this modification to theexecutives’ bonus award resulted in a variable based compensation award whichis required to be measured based upon the fair market value of the Company’sCommon Stock at each reporting period, namely at the end of the third andfourth quarter of 2002.  At September30, 2002, management determined that it was probable that the EBITA targetwould be met and determined, at $0.20 per share, that the bonus equates toapproximately 1.35 million common shares. Accordingly, at September 30, 2002, the four executives’ bonus awardsresulted in a non-cash stock-based compensation charge of approximately $0.5million based upon the fair market value of the Company’s Common Stock of $0.37per share as of the end of the reporting period.  If it is determined in the fourth quarter of 2002 that the EBITAtarget may not be fully achieved and/or the Company’s Common Stock pricedeclines from the $0.37 at September 30, 2002, the charge may be adjusteddownward in the fourth quarter of 2002.

 

*OtherIssuances*

 

From January to July 2002, approximately 58employees including members of senior management agreed to receive between 5and 20% of their compensation in the form of the Company’s common stock in lieuof cash.  As a result, approximately 1.1million shares, valued at $0.2 million, were issued.

 

17

----

 

In April 2002, the Company issued 416,784shares, valued at $0.1 million, principally to the CEO, for 2001 bonuses asreported in the Company’s 10-K and accrued as of December 31, 2001.

 

On March 23, 2001, the Companyissued 710,000 shares of common stock to employees of the Company for meetingthe earn-out provisions in the WSR merger agreement, as amended. The relatedcompensation expense of approximately $0.2 million is reflected as stock based compensation expense in theconsolidated statements of operations. Substantially all of these shares were returned as part of thesettlement with the former principal stockholders on September 25, 2001.

 

On May 23, 2000, the Companyoffered certain members of management the option of exchanging their January 1,2000 option grants for restricted stock in a ratio of one share for threeoptions.  As a result, the Companycancelled 832,500 options and issued approximately 285,000 shares of restrictedstock to these employees of the Company, which vest over a period of three tofour years. Such grants resulted in a deferred compensation expense ofapproximately $4.5 million, which is being amortized over the vesting period ofthose shares.  For the three and ninemonth periods ended September 30, 2002 and 2001, 6,646, 19,938, 12,792, and152,960 shares, respectively, were granted to employees according to theirvesting schedule.  At September 30,2002, approximately 32,000 shares of restricted stock remain, vesting quarterlythrough December 31, 2003.

 

*Additional Paid- in Capital*

* *

During the nine-months ended September 30,2002, the Company’s additional paid-in capital increased by $12.5 millionprimarily due to: (i) the $3.1 million of common and Series B preferred stockissued in connection with the Now Marketing acquisition, net of the $1.25million preferred stock conversion discount, (ii) the $7.3 million of netproceeds from the issuances of Series A preferred stock and warrants; and (iii)the $1.5 million of non-cash compensation charge associated with the commonstock and options issued in connection with the restructured severancearrangements of four executives.

 

**(8)  STOCK INCENTIVE PLAN**

 

For the nine month period ended September 30,2002, the Company granted approximately 7.3 million stock options under the1998 Stock Incentive Plan, 1.6 million stock options under the 2001 StockIncentive Plan for Non-officers to employees at exercise prices based on thefair market value of the Company’s common stock at the respective dates ofgrant.  The Company also granted 2.1million options from the 2002 Stock Incentive Plan to certain executives at astrike price of $0.20 per share (see note 7). On January 1, 2002, in accordance in the terms of the 2001 Plan, sharesavailable under the Plan were increased by 1,485,230.

 

On September 10, 2002, the stockholdersapproved the 2002 Stock Incentive Plan to enable the Company to offer and issueto certain employees, consultants and non-employee directors of the Company andits affiliates its common stock in order to strengthen the mutuality ofinterests between such parties and the Company’s stockholders.  The aggregate number of shares of commonstock that may be issued pursuant to the 2002 Stock Incentive Plan shall notexceed 10,000,000 shares.  The number ofshares available under the 2002 Stock Incentive Plan will automaticallyincrease on the first trading day of each calendar year, beginning with 2003 byan amount equal to 3% of the sum of the common stock outstanding and thepreferred stock on an as if converted basis, up to 3,000,000.

 

As a result of the adoption of the 2002 StockIncentive Plan, the Board of directors approved an amendment to the 1998 StockIncentive Plan to eliminate the automatic increase of 3% and eliminate anyfurther grants to non-employee directors.

 

On April 22, 2002, the Board approved the24/7 Real Media, Inc. 2002 Equity Compensation Plan to enable the Company tooffer and issue to certain employees, former employees, advisors andconsultants of the Company and its affiliates its common stock in payment ofamounts owed to such third parties.  Theaggregate number of shares of common stock that may be issued pursuant to the2002 Equity Compensation Plan shall not exceed 3,000,000 shares. The Companymay from time to time issue to employees, former employees, advisors andconsultants to the Company or its affiliates shares of its common stock inpayment or exchange for or in settlement or compromise of amounts due by theCompany to such persons for goods sold and delivered or to be delivered orservices rendered or to be rendered. Shares of the Company’s common stock issued pursuant to the 2002 EquityCompensation Plan will be issued at a price per share of not less thaneighty-five percent (85%) of the fair market value per share on the date ofissuance and on such other terms and conditions as determined by theCompany.  The Chief Executive Officer ofthe Company is authorized to issue shares pursuant to and in accordance withthe terms of the 2002 Equity Compensation Plan, provided that all issuancesshall be co-authorized by at least

 

18

----

 

one of the President, any Executive VicePresident, the Chief Financial Officer or the General Counsel.  The Company may amend the plan at any time.

 

**(9)  RESTRUCTURING CHARGES**

 

During the three and nine monthperiods ended September 30, 2001, restructuring charges of approximately $0.5million and $1.0 million, respectively, were recorded by the Company inaccordance with the provisions of EITF 94-3, and Staff Accounting Bulletin(“SAB”) No. 100.  The Company’srestructuring initiatives were to reduce employee headcount by the involuntarytermination of approximately 100 employees.

 

The Company acquiredapproximately $4.5 million in restructuring reserves in connection with theOctober 31, 2001 acquisition of Real Media (see note 2).  The restructuring plan provided for officeclosing costs of $0.2 million, a workforce reduction of approximately 120 employeesof $3.1 million and other related obligations of $1.2 million.  During the second quarter of 2002, theCompany reversed $320,000 of restructuring reserves acquired against goodwillas they were no longer deemed necessary.

 

The following sets forth theactivities in the Company’s restructuring reserve for the nine months endedSeptember 30, 2002, which is included in accrued expenses in the consolidatedbalance sheet (in thousands):

 
|                           |   | **Beginning********Balance** |   | **Current year********utilization** |   | **Current year********reversal** |   | **Ending********Balance** |   |
|--------------------------------|--------|------------------------------|--------|-------------------------------------|--------|----------------------------------|--------|---------------------------|--------|
| Employee  termination benefits |   | $                            | 2,489  |                                | $      | (2,169                           | )      | $                         | (320   | ) | $ | 3⁄4 |   |
| Office closing  costs          |   | 266                          |   | (223                                | )      | 3⁄4                           |   | $                         | 43     |   |
| Other exit  costs              |   | 1,512                        |   | (1,050                              | )      |                             |   | $                         | 462    |   |
|                           |   | $                            | 4,267  |                                | $      | (3,442                           | )      | $                         | (320   | ) | $ | 505 |   |

 

 

19

----

**(10)  SEGMENT INFORMATION**

 

On October 30, 2001, the Company merged withReal Media.  As a result of this mergerand the restructuring performed by both companies, the Company has changed howit operates its businesses and views its reportable segments.  Based on these operational changes theconsolidated financial statements presented have been restated to reflect thesenew reportable segments.  The Company’sbusiness is currently comprised of two reportable segments:  Integrated Media Solutions and TechnologySolutions.  The Integrated MediaSolutions segment generates revenue by delivering advertisements to affiliatedWeb sites, promotions management and search engine traffic delivery.  The Technology Solutions segment generatesrevenue by providing third-party ad serving and, in 2001, email deliveryservice bureau.  The Company’smanagement reviews corporate assets and overhead expenses for eachsegment.  The summarized segmentinformation as of and for the three and nine month periods ended September 30,2002 and 2001, is as follows:

 
|                                     |   | **Three  months ended September 30, 2002** |   | **Three  months ended September 30, 2001** |   |
|------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
|                                     |   | **Integrated  Media  Solutions**           |   | **Technology  Solutions**                  |   | **Total** |   | **Integrated  Media  Solutions** |   | **Technology  Solutions** |   | **Total** |   |
|                                     |   | **(in  thousands)**                        |   |
|                                     |   |                                       |   |                                       |   |   |   |   |   |   |   |   |   |
| Revenues                                 |   | $                                          | 6,379  |                                       | $      | 3,340 |   | $ | 9,719 |   | $ | 7,039 |   | $ | 3⁄4 |   | $ | 7,039 |   |
| Segment loss from  operations            |   | (5,640                                     | )      | (829                                       | )      | (6,468 | ) | (22,201 | ) | 3⁄4 |   | (22,201 | ) |
| Amortization of goodwill and intangibles |   | 216                                        |   | 250                                        |   | 466 |   | 2,196 |   | 3⁄4 |   | 2,196 |   |
| Stock-based compensation(1)              |   | 36                                         |   | 4                                          |   | 40 |   | 194 |   | 3⁄4 |   | 194 |   |
| Restructuring costs                      |   | 3⁄4                                     |   | 3⁄4                                     |   | 3⁄4 |   | 521 |   | 3⁄4 |   | 521 |   |
| Loss (gain) on sale of  assets, net      |   | 856                                        |   | 3⁄4                                     |   | 856 |   | (647 | ) | 3⁄4 |   | (647 | ) |
| Impairment of intangible  assets         |   | 3⁄4                                     |   | 3⁄4                                     |   | 3⁄4 |   | 9,600 |   | 3⁄4 |   | 9,600 |   |
|                                          |        |                                            |        |                                            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                     |   | **Nine months  ended September 30, 2002** |   | **Nine months  ended September 30, 2001** |   |
|------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|
|                                     |   | **Integrated  Media  Solutions**          |   | **Technology  Solutions**                 |   | **Total** |   | **Integrated  Media  Solutions** |   | **Technology  Solutions** |   | **Total** |   |
|                                     |   |                                      |   |                                      |   |   |   |   |   |   |   |   |   |
| Revenues                                 |   | $                                         | 21,224 |                                      | $      | 9,825 |   | $ | 31,049 |   | $ | 28,269 |   | $ | 8,062 |   | $ | 36,331 |   |
| Segment loss from  operations            |   | (12,389                                   | )      | (1,878                                    | )      | (14,267 | ) | (106,638 | ) | (7,285 | ) | (113,923 | ) |
| Amortization of goodwill and intangibles |   | 725                                       |   | 750                                       |   | 1,475 |   | 11,724 |   | 833 |   | 12,557 |   |
| Stock-based compensation(1)              |   | 132                                       |   | 55                                        |   | 187 |   | 1,354 |   | 122 |   | 1,476 |   |
| Restructuring costs                      |   | 3⁄4                                    |   | 3⁄4                                    |   | 3⁄4 |   | 1,566 |   | (614 | ) | 952 |   |
| Loss (gain) on sale of  assets, net      |   | 550                                       |   | 3⁄4                                    |   | 550 |   | (992 | ) | (537 | ) | (1,529 | ) |
| Impairment of intangible  assets         |   | 3⁄4                                    |   | 3⁄4                                    |   | 3⁄4 |   | 52,206 |   | 4,501 |   | 56,707 |   |
|                                     |   |                                      |   |                                      |   |   |   |   |   |   |   |   |   |
| Total assets:                            |   |                                      |   |                                      |   |   |   |   |   |   |   |   |   |
| September 30, 2002                       |   | 26,457                                    |   | 10,769                                    |   | 37,225 |   |   |   |   |   |   |   |
| December 31, 2001(2)                     |   | 29,936                                    |   | 12,970                                    |   | 42,906 |   |   |   |   |   |   |   |
|                                          |        |                                           |        |                                           |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Not included above for the three and ninemonth periods ended September 30, 2002 is $2.1 million and $2.4 million,respectively, related to corporate officers.

(2) Not included above at December 31, 2001are $2.7 million in assets related to discontinued operations.

 

Geographical information is as follows:

 
|                                    |   | **US**              |   | **International** |   | **Total** |   |
|-----------------------------------------|--------|---------------------|--------|-------------------|--------|-----------|--------|
|                                    |   | **(in  thousands)** |   |
| **Periods  ended September 30, 2002**   |   |                |   |              |   |      |   |
| Revenues for three months  ended        |   | $                   | 6,570  |              | $      | 3,149     |   | $ | 9,719 |   |
| Revenues for nine months  ended         |   | 21,363              |   | 9,686             |   | 31,049    |   |
| Long-lived assets                       |   | 14,053              |   | 2,745             |   | 16,798    |   |
|                                    |   |                |   |              |   |      |   |
| **Periods  ended September 30, 2001**   |   |                |   |              |   |      |   |
| Revenues for three months  ended        |   | $                   | 6,357  |              | $      | 682       |   | $ | 7,039 |   |
| Revenues for nine months  ended         |   | 33,698              |   | 2,633             |   | 36,331    |   |
| Long-lived assets at  December 31, 2001 |   | 14,313              |   | 9,701             |   | 24,014    |   |

 

**(11)  SUPPLEMENTAL CASH FLOW INFORMATION**

 

The amount of cash paid for interest was$10,000 and $14,000 for the nine month periods ended September 30, 2002 and2001, respectively.

 

The Company accrued $245,625 in interestduring 2002 on the Publigroupe notes, which is payable with the principal in2005 and 2006.

 

20

----

 

**(12)  RELATED PARTY**

 

*Loan Payable*

 

In conjunction with the merger with Real Media on October 31, 2002, theCompany guaranteed a Promissory Note for $4.5 million to Publigroupe as of theacquisition date, which was to be used in accordance with Real Media’srestructuring plan and in payment of transactional bonuses. The restructuringplan provides for office closings, workforce reduction and other relatedobligations (see notes 2 and 9 for details).

 

The note bears interest at 4.5% compounded monthly and principal andinterest are due on October 30, 2006. In addition, in accordance with the RealMedia purchase agreement in January 2002, the Company received cash of $1.5million and signed a promissory note bearing interest at 6% compounded monthly,with interest and principal due in January 2006. Based on the Company achievingcertain target operating results for the three months ended March 31, 2002 itreceived another $1.5 million in the form of a 6% three-year promissory note onMay 13, 2002, with principal and interest due in May 2005.

 

The interest expense related to these notes for the nine months endedSeptember 30, 2002 was approximately $245,625. The interest is accrued and added to the loan principal, as it is due atmaturity.

* *

*Sunra*

 

In connection with its purchase of Series A Preferred Stock in July2002, Sunra received the right to designate two seats on the Company’s Board ofDirectors.  To date, Sunra hasdesignated Joseph Waechter as one of its representatives on the Board.  Additionally, Mr. Waechter was affiliatedwith Merchant’s Group International, to whom the Company paid $320,000 andissued 400,000 warrants to purchase our common stock at an exercise price of$0.20535 per share as payment of a placement fee for the sale of the Series APreferred.

 

21

----

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

THE TERMS “WE” AND “OUR COMPANY” MEAN 24/7REAL MEDIA, OUR SUBSIDIARIES AND EACH OF OUR PREDECESSOR ENTITIES.

 

**FORWARD-LOOKINGSTATEMENTS**

 

This report includes forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933, andSection 21E of the Securities Exchange Act of 1934.  We intend such forward-looking statements to be covered by thesafe harbor provisions for forward-looking statements contained in the PrivateSecurities Litigation Reform Act of 1995, and we are including this statementfor purposes of complying with these safe harbor provisions. We have basedthese forward-looking statements on our current expectations and projectionsabout future events. These forward-looking statements are not guarantees offuture performance and are subject to risks, uncertainties and assumptions,including those set forth under “Risk Factors” below.

 

Words such as “expect”, “anticipate”,“intend”, “plan”, “believe”, “estimate” and variations of such words andsimilar expressions are intended to identify such forward-looking statements.We undertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.In light of these risks, uncertainties and assumptions, the forward-lookingevents discussed in this report might not occur.

 

**GENERAL**

 

24/7 Real Media provides marketing solutions to the digital advertisingindustry.  Through its comprehensivesuite of online marketing and technology services, 24/7 Real Media connectsmedia buyers and media sellers across multiple digital platforms and worksclosely with individual clients to develop a comprehensive, customized,value-enhancing solution.  We focus onthe United States, Canada and Europe and is organized into two principal linesof business: Integrated Media Solutions and Technology Solutions.

 

•              Integrated Media Solutions connects advertisers to audiences throughthree products: (i) the 24/7 Network of branded Web sites and niche Web sites;(ii) a comprehensive promotions suite; and (iii) a leading search engineresults listing service.  We also act asa broker for permission based email lists.

 

•              Technology Solutions,through Open AdStream, our proprietary technology, provides advertisingdelivery and management.

 

We hold a patent related to our ad-servingtechnology.  Two other parties have acquireda license or interest in the patent.  Weare seeking to license the patent to a substantial number of additionalparties.

 

**CRITICALACCOUNTING POLICIES**

 

Financial Reporting Release No.60, which was recently released by the Securities and Exchange Commission(“SEC”), requires all companies to include a discussion of critical accountingpolicies or methods used in the preparation of financial statements. Note 1 ofthe Notes to the Consolidated Financial Statements includes a summary of thesignificant accounting policies and methods used by the Company. In addition,Financial Reporting Release No. 61 was recently released by the SEC to requireall companies to include a discussion to address, among other things,liquidity, off balance sheet arrangements, contractual obligations andcommercial commitments.

 

22

----

 

***General***

 

The consolidated financialstatements of the Company are prepared in conformity with accounting principlesgenerally accepted in the United States of America. As such, the Company isrequired to make certain estimates, judgments and assumptions that managementbelieves are reasonable based upon the information available. These estimatesand assumptions affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the dates of theconsolidated financial statements and the reported amounts of revenues andexpenses during the reporting periods.

 

The significant accountingpolicies which the Company believes are the most critical to aid in fullyunderstanding and evaluating the reported consolidated financial resultsinclude the following:

 

**RevenueRecognition**

 

*Integrated Media Solutions*

 

Our network revenues arederived from short-term advertising agreements in which we deliver advertisingimpressions for a fixed fee to third-party Web sites comprising ournetwork.  Service revenue is derivedfrom driving traffic to a client website which are recognized upondelivery.  Media revenue is recognizedprovided no significant obligations remain outstanding and collection of theresulting receivable is probable.  OnMay 3, 2002 the Company sold its US email management product and starting inMay 2002 we only recognize commissions from brokerage sales as revenue in theUS upon delivery.  Prior to its sale,our email related revenues were derived from short-term delivery basedagreements in which we deliver advertisements to email lists for advertisersand recognized revenue upon delivery.

 

Third party Web sites thatregister Web pages with our network and display advertising banners on thosepages are commonly referred to as ‘‘Affiliated Web sites.’’ These third partyWeb sites are not ‘‘related party’’ relationships or transactions as defined inSFAS No. 57, ‘‘Related Party Disclosures.’’ We pay Affiliated Web sites a feefor providing advertising space to our network. We become obligated to makepayments to Affiliated Web sites, which have contracted to be part of ournetwork, and list owners in the period the advertising impressions aredelivered. Such expenses are classified as cost of revenues in the consolidatedstatements of operations.

 

*Technology Solutions*

 

Our technology revenues arederived from licensing of our ad serving software and related maintenance andsupport contracts. In addition, we derived revenue from our email servicebureau subsidiary, Exactis, and our third party ad serving subsidiary, Sabela,both of which were sold in May of 2001.

 

Revenue from software licensingagreements is recognized in accordance with Statements of Position (‘‘SOP’’)97-2, ‘‘Software Revenue Recognition,’’ and Staff Accounting Bulletin No. 101,‘‘Revenue Recognition in Financial Statements’’ upon delivery of the software,which is generally when customers begin utilizing the software, there ispervasive evidence of an arrangement, collection is reasonably assured, the feeis fixed or determinable, and vendor-specific objective evidence exists toallocate the total fees to all elements of the arrangement. Revenue related tothe central ad-serving product is recognized based on monthly usage fees.

 

Revenue from softwaremaintenance and support services is recognized ratably over the life of themaintenance agreements, which typically range from one to three years.  Maintenance revenue invoiced in advance ofthe related services is recorded as deferred revenue. Expense from ourlicensing, maintenance and support revenues are primarily payroll costsincurred to deliver, modify and support the software. These expenses areclassified as cost of revenues in the accompanying consolidated statements ofoperations.  Revenue from patentlicensing will be recognized when an agreement is signed for a perpetuallicense or during the period in which the revenue is earned from other royaltyarrangements.  To date, we have notrecorded any revenue from patent licensing.

 

23

----

 

***Accounts Receivable***

 

We perform ongoing creditevaluations of our customers and adjust credit limits based upon paymenthistory and the customer’s current credit worthiness, as determined by a reviewof their current credit information. We continuously monitor collections andpayments from our customers and maintain a provision for estimated creditlosses based upon historical experience and any specific customer collectionissues that have been identified. While such credit losses have historicallybeen within our expectations and the provisions established, we cannotguarantee that we will continue to experience the same credit loss rates thathave 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 assessgoodwill for impairment annually unless events occur that require more frequentreviews.  Long-lived assets, includingamortizable intangibles, are tested for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable.  Discounted cash flowanalyses are used to assess nonamortizable intangible impairment whileundiscounted cash flow analyses are used to assess long-lived assetimpairment.  If an assessment indicatesimpairment, the impaired asset is written down to its fair market value basedon the best information available. Estimated fair market value is generally measured with discounted estimatedfuture cash flows.  Considerablemanagement judgment is necessary to estimate undiscounted and discounted futurecash flows.  Assumptions used for thesecash flows are consistent with internal forecasts.

 

On an on-going basis,management reviews the value and period of amortization or depreciation oflong-lived and other intangible assets. During this review, we reevaluate thesignificant assumptions used in determining the original cost of long-livedassets. Although the assumptions may vary from transaction to transaction, theygenerally include revenue growth, operating results, cash flows and otherindicators of value. Management then determines whether there has been animpairment 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.

 

The impairment factorsevaluated by us may change in subsequent periods, given that our businessoperates in a highly volatile business environment. This could result insignificant additional impairment charges in the future.

 

**RESULTSOF OPERATIONS**

 

**FACTORSAFFECTING COMPARABILITY OF 2002 TO 2001**

 

On October 30, 2001, weacquired Real Media.  The merger createdcost synergies for our combined company, one of which was to focus on RealMedia’s proprietary Open AdStream technology and abandon our existing adserving technology, 24/7 Connect. The transition of the network business ontothe Open AdStream platform began in December 2001 and was completed in February2002 resulting in the elimination of redundant personnel and operating costsassociated with having two ad serving platforms. Throughout 2001 and into 2002,in accordance with our business plan, we divested or discontinued many of ournon-core assets, including:

 

•              In May 2001,we completed the sale of certain technology assets and intellectual property ofSabela and completed the shut down of Sabela operations on June 30, 2001.

 

•              In May 2001,we completed the sale of Exactis, our email service bureau.

 

24

----

 

•              In August2001, the operations of 24/7 Europe were shut down and our consolidatedfinancial statements have been revised to reflect this international segment asa discontinued operation.

 

•              In January2002, we completed the sale of our IMAKE subsidiary.  The financial statements of prior periods have been revised toreflect the disposition of IMAKE.

 

•              In May 2002,we completed the sale of certain assets related to our US email managementproduct.

 

The revenue attributed to thedisposition of these non-core assets for the three and nine month periods endedSeptember 30, 2002 was approximately $0 and $1.6 million, respectively, all ofwhich relates to the US email management product within the Integrated MediaSolutions segment.  For the three andnine month periods ended September 30, 2001 revenue related to disposition ofnon-core assets was  $1.5 million and$13.9 million, respectively, of which $1.5 million and $5.8 million,respectively, related to the US email management product within the IntegratedMedia Solutions segment and $0 and $8.1 million related to the TechnologySolutions segment.  Our TechnologySolutions segment is not comparable as the revenue in 2002 is derived solelyfrom operations that were acquired with Real Media in October 30, 2001, whilethe revenue in 2001 relates to operations that have been sold or shut down,including Exactis and Sabela.  This doesnot include $1.3 million and $15.3 million for the three and nine month periodsended September 30, 2001, related to 24/7 Europe and IMAKE, which are shown aspart of discontinued operations in the 2001 consolidated statement ofoperations.

 

On September 19, 2002, weacquired certain assets of Elbit Vflash Inc. and Elbit Vflash Ltd. d/b/a NowMarketing (see footnote 2 to the Interim Consolidated Financial Statements)that did not have a material impact on our results of operation for the thirdquarter of 2002.

 

As a result of our cost-cuttingand divestiture efforts, which began in November 2000 through December 31,2001, we reduced our headcount by approximately 1,000 and closed severaloffices, both domestic and international. The core elements of our businessthat remain are:

 

•              OpenAdStream ad serving technology, with one of the largest installed base of anyad serving solution in the world;

 

•              The 24/7Network, one of the largest branded ad networks online;

 

•              24/7iPromotions, an innovative online promotions and sweepstakes services, whichnow includes Vflash; and

 

•              24/7 WebsiteResults, a leading traffic driving and keyword monetizing solution.

 

**RESULTSOF OPERATIONS**

 

**REVENUES**

 

**INTEGRATED MEDIA SOLUTIONS.**Our Integrated Media Solutions revenues were $6.4million and $21.2 million for the three and nine month periods ended September30, 2002, respectively, as compared to $7.0 million and $28.3 million for thethree and nine month periods ended September 30, 2001, respectively,representing a 9.4% and 24.9% decrease, respectively.  The decrease in revenue was due to a decrease in advertisingdollars spent as the economy continued to deteriorate and the sale of the USemail management product on May 3, 2002. The declines in revenue were partiallyoffset by our merger with Real Media on October 30, 2001.  The US email management product accountedfor $0 and $1.5 million for the three months ended September 30, 2002 and 2001,respectively, and $1.6 million and $5.8 for the nine months ended September 30,2002 and 2001, respectively.

 

25

----

 

**TECHNOLOGY SOLUTIONS.**Our Technology Solutions revenues were $3.3million and $9.8 million for the three and nine month periods ended September30, 2002, respectively, as compared to $0 and $8.1 million for the three andnine month periods ended September 30, 2001, respectively, representing anincrease of 21.9% for the nine month period ended September 30, 2002.  The periods are not comparable as therevenue in 2002 is derived solely from operations that were acquired with RealMedia on October 30, 2001, while the revenue in 2001 relates to operations thathave been sold or shut down, including Exactis and Sabela.

 

**COST OF REVENUES AND GROSS PROFIT**

 

**INTEGRATED MEDIA SOLUTIONS COST OF REVENUESAND GROSS PROFIT. **The cost of revenues consists primarily of feespaid to affiliated Web sites, which are calculated as a percentage of revenuesresulting from ads delivered on our Network; list providers and trafficproviders; depreciation of our 24/7 Connect ad serving system (in 2001) andinternet access costs.  In 2002, costassociated with ad serving is accounted for in our Technology Solutions segmentcost of revenues and an allocation based on usage is reflected in theIntegrated Media Solutions cost of revenues, making these costs variable versusfixed as they were under 24/7 Connect. Gross margins were 32.1% and 32.0% for the three and nine month periodsended September 30, 2002, respectively, and (6.5%) and 12.2% for the three andnine month periods ended September 30, 2001. The increase is due to lower ad serving costs as the operations in 2001could not support the fixed costs of 24/7 Connect which adversely affected thegross margin.  Excluding the US emailmanagement product in the US, the margins were 32.1% and 34.7% for the threeand nine month periods ended September 30, 2002 and (8.3%) and 13.4% for thethree and nine month periods ended September 30, 2001.

 

**TECHNOLOGY SOLUTIONS COST OF REVENUES AND AGROSS PROFIT.**Thecost of technology revenues consists of the cost of equipment and broadbandcapacity for our third party ad-serving solutions and payroll costs to deliver,modify and support software offset by the portion allocated to integrated mediasolutions for ad-serving.  Gross marginswere 74.6% and 73.7% for the three and nine month periods ended September 30,2002, respectively, and 73.4% for the nine month period ended September 30,2001.  As noted above, the periods arenot comparable, as the segment is comprised of completely different operations.

 

**OPERATING EXPENSES**. Each of sales and marketing, general andadministrative, product technology expenses decreased significantly in theperiods ended September 30, 2002 compared to the periods ended September 30,2001 as a result of our restructuring activities, the decisions to exit LatinAmerica and the sales of Sabela and Exactis. The decreases were partially offset by the acquisition of Real Media.

 

**SALESAND MARKETING EXPENSES****.**  Sales and marketing expensesconsist primarily of sales force salaries and commissions, advertisingexpenditures and costs of trade shows, conventions and marketingmaterials.  Sales and marketing expenseswere $3.2 million and $9.5 million for the three and nine month period endedSeptember 30, 2002, respectively, and $3.4 million and $15.7 million for thethree and nine month periods ended September 30, 2001, respectively.  As a percentage of revenue, the expensedecreased from 47.6% to 32.7% for the three month periods ended September 30,2001 and 2002, respectively, and from 43.2% to 30.4% for the nine month periodsended September 30, 2001 and 2002.  Thisdecrease is due to our successful rationalization efforts and reduction ofdiscretionary expenses.

 

**GENERAL ANDADMINISTRATIVE EXPENSES**. General and administrative expensesconsist primarily of compensation, facilities expenses and other overheadexpenses incurred to support the business. General and administrative expenses were $3.5 million and $11.0 millionfor the three and nine month periods ended September 30, 2002, respectively,and $5.1 million and $27.8 million for the three and nine month periods endedSeptember 30, 2001, respectively.   As apercentage of revenue, the expense decreased from 73.3% to 36.1% for the threemonth periods ended September 30, 2001 and 2002, respectively, and from 76.6%to 35.3% for the nine month periods ended September 30, 2001 and 2002.  The significant decrease is due to ourrationalization efforts in eliminating headcount, office space and unnecessaryexpenses.  In 2002, General andadministrative expenses include cost recoveries in connection with patentclaims.  As the economy deteriorated in2001, we accrued significant bad debt reserves, however, positive collectionefforts in 2002 have reduced the required reserves; therefore, we reversedapproximately $0.3 million in bad debt expense during the third quarter.  The net benefit from bad debt expensereversals for the year is approximately $0.2 million.

 

26

----

 

**PRODUCTTECHNOLOGY EXPENSES****.**  Product technology expenses consist primarily ofcompensation and related costs incurred to further enhance our ad serving andother technology capabilities.  Producttechnology expenses were $0.8 million and $3.3 million for the three and ninemonth period ended September 30, 2002, respectively, and $1.3 million and $9.6million for the three and nine month periods ended September 30, 2001,respectively.  As a percentage ofrevenue, the expense decreased from 19.5% to 8.3% for the three month periodsended September 30, 2001 and 2002, respectively, and from 26.4% to 10.5% forthe nine month periods ended September 30, 2001 and 2002.  The decrease is due to the sale of Exactison whose technology we spent significant dollars and our focus on OAS whichrequires less enhancements than did 24/7 Connect.  Also, the expense decreased in 2002 as the costs related todeveloping our Open Advertiser (OAD) product are being capitalized.  We capitalized approximately $0.4 millionduring the quarter and will continue to capitalize costs until OAD is ready forgeneral release, which is expected during the fourth quarter.

 

**AMORTIZATIONOF GOODWILL AND INTANGIBLES****.**  Amortization of goodwill andintangibles were $0.5 million and $1.5 million for the three and nine monthperiod ended September 30, 2002, respectively, and $2.2 million and $12.6million for the three and nine month periods ended September 30, 2001,respectively.    The decrease is due toimpairment charges taken during 2001 for Exactis, Sabela, AwardTrack,iPromotions, ConsumerNet and Website Results as well as the sale of Exactis inMay 2001 and the adoption of SFAS No. 142 which states that goodwill is nolonger amortized which also contributed to the decline.    The Company’s loss from continuingoperations for the three and nine months ended September 30, 2001, excludinggoodwill amortization would have been ($20.0) million, or ($0.45) per share and($104.6) million, or ($2.40) per share, respectively.

 

**STOCK-BASEDCOMPENSATION**. Stock basedcompensation was $2.2 million and $2.6 million for the three and nine monthperiods ended September 30, 2002, respectively, and $0.2 million and $1.5million for the three and nine month periods ended September 30, 2001,respectively.  The expense for the ninemonths ended September 30, 2002 consists of $0.2 million in salary for certainemployees who elected to receive stock instead of cash, $0.3 million inamortization of deferred compensation for restricted shares previously issuedto certain employees, $0.1 million in amortization of deferred compensationfrom acquisitions, $0.5 million in discretionary bonuses that will be paid instock to executives if the Company meets certain earnings targets and $1.5million in stock and options grants to executives for restructuring theiremployment agreements.  The expense forthe nine months ended September 30, 2001 consists of a $1.0 million inamortization of deferred compensation for restricted shares issued to certainemployees, $0.1 million in amortization of deferred compensation fromacquisitions and $0.4 million in stock to be given as bonuses to certainemployees.

 

**RESTRUCTURINGCOSTS****.**  During the three and nine months ended September30, 2001 a restructuring charge of approximately $0.5 million and $1.0 millionwas recorded related to the reduction of employee headcount.  This restructuring involved the involuntarytermination of approximately 100 employees.

 

**GAIN ON SALEOF NON-CORE ASSETS, NET. **The $0.5 million loss for the nine months endedSeptember 30, 2002 includes a $1.1 million gain related to the sale of Exactisin May 2001, offset by a $1.6 million loss on the sale of certain assetsrelated to our US email management product. As part of the sale of Exactis, there were approximately $1.5 million indeferred gains related to an escrow balance and $1.75 million in deferred gainsrelated to prepaid service amounts.  Thegains are recognized as the escrow balance is released and the prepaid servicesare utilized.  During the first quarterof 2002, we agreed to pay Experian, the acquirer of Exactis, $0.75 million ofthe escrow balance, with the remainder released to the Companyimmediately.  Therefore, $0.75 millionof the deferred gain was recognized and $0.75 million of deferred gain was reversedagainst the escrow balance.  During thenine month period ended September 30, 2002, we used approximately $0.2 millionis Exactis services and recorded the related gain.  The $0.1 million remaining amount of the gain relates to thereversal of unnecessary accrual related to Exactis.  The $1.5 million for the nine months ended September 30, 2001relates to the sale of Exactis and the sale of intellectual property of Sabelaand AwardTrack.

 

**IMPAIRMENTOF INTANGIBLE ASSETS**. During 2001, we performed on-goingbusiness reviews and, based on quantitative and qualitative measures, assessedthe need to record impairment losses on long-lived assets used in operationswhen impairment indicators were present. Where impairment indicators were

 

27

----

 

identified,we determined the amount of the impairment charge by comparing the carryingvalues of goodwill and other long-lived assets to their fair values.

 

ThroughAugust 2000, we completed numerous acquisitions that were financed principallywith shares of our common stock and were valued based on the price of thecommon stock at that time.  Startingwith the fourth quarter of 2000 through December 31, 2001, we reevaluated thecarrying value of our businesses on a quarterly basis.  The revaluation was triggered by thecontinued decline in the Internet advertising and marketing sectors throughout2000 and 2001. In addition, each of these entities have experienced declines inoperating and financial metrics over several quarters in 2001, primarily due tothe continued weak overall demand of on-line advertising and marketingservices, in comparison to the metrics forecasted at the time of theirrespective acquisitions.  These factorssignificantly impacted current projected revenue generated from thesebusinesses.  Our evaluation ofimpairment was also based on achievement of the unit’s business plan objectivesand milestones, the fair value of each business unit relative to its carryingvalue, the financial condition and prospects of each business unit and otherrelevant factors. The business plan objectives and milestones that wereconsidered included, among others, those related to financial performance, suchas achievement of planned financial results, and other non-financial milestonessuch as successful deployment of technology or launching of new products andthe loss of key employees.  Theimpairment analysis also considered when these properties were acquired andthat the intangible assets recorded at the time of acquisition were beingamortized over useful lives of 2 - 4 years. The amount of the impairment chargewas determined by comparing the carrying value of goodwill and other long-livedassets to fair value at each respective period end.

 

Whereimpairment was indicated, we determined the fair value of its business unitsbased on a market approach, which included an analysis of market pricemultiples of companies engaged in similar businesses.  To the extent that market comparables were not available, we useddiscounted cash flows in determining the value. The market price multiples areselected and applied to the business based on the relative performance, futureprospects and risk profile of the business in comparison to the guidelinecompanies.  The methodology used to testfor and measure the amount of the impairment charge was based on the samemethodology used during the initial acquisition valuations.  As a result, during our review of the valueand periods of amortization of both goodwill and certain other intangibles itwas determined that the carrying value of goodwill and certain other intangibleassets were not recoverable.  The otherintangible assets that were determined to be impaired related to the decline infair market value of acquired technology, a significant reduction in theacquired customer bases and turnover of workforce that was in place at the timeof the acquisition of these companies.

 

As aresult, we determined that the fair value of goodwill and other intangibleassets attributable to several of our operating units were less than theirrecorded carrying values.  Accordingly,we recognized $56.7 million in impairment charges to adjust the carrying valuesin 2001 - $26.9 million related to WSR, $25.3 millionrelated to Mail and $4.5 million related to Exactis.

 

Theimpairment factors evaluated may change in subsequent periods, given that ourbusiness operates in a highly volatile business environment.  This could result in significant additionalimpairment charges in the future.

 

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 and broadens the presentation ofdiscontinued operations to include more disposal transactions.  We have completed our initial transitionalgoodwill impairment assessment in the second quarter of 2002 and determinedthat there was no impairment of goodwill.

 

**INTERESTINCOME (EXPENSE), NET**. Interestincome, net includes interest income from our cash and cash equivalents andshort-term investments and interest expense, net related to our long term debtand capital lease obligations. Interest expense was $0.1 million and $0.2million the three and nine month periods ended September 30, 2002.  Interest income, net was $0.1 million and$0.8 million for the three and nine month

 

28

----

 

periodsended September 30, 2001.  The netdecrease was due to the addition of debt as the related interest expense offsetany interest income.

 

**GAIN ON SALEOF INVESTMENTS**.  The gain on sale of investments was $0.9 millionand $5.0 million for the three and nine months periods ended September 30,2001.  These gains relate to the sale ofour remaining securities.

 

**IMPAIRMENTOF INVESTMENTS.**  During2001, we wrote down certain of our investments and recognized impairmentcharges of approximately $3.1 million for other-than-temporary declines invalue.   Management made an assessmentof the carrying value of our cost-based investments and determined that theywere in excess of their carrying values due to the significance and duration ofthe decline in valuations of comparable companies operating in the Internet andtechnology sectors. The write down of cost based investments was $0.6 millionrelated to Media-Asia.  Management alsorecognized that the decline in value of our available-for-sale investments inNetwork Commerce and i3Moble were other-than-temporary and recorded animpairment of $2.3 million and $0.2 million, respectively.

 

**LOSS FROM DISCONTINUED OPERATIONS**.  OnAugust 6, 2001, we ceased funding our European subsidiaries and communicatedthat to 24/7 Europe NV’s Board of Directors. Management of 24/7 Europe shutdown all operations. Approximately $0 and $30.5 million of the loss fromdiscontinued operations in the three and nine month periods ended September 30,2001, respectively, related to 24/7 Europe. All revenue, cost and expensesrelated to the discontinued business are included in this line for the currentperiod and prior periods have been reclassified to reflect this presentation inaccordance with Accounting Principles Board Opinion No. 30, “Reporting theResults of Operations - Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions”.

 

OnJanuary 22, 2002, we completed the sale of our wholly owned subsidiary, IMAKE.In accordance with Statement of Financial Accounting Standard No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”, we accountedfor the operations of this component as a discontinued operation. Approximately$9.7 and $21.5 million of the loss from discontinued operations in the threeand nine month periods ended September 30, 2001, related to IMAKE. Theconsolidated financial statements have been revised to reflect the sale of theIMAKE subsidiary as a discontinued operation in accordance with Statement ofFinancial Accounting Standard No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets”.  Seefootnote 3 to the Interim Consolidated Financial Statements.

 

**DIVIDENDS ON PREFERRED STOCK.**  TheSeries A and Series B preferred stock issued during the third quarter of 2002 accrue and cumulate dividends at a rate of 6%per year, compounded monthly, payable when, as and if declared by our Board ofDirectors.  The dividends start accruingon the first day in the month following original issuance; therefore, only aportion of the Series A and none of the Series B accumulated dividends in thethird quarter of 2002.

 

**PREFERRED STOCK CONVERSION DISCOUNT. **During the third quarter of 2002, we issuedSeries A and Series B preferred stock, which are convertible into common stockat prices of $0.20535 and $0.2066 per share, respectively.  At the time we agreed to initial terms ofthe transactions with the third parties, the conversion price of the preferredstock approximated the fair value of our underlying common stock.  From the time the agreements weresubstantially complete until the transactions closed and all contingencies wereresolved (e.g. stockholder approval), the stock price increased toapproximately $0.46 per share for the Series A and $0.44 per share for theSeries B.  As a result of the increasein stock price, the preferred stock was issued at a substantial discount tofair market value.  In accordance withGenerally Accepted Accounting Principles, the beneficial conversion feature,calculated as the difference between fair market value on the date of issuanceand the conversion price, is required to be expensed immediately, however, thediscount was limited to the amount of cash allocable to each of the preferredstock transactions.  Accordingly, werecorded a non-cash charge of $5.4 million for the Series A preferred stock and$1.25 million for the Series B preferred stock for a total charge of $6.6million.

 

29

----

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

At September 30, 2002, we had cash and cash equivalents of $10.6 millionversus $7.0 million at December 31, 2001. Cash and cash equivalents arecomprised of highly liquid short-term investments with maturities of threemonths or less.

 

During 2002, our liquidity increased through the receipt of $7.4 millionin net proceeds from issuances of preferred stock, $3.0 million in long-termdebt financing from Publigroupe, a related party, $2.4 million proceeds fromthe sale of non-core assets and $1.2 million in net cash acquired in theNowMarketing acquisition.  In 2001, wegenerated a portion of our liquidity through the sale of non-core assets andmonetization of our investments primarily chinadotcom common stock, whichgenerated approximately $16.8 million and $6.9 million in proceeds,respectively.  The debt financing andproceeds from the sale of investments were used to finance restructurings andsustain operations during periods of declining revenues.  We used approximately $9.9 million and $27.6million of cash in operating activities during 2002 and 2001, respectively,generally as a result of our net operating losses, adjusted for certainnon-cash items such as amortization of goodwill and other intangible assets,gain on sales of investments, gain on sale of non-core assets, impairment ofinvestments and intangibles and non-cash related equity transactions andrestructuring and exit costs, and also significant decreases in accountsreceivable and prepaid and other current assets which were partially offset bydecreases in accounts payable and accrued expenses and deferred revenue.  As a result, our working capital positionimproved by $9.1 million during 2002, to a positive $1.1 million.

 

Net cash provided by investing activities was approximately $3.0 millionin 2002 versus $23.5 million in 2001. The majority of the cash provided byinvesting activities during 2002 and 2001 related to proceeds received from thesale of our non-core assets and investments in 2001.  During 2002, we also received $1.2 million in cash in connectionwith the Now Marketing acquisition. During 2001, as a result of divestitures of non-core assets and numerousrestructurings, we had significantly scaled back our capital expenditures. As aresult of the merger with Real Media and the decision to consolidate onto theOpen AdStream technology platform, we had sufficient equipment to support ourcurrent ad-serving volumes and did not budget for a significant amount ofcapital expenditures in 2002.

 

The Company has various employment agreements with employees, themajority of which are for one year with automatic renewal. The obligation underthese contracts is approximately $2.2 million for 2002 including salary andperformance based target bonuses. These contracts, some of which wererestructured in the third quarter of 2002, call for severance in the event ofinvoluntary termination, which ranges in amount from two months to one years’salary. All European employees have employment contracts as required by locallaw. The majority of these contracts allow for resignation or termination byeither party at any time, according to the notice period provisions containedin the employment contracts, or according to the minimum notice period asmandated by local law. The contracts, or if no expressed provision is includedin the contract, local law, also require severance for involuntary terminationsranging from one to six months. As of November 1, 2002, there wereapproximately 73 employees in Europe whose annualized base salaries wereapproximately $3.0 million.

 

As of September 30, 2002, we had approximately $0.5 million remaining ofcash outlay obligations relating to restructuring and exit costs. These amountsconsist primarily of costs to exit contracts, which we expect to settle byDecember 2002.

 

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.  We have received a report from ourindependent accountants containing an explanatory paragraph stating that ourrecurring losses from operations since inception and working capital deficiencyas of December 31, 2001 raise substantial doubt about our ability to continueas a going concern.  Management believesthat the support of our vendors, customers, stockholders, and employees, amongothers, continue to be key factors affecting our future success.  Moreover, management’s plans to continue asa going concern rely heavily on achieving revenue targets, raising additionalfinancing and controlling our operating expenses.

 

30

----

 

Management believes that significant progress has been made in reducingoperating expenses since the Real Media merger. In addition, management iscurrently exploring a number of strategic alternatives and is also continuingto identify and implement internal actions to improve our liquidity.  These alternatives may include sellingassets, which could result in changes in our business plan. To the extent weencounter additional opportunities to raise cash, we may sell additional equitysecurities, which would result in further dilution of our stockholders.Stockholders may experience extreme dilution due to both our current stockprice and the significant amount of financing we may be required to raise.  These securities may have rights senior tothose of holders of our common stock. We do not have any contractual restrictions on our ability to incurdebt.  Any indebtedness could containcovenants, which would restrict our operations.

 

With the acquisition of Real Media, Inc. in October 2001, we acquired anote payable of $4.5 million to Publigroupe, which as a result of the merger isa significant stockholder. The note bears interest at 4.5% and principal andinterest are due on October 30, 2006. In addition, in accordance with the RealMedia purchase agreement in January 2002, we received cash of $1.5 million andsigned a promissory note bearing interest at 6%, with interest and principaldue in January 2005. We achieved certain target operating results for the threemonths ended March 31, 2002 and as a result, on May 13, 2002, we receivedanother $1.5 million in exchange for a 6% three-year promissory note withinterest and principal due in May 2005.

 

On March 21, 2001, we entered into a commonstock purchase agreement with Maya Cove Holdings. The agreement gives us theability to sell our common stock to Maya pursuant to periodic drawdowns once aRegistration Statement covering these shares has been declared effective by theSEC. The draw downs would be subject to our ability to continue trading on theNasdaq, our trading volumes and prices and our ability to comply withsecurities registration requirements for this type of facility. Based on currentmarket price, we estimate the maximum potential draw down is approximately $2.0million. To date, no amounts have been drawn under this facility. There can beno assurances that it will provide the resources necessary to fund our needsand we are continuing to evaluate other fund raising vehicles.

 

On January 22, 2002, we completed the sale of our wholly ownedsubsidiary, IMAKE, to Schaszberger Corporation. Under the terms of the sale,the purchase price payable to Schaszberger Corporation payable to us was up toapproximately $6.5 million for the stock of IMAKE consisting of $2.0 million inthe form of a 6% four year secured note due in January 2006, approximately $0.5million in cash consideration, and a potential earn out of up to $4.0 millionover the next three years based on gross revenue. Additionally, we receivedSeries A preferred stock of Schaszberger Corp which, as of the closing date,represented 19.9% of the buyer. The note is secured by certain assets of IMAKEand is guaranteed by Schaszberger Corporation. We have recorded theconsideration received at its estimated fair value of $0.5 million for the notereceivable and $1.5 million for the earnout as part of assets held for sale atDecember 31, 2001. In January 2002, we received the cash consideration of $0.5million and have received monthly payments for the periods through September2002.

 

On May 3, 2002, we completed the sale ofcertain assets related to our US email management product, including customercontracts, certain intangibles and employee relationships, to 24/7 Mail, Inc.,a wholly owned subsidiary of Naviant, Inc. Under the terms of the sale, the purchase price payable is up to $4.5million.  The purchase price iscomprised of (i) $1.0 million that was paid at closing; (ii) $1.0 million inthe form of a non-interest bearing installment note with $350,000 due in ninetydays, $350,000 due in one hundred and eighty days and $300,000 due in twohundred seventy days from closing; (iii) an earn-out payable quarterly over thenext 45 months, based on 5% of Net Revenue (as defined in the Asset PurchaseAgreement), with minimum quarterly payments of $50,000 and a maximum of $2.0million, through 2005.  Lastly, pursuantto a $500,000 non-interest bearing installment note, half of which is payableon each of April 30, 2004 and April 30, 2005, Naviant has the option either to(i) issue to us a number of shares currently comprising 19.9% of 24/7 Mail,Inc., or (ii) pay us cash in lieu of the shares.  The consideration paid to us was determined as a result ofarms-length negotiations between the buyer and us.

 

On July 30, 2002, we received a letter fromNaviant alleging the breach of certain of our warranties with respect to theassets sold to Naviant.  Naviant claimeddamages of approximately $2.3 million, which it intended to offset against theamounts due to us.  On October 3, 2002,the parties agreed to resolve the dispute through immediate payment of $1.25million by Naviant to us in lieu of all future amounts that Naviant may oweus.  Naviant agreed to

 

31

----

 

waive further claims with regard to thespecific warranty in dispute, however, certain representations made by us underthe Purchase Agreement dated as of April 30, 2002 among us, 24/7 Mail Inc andNaviant, Inc. continue in effect and Naviant has the right to bring claims withrespect to such representations until June 30, 2003.  As result of the settlement, we wrote off approximately $0.9million of the remaining amount due from Naviant in the third quarter of2002.  We received the the $1.25 millionon October 4, 2002.

 

On July 2, 2002, we entered into a Series Aand Series A-1 Preferred Stock and Common Stock Warrant Purchase Agreement withSunra Capital Holdings Limited (“Sunra”), a newly formed investment fundadvised by Merchant’s Group International. On July 2, 2002, Sunra purchased $1.6 million of our newly createdSeries A Preferred Stock, $3.4 million of our newly created Series A-1 NonVoting Convertible Preferred Stock, and on August 8, 2002 Sunra and affiliatedparties agreed to subject to stockholder approval purchase an additional $3.0million of the Series A Preferred Stock, for a total investment of $8.0million.   Upon receipt of stockholderapproval on September 10, 2002, the outstanding shares of Series A-1 PreferredStock converted into shares of Series A Preferred Stock and Sunra consummatedthe purchase of an additional $3.0 million of the Series A Preferred Stock (the“September 10, 2002 Series A Preferred Stock transactions”).  Each share of Series A Preferred Stock isconvertible into our Common Stock at any time at the option of the holderthereof at a conversion price of $0.20535 per share of common stock, or38,957,876 shares of Common Stock on an as-if converted basis.  We also issued at total of 3,895,788warrants to Sunra to purchase shares of Common Stock at an exercise price of$0.20535.  All of the warrants issuedmay be exercised through a cashless exercise and have a five year term.  Sunra is the beneficial owner ofapproximately 42,853,664 shares of our Common Stock, or approximately 42.3% ofour outstanding Common Stock at September 30, 2002 on a fully dilutedbasis.   We also issued 400,000 warrantsto Merchant’s Group International as partial payment of a placement fee andincurred transaction costs approximately $0.7 million.  The Series A Preferred Stock accrues andcumulates dividends at the rate of 6% per year, compounded monthly, payablewhen, as and if declared by our Board of Directors.  Accordingly, the $50,000 cumulative dividends are reflected as“Preferred stock dividends” on the consolidated statement of operations.

 

Accordingly, the July 2, 2002and September 10, 2002 Series A Preferred Stock transactions contained embeddedbeneficial conversion features that were required to be valued separately.  We allocated the proceeds received in eachof the transactions to the Series A Preferred Stock and detachable warrantsbased on a relative fair value basis. The intrinsic value of the beneficial conversion feature associated withthe July 2, 2002 Series A Preferred Stock transaction was approximately $0.2million.  The intrinsic value of thebeneficial conversion feature associated with the September 10, 2002 Series APreferred Stock transactions was calculated as the difference between theconversion price of $0.20535 per share of Common Stock and the fair value ofthe Common Stock into which the Series A Preferred Stock was convertible intoon the stockholder approval date of $0.46 per share, or an intrinsic value ofapproximately $0.25465 per share, which was greater than the proceeds allocatedto the September 10, 2002 Series A Preferred Stock transactions.  Accordingly, the amount of the discount waslimited to the amount of cash allocable to the September 10, 2002 Series APreferred Stock transactions. Therefore, we recorded a non-cash charge of $5.2 million in the thirdquarter of 2002, representing the number of common shares into which theSeptember 10, 2002 Series A Preferred Stock transactions were convertible into(31,166,302 shares of Common Stock) multiplied by the effective conversionprice of $0.1675 per share of Common Stock. The total non-cash charge of $5.4 million is included in the “Preferredstock conversion discount” on the consolidated statement of operations similarto a Preferred Stock dividend.

 

In conjunction with the Sunrainvestment on July 2, 2002, four executives each agreed to modify theirrespective employment agreements with us to reduce the amount of severancepayable to such executive officers by 50% payable in one lump sum, and toreduce the notice period for termination or non-renewal from 180 days to 30days.  In exchange, such executiveswould receive, in the aggregate, approximately 2.1 million shares of our CommonStock of which the initial conversion value was based on the approximate fairmarket value of our Common Stock as of the date of the July 2, 2002 Sunrainvestment, or $0.20 per share in consideration of approximately $0.4 million,out of a total of approximately $0.8 million, future severance benefitsforfeited.  In addition, such executiveswould also receive fully-vested stock options to acquire approximately 2.1million shares of our Common Stock with an exercise price of $0.20 pershare.  The issuance of the shares andoptions were subject to stockholder approval of the 2002 Stock Incentive Planand the Sunra Series A Preferred Stock transactions.  For accounting purposes, the shares and options are being valuedat $0.46 per share, based on their fair market value using the closing price ofour Common Stock as of the stockholder approval date on September 10,

 

32

----

 

2002.  In accordance with FASB Interpretation No. 44, “Accounting forCertain Transactions Involving Stock Stock-Based Compensation”, this approvalresulted in a non-cash stock-based compensation charge of approximately $1.5million in the aggregate.  Thecompensation charge related to the options is based on their intrinsic value of$0.26 per option, that is, the fair market value of our Common Stock on theshareholder approval date of $0.46 per share less the exercise price of $0.20per share which resulted in $0.6 million of the $1.5 million charge.

 

In addition, the fourexecutives also agreed to receive the Earnings Before Interest, Taxes andAmortization (“EBITA”) portion of their 2002 target bonus, if earned, in sharesof our Common Stock.  The number ofshares to be issued in connection with the award is based upon EBITA portion oftheir 2002 target bonus award divided by $0.20 per share.  Accordingly, this modification to theexecutives’ bonus award resulted in a variable based compensation award whichis required to be measured based upon the fair market value of our Common Stockat each reporting period, namely at the end of the third and fourth quarter of2002.  At September 30, 2002, managementdetermined that is was probable that the EBITA target would be met anddetermined, at $0.20 per share, the bonus equates to approximately 1.35 millioncommon shares.  Accordingly, atSeptember 30, 2002, the four executives’ bonus awards resulted in a non-cashstock-based compensation charge of approximately $0.5 million based upon thefair market value of our Common Stock of $0.37 per share as of the end of thereporting period.  If it is determinedin the fourth quarter of 2002 that the EBITA target may not be achieved and/orour common stock price declines from the $0.37 per share at September 30, 2002,the charge may be adjusted downward in the fourth quarter of 2002.

 

On September 19, 2002, we acquiredcertain assets of Elbit Vflash Inc. and Elbit Vflash Ltd. d/b/a Now Marketing(“Now Marketing”), a New York-based marketing services firm.  The acquisition agreement required Now Marketing’sparent, Elbit Ltd. and Gilbridge, Inc., together (“Now Marketing’s Parent”), tomake a $1.25 million investment in exchange for 125,000 shares of Series BPreferred Stock.  Accordingly, the totalpurchase consideration of $4.3 million consists of 4.1 million shares of CommonStock valued at $1.7 million, 125,000 shares of Series B Preferred Stock valuedat $2.5 million and $60,000 of transaction costs.  The Series B Preferred Stock is convertible into shares of ourCommon Stock at any time at the option of the holder thereof at a conversionprice of $0.2066 per share, or 6,050,339 shares of Common Stock on an as-ifconverted basis.  The excess purchaseprice (excluding the $1.25 million Series B Preferred Stock discount) over the fairmarket value of net tangible assets of approximately $1.8 million has beeninitially allocated to goodwill pending final allocation of such amount duringthe fourth quarter of 2002.  Theacquisition was accounted for as a purchase business combination in accordancewith SFAS No. 141, ‘‘Business Combinations’’ and SFAS No. 142, ‘‘Goodwill and OtherIntangible Assets’’.

 

MARKET FOR COMPANY’S COMMON EQUITY

 

The shares of our common stock were previously listed on the NasdaqNational Market. Due to the low share price of our common stock, on February14, 2002, we received a letter from Nasdaq stating that they determined that wefailed to meet Nasdaq’s minimum listing requirements and as a result, ourcommon stock could be delisted if we did not satisfy these requirements by May15, 2002.

 

As a result, the Company transitioned its listing to the NasdaqSmallCap Market.  Our common stock willremain listed on Nasdaq SmallCap through at least February 10, 2003.  Should our stock price remain consistentlybelow $1.00, we will be deemed to be out of compliance with the Nasdaqrequirements and will have to**explorecertain avenues, including a potential reverse stock split, to increase ourstock price above $1.00 and thus regain compliance.  There can be no assurance that the Company will be able to maintainits Nasdaq listing in the future.

 

Our failure to meet Nasdaq’s maintenance criteria may result in thedelisting of our common stock from Nasdaq. In such event, trading, if any, inthe securities may then continue to be conducted in the non-NASDAQ over-the-countermarket in what are commonly referred to as the electronic bulletin board andthe “pink sheets”.  As a result, aninvestor may find it more difficult to dispose of or obtain accurate quotationsas to the market value of the securities. In addition, we would be subject to a Rule promulgated by the Securitiesand Exchange Commission that, if we fail to meet criteria set forth in suchRule, imposes various practice requirements on broker-dealers who sellsecurities governed by the Rule to persons other

 

33

----

 

thanestablished customers and accredited investors.  For these types of transactions, the broker-dealer must make aspecial suitability determination for the purchaser and have received the purchaser’swritten consent to the transactions prior to sale.  Consequently, the Rule may have a materially adverse effect onthe ability of broker-dealers to sell the securities, which may materiallyaffect the ability of stockholders to sell the securities in the secondarymarket.

 

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.

 

RISK FACTORS

 

AN INVESTMENTIN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.  YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFOREYOU DECIDE TO BUY OUR COMMON STOCK.  IFANY OF FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITIONS ORRESULTS OF OPERATIONS WOULD LIKELY SUFFER. IN THIS CASE, THE PRICE OF OUR SECURITIES COULD DECLINE AND YOU MAY LOSEALL OR PART OF YOUR INVESTMENT

 

WE WILL NEEDTO RAISE ADDITIONAL FUNDS TO CONTINUE OPERATIONS AND OUR RECURRING OPERATINGLOSSES AND WORKING CAPITAL DEFICIENCY RAISE SUBSTANTIAL DOUBT ABOUT OUR ABILITYTO CONTINUE AS A GOING CONCERN.

 

Our current cash may not be sufficient to meet our anticipatedoperating cash needs for 2003 and there can be no assurance that new funds canbe secured when needed. The support of our vendors, customers, stockholders andemployees will continue to be key to our future success. There can be noassurance that we will be able to raise additional financing to meet our cashand operational needs or reduce our operating expenses or increase revenuessignificantly to address this going concern issue.

 

Since our inception, we have incurred significant operating losses andwe believe we will continue to incur operating losses for the foreseeablefuture. We also expect to incur negative cash flows for the foreseeable futureas a result of our operating losses.

 

We have received a report from our independent accountants on ourDecember 31, 2001 consolidated financial statements containing an explanatory“going concern” paragraph stating that our recurring losses from operations andworking capital deficiency since inception raise substantial doubt about ourability to continue our business as a going concern. Management’s plans tocontinue as a going concern rely heavily on achieving revenue targets, reducingoperating expenses and raising additional financing. Management is currentlyexploring a number of strategic alternatives and is also continuing to identifyand implement internal actions to improve our liquidity. These alternatives mayinclude selling assets, which could result in changes in our business plan.

 

To the extent we encounter additional opportunities to raise cash, wemay sell additional equity or debt securities. Stockholders may experienceextreme dilution due to our current stock price and the significant amount offinancing we need to raise and these securities may have rights senior to thoseof holders of our common stock. We do not have any contractual restrictions onour ability to incur debt. Any indebtedness could contain covenants thatrestrict our operations.

 

We have limited access to the capital markets to raise capital. Thecapital markets have been unpredictable in the past, especially forunprofitable companies such as ours. In addition, it is difficult to raisecapital in the current market conditions. The amount of capital that a companysuch as ours is able to raise often depends on variables that are beyond ourcontrol, such as the share price of our stock and its trading volume. As aresult, there is no guarantee that our efforts to secure financing will beavailable on terms attractive to us, or at all. Due to our operating losses, itmay be difficult to obtain debt financing. If we are able to consummate afinancing arrangement, there is no guarantee that the amount raised will be

 

34

----

 

sufficient tomeet our future needs. If adequate funds are not available on acceptable terms,or at all, our business, results of operation, financial condition andcontinued viability will be materially adversely affected.

 

THE LOW PRICEOF OUR COMMON STOCK COULD RESULT IN ITS DELISTING FROM THE NASDAQ SMALLCAPMARKET.

 

The shares of our common stock were previously listed on the NasdaqNational Market. Due low share price of our common stock, on February 14, 2002,we received a letter from Nasdaq stating that they have determined that we havefailed to meet Nasdaq’s minimum listing requirements and as a result, ourcommon stock could be delisted if we do not satisfy these requirements by May15, 2002.

 

As a result, the Company transitioned its listing to the NasdaqSmallCap Market.  Our common stock willremain listed on Nasdaq SmallCap through at least February 10, 2003.  Should our stock price remain consistentlybelow $1.00, we will be deemed to be out of compliance with the Nasdaqrequirements and will have to**explorecertain avenues, including a potential reverse stock split, to increase ourstock price above $1.00 and thus regain compliance.  There can be no assurance that the Company will be able tomaintain its Nasdaq listing in the future.

 

Our failure to meet Nasdaq’s maintenance criteria may result in thedelisting of our common stock from Nasdaq. In such event, trading, if any, inthe securities may then continue to be conducted in the non-NASDAQover-the-counter market in what are commonly referred to as the electronicbulletin board and the “pink sheets”. As a result, an investor may find it more difficult to dispose of orobtain accurate quotations as to the market value of the securities.  In addition, we would be subject to a Rulepromulgated by the Securities and Exchange Commission that, if we fail to meetcriteria set forth in such Rule, imposes various practice requirements onbroker-dealers who sell securities governed by the Rule to persons other thanestablished customers and accredited investors.  For these types of transactions, the broker-dealer must make aspecial suitability determination for the purchaser and have received thepurchaser’s written consent to the transactions prior to sale.  Consequently, the Rule may have a materiallyadverse effect on the ability of broker-dealers to sell the securities, whichmay materially affect the ability of shareholders to sell the securities in thesecondary 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.

 

HIGHVOLATILITY 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 volatility in the market price of a particular company’ssecurities, securities class action litigation has often been brought againstthat company.  Many companies in ourindustry have been subject to this type of litigation in the past.  We may also become involved in this type oflitigation.  Litigation is oftenexpensive and diverts management’s attention and resources, which couldmaterially and adversely affect our business, financial condition and resultsof operations.

 

REVENUE GROWTHIN PRIOR PERIODS MAY NOT BE INDICATIVE OF FUTURE GROWTH.

 

At times in the past, our revenues have grown significantly, primarilyas a result of our numerous acquisitions. Our limited operating history makes prediction of future revenue growthdifficult.  Accurate predictions offuture revenue growth are also difficult because of the rapid changes in ourmarkets and the possible 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.

 

35

----

 

WE HAVE ALIMITED OPERATING HISTORY ON WHICH AN INVESTOR CAN EVALUATE OUR BUSINESS.

 

We have an extremely limited operating history.  You must consider the risks, expenses anddifficulties typically encountered by companies with limited operatinghistories, particularly companies in new and rapidly expanding markets such asInternet advertising.  These risksinclude our ability 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.

 

WE ANTICIPATECONTINUED 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 $14.5 million and $163.4 million forthe nine months ended September 30, 2002 and 2001, respectively.  Even if we do achieve profitability, wecannot assure you that we can sustain or increase profitability on a quarterlyor annual basis in the future.

 

OUR FUTUREREVENUES AND RESULTS OF OPERATIONS MAY BE DIFFICULT TO FORECAST.

 

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 factorsinclude:

 

•              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;

 

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

 

•           changes in governmentalregulation of the Internet; and

 

•              generaleconomic conditions.

 

Our future revenues and results of operations may be difficult toforecast due to the above factors. In addition, our expense levels are based inlarge part on our investment plans and estimates of future revenues.  Any increased expenses may precede or maynot be followed by increased revenues, as we may be unable to, or may elect notto, adjust spending in a timely manner to compensate for any unexpected revenueshortfall.  As a result, we believe thatperiod-to-period comparisons of our results of operations may not bemeaningful.  You should not rely on pastperiods as indicators of future performance. In future

 

36

----

 

periods, ourresults of operations may fall below the expectations of securities analystsand investors, which could adversely affect the trading price of our commonstock.

 

A SUBSTANTIAL  AMOUNT OF OUR COMMON STOCK MAY BE SOLD INTHE PUBLIC MARKET IN THE FUTURE, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.

 

Sales of a  substantial numberof shares of our common stock in the public market could  cause the market price of our common stockto decline. As of November 11, 2002,  wehad an aggregate of 58,474,109 shares of common stock outstanding,  substantially all of which were freelytradable. Additionally, as of that date, (i) our Series A and Series B preferred stock was convertible intoapproximately  45,008,216 shares ofcommon stock; we have filed a preliminary registration  statement with respect to such shares, andsuch shares will become freely  tradableupon effectiveness of such registration statement; (ii) there were outstandingstock options to purchase approximately 12,606,149 shares of our  common stock, all of which are freelytradable, and (iii) there were outstanding warrants to purchase approximately 8,316,200 shares of our common stock,all of  which are either freely tradableor included in the pending registration statement.

 

SUNRA, ELBIT  LTD. ANDPUBLIGROUPE COLLECTIVELY HOLD APPROXIMATELY 55% OF THE TOTAL  OUTSTANDING VOTING POWER OF 24/7 REAL MEDIAAND WILL LIKELY BE ABLE TO PREVENT A CHANGE OF CONTROL AND INFLUENCE CERTAIN APPROVAL MATTERS.

 

** **Sunra Capital Holdings Ltd. and affiliated parties are currently the beneficial owner of 42,853,665shares of  our common stock and controlapproximately 37.7% of the voting power of our common stock.  Elbit Ltd. is currently the beneficial owner of 8,940,271 shares of our common stockand controls  approximately 9.7% of thevoting power.   Publigroupe USA Holdingsis the owner of 7,745,518 shares of our common stock and controls 7.5% of the voting power and has entered into anagreement to  vote on all matters inaccordance with the recommendations of our Board of  Directors.  Additionally, the terms  of the Series A and Series B PreferredStock, owned principally by Sunra and Elbit, contain certain protective provisions that provide such holdersan  effective veto right over certaincorporate matters.

 

Based on  their voting power,Sunra, Elbit and Publigroupe may effectively be able to  determine the outcome of all mattersrequiring stockholder approval, including the election of directors, amendment of our charter and approval ofsignificant  corporate transactions, andwill likely be in a position to prevent a change in  control of 24/7 Real Media even if the other stockholders were infavor of the  transaction.

 

OUR NETOPERATING LOSS CARRYFORWARDS MAY BE LIMITED

 

Due to the"change in ownership" provisions of the Internal Revenue Code, theavailability of 24/7 Real Media's net operating loss and credit carryforwardsmay be subject to an annual limitation against taxable income in futureperiods, which could substantially limit the eventual utilization of thesecarryforwards.

 

OUR FINANCIALPERFORMANCE AND REDUCTION OF OUR WORKFORCE MAY AFFECT THE MORALE ANDPERFORMANCE OF OUR PERSONNEL.

 

We have incurred significant net losses since our inception.  In an effort to reduce our cash expenses, webegan to implement certain restructuring initiatives and cost reductions.  During 2001, we reduced our workforce byover 1,000 employees.  We have also leftpositions unfilled when employees have left the company.  In addition, recent trading levels of ourcommon stock have decreased the value of the stock options granted to employeespursuant to our stock option plan.  As aresult of these factors, our remaining personnel may seek employment withlarger, more stable companies they perceive to have better prospects.  Our failure to retain qualified employees tofulfill our current and future needs could impair our future growth and have amaterial adverse effect on our business.

 

OUR FINANCIALPERFORMANCE MAY AFFECT OUR ABILITY TO ENTER INTO NEW BUSINESS RELATIONSHIPS ANDTO COLLECT REVENUES.

 

The publicity we receive in connection with our financial performanceand our measures to remedy this performance generate negative publicity, whichmay negatively affect our reputation and our business partners’ and othermarket participants’ perception of our company.  If we are unable to maintain the existing relationships anddevelop new ones, our revenues and collections could suffer materially.

 

UNCERTAINTY OFCOLLECTION OF RECEIVABLES.

 

While we perform credit checks on all customers, our level ofuncollectible receivables has been significantly affected by our advertisingcustomers which traditionally have had limited operating histories and modestfinancial resources.  Additionally, manyof the technology customers obtained as a result of the Real Media acquisitionhave similar financial histories. Historically, out uncollectible receivables has been substantiallyhigher than our current levels.

 

Furthermore, as a result of our dispositions of certain assets andbusinesses, our balance sheet currently reflects notes and amounts receivableof approximately $3.1 million.  Theentities that owe us these monies are Internet-enabled businesses which mayface significant competition and their ability to pay us these amounts in fulldepends to a large extent on their own successful financial performance.  In addition, these entities may requireadditional financing to meet their cash and operational needs; however, therecan be no assurance that such funds will be available to them, to the extentneeded, or on terms acceptable to the entities, it at all.  If we are unable to collect all receivablesreflected on our balance sheet, we will be required to write-down our assets infuture reporting periods, adversely affecting our financial results, cashflows, and financial position in the future periods.

 

OUR BUSINESSMAY NOT GROW IF THE INTERNET ADVERTISING MARKET DOES NOT CONTINUE 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 click through 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.

 

OUR BUSINESSMAY SUFFER IF WE ARE UNABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS MODEL

 

37

----

 

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 achievebroad market acceptance by advertisers, ad agencies and Web publishers.  Our ability to generate significant revenuefrom advertisers will depend, in part, on our ability to contract with Webpublishers that have Web sites with adequate available ad space inventory.  Further, these Web sites must generatesufficient user traffic with demographic characteristics attractive to ouradvertisers.  The intense competitionamong Internet advertising sellers has led to the creation of a number ofpricing alternatives for Internet advertising. These alternatives make it difficult for us to project future levels ofadvertising revenue and applicable gross margin that can be sustained by us orthe Internet advertising industry in general.

 

Intensive marketing and sales efforts may be necessary to educateprospective advertisers regarding the uses and benefits of, and to generatedemand for, our products and services. Enterprises may be reluctant or slow to adopt a new approach that mayreplace, limit or compete with their existing direct marketing systems.  In addition, since online direct marketingis emerging as a new and distinct business apart from online advertising,potential adopters of online direct marketing services will increasingly demandfunctionality tailored to their specific requirements.  We may be unable to meet the demands ofthese clients. Acceptance of our new solutions will depend on the continuedemergence of Internet commerce, communication and advertising, and demand forits solutions.  We cannot assure youthat demand for its new solutions will emerge or become sustainable.

 

BANNERADVERTISING, FROM WHICH WE CURRENTLY DERIVE A SIGNIFICANT PORTION OF OURREVENUE, MAY NOT BE AN EFFECTIVE ADVERTISING METHOD IN THE FUTURE.

 

A significant portion of our revenues are derived from the delivery ofbanner advertisements.  Online banneradvertising has dramatically decreased since the middle of 2000, which couldhave a material adverse effect on our business.  If advertisers determine that banner advertising is anineffective or unattractive advertising medium, we cannot assure you that wewill be able to effectively make the transition to any other form of Internetadvertising.  Also, there are “filter”software programs that limit or prevent advertising from being delivered to auser’s computer.  The commercialviability of Internet advertising, and our business, results of operations andfinancial condition, would be materially and adversely affected by Web users’widespread adoption of such software. In addition, many online advertisers have been experiencing financialdifficulties, which could materially impact our revenues and our ability to collectour receivables.

 

GROWTH OF OURBUSINESS DEPENDS ON THE DEVELOPMENT OF ONLINE DIRECT MARKETING.

 

Adoption of online direct marketing, particularly by those entitiesthat have historically relied upon traditional means of direct marketing, suchas telemarketing and direct mail, is an important part of our businessmodel.  Intensive marketing and salesefforts may be necessary to educate prospective advertisers regarding the usesand benefits of our products and services to generate demand for our directmarketing services.  Enterprises may bereluctant or slow to adopt a new approach that may replace, limit, or competewith their existing direct marketing systems. In addition, since online direct marketing is emerging as a new anddistinct market apart from online advertising, potential adopters of onlinedirect marketing services will increasingly demand functionality tailored totheir specific requirements.  We may beunable to meet the demands of our clients.

 

LOSS OF OURMAJOR WEB SITES WOULD SIGNIFICANTLY REDUCE OUR REVENUES.

 

The 24/7 Network generates a significant portion of our revenues, andwe expect that the 24/7 Network will continue to account for a significantportion of our revenue for the foreseeable future.  The 24/7 Network consists of a limited number of our Web sitesthat have contracted for our services under agreements cancelable generallyupon a short notice period.  Weexperience turnover from time to time among our Web sites, and we cannot becertain that the Web sites named above will remain associated with us or that suchWeb sites will not experience a reduction in online traffic on theirsites.  We cannot assure

 

38

----

 

you that wewill be able to replace any departed Web site in a timely and effective mannerwith a Web site with comparable traffic patterns and user demographics.  Our business, results of operations andfinancial condition would be materially adversely affected by the loss of oneor more of the Web sites that account for a significant portion of our revenuefrom the 24/7 Network.

 

LOSS OF MAJORCUSTOMERS WOULD REDUCE OUR REVENUES.

 

We generate a significant portion of our revenues from a limited numberof customers.  We expect that a limitednumber of these entities may continue to account for a significant percentageof our revenues for the foreseeable future. For the three months ended September 30, 2002, our top ten customersaccounted for approximately 21.6% of our total revenues.  Customers typically purchase advertising orservices under agreements on a short-term basis.  Since these contracts are short-term, we will have to negotiatenew contracts or renewals in the future that may have terms that are not asfavorable to us as the terms of existing contracts.  We cannot be certain that current customers will continue topurchase advertising or services from us or that we will be able to attractadditional customers successfully, or that customers will make timely paymentof amounts due to us.  In addition,current and potential competitors have established or may establish cooperativerelationships among themselves or with third parties to increase the ability oftheir products or services to address the needs of our prospectiveclients.  Our business, results of operationsand financial condition would be materially adversely affected by the loss ofone or more of our customers that account for a significant portion of ourrevenue.

 

WE HAVE GROWNOUR 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 maydistract management’s attention from our other operations.  We may continue pursuing selectiveacquisitions of businesses, technologies and product lines as a key componentof our growth strategy.  Any futureacquisition or investment may result in the use of significant amounts of cash,potentially dilutive issuances of equity securities, incurrence of debt andamortization expenses related to goodwill and other intangible assets. Inaddition, acquisitions involve numerous risks, including:

 

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

 

•              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.

 

OURADVERTISING CUSTOMERS AND THE COMPANIES WITH WHICH WE HAVE STRATEGICRELATIONSHIPS MAY EXPERIENCE ADVERSE BUSINESS CONDITIONS THAT COULD ADVERSELYAFFECT OUR BUSINESS.

 

As a result of unfavorable conditions in the public and private capitalmarkets, some of our customers may have difficulty raising sufficient capitalto support their long-term operations. As a result, these customers have reduced their spending on Internetadvertising, which has materially and adversely affected our business,financial condition and results of operations. In addition, from time to time, we have entered into strategic businessrelationships with other companies, the nature of which varies, but generallyin the context of customer relationships. These companies may experience similar adverse business conditions thatmay render them unable to meet our expectations for the strategic businessrelationship or to

 

39

----

 

fulfill theircontractual obligations to us.  Such anevent could have a material adverse impact on our business, financial conditionand results of operations.

 

OUR REVENUESARE SUBJECT TO SEASONAL FLUCTUATIONS.

 

Our revenues are subject to seasonal fluctuations because advertisersgenerally place fewer advertisements during the first and third calendarquarters of each year and direct marketers mail substantially more marketingmaterials in the third quarter each year. Internet user traffic typically drops during the summer months, whichreduces the number of advertisements to sell and deliver.  Expenditures by advertisers and directmarketers tend to vary in cycles that reflect overall economic conditions aswell as budgeting and buying patterns. Our revenue could be materially reduced by a decline in the economicprospects of advertisers, direct marketers or the economy in general, which couldalter current or prospective advertisers’ spending priorities or budget cyclesor extend our sales cycle.  Due to suchrisks, you should not rely on quarter-to-quarter comparisons of our results ofoperations as an indicator of our future results.

 

OUR TECHNOLOGYSOLUTIONS MAY NOT BE SUCCESSFUL AND MAY CAUSE BUSINESS DISRUPTION.

 

Open AdStream is our proprietary next generation ad serving technologythat is intended to serve as our sole ad serving solution.  We launched Open AdStream Central andNetwork in mid-2001, and we must, among other things, ensure that thistechnology will function efficiently at high volumes, interact properly withour database, offer the functionality demanded by our customers and assimilateour sales and reporting functions.  Thisdevelopment effort could fail technologically or could take more time thanexpected.  Our Open AdStream technologyresides on a computer system located in our data centers housed by ExodusCommunications.  These systems’continuing and uninterrupted performance is critical to our success.  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.  Our operations aredependent on our ability to protect our computer systems against damage fromfire, power loss, water damage, telecommunications failures, vandalism and othermalicious acts, and similar unexpected adverse events.  In addition, interruptions in our solutionscould result from the failure of our telecommunications providers to providethe necessary data communications capacity in the time frame we require.  Despite precautions that we have taken,unanticipated problems affecting our systems have from time to time in the pastcaused, and in the future could cause, interruptions in the delivery of oursolutions.  Our business, results ofoperations and financial condition could be materially and adversely affectedby any damage or failure that interrupts or delays our operations.

 

OUR FAILURE TOSUCCESSFULLY 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.

 

40

----

 

 

Many of our competitors have longer operating histories, greater namerecognition, larger customer bases and significantly greater financial,technical and marketing resources than ours. In addition, current and potential competitors have established or mayestablish cooperative relationships among themselves or with third parties toincrease the 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.

 

CHANGES INLAWS AND STANDARDS RELATING TO DATA COLLECTION AND USE PRACTICES AND THEPRIVACY OF INTERNET USERS AND OTHER INDIVIDUALS COULD HARM OUR 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 Open AdStream technology could be limited by anyregulation limiting the collection or use of information regarding Internetusers.  Since many of the proposed lawsor regulations are just being developed, we cannot yet determine the impactthese regulations may have on its business. In addition, growing public concern about privacy and the collection,distribution and use of information about individuals has led toself-regulation of these practices by the Internet advertising and directmarketing industry and to increased federal and state regulation.  The Network Advertising Initiative, or NAI,of which 24/7 Real Media is a member along with other Internet advertisingcompanies, has developed self-regulatory principles for online preferencemarketing.  These principles wererecently endorsed by the Federal Trade Commission, and are in the process ofbeing adopted by the NAI companies.  TheDirect Marketing Association, or DMA, the leading trade association of directmarketers, has adopted guidelines regarding the fair use of this informationwhich it recommends participants, such as us, through our services, in thedirect marketing industry follow.  Weare also 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 DMA’sguidelines and applicable federal and state laws and regulations has not had amaterial adverse effect on us, we cannot assure you that the DMA will not adoptadditional, more burdensome guidelines or 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.

 

IF WE LOSE OURCEO OR OTHER SENIOR MANAGERS OUR BUSINESS WILL BE ADVERSELY EFFECTED.

 

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 adversely affectour 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. Competition for such personnel in the Internet industryis intense, and we cannot be certain that we will be able to retain our keypersonnel or that we can attract, integrate or retain other highly qualifiedpersonnel in the future.  We have experiencedin the past, and may continue to experience in the future, difficulty in hiringand retaining candidates with appropriate qualifications, especially in salesand marketing positions.

 

41

----

 

OUR INTERNATIONAL OPERATIONSMAY POSE LEGAL AND 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.

 

In addition to these factors, due to our minority stake in 24/7 RealMedia Korea in Asia, we are relying on our partner to conduct operations, buildthe network, aggregate Web publishers and coordinate sales and marketingefforts.

 

DEPENDENCE ONPROPRIETARY 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 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 cannot assureyou that any of our proprietary rights will be of value in the future since thevalidity, enforceability and scope of protection of certain proprietary rightsin Internet-related industries is uncertain and still evolving.

 

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 or litigationunless we enter into arrangements with the third parties responsible for suchclaims or litigation, which may be unavailable on commercially reasonableterms.

 

42

----

 

INTELLECTUALPROPERTY 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.

 

PRIVACYCONCERNS 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 Open AdStream technology targetsadvertising to users through the use of identifying data, or “cookies” andother non-personally-identifying information. Open AdStream enables the use of cookies to deliver targeted advertisingand to limit the frequency with which an advertisement is shown to theuser.  Most currently available Internetbrowsers allow users to modify their browser settings to prevent cookies frombeing 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 theeffectiveness of our sales and marketing efforts and impair our targetingcapabilities.  Recently, MicrosoftCorporation changed the design and instrumentation of its Web browser in such away as to give users the option to accept or reject third party cookies.  Giving users the option to decline suchcookies could result in a reduction of the number of Internet users we arecapable of profiling anonymously.  Suchchanges also could adversely affect our ability to determine the reach ofadvertising campaigns sold and delivered by us and the frequency with whichusers of sites in the 24/7 Network see 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.  In addition, privacy concerns may cause someWeb users to be less likely to visit Web sites that contribute data to ourdatabases.  This could have a materialadverse effect on our financial condition. In addition, we are developing our database to collect data derived fromuser activity on our networks and from other sources.  We collect and compile information in databases for the productofferings of all our businesses. Individuals or entities may claim in the future, that our collection ofthis information is illegal.  Althoughwe believe that we have the right to use and compile the information in thesedatabases, we cannot assure you that our ability to do so will remain lawful,that any trade secret, copyright or other intellectual property protection willbe available for our databases, or that statutory protection that is or becomesavailable for databases will enhance our rights.  In addition, others may claim rights to the information in ourdatabases.  Further, pursuant to ourcontracts with Web publishers using our solutions, we are obligated to keepcertain information regarding each Web publisher confidential and, therefore,may be restricted from further using that information in our business.

 

WE MAY HAVE TOCHANGE OUR BUSINESS PLANS BASED UPON CHANGES IN INFORMATION COLLECTIONPRACTICES.

 

There has beenpublic debate about how fair information collection practices should beformulated for the online and offline collection, distribution and use ofinformation about a consumer.  Some ofthe discussion has focused on the fair information collection practices thatshould apply when information about an individual that is collected in theoffline environment is associated with information that is collected over theInternet about that individual.  We areworking with industry groups, such as the NAI and the Online Privacy Alliance,to establish such standards with the U.S. government regarding the merger ofonline and offline consumer information. We cannot assure you that we will be successful in establishing industry

 

43

----

 

standardsacceptable to the U.S. government or the various state governments, or that thestandards so established will not require material changes to our businessplans.  We also cannot assure you thatour business plans, or any U.S. industry standards that are established, willeither be acceptable to any non-U.S. government or conform to foreign legal andbusiness practices.  As a consequence ofgovernmental legislation or regulation or enforcement efforts or evolvingstandards of fair information collection practices, we may be required to makechanges to our products or services in ways that could diminish theeffectiveness of the product or service or their attractiveness to potentialcustomers.  In addition, given theheightened public discussion about consumer online privacy, we cannot assureyou that our products and business practices will gain market acceptance, evenif they do conform to industry standards.

 

CHANGES INGOVERNMENT REGULATION COULD DECREASE OUR REVENUES AND INCREASE 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 Internet generally and decreasethe acceptance of the Internet as a communications, commercial and advertisingmedium. State governments or governments of foreign countries might attempt toregulate our transmissions or levy sales or other taxes relating to ouractivities.  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 todetermine whether and how existing laws such as those governing intellectualproperty, privacy, libel and taxation apply to the Internet and Internetadvertising.  In addition, the growthand development of Internet commerce may prompt calls for more stringentconsumer protection laws, both in the United States and abroad, that may imposeadditional burdens on companies conducting business over the Internet.  Our business, results of operations andfinancial condition could be materially and adversely affected by the adoptionor modification of laws or regulations relating to the Internet.

 

RISKSASSOCIATED 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.

 

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

 

44

----

 

 

ITEM 3.  QUALITATIVE AND QUANTITATIVE DISCLOSUREABOUT MARKET RISK

 

Cash and cash equivalents are investmentswith original maturities of three months or less. Therefore, changes in themarket’s interest rates do not affect the value of the investments as recordedby 24/7 Real Media.

 

Our accounts receivables are subject, in thenormal course of business, to collection risks. We regularly assess these risksand have established policies and business practices to protect against theadverse effects of collection risks. Due to the current economic environment,we believe that we have sufficiently provided for any material losses in thisarea, however, there can be no assurance that unanticipated material losses maynot result.

 

We transact business in various foreigncountries. Accordingly, we are subject to exposure from adverse movements inforeign currency exchange rates. This exposure is primarily related to revenueand operating expenses in the United Kingdom and in countries which the currencyis the Euro. The effect of foreign exchange rate fluctuations for 2002 and 2001was not material. We do not use derivative financial instruments to limit ourforeign currency risk exposure.

 

Our debt is at fixed rates;therefore, there is no rate risk.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

(a)  Within the 90 days prior to the date of this report, we carriedout an evaluation, under the supervision and with the participation of ourmanagement, including our Chief Executive Officer along with our Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures pursuant to Exchange Act Rule 13a-14. Based upon thatevaluation, our Chief Executive Officer along with our Chief Financial Officerconcluded that our disclosure controls and procedures are effective in timelyalerting them to material information relating to us (including ourconsolidated subsidiaries) required to be included in our periodic SECfilings.  It should be noted that thedesign of any system of controls is based in part upon certain assumptionsabout the likelihood of future events, and there can be no assurance that anydesign will succeed in meeting its stated goals under all potential futureconditions, regardless of how remote.

 

(b)  There have been no significant changes in our internal controlsor in other factors that could significantly affect internal controlssubsequent to the date we carried out this evaluation and no corrective actionswith regard to significant deficiencies and material weaknesses.

 

45

----

 

**PARTII.  OTHER INFORMATION**

 

**Item 1.  LegalProceedings**

 

None.

 

**Item 2.  Changes in Securities and Use of Proceeds**

 

None.

 

**Item 3.  Defaults Upon Senior Securities**

 

None.

 

**Item 4.  Submission of Matters to a Vote ofSecurities Holders**

 

At our Annual Meeting of Stockholders on September 10,  2002, we submitted five proposals to a voteof our stockholders through a proxy solicitation.  The results of the voting at the Annual Meeting were as follows:

 
| **Proposal**                                                                                                                                                                        |   | **Affirmative     Votes** |   | **Votes  Against** |   | **Shares  Withheld** |   | **Broker  Non-votes** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|-------------------------|--------|---------------------------|--------|----------------------------|--------|
|                                                                                                                                                                                |   |                                          |   |                    |   |                      |   |                       |   |
| Election of David J.  Moore as a Class I Director                                                                                                                              |   | 49,049,779                                    |   | 1,154,100               |   | 0                         |   | 0                          |   |
|                                                                                                                                                                                |   |                                          |   |                    |   |                      |   |                       |   |
| Election of Richard  Burns as a Class I Director                                                                                                                               |   | 37,804,585                                    |   | 82,900                  |   | 0                         |   | 0                          |   |
|                                                                                                                                                                                |   |                                          |   |                    |   |                      |   |                       |   |
| Conversion of the  Company’s outstanding Series A-1 Preferred stock and issuance  of  additional shares of Series A  Preferred Stock                                 |   | 15,809,119                                    |   | 631,005                 |   | 409,106                   |   | 25,780,602                 |   |
|                                                                                                                                                                                |   |                                          |   |                    |   |                      |   |                       |   |
| Authorization of Board  of Directors to amend the certificate of  incorporation to effect a reverse   split of the Company’s common stock at specified  ratios. |   | 47,422,190                                    |   | 2,785,734               |   | 40,955                    |   | 0                          |   |
|                                                                                                                                                                                |   |                                          |   |                    |   |                      |   |                       |   |
| Adoption of the 2002  Stock Incentive Plan                                                                                                                                     |   | 46,826,623                                    |   | 2,109,318               |   | 1,312,938                 |   | 0                          |   |

 

**Item 5.  OtherInformation**

 

None.

 

**Item 6.  Exhibits and Reports on Form 8-K**

 

(a)         Exhibits.

 
| 99.1   | Certification  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the  Sarbanes-Oxley Act of 2002 |
|--------|-------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                    |
| 99.2   | Certification  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the  Sarbanes-Oxley Act of 2002 |

 

(b)        Reportson Form 8-K.

 

Report on Form 8-K dated July 3, 2002 (file no. 1-14355).  The report contained information regarding thepurchase of Series A and Series A-1 convertible preferred stock by SunraCapital Holdings Limited.

 

Report on Form 8-K/A dated July 12, 2002 (file no. 1-14355).  The report contained updated informationregarding the purchase of Series A and Series A-1 convertible preferred stockby Sunra Capital Holdings Limited.

 

Report on Form 8-K dated August 13, 2002 (file no. 1-14355).  The report contained information regardingan additional $3.0 million purchase of Series A convertible preferred stock bySunra Capital Holdings Limited.

 

Report on Form 8-K dated August 14, 2002 (file no. 1-14355).  The report contained the certification ofthe second quarter results by the Company’s Chief Executive Officer and ChiefFinancial Officer.

 

**Item 7. 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:  November 14, 2002

 

 
|   |   | By:    | /s/  David J. Moor e             |   |
|--------|--------|--------|---------------------------------------|--------|
|   |   |   | David J.  Moore                       |
|   |   |   | Chairman and  Chief Executive Officer |

 

46

----

 
|   |   | By:    | /s/  Norman M. Blashka      |   |
|--------|--------|--------|----------------------------------|--------|
|   |   |   | Norman M.  Blashka               |
|   |   |   | EVP and  Chief Financial Officer |

 

47

----

 

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

 

I, David J. Moore, certifythat:

 

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

 

2.          Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.          Based on my knowledge,the financial 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 officer 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)           designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

(b)           evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “**Evaluation Date**”); and

 

(c)           presented in this quarterly reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

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)           all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

(b)           any fraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’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: November 14, 2002

 

 
|   | /s/            |
|--------|----------------|
|   | David J. Moore |

 

48

----

 

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

 

I, Norman M. Blashka, certifythat:

 

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

 

2.          Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.          Based on my knowledge,the financial 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 officer 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)           designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

(b)           evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “**Evaluation Date**”); and

 

(c)           presented in this quarterly reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

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)           all significant deficiencies in thedesign or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

(b)           any fraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’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: November 14, 2002

 

 
|   | /s/                |
|--------|--------------------|
|   | Norman M.  Blashka |

 

49

----