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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q/A

Amendment No. 1



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



Commission File Number: 0-23137



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AQUANTIVE, INC.

(Exact name of registrant as specified in its charter)



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|                         |  |                                        
|------------------------ |  | ---------------------------------------
|Washington               |  | 91-1819567                             
|(State of Incorporation) |  | (I.R.S. Employer Identification Number)



821 Second Avenue,
18thFloor

Seattle, Washington 98104

(Address of principal executive offices)



(206) 816-8800

(Registrants telephone number, including area code)



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Indicate by check mark whether the registrant: (1) 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 shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark
whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No ̈



The number of shares of the registrants Common Stock outstanding as of October 29, 2004 was 61,930,201.



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EXPLANATORY NOTE



This Amendment No. 1 to the Quarterly Report on Form 10-Q (Form 10-Q) of aQuantive Inc., originally filed with the Securities and Exchange
Commission on November 9, 2004, is being filed solely to correct an error in the Outlook for 2004 section of Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations. The Form 10-Q
originally filed on November 9, 2004 contained incorrect figures for anticipated diluted net income per share for the year ended December 31, 2004. This Amendment No. 1 to the Form 10-Q sets forth the complete text of Item 2, as corrected, and
updates the signature page and Exhibits 31.1 and 31.2. The remainder of the Form 10-Q, is unchanged and is not reproduced in this Amendment No. 1. This Amendment No. 1 reflects only the changes discussed above. No other information included in the
original Form 10-Q, including our financial statements and the footnotes thereto, has been modified or updated.



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



This Quarterly Report contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions. Words such as anticipates, expects, intends, plans, believes, estimates, may, will and similar expressions are intended to
identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Our actual
results could differ materially and adversely from those discussed in any forward-looking statements as a result of various factors. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the
section entitled Additional Factors that May Affect Our Business, Future Operating Results and Financial Condition, included elsewhere in this Quarterly Report. Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and
consider the various disclosures made in this report and in our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of
operations.



The information presented in this quarterly
report on Form 10-Q includes financial information prepared in accordance with GAAP, as well as other financial measures that may be considered non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a
companys performance, financial position or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. As described
more fully below, management believes these non-GAAP measures provide meaningful additional information about our performance. The non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information prepared
in accordance with GAAP.



We begin Managements Discussion
and Analysis of Financial Condition and Results of Operations (MD&A) with an introduction to aQuantives lines of business and an overview of the significant highlights for the three and nine months ended September 30, 2004. This is
followed by a discussion of the Critical Accounting Policies and Judgments that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. In the next section, beginning on page 19, we
discuss our results of operations for the three and nine months ended September 30, 2004 compared to the three and nine months ended September 30, 2003 and also provide our outlook for the remainder of 2004. We then provide an analysis of changes in
our cash flows, and discuss our financial commitments in the section titled Liquidity and Capital Resources.



Overview



We are a digital marketing services and technology company that helps marketers acquire, retain, and grow customers across digital media. We are organized
into three lines of business, digital marketing services, digital marketing technologies, and beginning January 1, 2004, digital performance media. Beginning in 2004, we moved revenue associated with a technology product for publishers, which was
developed and managed by Avenue A/Razorfish and had been included in digital marketing services results in the past, to the digital marketing technologies segment. The results for the three and nine months ended September 30, 2003 have been adjusted
to reflect this change. In addition, beginning in 2004, we are now reporting all revenues derived from selling proprietary ad serving technologies through our digital marketing services as part of revenue of Atlas DMT and the digital marketing
technologies line of business.



Acquisitions and
Comparability of Operations



Our results of operations for
the nine months ended September 30, 2004 include the results of several acquisitions during the past year including GO TOAST (now Atlas OnePoint) in December 2003, NetConversions (now Atlas NetConversions) in February 2004, MediaBrokers, Technology
Brokers and SBI.Razorfish in July 2004. The results of these acquisitions must be factored into any comparison of our 2004 results of operations to 2003 results. See Note 5 of our condensed consolidated financial statements for pro forma financial
statements as if these entities had been acquired on January 1, 2003.



Digital Marketing Services



Throughout 2003,
our interactive advertising agency Avenue A/Razorfish revised its contractual agreements with clients and online publishers so that effective January 1, 2004, Avenue A/Razorfishs clients are directly liable for the cost of media purchases
pursuant to those contractual agreements. As a result, we began recording revenue generated under such contractual agreements on a net basis, which excludes the cost of media purchased for our clients.



In July 2004, we completed the acquisition of interactive advertising agency,
SBI.Razorfish, an Internet marketing and consulting firm. Combined with interactive agency Avenue A, the resulting brand identity for the Companys core agency business is now Avenue A/Razorfish. Through our interactive advertising agencies,
Avenue A/Razorfish and i-FRONTIER, we offer advertisers a suite of digital marketing services to help clients use the Internet as an integrated online advertising and business channel. All our capabilities include a process anchored in strategy,
user-centric design, dynamic technology platforms, channel integration and optimization. Our agency core services include media planning and buying, ad serving, campaign analysis, optimization, web site and web application development, and creative.
In addition, we offer our clients services such as Customer Insights, Customer Targeting, E-mail, Search Engine Marketing (also known as Avenue A/Razorfish Search), Portal Relationship Management and products such as BrandOptics, Global Marketing
Dashboard, and ChannelScope.



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The digital marketing services industry is continuing to experience growth as more and more advertisers
discover the Internets capabilities to deliver accountable marketing results. In addition, as more and more people move online, and spend increased amounts of time surfing the Internet, the demand grows for advertising space. As a result the
industry has seen a shift in the type of media that is being purchased. Two distinct categories of inventory have emerged  high impact, high priced brand inventory, and higher frequency, lower cost performance inventory. The large portals,
including Yahoo! and Microsofts MSN, have experienced the most dramatic rise in pricing due to their keen focus on maximizing both types of inventory. Advances in the technology that supports rich media and online video have also led to
advertisers now buying high impact, higher priced rich media advertisements. In addition, the industry is experiencing increased demand for effective search engine marketing. We believe the increases in inventory prices have resulted in increased
demand for expertise in media planning and buying in order to more efficiently and effectively manage all media purchases.



Due to the contributions made by SBI.Razorfish, new clients, and the impact of these and other industry trends, our digital marketing services line of
business experienced significant growth during the three months ended September 30, 2004 resulting in revenues of $28.3 million, compared to $7.3 million in net revenue, which management believes is a non-GAAP financial measure, and which excludes
the cost of media purchased for our clients, during the three months ended September 30, 2003. During the three months ended September 30, 2004, we had 170 clients, which include 109 SBI.Razorfish clients, compared to 50 and 65 clients who generated
revenue during the three months ended September 30, 2003 and June 30, 2004, respectively.



The digital marketing services line of business experienced a decrease in income from operations as a percentage of revenue, from $2.5 million of income from operations, or 8.7% of revenue, during the three months
ended September 30, 2004 compared to $1.7 million, or 23% of revenue, during the three months ended September 30, 2003. This decrease in income from operations as a percentage of revenue is due to lower operating margins of the SBI.Razorfish portion
of this line of business.



Digital Marketing Technologies



Through our Atlas DMT operating unit we provide large
traditional advertising agencies, specialty interactive advertising agencies, and large direct advertisers who buy media with the ability to manage their digital marketing programs through our proprietary digital marketing management system known as
the Atlas Digital Marketing Suite and through our Atlas GRP and Reach Forecaster. In addition, through our Atlas OnePoint service offerings, we provide our clients paid search management and optimization tools to improve their search engine
marketing efforts. We also provide our clients with the ability to manage their Web sites effectiveness with our Atlas Vital Signs and Atlas NetConversions tools. We also market to select publishers a technology product that enables them to
increase revenue in connection with low value and unsold inventory.



The digital marketing technologies industry is also continuing to experience growth as the Internet continues to attract new advertisers. The growth in the industry is being experienced not only in the United States, but also in Europe.
Specifically, according to an industry trade group Britains Internet advertising market topped 350 million pounds ($650 million) in 2003, putting the industry on track to surpass commercial radio in Britain within the next three years. With
the increased international demand for online advertising, in July 2004, we purchased TechnologyBrokers, the European reseller of Atlas DMT technology. Prior to July 2004, AtlasDMT had a reseller agreement with TechnologyBrokers in which we paid
them commissions and fees for sales and client service support for our European customers. The industry overall is continuing to experience pricing pressures on ad serving as large advertisers ask for volume discounts. This has been a trend
throughout 2004.



Supported by the growth in the industry, our
digital marketing technologies line of business increased revenues to $15.6 million during the three months ended September 30, 2004, compared to $8.2 million during the three months ended September 30, 2003. This was achieved primarily through the
contributions in revenue from new clients added over the past several quarters. As of September 31, 2004, AtlasDMT had over 200 clients. Our clients are located both domestically and internationally, including Canada, the United Kingdom, Germany and
Australia. In addition, the growth in revenue was a result of the increased demand for our search engine marketing tools, provided through Atlas OnePoint, which are technologies obtained through the purchase of GO TOAST in December 2003. As a result
of the growth in revenue, our digital marketing technologies line of business generated $6.7 million of income from operations, or 43% of revenue, during the three months ended September 30, 2004 compared to $3.0 million, or 36% of revenue, during
the three months ended September 30, 2003. During the three months ended September 30, 2004, we continued to integrate the technologies purchased to support our search engine and rich media capabilities and enhance our existing Atlas Digital
Marketing Suite, resulting in an increase in product development expenses. With the new client additions and recent acquisitions, we experienced increases in cost of revenue, sales and marketing and general and administrative, which are necessary to
support this growth.



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Digital Performance Media



Effective January 1, 2004, we established a third line of business, digital performance media, that includes both DRIVEpm
and MediaBrokers, which we purchased in July 2004. Through our digital performance media line of business, we serve as a liaison between online publishers and advertisers by buying blocks of online ad inventory from publishers and reselling the
inventory to advertisers on a highly targeted basis. DRIVEpm offers both the Performance and Selector programs and MediaBrokers offers both the MediaBrokers PFP and CPM programs. Under the Performance and PFP programs, our clients designate specific
actions desired and pay once the specified actions are achieved. Under the Selector and CPM programs, our clients can focus ad impressions on those users that fit a predetermined customer segment. Our digital performance media line of business had
revenue of $2.8 million during the three months ended September 30, 2004 and incurred $2.7 million in costs and expenses resulting in $99,000 of income from operations.



Critical Accounting Policies and Judgments



The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires estimates and
assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a
companys most critical accounting policies as the ones that are most important to the portrayal of the companys financial condition and results of operations, and that require managements most difficult, subjective, or complex
judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. Although we believe
that our estimates and assumptions are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions or conditions.



Revenue Recognition for Fixed Price Contracts



Avenue A/Razorfish recognizes revenue from fixed-fee consulting contracts as
services are rendered using the percentage-of-completion method with progress-to-complete measured using labor hour inputs and milestone outputs, as applicable. Cost estimates on percentage-of-completion contracts are reviewed periodically with
adjustments recorded in the period in which the revisions are made. Any anticipated losses on contracts are charged to operations as soon as they are determinable. Billings on uncompleted contracts may be greater than or less than the revenues
recognized and are recorded as either unbilled receivable (an asset) or deferred revenue (a liability) in the consolidated financial statements.



We estimate the percentage of completion on contracts with fixed fees on a monthly basis utilizing hours incurred to date as a percentage of total
estimated hours to complete the project. When total cost estimates exceed revenues, we accrue for the estimated losses immediately using cost estimates that are based upon an average fully burdened daily rate applicable to the business delivering
the services. The complexity of the estimation process and factors relating to the assumptions, risks and uncertainties inherent with the application of the percentage-of-completion method of accounting affect the amounts of revenue and related
expenses reported in our consolidated financial statements. A number of internal and external factors can affect our estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes.



Accounting for Acquisitions



Significant judgment is required to estimate the fair value of intangible
assets at the date of acquisition, including estimating future cash flows from the acquired business, determining appropriate discount rates, asset lives, and other assumptions. Our process to determine the fair value of the non-compete agreements,
customer relationships, developed technology, and consulting service model includes the use of estimates including: the potential impact on operating results if the non-compete agreements were not in place; revenue estimates for customers acquired
through the acquisition based on an assumed customer attrition rate; estimated costs willing to be incurred to purchase the capabilities gained through the developed technology and consulting service model; and appropriate discount rates based on
the particular businesss weighted average cost of capital. Our estimates of an entitys growth and costs are based on historical data, various internal estimates and a variety of external sources, and are developed as part of our routine
long-range planning process.



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Accounting for Goodwill



Goodwill is initially recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net
identified tangible and intangible assets acquired. We perform an annual review in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine if the recorded goodwill is impaired. Our impairment
review process compares the fair value of the reporting unit to its carrying value, including the goodwill related to the reporting unit. To determine the fair value, our review process uses the income method and is based on a discounted future cash
flow approach that uses estimates

including the following for the reporting units: revenue based on assumed market segment growth rates; estimated costs;
and appropriate discount rates based on the particular businesss weighted average cost of capital. Our estimates of market segment growth and costs are based on historical data, various internal estimates and a variety of external sources, and
are developed as part of our routine long-range planning process. In addition to being used in our goodwill impairment analysis, the same estimates are used in the planning for both our long-term and short-term business planning and forecasting. We
test the reasonableness of the inputs and outcomes of our discounted cash flow analysis by comparison to available and comparable market data. During the fourth quarter of 2003, we completed our most recent review which did not result in the
recording of an impairment charge. We will perform our next annual review during the fourth quarter of 2004. We may incur charges for the impairment of goodwill in the future if a business segment fails to achieve our assumed revenue growth rates or
assumed operating margin results.



Income Taxes



We recognize tax assets on the balance sheet if it is
more likely than not that they will be realized in the future. Prior to September 30, 2004 a valuation allowance was recorded against our deferred tax assets, consisting primarily of net operating loss carry forwards. Based on our cumulative
operating results through September 30, 2004 and an assessment of our expected future operations, we concluded that it is more likely than not that our deferred tax assets will be realized. Therefore we decreased the valuation allowance which
resulted in an income tax benefit of $20.6 million during the quarter.



As of September 30, 2004, we had $22.8 million in deferred tax assets. The valuation allowance at September 30, 2004 is $893,000 and is comprised of the tax impact of capital losses incurred in prior years for which an allowance is still
required.



Estimates and Assumptions Related to Financial Statements



The discussion and analysis of our financial condition
and results of operations is based upon our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those
affecting revenues, the allowance for doubtful accounts, intangible assets, goodwill, state, local and federal income taxes and general business contingencies. We base our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.



Washington State tax authorities issued a ruling in 2002 that permits us to exclude amounts paid by us to purchase media for clients, that is ultimately billed to and paid for by clients, from the measure of Washington State business and
occupation tax. We received reporting instructions from Washington State tax authorities that disallows this exclusion after periods beginning in February 2003. We have since implemented tax planning strategies that may mitigate any potentially
adverse tax consequences resulting from this change.



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Results of Operations



The following table presents statements of operations data for each of our lines of business for the three and nine months ended September 30, 2004 and
2003. Our discussion of revenue and cost of revenue for our digital marketing services segment provides revenue and cost of revenue as if cost of media purchases were excluded (net revenue). Net revenue and cost of revenue for 2003 may be considered
non-GAAP financial measures. We believe this net revenue and cost of revenue analysis facilitates a better comparison to results of our digital marketing services line of business in 2004 due to the contractual changes discussed previously.
Beginning January 1, 2004 all revenue from Avenue A/Razorfish is recorded net of media purchases. The results of any period are not necessarily indicative of results for any future period.



|                                            |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   |         |  
|------------------------------------------- |  | ------------------------------------- | ------ | ---------------------------- | - | ----------------------- |  | - | ---------------------------- | - |  | ----- | ------ | - |  | - | ------- | -
|(in thousands)                              |  | DigitalMarketingServices              |        | DigitalMarketingTechnologies |   | DigitalPerformanceMedia |  |   | UnallocatedCorporateExpenses |   |  | Total |       
|                                            |  | Three months ended September 30, 2004 |       
|Revenue                                     |  | $                                     | 28,299 |                              | $ | 15,612                  |  | $ | 2,829                        |   |  | $     |       |   |  | $ | 46,740  |  
|                                            |  |                                       |        |                              |  
|Costs and expenses:                         |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   |         |  
|Cost of revenue                             |  |                                       |       |                              |   | 3,815                   |  |   | 2,066                        |   |  |       | 192    | 2 |  |   | 6,073   |  
|Client support                              |  |                                       | 22,725 |                              |   |                        |  |   | 545                          |   |  |       |       |   |  |   | 23,270  |  
|Product development                         |  |                                       |       |                              |   | 1,580                   |  |   |                             |   |  |       |       |   |  |   | 1,580   |  
|Sales and marketing                         |  |                                       | 596    |                              |   | 1,822                   |  |   |                             |   |  |       |       |   |  |   | 2,418   |  
|General and administrative                  |  |                                       | 1,957  |                              |   | 1,679                   |  |   | 119                          |   |  |       | 2,347  |   |  |   | 6,102   |  
|Amortization of intangible assets           |  |                                       |       |                              |   |                        |  |   |                             |   |  |       | 1,370  |   |  |   | 1,370   |  
|Client reimbursed expenses                  |  |                                       | 557    |                              |   |                        |  |   |                             |   |  |       |       |   |  |   | 557     |  
|                                            |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   |         |  
|Total costs and expenses                    |  |                                       | 25,835 |                              |   | 8,896                   |  |   | 2,730                        |   |  |       | 3,909  |   |  |   | 41,370  |  
|                                            |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   |         |  
|Income (loss) from operations               |  | $                                     | 2,464  |                              | $ | 6,716                   |  | $ | 99                           |   |  | $     | (3,909 | ) |  | $ | 5,370   |  
|                                            |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   |         |  
|Interest and other income, net              |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   | 3       |  
|Benefit for income taxes                    |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   | (18,762 | )
|Net income                                  |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  | $ | 24,135  |  
|                                            |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   |         |  
|                                            | 
|                                            |  | Three months ended September 30, 2003 |       
|                                            |  |                                       |        |                              |  
|Revenue                                     |  | $                                     | 7,3181 |                              | $ | 8,195                   |  | $ |                             |   |  | $     |       |   |  | $ | 15,5131 |  
|Costs and expenses:                         |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   |         |  
|Cost of revenue                             |  |                                       | 1     |                              |   | 2,153                   |  |   |                             |   |  |       |       |   |  |   | 2,153   | 1
|Client support                              |  |                                       | 4,782  |                              |   |                        |  |   |                             |   |  |       |       |   |  |   | 4,782   |  
|Product development                         |  |                                       |       |                              |   | 1,215                   |  |   |                             |   |  |       |       |   |  |   | 1,215   |  
|Sales and marketing                         |  |                                       | 52     |                              |   | 973                     |  |   |                             |   |  |       |       |   |  |   | 1,025   |  
|General and administrative                  |  |                                       | 804    |                              |   | 891                     |  |   |                             |   |  |       | 1,732  |   |  |   | 3,427   |  
|Amortization of deferred stock compensation |  |                                       |       |                              |   |                        |  |   |                             |   |  |       | 300    |   |  |   | 300     |  
|Amortization of intangible assets           |  |                                       |       |                              |   |                        |  |   |                             |   |  |       | 72     |   |  |   | 72      |  
|                                            |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   |         |  
|Total costs and expenses                    |  |                                       | 5,638  |                              |   | 5,232                   |  |   |                             |   |  |       | 2,104  |   |  |   | 12,974  |  
|                                            |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   |         |  
|Income (loss) from operations               |  | $                                     | 1,680  |                              | $ | 2,963                   |  | $ |                             |   |  | $     | (2,104 | ) |  | $ | 2,539   |  
|                                            |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   |         |  
|Interest and other income, net              |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   | 1,077   |  
|Provision for income taxes                  |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   | 174     |  
|Net income                                  |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  | $ | 3,442   |  
|                                            |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   |         |  
|                                            | 
|                                            |  | Nine months ended September 30, 2004  |       
|Revenue                                     |  | $                                     | 50,946 |                              | $ | 42,006                  |  | $ | 4,279                        |   |  | $     |       |   |  | $ | 97,231  |  
|                                            |  |                                       |        |                              |  
|Costs and expenses:                         |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   |         |  
|Cost of revenue                             |  |                                       |       |                              |   | 10,486                  |  |   | 3,738                        |   |  |       | 384    | 2 |  |   | 14,608  |  
|Client support                              |  |                                       | 36,470 |                              |   |                        |  |   | 1,039                        |   |  |       |       |   |  |   | 37,509  |  
|Product development                         |  |                                       |       |                              |   | 4,486                   |  |   |                             |   |  |       |       |   |  |   | 4,486   |  
|Sales and marketing                         |  |                                       | 952    |                              |   | 5,450                   |  |   |                             |   |  |       |       |   |  |   | 6,402   |  
|General and administrative                  |  |                                       | 3,731  |                              |   | 4,727                   |  |   | 217                          |   |  |       | 6,017  |   |  |   | 14,692  |  
|Amortization of intangible assets           |  |                                       |       |                              |   |                        |  |   |                             |   |  |       | 2,216  |   |  |   | 2,216   |  
|Client reimbursed expenses                  |  |                                       | 557    |                              |   |                        |  |   |                             |   |  |       |       |   |  |   | 557     |  
|                                            |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   |         |  
|Total costs and expenses                    |  |                                       | 41,710 |                              |   | 25,149                  |  |   | 4,994                        |   |  |       | 8,617  |   |  |   | 80,470  |  
|                                            |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   |         |  
|Income (loss) from operations               |  | $                                     | 9,236  |                              | $ | 16,857                  |  | $ | (715                         | ) |  | $     | (8,617 | ) |  | $ | 16,761  |  
|                                            |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   |         |  
|Interest and other income, net              |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   | 1,060   |  
|Benefit for income taxes                    |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   | (17,969 | )
|Net income                                  |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  | $ | 35,790  |  
|                                            |  |                                       |        |                              |   |                         |  |   |                              |   |  |       |        |   |  |   |         |  



5



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|                                            |  |                                      |         |  |   |        |  |   |   |  |   |        |   |  |   |         |  
|------------------------------------------- |  | ------------------------------------ | ------- |  | - | ------ |  | - | - |  | - | ------ | - |  | - | ------- | -
|                                            |  | Nine Months ended September 30, 2003 |        
|                                            |  |                                      |         |  |  
|Revenue                                     |  | $                                    | 21,4861 |  | $ | 24,122 |  | $ |  |  | $ |       |   |  | $ | 45,6081 |  
|Costs and expenses:                         |  |                                      |         |  |   |        |  |   |   |  |   |        |   |  |   |         |  
|Cost of revenue                             |  |                                      | 1      |  |   | 6,925  |  |   |  |  |   |       |   |  |   | 6,925   | 1
|Client support                              |  |                                      | 14,845  |  |   |       |  |   |  |  |   |       |   |  |   | 14,845  |  
|Product development                         |  |                                      | 68      |  |   | 2,834  |  |   |  |  |   |       |   |  |   | 2,902   |  
|Sales and marketing                         |  |                                      | 610     |  |   | 2,938  |  |   |  |  |   |       |   |  |   | 3,548   |  
|General and administrative                  |  |                                      | 2,563   |  |   | 2,931  |  |   |  |  |   | 4,873  |   |  |   | 10,367  |  
|Amortization of deferred stock compensation |  |                                      |        |  |   |       |  |   |  |  |   | 904    |   |  |   | 904     |  
|Amortization of intangible assets           |  |                                      |        |  |   |       |  |   |  |  |   | 204    |   |  |   | 204     |  
|                                            |  |                                      |         |  |   |        |  |   |   |  |   |        |   |  |   |         |  
|Total costs and expenses                    |  |                                      | 18,086  |  |   | 15,628 |  |   |  |  |   | 5,981  |   |  |   | 39,695  |  
|                                            |  |                                      |         |  |   |        |  |   |   |  |   |        |   |  |   |         |  
|Income (loss) from operations               |  | $                                    | 3,400   |  | $ | 8,494  |  | $ |  |  | $ | (5,981 | ) |  | $ | 5,913   |  
|                                            |  |                                      |         |  |   |        |  |   |   |  |   |        |   |  |   |         |  
|Interest and other income, net              |  |                                      |         |  |   |        |  |   |   |  |   |        |   |  |   | 2,121   |  
|Provision for income taxes                  |  |                                      |         |  |   |        |  |   |   |  |   |        |   |  |   | 338     |  
|Net income                                  |  |                                      |         |  |   |        |  |   |   |  |   |        |   |  | $ | 7,696   |  
|                                            |  |                                      |         |  |   |        |  |   |   |  |   |        |   |  |   |         |  

---

|1 | Effective January 1, 2004, as a result of contractual change with advertisers and publisher, Avenue A/Razorfish, included in the digital marketing services segment,
began recording revenue and cost of revenue exclusive of the costs paid to publishers for media. In this presentation, during the three months ended September 30, 2003, net revenue and cost of revenue was $15.5 million and $2.2 million,
respectively, which exclude media costs of $43.1 million. During the nine months ended September 30, 2003, net revenue and cost of revenue was $45.6 and $6.9 million, which exclude media costs of $112.5 million. Net revenue and cost of revenue is
used for the three and nine months ended September 30, 2003 for better comparability with the 2004 results.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During the three
months ended September 30, 2003, net revenue and cost of revenue for digital marketing services line of business was $7.3 million and $0, which excludes media costs of $43.1 million. During the nine months ended September 30, 2003, net revenue and
cost of revenue was $21.5 million and $0, which excludes media costs of $112.5 million.



|2 | For the three and nine months ended September 30, 2004, cost of revenue classified as unallocated corporate expenses relates to the amortization of developed
technology resulting from the acquisition of GO TOAST and NetConversions.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Revenue



Revenue was
$46.7 and $97.2 million during the three and nine months ended September 30, 2004, respectively, compared to $58.6 and $158.1 million during the three and nine months ended September 30, 2003, respectively. Revenue decreased in 2004 as beginning on
January 1, 2004, due to revised contractual arrangements with clients, digital marketing services generates all revenue under the net method, which excludes the cost of media purchased for our Avenue A/Razorfish clients. Prior to January 1, 2004 the
revenue was generated under the gross method and included the cost of media purchased for our Avenue A/Razorfish clients.



Revenue from digital marketing services increased to $28.3 and $51.0 million during the three and nine months ended September 30, 2004, respectively, from
$7.3 and $21.5 million in net revenue for the three and nine months ended September 30, 2003. The increase in revenue is primarily attributed to the acquisition of SBI.Razorfish in July 2004. During the three and nine months ended September 30,
2004, SBI.Razorfish contributed revenue of $17.5 million to the digital marketing services line of business. Excluding the revenue generated from SBI.Razorfish, revenue from digital marketing services was $10.8 and $33.4 million during the three and
nine months ended September 30, 2004. This increase in revenue was also due to contributions made by new clients evidenced by 170 clients who generated revenue during the three months ended September 30, 2004, including 109 SBI.Razorfish clients,
compared to 50 clients who generated revenue during the three months ended September 30, 2003. In addition to new clients, we experienced strong spending from several existing large clients as they expanded their online advertising budgets. With the
change from gross to net revenue reporting and the acquisition of SBI.Razorfish in July 2004, we also experienced a significant decrease in our client concentration compared to 2003. During the three months ended September 30, 2004, our top five
clients generated 23% of our revenue compared to 67% and 38% during the three months ended September 30, 2003 and June 30, 2004, respectively.



6



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Revenue from digital marketing technologies increased to $15.6 and $42.0 million for the three and nine
months ended September 30, 2004, respectively, from $8.2 and $24.1 million from the three and nine months ended September 30, 2003, respectively. The increase in revenue is primarily the result of increased use of the Atlas DMT technology by
existing customers combined with a consistent increase in client base over the past several quarters of both agencies and direct advertisers around the world. In addition, Atlas OnePoint and Atlas NetConversions contributed $2.3 and $5.1 million to
revenue of digital marketing technologies during the three and nine months ended September 30, 2004, respectively, and none in 2003. As of September 30, 2004, Atlas DMT had over 200 clients compared to 167 and 114 at June 30, 2004 and September 30,
2003, respectively.



Revenue from digital performance media was
$2.8 and $4.3 million during the three and nine months ended September 30, 2004, respectively, and is comprised of the gross value of the advertising space that was purchased for our clients and our fee for providing such service. Digital
performance media consists of our DRIVEpm operating unit that was formed during the quarter ended December 31, 2003 and launched as a separate line of business to the public during the quarter ended March 31, 2004. In addition, digital performance
media includes MediaBrokers, which was acquired in July 2004. During the three and nine months ended September 30, 2004, MediaBrokers contributed revenue of $1,094 to the digital performance media line of business.



Cost of revenue



Cost of revenue was $6.1 and $14.6 million during the three and nine months
ended September 30, 2004, respectively, compared to $45.2 and $119.4 million during the three and nine months ended September 30, 2003, respectively. Cost of revenue decreased in 2004 as beginning on January 1, 2004, we revised our contractual
arrangements with clients. Digital marketing services generates all cost of revenue under the net method, which excludes the cost of media purchased for our Avenue A/Razorfish client. Prior to January 1, 2004 the cost of revenue was generated under
the gross method and included the cost of media purchased for our Avenue A/Razorfish clients.



Cost of revenue associated with our digital marketing technologies line of business consists primarily of the salaries and related expenses of the digital marketing technologies client support personnel and
personnel directly supporting the maintenance of our ad serving system. In addition, cost of revenue includes bandwidth and technology infrastructure costs associated with delivering advertisements over the Internet. Cost of revenue associated with
digital marketing technologies increased to $3.8 and $10.5 million for the three and nine months ended September 30, 2004, respectively, from $2.2 and $6.9 million for the three and nine months ended September 30, 2003, respectively. The increase in
cost of revenue was primarily due to increased headcount associated with client support for our digital marketing technologies line of business. The increased headcount was a result of the acquisitions of Atlas OnePoint in December 2003 and
NetConversions in February 2004 and additional client support personnel necessary to support new Atlas DMT clients. As of September 30, 2004, there were 49 client support personnel associated with digital marketing technologies, including 13 Atlas
OnePoint and NetConversions client support personnel, compared to 24 as of September 30, 2003. In addition, there were 33 production support personnel as of September 30, 2004 compared to 24 as of September 30, 2003.



Cost of revenue associated with our digital performance media was $2.1 and
$3.7 million for the three and nine months ended September 30, 2004, respectively, and relates to the cost of the advertising space that is purchased from Web sites to resell to our clients.



Client Support



Client support expenses associated with our digital marketing services
consist primarily of salaries and related expenses for client support personnel for our interactive advertising agencies, Avenue A/Razorfish and i-FRONTIER. Client support expenses also include expenses for contractors retained their specialized
skill set to work on client contracts. Client support expenses associated with digital marketing services increased to $22.7 and $36.5 million for the three and nine months ended September 30, 2004, respectively from $4.8 and $14.8 million for the
three and nine months ended September 30, 2003. The increase in client support expenses was primarily due to the acquisition of SBI.Razorfish in July 2004. During the three and nine months ended September 30, 2004, SBI.Razorfish contributed $15.2
million in client support expenses associated with the digital marketing services line of business. In addition to the impact of the acquisition of SBI.Razorfish, the increase in client support expenses was due to increased headcount necessary to
support new clients and increased spending by existing clients. As of September 30, 2004 there were 824 client support personnel in our digital marketing services line of business, including 537 from the addition of SBI.Razorfish, compared to 189 as
of September 30, 2003. In general, for our media business, increased spending from existing clients requires only modest increases in client support costs, while the addition of new clients results in a more significant increase in client support
costs. For the non media business, both the addition of new clients and increased spending from existing clients requires a more proportionate increase in client support expense in order to fulfill the client contracts.



Client support expenses associated with our digital performance media consist
primarily of salaries and related expenses for client support personnel for DRIVEpm and MediaBrokers. Client support expenses associated with digital performance media were $545,000 and $1.0 million during the three and nine months ended September
30, 2004, respectively.



7



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Product Development



Product development expenses consist primarily of salaries and related expenses for product development personnel. In
addition, product development expenses include the costs of software development and the costs incurred in preparing new versions of our Atlas Digital Marketing Suite for marketing to external clients. Product development expenses increased to $1.6
and $4.5 million for the three and nine months ended September 30, 2004, respectively, compared to $1.2 and $2.9 million for the three and nine months ended September 30, 2003. The increase in product development expenses was primarily due to an
increase in product development personnel as a result of the acquisition of GO TOAST (now Atlas OnePoint) in December 2003 and development efforts toward integration of our search management and ad serving technologies. The increase can also be
attributed to lower capitalization of certain direct costs incurred in the development of our Atlas Digital Marketing Suite. During the three and nine months ended September 30, 2004 and 2003, we capitalized $378,000 and $660,000 of certain direct
costs, respectively, in accordance with the guidance provided in Statement of Position 98-1 Accounting for the Costs of Computer Software Developed or obtained for Internal Use. Similarly, during the three and nine months ended September
30, 2003, we capitalized $1.1 and $1.9 million, respectively, of such costs. As of September 30, 2004, there were 58 product development personnel compared to 35 as of September 30, 2003.



Sales and Marketing



In general, our digital marketing services line of business acquires clients through a consultative approach using our existing client service teams.
Sales and marketing expenses associated with our digital marketing services line of business consist primarily of salaries and related expenses for personnel dedicated entirely to the sales and marketing efforts of our interactive advertising
agencies, Avenue A/Razorfish and i-FRONTIER. In addition, sales and marketing expenses include professional service fees and marketing costs such as trade shows and the costs of advertising our services in trade publications. Sales and marketing
expenses associated with digital marketing services increased to $596,000 and $952,000 for the three and nine months ended September 30, 2004, respectively, from $52,000 and $610,000 for the three and nine months ended September 30, 2003. The
increase in sales and marketing expenses was primarily due to acquisition of SBI.Razorfish in July 2004. During the three and nine months ended September 30, 2004, SBI.Razorfish contributed $394,000 in sales and marketing expenses to the digital
marketing services line of business. As of September 30, 2004 there were 10 sales and marketing personnel in our digital marketing services line of business, including 6 from the acquisition of SBI.Razorfish, compared to 3 as of September 30, 2003.



Sales and marketing expenses associated with our digital
marketing technologies line of business consist primarily of salaries and related expenses for our sales force, including an agreement with TechnologyBrokers to provide sales of the Atlas Digital Marketing Suite in the U.K. This agreement was ended
in late July 2004 in connection with the acquisition of TechnologyBrokers. In addition, these expenses include salaries of marketing personnel and marketing costs such as trade shows and the costs of advertising our services on the Internet. Sales
and marketing expenses associated with digital marketing technologies increased to $1.8 and $5.5 million during the three and nine months ended September 30, 2004, respectively, from $973,000 and $2.9 million for the three and nine months ended
September 30, 2003. The increase in sales and marketing expenses was primarily due to an increase in sales and marketing efforts in order to gain increased acceptance in the marketplace, especially in Europe. Prior to July 2004, we contracted with
TechnologyBrokers to provide sales support to Atlas DMT in the United Kingdom, and, in turn, we paid them commissions based on a specified percentage of qualifying revenues. Subsequent to the acquisition in late July, we no longer pay commissions to
TechnologyBrokers, but this was offset by the increase in commissions paid prior to the acquisition due to the sales growth. In addition, the increase can be attributed to the addition of Atlas OnePoint and Atlas Net Conversions sales
personnel and their related sales and marketing efforts. As of September 30, 2004 there were 29 sales and marketing personnel in our digital marketing technologies line of business compared to 14 as of September 30, 2003.



General and Administrative



General and administrative expenses consist of the salaries and related
expenses for executive, legal, finance, human resource, corporate IT and administrative personnel, professional fees, and other general corporate expenses such as rent for our corporate headquarters in Seattle. General and administrative expenses
included in our digital marketing services, technologies, and performance media lines of business consist of a direct allocation of these costs based on several allocation methods including headcount and the percentage of revenue generated by the
respective entity. General and administrative expenses increased to $6.1 and $14.7 million for the three and nine months ended September 30, 2004, respectively, from $3.4 and $10.4 million for the three and nine months ended September 30, 2003,
respectively. The increase in general and administrative expenses was primarily due to the acquisition of SBI.Razorfish in July 2004 in which we acquired certain general and administrative personnel. During the three and nine months ended September
30, 2004, SBI.Razorfish contributed $698,000 in general and administrative expenses. The increase in general and administrative expenses was also due to increased headcount necessary to support the growth of our operating units including costs
associated with continued development and support of a new corporate financial system. In addition, we experienced increased expenses associated with efforts to comply with the new corporate governance requirements, and increases in
performance-based compensation expenses. As of September 30, 2004, there were 95 corporate personnel, including 28 from the acquisition of SBI.Razorfish, compared to 39 as of September 30, 2003.



8



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Amortization of Deferred Stock Compensation



Amortization of deferred stock compensation consists of expenses related to
employee stock option grants with option exercise prices below the fair value of our common stock as of the date of grant. Deferred stock compensation was being amortized on an accelerated basis over the four-year vesting period of the applicable
options. There is no amortization expense for deferred stock compensation for the three or nine months ended September 30, 2004 as deferred stock compensation was fully amortized as of December 31, 2003. Amortization of deferred stock compensation
was $300,000 and $904,000 for the three and nine months ended September 30, 2003.



Amortization of Intangible Assets



Amortization of intangible assets relates to the intangible assets purchased through various acquisitions. Amortization of intangible assets was $1.4 million, $2.2 million, $72,000 and $204,000 during the three and
nine months ended September 30, 2004 and 2003, respectively. Amortization of the intangible assets associated with the purchased technology is recorded as a cost of revenue and was $192,000 and $384,000 during the three and nine months ended
September 30, 2004.



Client Reimbursed Expenses



Client reimbursed expenses include all reimbursable
project expenses billed to customers. These expenses are also recorded as a component of revenue. Client reimbursed expenses were $557,000 for the three and nine months ended September 30, 2004.



Interest and Other Income, Net



Net interest and other income consist primarily of earnings on our cash,
cash equivalents, and short-term investments. Net interest and other income was $268,000, $1.3 million, $1.1 million and $2.1 million for the three and nine months ended September 30, 2004 and 2003, respectively. The decrease in net interest and
other income is primarily related to the decrease in cash, cash equivalents, and short-term investments associated with the purchase of SBI.Razorfish in July 2004.



Interest Expense



Interest expense was $265,000, $265,000, $6,000, and $32,000 during the three and nine months ended September 30, 2004 and 2003, respectively. During the
three and nine months ended September 30, 2004, interest expense relates to the outstanding debt issued in connection with the acquisition of SBI.Razorfish in July 2004. This debt was subsequently paid off with the proceeds from the sale and
issuance of convertible debt in August and September 2004.



(Benefit) Provision for Income Taxes



Based on
our cumulative operating results through September 30, 2004 and an assessment of our expected future operations, we concluded that it is more likely than not that our deferred tax assets will be realized. Therefore we decreased the valuation
allowance which resulted in an income tax benefit of $20.6 million during the quarter.



During the three and nine months ended September 2004, we incurred an $18.8 and $18.0 million net credit to provision for income taxes, respectively. This is comprised of the $20.6 million valuation allowance decrease
offset by the current period income tax provision of $1.9 and $2.7 million for the three and nine months ended September 2004, respectively. This compares to $174,000 and $338,000 provision for income taxes for the corresponding periods in 2003.



Through the remainder of 2004, we expect that our income tax
provision will be recorded based on an estimated effective tax rate of 35-40%.



Outlook for 2004



For the three months ending
December 31, 2004, we anticipate revenue between $53.0 and $56.0 million and diluted net income between $0.03 and $0.05 per share. For the year ended December 31, 2004, we anticipate revenue between $150.0 and $153.0 million and diluted net income
between $0.25 and $0.27 per share.



9



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Liquidity and Capital Resources



Since our inception, we have financed our operations primarily through the net proceeds from private sales of equity
securities, which raised $30.4 million through December 31, 1999, and our initial public offering of common stock, which raised $132.5 million during the first quarter of 2000.



As of September 30, 2004, we had cash and cash equivalents of $19.1 million, short-term investments of $33.5 million, and
$80 million of convertible debt on our consolidated balance sheet.



Net Cash from Operating Activities



Net cash
provided by operating activities was $26.7 and $9.2 million during the nine months ended September 30, 2004 and 2003, respectively. Our net cash provided by operating activities is primarily a result of our net income adjusted by the timing of cash
collections from our clients and the subsequent cash payments for purchases of media on behalf of our clients.



Under our prior Avenue A contract structure in 2003, we were liable for media purchases for our clients and the payment of publisher invoices was not
dependent on receipt of payment from our clients. As such, during the nine months ended September 30, 2003, the cash generated from operating activities has been influenced by the timing of payments received from clients and payment to publisher Web
sites. Effective January 1, 2004, under our new contract structure, Avenue As clients are directly liable for media purchases and we are not legally required to pay publisher invoices without previous payment from our client for that media
purchase. We believe this change influenced our cash flow from operating activities as the timing of payments for media purchases is now influenced by the timing of payment received from our clients for such media purchases.



Although our cash flow from operating activities is influenced primarily by
the timing of media payments and our client concentration, the cash received from our clients for our services exceeds the funds necessary to maintain current operations.



Net Cash from Investing Activities



Our investing activities primarily relate to the purchase and sale of short term investments, purchases of property and
equipment, and acquisition related activities. Net cash used in investing activities was $47.5 million and $8.1 million for the nine months ended September 30, 2004 and 2003, respectively.



In accordance with our investment policy, we purchase primarily
investment-grade marketable securities with maturities of less than two years. Net cash from investing activities relates primarily to the timing of the purchases and sales of these marketable securities. During the nine months ended September 30,
2004 we had net sales of marketable securities of $56.3 million and during the nine months ended September 30, 2003, we had net purchases of $4.6 million.



Capital expenditures relate primarily to the purchase of computers and software for general operational purposes, including our ad serving capabilities,
computer hardware and software for the development of our proprietary technology, and leasehold improvements for our facilities. During the nine months ended September 30, 2004 and 2003, capital expenditures were $5.4 million and $3.5 million
respectively. In addition, during the nine months ended September 30, 2004, we purchased $1.7 million of software to accelerate the development and launch of rich media capabilities in our Atlas Digital Marketing Suite. This software is being
depreciated over 36 months.



In February 2004, we purchased
NetConversions (now Atlas NetConversions) for $4.0 million, which includes net cash acquired of $60,000 and acquisition costs of $145,000. An additional $550,000 in cash will be paid upon completion of certain post-closing requirements. Atlas
NetConversions is eligible for future contingency payments. See Note 5 of our Notes to Condensed Consolidated Financial Statements for further discussion of contingency payments.



In July 2004, we purchased TechnologyBrokers and MediaBrokers for approximately $3.2 million, which includes net cash
acquired of $349,000 and acquisition costs of $221,000. In addition approximately $731,000 in cash will be paid in connection with working capital requirements as of the purchase date. TechnologyBrokers and MediaBrokers are eligible for future
contingency payments. See Note 5 of our Notes to Condensed Consolidated Financial Statements for further discussion of contingency payments.



10



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In July 2004, we purchased SBI.Razorfish for $85.0 million in cash and approximately $75.0 million in
convertible debt.



Net Cash from Financing Activities



Our financing activities primarily relate to the proceeds
from and payments made on notes payable and the proceeds from issuance of common stock through our stock option and employee stock purchase plans.



In 2003, we paid the remaining balance on our notes payable and as of December 31, 2003, we had no outstanding debt. In August and September 2004, we sold
approximately $80.0 million in convertible senior subordinated notes, the proceeds of which were used to redeem 100 percent of the notes issued in connection with the acquisition of SBI.Razorfish. In connection with the offering, we also paid $2.2
million in debt issuance costs. See discussion of interest and principal payments in Note 7 of our Notes to Consolidated Financial Statements.



Proceeds from the exercises of common stock options and issuance of common stock through our employee stock purchase plan were $4.0 million and $2.6
million for the nine months ended September 30, 2004 and 2003, respectively.



With the acquisition of SBI.Razorfish, we anticipate experiencing a significant increase in operating expenditures including the addition of interest expense associated with the convertible notes. This will result in
a material use of our cash resources. We also estimate an increase in revenue in 2004 related both to traditional aQuantive service lines and new services provided through the acquisition of SBI.Razorfish. We believe that our current cash, cash
equivalents and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months and beyond.



Commitments



As of September 30, 2004, we had material commitments related to our convertible debt and operating leases for office space and office equipment. In
addition, we had material obligations related to ad content delivery services. The following are our contractual commitments and obligations as of September 30, 2004 (in thousands):



|                             |  |                                    |       |                         |      |       |      |   |                    |  |   |       |  |   |        
|---------------------------- |  | ---------------------------------- | ----- | ----------------------- | ---- | ----- | ---- | - | ------------------ |  | - | ----- |  | - | -------
|                             |  | Three monthsendedSeptember 30,2004 |       | Year ended December 31,
|                             |  |                                    | 2005  |                         | 2006 |       | 2007 |   | 2008 andthereafter
|Commitments:                 |  |                                    |       |                         |      |       |      |   |                    |  |   |       |  |   |        
|Operating leases             |  | $                                  | 1,035 |                         | $    | 4,469 |      | $ | 4,998              |  | $ | 3,938 |  | $ | 9,677  
|Ad content delivery services |  |                                    | 430   |                         |      | 1,311 |      |   | 27                 |  |   | 9     |  |   |       
|Convertible debt             |  |                                    | 860   |                         |      | 900   |      |   | 1,800              |  |   | 1,800 |  |   | 110,600
|                             |  |                                    |       |                         |      |       |      |   |                    |  |   |       |  |   |        
|Total commitments            |  | $                                  | 2,325 |                         | $    | 6,680 |      | $ | 6,825              |  | $ | 5,747 |  | $ | 120,277
|                             |  |                                    |       |                         |      |       |      |   |                    |  |   |       |  |   |        



11



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Additional Factors That May Affect Our Business, Future Operating Results and Financial Condition



You should carefully consider the following factors that may affect our
business, future operating results and financial condition, as well as other information included in this Quarterly Report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, financial condition and operating results could be materially adversely affected.



We are subject to risks frequently encountered by companies in the Internet marketing
and advertising industry.



Our prospects for financial and operational
success must be considered in light of the risks frequently encountered by companies in the Internet marketing and advertising industry. These risks include the need to:



| |  | attract new clients and maintain current client relationships;
| | - | --------------------------------------------------------------



| |  | achieve effective advertising campaign results for our clients;
| | - | ---------------------------------------------------------------



| |  | continue to expand the number of services and technologies we offer;
| | - | --------------------------------------------------------------------



| |  | successfully implement our business model, which is evolving;
| | - | -------------------------------------------------------------



| |  | maintain our reputation and build trust with our clients; and
| | - | -------------------------------------------------------------



| |  | identify, attract, retain and motivate qualified personnel.
| | - | -----------------------------------------------------------



If we do not successfully address these risks, our business could suffer.



We have a history of losses and may not maintain profitability.



We incurred net losses of $105.1 million for the period from our inception on July 1, 1997 through September 30, 2002. As of September 30, 2004, our accumulated deficit
was $55.2 million. We expect to continue to make additional operating and capital expenditures and, as a result, we will need to generate additional revenue to maintain profitability, which we first achieved in the quarter ended December 31, 2002.
We cannot assure you that we will generate sufficient revenue to maintain profitability. If our revenue grows more slowly than we anticipate or declines, or if our operating expenses exceed our expectations, we may be unable to maintain
profitability.



Our quarterly operating results are subject to fluctuations
that may cause our stock price to decline.



Our revenue, expenses and
operating results could vary significantly from quarter to quarter for several reasons, including:



| |  | addition of new clients or loss of current clients;
| | - | ---------------------------------------------------



| |  | seasonal fluctuations in advertising spending;
| | - | ----------------------------------------------



| |  | timing variations on the part of advertisers with regard to implementing advertising campaigns;
| | - | -----------------------------------------------------------------------------------------------



| |  | changes in the availability and pricing of advertising space;
| | - | -------------------------------------------------------------



| |  | timing of signing large contracts or satisfying milestone deliverables;
| | - | -----------------------------------------------------------------------



| |  | timing and amount of our costs; and
| | - | -----------------------------------



| |  | costs related to any possible future acquisitions of technologies or businesses.
| | - | --------------------------------------------------------------------------------



Our quarterly operating results have fluctuated in the past and are likely to continue to do so in the future. It is possible that in the
future our operating results in a particular quarter or quarters will not meet the expectations of securities analysts, investors or us. If our operating results fail to meet these expectations, the market price of our common stock could decline. We
believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance and should not be relied upon to predict the future performance of our stock price.



12



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We rely on a limited number of clients, and the loss of a major client or a reduction in a major clients
Internet advertising or marketing budget could significantly reduce our revenue.



Our business would be harmed by the loss of any of our major clients, a reduction in the Internet advertising or marketing budgets of any of these clients or any significant reduction in revenue generated from these clients. Current clients
may decide not to continue purchasing advertising or marketing services from us or may significantly reduce their advertising or marketing spending, and we may not be able to successfully attract additional clients. For example, in July 2003,
AT&T Wireless informed us that it had selected a new agency of record for its online advertising initiatives and therefore would discontinue its use of most of our services. In addition, the non-payment of amounts due to us from one or more of
our significant clients could harm our business.



Our client contracts have
short termination periods, and the loss of one or more of these contracts in a short period of time could harm our business.



We derive a significant portion of our revenue from the sale of advertising services under advertising campaign services contracts, all of which are terminable upon 90
days or less notice. In addition, these contracts generally do not contain penalty provisions for termination before the end of the contract term. As a result of our acquisition of SBI.Razorfish, a significant portion of our revenue is now
derived from the provision of Internet marketing and consulting services, which tend to be project based and terminable on short notice. The non-renewal, termination or deferral of a significant number of these contracts or the termination or
deferral of engagements for Internet marketing and consulting services in any one period could cause an immediate and significant decline in our revenue and harm our business.



The Internet advertising or marketing market may deteriorate, or develop more slowly than expected, which could harm our business.



If the market for Internet advertising or marketing deteriorates, or
develops more slowly than we expect, our business could suffer. Our future success is highly dependent on an increase in the use of the Internet, the commitment of advertisers and marketers to the Internet as an advertising and marketing medium, the
willingness of our potential clients to outsource their Internet advertising and marketing needs, and our ability to sell technology services to advertising agencies. The Internet advertising and marketing market is relatively new and rapidly
evolving. As a result, demand and market acceptance for Internet advertising, marketing and technology services is uncertain. Many of our current or potential clients have little or no experience using the Internet for advertising or marketing
purposes and have allocated only a limited portion of their advertising or marketing budgets to Internet advertising or marketing. Also, we must compete with traditional advertising media, including television, radio, cable and print, for a share of
our clients total advertising budgets. Businesses, including current and potential clients, may find Internet advertising or marketing to be less effective than traditional advertising media or marketing methods for promoting their products
and services, and therefore the market for Internet advertising, marketing and technology services may deteriorate or develop more slowly than expected. In addition, filter software programs are available that limit or prevent
advertising from being delivered to an Internet users computer. The widespread adoption of such software could significantly undermine the commercial viability of Internet advertising and seriously harm our business.



We may not manage the integration of acquired companies successfully.



We have recently completed several acquisitions, including: GO TOAST, a Denver-based
provider of paid search management and optimization tools; NetConversions, a Seattle-based provider of website usability technology; SBI.Razorfish, a provider of internet marketing and consulting services; TechnologyBrokers, a UK-based company that
resells AtlasDMT technologies and MediaBrokers, a UK-based company that provides performance media. We may in the future acquire or make investments in other businesses, or acquire products and technologies, to complement our current businesses. Any
future acquisition or investment may require us to use significant amounts of cash, issue potentially dilutive equity securities or incur debt. In addition, our recent acquisitions and any potential future acquisitions involve numerous risks, any of
which could harm our business, including:



| |  | difficulties in integrating the operations, technologies, services and personnel of acquired businesses;
| | - | --------------------------------------------------------------------------------------------------------



| |  | ineffectiveness or incompatibility of acquired technologies or services;
| | - | ------------------------------------------------------------------------



| |  | diversion of managements attention from other business concerns;
| | - | -----------------------------------------------------------------



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| |  | unavailability of favorable financing for future acquisitions;
| | - | --------------------------------------------------------------



| |  | potential loss of key employees of acquired businesses;
| | - | -------------------------------------------------------



| |  | inability to maintain the key business relationships and the reputations of acquired businesses;
| | - | ------------------------------------------------------------------------------------------------



| |  | responsibility for liabilities of acquired businesses, some of which may be unknown at the time of acquisition;
| | - | ---------------------------------------------------------------------------------------------------------------



| |  | potential failure to achieve additional sales through cross-marketing of the combined companys products to new and existing customers;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | inability to maintain our standards, controls, procedures and policies, which could affect our ability to receive an unqualified attestation from our independent accountants
regarding managements required assessment of the effectiveness of our internal control structure and procedures for financial reporting; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | increased fixed costs.
| | - | ----------------------



Our business may be seriously harmed by third-party litigation against us relating to the collection and use of Internet user information.



We have been subject to class action lawsuits alleging, among other things, that our collection and use of Internet user information
violates federal and state laws, and we may be subject to additional suits in the future. Class action litigation is often expensive and time-consuming, and the outcome of such litigation is often uncertain. Such lawsuits, regardless of their
outcome, may cause us to incur significant expenses and divert the attention of our management and key personnel from our business operations. In addition, such lawsuits may require us to pay substantial damages or prevent us from conducting
targeted advertising and aggregating data from our clients advertising campaigns. Furthermore, several Internet-related companies, including some in the Internet advertising industry, have had claims brought against them before the Federal
Trade Commission regarding the collection and use of Internet user information, and we may be subject to similar claims. Such claims, and any other claim by a government entity or other third party against us regarding our collection and use of
Internet user information, could seriously harm our business.



Privacy
concerns could lead to legislative and other limitations on our ability to collect usage data from Internet users, including limitations on our use of cookie or action tag technology and user profiling.



Privacy concerns could lead to legislative and other limitations on our
ability to conduct targeted advertising campaigns and compile data that we use to formulate campaign strategies for our clients. Our systems use cookies and action tags to track Internet users and their online behavior, which
allows us to build anonymous user profiles. A cookie is a small file of information stored on a users computer that allows us to recognize that users browser when we serve advertisements. An action tag functions similarly to a banner ad,
except that the action tag is not visible. Our action tags may be placed on specific pages of our clients or prospective clients websites. This enables us to measure an advertising campaigns effectiveness in driving consumers to
take specific actions.



We are substantially dependent on
cookie and action tag technology to target our clients advertising campaigns and measure their effectiveness. Any reduction in our ability to use cookies or action tags or other means to build anonymous user profiles could harm our business.
Such a reduction may result from several causes, including governmental action, technology or litigation. First, governmental bodies concerned with the privacy of Internet users have suggested limiting or eliminating the use of cookies, action tags
or user profiling. Bills aimed at regulating the collection and use of personal data from Internet users are currently pending in Congress and many state legislatures. Other bills, which are intended to regulate spyware, may be drafted in such a way
as to include technology like cookies and action tags in the definition of spyware, thereby creating restrictions that could reduce our ability to use them. In addition, the Federal Trade Commission and the Department of Commerce have conducted
hearings regarding user profiling, the collection of non-personally identifiable information and online privacy. Outside the United States, privacy concerns have led to legal and technical limitations on the use of cookies, action tags and user
profiling. For example, the European Union has adopted a directive addressing data privacy that limits the collection, disclosure and use of information regarding European Internet users. In addition, the European Union has enacted an electronic
communications directive that imposes certain restrictions on the use of cookies and action tags and also places restrictions on the sending of unsolicited communications. Each European Union member country was required to enact legislation to
comply with the provisions of the electronic communications directive by October 31, 2003 (though not all have done so). Germany has imposed its own laws limiting the use of user profiling, and other countries (both in and out of the European Union)
may impose similar limitations. Second, users may limit or eliminate the placement of cookies on their computers by using third-party software that blocks cookies, or by disabling or restricting the cookie functions of their Internet browser
software. Internet browser software upgrades may also result in limitations on the use of cookies or action tags. Technologies like the Platform for Privacy Preferences (P3P) Project may limit collection of cookie and action tag information.
Finally, third parties have brought class action lawsuits against us and other companies relating to the use of cookies, and we may be subject to similar lawsuits in the future. The results of such lawsuits could limit or eliminate our ability to
use cookies and action tags.



If our ability to use cookies or
action tags or to build user profiles were substantially restricted, we would likely have to use other technology or methods that allow the gathering of user profile data in other ways in order to provide our services to our clients. This change in
technology or methods could require significant reengineering time and resources, and might not be done in time to avoid negative consequences to our business. In addition, alternative technology or methods might not be available on commercially
reasonable terms, if at all.



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Our business may be seriously harmed by litigation alleging violations of federal and state securities laws.



We and some of the underwriters of our initial public offering of common
stock in February 2000 are defendants in a consolidated class action lawsuit that alleges violations of federal securities laws in connection with our initial public offering. Razorfish is similarly involved in this lawsuit relating to its initial
public offering in April 1999. The claims in the lawsuit include, among other things, allegations of misrepresentations or failures to disclose alleged facts relating to the defendant underwriters compensation and commissions in connection
with our initial public offering and alleged agreements between the underwriters and their customers relating to future purchases of our stock and/or the stock of other companies. We recently accepted a settlement proposal for this litigation. The
settlement is subject to a number of procedural conditions and will also require approval by the court, after class members, co-defendant underwriters and other interested parties are given the opportunity to object to or opt out of the settlement.
The court is currently considering the motion for approval of the settlement. The underwriters, as a group, have raised objections to the settlement. Approval of the settlement cannot be assured. Class action litigation is often expensive and
time-consuming, and the outcome of such litigation is often uncertain. Such lawsuits, regardless of their outcome, may cause us to incur significant expenses and divert the attention of our management and key personnel from our business operations.
In addition, such lawsuits may result in the payment by us of substantial damages and may otherwise seriously harm our business.



We may be subject to patent infringement claims in the future, including claims that our ad serving technologies, processes or methods infringe the patents of other
parties.



Patents have been issued to third parties that may cover some of
the technologies, processes or methods that we use. We cannot assure you that we would be able to distinguish our technologies, processes or methods from those covered under any of these third-party patents or that these patents would be invalidated
if challenged. The patent field covering Internet-related technologies is rapidly evolving and surrounded by a great deal of uncertainty, and other patents or patent applications relating to the delivery of Internet advertising may exist of which we
are unaware.



Several companies in the Internet advertising field have brought
patent infringement suits against competitors in connection with patents relating to ad serving technologies, and we expect this type of litigation to increase in the future. Any patent infringement claims brought against us may cause us to incur
significant expenses and, if successfully asserted against us, may cause us to pay substantial damages and prevent us from using the intellectual property subject to these claims. Even if we were to prevail, any litigation would likely be costly and
time-consuming and divert the attention of our management and key personnel from our business operations. Furthermore, as a result of a patent infringement suit, we may be prevented from providing some of our services, including our core ad serving
services, unless we enter into royalty or license agreements. We may not be able to obtain royalty or license agreements on terms acceptable to us, if at all.



We may be subject to trademark infringement claims and other legal challenges, which could cause us to incur significant expenses, pay substantial damages and be
prevented from using our trademarks.



Our use of our trademarks may result
in infringement claims and other legal challenges, which could cause us to incur significant expenses, pay substantial damages and be prevented from using these marks. We are aware of third parties that use marks or names, including Internet domain
names, that are the same or similar to the names for which we have sought trademark protection. There may be other third parties using names similar to ours of whom we are unaware. As a result of any infringement claims or challenges, we may incur
significant expenses, pay substantial damages and be prevented from using our trademarks unless we enter into royalty, license or coexistence agreements. We may not be able to obtain such royalty, license or coexistence agreements on terms
acceptable to us, if at all. Use of our trademarks by third parties may also cause confusion to our clients and confusion in the market, which could decrease the value of our brand and harm our reputation.



In addition to patent and trademark claims, third parties may assert other intellectual
property claims, which may cause us to incur significant expenses, pay substantial damages and be prevented from providing our services.



In addition to patent and trademark claims, third parties may claim that we are infringing or violating their other intellectual property rights, including their
copyrights and trade secrets, or otherwise challenge our intellectual property, which may cause us to incur significant expenses and, if successfully asserted against us, pay substantial damages and be prevented from providing our services. Even if
we were to prevail, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations. Furthermore, as a result of an intellectual property
challenge, we may be prevented from providing some of our services unless we enter into royalty, license or coexistence agreements. We may not be able to obtain such royalty, license or coexistence agreements on terms acceptable to us, if at all.



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Failure of our services to perform properly or improper use of our services by our clients could give rise to legal
claims against us or damage our reputation.



If our services fail to
perform properly for our clients, we may be exposed to liability to our clients or to the customers for whom our clients used our services. In addition, our clients may use our technology-based services in a manner that fails to comply with
applicable laws, including but not limited to laws and regulations surrounding the Internet. For example, because our services may be used by clients to transmit information over the Internet, our services might be used by clients to transmit
information that violates laws or regulations, or to transmit negative messages, unauthorized reproduction of copyrighted material, inaccurate data, harmful applications or computer viruses to end-users in the course of delivery. Any claims made
against us arising in connection with our clients use of our services, regardless of their outcome, may cause us to incur significant expenses and divert the attention of our management and key personnel from business operations. In addition,
such claims may require us to pay substantial damages, modify or discontinue some of our services and otherwise seriously harm our business and damage our reputation.



The loss of key personnel or any inability to attract and retain additional personnel could impair our ability to maintain or expand our
business.



The loss of the services of members of our management team or
other key personnel could harm our business. Our future success depends to a significant extent on the continued service of our key management, client service, product development, sales and technical personnel. Many key personnel have joined us as
a result of our recent acquisitions and they may not feel as much loyalty to us, or have as much desire to work for a company of our size and nature, as they did with respect to the company they worked for prior to the acquisition. We do not
maintain key person life insurance on any of our executive officers and do not intend to purchase any in the future. Although we generally enter into non-competition agreements with our employees, our business could be harmed if one or more of our
officers or key employees decided to join a competitor or otherwise compete with us.



Our business of delivering Internet professional services is labor intensive. Accordingly, our future success also depends in large part on our ability to identify, attract, hire, train, retain and motivate highly skilled personnel who can
provide the Internet strategy, technology, marketing and creative skills required by our clients. If we fail to hire and retain a sufficient number of qualified client service, product development, sales and technical personnel, we may not be able
to maintain or expand our business.



Some of our clients have limited
operating histories, are unprofitable and may not be able to pay for our services.



If any of our current or future clients is unable to pay for our services, our business could suffer. Some of our clients have limited operating histories and have not achieved profitability. In the past we have lost clients, or have had
difficulty collecting payments from clients who could not pay for our services, because they were unable to secure ongoing funding. The ability of several of our clients to meet their payment obligations is affected by the risks and difficulties
encountered by companies with limited operating histories, particularly in the evolving Internet market.



We may not be able to compete successfully in the market for Internet advertising.



The market for Internet advertising and consulting services is relatively new, yet competitive. Our digital marketing services line of business, including Avenue
A/Razorfish and i-FRONTIER, competes with interactive advertising agencies, traditional advertising agencies that perform Internet advertising and marketing as part of their services to clients, such as the Internet advertising arm of Ogilvy and
Omnicom, and companies that provide marketing services such as Digitas. We also compete in the digital marketing services market with several technology system integrators, such as IBM Global Solutions and Accenture. Our digital marketing
technologies, through Atlas DMT, compete with third-party ad serving companies and campaign management technology companies such as Doubleclick. In addition, the Atlas OnePoint division competes with providers of search management capabilities, such
as Did It and Bid Rank, and Atlas NetConversions competes with providers of website usability and effectiveness metrics tools, such as Keynote Systems, Optimost and Offermatica.



Many of our competitors have longer operating histories, greater name recognition, larger client bases and significantly greater financial,
technical and marketing resources than we have. Also, many of our current and potential competitors have established or may establish cooperative relationships among themselves or with third parties. In addition, several of our competitors have
combined or may combine in the future with larger companies with greater resources than ours. These competitors may engage in more extensive research and development, undertake more far-reaching marketing campaigns and make more attractive offers to
existing and potential employees and clients than we do. They could also adopt more aggressive pricing policies and may even provide services similar to ours at no additional cost by bundling them with their other product and service offerings. They
may also develop services that are equal or superior to our services or that achieve greater market acceptance than our services. Increased competition is likely to result in price reductions, reduced margins and loss of market share. We cannot
assure you that we will be able to compete successfully, and competitive pressures may harm our business.



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In addition, our ability to maintain existing client relationships and generate new clients will depend to a significant
degree on the quality of our services and our reputation among clients and potential clients, as compared with our competitors. To the extent we lose clients to our competitors because of dissatisfaction with our services or because our reputation
is harmed for any other reason, our business could be negatively affected.



Consolidation of Internet advertising networks, web portals, Internet search engine sites and web publishers may impair our ability to serve advertisements, to acquire advertising space at favorable rates and to collect campaign data.



The consolidation of Internet advertising networks, web portals, Internet
search engine sites and web publishers could harm our business. This type of consolidation could eventually lead to a concentration of desirable advertising space on a very small number of networks and websites. This type of concentration could
substantially impair our ability to serve advertisements if these networks or websites decide not to permit us to serve, track or manage advertisements on their websites, or if they develop ad placement systems that are not compatible with our ad
serving systems. These networks or websites could also use their greater bargaining power to increase their rates for advertising space or prohibit or limit our aggregation of advertising campaign data. In addition, concentration of desirable
advertising space in a small number of networks and websites could diminish the value of our advertising campaign databases, as the value of these databases depends to some degree on the continuous aggregation of data from advertising campaigns on a
variety of different advertising networks and websites.



Sustained or
repeated system failures could significantly impair our operations and lead to client dissatisfaction.



Sustained or repeated system failures could significantly impair our operations and reduce the attractiveness of our services to our current and potential clients. The continuous and uninterrupted performance of our
systems is critical to our success. Our operations depend on our ability to protect these systems against damage from fire, power loss, water damage, earthquakes, telecommunications failures, viruses, vandalism and other malicious acts and similar
unexpected adverse events. Clients may become dissatisfied by any system failure that interrupts our ability to provide our services to them. In particular, the failure of our ad serving systems, including failures that delay or prevent the delivery
of targeted advertisements to websites and advertising networks, could reduce client satisfaction and damage our reputation.



Our services are substantially dependent on certain systems provided by third parties over whom we have little control. Interruptions in our services could result from
the failure of telecommunications providers and other third parties to provide the necessary data communications capacity in the time frame required. Our ad serving systems and computer hardware are primarily located in the Seattle, Washington
metropolitan area and in Weehawken, New Jersey, Dallas, Texas and London, England at facilities operated by Savvis, Inc. and MCI. Additionally, Speedera Networks Inc. provides content delivery for us at their facilities. We depend on these
third-party providers of Internet communication services to provide continuous and uninterrupted service. We also depend upon Internet service providers that provide access to our services. In the past, we have occasionally experienced significant
difficulties delivering advertisements to Internet advertising networks and websites due to system failures unrelated to our own systems. Any disruption in the Internet access provided by third-party providers or any failure of third-party providers
to handle higher volumes of user traffic could impair our ability to deliver advertisements and harm our business.



Clients may attempt to prohibit us from providing services to their competitors, limiting our business opportunities.



To use our services more effectively, clients often provide us with confidential business
and marketing information. Many companies are wary of third parties having access to this information, because access by third parties increases the risk that confidential business and marketing information may become known, even if unintentionally,
to these companies competitors. These confidentiality concerns may prompt our clients to attempt to contractually prohibit us from managing the Internet advertising campaigns of their competitors. Limitation of our client base in a particular
industry in this manner could limit the growth of our business.



Legislation, regulations or standards may be adopted or amended that could impair our ability to provide our services to clients or otherwise harm our business.



Legislation, regulations or standards may be adopted or amended that could impair our ability to provide our services to clients or
otherwise harm our business. The legal and regulatory environment governing the Internet and Internet advertising is uncertain and may change. Laws, regulations and standards may be adopted or amended covering issues such as privacy, pricing,
acceptable content, consumer protection and quality of products and services on the Internet. These laws, regulations and standards could dampen the growth in use of the Internet generally and decrease the acceptance of the Internet as an
advertising medium. Also, due to the global nature of the Internet, it is possible that multiple federal, state or foreign jurisdictions might inconsistently regulate our activities or the activities of advertising networks or websites. Further, our
business and technology is very complex, and legislation may be adopted that has unintended consequences on our business or is unnecessarily broad. Any of these developments could harm our business.



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In addition, laws, regulations and standards may be adopted or amended relating to the taxation of our services. We
received reporting instructions from Washington State tax authorities that require us to pay Washington State business and occupation tax on the media we purchase on behalf of our clients. We expect to assert administrative remedies with the
Washington State tax authorities and evaluate tax strategies that might allow deduction of media purchases in connection with the measure of business and occupation tax. If these efforts are not successful, this business and occupation tax
requirement, and any other tax-related requirements, could substantially increase our cost of conducting business.



In conjunction with third-party contractors, our service offerings include email advertising and marketing services. The market for email advertising and marketing in
general is vulnerable to the negative public perception associated with unsolicited email. Federal, state and foreign governments have enacted legislation, including the CAN-SPAM Act of 2003 that limits or prohibits the use of unsolicited email and
imposes liability on those that assist sending such email. The Federal Trade Commission, under the CAN-SPAM Act, is commencing rulemaking that may further limit the use of email for advertising. Government action, public perception or press reports
related to solicited or unsolicited email could reduce the overall demand for email advertising and marketing in general and our email services in particular. The negative public perception surrounding providers and users of email advertising, which
may include us and our clients, may also lead third party vendors and/or partners to choose not to work with us, or to discontinue current relationships. In addition, although our email delivery program is based on the email addressees consent
or other indication of willingness to receive such email where required by law, it is possible that laws, regulations or standards may be adopted or amended that may require us to change or discontinue our current practices or may subject us to
liabilities. Furthermore, we may be the target of lawsuits or enforcement actions if a plaintiff or government agency believes that legal requirements regarding the delivery of email have not been followed by us, our clients or a third-party
contractor or that emails have been received contrary to the email addressees wishes. Any of these circumstances could harm our business.



We may not be able to adapt to rapidly changing Internet technology trends and evolving industry standards.



The Internet and Internet advertising markets are characterized by rapidly changing
technologies, evolving industry standards, frequent new product and service introductions and changing client demands, particularly in the areas of search marketing and rich media. The introduction of new products and services embodying new
technologies and the emergence of new industry standards may render our services obsolete. Our future success will depend on our ability to adapt to rapidly changing technologies, enhance our existing Internet advertising services and develop and
introduce a variety of new services to address our clients changing demands. We may experience difficulties that could delay or prevent the successful design, development, introduction or marketing of our services. In addition, any new
services or enhancements must meet the requirements of our current clients and must achieve market acceptance. Material delays in introducing new services and enhancements may cause clients to discontinue use of our services and to use the services
of our competitors.



Our business is increasingly geographically dispersed
both within the United States and internationally, and our business will be harmed if we are not able to effectively manage these operations.



Largely as a result of our recent acquisitions, we now have business operations in more than ten locations in the United States and several international locations, and
we expect continued growth of our international operations in the future. Effective management of these dispersed domestic operations requires significant dedication of senior management time and effort, requires us to replicate certain processes,
procedures and resources in multiple locations, and may result in higher overhead costs. Further, our international operations are subject to additional risks inherent to international operations, including:



| |  | the high cost of maintaining international operations;
| | - | ------------------------------------------------------



| |  | difficulties and costs of staffing and managing foreign operations;
| | - | -------------------------------------------------------------------



| |  | impact of recessions or instability in economies outside the United States;
| | - | ---------------------------------------------------------------------------



| |  | changes in regulatory requirements;
| | - | -----------------------------------



| |  | more restrictive data protection regulations, which may vary by country;
| | - | ------------------------------------------------------------------------



| |  | reduced protection for intellectual property rights in some countries;
| | - | ----------------------------------------------------------------------



| |  | potentially adverse tax consequences; and
| | - | -----------------------------------------



| |  | fluctuations in exchange rates.
| | - | -------------------------------



Our stock price has been and may continue to be volatile.



The trading price of our common stock has been and is likely to continue to be highly volatile. For example, during the 52-week period ended November 5, 2004, the closing
price of our common stock ranged from $7.56 to $13.28 per share. The market price of our common stock may fluctuate significantly in response to a number of factors, including:



| |  | releases to the public of financial and other information about companies we have acquired;
| | - | -------------------------------------------------------------------------------------------



| |  | quarterly variations in our operating results;
| | - | ----------------------------------------------



| |  | announcements by us or our competitors of new products or services, significant contracts, acquisitions or business relationships with other companies;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | publicity about our company, our services, our competitors or Internet advertising in general;
| | - | ----------------------------------------------------------------------------------------------



| |  | additions or departures of key personnel;
| | - | -----------------------------------------



| |  | acquisitions or losses of significant clients;
| | - | ----------------------------------------------



| |  | any future sales of our common stock or other securities; and
| | - | -------------------------------------------------------------



| |  | stock market price and volume fluctuations of other publicly traded companies in general and, in particular, those that are Internet or advertising related.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------



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In the past, many companies that have experienced volatility in the market price of their stock have been subject to
securities class action litigation. We have been the subject of securities class action litigation in the past and may be the target of additional lawsuits in the future. Any securities class action litigation against us could result in substantial
costs and divert our managements attention from business concerns, which could harm our business.



We may need additional financing in the future, which we may be unable to obtain.



We may need additional funds to finance our operations in the future, as well as to enhance our services, respond to competitive pressures or acquire complementary
businesses or technologies. We may be unable to obtain financing on terms favorable to us, if at all. Poor financial results, unanticipated expenses or unanticipated opportunities that require financial commitments could give rise to additional
financing requirements sooner than we expect. If we raise additional funds through the issuance of equity or convertible debt securities, this may reduce the percentage ownership of our existing shareholders, and these securities might have rights,
preferences or privileges senior to those of our common stock. If adequate funds are not available or are not available on acceptable terms, our ability to enhance our services, respond to competitive pressures or take advantage of business
opportunities would be significantly limited, and we might need to significantly restrict our operations.



We rely on strategic relationships that could be terminated easily.



For the website design and development portion of our digital marketing services line of business, we have a number of strategic relationships with leading hardware and software companies. The loss of any one of these
strategic relationships would deprive us of the opportunity to gain early access to leading-edge technology, cooperatively market products with the vendor, cross-sell additional services and gain enhanced access to vendor training and support.
Maintenance of our strategic relationships is based primarily on an ongoing mutual business opportunity and a good overall working relationship. The legal contracts associated with these relationships would not be sufficient to force the strategic
relationship to continue effectively if the strategic partner wanted to terminate the relationship. In the event that any strategic relationship is terminated, our business may be negatively affected.



The infringement or misuse of intellectual property rights could harm our business.



We regard our intellectual property rights, such as copyrights,
trademarks, trade secrets, practices and tools, as important to our success. To protect our intellectual property rights, we rely on a combination of trademark and copyright law, trade secret protection and confidentiality agreements and other
contractual arrangements with our employees, affiliates, clients, strategic partners, acquisition targets and others. Effective trademark, copyright and trade secret protection may not be available in every country in which we intend to offer our
services. The steps we have taken to protect our intellectual property rights may not be adequate, third parties may infringe or misappropriate our intellectual property rights and we may not be able to detect unauthorized use and take appropriate
steps to enforce our rights.



If we do not perform to our clients
expectations, we face potential liability.



Many of our consulting
engagements regarding website design and development in our digital marketing services line of business involve the development, implementation and maintenance of applications that are critical to the operations of our clients businesses. Our
failure or inability to meet a clients expectations in the performance of its services could injure our business reputation or result in a claim for substantial damages against us, regardless of our responsibility for the failure. In addition,
we possess technologies and content that may include confidential or proprietary client information. Although we have implemented policies to prevent this client information from being disclosed to unauthorized parties or used inappropriately, any
unauthorized disclosure or use of this information could result in a claim for substantial damages. Contractual damages limitation provisions that we attempt to implement to limit our damages from negligent acts, errors, mistakes or omissions in
rendering professional services may not be enforceable or may not otherwise protect us from liability for damages.



Further, clients often hire us for complex development engagements that they cannot complete themselves. These projects often involve the use of new technology that has
not been extensively tested or used in actual applications. We attempt to negotiate appropriate provisions into our professional services agreements to protect us against unexpected delays or failures caused by this new technology, but we are often
unable to do so. In any event, if we fail to successfully complete projects according to the agreed upon schedule and budget, our client relationships suffer, and our business could be adversely impacted.



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Our business may suffer if we have disputes over our right to reuse intellectual property developed for specific
clients.



Part of our business involves the development of software
applications for discrete client engagements. Ownership of client-specific software is generally retained by the client, although we typically retain the right to reuse some of the applications, processes and other intellectual property developed in
connection with client engagements. Issues relating to the rights to intellectual property can be complicated, and disputes may arise that could adversely affect our ability to reuse these applications, processes and other intellectual property.
These disputes could damage our relationships with our clients and our business reputation, divert our managements attention and have a material adverse effect on our business.



Our business may be harmed if we fail to accurately estimate the cost, scope, expectations or duration of a fixed fee engagement.



The website design and development portion of our digital marketing
services business performs some of its services on a fixed fee basis. Because of the complexity of many of these fixed fee engagements, accurately estimating the cost, scope, expectations and duration of a particular fixed fee engagement can be a
difficult task. If we fail to appropriately structure one or more fixed fee engagements, we could be forced to devote additional resources to these engagements for which we will not receive additional compensation. To the extent that an expenditure
of additional resources is required on a fixed fee engagement, this could harm our reputation and result in a loss on the engagement.



Our billable employees may be underutilized if clients do not retain our services, which could reduce our revenues and margins.



The website design and development portion of our digital marketing services line of
business derives much of its revenue from projects that use billable employees. If clients who use our services fail to retain us for future projects or if clients or prospective clients delay planned projects, we may be unable to quickly reassign
billable employees to other engagements so as to minimize under-utilization of these employees. This under-utilization could reduce our revenues and gross margins.



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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 11, 2004.



AQUANTIVE, INC.By:

/s/ MICHAEL VERNONMichael Vernon Chief Financial Officer (Authorized Officer and Principal Financial Officer)




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