##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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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, 2003



OR



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



Commission File Number: 0-29361



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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)



506 Second Avenue,
9th Floor

Seattle, Washington 98104

(Address of principal executive offices)



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(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 November 7, 2003 was 59,970,641.



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##### Table of Contents

AQUANTIVE, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2003



TABLE OF CONTENTS



|        |  |                                                                                       |  | Page
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|        |  | PART I. FINANCIAL INFORMATION                                                         |  |     
|        |  |                                                                                      
|Item 1. |  | Condensed Consolidated Financial Statements                                           |  | 3   
|        |  |                                                                                      
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 11  
|        |  |                                                                                      
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 26  
|        |  |                                                                                      
|Item 4. |  | Controls and Procedures                                                               |  | 26  
|        |  |                                                                                      
|        |  | PART II. OTHER INFORMATION                                                            |  |     
|        |  |                                                                                      
|Item 1. |  | Legal Proceedings                                                                     |  | 27  
|        |  |                                                                                      
|Item 2. |  | Changes in Securities and Use of Proceeds                                             |  | 27  
|        |  |                                                                                      
|Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  | 28  



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##### Table of Contents

AQUANTIVE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands except per share amounts)

(unaudited)



|                                                                                                                                                                    |  | September 30, 2003 |         |   | December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | -
|ASSETS                                                                                                                                                              |  |                    |         |   |                   |  
|Current assets:                                                                                                                                                     |  |                    |         |   |                   |  
|Cash and cash equivalents                                                                                                                                           |  | $                  | 34,635  |   |                   | $
|Short-term investments                                                                                                                                              |  |                    | 93,529  |   |                   |  
|Accounts receivable, net of allowances of $2,155 and $1,785, respectively                                                                                           |  |                    | 44,987  |   |                   |  
|Other receivables                                                                                                                                                   |  |                    | 1,579   |   |                   |  
|Prepaid expenses and other current assets                                                                                                                           |  |                    | 1,268   |   |                   |  
|                                                                                                                                                                    |  |                    |         |   |                   |  
|Total current assets                                                                                                                                                |  |                    | 175,998 |   |                   |  
|                                                                                                                                                                    |  |                   
|Property and equipment, net                                                                                                                                         |  |                    | 4,969   |   |                   |  
|Goodwill                                                                                                                                                            |  |                    | 2,292   |   |                   |  
|Other intangible assets, net                                                                                                                                        |  |                    | 1,886   |   |                   |  
|Other assets                                                                                                                                                        |  |                    | 412     |   |                   |  
|                                                                                                                                                                    |  |                    |         |   |                   |  
|Total assets                                                                                                                                                        |  | $                  | 185,557 |   |                   | $
|                                                                                                                                                                    |  |                    |         |   |                   |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                |  |                    |         |   |                   |  
|Current liabilities:                                                                                                                                                |  |                    |         |   |                   |  
|Accounts payable                                                                                                                                                    |  | $                  | 44,318  |   |                   | $
|Accrued expenses                                                                                                                                                    |  |                    | 5,962   |   |                   |  
|Pre-billed media                                                                                                                                                    |  |                    | 4,859   |   |                   |  
|Deferred revenue                                                                                                                                                    |  |                    | 5,794   |   |                   |  
|Notes payable                                                                                                                                                       |  |                    | 278     |   |                   |  
|                                                                                                                                                                    |  |                    |         |   |                   |  
|Total current liabilities                                                                                                                                           |  |                    | 61,211  |   |                   |  
|                                                                                                                                                                    |  |                   
|Deferred income taxes                                                                                                                                               |  |                    | 34      |   |                   |  
|                                                                                                                                                                    |  |                    |         |   |                   |  
|Total liabilities                                                                                                                                                   |  |                    | 61,245  |   |                   |  
|                                                                                                                                                                    |  |                    |         |   |                   |  
|Shareholders equity:                                                                                                                                               |  |                    |         |   |                   |  
|Common stock, $0.01 par value; 200,000 shares authorized; 59,813 and 58,380 shares issued and outstanding at September 30, 2003
and December 31, 2002, respectively |  |                    | 598     |   |                   |  
|Paid-in capital                                                                                                                                                     |  |                    | 218,722 |   |                   |  
|Deferred stock compensation                                                                                                                                         |  |                    | (199    | ) |                   |  
|Subscription receivable                                                                                                                                             |  |                    | (79     | ) |                   |  
|Accumulated deficit                                                                                                                                                 |  |                    | (95,070 | ) |                   |  
|Accumulated other comprehensive income                                                                                                                              |  |                    | 340     |   |                   |  
|                                                                                                                                                                    |  |                    |         |   |                   |  
|Total shareholders equity                                                                                                                                          |  |                    | 124,312 |   |                   |  
|                                                                                                                                                                    |  |                    |         |   |                   |  
|Total liabilities and shareholders equity                                                                                                                          |  | $                  | 185,557 |   |                   | $
|                                                                                                                                                                    |  |                    |         |   |                   |  



The accompanying notes
are an integral part of these condensed consolidated financial statements.



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##### Table of Contents

AQUANTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME (LOSS)

(in thousands except per share amounts)

(unaudited)



|                                                                                                                                       |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | -
|                                                                                                                                       |  | 2003                             |        |   | 2002                            |  
|Revenue                                                                                                                                |  | $                                | 58,580 |   |                                 | $
|Expenses:                                                                                                                              |  |                                  |        |   |                                 |  
|Cost of revenue                                                                                                                        |  |                                  | 43,607 |   |                                 |  
|Client support (excluding amortization of deferred stock compensation of $216, $459, $654 and $1,308,
respectively)                    |  |                                  | 5,775  |   |                                 |  
|Product development (excluding amortization of deferred stock compensation of $38, $131, $110, and $515,
respectively)                 |  |                                  | 1,113  |   |                                 |  
|Selling, general, and administrative (excluding amortization of deferred stock compensation of $46, $149, $140 and $446,
respectively) |  |                                  | 4,164  |   |                                 |  
|Depreciation and amortization of property and equipment                                                                                |  |                                  | 1,010  |   |                                 |  
|Amortization of deferred stock compensation                                                                                            |  |                                  | 300    |   |                                 |  
|Amortization of intangible assets                                                                                                      |  |                                  | 72     |   |                                 |  
|Corporate restructuring charges                                                                                                        |  |                                  |       |   |                                 |  
|                                                                                                                                       |  |                                  |        |   |                                 |  
|Total expenses                                                                                                                         |  |                                  | 56,041 |   |                                 |  
|                                                                                                                                       |  |                                  |        |  
|Income (loss) from operations                                                                                                          |  |                                  | 2,539  |   |                                 |  
|Interest and other income, net                                                                                                         |  |                                  | 1,077  |   |                                 |  
|                                                                                                                                       |  |                                  |        |   |                                 |  
|Income (loss) before cumulative effect on prior years of change in accounting principle and provision for income
taxes                 |  |                                  | 3,616  |   |                                 |  
|                                                                                                                                       |  |                                  |        |  
|Provision for income taxes                                                                                                             |  |                                  | 174    |   |                                 |  
|                                                                                                                                       |  |                                  |        |   |                                 |  
|Net income (loss) before cumulative effect on prior years of change in accounting principle                                            |  |                                  | 3,442  |   |                                 |  
|Cumulative effect on prior years of change in accounting principle                                                                     |  |                                  |       |   |                                 |  
|                                                                                                                                       |  |                                  |        |   |                                 |  
|Net income (loss)                                                                                                                      |  | $                                | 3,442  |   |                                 | $
|                                                                                                                                       |  |                                  |        |   |                                 |  
|Basic net income (loss) per share before cumulative effect on prior years of change in accounting principle                            |  | $                                | 0.06   |   |                                 | $
|Cumulative effect on prior years of change in accounting principle                                                                     |  |                                  |       |   |                                 |  
|                                                                                                                                       |  |                                  |        |   |                                 |  
|Basic net income (loss) per share                                                                                                      |  | $                                | 0.06   |   |                                 | $
|                                                                                                                                       |  |                                  |        |   |                                 |  
|Diluted net income (loss) per share                                                                                                    |  | $                                | 0.05   |   |                                 | $
|                                                                                                                                       |  |                                  |        |   |                                 |  
|Shares used in computing basic net income (loss) per share                                                                             |  |                                  | 59,644 |   |                                 |  
|Shares used in computing diluted net income (loss) per share                                                                           |  |                                  | 69,280 |   |                                 |  
|Comprehensive income (loss):                                                                                                           |  |                                  |        |   |                                 |  
|Net income (loss)                                                                                                                      |  | $                                | 3,442  |   |                                 | $
|Items of comprehensive income (loss)                                                                                                   |  |                                  | (280   | ) |                                 |  
|                                                                                                                                       |  |                                  |        |   |                                 |  
|Comprehensive income (loss)                                                                                                            |  | $                                | 3,162  |   |                                 | $
|                                                                                                                                       |  |                                  |        |   |                                 |  



The accompanying notes
are an integral part of these condensed consolidated financial statements.



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##### Table of Contents

AQUANTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                         |  | Nine Months Ended September 30, |        
|---------------------------------------------------------------------------------------- |  | ------------------------------- | -------
|                                                                                         |  | 2003                            |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |  |                                 |        
|Net income (loss)                                                                        |  | $                               | 7,696  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                 |        
|Depreciation and amortization                                                            |  |                                 | 3,850  
|Impairment of intangible assets                                                          |  |                                 |       
|Non-cash compensation expense                                                            |  |                                 | 474    
|Changes in assets and liabilities:                                                       |  |                                 |        
|Accounts receivable                                                                      |  |                                 | (18,400
|Other receivables, prepaid expenses and other current assets                             |  |                                 | (1,133 
|Other assets                                                                             |  |                                 | 431    
|Accounts payable                                                                         |  |                                 | 12,813 
|Accrued expenses                                                                         |  |                                 | (956   
|Pre-billed media                                                                         |  |                                 | 1,102  
|Deferred revenue                                                                         |  |                                 | 3,240  
|Deferred income taxes                                                                    |  |                                 | 34     
|                                                                                         |  |                                 |        
|Net cash provided by operating activities                                                |  |                                 | 9,151  
|                                                                                         |  |                                 |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |  |                                 |        
|Purchases of property and equipment                                                      |  |                                 | (3,488 
|(Purchases) sale of marketable securities, net                                           |  |                                 | (4,603 
|                                                                                         |  |                                 |        
|Net cash (used in) provided by investing activities                                      |  |                                 | (8,091 
|                                                                                         |  |                                 |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                    |  |                                 |        
|Payment of notes payable                                                                 |  |                                 | (1,291 
|Proceeds from issuance of common stock and exercises of common stock options, net        |  |                                 | 2,618  
|Repurchase of common stock                                                               |  |                                 |       
|                                                                                         |  |                                 |        
|Net cash provided by (used in) financing activities                                      |  |                                 | 1,327  
|                                                                                         |  |                                 |        
|Net increase in cash and cash equivalents                                                |  |                                 | 2,387  
|Cash and cash equivalents, beginning of period                                           |  |                                 | 32,248 
|                                                                                         |  |                                 |        
|Cash and cash equivalents, end of period                                                 |  | $                               | 34,635 
|                                                                                         |  |                                 |        



The accompanying notes
are an integral part of these condensed consolidated financial statements.



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##### Table of Contents

AQUANTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2003

(in thousands except per share amounts)

(unaudited)



1. Organization and Operations of the Company



aQuantive, Inc. (the Company), formerly Avenue A, Inc.,
and its operating units, including Avenue A, i-FRONTIER, and Atlas DMT, provide digital marketing services and technologies to businesses. The Company was founded on July 1, 1997 and incorporated on February 27, 1998 in Washington State. The
Companys headquarters are located in Seattle, Washington. Avenue A/NYC was acquired in September 1999 and i-FRONTIER was acquired in November 2002.



Effective January 1, 2001, the Company established two lines of business: digital marketing services and digital marketing technologies. Digital marketing
services, including interactive advertising agencies Avenue A and i-FRONTIER, provide service offerings to clients that include Web advertising, email services, strategic portal relationships, affiliate programs, customer targeting, analytical
services, search engine optimization, and creative and Web site development. Digital marketing technologies, including the Atlas DMT operating unit, provides a digital marketing management system, the Atlas Digital Marketing Suite, to traditional
and interactive agencies, as well as in-house media buyers for planning, serving, analyzing, and managing online campaigns.



The Company is subject to a number of risks similar to other companies in a comparable stage of development, including the need for continued growth of
the Internet advertising market, reliance on key personnel and competition from other companies with greater financial, technical and marketing resources.



2. Summary of Significant Accounting Policies



Basis of Presentation: The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.



These statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of the Companys management, are
necessary for a fair presentation of the results of operations for the periods presented. Operating results for the quarter ended September 30, 2003 are not necessarily indicative of the results that may be expected for any subsequent quarter or for
the year ending December 31, 2003. Certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).



These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Companys audited financial statements and the
accompanying notes for the years ended December 31, 2002, 2001, and 2000, as included in the Companys Annual Report on Form 10-K filed with the SEC.



Revenue Recognition: The Companys digital marketing services, including Avenue A and i-FRONTIER, generate revenue by providing
technology-based Internet advertising services to businesses. The Companys core services include media planning and buying, ad serving, campaign analysis, optimization, data collection and aggregation, and creative and Web site development.
The Company also generates revenue through the Strategic Partnership Program which manages longer term exclusive or complex partnerships between the Companys clients and Web sites or advertising networks; the Customer Insight Group which
develops and maintains an evolving suite of proprietary analytical tools, fed by agency data, that lend insight into how customers and prospective customers are likely to behave in the future; E-mail which delivers targeted emails to specific
customer segments; Customer Targeting which delivers tailored advertisements to the browsers of users that have previously visited clients Web sites; and the Search Engine Optimization Program which enables the Companys clients to
improve their rankings on Internet search engines.



The Company
follows Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements. This pronouncement summarizes certain of the SEC staffs views in applying accounting principles generally accepted in the United States of America
to revenue recognition. In addition, the Company follows the final consensus reached by the Emerging Issues Task Force (EITF) in July 2000 on EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent.



In accordance with EITF 99-19, the majority of Avenue A revenue is recognized
under the gross method, which consists of the gross value of the Companys billings to the Companys clients and includes the price of the advertising space that the Company purchases from Web sites to resell to its clients. To generate
revenue under gross method contracts, the Company purchases advertising space from publisher Web sites and sells the purchased space to the Companys clients and is ultimately responsible for payment to Web sites for the cost of space the
Company purchases. The Company also recognizes revenue for certain contracts under the net method. To generate revenue under net method contracts, the Company buys advertising space from publisher Web sites on behalf of its clients and earns fees
based on the dollar amount of advertising space the Company purchases. Under net method contracts, the Companys client that is party to the contract is primarily responsible for payment to the publisher Web sites for the cost of the
advertising space purchased. All such revenue is recognized over the period that the related advertising is delivered, which includes revenue from the Companys core services, the Strategic Partnership Program and Customer Targeting.



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##### Table of Contents

AQUANTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2003

(in thousands except per share amounts)

(unaudited)



E-mail is volume based, and revenue is generally recognized when impressions are delivered. The
Company recognizes revenue from Search Engine Optimization Programs based on either volume or as a subscription. Revenue from the volume-based service is generally recognized when impressions are delivered and revenue from the subscription-based
service is recognized ratably over the service period. Vital Signs and Avondale are monthly subscription-based services, and revenue is recognized for each month that the service is provided. Revenue is generally recognized for Customer Insight
services under a proportional performance method of accounting. It is the Companys policy to recognize any loss on services as soon as management estimates indicate a loss will occur.



The Atlas DMT operating unit provides digital marketing technology services
to manage online media planning, buying, ad delivery and analysis for advertising agencies and advertisers. These services are offered online through the Atlas Digital Marketing Suite as are Atlas DMTs other services such as Vital Signs, GRP
and Reach Forecaster and Brand Exposure Duration (BXD). Such services are recognized based on either volume or as a subscription. Revenue from the volume-based services is recognized based on the volume in the period of usage. Revenue from
subscription-based services is recognized ratably over the service period.



Revenue is deferred in cases where the Company has not yet earned advertising revenue but has billed the customer or received payment from the customer prior to providing the services. Revenue is recognized only when
collection of the resulting receivable is reasonably assured.



Revenue also includes any reimbursements received from the Companys clients related to expenses incurred by employees in servicing such clients. Such expenses include airfare, mileage, meals and hotel stays.



The percentage of revenue to customers representing more than 10% of
consolidated revenues is as follows:



|           |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|---------- |  | -------------------------------- |  | -------------------------------
|           |  | 2003                             |  | 2002                           
|Customer A |  | 41%                              |  | 30%                            
|Customer B |  | *                                |  | 21%                            



The percentage of
accounts receivable representing more than 10% of consolidated accounts receivable from customers is as follows (if applicable):



|           |  | September 30,2003 |  | December 31,2002
|---------- |  | ----------------- |  | ----------------
|Customer A |  | 33%               |  | 15%             
|Customer B |  | *                 |  | 26%             
|Customer C |  | *                 |  | 13%             
|Customer D |  | 10%               |  | *               

---

|* | Less than 10%
|- | -------------



Computation of Basic and Diluted Net Income (Loss) Per Share: Net income (loss) per share has been calculated under Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings per Share. Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding. Unvested outstanding shares subject to repurchase rights are
excluded from the calculation. During the three and nine months ended September 30, 2003, using the treasury stock method, 433 and 2,022, respectively, common stock equivalent shares related to stock options are excluded in the
calculation of diluted net income (loss) per share, as their effect is anti-dilutive. During the three and nine months ended September 30, 2002, common stock equivalent shares related to stock options were 13,657 and 13,832, respectively, and are
excluded from the calculation of diluted net income (loss) per share, as their effect is anti-dilutive. Accordingly, basic and diluted loss per share during the three and nine months ended September 30, 2002 are equivalent.



Goodwill and Intangible Assets: Intangible assets include identifiable
intangible assets purchased through the i-FRONTIER acquisition in November 2002. Intangible assets are presented net of related accumulated amortization and are being amortized on a straight-line basis over three to seven years. The Company performs
an impairment test on goodwill and intangible assets with identified lives, in accordance with the guidance provided by SFAS No. 142, Goodwill and Other Intangible Assets, at least annually, and more often if events and circumstances
indicate that such assets might be impaired. The Company will perform its annual impairment assessment of goodwill during the fourth quarter of 2003.



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##### Table of Contents

AQUANTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2003

(in thousands except per share amounts)

(unaudited)



Stock-Based Compensation: The Company has elected to apply the disclosure-only provisions of
SFAS No. 123, Accounting for Stock-Based Compensation. In accordance with the provisions of SFAS No. 123, the Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its stock option plans. The Company has recorded approximately $84, $27, $276, and $133 as compensation expense for the issuance of non-qualified stock options for the three and nine months ended September 30, 2003
and 2002, respectively.



The following table summarizes
relevant information as to reported results under the Companys intrinsic value method of accounting for stock awards, with supplemental information as if the fair value recognition provisions of SFAS No. 123 had been applied:



|                                                                                               |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|---------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | -
|                                                                                               |  | 2003                             |        |   | 2002                            |  
|Net income (loss), as reported                                                                 |  | $                                | 3,442  |   |                                 | $
|Add: stock-based employee compensation expense included in reported net income (loss)          |  |                                  | 300    |   |                                 |  
|Deduct: total stock-based compensation determined under fair value based method for all awards |  |                                  | (2,407 | ) |                                 |  
|As adjusted net income (loss), fair value method for all stock-based awards                    |  | $                                | 1,335  |   |                                 | $
|                                                                                               |  |                                  |        |   |                                 |  
|Basic net income (loss) per share:                                                             |  |                                  |        |   |                                 |  
|As reported                                                                                    |  | $                                | 0.06   |   |                                 | $
|As adjusted                                                                                    |  | $                                | 0.02   |   |                                 | $
|Diluted net income (loss) per share:                                                           |  |                                  |        |   |                                 |  
|As reported                                                                                    |  | $                                | 0.05   |   |                                 | $
|As adjusted                                                                                    |  | $                                | 0.02   |   |                                 | $



The fair value for
each option granted was estimated at the date of grant using the Black-Scholes option-pricing model, assuming no expected dividends and the following weighted average assumptions:



|                                         |  | September 30, |  
|---------------------------------------- |  | ------------- | -
|                                         |  | 2003          |  
|Weighted average risk-free interest rate |  | 3.20          | %
|Expected lives (in years)                |  | 1-4.5         |  
|Expected dividend yields                 |  |              |  
|Expected volatility                      |  | 111           | %



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##### Table of Contents

AQUANTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2003

(in thousands except per share amounts)

(unaudited)



3. Earning (Loss) Per Share



The following is a reconciliation of the numerators and denominators used in computing basic and diluted earnings (loss) per
share:



|                                                                      |  | Three Months Ended September 30, |        |      | Nine Months Ended September 30, |       
|--------------------------------------------------------------------- |  | -------------------------------- | ------ | ---- | ------------------------------- | ------
|                                                                      |  | 2003                             |        | 2002 |                                 |       
|Net income (loss) available for common shareholders (A)               |  | $                                | 3,442  |      | $                               | (677  
|                                                                      |  |                                  |        |      |                                 |       
|Gross weighted average common shares outstanding                      |  |                                  | 59,647 |      |                                 | 58,509
|Less: Weighted average common shares subject to repurchase            |  |                                  | 3      |      |                                 | 141   
|                                                                      |  |                                  |        |      |                                 |       
|Shares used in computation of basic net income (loss) per share (B)   |  |                                  | 59,644 |      |                                 | 58,368
|                                                                      |  |                                  |        |      |                                 |       
|Add: Dilutive effect of employee stock options                        |  |                                  | 9,636  |      |                                 |      
|                                                                      |  |                                  |        |      |                                 |       
|Shares used in computation of diluted net income (loss) per share (C) |  |                                  | 69,280 |      |                                 | 58,368
|                                                                      |  |                                  |        |      |                                 |       
|Basic net income (loss) per share (A/B)                               |  | $                                | 0.06   |      | $                               | (0.01 
|                                                                      |  |                                  |        |      |                                 |       
|Diluted net income (loss) per share (A/C)                             |  | $                                | 0.05   |      | $                               | (0.01 
|                                                                      |  |                                  |        |      |                                 |       



4. Segment Reporting



The Company reports selected segment information in its
financial reports to shareholders in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.



The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The segment information
provided reflects the two distinct lines of business within the Companys organizational structure: digital marketing services, which consists of Avenue A and i-FRONTIER, and digital marketing technologies, which consists of Atlas DMT.



Segment income (loss) from operations excludes amortization
and non-cash stock compensation expenses as these are centrally managed at the corporate level and not reviewed by the Companys chief operating decision maker in evaluating results by segment.



Reconciling items include the elimination of intersegment revenue, as Atlas
DMT provides the Atlas Digital Marketing Suite to Avenue A, and corporate expense and other non-recurring items not allocated to segments. Intersegment revenue is recorded at market rates as if the transactions occurred with third parties. All of
the digital marketing services sales are to external customers. Digital marketing technologies sales to external customers were $2,496, $648, $6,109, and $897 during the three and nine months ended September 30, 2003 and 2002, respectively. Segment
information for the three and nine months ended September 30, 2003 and 2002 is as follows:



|                                    |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|----------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | -
|                                    |  | 2003                             |        |   | 2002                            |  
|Revenue:                            |  |                                  |        |   |                                 |  
|Digital marketing services          |  | $                                | 56,084 |   |                                 | $
|Digital marketing technologies      |  |                                  | 7,767  |   |                                 |  
|Intersegment eliminations           |  |                                  | (5,271 | ) |                                 |  
|                                    |  |                                  |        |   |                                 |  
|Total revenue                       |  | $                                | 58,580 |   |                                 | $
|                                    |  |                                  |        |   |                                 |  
|Income (loss) from operations:      |  |                                  |        |   |                                 |  
|Digital marketing services          |  | $                                | 2,103  |   |                                 | $
|Digital marketing technologies      |  |                                  | 2,885  |   |                                 |  
|Reconciling amounts                 |  |                                  | (2,449 | ) |                                 |  
|                                    |  |                                  |        |   |                                 |  
|Total income (loss) from operations |  | $                                | 2,539  |   |                                 | $
|                                    |  |                                  |        |   |                                 |  



The Company had no
material sales to international customers.



Pursuant to SFAS
No. 131, total segment assets have not been disclosed as this information is not reported to or used by the chief operating decision maker. Additionally, substantially all of the Companys assets are located in the United States as of September
30, 2003.



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AQUANTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2003

(in thousands except per share amounts)

(unaudited)



5. Acquisition



Effective November 25, 2002, the Company acquired 100% of the stock of i-FRONTIER, Corp., a Philadelphia-based, full-service interactive advertising
agency. Management believes that the purchase of i-FRONTIER further enhances the Companys digital marketing services with the addition of a strong client portfolio, especially in the pharmaceutical industry. In connection with the acquisition,
the Company paid $5,000 in cash in exchange for all of the outstanding common stock of i-FRONTIER. The Company also incurred $191 in acquisition costs, for a total initial purchase price of $5,191. The purchase agreement also includes future
contingent payments in 2004 and 2006, which will be determined based upon the revenue and earnings of i-FRONTIER through December 31, 2005. In the event that i-FRONTIER achieves results consistent with managements current forecasts, we
estimate that future payments will range from $9,400 to $15,200. However, these payments will be adjusted based on actual earnings over the four years ending December 31, 2005 and only will be recorded when actually determined, due to the
uncertainty of achieving these results. The future contingent payments, when and if made, will be recorded as goodwill.



6. Intangible Assets



The Company adopted SFAS No. 142 on January 1, 2002 and completed a transitional impairment test for the intangible assets recorded in connection with the
purchase of Avenue A/NYC LLC during September 1999. Upon adoption of SFAS No. 142, the Company reclassified all previously recorded intangible assets as goodwill, as those assets related to workforce and customer base, did not meet the criteria
under SFAS No. 142 for separate identification. Furthermore, as a result of the impairment test, during the quarter ended March 31, 2002, the Company recorded an impairment charge of $1,330 that has been recognized as a cumulative effect of a change
in accounting principle in the accompanying consolidated financial statements. This impairment charge impacted the Digital Marketing Services segment. In connection with the acquisition of i-FRONTIER in November 2002, the Company recorded
goodwill and intangible assets with definite lives. As of September 30, 2003, goodwill was $2,292 and the intangible assets related to customer relationships, developed technology, and a non-compete agreement had net book values of $1,569, $173, and
$144, respectively.



7. Stock Repurchase Program



In April 2002, the Company announced that its Board of Directors had
authorized a stock repurchase program, under which up to $15,000 of the Companys common stock could be repurchased from time to time with available funds. The primary purpose of the stock repurchase program is to allow the Company the
flexibility to repurchase its common stock to potentially reduce stock dilution and seek to improve its long-term earnings per share. Repurchases may be made in the open market or in privately negotiated transactions, subject to regulatory
considerations, and may be discontinued at any time. During the year ended December 31, 2002, the Company repurchased 714,500 shares of common stock for approximately $1,800. During the nine months ended September 30, 2003, the Company did not
repurchase any shares of common stock. Although the stock repurchase program remains in place, the Company does not currently intend to make repurchases under the present circumstances. The number of shares of common stock actually acquired, if any,
by the Company will depend on subsequent developments, corporate needs and market conditions. If subsequent developments occur or corporate needs and market conditions change that might cause the Company to make one or more repurchases, the Company
would not necessarily make a public announcement about it at that time.



8.
Legal Proceedings



The Company has been named as a
defendant in a consolidated lawsuit alleging violations of the federal securities laws in connection with disclosures contained in the Companys prospectus dated February 28, 2000, for its initial public offering of common stock. The Company is
also the subject of a lawsuit claiming patent infringement. The Company believes these lawsuits are without merit and is vigorously defending against them. The Company may be subject to additional suits in the future regarding its collection and use
of Internet user information, regarding intellectual property rights or regarding alleged violations of the federal securities laws. 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 the Company may be subject to similar claims. The pending lawsuits could seriously harm the Companys business.
In addition, any future claim by a government entity or other third party against the Company regarding its collection and use of Internet user information, regarding intellectual property rights or regarding alleged violations of the federal
securities laws could seriously harm the Companys business.



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##### Table of Contents

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



The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements
and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The discussion in this report contains forward-looking statements that involve risks and uncertainties, such as our objectives, expectations and intentions. Our
actual results could differ materially from results that may be anticipated by such forward-looking statements. 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 report. When used in this document, the words believes, expects,
anticipates, intends, plans and similar expressions, are intended to identify certain of these forward-looking statements. However, these words are not the exclusive means of identifying such statements. In
addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The cautionary statements made in this document should be read as being applicable to all
related forward-looking statements wherever they appear in this document. 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. Unless the context requires otherwise in this Quarterly Report the terms aQuantive,
the Company, we, us and our refer to aQuantive, Inc. and its subsidiaries, and references to Avenue A refer to the Avenue A operating unit, i-FRONTIER refer to i-FRONTIER,
Corp., an operating unit and wholly-owned subsidiary of aQuantive Inc., and Atlas DMT refer to Atlas DMT LLC, a wholly owned subsidiary of aQuantive, Inc.



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 two lines of business, digital marketing services, including our Avenue A and i-FRONTIER operating units, and digital marketing technologies, through our Atlas DMT operating unit.



Through our interactive advertising agencies, Avenue A and i-FRONTIER, we offer advertisers a suite of services that enable
those advertisers to increase the effectiveness and return on investment of their Internet advertising campaigns. Our agency core services include media planning and buying, ad serving, campaign analysis, optimization, data collection and
aggregation and creative and Web site development. In addition, we offer our clients services such as our Strategic Partnership Program, Customer Targeting, E-mail, Customer Insights, Search Engine Optimization Program, and products such as Vital
Signs and Avondale.



Through our Atlas DMT operating unit, we
provide large traditional advertising agencies, specialty interactive advertising agencies, and large advertisers who buy media directly with the ability to manage online media planning, buying, ad delivery and analysis. Our proprietary digital
marketing management system is known as the Atlas Digital Marketing Suite, which is an end-to-end solution that consists of the Atlas Media Console, the Atlas Creative Management System, the Atlas Delivery and Tracking Service, and the Atlas
Analysis and Optimization Engine. We also offer our clients additional online tools such as Vital Signs, GRP and Reach Forecaster, and Brand Exposure Duration (BXD).



Critical Accounting Policies and Judgments



The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America 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 condensed consolidated financial statements and accompanying notes. The United
States Securities and Exchange Commission (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 only upon information presently available. Actual results may differ significantly from these estimates under different
assumptions or conditions.



Revenue Recognition



The majority of our revenue in 2003 and 2002 has been
recognized on a gross basis in accordance with the final consensus reached by the Emerging Issues Task Force (EITF) in July 2000 on EITF 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. Revenue generated under gross
method contracts, which consists of the gross value of our billings to our clients, includes the price of the advertising space that we purchase from Web sites to resell to our clients. To generate revenue under these contracts, we purchase
advertising space from publisher Web sites and sell the purchased space to our clients and are ultimately responsible for payment to Web sites for the cost of space we purchase. We also recognize revenue for certain contracts with clients under the
net method. To generate revenue under net method contracts, we buy advertising space from publisher Web sites on behalf of our clients and earn fees based on the dollar amount of advertising space we purchase. Under net method contracts, our clients
are primarily responsible for payment to the publisher Web sites for the cost of the advertising space purchased. All such revenue, including revenue from our core services, the Strategic Partnership Program and Customer Targeting, is recognized
over the period that the related advertising is delivered or services are provided.



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##### Table of Contents

During 2003, we intend to revise contractual agreements with clients and online publishers so that direct
liability for media purchases will rest with Avenue As clients. We intend to make these new contractual terms effective January 1, 2004. Accordingly, beginning on January 1, 2004, we intend to generate all revenue under net method contracts.
We believe that these net method contracts will be consistent with the type of contracts that most advertising agencies use and will better facilitate financial comparisons with competitors in our industry. We also believe that this change in
contracts will standardize contractual terms and revenue presentation among our interactive advertising agency operating units and mitigate state tax and certain other business obligations.



The tables below provide a reconciliation of revenue as reported to net
revenue, which excludes the cost of media purchased for our Avenue A clients:



|                             |  | Three Months Ended September 30, |         |   | Nine Months Ended September 30, |  
|---------------------------- |  | -------------------------------- | ------- | - | ------------------------------- | -
|                             |  | 2003                             |         |   | 2002                            |  
|                             |  | (in thousands)                   |        
|Revenue, as reported         |  | $                                | 58,580  |   |                                 | $
|Less cost of media purchases |  |                                  | (42,933 | ) |                                 |  
|                             |  |                                  |         |   |                                 |  
|Net revenue                  |  | $                                | 15,647  |   |                                 | $
|                             |  |                                  |         |   |                                 |  



Net revenue, which
excludes the cost of media purchased from our Avenue A clients is not a measure determined under generally accepted accounting principles, or GAAP, in the United States of America and may not be comparable to similarly titled measures reported by
other companies. We have presented net revenue to provide additional information that we believe will better facilitate financial comparisons with competitors in our industry.



We generally recognize revenue from E-mail, which is a volume-based service, when impressions are delivered. We recognize
revenue from Search Engine Optimization Programs based on either volume or as a subscription. Revenue from the volume-based service is generally recognized when impressions are delivered and revenue from the subscription-based service is recognized
ratably over the service period. Vital Signs and Avondale are monthly subscription-based services, and revenue is recognized for each month that the service is provided. Revenue is generally recognized for Customer Insight services under a
proportional performance method of accounting. It is our policy to recognize any loss on services as soon as management estimates indicate a loss will occur. Historically, we have not generated losses on these types of contracts.



Our Atlas DMT operating unit provides digital marketing technology services
to manage online media planning, buying, ad delivery and analysis for advertising agencies and advertisers. These services are offered online through the Atlas Digital Marketing Suite as are our other services such as Vital Signs, GRP and Reach
Forecaster, and Brand Exposure Duration (BXD). Revenue from such services is recognized based on either volume or as a subscription. Revenue from the volume-based services is recognized based on the volume in the period of usage. Revenue from
subscription-based services is recognized ratably over the service period.



Revenue is deferred in cases where we have not yet earned advertising revenue but have billed the customer or received payment from the customer prior to providing the services. Revenue is recognized only when
collection of the resulting receivable is reasonably assured.



Revenue also includes any reimbursements received from our clients related to expenses incurred by our employees in servicing our clients. Such expenses include airfare, mileage, meals and hotel stays.



Accounting for Acquisitions



In connection with our acquisition of i-FRONTIER in November 2002, we
allocated the cost of the acquisition to the assets acquired and liabilities assumed based on their estimated fair values at date of acquisition in accordance with SFAS No. 141. As a result, the excess of the purchase price over the value of the net
tangible assets acquired was allocated to the following (in thousands):



|Non-compete agreement  |  | $ | 172  
|---------------------- |  | - | -----
|Customer relationships |  |   | 1,785
|Developed technology   |  |   | 240  
|Goodwill               |  |   | 2,292
|                       |  |   |      
|                       |  | $ | 4,489
|                       |  |   |      



Significant judgment
is required to estimate the fair value at date of acquisition, including estimating future cash flows from the acquired business, determining appropriate discount rates, asset lives, and other assumptions.



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Accounting for Goodwill and Certain Other Intangibles



In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets, which provides accounting and reporting standards for acquired intangible assets. Under SFAS No. 142, goodwill and other intangible assets with indefinite useful lives are no longer
amortized but tested for impairment at least annually. We adopted SFAS No. 142 on January 1, 2002, and completed a transitional impairment test for the intangible assets recorded in connection with the purchase of Avenue A/NYC LLC in September 1999.
Upon adoption of SFAS No. 142, we reclassified all previously recorded intangible assets as goodwill, as those assets related to workforce and customer base did not meet the criteria under SFAS No. 142 for separate identification. Furthermore, as a
result of the impairment test, we recorded an impairment charge of $1.3 million that has been recognized as a cumulative effect of a change in accounting principle for the quarter ended March 31, 2002.



In connection with our acquisition of i-FRONTIER in November 2002, we
recorded certain goodwill and other intangible assets with finite lives. The separable intangible assets that have finite lives will continue to be amortized over their estimated lives, ranging from three to seven years. We will perform an
impairment test on goodwill, in accordance with the guidance provided by SFAS No. 142, at least annually, unless events and circumstances indicate that such assets might be impaired, in which case we would perform an impairment analysis at such
time. We will perform our annual impairment assessment of goodwill during the fourth quarter of 2003. Impairment adjustments recognized, if any, generally are recognized as operating expenses. Application of the goodwill impairment test requires
judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Significant judgments required to estimate
the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each
reporting unit.



The i-FRONTIER purchase agreement also
includes future contingent payments in 2004 and 2006, which will be determined based upon the operating results of i-FRONTIER through December 31, 2005. Any contingent payments will be recorded as goodwill. The calculation of the contingent payments
is based upon a combination of a multiple of earnings through December 31, 2005 and an amount equal to the value of net assets at the date of acquisition. The agreement includes the potential for an interim payment based upon i-FRONTIER earnings
during the two years ending December 31, 2003, which is partially refundable based upon i-FRONTIER earnings during the four years ending December 31, 2005. During this period, the assets recorded in connection with the contingent payments will be
adjusted as actual earnings become known. These adjustments require judgment, including estimating the future earnings of i-FRONTIER.



Accounting for Stock-Based Compensation



We have elected to apply the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. In accordance with the
provisions of SFAS No. 123, we apply Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for our stock option plans. A number of companies have recently adopted
or announced their intention to adopt the fair value based method of accounting for stock-based employee compensation. To respond to concerns raised by constituents, in December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
CompensationTransition and Disclosure. This Statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. We are
currently evaluating the alternative methods of transition,and, if we decide to voluntarily adopt the fair value based method of accounting for stock-based compensation, this could have a significant impact on our operating results.



Accounting for Income Taxes



We account for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable for the current year and deferred tax assets and liabilities for the future tax consequences of events that
have been recognized in an entitys financial statements or tax returns.



The determination of the amount of taxes payable for the current year includes estimates of expected taxable income. In the event that actual results differ materially from managements expectations, the
estimated taxes payable could materially change, directly impacting our financial position or results of operations.



The determination of deferred tax assets and liabilities includes assessing the future tax consequences of events that have been recognized in our
financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact our financial position or results of operations.



Estimates and Assumptions Related to Financial Statements



The discussion and analysis of our financial condition and results of operations is based upon our audited 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.



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Washington State tax authorities issued a ruling in 2002 that permitted us to exclude amounts paid by us
to purchase media for clients, which is ultimately billed to and paid for by clients, from the measure of Washington State business and occupation tax. We subsequently received reporting instructions from Washington State tax authorities that
disallowed this exclusion effective February 2003. We are considering alternatives to mitigate the resulting adverse tax consequences, including evaluation of tax strategies that might allow deduction of media purchases in connection with the
measure of business and occupation tax and assertion of administrative remedies in accordance with Washington State tax regulations.



Results of Operations



The following table presents, in dollars and as a percentage of revenue, statements of operations data for the three and nine months ended September 30,
2003 and 2002. Our discussion of revenue and cost of revenue that follows provides a reconciliation of revenue and cost of revenue as reported and revenue and cost of revenue as if cost of media purchases were excluded (net revenue). We believe the
net revenue analysis facilitates a better comparison of our digital marketing services against other companies in our industry, since many of these companies also exclude the cost of media from reported revenue. Furthermore, due to the prospective
contractual changes discussed previously, we believe this measure will enhance comparability in future periods. The results of any period are not necessarily indicative of results for any future period.



|                                                                                                                       |  | Three Months Ended September 30,         |        |  | Nine Months Ended September 30, |  
|---------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------ |  | ------------------------------- | -
|                                                                                                                       |  | 2003                                     |        |  | 2002                            |  
|                                                                                                                       |  | (in thousands except percentage amounts) |       
|Revenue                                                                                                                |  | $                                        | 58,580 |  | 100.0                           | %
|Expenses:                                                                                                              |  |                                          |        |  |                                 |  
|Cost of revenue                                                                                                        |  |                                          | 43,607 |  | 74.5                            | %
|Client support                                                                                                         |  |                                          | 5,775  |  | 9.9                             | %
|Product development                                                                                                    |  |                                          | 1,113  |  | 1.9                             | %
|Selling, general and administrative                                                                                    |  |                                          | 4,164  |  | 7.1                             | %
|Depreciation and amortization of property and equipment                                                                |  |                                          | 1,010  |  | 1.7                             | %
|Amortization of deferred stock compensation                                                                            |  |                                          | 300    |  | 0.5                             | %
|Amortization of intangible assets                                                                                      |  |                                          | 72     |  | 0.1                             | %
|Corporate restructuring charges                                                                                        |  |                                          |       |  |                                |  
|                                                                                                                       |  |                                          |        |  |                                 |  
|Total expenses                                                                                                         |  |                                          | 56,041 |  | 95.7                            | %
|Income (loss) from operations                                                                                          |  |                                          | 2,539  |  | 4.3                             | %
|Interest and other income, net                                                                                         |  |                                          | 1,077  |  | 1.9                             | %
|                                                                                                                       |  |                                          |        |  |                                 |  
|Income (loss) before cumulative effect on prior years of change in accounting principle and provision for income
taxes |  |                                          | 3,616  |  | 6.2                             | %
|Provision for income taxes                                                                                             |  |                                          | 174    |  | 0.3                             | %
|                                                                                                                       |  |                                          |        |  |                                 |  
|Net income (loss) before cumulative effect on prior years of change in accounting principle                            |  |                                          | 3,442  |  | 5.9                             | %
|Cumulative effect of change in accounting principle                                                                    |  |                                          |       |  |                                |  
|                                                                                                                       |  |                                          |        |  |                                 |  
|Net income (loss)                                                                                                      |  | $                                        | 3,442  |  | 5.9                             | %
|                                                                                                                       |  |                                          |        |  |                                 |  



Revenue. The
following table provides a reconciliation of revenue as reported to net revenue, which excludes the cost of media purchased for our Avenue A clients.



|                             |  | Three Months Ended September 30, |         |   | Nine Months Ended September 30, |  
|---------------------------- |  | -------------------------------- | ------- | - | ------------------------------- | -
|                             |  | 2003                             |         |   | 2002                            |  
|                             |  | (in thousands)                   |        
|Revenue, as reported         |  | $                                | 58,580  |   |                                 | $
|Less cost of media purchases |  |                                  | (42,933 | ) |                                 |  
|                             |  |                                  |         |   |                                 |  
|Net revenue                  |  | $                                | 15,647  |   |                                 | $
|                             |  |                                  |         |   |                                 |  



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Revenue increased to $58.6 million for the three months ended September 30, 2003 from $34.4 million for
the three months ended September 30, 2002. Revenue increased to $158.1 million for the nine months ended September 30, 2003 from $88.3 million for the nine months ended September 30, 2002. Revenue from digital marketing services increased to $56.1
million and $152.0 million for the three and nine months ended September 30, 2003 from $33.7 million and $87.4 million for the three and nine months ended September 30, 2002, respectively. Revenue from digital marketing technologies increased to
$2.5 million and $6.1 million for the three and nine months ended September 30, 2003 from $648,000 and $896,000 for the three and nine months ended September 30, 2002, respectively.



During the nine months ended September 30, 2003, we added a net total of six new digital marketing services clients. Revenue
has increased each quarter of 2003 primarily due to increases in spending for our digital marketing services among our existing customers and the clients that were added during the nine months ended September 30, 2003. Typically, new clients begin
their online advertising with modest campaigns for several quarters followed by campaign increases as they begin to see results from their initial campaigns. In general, we believe many companies are beginning to understand the effectiveness of
online media, resulting in increased online budgets through additional incremental advertising spending and the movement of more traditional marketing spending to non-traditional programs, such as online advertising. The increase in revenue was also
attributable to digital marketing technologies. We continued to add clients for our Atlas Digital Marketing Suite, including agencies and direct advertisers. During the three months ended September 30, 2003, our digital marketing technologies line
of business was successful in adding a net total of 26 additional clients. Due to the increase in spending among our client base and because of a significant client loss, revenue from our five largest revenue generating clients decreased to 67% of
our total revenue during the three months ended September 30, 2003 compared to 70% during the three months ended June 30, 2003 and 71% during the three months ended September 30, 2002.



In July 2003, we announced the loss of one of our clients that was historically one of our five largest revenue generating
clients. We largely concluded our relationship with this client during the quarter ended September 30, 2003. Consequently, we expect revenue contributions from this client to continue to decline during the three months ended December 31, 2003.
During the remainder of 2003, we expect to continue to experience increased revenue from digital marketing services, with increased contribution from new clients. In addition, we expect digital marketing technologies to continue to grow its revenue
from agencies and direct advertisers. Accordingly, we expect total revenues in the range of $218 million to $223 million in 2003.



Net revenue, which excludes the cost of media purchases, increased to $15.7 million and $45.7 million for the three and nine months ended September 30,
2003, from $10.8 million and $27.1 million for the three and nine months ended September 30, 2002, respectively. The increase in net revenue was primarily due to increases in spending from our existing clients and increased revenue contribution from
new clients, resulting in increased fees earned from our clients. In addition, revenue from digital marketing technologies increased significantly during the three and nine months ended September 30, 2003, compared to the three and nine months ended
September 30, 2002, as we continue to add clients for our Atlas Digital Marketing Suite, including external agencies and direct advertisers.



Cost of revenue. The following table provides a reconciliation of cost of revenue as reported to cost of revenue exclusive of media purchases for
our Avenue A clients.



|                                              |  | Three Months Ended September 30, |         |   | Nine Months Ended September 30, |  
|--------------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------- | -
|                                              |  | 2003                             |         |   | 2002                            |  
|                                              |  | (in thousands)                   |        
|Cost of revenue, as reported                  |  | $                                | 43,607  |   |                                 | $
|Less cost of media purchases                  |  |                                  | (42,933 | ) |                                 |  
|                                              |  |                                  |         |   |                                 |  
|Cost of revenue, exclusive of media purchases |  | $                                | 674     |   |                                 | $
|                                              |  |                                  |         |   |                                 |  



Cost of revenue
consists mainly of the costs of media that we purchase from publishers Web sites, and the variable costs of delivering the advertisements over the Internet. It also consists of costs paid to third parties for email delivery, surveys, and
search engine optimization. Cost of revenue increased to $43.6 million, or 74.5% of revenue, for the three months ended September 30, 2003 from $24.2 million, or 70.5% of revenue, for the three months ended September 30, 2002. Cost of revenue
increased to $114.3 million, or 72.3% of revenue, for the nine months ended September 30, 2003 from $63.0 million, or 71.3% of revenue, for the nine month ended September 30, 2002. The dollar increases in cost of revenue were primarily due to
increases in the volume of advertising space we purchased for our clients, as spending for our services increased among existing and new clients. Due to the expected growth in revenue from existing clients and increased contribution from new
clients, we anticipate cost of revenue in the range of $159 million to $162 million in 2003.



The cost of revenue exclusive of media purchases decreased to $674,000 for the three months ended September 30, 2003, from $690,000 during the three months ended September 30, 2002. The decrease in cost of revenue
exclusive of media purchases was due to the timing and use of services such as survey delivery, search engine optimization, and email. In addition, the variable cost of delivering advertisements over the Internet, specifically bandwidth costs,
decreased as we continue to renegotiate lower pricing with our bandwidth providers. The cost of revenue exclusive of media purchases increased to $2.0 million for the nine months ended September 30, 2003 from $1.8 million for the nine months ended
September 30, 2002. The increase in cost of revenue exclusive of media purchases was due to an increased use of services such as survey delivery, search engine optimization, and email. In addition, bandwidth costs increased during this period due to
the increased volume of ads served, which was partially offset by the decreased bandwidth costs experienced during the three months ended September 30, 2003.



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Client support. Client support expenses consist primarily of salaries and related expenses for
client support personnel, including employees within our digital marketing services client teams and client service employees within digital marketing technologies. Client support expenses also include employees who support other functions such as
the Strategic Partnership Program and Customer Insight services. Client support expenses increased to $5.8 million, or 9.9% of revenue, for the three months ended September 30, 2003 from $3.6 million, or 10.5% of revenue, for the three months ended
September 30, 2002. Client support expenses increased to $18.1 million, or 11.4% of revenue, for the nine months ended September 30, 2003, from $10.5 million, or 11.8% of revenue, for the nine months ended September 30, 2002. The dollar increases in
client support expenses were primarily due to the increased headcount associated with the addition of i-FRONTIER. In addition, headcount in client support personnel increased to support increased spending by our new and existing digital marketing
services clients and the new clients added in our digital marketing technologies line of business. The decreases in client support expenses as a percentage of revenue during the three and nine months ended September 30, 2002 and 2003 were primarily
due to increased revenue from new and existing clients, while headcount and the related expenses for client support staff increased at a slower rate. In general, increased spending from existing clients requires only modest increases in client
support costs. Additions of new clients generally increase the need for client support staff as the clients begin to increase their advertising spending, which can typically takes several quarters. As we added a net six new clients during the nine
months ended September 30, 2003 and we expect to add additional new clients during the remainder of 2003 and through 2004, we anticipate an increase in client support costs in the event that these clients begin to increase their advertising
spending.



Product development.Product development
expenses consist of salaries and related expenses for product development as well as research and development personnel. In addition, product development expenses include the costs of software development and the costs incurred in preparing our
Atlas Digital Marketing Suite for marketing to
external clients. Product development expenses decreased to $1.1 million or 1.9% of revenue, for the three months ended September 30, 2003, from $1.6 million, or 4.5% of revenue, for the three months ended September 30, 2002. Product development
expenses decreased to $3.0 million, or 1.9% of revenue, for the nine months ended September 30, 2003, from $4.9 million, or 5.5% of revenue, for the nine months ended September 30, 2002. The dollar and percentage decreases during the three and nine
months ended September 30, 2003 and 2002 were primarily due to an increase in the capitalization of certain direct costs incurred in the development of our Atlas Digital Marketing Suite and decreased personnel costs due to the reduction in force
that occurred in September 2002.



Selling, general and
administrative. Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, sales, finance, marketing, human resource and administrative personnel, professional fees, and other general corporate
expenses including rent. In addition, these expenses include marketing costs such as trade shows and the costs of advertising our services in trade publications. Selling, general and administrative expenses increased to $4.2 million, or 7.1% of
revenue, for the three months ended September 30, 2003, from $4.0 million, or 11.7% of revenue, for the three months ended September 30, 2002. Selling, general and administrative expenses increased to $13.0 million, or 8.2% of revenue, for the nine
months ended September 30, 2003 from $11.9 million, or 13.4% of revenue, for the nine months ended September 30, 2002. The dollar increases in selling, general and administrative expenses were primarily due to increased headcount, additional
professional services expenses associated with the increased corporate governance requirements, and an increase in sales and marketing efforts associated with our digital marketing technologies line of business. The decreases in selling, general and
administrative costs as a percentage of revenue were primarily due to revenue growth from existing and new clients that exceeded the growth in headcount and related expenses. In general, client support expenses increase as our revenues from digital
marketing services and digital marketing technologies increases. In addition, our selling expenses will also increase as digital marketing technologies revenue increases. We can support increased spending from digital marketing services and
technologies clients with modest increases in general and administrative expenses.



Depreciation and amortization of property and equipment. Depreciation and amortization of property and equipment consists primarily of depreciation expense on computer equipment, furniture and fixtures, and
software costs and amortization expense of leasehold improvements. Depreciation and amortization of property and equipment decreased to $1.0 million or 1.7% of revenue, for the three months ended September 30, 2003 from $1.2 million, or 3.5% of
revenue, for the three months ended September 30, 2002. Depreciation and amortization of property and equipment decreased to $2.7 million, or 1.7% of revenue, for the nine months ended September 30, 2003 from $3.5 million, or 4.0% of revenue, for
the nine months ended September 30, 2002. The dollar and percentage decreases were primarily due to certain assets becoming fully depreciated partially offset by the purchase of new equipment.



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 is being amortized on an accelerated basis over
the four-year vesting period of the applicable options. Amortization of deferred stock compensation decreased to $300,000 or 0.5% of revenue, for the three months ended September 30, 2003 from $739,000 or 2.2% of revenue, for the three months ended
September 30, 2002. Amortization of deferred stock compensation decreased to $904,000 or 0.6% of revenue, for the nine months ended September 30, 2003, from $2.3 million, or 2.6% of revenue, for the nine months ended September 30, 2002. The dollar
and percentage decreases were primarily related to the decrease in deferred stock compensation due to our use of the accelerated method of amortization for our employee stock compensation arrangements plus the reversal of balances of unamortized
stock-based compensation as a result of employee terminations. We anticipate that all deferred stock compensation recorded as a result of options granted prior to our initial public offering will be fully amortized by the end of 2003.



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Amortization of intangible assets. Amortization of intangible assets relates to the customer base
and non-compete agreement recorded in connection with the purchase of i-FRONTIER in November 2002. Amortization of the intangible assets associated with the purchased technology is recorded as cost of revenue and was $20,000 and $67,000 during the
three and nine months ended September 30, 2003, respectively. Amortization of intangible assets was $72 and $0 during the three months ended September 30, 2003 and 2002, respectively. Amortization of intangible assets was $204 and $0 during the nine
months ended September 30, 2003 and 2002, respectively. As of September 30, 2003, intangible assets consisted of a non-compete agreement, customer relationships, and developed technology with net book value of $144,000, $1.6 million, and $173,000,
respectively. The intangible assets are amortized on a straight-line basis over useful lives of five, seven, and three years, respectively.



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 increased to $1.1 million, or 1.9% of revenue, for the three months ended September 30, 2003 from $797,000, or 2.3% of revenue, for the three months ended September 30, 2002. The dollar increase was
primarily due to the reversal of certain liabilities that we accrued for in prior periods, a result that could re-occur in future periods. The percentage decrease was primarily due to the revenue increasing at a faster rate than our returns on
invested funds, which are a result of lower interest rates experienced in the economy. Net interest and other income decreased to $2.1 million, or 1.3% of revenue during the nine months ended September 30, 2003 from $3.2 million, or 3.5% of revenue,
during the nine months ended September 30, 2002. The dollar and percentage decreases were primarily due to lower returns on our invested funds due to the declining interest rates experienced in the economy.



Cumulative effect on prior years of a change in accounting principle.
On January 1, 2002, we adopted SFAS No. 142 and completed a transitional impairment test for the intangible assets recorded in connection with the purchase of Avenue A/NYC LLC during September 1999. Upon adoption of SFAS No. 142, we reclassified all
previously recorded intangible assets as goodwill, as those assets, related to workforce and customer base, did not meet the criteria under SFAS No. 142 for separate identification. Furthermore, as a result of the impairment test, we recorded an
impairment charge of $1.3 million that has been recognized as a cumulative effect on prior years of a change in accounting principle in the accompanying consolidated financial statements.



Outlook for 2004



In 2004, we expect continued growth in the online advertising industry, as more companies move online and find new ways to deploy this medium. We think
that our revenue in 2004 will outpace overall growth in online advertising through increased online spending from existing clients and new client wins. As such, we believe we will see revenue growth in both our digital marketing services and
technologies lines of business during 2004.



In our digital
marketing services line of business, we expect to continue to win new clients. In general, we expect to see modest campaigns for several quarters for new clients followed by campaign increases as clients begin to see results from their initial
campaigns. In addition, we expect to see increased spending from many of the clients added in 2003.



In our digital marketing technologies line of business, we expect to continue to increase the number of agency and direct advertiser clients and further
increase the adoption of our Atlas Digital Marketing Suite within existing agency clients.



In 2004, we expect increases in operating expenses as revenues increase. We expect to increase spending for customer support personnel to support new and existing clients. In addition, we anticipate some increases in
product development expenses as we continue to develop the Atlas Digital Marketing Suite and general and administrative expenses, particularly related to investments in corporate financial systems.



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, 2003, we had cash and cash equivalents of $34.6 million
and short-term investments of $93.5 million. We have a $5.5 million equipment term loan facility with a bank, of which $278,000 is outstanding as of September 30, 2003.



Net cash provided in operating activities was $9.2 million for the nine months ended September 30, 2003. Net cash provided
by operating activities was $2.6 million for the nine months ended September 30, 2002.



Net cash used in investing activities was $8.1 million for the nine months ended September 30, 2003, which was related to the purchase of software and equipment and the purchase of short-term investments. Net cash
provided by investing activities was $18.4 million for the nine months ended September 30, 2002, which was primarily related to net proceeds from the sale of marketable securities, offset by purchases of equipment.



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Net cash provided by financing activities was $1.3 million for the nine months ended September 30, 2003,
which related to proceeds from the sale of common stock upon the exercise of stock options, offset by payments on our equipment loan. Net cash used in financing activities was $2.7 million for the nine months ended September 30, 2002, which related
to payments on our equipment loan offset and cash used to repurchase common stock in accordance with our stock repurchase program. These payments were offset by proceeds from sales of securities.



As of September 30, 2003, we had material commitments related to operating
leases for office space and office equipment, and a note payable to a bank. The note is secured by the equipment purchased with the proceeds from the notes. In addition, we had material obligations related to the facility leases for our ad serving
systems.



In March 2003, we entered into an agreement with an
entity that will provide sales and service support to Atlas DMT in the United Kingdom. Under the agreement, we will pay the entity commissions based on a specified percentage of qualifying revenues. If the contract is terminated by Atlas DMT, we
will pay the lesser of a specified percentage of qualifying revenues or $1,000,000.



The i-FRONTIER purchase agreement includes potential contingent payments in 2004 and 2006, which are determined by the operating results of i-FRONTIER for the four years ending December 31, 2005. We estimate that
future payments will range from $9.4 million to $15.2 million. This estimate will be adjusted based on actual revenue and earnings over the four years ending December 31, 2005. Our estimates require judgment, based on estimating the
future earnings of i-FRONTIER. We cannot assure you that actual future payments will not be materially different than our current estimates.



In April 2002, we announced that our Board of Directors had authorized a stock repurchase program under which up to $15 million of our common stock could
be repurchased from time to time with available funds. The primary purpose of the stock repurchase program is to allow us the flexibility to repurchase our common stock to potentially reduce stock dilution and seek to improve our long-term earnings
per share. Repurchases may be made in the open market or in privately negotiated transactions, subject to regulatory considerations, and may be discontinued at any time. During the year ended December 31, 2002, we repurchased 714,500 shares of
common stock for approximately $1.8 million. During the nine months ended September 30, 2003, we did not repurchase any shares of common stock. Although the stock repurchase program remains in place, we do not currently intend to make repurchases
under the present circumstances. Future repurchases, if any, will depend on subsequent developments, corporate needs and market conditions. If subsequent developments occur or corporate needs and market conditions change that might cause us to make
one or more repurchases, we would not necessarily make a public announcement about it at that time.



Since our inception, we have significantly increased our operating expenses. Due to the estimated increase in revenue in the remainder of 2003 and 2004,
we currently anticipate that we will continue to experience some growth in our operating expenses and such expenses will be a material use of our cash resources. 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.



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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 advertising market



Our prospects for financial and operational
success must be considered in light of the risks frequently encountered by companies in the Internet 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,
2003, our accumulated deficit was $95.1 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 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. For example, although we recorded a profit in the first three quarters of 2003, we cannot assure you that we will be
profitable in subsequent quarters.



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 to implement advertising campaigns;
| | - | --------------------------------------------------------------------------------



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



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



| |  | the restructuring of contracts with clients and publishers such that we recognize revenue under the net method rather than the gross method; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------



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



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We intend to restructure most or all of our contracts with clients and publishers such that we
recognize revenue under the net method rather than the gross method, which could have an adverse effect on our stock price



We intend to restructure most of our Avenue A agency contracts with clients and publishers such that, effective January 1, 2004, we will recognize revenue under the net
method rather than the gross method, which will change the amount of revenue and cost of revenue we report. Such a change could alter the perceptions of securities analysts or investors, which could have an adverse effect on our stock price. Such a
decrease in the market price of our stock could subject us to securities class action litigation, which could result in substantial costs and payment of damages, divert our managements attention from other business concerns and otherwise harm
our business.



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 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 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 services from us or may significantly reduce their advertising 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 was going to 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 terms, and the loss of one or more of these contracts in a short period of time could harm our business



We derive substantially all of our revenue from the sale of advertising services under short-term advertising campaign services contracts,
all of which are cancelable upon 90 days or less notice. In addition, these contracts generally do not contain penalty provisions for cancellation before the end of the contract term. The non-renewal, cancellation or deferral of a significant
number of these contracts in any one period could cause an immediate and significant decline in our revenue and harm our business.



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



If the market for Internet advertising 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 to the Internet as an advertising 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 market is relatively new and rapidly evolving. As a result, demand and market acceptance for Internet advertising and
technology services is uncertain. Many of our current or potential clients have little or no experience using the Internet for advertising purposes and have allocated only a limited portion of their advertising budgets to Internet advertising. 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 to be
less effective than traditional advertising media for promoting their products and services, and therefore the market for Internet advertising 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.



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 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, prevent us from conducting targeted advertising and aggregating data from our clients advertising campaigns, and
otherwise seriously harm our business. 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.



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Defaults by issuers of short-term debt could harm our financial condition



Our short-term investments represent a significant portion of our cash
position. As of September 30, 2003, short-term investments constituted $93.5 million of our cash position of $128.2 million. If issuers of the short-term debt in which we have invested default or if the market value of such investments becomes
impaired, such defaults and impairments could significantly harm our financial condition.



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 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 Web sites. This enables our measurement of an advertising campaigns effectiveness in driving consumers to 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. Also, 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. The European Union has also enacted an electronic communications directive that imposes certain
restrictions on the use of cookies and action tags. The directive 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
directive by October 31, 2003. Germany already 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 the cookie functions of their Internet browser software. Also, Internet browser software upgrades may 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.



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 pending consolidated class action lawsuit that alleges violations of federal securities laws in connection with our initial public offering. 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. 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 are subject to patent
infringement claims and may be subject to additional claims in the future, including claims that our ad serving technologies, processes or methods infringe the patents of other parties



Other parties may claim that our technologies, processes or methods infringe their patents.
Any such claim may cause us to incur significant expense 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, which could substantially harm
our business. For example, in November 2001, we received correspondence from counsel for 24/7 Real Media, Inc. (24/7 Real Media) alleging that we infringe claims of U.S. Patent No. 6,026,368. In April 2002, we filed a lawsuit against 24/7 Real Media
seeking a declaratory judgment that we are not infringing any claims of this patent and/or that the claims of this patent are invalid. 24/7 Real Media counterclaimed, seeking dismissal of our claim, alleging current and past infringement of this
patent, seeking an injunction precluding us from using technology allegedly covered by the patent through the life of the patent, and seeking reasonable royalty or lost profits for alleged past infringement. We filed a motion for partial summary
judgment of non-infringement, which was granted on July 3, 2003. The parties have stipulated that, if the Courts order is affirmed on appeal, neither party will pursue any of their remaining claims in the case. The district court entered its
final judgment, and 24/7 Real Media has appealed. In addition, in July 2003, Unicast Communications Corp. alleged that we infringe a claim of U.S. Patent No. 6,516,338, which Unicast claims covers our rich media ad serving technology. We have denied
infringement of the patent, and the matter is currently pending.



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In addition, other 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 trademarks 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 trademarks 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.



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 their 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.



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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. 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 future success also depends on our ability to attract, retain and motivate highly skilled personnel. 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 is relatively new, yet competitive. Our digital
marketing services, including our Avenue A and i-FRONTIER operating units, compete with interactive advertising agencies, enabling online advertising technology providers, advertising networks, targeted email service providers and traditional
advertising agencies that perform Internet advertising and marketing as part of their services to clients. Our digital marketing technologies, through our Atlas DMT operating unit, compete with third-party ad serving companies and campaign
management technology companies.



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 gross 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.



Consolidation of Internet advertising networks ,Internet 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, Internet 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 Web sites. This type of concentration could substantially impair our ability to serve advertisements
if these networks or Web sites decide not to permit us to serve advertisements on their Web sites or if they develop ad placement systems that are not compatible with our ad serving systems. These networks or Web sites 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 Web sites could diminish
the value of our advertising campaign databases, as the value of these databases depends on some degree on the continuous aggregation of data from advertising campaigns on a variety of different advertising networks and Web sites.



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 Web sites 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 Seattle, Washington, Weehawken, New Jersey, and Dallas, Texas at facilities operated by Cable &
Wireless Internet Services, Inc. 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 Web sites and advertising networks 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.



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There may be risks related to our prior use of Arthur Andersen LLP as our independent auditor



Arthur Andersen LLP (Andersen) served as our independent auditor from
1998 until May 2002, when our Board of Directors dismissed Andersen. Our access to the capital markets could be impaired because Andersen can no longer make representations on our behalf with respect to audits completed by Andersen prior to its
dismissal. In addition, it is possible that the SEC may cease accepting financial statements that were audited by Andersen. If it is necessary for us to re-audit our prior financial statements, such a change could disrupt our operations and divert
the attention of our management from other business matters, and we could experience additional cost or delay in completing our periodic reports required to be filed with the SEC.



Acquisitions or investments may be unsuccessful and may divert our managements attention and consume significant
resources



We may in the future acquire or make investments in other
businesses, or acquire products and technologies, to complement our current business. Any future acquisition or investment may require us to use significant amounts of cash, issue potentially dilutive equity securities or incur debt. In addition,
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;
| | - | -----------------------------------------------------------------



| |  | 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;
| | - | ------------------------------------------------------



| |  | inability to maintain our standards, controls, procedures and policies; and
| | - | ---------------------------------------------------------------------------



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



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.



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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.



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 Web sites. Any of these developments could harm our business.



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 required us to pay Washington State business and occupation tax on the media we purchase on behalf of our clients effective February 2003. 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. Various states and foreign governments have enacted legislation and several bills have been introduced in Congress that limit or prohibit the use of unsolicited email. 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. In addition, although our email delivery program is based on the email addressees consent to receive
email, or other indication of willingness to receive such emails or as otherwise permitted 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 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. 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 use the services of our competitors.



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 October 31, 2003, the closing price of our common stock ranged from $2.56 to $13.28 per share. The market price of our common stock may fluctuate significantly in response to a number of
factors, including:



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



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| |  | 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 and, in particular, those that are Internet or advertising related.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



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.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Our exposure to market risk is limited to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates,
particularly because the majority of our investments are in short-term, investment-grade debt securities issued by corporations and the U.S. government. We place our investments with high-quality issuers and limit the amount of credit exposure to
any one issuer. Due to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure. We do not have any foreign currency or other derivative financial instruments.



ITEM 4. CONTROLS AND PROCEDURES



Evaluation of
Disclosure Controls and Procedures



As of the end of the
period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and our chief financial officer, of the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, our chief executive officer and our chief financial officer have concluded that, as of the date of the evaluation, our disclosure
controls and procedures were effective. It should be noted that the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions, regardless of how remote.



Changes in Internal Controls



No change was made to our internal control over financial reporting in connection with this evaluation that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.



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PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



We have
been named as a defendant in a consolidated amended class action complaint filed in the United States District Court for the Southern District of New York on or about April 19, 2002 and captionedIn re Avenue A, Inc. Initial Public Offering
Securities Litigation. This consolidated complaint relates to several previously filed class action complaints filed against us, the first of which was originally filed on or about June 15, 2001. Plaintiffs filed the consolidated complaint on
behalf of themselves and all others who acquired our common stock between February 28, 2000 and December 6, 2000, pursuant or traceable to our prospectus dated February 28, 2000. The complaint also named as defendants Morgan Stanley & Co.,
Salomon Smith Barney, Inc., Thomas Weisel Partners, LLC, and RBC Dain Rauscher, Inc., certain of the underwriters of our initial public offering; Brian P. McAndrews, our President and Chief Executive Officer; Nicolas Hanauer, our Chairman of the
Board; and Robert Littauer, our former Chief Financial Officer. The complaint contains the following purported claims against all defendants: (1) violation of 15 U.S.C. § 77k (Section 11 of the Securities Act of 1933), and (2) violation of 15
U.S.C. § 78j(b) (Section 10(b) of the Securities Exchange Act of 1934) and 17 C.F.R. § 240.10b-5 (Exchange Act Rule 10b-5). The complaint contains the following purported claims against the individual defendants alone: (1) violation of 15
U.S.C. § 77o (Section 15 of the Securities Act of 1933), and (2) violation of 15 U.S.C. § 78t(a) (Section 20(a) of the Securities Exchange Act of 1934). Plaintiffs seek monetary damages. The complaint alleges violations of federal
securities laws in connection with disclosures contained in our prospectus dated February 28, 2000, for our initial public offering of common stock. The complaint alleges incorrect disclosure or omissions in our prospectus relating generally to
commissions to be earned by the underwriters and certain allegedly improper agreements between the underwriters and certain purchasers of our common stock. It also alleges that the SEC and/or other regulatory authorities are investigating
underwriting practices similar to those alleged in the complaint. We have no knowledge as to whether aQuantive or our initial public offering is the subject of any such investigation.



This consolidated complaint is among over 300 similar consolidated class action lawsuits filed in the United States District
Court for the Southern District of New York against underwriters and other issuers of stock in initial public offerings. The Court has coordinated the cases under a single case number for pretrial proceedings. On July 15, 2002, the issuer defendants
as a group filed a motion to dismiss the claims alleged in the consolidated complaints. On October 8, 2002, the court entered an order dismissing, without prejudice, all of the claims against Messrs. McAndrews, Hanauer, and Littauer in the
consolidated class action lawsuit pursuant to an agreement between plaintiffs and Messrs. McAndrews, Hanauer and Littauer. On February 19, 2003, the court granted aQuantives motion to dismiss the claims against it under Section 10(b) of the
Securities Exchange Act of 1934 and denied its motion to dismiss the claims against it under Section 11 of the Securities Exchange Act of 1933.



By action of a special committee of disinterested directors (who were neither defendants in the litigation nor members of our Board of Directors at the
time of the actions challenged in the litigation), we recently decided to accept a settlement proposal presented to all issuer defendants. In this settlement, plaintiffs will dismiss and release all claims against us and Messrs. McAndrews, Hanauer,
and Littauer, in exchange for a contingent payment by the insurance companies collectively responsible for insuring the issuers in all of the consolidated IPO cases, and for the assignment or release of certain potential claims that we may have
against the underwriters. We will not be required to make any cash payments in the settlement, unless the pro rata amount paid by the insurers in the settlement on our behalf exceeds the amount of the insurance coverage, a circumstance that we
believe is not likely to occur. The settlement is subject to a number of procedural conditions. The settlement will also require approval by the Court, which cannot be assured, after class members are given the opportunity to object to the
settlement or opt out of the settlement.



On April 19, 2002, we
filed a lawsuit against 24/7 Real Media, Inc. in the United States District Court for the Western District of Washington seeking a declaratory judgment that aQuantive is not infringing any claims of U.S. Patent No. 6,026,368 and/or that the claims
of the patent are invalid. On May 10, 2002, 24/7 Real Media filed an answer to our complaint and counterclaimed, seeking dismissal of our claim, alleging current and past infringement of this patent, seeking an injunction precluding us from using
technology allegedly covered by the patent through the life of the patent, and seeking reasonable royalty or lost profits for alleged past infringement. We filed a motion for partial summary judgment of non-infringement, which was granted on July 3,
2003. The parties have stipulated that, if the Courts order is affirmed on appeal, neither party will pursue any of their remaining claims in the case. The parties requested that the district court enter final judgment, which would make the
decision ripe for appeal. The district court entered its final judgment, and 24/7 Real Media has appealed.



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



(d) Use of Proceeds



On
February 28, 2000, the SEC declared effective our registration statement on Form S-1 as filed with the Commission in connection with our initial public offering of common stock, par value $0.01 per share. The offering was co-managed by Morgan
Stanley & Co. Incorporated, Salomon Smith Barney Inc. and Thomas Weisel Partners LLC. Pursuant to the registration statement, we registered and sold an aggregate of 6,037,500 shares of common stock for a gross aggregate offering price of $144.9
million. In connection with the offering, we incurred total expenses of approximately $12.4 million, including underwriting discounts and commissions of approximately $10.1 million. All of these expenses were direct or indirect payments to others
and not payments to our directors or officers (or their associates) or to our affiliates or 10% shareholders.



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As of September 30, 2003, we have used approximately $18.8 million of the net proceeds of the public
offering primarily for general corporate purposes, including working capital and capital expenditures. The remaining proceeds have been placed in temporary investments consisting of cash, cash equivalents and short-term investments. None of the
proceeds was used as payments to our directors or officers (or their associates), or to our affiliates or 10% shareholders.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) | Exhibits Required by Item 601 of Regulation S-K
| | --- | -----------------------------------------------



|     | 
|---- | 
|10.1 | 
|     | 
|31.1 | 
|     | 
|31.2 | 
|     | 
|32.1 | 
|     | 
|32.2 | 



| | (b) | Reports on Form 8-K
| | --- | -------------------



We filed a report on Form 8-K (Items 5 and 7) with the Commission dated July 15, 2003.



We furnished a report on Form 8-K (Items 7 and 9) to the Commission dated July 23, 2003.



We filed a report on Form 8-K (Items 5 and 7) with the Commission dated
August 4, 2003.



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 13, 2003.



AQUANTIVE, INC.By:

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




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INDEX TO EXHIBITS



|Exhibit No. |  | Description                                                                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            | 
|10.1        |  | Sublease agreement between Gray Cary Ware & Fredenrich LLP and Atlas DMT LLC dated August 19, 2003.                                                                     
|            | 
|31.1        |  | Certification of Brian P. McAndrews Pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of
2002
|            | 
|31.2        |  | Certification of Michael Vernon Pursuant to Rule 13a-14(a) of the Securities and Exchange Act of 1934, as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of
2002    
|            | 
|32.1        |  | Certification of Brian P. McAndrews Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002                                          
|            | 
|32.2        |  | Certification of Michael Vernon Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002                                              





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