**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

| x                                                                                                                                                                  | **ANNUAL REPORT PURSUANT TO SECTION 13 or  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.**     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| **For the fiscal year ended December 31,  2006.**                                                                                                             |
| o                                                                                                                                                                  | **TRANSITION REPORT PURSUANT TO  SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.** |
| **For the transition period from             to            .** |

 

**CommissionFile No. 0-29768**

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

(Exact name of registrantas specified in its charter)

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

 

**(212)231-7100**

(Registrant’s telephonenumber, including area code)

**Securitiesregistered pursuant to Section 12(b) of the Act:**

| **Title of each class**                 |   | **Name of  each exchange on which registered** |
|-----------------------------------------|--------|------------------------------------------------|
| Common Stock, par  value $.01 per share |   | The NASDAQ  National Market                    |

 

**Securitiesregistered pursuant to Section 12(g) of the Act: None.**

Indicate by check mark if the registrant is awell-known seasoned issuer as defined in Rule 405 of the Securities Act.        Yes o        No x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act.       Yes o       No x

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.        Yes x        No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.        o

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

| Large accelerated  filer   o |   | Accelerated filer   [x] |   | Non-accelerated filer   o |
|---------------------------------------------|--------|----------------------------------------|--------|------------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).        Yeso        Nox

As of June 30, 2006, the last business day of theregistrant’s most recently completed second fiscal quarter, the aggregatemarket value of the voting common equity held by non-affiliates of theregistrant was approximately $419.2 million, based upon the last price quotedon the NASDAQ National Market on June 30, 2006 of $8.78. For purposes ofthis calculation, the registrant has assumed that its directors and officersand each person who beneficially owned 10% or more of the outstanding commonstock on that date are affiliates. The registrant does not have any non-votingcommon equity outstanding.

Thenumber of outstanding shares of the registrant’s common stock as of February 28,2007 was 50,802,518.

**Documents Incorporatedby Reference**

Items 11-14 of Part III of this AnnualReport on Form 10-K will be filed with the Securities and ExchangeCommission as an amendment to this Annual Report on Form 10-K inaccordance with General Instructions G(3) to Form 10-K.

 

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**24/7 REAL MEDIA,INC.2006 ANNUAL REPORT ON FORM 10-K**

**TABLEOF CONTENTS**

| Item No.      | ** ** | ** **                                                                                                           | ** ** | ** ** | ** ** | **Page** |
|---------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|
| PART I   |       |                                                                                                                 |
| 1.            |       | Business                                                                                                             |       | 3          |
| 1A.           |       | Risk  Factors                                                                                                        |       | 13         |
| 1B.           |       | Unresolved Staff Comments                                                                                            |       | 26         |
| 2.            |       | Properties                                                                                                           |       | 27         |
| 3.            |       | Legal  Proceedings                                                                                                   |       | 27         |
| 4.            |       | Submission of Matters to a Vote of Security Holders                                                                  |       | 27         |
| PART II  |       |                                                                                                                 |
| 5.            |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer   Purchases of Equity Securities |       | 28         |
| 6.            |       | Selected Financial Data                                                                                              |       | 30         |
| 7.            |       | Management’s Discussion and Analysis of Financial  Condition and Results   of Operation                         |       | 31         |
| 7A.           |       | Quantitative and Qualitative Disclosures About Market  Risk                                                          |       | 51         |
| 8.            |       | Financial Statements and Supplementary Data                                                                          |       | 51         |
| 9.            |       | Changes in and Disagreements with Accountants on  Accounting and Financial   Disclosure                              |       | 51         |
| 9A.           |       | Controls and Procedures                                                                                              |       | 52         |
| 9B.           |       | Other  Information                                                                                                   |       | 53         |
| PART III |       |                                                                                                                 |
| 10.           |       | Directors, Executive Officers and Corporate Governance                                                               |       | 53         |
| 11.           |       | Executive Compensation                                                                                               |       | 56         |
| 12.           |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                      |       | 56         |
| 13.           |       | Certain Relationships and Related Transactions, and  Director Independence                                           |       | 56         |
| 14.           |       | Principal Accounting Fees and Services                                                                               |       | 57         |
| PART IV  |       |                                                                                                                 |
| 15.           |       | Exhibits and Financial Statement Schedules                                                                           |       | 57         |
|               |            |                                                                                                                      |            |            |            |          |  |  |

 

Open AdStream®, Insight XE®, Insight ACT®, OpenAdvertiser®, 24/7 Search® and Decide DNA® are registered trademarks of 24/7Real Media, Inc. All other brand names or trademarks appearing herein arethe property of their respective holders.

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**PART I**

This Annual Report on Form 10-Kincludes forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. This Act provides a “safe harbor” forforward-looking statements to encourage companies to provide prospectiveinformation about themselves so long as they identify these statements asforward-looking and provide meaningful cautionary statements identifyingimportant factors that could cause actual results to differ from the projectedresults. All statements other than statements of historical fact, includingstatements regarding industry prospects and future results of operations orfinancial position, made in this Annual Report on Form 10-K areforward-looking. We use words such as “anticipates,” “believes,” “expects,” “future”and “intends” and similar expressions to identify forward-looking statements. Forward-looking statements also include anyother passages that relate to expected future events or trends that can only beevaluated by events or trends that will occur in the future. Forward-lookingstatements reflect management’s current subjective opinions, expectations,plans or projections and are inherently uncertain. Our actual results maydiffer significantly from management’s expectations, plans or projections.Readers are cautioned not to place undue reliance on these forward-lookingstatements, which speak only as of the date hereof. Except as required by law, 24/7 Real Media undertakes no obligation toupdate any forward-looking or other statements in this news release, whether asa result of new information, future events or otherwise. Certain risksand uncertainties that could cause our actual results to differ significantlyfrom management’s expectations are described in the section entitled “RiskFactors” and elsewhere in this Annual Report on Form 10-K. Weundertake no obligation to publicly release any revisions to theseforward-looking statements to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events. Readers are urged,however, to review the risk factors set forth in reports that we file from timeto time with the Securities and Exchange Commission (the “SEC”). Unless thecontext requires otherwise in this Annual Report on Form 10-K, the terms“24/7 Real Media,” the “Company,” “we,” “us” and “our” refer to 24/7 Real Media, Inc.and its consolidated subsidiaries.

**ITEM1.**                BUSINESS.

**24/7 REAL MEDIA OVERVIEW**

24/7 Real Media is aleading global digital marketing company, providing online advertising andsearch engine marketing (“SEM”) strategies to meet the needs of a broadrange of Web publishers and advertisers since 1995. We work closely with ourclients to implement integrated solutions to sell and deliver advertising onWeb sites and manage online campaign planning, execution, measurement andanalysis. We sell our products and services worldwide from 20 sales locationsin twelve countries throughout North America, Europe, Asia and Australia.

We generate revenueprimarily through our three principal lines of business, Media, Search andTechnology. Our Media business help advertisers increase the reach of their adcampaigns through the Global Web Alliance, a group of affiliated Web sites withbrand names, quality content and a global scope, and sophisticated campaigntargeting options within the Global Web Alliance. Our Search business services,which are powered by our proprietary Search software, Decide DNA®, allowadvertisers to maximize their SEM spending and achieve optimum returns on theirinvestments. Through our Technology business, we provide online advertisementserving, analytics and behavioral targeting services to publishers using ourproprietary Open AdStream® (“OAS”) online advertisement delivery and managementsoftware. Our Media and Search segments each contributed approximately 42% ofour revenue in 2006, while our Technology segment contributed approximately 16%to 2006 revenue. See Note 16 to the Consolidated Financial Statements forfinancial information about each of our business segments, including revenue,income (loss) from operations and total assets, as well as revenue andlong-lived asset information by geographic area.

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We were organized underthe laws of the State of Delaware on January 23, 1998, and have been apublicly traded company since August 1998. Our corporate headquarters arelocated at 132 West 31st Street, New York, NY 10001, and our telephonenumber is (212) 231-7100. Our corporate Web site address iswww.247realmedia.com.

**OUR PRINCIPAL LINES OF BUSINESS**

**Media**

***Web SiteRepresentation***

Through our Global WebAlliance, an alliance of affiliated Web sites, we provide Web siterepresentation services to Web publishers seeking to increase advertisingrevenue from their Web sites and maximize revenue from their existingadvertising inventory. We represent Web sites with brand names, quality contentand global reach. We enforce our quality standards by reviewing andperiodically auditing the content of our affiliates’ Web sites, and we rejectmembership requests from Web sites that do not meet our criteria. Our qualitycontrols are intended to screen out unsuitable Web sites, such as those withinappropriate content, insufficient traffic, that engage in illegal acts orfraudulent clicking activity or that do not comply with industry-standardprivacy practices. We also employ a Web site relationship department thatsurveys our partner Web sites and monitors qualitative indicators of servicelevels in order to continuously improve our customer service.

By entering into revenuesharing agreements with us, our affiliated Web publishers allow us to selltheir premium and under-utilized advertising inventory, as well as inventorythat might otherwise go unsold, and we pay them a royalty for the ad inventorywe sell. Our experienced global sales force ensures that our affiliated Websites are well-represented to advertisers worldwide and promoted as a leadingsolution for advertisers to reach a diverse, global audience. We sell inventoryin the Global Web Alliance in a variety of ways in order to further increasethe reach and appeal of the inventory of our Web publishers. Our salestechniques include site-specific sales on individual premium Web sites, “vertical”sales, which group publisher affiliates together based on Web site content and “runof network” sales, which allow advertisers who do not need to target particularWeb site content to run their campaigns across a wide range of affiliated Websites with varying content.

We use, OAS, ourproprietary online advertisement delivery and management technology, to serveadvertisements on behalf of the Web sites in the Global Web Alliance. Our Website affiliates have access to a user interface that allows them to control thetypes of advertisements that are running on their site and reject advertisingcampaigns that they do not approve of. Affiliates who opt to license our OAStechnology will benefit from enhanced insight into their ad inventory andadditional campaign management functionality, as described below in more detailunder “Technology.”

***Web Advertising***

We sell ad inventory inthe Global Web Alliance to advertisers seeking to target broad or specificaudiences, build their brands and generate greater customer response andgreater return from their advertising spending. We focus our sales andmarketing efforts on the leading domestic and international advertisers andadvertising agencies, and can implement ad campaigns in virtually any format,including rich media. We implement advertising campaigns on the Global WebAlliance pursuant to written agreements, or insertion orders, covering themedia buy, which we enter into directly with the advertiser or through itsadvertising agency. The insertion order will set forth the nature and durationof the advertising campaign, the Web sites or categories of Web sites that thecampaign will run on and the pricing and other parameters. We typically selladvertising space on a cost-per-thousand impressions (“CPM”) basis, enabling aclient advertiser to pay a fee based on the number of times its advertisementis displayed. We 

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typicallycount an advertising impression each time a user’s Web browser requests thatour computer servers transmit the advertisement.

Our sales force worksclosely with our customers to enhance the effectiveness of their ad campaigns.Based on the extensive reach of the Global Web Alliance and the diverse Website content within it, we are able to offer customized advertising solutionsto advertisers and advertising agencies. Our advertising solutions include thesale of ad inventory on individual Web sites with premier brands, qualitycontent and large online audiences, “vertical” sales that group together Websites based on content (sports, travel, women’s interest, etc.), demographics(18-34 age group, teens, etc.) or psychographic characteristics (music,politics, etc.), sales of premium inventory and “run of network” sales, whichgive advertisers a cost-effective way to run a high number of advertisingimpressions across a wide range of affiliated Web sites.

We use our OAS technologyplatform and our experienced traffic and account management staff to help ouradvertiser clients quickly and effectively refine their ad campaigns and targetadvertisements to the right segments of the Global Web Alliance audience. Withthe OAS technology’s advanced targeting capabilities, we can enhance campaignsfor advertisers in a number of ways. The behavioral targeting application andservice within OAS allows advertisers to target Internet users based on theirrecent online behavior and other specific characteristics whenever the usersare on a Web site within the Global Web Alliance. Behavioral targeting optionsinclude serving ads based on: the content in a Web site that a user is viewing,a user’s specific geographic location, keyword (the specific words entered intoa search box by a user), the particular time of day or week and frequencycapping (limiting the number of times a particular advertisement is deliveredto the same user within specific time periods).

**Search**

We provide SEM services toadvertisers, and, to a lesser extent, provide services to search engines thatemploy us to enhance the relevancy of their Web site listings and report onadvertising campaigns for their advertisers. Our proprietary Decide DNAtechnology is the foundation for all our Search services, and automates,manages, tracks, reports, analyzes and optimizes search engine traffic. Weupgrade and issue new releases of our Decide DNA from time to time, and mostrecently released version 6.0 in July of 2006.

***Managed SEMServices for Advertisers***

Our managed SEM servicesare designed to increase a Web site’s visibility in a search engine’s resultspage. We provide SEM services to advertisers through three methods:  keyword bid management, which involves auctionedbidding on search terms, or keywords, to ensure that a Web site’s advertisingshows up in a search engine’s sponsored listings, paid inclusion (“PI”), whichensures that a Web site shows up in a search engine’s natural listings, and Website search engine optimization (“SEO”), which involves improving a Web site’scontent and structure to improve the site’s rankings in the natural results ofa keyword search on a search engine. Any strong search advertising campaigninvolves a combination of these three techniques, and we believe that DecideDNA is the only search engine marketing tool that combines all three servicesin a single tool. Through Decide DNA, we also provide our clients with trackinginformation and reports, such that clients can view organic search trafficinformation alongside the results of their SEM activities.

***Keyword Bid Management.******  ***Web sites can advertise onsearch engines by having their listings displayed in the sponsored listingssection of a search engine’s results page. This type of advertising is alsoknown as pay-for-placement, or P4P. Web sites accomplish this through biddingon keyword search terms—a Web site will have its advertisement and a link tothe Web site displayed as a featured result when a user searches for a specifickeyword that the Web site has successfully bid on. For client advertisers running keyword triggered ad campaigns onpay-for-placement search engines, we use our Decide DNA technology tohelp them identify the keywords that are most relevant to their products andservices—those that will lead users from the search engine results to theadvertisers’ Web sites—and manage bidding on 

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those keywordssimultaneously across multiple search engines. The automated bid managementfunctionality of Decide DNA allows us, on behalf of our clients, to managefrequently changing minimum, maximum and average bid prices of keyword searchterms and groups of keywords, optimize our clients’ SEM budget across thosekeywords by analyzing all the factors that affect the client’s return oninvestment, such as ad creative, product, keyword, clicks, price and rank, andset controls to pace user traffic and spending of the budget over the course ofthe SEM campaign. Decide DNA provides our clients with detailed reporting fortracking and analyzing, campaign expenditures and return on investment. Wecharge our clients for our keyword bid management services either based on apercentage of the client’s spend with the search engines or an agreedcost-per-click (“CPC”) fee model. CPC fees are generated each time searchengine users click Web site listings and are directed to our client advertisers’Web sites.

***Paid-Inclusion.***   Searchengines use computer programs called spiders or web crawlers to automaticallyreview and index the content of Web sites in the Internet. The majority ofsearch engines allow Web sites, for a fee, to submit their site content forinclusion in the main body of the search engine’s results page (alsoreferred to as the search engine’s natural or algorithmic results). Without PI,Web sites must rely on the search engines’ methodologies for crawling, indexingand displaying site content, which often involves only crawling the front ormain page of a Web site, or indexes that are not updated frequently enoughto include new Web site content. We manage the PI process for our Searchclients, and use our Decide DNA technology to build and submit to searchengines a “data feed” of the content on the client’s Web site pages thatis editorially compliant, indexed and relevant based on the unique requirementsof a given search engine. Our PI services help to expose deeper content on theWeb pages and Web pages that might otherwise be hard to index insearch engine listings due to the way the search engines would otherwise crawlthem. PI also ensures the display of Web site listings that include the mostrecent and relevant Web site content. PI clients can use Decide DNA’s reportingfunctionality to track and analyze their return on the money they spend. Wecharge our clients for our PI services either based on a percentage of theclient’s spend with the search engines or an agreed cost-per-click, or CPC, feemodel. CPC fees are generated each time search engine users click Web sitelistings and are directed to our client advertisers’ Web sites.

***Web Site Optimization.***   Searchengine optimization services, or SEO services, are designed to index andimprove the rankings for Web sites in a search engine’s natural or algorithmicresults, without payment of a PI fee, by capitalizing on the algorithmsemployed by the search engine. The ultimate goal is to achieve good placementfor the Web pages in the search engine’s natural results when users searchon the search engine for keywords that are most relevant to the Web pages.Through our relationships with major search engines and our understanding ofsearch engine algorithms, we help advertisers optimize pages in their Websites in order to increase thevisibility and relevance of the Web pages in the algorithmic resultsdisplayed by search engines. We typically perform an initial audit of theclient’s Web site and then provide the client with our recommendationsabout how to fine tune the Web pages, while keeping them functional andnavigable from a search engine, user and marketing perspective. We typically charge advertisers an initialfixed fee and a monthly maintenance fee for our optimization services.

***OptimizationServices for Search Engines***

We build and optimizeadvertiser Web site listings submissions for search engines. This service isknown as “trusted feed generation.” We typically charge a fee based on apercentage of the revenue generated by the search engine from advertisers thathave Web site listing submissions built and optimized by us.

Currently,we provide trusted feed generation services primarily for Yahoo. We workwith clients of Yahoo’s Search Submit Pro Program to build and optimize Website listings, report on campaign performance and provide ongoing optimization.Yahoo employs us to ensure that all relevant deep Web site content is fedaccurately into its database on a guaranteed and frequently updated basis. Thisprocess 

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requiresextensible mark-up language (“XML”) data feed formatting to facilitate largequantities of data transfers. The Yahoo Site Match Xchange service simplifiesand automates the work required to build, report and optimize XML feeds.Clients provide us, in spreadsheet or simple text file format, the basic dataused or referenced in the client’s Web site that the client would like toinclude in Yahoo’s paid inclusion feed.

**Technology**

***The Open AdStream(OAS) Platform***

Our award-winning OpenAdStream (“OAS”) platform is the foundation of 24/7 Real Media’s proprietaryonline advertisement delivery and management technology offering. We upgradeand issue new releases of our OAS technology from time to time. Future versionsof our OAS platform may incorporate our Decide DNA technology andfunctionalities targeted at advertisers.

We believe our OASplatform offers our customers one of the most versatile advertisement deliverytechnologies available. The OAS platform allows our customers to activelymonitor and manage their advertising campaigns and fully integrates ad serving,analytics, behavioral and other targeting, and contract management applicationsin one piece of software. The major functionalities of OAS include thefollowing:

***Ad Serving.******  ***With our OAS technology, Webpublishers can deliver and manage advertising across the Internet in virtuallyall types of formats, from static images to rich media advertisements,including streaming media, expanding, floating, interactive, pop-up and banneradvertisements, interstitial ads, which are displayed to users before therequested Web site content, full page advertisements and video ads. OAScan also serve ads into interactive digital television and on mobile and otherWAP (wireless application protocol) platforms.

***Ad Campaign Data and Reporting.******  ***Publishers can use the datagenerated from ad campaigns that run on their Web sites to**create a broadrange of reports based on a variety of characteristics. These reports includestatus reports about the scheduling of current ad campaigns, reports on campaignperformance based on impression levels and click-through rates, bothindividually and measured against other ad campaigns, and reach and frequencyreports that provide information about how many unique users a campaign hasreached, the Web sites on which users were reached and the number ofimpressions served and click-throughs per user. OAS also automatically analyzeshistorical data to forecast the amount of advertising inventory that will beavailable in the future, which helps publishers to maximize their advertisingrevenue. Customers can alsoeasily export data from OAS, allowing them to integrate the technology withtheir other management and billing systems.

***Analytics.******  ***Our analytics applicationoffers Web publishers active campaign reporting, marketing intelligence andrevenue information. Publishers can maximize advertising revenue through theinformation gleaned from standard and customized reports generated by theapplication, which can instantly analyze online advertising data by any campaignproperty, including campaign type, campaign owner, target market, product line,anticipated revenue, agency or publisher, ad creative, media type and adplacement. The application also helps publishers to measure, analyze and managethe online audiences on their Web sites. Publishers can review user trafficdata from specific pages on their Web sites, including page viewdata, entry and exit data, previous and next page data and clicks-to-page data,as well as analyze the specific paths that visitors use to navigate within theWeb sites and how they flow from one Web page to another. Publishers canuse this information to optimize their Web sites and drive traffic within them.

***Behavioral Targeting.******  ***Our behavioral targetingapplication enables publishers to identify, segment and target visitors totheir Web sites based on the visitors’ online behavior. The application offersa broad range of targeting options, including targeting based on user behavior,geographic location, demographic 

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information, andthe search terms that users are already looking for, cookie-based targeting andtargeting based on criteria that are most important to a particular ad campaign.Publishers can also use the application to implement frequency capping, whichcontrols the number of times advertisements are displayed to visitors by Website session, hour, day, week, month or lifetime visits, or throughcombinations of the preceding frequency capping options, to execute ad sequencing,which involves serving ads to users in a specific order to keep them engaged,and to create “surround sessions,” whereby visitors receive certain advertisements in different positionsas they click from page to page on an entire Web site. These targetingoptions can also be used across a network of different Web sites. Publisherscan generate detailed and concise reports that present the results of thetargeting options that they have implemented.

***Contract Management.******  ***Our contract managementsolution automates the sales process for our publisher clients, allowing themto manage ad campaign contracts simply and efficiently within a secure solution.Through contract management, publishers can gather contact information frompotential advertisers, review ad campaign proposals and approve campaigninsertion orders. The contract management service communicates with our OAS adserver to initiate and track a campaign’s performance throughout its course.Contract management includes a flexible reporting system that quickly generatesad delivery, revenue and other customized reports. Automation of theseprocesses helps publishers to increase workflow efficiency and providesadditional insight into the ad campaign management process.

***Network Module.******  ***Our network module isdesigned to provide ad management technology for advertising networks. Throughan affiliate user interface, an ad network’s Web site affiliates can monitor adcontent, accept or decline scheduled advertising and automatically include orexclude certain advertisers and ad types. The user interface allows the adnetwork to track settlement and fulfillment, and the reporting section can beused to produce reports on revenue sharing or CPM relationships.

Our OAS platform isavailable to customers from software hosted centrally on our servers (“OASCentral”) or from software hosted locally on the customers’ servers (“OAS Local”).

***Open AdStream Central.******  ***Welicense OAS Central to Web publishers and distribute it from software hostedcentrally on our servers within a secure, managed environment. Our OAS Centralsolution enables Web publishers to execute advertising programs without thecosts of devoting the in-house resources, time, and personnel required to hosttheir own advertisement serving system. OAS Central continuously monitorsadvertising delivery for optimum accuracy and performance, using a fullydistributed system architecture with geographic load balancing, spreading thead delivery work among multiple resources. The system employs a fully redundantinfrastructure with multiple data centers, Internet connections, mirrored diskbackup and battery and generator backups that provide robust, reliable servicewith rapid scalability and performance. This allows the OAS service to optimizeuse of our resources and continue performing for our clients in the event ofany server downtime due to failure or maintenance. We partner with GlobalContent Delivery Networks for efficient content delivery.

We charge service fees toWeb publishers for operating OAS centrally from our servers. We typicallycharge a service fee determined by multiplying an agreed CPM by the number ofadvertising impressions served using OAS. The service fee may vary based on theforecasted number of advertising impressions a Web publisher will serve usingour software and the service term, among other factors. We charge additionalfees to Web publishers that opt to purchase our analytics application andservice, our behavior targeting application and service or our contractmanagement services. Service fees for use of the analytics and behavioraltargeting applications and services are calculated by multiplying an agreed CPMby the number of page views measured by the respective application, whilefees for contract management are calculated on the same basis as the associatedOAS service fees. Our contracts also typically provide for a softwaremaintenance and technical support services fee and a training fee.

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***Open AdStream Local.******  ***We license OASLocal to Web publishers, who run the technology on their in-house servers. OASLocal offers Web publishers controlover advertisement delivery, since the Web publishers operate, controland own the equipment that is serving the advertisements, and complete controlover how visitor data is used and who has access to it. OAS Local is an idealsolution for companies that have sufficient in-house experience, equipment anddata center facilities to run an advertisement serving system on their own.

We charge fees to Webpublishers for operating our OAS software locally from their own servers. Ourlicense agreements typically provide for a license fee, a software maintenanceand technical support services fee and a training fee. We often base licensefees on the forecasted number of advertising impressions a Web publisher willserve using our software, the use of advanced software modules and the licenseterm.

**SEASONALITY**

Historically, our businessis subject to some seasonal fluctuations with higher revenue in the fourthquarter due to increased demand for online advertising during the holidayseason, and in the first quarter with advertising demand dampened followingcompanies’ budgeted holiday spending, and in the third quarter, particularly inEurope, due to the summer holidays. Our Search segment has continued to growwithout regard to seasonality.

**INTERNATIONALOPERATIONS**

We are a global provider of Internet mediarepresentation services, with sales locations in North America, Europe, Asiaand Australia. One of our long-term growth strategies has been to expand ourinternational operations, either by leveraging our existing operations or byengaging in strategic acquisitions and partnerships. We have increased ourinternational presence over the past few years and, as a result, our revenuehas become increasingly dependent on our international operations. Our Searchsegment, in particular, is dependent on revenue from international operations. Wecurrently derive more than half of our total revenue from our foreignoperations.

Our internationaloperations are subject to the same risks that affect our Company and ourindustry generally, as well as specific risks related to legal and culturalchallenges in foreign countries. We also have risks associated with specificinternational operations. Whilewe will continue to strive to expand our international presence, we could faceincreased competition as existing competitors increase their presence or as newcompanies enter the market. Increased competition could negatively impact ourplans for expansion and decrease our profitability in the affected areas. See“Risk Factors” for further information on risks affecting our Company, ourindustry and our international operations.

**SALES AND MARKETING**

We sell our products andservices worldwide through a sales and marketing organization that includes 20sales locations in twelve countries throughout North America, Europe, Asia andAustralia. In the United States, our sales force is located at our headquartersin New York and our sales locations in Chicago, IL, Fort Washington, PA,Houston, TX, Los Angeles, CA, San Francisco, CA, and Sunnyvale, CA. We alsohave sales locations in Australia, Canada, France, Germany, Italy, Spain, Sweden,Switzerland, the United Kingdom, Japan and South Korea.

**PRIVACY PROTECTION**

The growth of our business and of the Internet dependson user trust in the integrity of the Internet and in the businesses that useit. We believe that fostering user confidence in online privacy is an integralcomponent of our commitment to delivering the right message to the right userat the right time. We 

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actively monitor privacylaws and regulations, and we take seriously the principles that consumers musthave notice and choice and confidence that their information is secure. We area founding member of the Network Advertising Initiative (NAI), a cooperation ofcompanies that own major ad networks and we participate in the TRUSTe Web Sealprogram for Web sites that comply with TRUSTe’s strict standards for onlineprivacy. We have qualified under the EU safe harbor framework developed by theU.S. Department of Commerce in coordination with the European Commission, whichgives guidance on how to provide adequate protection for personal data fromEurope, as required by the European Union’s Directive on Data Protection. Wealso designed our Open AdStream technology to help protect the privacy ofonline consumers and safeguard private information.

We may collectnon-personally identifiable information on behalf of our customers in thedelivery of Internet advertising. When we perform such services, we providenotice to users about our use of such information and insist that our customersprovide users with the choice not to participate. We do not directly collect ormaintain a database of personally identifiable information about onlineconsumers or associate online and offline information collected about users. Weinsist that our customers provide notice to users about the marketing uses ofpersonally identifiable information collected online, including whether theyassociate online and offline information about users, and that they provideusers with the choice not to participate.

**INTELLECTUALPROPERTY**

We own U.S. Patent No. 6,026,368 entitled “On-LineInteractive System and Method for Providing Content and Advertising Informationto a Targeted Set of Viewers.” The patent, which expires in 2015, embodiespioneering technology in the field of targeted content delivery. The patentrelates to an online system for managing the delivery of targetedadvertisements or other content that adjusts the priorities associated withsuch advertisements or content in order to satisfy exposure goals or otherpredetermined criteria. We also own U.S. Patent No. 6,601,041 entitled “Methodof Providing Targeted Advertisement to a Computer Mediated CommunicationsNetwork,” which covers methods relating to the sequencing of advertising, whichwe believe further extends our competitive advantage. This patent also expiresin 2015.

In January 2003, we acquired our Web analyticstechnology, for which a patent application currently is pending. The acquiredWeb analytics technology uses a proprietary taxonomy engine to speak the samelanguage that a business uses when talking about its customers. It is designedto provide revenue-generating marketing intelligence to Web publishers and tohelp companies measure, analyze and monetize their interactive audience. Amongother functions, the acquired technology is designed to enable marketers toperform behavioral segmentation and clickstream analysis and allow Webpublishers and advertisers to use behavioral information with e-commerce andother applications.

In 2002, we acquired U.S. Patent No. 5,446,919,entitled “Communication System and Method with Demographically orPsychographically Defined Audiences,” which broadly covers communicationssystems, including interactive and cable television, in which advertisementsand other media messages are determined by demographic or psychographicinformation associated with the user. This patent expires in 2012.

Open AdStream®, InsightXE®, Insight ACT®, Open Advertiser®, 24/7 Search® and Decide DNA® are U.S.registered trademarks of 24/7 Real Media, Inc. We have entered into confidentialityand invention assignment agreements with our employees and contractors, andnondisclosure agreements with parties with whom we conduct business in order tolimit access to, and disclosure of, our proprietary information.

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**COMPETITION**

We believe we are aleader in the highly competitive market of Internet advertising and marketingservices. We believe our ability to compete overall depends on many factors,including the following:

·       ourability to adapt and scale our existing technology, and develop and bring tomarket new technologies, as customer needs evolve;

·       thetiming and acceptance of new products and services and enhancements to existingproducts and services either developed or acquired by us;

·       theperformance, functionality, price and reliability of our products and services;

·       ourglobal sales and marketing efforts;

·       ourcustomer service and support efforts; and

·       therelative impact of general economic and industry conditions on us and ourcompetitors.

We also compete in each ofour lines of business with companies offering similar services. We monitor ourlines of business to ensure that we remain competitive in each of these areas. Maincompetitive drivers in each of our lines of business are the technology offeredand its performance, the pricing of products and services and the levels ofcustomer support.

***Media***

In our Media business wecompete for advertising spending against Web publishers, including some of ourpartners who have their own sales forces. We also compete with a variety ofInternet advertising networks and companies that facilitate Internetadvertising, including ValueClick, Advertising.com, Burst! and Tribal Fusion,as well as some smaller niche online advertising networks. In addition to theseWeb site networks we also compete with large portal sites such as AOL, MSN andYahoo!. We also compete with the traditional advertising media of television,radio, cable and print for a share of advertisers’ total advertising budgets.

***Search***

Our Search businesscompetes with several other companies that provide SEM services, includingDoubleClick/Performics, iProspect, iCrossing and Impaqt, a substantial numberof local players in each market in which we operate, as well as start-upcompanies with untested SEM solutions.

***Technology***

We compete against otherestablished providers of advertisement serving solutions, advertising agenciesthat are starting in-house SEM services, and several other companies thatprovide third-party advertisement serving services as well as start-upcompanies with untested products and services. Our competitors foradvertisement serving solutions include DoubleClick, aQuantive/Accipiter andValueClick.

**EMPLOYEES**

As of March 1, 2007,we employed approximately 390 persons worldwide, including approximately 243 insales and marketing, 95 in technology and product development and 52 inaccounting, human resources and administration. We consider our employeerelations to be good. Our subsidiaries in France, Spain and Scandinavia areparties to collective bargaining agreements pursuant to, and in accordancewith, applicable law.

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**WEBSITE ACCESS TOOUR SEC REPORTS**

Our Internet address is www.247realmedia.com. Throughour Web site, we will make available, free of charge, the following reports assoon as reasonably practicable after electronically filing them with, orfurnishing them to, the SEC: our Annual Reports on Form 10-K; ourQuarterly Reports on Form 10-Q; our Current Reports on Form 8-K;and amendments to those reports filed or furnished pursuant to Section 13(a) ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our ProxyStatements for our Annual Stockholder Meetings are also available through ourWeb site. Our Web site and the information contained therein or connectedthereto are not intended to be incorporated into this Annual Report on Form 10-K.

You may also obtain copies of our reports withoutcharge by writing to:

24/7Real Media, Inc.132 West 31st StreetNew York, NY 10001Attn:  Investor Relations

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**ITEM1A. RISK FACTORS.**

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

**WE MAY NOT BEABLE TO SUSTAIN OUR PROFITABILITY.**

We have achievedprofitability in accordance with generally accepted accounting principles inthe United States, or GAAP, in certain reporting periods; however, we have alsoincurred net losses in other periods. We may not achieve profitability infuture quarterly or annual reporting periods. We may incur net losses for theforeseeable future. Even if we do achieve profitability in future periods, wemay not be able to sustain or increase our profitability in the short-term orlong-term, on a quarterly or an annual basis, in subsequent periods.

**WE MAY NOT BEABLE TO SUCCESSFULLY UPGRADE AND INTEGRATE OUR EXISTING PRODUCTS ANDTECHNOLOGY.**

Our ability to competedepends, in part, on our success at upgrading and integrating our existingproducts and technology globally and transitioning our customers onto theupgraded products. From time to time we upgrade and issue new releases of ourexisting technology to integrate new functionalities and respond to industrydevelopments. For example, in 2006 we released new versions of our Decide DNAplatform for search marketers and our OAS platform targeted at publishers. Wemay experience delays, difficulties or increased costs that could hinder orprevent the successful design, integration, development, introduction,implementation or marketing of new releases of our technology globally. Inaddition, we must ensure that the performance levels and capacity of our technologyremain steady when we release new versions to our customers and migratecustomers onto new technology promptly. Any material delays in introducing orimplementing a new release or migration or performance problems could cause usto lose customers and cause our revenue to decline.

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

Wehave operations in a number of international markets, including Australia,Canada, Europe, Japan and South Korea, we sell our products and services intomany additional international markets, and we currently derive more than 60% ofour revenue from non-U.S. markets. We also plan to expand our operations inAsia and the Pacific Rim through our expanded joint venture with Dentsu. Todate, we have limited experience in marketing, selling and distributing oursolutions internationally in certain regions. Our international operations aresubject to additional risks, including:

·       changesin regulatory requirements;

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

·        localstatutory liquidity requirements for businesses operating in certain foreigncountries;

·        theneed to maintain cash balances to meet short-term capital requirements;

·        operationsin foreign countries with higher tax rates than the United States;

·        applicationof withholding taxes at a high rate on intercompany royalty and other payments;

·        theinability to utilize certain foreign tax credits; and

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

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·       difficultiesand costs of staffing and managing foreign operations;

·       reducedprotection for intellectual property rights in some countries;

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

·       locallaw requirements governing employment contracts, which may impose, among otherthings, minimum notice periods and minimum severance payments for involuntaryterminations;

·       politicaland economic instability;

·       fluctuationsin currency exchange rates; and

·       seasonalreductions in business activity during the summer months in Europe and certainother parts of the world.

Any or all of these riskscould affect our business outside of the United States and negatively impactour results of operations.

**STRATEGIC BUSINESSVENTURES, WHICH HAVE BEEN CRITICAL TO OUR GROWTH, MAY NOT BE SUCCESSFUL ORAVAILABLE TO US IN THE FUTURE.**

We were formed in February 1998to consolidate three Internet advertising companies, and have since acquired orentered into joint ventures with many other companies. Most recently, in November 2006,we announced the planned expansion of our joint venture with Dentsu to provideour SEM services throughout Asia and the Pacific Rim. We may continue pursuingselective acquisitions of businesses, technologies and product lines andadditional strategic ventures as a key component of our growth strategy. If weare unable to enter into new strategic business ventures in the future, ourability to grow and adapt in our industry may be impaired and our revenue maysuffer.

If weare able acquire new companies or expand our business lines through strategicventures, any such business venture may result in the use of significantamounts of cash, potentially dilutive issuances of equity securities and theincurrence of debt and amortization expenses related to intangible assets. Inaddition, any such business venture may involve numerous risks, including:

·       thedifficulty and cost of implementing new processes and procedures, integratingand assimilating any existing operations, technologies, products and personnel,and expanding, training and managing the work force;

·       implementingnew, or remediating existing, financial and management controls, reportingsystems, procedures and policies appropriate for a U.S. public company;

·       thededication of global resources, personnel and members of management, on a shortor long-term basis, which take a significant period of time and may distractmanagement’s attention from our other operations;

·       theavailability of favorable acquisition or other financing for the venture; and

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

Our inability tosuccessfully integrate any acquired company, or failure to achieve any expectedsynergies of an acquisition or strategic business venture, could adverselyaffect our business.

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

At times our globalrevenue and revenue in certain segments and operating units has grownsignificantly and has decreased significantly. Accurate predictions of futurerevenues are difficult, among other things, because of the rapid changes in themarkets and regulatory environment in which we operate. Additionally, ourglobal Media business contracts for a substantial protion of its revenue in themonth in which it runs.

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

·       theaddition of new clients or the loss of existing clients;

·       changesin fees paid to us by advertisers or publishers;

·       changesin the amount of royalties payable by us to our Global Web Alliance affiliates;

·       changesin the amount of our liability for our customers’ bad debt when we extendcredit to customers;

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

·       variationsin the levels of capital or operating expenditures, accounts receivable andpayable, and other costs relating to the maintenance or expansion of ouroperations, including personnel costs;

·       seasonality,which tends to result in lower revenue during the summer months of the thirdquarter and higher revenue in the fourth quarter of each year;

·       changesin results of operations brought about by newly acquired businesses orstrategic partnerships, the success of which may be difficult to predict;

·       changesin governmental regulation of online marketing or other regulatoryrequirements;

·       changesin accounting principles or any determination that one or more of the estimatesor assumptions underlying our financial statements is faulty; and

·       generaleconomic conditions.

Our future revenues andresults of operations may be difficult to forecast due to the above factors andthe time we may need to adequately respond to any changes in them. For example,the search engines that we interface with in the provision of our SEM servicesmay impose additional charges on us for using their technology interfaces toassist our clients. Our profit margins may suffer if we are unable to pass someof these types of costs on to our customers. In addition, our expense levelsare based in large part on our investment plans and estimates of futurerevenues. Any increased expenses may precede or may not be followed byincreased revenues, as we may be unable to, or may elect not to, adjustspending in a timely manner to compensate for any unexpected revenue shortfall.As a result, we believe that period-to-period and year-to-year comparisons ofour results of operations may not be meaningful.

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**WE MAY HAVEINEFFICIENCIES IN OUR SEARCH BUSINESS MODEL OR MAY BE UNABLE TO CAPITALIZEON CURRENT OR FUTURE SEARCH MARKETING TRENDS.**

The search industry is still relatively new,competition is high and there are no set parameters among SEM providers as tohow to run campaigns, track data or include more complex features, such asbehavioral targeting. We are working to develop set standards as our Searchbusiness grows, but our current strategies may not be successful in thelong-run. As a result, it is difficult to predict how our Search segment will performin the future. For example, revenue in the segment has increased significantlyin recent periods, while margins have decreased as our lower gross marginmanaged SEM services business performed better than other search areas.Further, we have and may continue to encounter inefficiencies, such as theunder or over-delivery of campaigns due to programming difficulties orset-backs and tools that must be reconfigured or replaced. Furthermore, oursuccess in SEM is dependent in part on our ability to develop and maintain goodrelationships with the major search engines, who both cooperate and competewith us for search clients, and who change the requirements as to how externalsoftware must interact with their software on an on-going basis and are unwillingto negotiate those terms and conditions. There is no guarantee that our currentor future Search software and techniques will meet our clients’ needs and thedemands of search engines, successfully manage increasingly complex SEMcampaigns or be profitable for our business.

**OUR TECHNOLOGYPRODUCTS AND SERVICES ARE BASED ON OUR PROPRIETARY OPEN ADSTREAM PLATFORM, ANDOUR BUSINESS WOULD SUFFER IF OPEN ADSTREAM WAS DISRUPTED.**

Open AdStream is ourproprietary advertisement serving technology and serves as our soleadvertisement serving solution. We have incorporated a variety offunctionalities and modules into this platform, and our Media business alsoutilizes Open AdStream technology. We must, among other things, ensure that thetechnology will continue to function efficiently at high volumes, interactproperly with our database, offer the functionality demanded by our customersand assimilate our sales and reporting functions. Customers may becomedissatisfied by any system failure that interrupts our ability to provide ourservices to them, including failures affecting our ability to deliveradvertisements or report on advertisement delivery without significant delay.Sustained or repeated system failures would reduce the attractiveness of oursolutions to advertisers, advertising agencies and Web publishers and result incontract terminations, fee rebates and make-goods, thereby reducing our revenue.Slower response time or system failures may also result from straining thecapacity of our deployed software or hardware due to an increase in the volumeof advertising delivered through our servers. To the extent that we do noteffectively address any capacity constraints or system failures, our business,results of operations and financial condition could be materially and adverselyaffected.

**OUR REVENUE COULDDECLINE IF WE FAIL TO EFFECTIVELY ACQUIRE AND MANAGE ADVERTISING INVENTORY.**

Our success depends inpart on our ability to effectively obtain web publisher advertising inventoryand sell it to advertisers. The Web publishers that currently list their unsoldadvertising inventory with us, including a small number of large Web publishersthat provide us with a sizable amount of inventory, are not bound by long-termcontracts and can change the amount of inventory they make available to us atany time. There is competition for Web site inventory among ad networks, and aWeb publisher can easily reduce or cancel the advertising space from its Websites available to us and provide it to a competitor. If this occurs, we maynot be able to locate replacement advertising space from other Web sites withcomparable traffic patterns and user demographics quickly enough to fulfill ouradvertisers’ requests. If we fail to manage our existing advertising spaceeffectively to anticipate or meet our customers’ changing requirements, ourrevenue could decline.

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We expect that ourcustomers’ requirements will become increasingly sophisticated as the Webcontinues to mature as an advertising medium. Our growth depends on our abilityto attract and retain advertisers and ad agencies by providing high qualityadvertising inventory with attractive demographics, innovative and qualitycontent and large audiences. Our ability to provide such inventory is dependanton our capacity to screen out illegitimate or unreliable Web sites and attractand retain trustworthy, quality Web publishers. Web publisher retention dependson a number of factors, some of which are beyond our control, including ourability to introduce new and innovative product lines and services, our abilityto efficiently manage our existing advertising inventory, our pricing policiesand the cost-efficiency to Web publishers of outsourcing all or part of theiradvertising sales. In addition, the number of competing intermediaries thatpurchase advertising inventory from Web publishers continues to increase. Theamount of our inventory may not increase or even remain constant in the future,which could cause our advertising revenue to decline significantly.

**WE COULD LOSECUSTOMERS OR ADVERTISING INVENTORY IF WE FAIL TO MEASURE IMPRESSIONS, CLICKSAND ACTIONS ON ADVERTISEMENTS IN A MANNER THAT IS ACCEPTABLE TO OUR ADVERTISERSAND WEB PUBLISHERS.**

We earn advertising revenue and make payments to Webpublishers based on the number of impressions, clicks and actions fromadvertisements delivered on our network. Advertisers’ and Web publishers’willingness to use our services and join our network will depend on the extentto which they perceive our delivery of advertisements and our measurements ofclicks to be accurate and reliable. Advertisers and Web publishers oftenmaintain their own technologies and methodologies for counting clicks, and fromtime to time we have had to resolve differences between our measurements andtheirs, or regarding over-delivery of advertising impressions. Further, searchand media advertisers are paying much closer attention to allegations of clickfraud and impression fraud. Click fraud can occur when a user, manually orusing a computer program (including internet “clickbots” or “zombie”computers)  intentionally clicks on anadvertisement displayed on a Web site for any reason other than a legitimateinterest in the related content. Impression fraud, a variant of click fraud,can occur when a user, either manually or using a computer program, searchesmultiple times on a search engine for a keyword without clicking on the resultsof the searches. This can cause search engines to automatically disable therelevant keywords, knocking out high bidders on the keywords and increasing thedisplay of advertisements for low bidders. As a result, search and mediaadvertisers have become more willing to inquire about or challenge click countsrelated to SEM and media services. Search engine robots that are masked asvalid browser agents could bypass industry standard robot and spider lists andour filters and also cause artificial inflation in click results. Anysignificant dispute over the proper measurement of clicks or impressions orother user responses to advertisements could cause us to lose customers,advertising inventory and revenue, could substantially reduce the gross profitmargin we generate in our media and search businesses and could lead to a classaction or other litigation.

**WE ARE UNDERTAKING SEVERAL GLOBAL INITIATIVES IN ORDERTO BETTER LEVERAGE OUR BUSINESS, AND OUR EFFORTS MAY NOT BE SUCCESSFUL OR MAY NOTBE BENEFICIAL TO EACH OF THE OFFICES IN WHICH WE OPERATE.**

In order to realign andbetter leverage our business we have commenced several global initiatives,including harmonizing our global product lines across the offices in which weoperate, creating global standards for product management, development andmarketing and implementing global databases for our sales personnel, which wewill continue during the remainder of 2007. In order to synchronize our variousoffices and create a uniform worldwide business model we will need to, amongother things, set up uniform processes, formalize and build out trainingcourses, set up global information sharing and communication processes,identify and track productivity and cost measurements and identify areas ofinefficiency and develop global recovery plans. While we anticipate that theglobal realignment will have 

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cost andefficiency savings for our business, there is no guarantee that our globalefforts will be successful over the long run. Additionally, the global businessmodel that we implement for each of our business segments may not be the idealstandard for each of our offices, and may result in increased costs anddecreased savings for particular offices and lines of business throughout ourorganization.

**CHANGES IN THE ACCOUNTING RULES FOR STOCK-BASEDCOMPENSATION MAY ADVERSELY AFFECT OUR OPERATING RESULTS, OUR STOCK PRICEAND OUR ABILITY TO ATTRACT AND RETAIN EMPLOYEES.**

We have a history of usingemployee stock options and other stock-based compensation to attract, motivateand retain our staff. In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued the revised Statement of Financial Accounting Standards (“SFAS”)No. 123, *Share-Based Payment* (“SFAS No. 123R”),which required us, as of January 1, 2006, to measure compensation costsfor all stock-based compensation (including stock options) at fair value and torecognize these costs as expenses in our statements of operations. Therecognition of these expenses in our statements of operations has had anegative effect on our earnings per share since the adoption of SFAS No. 123Rand is likely to have a negative effect on our earnings per share in futureperiods, which could negatively impact our stock price. In addition, if wereduce or alter our use of stock-based compensation to minimize the recognitionof these expenses, our ability to attract, motivate and retain qualifiedpersonnel may be impaired, which could be detrimental to our business.

**OUR NET OPERATING LOSSCARRYFORWARDS MAY BE LIMITED.**

Due to the “change inownership” provisions of the Internal Revenue Code, the availability of our netoperating loss and credit carryforwards are subject to an annual limitationagainst taxable income in future periods, which could substantially limit theeventual utilization of these carryforwards.

**WE COULD BE ADVERSELY AFFECTED BY AN IMPAIRMENT OF ASIGNIFICANT AMOUNT OF GOODWILL AND/OR INTANGIBLE ASSETS ON OUR BALANCE SHEET.**

In the course of our operating history, we haveacquired and disposed of numerous assets and businesses. Some of ouracquisitions have resulted in the recording of a significant amount of goodwilland/or intangible assets on our balance sheet. The goodwill and/or intangibleassets were recorded because the fair value of the net assets acquired was lessthan the purchase price. We may not realize the full value of the goodwilland/or intangible assets. As such, we evaluate on at least an annual basiswhether events and circumstances indicate that all or some of the carryingvalue of goodwill and/or intangible assets are no longer recoverable, in whichcase we would write off the unrecoverable portion as a charge to our earnings.

To improve our operatingperformance, we may decide to acquire other assets or businesses complementaryto our business and, as a result, we may record additional goodwill and/orintangible assets on our balance sheet in the future. The possible write-off ofthe goodwill and/or intangible assets could negatively impact our futureearnings. We will also be required to allocate a portion of the purchase priceof any acquisition to the value of any intangible assets that meet the criteriaspecified in the SFAS No. 141, *BusinessCombinations*, such as marketing, customer or contract-basedintangibles. The amount allocated to these intangible assets could be amortizedover a fairly short period. As a result, our earnings and the market price ofour common stock could be negatively affected.

**THE SUCCESS OF OUR SEARCH OPERATIONS DEPENDS ON OURRELATIONSHIPS WITH A SMALL NUMBER OF SEARCH ENGINES, AND THE LOSS OF ONE OFTHEM COULD RESULT IN A SUBSTANTIAL DECREASE IN OUR SEARCH REVENUE.**

We have generated themajority of our global Search revenue from clicks originating on Google andYahoo! Search Marketing, through relationships with these search engines inmany countries in which we 

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operate.We expect that these search engines will continue to generate a majority ormore of our Search revenue for the foreseeable future. The interruption, lossor deterioration of our relationship with Google or Yahoo! would cause asignificant decrease in our Search revenue. As a result of consolidation amongsearch engines, and other SEM companies, we could lose one or more of ourclients or face increased competition from clients that internally develop oracquire capabilities similar to our service. In addition, as our search clients’operations continue to evolve, we may be required to adjust our businessstrategy to maintain relationships with our clients. The loss of, or a changein, one or more of these relationships could have a material adverse effect onour Search revenue.

**OUR MAJOR BUSINESS PARTNERS MAY EXPERIENCEADVERSE BUSINESS CONDITIONS THAT COULD ADVERSELY AFFECT OUR BUSINESS.**

We have a joint venturewith Dentsu to promote SEM services in Japan, the expansion of which werecently announced, we have major search engine distribution partners, such asGoogle and Yahoo! Search Marketing, and we may enter into similar relationshipswith other companies. A substantial portion of our revenue is, directly orindirectly, attributable to these major relationships. If one or more of thesecompanies experiences adverse business conditions that may render them unableto meet our expectations for the strategic business relationship or to fulfilltheir contractual obligations to us, such an event could have a materialadverse impact on our business, financial condition and results of operations.

**IF WE LOSE ANY KEYPERSONNEL, OUR BUSINESS WILL BE ADVERSELY AFFECTED.**

Our success depends, to asignificant extent, upon our senior management and key sales and technicalpersonnel, particularly our Chief Executive Officer, our Chief OperatingOfficer and Chief Financial Officer, our Chief Technical Officer and our ChiefInfrastructure Officer. The competition for experienced and talentedexecutives, senior managers and technical and sales personnel has becomeintense in our industry. The loss of the services of one or more of thesepersons, other similarly positioned members of management or other keypersonnel could materially and adversely affect our ability to develop ourbusiness.

**IN ORDER TO CONTINUE TO OPERATE EFFICIENTLY AND TOGROW OUR BUSINESS, WE WILL NEED TO ATTRACT AND RETAIN QUALIFIED PERSONNEL ANDMANAGE OUR COSTS, WHICH WE MAY BE UNABLE TO DO.**

Our success depends on our ability to attract andretain qualified technical, sales and marketing, customer support, financialand accounting, and managerial personnel. We may expand our total workforce andwill need to continue to attract qualified personnel in order to grow ourbusiness successfully. Additionally, as our business has escalated, we haveincreased our reliance on contractors and outside firms for development. We maynot be able to attract, integrate and retain the numbers and types ofcandidates that we desire, and we may not be able to retain our contractors andoutside firms and may not be able to replace them. Even if we are successful inattracting new staff and retaining existing staff, we may not be able toincrease revenue quickly enough to offset the costs of the additional personnelor increased cost of retaining personnel. Any of these contingencies couldcause our business to suffer.

We have experienced, areexperiencing and may continue to experience, particular difficulty in hiringand retaining qualified staff. Competition for staff throughout all ourbusiness segments and geographies is very high, and training is difficultbecause the required skill set is complex and there is no industry standard. Ifwe are unable to attract, train and retain qualified staff, we may not remaincompetitive and could lose business and our customers, which could have anadverse effect on revenue.

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**OUR OPERATIONS ARE VULNERABLE TO NATURAL DISASTERS ANDOTHER EVENTS, INCLUDING TERRORIST ATTACKS, BECAUSE WE HAVE LIMITED BACKUPSYSTEMS.**

We have limited backup systems and have experiencedsystem failures and electrical outages from time to time in the past, whichhave disrupted our operations. We have a limited disaster recovery plan in theevent of damage from fire, floods, typhoons, earthquakes, power loss,telecommunications failures, break-ins and similar events. Our operations aredependent on our ability to protect our computer systems against these unexpectedadverse events.

If any of the foregoing occurs, we may experience acomplete system shutdown. Any business interruption insurance that we carry isunlikely to be sufficient to compensate us for loss of business in the event ofa significant catastrophe.

In addition, interruptions in our services couldresult from the failure of our telecommunications providers to provide thenecessary data communications capacity in the time frame we require. Our OpenAdStream technology resides on computer systems located in our data centershoused by Equinix, Switch and Data, and Savvis in the United States and Level 3Communications in Europe. These systems’ continuing and uninterruptedperformance is critical to our success, as a substantial portion of our revenuedepends on the continuing availability of these systems. Despite precautionsthat we have taken, unanticipated problems affecting our systems have from timeto time in the past caused, and in the future could cause, interruptions in thedelivery of our solutions. Our business, results of operations and financialcondition could be materially and adversely affected by any damage or failurethat interrupts or delays our operations. To improve the performance and toprevent disruption of our services, we may have to make substantial investmentsto deploy additional servers or one or more copies of our Web sites to mirrorour online resources. Although we believe we carry property insurance withadequate coverage limits, our coverage may not be adequate to compensate us forall losses, particularly with respect to loss of business and reputation thatmay occur.

In addition, terroristacts or acts of war may cause damage to our employees, facilities, clients, ourclients’ customers and vendors, which could significantly impact our revenues,costs and expenses and financial position. The potential for future terroristattacks, the national and international responses to terrorist attacks orperceived threats to national security, and other acts of war or hostility havecreated many economic and political uncertainties that could adversely affectour business and results of operations in ways that cannot be presentlypredicted. We are predominantly uninsured for losses and interruptions causedby terrorist acts and acts of war.

**OUR NETWORK OPERATIONS MAY BE VULNERABLE TOHACKING, VIRUSES AND OTHER DISRUPTIONS, WHICH MAY MAKE OUR PRODUCTS ANDSERVICES LESS ATTRACTIVE AND RELIABLE.**

Internet usage coulddecline if any well-publicized compromise of security occurs. “Hacking” involvesefforts to gain unauthorized access to information or systems or to causeintentional malfunctions or loss or corruption of data, software, hardware orother computer equipment. Hackers have made many attempts to breach thesecurity of our network operations, with minimal disruption to date. If hackersare successful in the future, they could misappropriate proprietary informationor cause substantial disruptions in our service. We may be required to expendcapital and other resources to protect our Web site against hackers. Anymeasures we may take may not be effective. In addition, the inadvertenttransmission of computer viruses could expose us to a material risk of loss orlitigation and possible liability, as well as materially damage our reputationand decrease our user traffic.

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**WE DEPEND ONPROPRIETARY RIGHTS, AND WE FACE THE RISK OF INFRINGEMENT.**

Our success and ability to compete are substantiallydependent on our internally developed technologies and trademarks, which weprotect through a combination of patent, copyright, trade secret and trademarklaw. We own three patents in the United States, and have filed and intend tofile additional patent applications in the United States. In addition, we applyto register our trademarks in the United States and internationally. Our patentapplications and trademark applications may not be approved. Even if they areapproved, such patents or trademarks may be successfully challenged by othersor invalidated. If our trademark registrations are not approved because thirdparties own such trademarks, our use of such trademarks will be restrictedunless we enter into arrangements with such third parties that may beunavailable on commercially reasonable terms.

We generally enter into confidentiality or licenseagreements with our employees, consultants and corporate partners, andgenerally control access to and distribution of our technologies, documentationand other proprietary information. Despite our efforts to protect ourproprietary rights from unauthorized use or disclosure, parties may attempt todisclose, obtain or use our solutions or technologies. The steps we have takenmay not prevent misappropriation of our solutions or technologies, particularlyin many foreign countries in which we operate, where laws or law enforcementpractices may not protect our proprietary rights as fully as in the UnitedStates.

We have from time to time licensed, and we may licensein the future, elements of our trademarks, trade dress and similar proprietaryrights to third parties. While we attempt to ensure that the quality of ourbrand is maintained by these business partners, such partners may take actionsthat could materially and adversely affect the value of our proprietary rightsor our reputation. The value of our proprietary rights could decline in thefuture since the validity, enforceability and scope of protection of certainproprietary rights in Internet-related industries is uncertain and stillevolving.

We have, from time to time, been, and may in the futurebe, subject to claims of alleged infringement of the trademarks and otherintellectual property rights of third parties by us or by Web publishers withWeb sites in our Global Web Alliance, or by customers who employ our Technologysolutions. We may be required, or may elect, to indemnify these parties againstsuch claims. Such claims and any resultant litigation could subject us tosignificant liability for damages and could result in the invalidation of ourproprietary rights. In addition, even if we prevail, such litigation could betime-consuming and expensive to defend, and could result in the diversion ofour time and attention, any of which could materially and adversely affect ourbusiness, results of operations and financial condition. Any claims orlitigation from third parties may also result in limitations on our ability touse the trademarks and other intellectual property subject to such claims orlitigation unless we enter into arrangements with the third parties responsiblefor such claims or litigation, which may be unavailable on commerciallyreasonable terms, if at all.

From time to time, we mayselectively pursue claims of infringement of our patents and other intellectualproperty rights by third parties. Such claims and any resultant litigationpresent the risk that a court could determine, either preliminarily or finally,that some of our patents or other intellectual property rights are not valid,which may make it difficult to sell our technology solutions and may lead to aloss of and an inability to generate licensing revenue from our patents. Inaddition, even if we prevail, such litigation could be time-consuming andexpensive to pursue, and could result in the diversion of our time andattention, any of which could materially and adversely affect our business,results of operations and financial condition.

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**RISKS RELATED TOOUR COMMON STOCK AND THE MARKET FOR OUR COMMON STOCK.**

**THE TRADING PRICEOF OUR COMMON STOCK HAS BEEN VOLATILE HISTORICALLY AND MAY CONTINUE TO BEVOLATILE IN RESPONSE TO VARIOUS INTERNAL AND EXTERNAL FACTORS.**

The trading price of our common stock has beenvolatile historically and may continue to be unstable. For example, during thepast twelve months, the closing sales price of our common stock on the NASDAQNational Market has ranged from a high of $11.61 per share to a low of $6.75per share. The trading price of our common stock may fluctuate widely inresponse to various events and factors, some of which are beyond our control,such as quarterly or annual variations in the operating results and stock priceperformance of the Company, our competitors or our business partners;announcements by us or our competitors of acquisitions, new or improvedproducts or services or business relationships; the initiation ordiscontinuation of coverage by securities analysts; guidance and reports by securitiesanalysts, including changes in their financial earnings estimates andrecommendations; announcements about our earnings estimates or earnings thatare not in line with analyst expectations or prior Company guidance;announcements by our competitors about their earnings, especially if they arenot in line with analyst expectations; sales of stock by us or by ourstockholders; and new reports relating to trends in our markets and generaleconomic conditions.

In addition, the stockmarket in general, and the market prices for technology or Internet-relatedcompanies in particular, have experienced extreme price and volume fluctuationsthat have often been unrelated or disproportionate to the operating performanceof those companies. These broad market and industry fluctuations may negativelyimpact the market price for our common stock, regardless of our actualoperating performance. In the past, following periods of volatility in theoverall market and the market price of a company’s securities, securities classaction litigation has often been instituted against these companies. Thislitigation, if instituted against us, could result in substantial costs and adiversion of our management’s attention and resources. Additionally, volatilityor a lack of positive performance in our stock price may adversely affect ourability to retain key employees, all of whom have been granted stock options orother equity-based awards.

**WE HAVE A VERYSUBSTANTIAL OVERHANG OF COMMON STOCK AND FUTURE SALES OF OUR COMMON STOCK WILLCAUSE SUBSTANTIAL DILUTION AND MAY NEGATIVELY AFFECT THE MARKET PRICE OFOUR COMMON STOCK.**

As of February 28, 2007, there were approximately 50.8 millionshares of our common stock outstanding. As of that date, we also had anaggregate of approximately 12.2 million shares of common stock that may besold into the market in the future, including approximately 6.6 millionshares of our common stock issuable upon exercise of options, approximately0.1 million shares of our common stock issuable upon the exercise of thewarrants related to our preferred stock, approximately 3.3 million shares ofour common stock issuable upon vesting of restricted shares, and approximately2.2 million shares of our common stock issuable upon conversion of the debenturesand exercise of the related warrants. In addition, if we undertake anadditional acquisition or financing involving securities convertible intoshares of our common stock, the aggregate number of shares into which thosesecurities are convertible will further increase our overhang.

We cannot predict theeffect, if any, that future sales of shares of our common stock into themarket, or the availability of shares of common stock for future sale, willhave on the market price of our common stock. Sales of substantial amounts ofcommon stock (including the sale of securities convertible into shares of ourcommon stock), or the perception that such sales could occur, or the grant of alarge number of options, may materially and adversely affect prevailing marketprices for our common stock.

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**WE DISCLOSE PROFORMA INFORMATION, WHICH MAY EXCLUDE ITEMS THAT ARE IMPORTANT TO ANINVESTOR’S UNDERSTANDING OF OUR RESULTS OF OPERATIONS.**

We prepare and releasequarterly financial statements prepared in accordance with GAAP. We alsodisclose and discuss certain pro forma and other non-GAAP information in therelated earnings releases and investor conference calls. This pro formafinancial information excludes or may exclude certain special charges and othercosts. We believe the disclosure of the pro forma financial information helpsinvestors more meaningfully evaluate the results of our ongoing operations.However, we urge investors to carefully review the GAAP financial informationincluded as part of our Quarterly Reports on Form 10-Q, our AnnualReports on Form 10-K, and our quarterly earnings releases, and tocompare the GAAP financial information to the pro forma financial resultsdisclosed in our quarterly earnings releases and investor calls.

**OUR ABILITY TOGENERATE SUFFICIENT CASH FLOW TO REPAY OUR INDEBTEDNESS DEPENDS ON MANYFACTORS, SOME OF WHICH ARE BEYOND OUR CONTROL.**

On September 26,2003, we issued to a single holder $15.0 million in principal amount of our 2%subordinated convertible debentures due September 2006, subsequentlyextended to September 2009 at the election of the holder. On January 1,2004, we began making semi-annual interest payments, which, thus far, we haveelected to pay with cash flow from operations. We need to ensure that we havesufficient cash on hand to cover any portion of the balance that we elect topay in cash at maturity, or, if the holder elects to exercise its redemptionright with respect to $7.5 million in principal amount of the debentures, anyamount thereof that we elect to redeem in cash. Our ability to generate cashflow is subject to economic, financial, competitive, regulatory and otherfactors beyond our control. If we are unable to generate sufficient cash flowto meet our debt service obligations, we may need to, among other things, seekadditional financing, refinance or restructure our debt or reduce or issue alarge amount of common stock, which, if possible, would be very dilutive ordelay planned expenditures.

**THE TERMS OF THEDEBENTURES HAVE ANTI-DILUTION PROVISIONS FAVORING THE HOLDER, WHICH DISCOURAGEUS FROM ENGAGING IN TRANSACTIONS IN WHICH THE ISSUANCE OF COMMON STOCK MIGHT BEREQUIRED AND WHICH OTHERWISE MIGHT BE BENEFICIAL TO OUR BUSINESS.**

The terms of thedebentures provide that, subject to certain exceptions, if, for financingpurposes, we issue or sell any shares of our common stock at a price less thanthe conversion price of the debentures, which is $8.75 per share of our commonstock, the conversion price of the debentures will be reduced to the price atwhich we issue new shares. This device, which is anti-dilutive for thedebenture holder, may discourage us from engaging in a transaction that mightotherwise be beneficial to our security holders, if we would be required toissue common stock at a price below $8.75 per share.

**THE POWER OF OURBOARD OF DIRECTORS TO DESIGNATE AND ISSUE SHARES OF STOCK COULD HAVE AN ADVERSEEFFECT ON HOLDERS OF OUR COMMON STOCK.**

Our Board of Directors isauthorized to issue up to 350,000,000 shares of common stock for such considerationas they may consider sufficient, without seeking stockholder approval. Theissuance of additional shares of common stock in the future would reduce theproportionate ownership and voting power of current stockholders. Our Amendedand Restated Certificate of Incorporation also authorizes our Board ofDirectors to issue up to 10,000,000 shares of preferred stock, the rights andpreferences of which our Board of Directors may designate without stockholderapproval. The designation and issuance of preferred stock in the future couldcreate additional securities with dividend and liquidation preferences prior inright of payment to the outstanding shares of common stock.

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

Some of theprovisions of our Amended and Restated Certificate of Incorporation, ourBy-laws and Delaware law could, among other things, together or separately:

·       discourage,delay or prevent potential acquisition proposals;

·       discourage,delay or prevent transactions involving an actual or threatened change incontrol;

·       impedethe ability of our stockholders to change the composition of our board ofdirectors in any one year; and

·       limitthe price that investors might be willing to pay for shares of our commonstock.

These provisions may applyeven if the action that is limited or prevented might be in the best interestof our shareholders.

**WE DO NOT INTEND TOPAY FUTURE CASH DIVIDENDS.**

We currently do notanticipate paying cash dividends on our common stock at any time in the nearfuture. We may never pay cash dividends or distributions on our common stock.In addition, the terms of our debentures restrict our ability to pay cashdividends on our common stock. Whether we pay cash dividends in the future willbe at the discretion of our Board of Directors and will be dependent upon ourfinancial condition, results of operations, capital requirements, contractualrestrictions and any other factors that the Board of Directors decides isrelevant.

**RISKS RELATED TOOUR INDUSTRY.**

**OUR FAILURE TOCOMPETE SUCCESSFULLY MAY HINDER OUR GROWTH.**

The markets forInternet advertising and related products and services are intenselycompetitive and such competition is expected to increase. Our failure tocompete successfully may hinder our growth. We believe that our ability tocompete depends upon many factors both within and beyond our control,including:

·       thedevelopment of new online advertising media and methods;

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

·       theability to attract and retain qualified personnel;

·       changingdemands regarding customer service and support;

·       shiftsin sales and marketing efforts by us and our competitors; and

·       theease of use, performance, price and reliability of our services and products.

Some of our competitorshave longer operating histories, greater name recognition, larger customerbases and significantly greater financial, technical and marketing resourcesthan ours. In addition, current and potential competitors have established ormay establish cooperative relationships among themselves or with third partiesto increase the ability of their products or services to address the needs ofour prospective clients. In addition, most online advertising companies areseeking to broaden their business models, so that companies that do notcurrently compete directly with us may decide to compete more directly with usin the future. We may be unable to compete successfully against current orfuture competitors.

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**CHANGES INGOVERNMENT REGULATION COULD DECREASE OUR REVENUES AND INCREASE OUR COSTS.**

Laws and regulationsdirectly applicable to Internet communications, commerce and advertising arebecoming more prevalent, and new laws and regulations are under considerationby the United States Congress and state legislatures. Any legislation enactedor restrictions arising from current or future government investigations orpolicy, including any legislation that does not have adequate provisions toprotect net neutrality, could dampen the growth in use of the Internetgenerally and decrease the acceptance of the Internet as a communications,commercial and advertising medium. State governments or governments of foreign countriesmight attempt to regulate our transmissions or levy sales or other taxesrelating to our activities. The laws governing the Internet, however, remainlargely unsettled, even in areas where there has been some legislative action.It may take years to determine whether and how existing laws such as thosegoverning intellectual property, privacy, libel and taxation apply to theInternet and Internet advertising. In addition, the growth and development ofInternet commerce may prompt calls for more stringent consumer protection laws,both in the United States and abroad, which may impose additional burdens oncompanies conducting business over the Internet. Our business, results ofoperations and financial condition could be materially and adversely affectedby the adoption or modification of laws or regulations relating to theInternet.

**CHANGES IN DOMESTICOR INTERNATIONAL LAWS AND STANDARDS RELATING TO DATA COLLECTION AND USEPRACTICES AND THE PRIVACY OF INTERNET USERS, OR RELATED LITIGATION, COULD HARMOUR BUSINESS.**

The U.S. federal and various state governments haverecently proposed limitations on the collection and use of informationregarding Internet users. In 2004 and 2005, the U.S. Congress proposed severalnew pieces of legislation that would limit the use of technologies deemed to be“spyware,” which some bills have defined to include cookies, Web beacons andjavascript, which are required by our products and services. The effectivenessof our Open AdStream products and services could be significantly limited byfederal and state regulations limiting the collection or use of informationregarding Internet users that are inconsistent with our policies and practices.Since many of the proposed federal and state laws or regulations are beingdeveloped, we cannot yet determine the impact these regulations may have on ourbusiness. In addition, growing public concern about privacy and the collection,distribution and use of personal information has led to self-regulation ofthese practices by the Internet advertising and direct marketing industry, andto increased federal and state regulation. Lastly, a number of civil actionshave been brought by federal and state authorities against companies alleged tohave distributed “spyware” without the proper consent of users. The NetworkAdvertising Initiative, of which we are a founding member, has developedself-regulatory principles for online preference marketing. We are also subjectto various federal and state regulations concerning the collection, distributionand use of personal information. These laws include the Children’s OnlinePrivacy Protection Act and state laws that limit or preclude the use of voterregistration and drivers license information, as well as other laws that governthe collection and use of consumer credit information. While we monitorlegislative initiatives, in the event that more onerous federal or state lawsor regulations are enacted or applied to us or to our clients, our business,financial condition and results of operations could be materially and adverselyaffected.

We also face risksassociated with international data and privacy protection. The interpretationand application of data protection laws in Europe and elsewhere are stilluncertain and subject to change. It is possible that one or more of these lawsmay be interpreted and applied in a manner that is inconsistent with ourpolicies on data collection and use, or that new laws may be enacted thatconflict with our data collection and use. If so, we could be subjected tofines, face increased compliance costs, be required to change our datapractices or be exposed to lawsuits, any one of which could have a materialadverse effect on our business and results of operations.

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**PRIVACY CONCERNS MAY PREVENTUS FROM COLLECTING USER DATA.**

Growing concerns about the use of cookies and datacollection may limit our ability to develop user profiles. Web sites typicallyplace small files of information, commonly known as “cookies,” on a user’s harddrive, generally without the user’s knowledge or consent. Cookie information ispassed to the Web site through the Internet user’s browser software. Our OpenAdStream technology enables the use of cookies and othernon-personally-identifying information to deliver targeted advertising and tolimit the frequency with which an advertisement is shown to a user. Mostcurrently available Internet browsers allow users to modify their browsersettings to prevent cookies from being stored on their hard drive, andMicrosoft Corporation changed the design and instrumentation of its Web browserto give users the option to accept or reject third-party cookies. There is alsothird-party software available that blocks the storage of cookies on a user’shard drive. A small minority of users are currently choosing to prevent certaincookies. Users can also delete cookies from their hard drive or modify them atany time. Some Internet commentators and privacy advocates have suggestedlimiting or eliminating the use of cookies. Any reduction or limitation in theuse of cookies or increase in the number of users blocking cookies could limitthe effectiveness of our sales and marketing efforts and impair our profilingand targeting capabilities. Such changes also could adversely affect ourability to determine the reach of advertising campaigns sold and delivered byus and the frequency with which users of sites in the Global Web Alliance seethe same advertisement.

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

**WE FACE RISKSASSOCIATED WITH TECHNOLOGICAL CHANGE.**

The Internet and Internet advertising markets are characterizedby rapidly changing technologies, evolving industry standards, frequent newproduct and service introductions and changing customer demands. Our futuresuccess will depend on our ability to adapt to rapidly changing technologiesand to enhance existing solutions and develop and introduce a variety of newsolutions to address our customers’ changing demands. We may experiencedifficulties that could delay or prevent the successful design, development,introduction or marketing of our solutions. In addition, our new solutions orenhancements must meet the requirements of our current and prospectivecustomers and must achieve significant market acceptance. Material delays inintroducing new solutions and enhancements may cause customers to forego purchasesof our solutions and purchase those of our competitors.

In addition, thedevelopment of commercial software and technology that blocks, eliminates orotherwise screens out Internet advertising may reduce the value of advertisinginventory on our Global Web Alliance and the benefits of our technologysolutions to our customers. We cannot guarantee that a new commercial softwareor technology, for end-users or enterprises, will not be capable of eliminatinga portion or all of the advertisement formats, including banners, pop-ups,pop-unders and other formats, that we utilize through our Global Web Allianceor that we currently deliver through our technology solutions. To the extentthat our customers refuse to pay for advertisements that are blocked, or if theuse of blocking software exceeds our expectations, our business, results ofoperations and financial condition may be materially and adversely affected.

**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS

None.

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**ITEM 2. PROPERTIES.**

Our principal executive offices are located at 132West 31st Street, New York, New York. They consist ofapproximately 35,000 square feet under a lease that expires in 2011 and 24,000square feet under a sublease that expires in 2009, which, collectively providefor total annual rent of approximately $1.1 million, subject to increaseannually to reflect increases in operating expenses.

In addition, wecurrently lease office space in the following domestic locations:

·       Fort Washington, PA

·       Los Angeles, CA

·       San Francisco, CA

·       Sunnyvale,CA

We currently leaseoffice space in the following countries for our international operations:

·       Australia

·       Canada

·       France

·       Germany

·       Japan

·       Spain

·       Sweden

·       Switzerland

·       South Korea

·       UnitedKingdom

We periodically evaluateour facilities requirements. Some of our facilities are sublet in whole or inpart.

**ITEM 3. LEGAL PROCEEDINGS.**

We are not involved in anymaterial pending legal proceedings at this time, and management is not aware ofany contemplated proceeding by any governmental authority.

**ITEM 4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITIES HOLDERS.**

We held our Annual Meeting of Stockholders onOctober 31, 2006.

The stockholders elected Robert Perkins and BrianSilva to serve as Class II directors, for three-year terms expiring at the2009 Annual Meeting of Stockholders or until the election and qualification oftheir respective successors.

The stockholders ratified the appointment of GoldsteinGolub Kessler LLP as our independent certified public accountants for the yearending December 31, 2006.

Sharesof common stock were voted as follows:

| **Director Nominee or Proposal** | ** ** | ** ** | ** ** | **For**   | ** ** | **Against /  Withheld** | ** ** | **Abstentions** | ** ** | **Broker Non-  Votes** | ** ** |
|-------------------------------------------------|------------|------------|------------|-----------|------------|------------------------------|------------|-----------------|------------|-----------------------------|------------|
| Robert Perkins                                  |       | 43,418,719 |       | 2,096,546 |       |                         | N/A        |            |       |                        | N/A        |   |   |
| Brian Silva                                     |       | 43,445,521 |       | 2,069,744 |       |                         | N/A        |            |       |                        | N/A        |   |   |
| Ratification of  Accountants                    |       | 45,410,778 |       | 94,559    |       |                         | 9,928      |            |       |                        | N/A        |   |   |

 

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**PART II**

**ITEM 5. MARKET FORREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES.**

Fromour initial public offering on August 13, 1998 until June 2002, ourcommon stock was traded on the NASDAQ National Market under the symbol “TFSM.”In June 2002, we transferred our common stock to the NASDAQ SmallCapMarket, where it continued to trade under the same symbol. Our common stock wasapproved for re-listing on the NASDAQ National Market effectiveNovember 3, 2005, where it continues to trade under the symbol “TFSM.” Thefollowing table sets forth, as applicable, the range of high and low bidinformation or sale price (in dollars per share) for our common stock, for theperiods indicated, as reported by the NASDAQ SmallCap Market or the NASDAQNational Market, as applicable.

| ** **                        | ** ** | **High**   | ** ** | **Low**    | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|
| **YEAR  ENDED DECEMBER 31, 2005** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter                     |       | $          | 4.60       |       | $          | 2.76 |   |
| Second Quarter                    |       | 4.19       |       | 2.79       |       |
| Third Quarter                     |       | 7.23       |       | 3.85       |       |
| Fourth Quarter                    |       | 8.28       |       | 5.45       |       |
| **YEAR  ENDED DECEMBER 31, 2006** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter                     |       | $          | 10.80      |       | $          | 7.34 |   |
| Second Quarter                    |       | 11.79      |       | 6.72       |       |
| Third Quarter                     |       | 9.75       |       | 6.75       |       |
| Fourth Quarter                    |       | 10.49      |       | 7.56       |       |

 

On February 28, 2007, the last reported saleprice for our common stock on the NASDAQ National Market was $9.64.

HOLDERS OF RECORD

Our authorized capital stock consists of 350,000,000shares of common stock, par value $0.01 per share, and 10,000,000 shares ofpreferred stock, par value $0.01 per share. As of February 28, 2007, therewere 50,802,518 shares of our common stock outstanding. As of February 28,2007, there were approximately 209 holders of record of our common stock.

DIVIDENDS

We have not declared or paid any dividends on ourcapital stock since our inception and do not anticipate paying dividends in theforeseeable future. Our current policy is to retain earnings, if any, tofinance the expansion of our business. The future payment of dividends willdepend on the results of operations, financial condition, capital expenditureplans and other factors that we deem relevant and will be at the solediscretion of our Board of Directors.

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PERFORMANCE GRAPH

Thefollowing graph compares the percentage change in the cumulative stockholderreturn on our common stock from December 31, 2001 throughDecember 31, 2006 to the NASDAQ Composite Index and the NASDAQ ComputerIndex. The chart assumes that the value of investment in our common stockand in each index was $100 at December 31, 2001 and that alldividends were reinvested.

| ** **                  | ** ** | **12/31/2001** | ** ** | **12/31/2002** | ** ** | **12/31/2003** | ** ** | **12/31/2004** | ** ** | **12/31/2005** | ** ** | **12/31/2006** | ** ** |   |
|-----------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|--------|
| **24/7  Real Media, Inc.**  |       |           | $          | 100.00         |       |           |       | $              | 100.00     |           |       |           | $          | 582.61 |   |   |   | $ | 376.52 |   |   |   | $ | 638.26 |   |   |   | $ | 786.96 |   |   |
| **NASDAQ  Composite Index** |       |           | $          | 100.00         |       |           |       | $              | 68.47      |           |       |           | $          | 102.71 |   |   |   | $ | 111.54 |   |   |   | $ | 113.07 |   |   |   | $ | 123.84 |   |   |
| **NASDAQ Computer Index**   |       |           | $          | 100.00         |       |           |       | $              | 63.50      |           |       |           | $          | 95.35  |   |   |   | $ | 98.45 |   |   |   | $ | 101.16 |   |   |   | $ | 107.38 |   |   |

 

In prior years we included a peer group line in thegraph above; however, due to the nature of our industry, over the past severalyears there has not been a sufficiently broad or stable group of peer companiesthe stock performance results of which can be combined to produce a reasonablemeasure against our common stock performance. As a result, we no longer provide a peer group line.

The information under the heading “Performance Graph”shall be deemed furnished, and not filed, in this Annual Report on Form 10-K,and shall not be deemed incorporated by reference into any filing under theSecurities Act of 1933, as amended, or the Exchange Act as a result of thisfurnishing, except to the extent that the Company specifically incorporates itby reference.

SECURITIESAUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The information regarding securities authorized forissuance under our equity compensation plans is included in Item 12,“Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters - Securities Authorized for Issuance Under EquityCompensation Plans” of this Form 10-K.

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**ITEM 6. SELECTEDFINANCIAL DATA.**

The following table sets forth selected consolidatedfinancial data for the Company. The selected consolidated financial data as ofDecember 31, 2006 and 2005, and for each of the years in the three yearperiod ended December 31, 2006, has been derived from our auditedconsolidated financial statements, which are included elsewhere herein. Theselected consolidated financial data as of December 31, 2004, 2003 and2002, and for each of the years in the two-year period ended December 31,2003, has been derived from our audited consolidated financial statements,which are not included herein. We believe that, due to the numerousacquisitions and dispositions that we made in recent years, the period toperiod comparisons for 2002 through 2006 are not meaningful and should not berelied upon as indicative of future performance.

Youshould read the selected consolidated financial data set forth below inconjunction with, and it is qualified in its entirety by reference to,“Management’s Discussion and Analysis of Financial Condition and Results ofOperation” and the audited consolidated financial statements and the notesthereto included elsewhere herein.

| ** **                                                                                                      | ** ** | **Year ended December 31,**                                                | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2006**                                                                                  | ** ** | **2005** | ** ** | **2004 (1)** | ** ** | **2003 (2)** | ** ** | **2002 (3)** | ** ** |
| ** **                                                                                                      | ** ** | **(in thousands, except share and per share amounts)** | ** ** |
| **CONSOLIDATED STATEMENTS OF OPERATIONS DATA:**                                             | ** ** | ** **                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                                                         |       | $                                                                                         | 200,243    |   | $ | 139,794 |   | $ | 85,255 |   | $ | 49,181 |   | $ | 42,558 |   |
| Gross profit                                                                                                    |       | 70,829                                                                                    |       | 54,453 |   | 36,025 |   | 23,495 |   | 19,782 |   |
| Loss from operations                                                                                            |       | (8,147                                                                                    | )          | (1,103 | ) | (6,781 | ) | (10,035 | ) | (18,244 | ) |
| Income (loss) before provision for income taxes and  minority interest in operations of consolidated subsidiary |       | (7,794                                                                                    | )          | 224 |   | (3,132 | ) | (11,979 | ) | (17,499 | ) |
| Net income (loss)                                                                                               |       | $                                                                                         | (8,622     | ) | $ | 38 |   | $ | (3,155 | ) | $ | (12,016 | ) | $ | (17,499 | ) |
| Dividends on preferred stock                                                                                    |       | —                                                                                    |       | (25 | ) | (306 | ) | (617 | ) | (189 | ) |
| Preferred stock conversion discount                                                                             |       | —                                                                                    |       | — |   | — |   | (1,780 | ) | (6,628 | ) |
| Net income (loss) attributable to common stockholders                                                           |       | $                                                                                         | (8,622     | ) | $ | 13 |   | $ | (3,461 | ) | $ | (14,413 | ) | $ | (24,316 | ) |
| Basic net income  (loss) per common share:                                                                      |       |                                                                                      |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                                               |       | $                                                                                         | (0.18      | ) | $ | — |   | $ | (0.09 | ) | $ | (0.71 | ) | $ | (1.65 | ) |
| Preferred stock dividends and conversion discount                                                               |       | —                                                                                    |       | — |   | (0.01 | ) | (0.15 | ) | (0.64 | ) |
| Net income (loss) attributable to common stockholders                                                           |       | (0.18                                                                                     | )          | — |   | (0.10 | ) | (0.86 | ) | (2.29 | ) |
| Weighted average shares outstanding used in basic net  income (loss) per common share                           |       | 48,508,739                                                                                |       | 45,350,466 |   | 35,373,973 |   | 16,817,502 |   | 10,600,191 |   |
| Diluted net income (loss)  per common share:                                                                    |       |                                                                                      |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                                               |       | $                                                                                         | (0.18      | ) | $ | — |   | $ | (0.09 | ) | $ | (0.71 | ) | $ | (1.65 | ) |
| Preferred stock dividends and conversion discount                                                               |       | —                                                                                    |       | — |   | (0.01 | ) | (0.15 | ) | (0.64 | ) |
| Net income (loss) attributable to common stockholders                                                           |       | (0.18                                                                                     | )          | — |   | (0.10 | ) | (0.86 | ) | (2.29 | ) |
| Weighted average shares outstanding used in diluted  net income (loss) per common share                         |       | 48,508,739                                                                                |       | 47,694,027 |   | 35,373,973 |   | 16,817,502 |   | 10,600,191 |   |
| **CONSOLIDATED  BALANCE SHEET DATA:**                                                                           |       |                                                                                      |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                                       |       | $                                                                                         | 59,390     |   | $ | 40,009 |   | $ | 27,690 |   | $ | 21,645 |   | $ | 7,674 |   |
| Working capital                                                                                                 |       | 54,516                                                                                    |       | 19,551 |   | 23,545 |   | 16,021 |   | 909 |   |
| Goodwill                                                                                                        |       | 39,573                                                                                    |       | 39,573 |   | 34,573 |   | 2,621 |   | 2,621 |   |
| Intangible assets, net                                                                                          |       | 7,609                                                                                     |       | 9,715 |   | 12,676 |   | 3,352 |   | 6,007 |   |
| Total assets                                                                                                    |       | 176,658                                                                                   |       | 142,804 |   | 121,398 |   | 46,180 |   | 33,967 |   |
| Long-term liabilities                                                                                           |       | 8,276                                                                                     |       | 1,386 |   | 7,154 |   | 17,226 |   | 9,582 |   |
| Total  stockholders' equity                                                                                     |       | 103,658                                                                                   |       | 78,719 |   | 75,268 |   | 10,037 |   | 5,515 |   |

 

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(1)          Factors affectingcomparability from period to period include our acquisition of 24/7 Real MediaKorea, a provider of media and technology solutions in South Korea, in January 2004,and our acquisition of Decide Holdings Pty Ltd. (“Decide”), a provider ofsearch marketing services in Europe and Australia, in August 2004.

(2)          Factors affectingcomparability from period to period include our disposition ofiPromotions, Inc., an online promotions business, and our acquisition ofInsight First, Inc. (“Insight”), a provider of Web analytics technology,each in January 2003.

(3)          Factorsaffecting comparability from period to period include our divestiture of IMAKESoftware & Services, Inc., a broadband convergence technologybusiness, in January 2002, and our disposition of certain assets relatedto our U.S. e-mail management product, in May 2002.

**ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATION.**

**OVERVIEW**

24/7 Real Media is aleading global digital marketing company, providing online advertising and SEMstrategies since 1995, and has been publicly traded since 1998. Wegenerate revenue primarily through our three principal lines of business,Media, Search and Technology, and operate in twelve countries. Our Mediabusiness helps advertisers increase the reach of their ad campaigns through ourGlobal Web Alliance, an alliance of affiliated Web sites, and sophisticatedcampaign targeting options within the Global Web Alliance. Our Search businessservices, which are powered by our proprietary Decide DNA software, allowadvertisers to maximize their SEM spending and achieve optimum returns on theirinvestments. Through our Technology business, we provide online advertisementserving, analytics and behavioral targeting services to publishers using ourproprietary OAS advertisement serving software. We have acquired and disposedof numerous businesses during our operating history, which may affect thecomparability of our results from period to period (see the footnotes to thefinancial table in Item 6, “Selected Financial Data,” for more detail).

***Media***

Through our Global Web Alliance, an alliance ofaffiliated Web sites, we provide Web site representation services to Webpublishers seeking to increase advertising revenue from their Web sites andmaximize revenue from their existing advertising inventory. We represent Websites with brand names, quality content and global reach. By entering into revenuesharing agreements with us, our affiliated Web publishers allow us to selltheir premium and under-utilized advertising inventory, as well as inventorythat might otherwise go unsold to advertisers, and we pay them a fixed royaltyfor the advertising inventory that we sell. We use OAS, our proprietary adserving technology, to serve advertisements on behalf of the Web sites in theGlobal Web Alliance.

We sell ad inventory inthe Global Web Alliance to advertisers seeking to target broad or specific audiences,build their brands and generate greater customer response and greater returnfrom their advertising spending. We generate Media revenue from fees paid byclient advertisers for advertising space. We typically sell advertising spaceon a CPM basis, enabling a client advertiser to pay a fee based on the numberof times its advertisement is displayed. We typically count an advertisingimpression each time a user’s Web browser requests that our computer serverstransmit the advertisement. We may charge higher CPMs to advertisers thatpurchase our advanced targeting solutions, such as our behavioral targetingsolution, in comparison to those that purchase advertising space that requiresless specific targeting. We have also generated limited Media revenue frome-mail advertisement and marketing services.

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***Search***

We provide SEM services to advertisers using ourproprietary Decide DNA technology through three methods:  keyword bid management, which involvesauctioned bidding on search terms, or keywords, to ensure that a Web site’sadvertising shows up in a search engine’s sponsored listings, paid inclusion,which ensures that a Web site shows up in a search engine’s natural listings,and Web site search engine optimization, which involves improving a Web site’scontent and structure to improve the site’s rankings in the natural results ofa keyword search on a search engine.

We generate Search revenuefor our keyword bid management services and PI services by charging our clientseither based on a percentageof the client’s spend with the search engines or an agreed CPC. CPC fees aregenerated each time search engine users click Web site listings submitted by usinto search engine databases and are directed to our client advertisers’ Websites. We typically generate revenue from Web site optimization by chargingadvertisers an initial fixed fee and a monthly maintenance fee for ourservices. To a lesser extent we also generate revenue from fees paid by searchengines for “trusted feed generation”—buildingand optimizing advertiser Web site listings and reporting on advertisingcampaigns for their advertisers. We typically charge a fee based on apercentage of the revenue generated by the search engine from advertisers thathave Web site listing submissions built and optimized by us.

***Technology***

Through our proprietary OAS advertisement delivery andmanagement technology, we allow our customers to actively monitor and managetheir advertising campaigns. OAS fully integrates ad serving, as well asapplications that allow clients to perform analytics (campaign reporting,marketing intelligence and revenue information), behavioral and other targeting(targeting Web site visitors based on their online behavior), and management ofad campaign contracts in one piece of software.

Our OAS platform is available to customers fromsoftware hosted centrally on our servers (“OAS Central”) or from softwarehosted locally on the customers’ servers (“OAS Local”). We license OAS Centralto Web publishers and we typically charge them a service fee determined bymultiplying an agreed CPM by the number of advertising impressions served usingOAS. We charge additional fees to Web publishers that opt to purchase ouranalytics application and service, our behavior targeting application andservice or our contract management services. Service fees for use of theanalytics and behavioral targeting applications and services are calculated bymultiplying an agreed CPM by the number of page views measured by therespective application, while fees for contract management are calculated onthe same basis as the associated OAS service fees. We license OAS Local to Webpublishers and we typically charge them a license fee, a software maintenanceand technical support services fee and a training fee. We often base licensefees on the forecasted number of advertising impressions a Web publisher willserve using our software, the use of advanced software modules and the licenseterm.

To a lesser extent, wegenerate revenue by providing professional services charged at an hourly rateand from fees paid by Web publishers for trafficking their advertisements.Trafficking advertisements refers to entering advertisement creative materialand campaign specifications into our OAS software.

**CRITICAL ACCOUNTINGPOLICIES  AND ESTIMATES**

***General***

Our consolidated financial statements are prepared inconformity with accounting principles generally accepted in the United Statesof America. The preparation of these consolidated financial statements requiresus to make certain estimates, judgments and assumptions that affect thereported amounts of assets, liabilities, revenues and expenses, and the relateddisclosure of contingent assets and liabilities.

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We base our estimates onhistorical experience and on various other assumptions that we believe arereasonable under the circumstances, the results of which form the basis ofmaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. We evaluate these estimates on anongoing basis. We refer to accounting estimates of this type as criticalaccounting policies and estimates, which we discuss further below.

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

*Media*

Our Media revenue isgenerated from fees paid by client advertisers for the advertising impressionsthey purchase. We typically offer advertisers a pricing model based on CPM,which enables an advertiser to pay a fee based on the number of times itsadvertisement is displayed. E-mail related revenue is derived from deliveringadvertisements to e-mail lists for advertisers. Agreements are primarilyshort-term and revenue is recognized as services are delivered, provided thatno significant obligations remain outstanding and collection of the resultingreceivable is probable. We become obligated to make royalty payments to Websites and e-mail lists that have contracted with us in the period theadvertising impressions or e-mails are delivered. Such expenses are classifiedas cost of revenue in the consolidated statements of operations.

*Search*

Our Search revenue isprimarily based on either a percentage of a client’s spend with the searchengines or the CPC fees paid by client advertisers. CPC fees are generated eachtime users click on Web site listings that we submitted into search enginedatabases and are directed to our client advertisers’ Web sites. Agreements areprimarily short-term and revenue is recognized as services are delivered,provided that no significant obligations remain outstanding and collection ofthe resulting receivable is probable. We become obligated to make payments tosearch engines that have contracted with us in the period in which the clicksoccur. Such expenses are classified as cost of revenue in the consolidatedstatements of operations. When we provide SEM services as an agent in which wedo not have principal risk and reward, we recognize revenue on a net basis. Toa lesser extent, we also generate revenue from fees paid by search engines thatemploy us to optimize the submission of Web site listings and report onadvertising campaigns for their advertisers. We typically charge a fee based on apercentage of the revenue generated by the search engine from advertisers thathave Web site listing submissions built and optimized by us.

*Technology*

Our Technology revenue is derived primarily fromlicensing our software, hosted advertisement serving and software maintenanceand technical support services. Revenue from OAS Central contracts isrecognized upon delivery. Revenue from OAS Local contracts is recognized inaccordance with Statement of Position (“SOP”) No. 97-2, *Software Revenue Recognition*, and SECStaff Accounting Bulletin (“SAB”) No. 104, *Revenue Recognition*, upon delivery of the software, which isgenerally when the software is made available for download, there is persuasiveevidence of an arrangement, collection is reasonably assured, the fee is fixedor determinable and vendor-specific objective evidence exists to allocate thetotal fees to all elements of the arrangement. Contracts that bundle thesoftware license with software maintenance and technical support are recognizedratably over the contract term. Revenue from software maintenance and technicalsupport contracts is recognized ratably over the life of the agreement, whichtypically does not exceed one year.

Expenses related to our Technology revenue areprimarily payroll costs incurred to deliver and support the software, andhosting, bandwidth and license fees paid to third-party software vendors. Theseexpenses are classified as cost of revenue in the consolidated statements ofoperations.

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*Deferred Revenue*

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

***Stock-based Compensation***

Effective January 1, 2006, we adopted SFAS No. 123R,using the modified prospective transition method and therefore have notrestated prior periods’ results. Under the fair value recognition provisions ofSFAS No. 123R, we recognize stock-based compensation net of an estimatedforfeiture rate and therefore only recognize stock-based compensation cost forthose shares expected to vest over the requisite service period of the award. Prior to the adoption of SFAS No. 123R,we accounted for awards using the intrinsic value method under AccountingPrinciples Board (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees*, and FASB interpretation No. 44, *Accounting for Certain Transactions Involving Stock Compensation—aninterpretation of APB Opinion No. 25,*and accordingly, onlyrecognized stock-based compensation related to restricted stock awards andaccounted for forfeitures as they occurred. We also complied with thedisclosure provisions of SFAS No. 123, *Accounting for Stock-BasedCompensation,*and SFAS No. 148, *Accountingfor Stock-Based Compensation—Transition and Disclosure*.

Calculating stock-basedcompensation requires the input of highly subjective assumptions, including theexpected term of the stock-based awards, stock price volatility, and thepre-vesting options forfeiture rate. We estimate the expected life of stockoptions granted based on the vesting period of the awards and on historicalexercise patterns, which we believe are representative of future behavior. Weestimate the volatility of our common stock on the date of grant based on thehistorical volatility of the Company’s common stock over a period equal to theexpected life of the award, adjusted for a historical trend. We selected the risk-freeinterest rate based on yields from United States Treasury zero-couponissues for a term consistent with the expected life of the awards in effect atthe time of grant. We estimate the expected forfeiture rate based on historicalexperience of our stock-based awards that are granted, exercised and canceled.

***Accounts Receivable***

Accounts receivable are recorded at the invoicedamount net of allowance for doubtful accounts and sales allowance. We do notrequire collateral. We maintain an allowance for doubtful accounts to reservefor potentially uncollectible receivables and a sales allowance to reserve forpotential credits issued to customers. The allowances are estimates calculatedbased on an analysis of current business and economic risks, customercredit-worthiness, specific identifiable risks such as bankruptcies,terminations or discontinued customers, or other factors that may indicate apotential loss.

As a normal part of ourbusiness, we have receivables that are invoiced in the month following thecompletion of the earnings process. All unbilled receivables are billed within30 days after each month-end.

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

We evaluate goodwill andindefinite lived intangible assets on an annual basis and whenever events orchanges in circumstances indicate that a carrying amount may not be fullyrecoverable. Long-lived assets, including property and equipment, goodwill,long-term assets and amortizable intangible assets, are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountmay not be fully recoverable. Conditions that would necessitate an impairmentassessment include a 

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significantdecline in the observable market value of an asset, a significant change in theextent to which or manner in which an asset is used, or a significant adversechange that indicates that the carrying amount of an asset or group of assetsis not recoverable. We assess impairment in accordance with the requirements ofSFAS No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*. We assess the impairment of goodwill and intangible assets inaccordance with the provisions of SFAS No. 142, *Goodwill and Other Intangible Assets*. We determine the recoverability of the assets by comparing thecarrying amount of the assets to net future cash flows that the assets areexpected to generate. The impairment we recognize is the amount by which the carryingamount exceeds the fair market value of the assets.

***Business Combinations***

We account for ouracquisitions as purchase business combinations in accordance with SFAS No. 141,*Business Combinations*, and SFAS No. 142,*Goodwill and Other Intangible Assets*. Weallocate a portion of the purchase price to identifiable tangible andintangible assets based on their respective estimated fair values, and recordas goodwill any remaining unallocated portion of the purchase price. Intangibleassets include trademarks, customer relationships, acquired technology andcovenants not to compete. Such intangible assets are amortized on astraight-line basis over their estimated useful lives, which are generally twoto seven years, except for trademarks that have an indefinite life.

***Contingencies and Litigation***

We evaluate contingentliabilities, including threatened or pending litigation, in accordance withSFAS No. 5, *Accounting forContingencies*, and record accruals when the outcome of these mattersis deemed probable and the potential liability is reasonably estimable. We makethese assessments based on the particular facts and circumstances and, in someinstances, based in part on the advice of outside legal counsel.

***Restructuring Estimates***

We account forrestructuring activities in accordance with SFAS No. 146, *Accounting for Costs Associated with Exit or DisposalActivities*. Restructuring-related liabilities include estimates for,among other things, involuntary terminations of employees and disposition oflease obligations. Key variables in determining such estimates include timingof sublease rentals, estimates of sublease rental payment amounts and tenantimprovement costs, and estimates for brokerage and other related costs. Weperiodically evaluate and, if necessary, adjust the estimates based oncurrently available information.

***Investments***

SFAS No. 115, *Accounting for Certain Investments in Debt and Equity Securities*,and SAB No. 59, *Accounting for Non-currentMarketable Equity Securities*, provide guidance on determining whenan investment is other-than-temporarily impaired. We review investmentsquarterly for indicators of other-than-temporary impairment. Each determinationrequires significant judgment. In making a judgment, we evaluate, among otherfactors, the duration and extent to which the fair value of an investment isless than its cost, the financial health of the investee, and our intent andability to hold the investment. Investments with an indicator are furtherevaluated to determine the likelihood of a significant adverse effect on thefair value and amount of the impairment as necessary. If market, industryand/or investee conditions deteriorate, we may incur future impairments.

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**IMPACT OF RECENTLYISSUED ACCOUNTING STANDARDS**

In July 2006the FASB issued Financial Interpretation Number 48, *Accountingfor Uncertainty in Income Taxes*, (“FIN 48”) as an interpretation ofSFAS No. 109, *Accounting for IncomeTaxes*. FIN 48 provides that the tax effects from an uncertain taxposition be recognized in a company’s financial statements only if the taxposition is more-likely-than-not of not being sustained upon examination by thetax authorities, based on the technical merits of the position. FIN 48also provides guidance on derecognition, classification, interest, penalties,accounting in interim periods, disclosure, and transition. FIN 48 will beeffective for the Company beginning January 1, 2007. We are currentlyevaluating the impact of adopting FIN 48 on our consolidated financialstatements. Differences between the amounts recognized in the statementsof financial position prior to the adoption of FIN 48 and the amounts reportedafter adoption should be accounted for as a cumulative-effect adjustmentrecorded to the beginning balance of retained earnings.

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements*, which clarifiesthe definition of fair value, establishes guidelines for measuring fair value,and expands disclosures regarding fair value measurements. SFAS No. 157does not require any new fair value measurements and eliminates inconsistenciesin guidance found in various prior accounting pronouncements. SFAS No. 157will be effective for the Company on January 1, 2008. We are currentlyevaluating the impact of adopting SFAS No. 157 on our consolidatedfinancial statements.

In September 2006, the SEC released SAB No. 108,*Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*.SAB No. 108 provides interpretive guidance on the SEC’s views on how theeffects of the carryover or reversal of prior year misstatements should beconsidered in quantifying a current year misstatement. The provisions of SAB No. 108are effective for the fiscal year ended December 31, 2006. The adoption ofSAB No. 108 did not have a material effect on our financial position, cashflow, or results of operations.

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**RESULTS OFOPERATIONS—2006 COMPARED TO 2005**

The following table compares the results of operationsfor 2006 to the results of operations for 2005 (in thousands):

| ** **                                                                                                      | ** ** | **Year ended December 31,** | ** ** | **Dollar** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                                                                                                      | ** ** | **2006**                                   | ** ** | **2005**   | ** ** | **Variance** | ** ** |
| Revenues:                                                                                                       |       |                                       |       |       |       |   |   |
| Media                                                                                                           |       | $                                          | 84,851     |       | $          | 65,363 |   | $ | 19,488 |   |
| Search                                                                                                          |       | 86,202                                     |       | 51,430     |       | 34,772 |   |
| Technology                                                                                                      |       | 29,190                                     |       | 23,001     |       | 6,189 |   |
| Total revenues                                                                                                  |       | 200,243                                    |       | 139,794    |       | 60,449 |   |
| Cost of revenues:                                                                                               |       |                                       |       |       |       |   |   |
| Media                                                                                                           |       | 57,531                                     |       | 44,562     |       | 12,969 |   |
| Search                                                                                                          |       | 65,590                                     |       | 36,490     |       | 29,100 |   |
| Technology (inclusive of $510 and $41 of stock-based  compensation, respectively)                               |       | 6,293                                      |       | 4,289      |       | 2,004 |   |
| Total cost of revenues                                                                                          |       | 129,414                                    |       | 85,341     |       | 44,073 |   |
| Gross profit                                                                                                    |       | 70,829                                     |       | 54,453     |       | 16,376 |   |
| Operating  expenses:                                                                                            |       |                                       |       |       |       |   |   |
| Sales and marketing (inclusive of $4,621 and $541 of  stock-based compensation, respectively)                   |       | 31,629                                     |       | 23,120     |       | 8,509 |   |
| General and administrative (inclusive of $13,104 and  $1,391 of stock-based compensation, respectively)         |       | 33,897                                     |       | 20,985     |       | 12,912 |   |
| Product development (inclusive of $2,212 and $254 of  stock-based compensation, respectively)                   |       | 10,047                                     |       | 6,087      |       | 3,960 |   |
| Amortization of intangible assets and deferred  financing costs                                                 |       | 3,403                                      |       | 4,391      |       | (988 | ) |
| Restructuring costs                                                                                             |       | —                                     |       | 973        |       | (973 | ) |
| Total operating expenses                                                                                        |       | 78,976                                     |       | 55,556     |       | 23,420 |   |
| Loss from operations                                                                                            |       | (8,147                                     | )          | (1,103     | )          | (7,044 | ) |
| Interest income (expense), net                                                                                  |       | 772                                        |       | (213       | )          | 985 |   |
| Change in fair  value of warrant liability                                                                      |       | (176                                       | )          | (381       | )          | 205 |   |
| Recovery of  investment                                                                                         |       | —                                     |       | 2,340      |       | (2,340 | ) |
| Impairment of  marketable securities                                                                            |       | —                                     |       | (588       | )          | 588 |   |
| Gain on sale of  marketable securities                                                                          |       | —                                     |       | 16         |       | (16 | ) |
| Other income  (expense), net                                                                                    |       | (243                                       | )          | 153        |       | (396 | ) |
| Income (loss) before provision for income taxes and  minority interest in operations of consolidated subsidiary |       | (7,794                                     | )          | 224        |       | (8,018 | ) |
| Provision for  income taxes                                                                                     |       | (692                                       | )          | (314       | )          | (378 | ) |
| Minority interest  in operations of consolidated subsidiary                                                     |       | (136                                       | )          | 128        |       | (264 | ) |
| Net income (loss)                                                                                               |       | $                                          | (8,622     | )          | $          | 38 |   | $ | (8,660 | ) |

 

***Media.***

*Revenue.*   Mediarevenue was $84.9 million for the year ended December 31, 2006, ascompared to $65.4 million for the year ended December 31, 2005. Global WebAlliance revenue was $83.4 million for the year ended December 31, 2006,as compared to $64.0 million for the year ended December 31, 2005, anincrease of 30.3%. The increase is primarily related an increase in the numberof advertising impressions we sold and delivered. The remainder of Mediarevenue came from our e-mail services.

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*Costof Revenue.***  **Mediacost of revenue consist primarily of fees paid to Web publishers in the GlobalWeb Alliance. Cost of revenue also includes advertisement serving costs, whichis an intercompany charge from the Technology segment based on a fixed CPM.

*Gross Profit.**  *Gross profit margins for Media was32.2% in 2006 and 31.8% in 2005. The improvement was the result of an increasein the number and the diversity of Web publishers in the Global Web Alliance,which decreased the average royalty percentage that we paid to individual Web publishers,and an increase in the number of advertising campaigns we delivered. Thisimprovement was offset by an 88.0% increase in revenue from Korea, which had astable although lower margin than the rest of the Media business. Advertisementserving costs were $1.8 million for 2006 and $1.8 million for 2005.

***Search.***

*Revenue.*   Searchrevenue was $86.2 million for the year ended December 31, 2006, ascompared to $51.4 million for the year ended December 31, 2005, anincrease of 67.6%. The increase was due to an increase in the number of clientaccounts under management, growth in the businesses of our search enginedistribution partners and our ability to meet our advertiser’s performancetargets.

*Costof Revenue.*   Search cost of revenue consistprimarily of fees paid to search engines, which are calculated as a percentageof revenues for algorithmic search engines and a fixed CPC forpay-for-placement search engines.

*Gross Profit.*   Grossprofit margins for Search was 23.9% in 2006 and 29.0% in 2005. The decrease wasprimarily due to a decrease in margin in our managed SEM service offering as aresult of competition in the marketplace as well as the addition of highervolume accounts, which usually command a better price. Adding to the decline isthe faster pace of growth of our lower margin managed SEM service offeringrelated to other Search product offerings. These decreases were partiallyoffset by an increase in revenue from K.K. 24-7 Search, our joint venturewith Dentsu, which is at a higher margin.

***Technology.***

*Revenue.***  **Technology revenue was $29.2 millionfor the year ended December 31, 2006, as compared to $23.0 million for theyear ended December 31, 2005, an increase of 26.9%. The improvementprimarily reflected increased use of OAS Central, through both expanded use byexisting customers and the addition of new customers.

*Costof Revenue.*   Technology cost of revenue consistof costs for hosting, bandwidth, third-party license and support fees, supportand maintenance of the infrastructure, and includes salaries and benefits ofrelated technical personnel. The cost of revenue is offset by intercompany feescharged to our Media segment for advertisement serving.

*GrossProfit.*   Gross profit margins for Technology was78.4% in 2006 and 81.4% in 2005. The decrease was primarily due to the increasein our advertisement serving facilities and services costs as a result of anincrease in the number of impressions delivered and personnel-related costs,including salary and stock-based compensation costs.

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***Sales and Marketing Expenses.***

Sales and marketing expensesconsist primarily of compensation and personnel related expenses for sales,account management, business development, affiliate relations andmarketing; and marketing costs such as advertising, trade shows and public andinvestor relations firms.

Sales and marketingexpenses were $31.6 million for the year ended December 31, 2006, ascompared to $23.1 million for the year ended December 31, 2005. Theincrease was primarily due to additional personnel-related costs, includingsalary and stock-based compensation costs, as the number of employees includedin sales and marketing increased from 221 at December 31, 2005 to 242 at December 31,2006, and an increase in marketing activities. Excluding stock-basedcompensation, as a percentage of revenue, the expenses decreased from 16.2% in2005 to 13.5% in 2006. Stock-based compensation of $4.6 million and $0.5million represented 14.6% and 2.3%, respectively, of the sales and marketingexpense for the years ended December 31, 2006 and 2005, respectively.

***General and Administrative Expenses.***

General and administrativeexpenses consist primarily of compensation and related expenses forexecutive and administrative personnel; costs related to leasing, maintainingand operating our facilities and systems; insurance; bad debts; fees forprofessional services; fees associated with the reporting and other obligationsof a public company; depreciation and other general and administrative services. Fees for professional servicesinclude payments to external lawyers, accountants, and other professionals inconnection with operating our business, compliance and evaluating and pursuingnew opportunities.

General and administrativeexpenses were $33.9 million for the year ended December 31, 2006, ascompared to $21.0 million for the year ended December 31, 2005. Theincrease was due primarily to increased personnel costs, including salary andstock-based compensation costs, as the number of executive and administrative employeesincreased from 49 at December 31, 2005 to 56 at December 31, 2006,increased professional fees for compliance efforts and depreciation due to theimprovement and expansion of our infrastructure, as well as variable costs as aresult of our increased revenue, such as provisions for bad debt. Excludingstock-based compensation, as a percentage of revenue, the expenses decreasedfrom 14.0% in 2005 to 10.4% in 2006. Stock-based compensation of $13.1 millionand $1.4 million represented 38.7% and 6.6%, respectively, of the general andadministrative expense for the years ended December 31, 2006 and 2005,respectively.

***Product Development Expenses.***

Product development expensesconsist primarily of compensation and related expenses for personnelresponsible for the development and maintenance of features, enhancements,functionality and qualityassurance for our software and services and development of new products.

Product developmentexpenses were $10.0 million for the year ended December 31, 2006, ascompared to $6.1 million for the year ended December 31, 2005. Theseamounts are inclusive of stock-based compensation of $2.2 million and $0.3million for the years ended December 31, 2006 and 2005, respectively. Theincrease reflects our continued investment in the development and enhancementof our existing products and services, as well as our exploration of newmarkets and product offerings. Excluding stock-based compensation, as apercentage of revenue, the expenses decreased from 4.2% in 2005 to 3.9% in 2006.

***Amortization of Intangible Assets and DeferredFinancing Costs.***

Amortization expense relates to intangible assets thatwe acquired with Website Results in August 2000, Real Media in October 2001,24/7 Real Media Korea in January 2004 and Decide in 

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August 2004; deferredfinancing costs associated with our subordinated convertible debenture offeringin September 2003; and a transition payment that we paid to Lycos inconnection with a strategic business relationship that we entered into in February 2004.

Amortization expense was$3.4 million for the year ended December 31, 2006 and $4.4 million for theyear ended December 31, 2005. For 2006, amortization expense related $1.4million to acquired technology, $0.7 million to other intangible assets, $0.4million to deferred financing costs and $0.9 million to the transition paymentto Lycos. For 2005, amortization expense related $2.2 million to acquiredtechnology, $0.8 million to other intangible assets, $0.5 million to deferredfinancing costs and $0.9 million to the transition payment to Lycos.

***Restructuring Costs.***

During 2005 we recorded arestructuring charge of approximately $1.0 million related to our former NewYork headquarters, as we moved to less expensive offices and sublet theoriginal space.

***Interest Income (Expense), Net.***

Interest income (expense),net, was $0.8 million for the year ended December 31, 2006 and ($0.2)million for the year ended December 31, 2005. Interest expense for 2006and 2005 was primarily related to interest paid in cash on the subordinatedconvertible debentures that we issued on September 26, 2003, the maturitydate of which has been extended to September 2009, interest paid in cashon the capital lease obligations, and amortization of the warrants that weissued with the debentures. Interest income for 2006 and 2005 was primarilyfrom our cash and cash equivalents.

***Change in Fair Value of Warrant Liability.***

Our warrant liability is related to warrantsoutstanding from our preferred stock offering, and is adjusted to fair value atthe end of each reporting period. The expense of $0.2 million and $0.4 millionfor the years ended December 31, 2006 and 2005, respectively, was due toan increase in the fair market value of the warrants outstanding, whichincreased the corresponding liability. The increase in the fair market value ofthe warrants was primarily due to the higher fair market value of our commonstock at the end of each reporting period, compared to the fair market value ofour common stock at the end of the prior year.

Our requirement tomaintain a registration statement related to the warrants outstanding from ourpreferred stock offering expired during 2006. Accordingly, our remainingliability at the date of expiration of $0.7 million was transferred to equity.

***Recovery of Investment.***

In 2005, we received $2.3million as a return on an investment in Bidland Systems, Inc. (“Bidland”).The return was a result of the settlement of pending litigation between Bidlandand another party, and the subsequent dissolution and liquidation of Bidland. Therewere no similar returns on investments for the year ended December 31,2006.

***Impairment of Marketable Securities.***

***We received 400,000 shares of chinadotcom Corporation***(“chinadotcom”)as part of a legalsettlement in June 2004, which we classified as available-for-sale. Duringthe fourth quarter of 2004 and the first quarter of 2005, we determined thatthe decline in the share price was other-than-temporary, and wrote down thevalue of the shares to the market price, as determined by the quoted marketprice at the time of the impairment. Accordingly, we recognized an impairmentcharge of $0.6 million in 2005, for 

40

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***other-than-temporary declines in the value of the investment.***There were no similar impairment charges for the year ended December 31,2006.

***Gain on Sale of Marketable Securities.***

During 2005, we sold ourshares of our chinadotcom common stock, which resulted in proceeds ofapproximately $1.3 million and an immaterial realized gain. We did not have again or loss on the sale of marketable securities for the year ended December 31,2006.

***Other Income (Expense), Net.***

Other expense, net, for the year ended December 31,2006 consisted of a $0.3 million settlement related to our acquisition ofWebsite Results, offset by realized foreign currency gains.

Other income, net, of $0.2million for the year ended December 31, 2005 consisted of legal feesassociated with a former subsidiary that we shut down, a legal settlement andrealized foreign currency losses offset by earn-out payments received in excessof amounts recorded and reversal of the earn-out liability initially estimatedto be due to the former owners of Insight.

***Provision for Income Taxes***

The increase in theprovision for income taxes in 2006 from 2005 of approximately $0.4 millionwas primarily a result of increases in taxes, driven by our higher pretaxincome in 2006 compared to 2005.

***Minority Interest in Operations of ConsolidatedSubsidiary.***

Minority interest inoperations of consolidated subsidiary represents the percentage share of incomeor losses attributable to holders who have a minority interest in subsidiariesin which we hold an ownership interest that is greater than fifty percent, butless than 100 percent, and the results of which we consolidate in our consolidatedfinancial statements. This amount relates to the activity of K.K. 24-7Search, our joint venture with Dentsu in Japan.

**RESULTS OFOPERATIONS—2005 COMPARED TO 2004**

In August 2004, we acquired Decide, a leadingprovider of SEM services in Europe and Australia. We retained approximately 54employees from Decide. It is not possible to separately attribute revenue toDecide, as we transitioned all of our existing Search relationships to beserviced by Decide’s DNA technology after the acquisition.

In January 2004, we acquired 24/7 Real MediaKorea, a leader in interactive marketing in Seoul, South Korea. Revenuecontributed by 24/7 Real Media Korea for the year ended December 31, 2004was approximately $12.6 million. We retained approximately 45 employees from24/7 Real Media Korea.

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The following table compares the results of operationsfor 2005 to the results of operations for 2004 (in thousands):
|                                                                                                                 | ** ** | **Year ended December 31,** | ** ** | **Dollar** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                                                                                                      | ** ** | **2005**                                   | ** ** | **2004**   | ** ** | **Variance** | ** ** |
| Revenues:                                                                                                       |       |                                       |       |       |       |   |   |
| Media                                                                                                           |       | $                                          | 65,363     |       | $          | 49,879 |   | $ | 15,484 |   |
| Search                                                                                                          |       | 51,430                                     |       | 16,439     |       | 34,991 |   |
| Technology                                                                                                      |       | 23,001                                     |       | 18,937     |       | 4,064 |   |
| Total revenues                                                                                                  |       | 139,794                                    |       | 85,255     |       | 54,539 |   |
| Cost of revenues:                                                                                               |       |                                       |       |       |       |   |   |
| Media                                                                                                           |       | 44,562                                     |       | 35,197     |       | 9,365 |   |
| Search                                                                                                          |       | 36,490                                     |       | 10,571     |       | 25,919 |   |
| Technology (inclusive of $41 and $0 of stock-based compensation,  respectively)             |       | 4,289                                      |       | 3,462      |       | 827 |   |
| Total cost of revenues                                                                                          |       | 85,341                                     |       | 49,230     |       | 36,111 |   |
| Gross profit                                                                                                    |       | 54,453                                     |       | 36,025     |       | 18,428 |   |
| Operating  expenses:                                                                                            |       |                                       |       |       |       |   |   |
| Sales and marketing (inclusive of $541 and $250 of stock-based  compensation, respectively)                     |       | 23,120                                     |       | 16,897     |       | 6,223 |   |
| General and administrative (inclusive of $1,391 and  $284 of stock-based compensation, respectively)            |       | 20,985                                     |       | 14,510     |       | 6,475 |   |
| Product development (inclusive of $254 and $4 of stock-based  compensation, respectively)                       |       | 6,087                                      |       | 4,544      |       | 1,543 |   |
| Amortization of intangible assets and deferred  financing costs                                                 |       | 4,391                                      |       | 4,331      |       | 60 |   |
| Restructuring costs                                                                                             |       | 973                                        |       | 841        |       | 132 |   |
| Impairment of intangible assets                                                                                 |       | —                                     |       | 896        |       | (896 | ) |
| Impairment of property and equipment                                                                            |       | —                                     |       | 787        |       | (787 | ) |
| Total operating expenses                                                                                        |       | 55,556                                     |       | 42,806     |       | 12,750 |   |
| Loss from operations                                                                                            |       | (1,103                                     | )          | (6,781     | )          | 5,678 |   |
| Interest expense, net                                                                                           |       | (213                                       | )          | (463       | )          | 250 |   |
| Change in fair  value of warrant liability                                                                      |       | (381                                       | )          | 2,040      |       | (2,421 | ) |
| Recovery of  investment                                                                                         |       | 2,340                                      |       | —     |       | 2,340 |   |
| Impairment of  marketable securities                                                                            |       | (588                                       | )          | (1,052     | )          | 464 |   |
| Gain on sale of  marketable securities                                                                          |       | 16                                         |       | —     |       | 16 |   |
| Gain on legal  settlement                                                                                       |       | —                                     |       | 2,896      |       | (2,896 | ) |
| Other income, net                                                                                               |       | 153                                        |       | 228        |       | (75 | ) |
| Income (loss) before provision for income taxes and  minority interest in operations of consolidated subsidiary |       | 224                                        |       | (3,132     | )          | 3,356 |   |
| Provision for income taxes                                                                                      |       | (314                                       | )          | (23        | )          | (291 | ) |
| Minority interest  in operations of consolidated subsidiary                                                     |       | 128                                        |       | —     |       | 128 |   |
| Net income (loss)                                                                                               |       | $                                          | 38         |       | $          | (3,155 | ) | $ | 3,193 |   |

 

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***Media.***

***Revenue.*****  **Media  revenueis primarily derived from our Global Web Alliance. Global Web Alliance revenuewas $64.0 million for the year ended December 31, 2005, as compared to$48.6 million for the year ended December 31, 2004, an increase of 31.8%.The increase primarily related to an increase in advertisement impressions soldand delivered. The remainder of Media revenue came from our e-mail services.

*Cost ofRevenue.***  **Mediacost of revenue consist primarily of royalties paid to Web publishers in the GlobalWeb Alliance. Cost of revenue also includes advertisement serving costs, whichare intercompany charges from our Technology segment based on a fixed CPM.

*GrossProfit.**  *Grossprofit margins for Media was 31.8% in 2005 and 29.4% in 2004. The improvementwas the result of an increase in the number and the diversity of Web publishersin the Global Web Alliance, which decreased the average royalty percentage thatwe paid to Web publishers, and an increase in the number of network campaignswe delivered. Advertisement serving costs were $1.8 million for 2005 and $1.5million for 2004.

***Search.***

*Revenue.  *Searchrevenue was $51.4 million for the year ended December 31, 2005, ascompared to $16.4 million for the year ended December 31, 2004, anincrease of 212.9%. The increase was due to the addition of new advertiseraccounts and advertiser accounts that we gained as a result of the August 2004Decide acquisition, and the use of the Decide DNA technology we acquired acrossall our accounts. We also believe growth in the businesses of our search enginedistribution partners, our increased sales efforts and improved operationalcontrols have contributed to an increase in the average revenue per advertiseraccount.

*Cost ofRevenue.*   Search cost of revenue consistsprimarily of fees paid to the search engines that we work with, which arecalculated as a percentage of revenues for algorithmic search engines and afixed CPC for pay-for-placement search engines. Search cost of revenue alsoincludes hosting and bandwidth charges associated with the infrastructure.

*GrossProfit.*   Gross profit margin for Search was 29.0%in 2005 and 35.7% in 2004. The decrease was primarily due to faster growth inour lower margin managed SEM service offering relative to the growth in ourother high margin product offerings. In addition, the margin for our managedSEM services declined due to the addition of higher quality, high volumeaccounts, which usually command a better price, as well as increased competitionin the marketplace.

***Technology.***

*Revenue.*   Technologyrevenue was $23.0 million for the year ended December 31, 2005, ascompared to $19.0 million for the year ended December 31, 2004, anincrease of 21.5%. The improvement primarily reflected increased use of OASCentral, through both expanded use by existing customers and the addition ofnew customers.

*Cost ofRevenue.*   Technology cost of revenue consists of costsfor hosting, bandwidth, third-party license and support fees, and support andmaintenance of the infrastructure, and includes salaries and benefits ofrelated technical personnel. The cost of revenue is offset by intercompany feescharged to our Media segment for advertisement serving in the Global WebAlliance.

*GrossProfit.*   The gross profit margin for Technologyof 81.4% for the year ended December 31, 2005 was consistent with that forthe year ended December 31, 2004.

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***Sales and Marketing Expenses.***

Sales and marketing expensesconsist primarily of compensation and personnel related expenses for sales,account management, business development, affiliate relations andmarketing; and marketing costs such as advertising, trade shows and public andinvestor relations firms.

Sales and marketingexpenses were $23.1 million for the year ended December 31, 2005, ascompared to $16.9 million for the year ended December 31, 2004. Theincrease was primarily due to additional personnel-related costs, as the numberof employees included in sales and marketing increased from 183 at December 31,2004 to 221 at December 31, 2005, and an increase in marketing activities.Excluding stock-based compensation, sales and marketing expenses decreased as apercentage of revenue from 19.5% in 2004 to 16.2% in 2005, as we continued togain operating leverage.

***General and Administrative Expenses.***

General and administrativeexpenses consist primarily of compensation and related expenses forexecutive and administrative personnel; costs related to leasing, maintainingand operating our facilities and systems; insurance; bad debts; fees forprofessional services; fees associated with the reporting and other obligationsof a public company; depreciation and other general and administrative services. Fees for professional servicesinclude payments to external lawyers, accountants, and other professionals inconnection with operating our business, compliance and evaluating and pursuingnew opportunities.

General and administrativeexpenses were $21.0 million for the year ended December 31, 2005, ascompared to $14.5 million for the year ended December 31, 2004. Theincrease was due primarily to the increased personnel costs, increasedprofessional fees for compliance efforts and depreciation due to theimprovement and expansion of our infrastructure, as well as variable costs as aresult of our increased revenue, such as provisions for bad debt. Excludingstock-based compensation, as a percentage of revenue, the expenses decreasedfrom 16.7% for 2004 to 14.0% for 2005, showing increased leverage of our globalfootprint over a larger revenue base.

***Product Development Expenses.***

Product development expensesconsist primarily of compensation and related expenses for personnelresponsible for the development and maintenance of features, enhancements,functionality and qualityassurance for our software and services and development of new products.

Product developmentexpenses were $6.1 million for the year ended December 31, 2005 ascompared to $4.5 million for the year ended December 31, 2004. Theincrease reflects our continued investment in the development and enhancementof our existing products and services, as well as our exploration of newmarkets and product offerings. We capitalized approximately $0.3 million forthe year ended December 31, 2004. The capitalization related to our DecideDNA technology, which we acquired in August 2004 with Decide. Wedid not capitalize any expenses related to product development in 2005.

***Amortization of Intangible Assets and DeferredFinancing Costs.***

Amortization expense relates to intangible assets thatwe acquired with Website Results in August 2000, Real Media in October 2001,Insight in January 2003, 24/7 Real Media Korea in January 2004 andDecide in August 2004; deferred financing costs associated with oursubordinated convertible debenture offering in September 2003; and atransition payment that we paid to Lycos in connection with a strategicbusiness relationship that we entered into in February 2004.

Amortization expense was$4.4 million for the year ended December 31, 2005 and $4.3 million for theyear ended December 31, 2004. For 2005, amortization expense related $2.2million to acquired technology, $0.8 million to other intangible assets, $0.5million to deferred financing costs and $0.9 million to the transition paymentto Lycos. For 2004, amortization expense related $2.3 million to acquiredtechnology, $0.7 million to other intangible assets, $0.6 million to deferredfinancing costs and $0.7 million 

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to thetransition payment to Lycos. In December 2004, we recorded an impairmentcharge related to the analytics technology that we acquired with Insight due tosignificant rewrites of the underlying software code during 2004. The remainingbalance of $0.9 million, inclusive of an earn-out liability of approximately$0.3 million initially estimated to be due to the former owners of Insight, wasconsidered impaired at December 31, 2004.

***Restructuring Costs.***

During 2005, we recorded a restructuring charge of$1.0 million related to our former New York headquarters as we moved to lessexpensive offices and sublet the original space.

During 2004 we recorded arestructuring charge of approximately $0.8 million, as we took steps to alignour sales, development and administrative organization and reduce corporateoverhead, partially related to redundancies due to the acquisition of Decide.Our efforts involved the involuntary termination of employees, as well ascharges for excess real estate space, primarily at our office in Munich,Germany.

***Impairment of Intangible Assets.***

We perform on-going business reviews and, based onquantitative and qualitative measures, assess the need to record impairmentlosses on long-lived assets used in operations when impairment indicators arepresent. Where impairment indicators are identified, management determines theamount of the impairment charge by comparing the carrying values of goodwilland other long-lived assets to their fair values.

In December 2004, wedetermined that the analytics technology that we acquired with Insight wasimpaired due to significant rewrites of the underlying software code during2004. We recorded the remaining balance of $0.9 million, inclusive of anearn-out liability of approximately $0.3 million initially estimated to be dueto the former owners Insight, as an impairment loss at December 31, 2004.We did not have any impairment of intangible assets for the year ended December 31,2005.

***Impairment of Property and Equipment.***

In the fourth quarter of2004, we made the strategic decision to integrate OAD functionalities into ourOpen AdStream software and, as a result, we reduced our support for OAD. Inaddition, we have not achieved significant sales of OAD since its commercialrelease in June 2003. We determined that OAD was impaired at December 31,2004, and we recorded the net balance of $0.8 million as an impairmentloss at that time.****We did nothave any impairment of property or equipment for the year ended December 31,2005.

***Interest Expense, Net.***

Interest expense, net was$0.2 million for the year ended December 31, 2005 and $0.5 million for theyear ended December 31, 2004. Interest expense for 2005 and 2004 primarilyrelated to interest paid in cash on the subordinated convertible debenturesthat we issued on September 26, 2003, interest paid in cash on our capitallease obligations, and amortization of the warrants that we issued with thedebentures.

***Change in Fair Value of Warrant Liability.***

Our remaining liability relates to warrantsoutstanding from our preferred stock offering and is adjusted to fair value atthe end of each reporting period.

The $0.4 million expense for the year ended December 31,2005 was due to an increase in the fair market value of the warrantsoutstanding, which increased the corresponding liability. The increase in thefair market value of the warrants was primarily due to the higher fair marketvalue of our common stock at December 31, 2005, as compared to the fairmarket value of our common stock at December 31, 2004.

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The $2.0 million gain forthe year ended December 31, 2004 was due to a decrease in the fair marketvalue of the warrants outstanding, which reduced the corresponding liability,and an amendment to the registration rights agreement related to the debenturesand the warrants, which enabled us to reclassify the warrant liability of $1.0million related to the debentures as additional paid-in capital. The decreasein the fair market value of the warrants was primarily due to the lower fairmarket value of our common stock at December 31, 2004, as compared to thefair market value of our common stock at December 31, 2003.

***Recovery of Investment.***

In 2005, we received $2.3million as a return on an investment in Bidland Systems, Inc. (“Bidland”).The return was a result of the settlement of pending litigation between Bidlandand another party, and the subsequent dissolution and liquidation of Bidland.There were no similar returns on investments for the year ended December 31,2004.

***Impairment of Marketable Securities.***

We received 400,000 sharesof chinadotcom Corporation (“chinadotcom”)as part of a legal settlement in June 2004, which we classified asavailable-for-sale. During the fourth quarter of 2004 and the first quarter of2005, we determined that the decline in the share price wasother-than-temporary, and wrote down the value of the shares to the marketprice, as determined by the quoted market price at the time of the impairment.Accordingly, we recognized an impairment charge of $0.6 million and $1.1million in 2005 and 2004, respectively, for other-than-temporary declines inthe value of the investment.

***Gain on Sale of Marketable Securities.***

During 2005, we sold ourshares of our chinadotcom common stock, which resulted in proceeds ofapproximately $1.3 million and realized an immaterial gain. We did not have again or loss on the sale of marketable securities for the year ended December 31,2004.

***Gain on Legal Settlement.***

The $2.9 million gain onlegal settlement for 2004 related to our legal settlement with chinadotcom. Wereceived 400,000 shares of chinadotcom common stock valued at the market priceon the date of settlement. There were no material gains related to legalsettlements for the year ended December 31, 2005.

***Other Income, Net.***

Other income, net, of $0.2 million for the year ended December 31,2005 consisted of legal fees associated with a former subsidiary that we shutdown, a legal settlement and realized foreign currency losses offset byearn-out payments received in excess of amounts recorded and reversal of theearn-out liability initially estimated to be due to the former owners ofInsight.

Other income, net, of $0.2million for the year ended December 31, 2004 included $0.3 million inamounts recovered from a former subsidiary and settlement of professionalservice fees, offset by $0.1 million in legal fees and other expenses relatedto previous patent litigation.

***Provision for Income Taxes.***

The increase in theprovision for income taxes in 2005 from 2004 of approximately $0.3 millionwas primarily a result of increases in taxes, driven by higher pretax income in2005 compared to 2004.

***Minority Interest in Operations of ConsolidatedSubsidiary.***

Minority interest inoperations of consolidated subsidiary represents the percentage share of incomeor losses attributable to holders who have a minority interest in subsidiariesin which we hold an ownership 

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interestthat is greater than fifty percent, but less than 100 percent, and theresults of which we consolidate in our consolidated financial statements. Thisamount relates to the activity of K.K. 24-7 Search, our joint venturewith Dentsu in Japan.

**LIQUIDITY ANDCAPITAL RESOURCES**

Cashflows for the years ended December 31, 2006, 2005 and 2004 were as follows(in thousands):

| ** **                                           | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net cash provided  by (used in) operating activities |       | $                     | 15,076     |   | $ | 10,235 |   | $ | (10,706 | ) |
| Net cash used in  investing activities               |       | $                     | (3,261     | ) | $ | (602 | ) | $ | (22,408 | ) |
| Net cash provided by  (used in) financing activities |       | $                     | (6,394     | ) | $ | 3,319 |   | $ | 38,001 |   |

 

Historically, we have financed our operations throughequity financings and long-term debt and more recently through cash generatedby operations. Net cash provided by (used in) operating activities for allperiods was generally due to our net operating income (loss), adjusted fornon-cash items included in our net operating results, as well as changes invarious components of working capital, particularly fluctuations in accountsreceivable.

Net cash used in investing activities in 2006 wasapproximately $3.3 million and consisted of capital expenditures foroperational purposes. Net cash used in investing activities in 2005 was approximately$0.6 million, and consisted of $2.0 million of proceeds from maturities onshort-term investments, $1.3 million of proceeds from the sale of marketablesecurities and $2.3 million from the recovery of an investment, offset by $6.2million in capital expenditures. Net cash used in investing activities in 2004was approximately $22.4 million, and related $2.0 million to the acquisition of24/7 Real Media Korea, $15.7 million to the acquisition of Decide, $2.0 millionto short-term investments, and $2.7 million to capital expenditures foroperational purposes.

Financing activities used $6.4 million in 2006 andconsisted of $0.2 million of proceeds from a note receivable and $7.7 millionfrom the exercise of common stock options, offset by a $1.3 million earn-outpayment to the former shareholders of Decide and $0.2 million in capital leaseobligations. Financing activities provided $3.3 million in 2005 and consistedof $1.7 million in proceeds received from Dentsu, the minority investor in ourconsolidated subsidiary, K.K. 24-7 Search, and $1.7 million received fromthe exercise of common stock options, offset by $0.1 million in capital leaseobligations. Net cash provided by financing activities was $38.0 million in2004 and consisted of $37.2 million of net proceeds from our secondary offeringof common stock and $0.8 million of proceeds from the exercise of stock optionsand common stock warrants.

On September 26, 2003, we completed the placementto an institutional accredited investor of $15.0 million of our subordinatedconvertible debentures due September 2006. In September 2006, on theterms and conditions set forth in the debentures, the holder elected to extendthe maturity date of the debentures until September 2009. If at any timeon or after September 26, 2005, the second anniversary of the initialissuance date, the weighted average price of our common stock is less than$8.75 on any five consecutive trading days, the holder has the right, in itssole discretion, to require that we redeem up to $7.5 million in principalamount of the debentures. This condition has been met, and management believesthe holder may exercise its right to require redemption. Management believesexisting cash and investments will be sufficient to meet the obligation toredeem, should the holder exercise its right.

The Company maintains cash balances at the subsidiarylevel to meet short-term capital requirements and to satisfy localstatutory liquidity requirements. These requirements, as well as local taximplications, may limit the amount of capital that can be repatriated fromcertain subsidiaries. These funds are freely available to the subsidiariesfor operational purposes. Specifically, K.K. 24-7 Search hasapproximately $3.2 million in cash as of December 31, 2006 that must bekept in Japan for operational purposes.

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We continue to increase capital expenditures andoperating lease commitments, which is consistent with our increased staffingand operational expansion, and we anticipate this will continue in the futureas business conditions merit. Additionally, we will continue to evaluatepossible acquisitions of, or investments in businesses, products, andtechnologies that are complementary to our business, which may require the useof cash. Management believes existing cash will be sufficient to meet operatingrequirements for at least the next twelve months; however, we may selladditional equity or debt securities or obtain credit facilities to furtherenhance our liquidity position. The sale of additional securities could resultin further dilution to our stockholders.

We are subjected to routine tax examinations by taxingauthorities at the federal, state and local levels in the United States and byvarious taxing authorities in foreign countries. As of December 31, 2006,there are several reviews being conducted and management is of the opinion thatthe ultimate outcome of these examinations will not have a material adverseimpact on our financial position or results of operations.

At December 31, 2006, we had approximately $13.7million of U.S. net operating loss carryforwards. As a result of various equitytransactions, we have undergone an “ownership change” as defined bySection 382 of the Internal Revenue Code. Accordingly, utilization of asubstantial part of the net operating loss carryforward is limited.Approximately $4.0 million of U.S. net operating loss are available for 2007and the remaining amount is limited to $0.65 million per year, expiring invarious years through 2022. Due to our history of operating losses and theSection 382 limitation, there is substantial uncertainty surroundingwhether we will ultimately realize the deferred tax assets. Accordingly, theseassets have been fully reserved. During 2006 the valuation allowance increasedby $0.4 million and during 2005 the valuation allowance decreased by $55.3million.

We are subject to routinetax examinations by taxing authorities at the federal, state and local levelsin the U.S. and by various levels in foreign countries. As of December 31,2006, there are several reviews being conducted and Management is of theopinion that the ultimate outcome of these examinations would not have amaterial adverse impact on the financial position or results of operations ofthe Company.

**OFF-BALANCE SHEETARRANGEMENTS**

We did not have any relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance or special purpose entities, which would have beenestablished for the purpose of facilitating off-balance sheet financialarrangements or other contractually narrow or limited purposes at December 31,2006. Accordingly, we are not materially exposed to any financing, liquidity,market or credit risk that could arise if we had engaged in such relationships.

Common stock warrantsissued in conjunction with our subordinated convertible debentures areequity-linked derivatives and accordingly represent off-balance sheetarrangements. In addition, the conversion and redemption features of thesubordinated convertible debentures constitute an embedded derivative. Some ofthe common stock warrants and the conversion and redemption features meet thescope exception in paragraph 11(a) of the SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*, and are accordingly not accounted for as derivatives forpurposes of SFAS No. 133, but instead are accounted for as equity. SeeNote 9 to the financial statements for more information.

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**CONTRACTUALOBLIGATIONS AND OTHER COMMITMENTS AND CONTINGENCIES**

Ourcontractual obligations at December 31, 2006 are as follows (in thousands):

| ** **                                           | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **Less than  1 year**           | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** | **Total** | ** ** |
| Debt obligations                                     |       |                                      | $          | 7,500 |   |   | $ | 7,500 |   |   | $ | — |   |   |   | $ | — |   |   | $ | 15,000 |   |
| Operating lease  obligations, net of sublease income |       |                                      | 2,916      |   |   | 5,009 |   |   | 3,729 |   |   |   | 2,760 |   |   | 14,414 |   |
| Capital lease  obligations                           |       |                                      | 544        |   |   | 271 |   |   | — |   |   |   | — |   |   | 815 |   |
| Funding for  Dentsu 24/7 Search Holdings             |       |                                      | 5,000      |   |   | — |   |   | — |   |   |   | — |   |   | 5,000 |   |
| Total                                                |       |                                      | $          | 15,960 |   |   | $ | 12,780 |   |   | $ | 3,729 |   |   |   | $ | 2,760 |   |   | $ | 35,229 |   |

 

***Long-Term******Debt.****  *The $15.0 million of oursubordinated convertible debentures, issued in September 26, 2003, was duein September 2006. In September 2006, on the terms and conditions setforth in the debentures, the holder elected to extend the maturity date of thedebentures until September 2009. Under the terms and conditions, if at anytime on or after September 26, 2005, the second anniversary of the date ofissuance, the weighted average price of our common stock is less than $8.75 onany five consecutive trading days, the holder has the right, in its solediscretion, to require that we redeem up to $7.5 million principal amount ofthe debenture. This condition has been met, and management believes the holdermay exercise its right to require redemption. Management believes existing cashand investments will be sufficient to meet the obligation to redeem, should theholder exercise its right. Semi-annual interest payments at 2% began in January 2004.Both the principal and interest may otherwise be paid in common stock.

***Capital******and Operating Leases.***   Capitallease agreements relate to various office equipment. The operating leaseagreements relate primarily to our offices throughout the United States andinternationally with the last lease expiring in 2015. We have entered into varioussublease arrangements associated with our excess facilities. Such subleaseshave terms extending through 2008. Net lease commitments as of December 31,2006 can be summarized as follows:

| ** **                                | ** ** | **Capital Leases** | ** ** | **Operating Leases** | ** ** | **Subleases** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|---------------------------|------------|---------------|------------|
| ** **                                | ** ** | **(in thousands)** | ** ** |
| Year Ending  December 31,            |       |                    |       |                      |       |          |       |   |   |   |   |   |   |
| 2007                                      |       |                    | $          | 571                       |       |          |       | $ | 3,630 |   |   |   | $ | (714 | ) |   |
| 2008                                      |       |                    | 275        |                      |       |          | 3,297      |   |   |   | (486 | ) |   |
| 2009                                      |       |                    | —     |                      |       |          | 2,198      |   |   |   | — |   |   |
| 2010                                      |       |                    | —     |                      |       |          | 1,966      |   |   |   | — |   |   |
| 2011                                      |       |                    | —     |                      |       |          | 1,763      |   |   |   | — |   |   |
| Thereafter                                |       |                    | —     |                      |       |          | 2,760      |   |   |   | — |   |   |
| Total minimum  lease payments             |       |                    | 846        |                      |       |          | $          | 15,614 |   |   |   | $ | (1,200 | ) |   |
| Less amount  representing interest        |       |                    | (31        | )                         |       |          |       |   |   |   |   |   |   |
| Present value of  minimum lease payments. |       |                    | 815        |                      |       |          |       |   |   |   |   |   |   |
| Less current  portion                     |       |                    | 544        |                      |       |          |       |   |   |   |   |   |   |
| Long-term portion.                        |       |                    | $          | 271                       |       |          |       |   |   |   |   |   |   |   |

 

***Funding***for Dentsu 24/7 Search Holdings.******   InNovember 2006, we expanded our search engine marketing partnership withDentsu, the minority owner of our consolidated subsidiary, K.K. 24-7Search. Under the terms of the agreement, both parties will each provideinitial capital of $5.0 million, which will be used to fund establishedoperations.

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***Restructuring******Expenses.***   As of December 31,2006, we had approximately $0.8 million remaining of cash outlay obligationsrelating to excess space at some of our facilities, net of amounts estimated tobe received from our sublease arrangements.

***Insurance******Coverage.***   We maintaindirector and officer insurance, which may cover certain liabilities arisingfrom our obligation, in certain circumstances, to indemnify our directors andofficers and former directors, officers and employees of acquired companies. Theindemnification provided by us to our officers and directors does not have astipulated maximum; therefore we are not able to develop a reasonable estimateof our maximum liability. To date, we have not incurred material costs as aresult of such obligations and have not accrued any liabilities related to suchindemnification obligations in our financial statements.

***Indemnifications.***   Inconnection with our commercial agreements, we provide indemnifications ofvarying scope and terms to customers, business partners and other parties withrespect to certain matters, including, but not limited to, losses arising outof our breach of such agreements and out of intellectual property infringementclaims made by third parties.

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**ITEM 7A.**     QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to the impact of interest rate changesand foreign currency fluctuations.

**INTEREST RATE RISK**

The primaryobjective of our investment activities is to preserve capital. Cash and cashequivalents are investments with original maturities of three months or less.Therefore, changes in the market’s interest rates do not affect the value ofthe investments as recorded by 24/7 Real Media. The following table presentsthe amounts of our financial instruments that are subject to interest rate riskby expected maturity and average interest rates as of December 31, 2006(in thousands, except percentages):
|                            | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total (1)** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|--------------------|------------|
| Cash and cash  equivalents |       | $        | 59,390     |     |       | $        | —     |     |       |     | $          | —         |       |               |       | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | 59,390 |   |
| Average interest rate      |       | 5.24     | %          |     |       |     |       |     |       |     |       |           |       |               |       |   |   |   |   |   |   |   |   | 5.24 | % |
|                            |            |          |            |          |            |          |            |          |            |          |            |                |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Due to the short-termnature of our cash and cash equivalents, the amounts presented represent thefair value as of December 31, 2006.

**FOREIGN CURRENCYRISK**

International revenues accounted for approximately 60%of our total revenues in 2006, as compared to 55% in 2005. The growth in ourinternational operations has increased our exposure to foreign currency fluctuations.Revenues and related expenses generated from our international subsidiaries aregenerally denominated in the functional currencies of the local countries.Primary currencies include Euros, British Pounds, Japanese Yen, Korean Won,Canadian Dollars and Australian Dollars. The income statements of ourinternational operations are translated into U.S. dollars at the averageexchange rates in each applicable period. To the extent the U.S. dollar weakensagainst foreign currencies, the translation of these foreign currencydenominated transactions results in increased revenues, operating expenses andnet income for our foreign operations. Similarly, our revenues, operatingexpenses and net income will decrease for our international segments when the U.S.dollar strengthens against foreign currencies. Realized foreign currencytransaction gains (losses) included in other income in the consolidatedstatements of operations were immaterial for the years ended December 31,2006, 2005 and 2004. We expect to use the assets denominated in foreigncurrencies for project execution expenditures in the currency in which they areheld, therefore the risk of realized translation losses is mitigated.

We considered thehistorical trends in currency exchange rates and determined that it wasreasonably possible that changes in exchange rates of 10% for all currenciescould be experienced in the near term. The changes would have resulted in animmaterial impact on income (loss) before provision for income taxes andminority interest in operations of consolidated subsidiary for the years ended December 31,2006, 2005 and 2004.

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA.

See Part IV, Item 15of this Annual Report on Form 10-K.

**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

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**ITEM9A.**        CONTROLS AND PROCEDURES.

**Evaluation of Disclosure Controls and Procedures**

As of the end of theperiod covered by this Annual Report on Form 10-K, we carried out anevaluation, under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Operating Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) ofthe Exchange Act).

Based on that evaluation,our Chief Executive Officer and Chief Operating Officer concluded that, as ofthe end of the period covered by this Annual Report on Form 10-K,our disclosure controls and procedures have been designed and are beingoperated in a manner that provides reasonable assurance that the informationrequired to be disclosed in reports filed pursuant to the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefOperating Officer, as appropriate, to allow timely decisions regarding requireddisclosure. In designing and evaluating the disclosure controls and procedures,our management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and our management necessarily is required to applyits judgment in evaluating the cost-benefit relationship of possible controlsand procedures.

In 2006, as a complementto our existing overall program of internal control, we initiated acompany-wide review of our internal control over financial reporting as part ofthe process for compliance with Section 404 of the Sarbanes-Oxley Act of2002. As a result of the review, we have made improvements to the design andeffectiveness of our internal controls through the fiscal year ended December 31,2006. We anticipate that improvements will continue to be made.

**Management’s Report on Internal Control Over FinancialReporting**

Our management isresponsible for establishing and maintaining adequate internal control over financial reporting, as such term is definedin Exchange Act Rules 13a-15(f) and 15d-15(f).Under the supervision and with the participation of our management, includingour Chief Executive Officer and Chief Operating Officer, we conducted anevaluation of the effectiveness of our internal control over financialreporting as of December 31, 2006 based on the framework in “*Internal Control—Integrated Framework*” issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Based on thatevaluation under the framework in “*Internal Control—IntegratedFramework*,” our management concluded that our internal control overfinancial reporting was effective as of December 31, 2006 based on thespecified criteria.

Our management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2006 has been audited by Goldstein GolubKessler LLP, an independent registered public accounting firm, as stated intheir report which is included in Part IV, Item 15 of this Annual Reporton Form 10-K.

Due to its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policiesand procedures may deteriorate.

**Changes in Internal Control Over Financial Reporting**

There has been no changein our internal control over financial reporting (as defined in Exchange ActRules 13a-15(f) and 15d-15(f)) during our most recentfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

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**ITEM9B.**       OTHER INFORMATION.

There was no informationrequired to be disclosed in a report on Form 8-K during the fourthquarter of the fiscal year ended December 31, 2006 that was not reportedon such form.

**PART III**

**ITEM10.**         DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT.

Thefollowing table provides information concerning our current named executiveofficers and directors:
| Name              | ** ** | ** ** | ** ** | **Age**                                                                         | ** ** | **Position and Offices Held** |
|-------------------|------------|------------|------------|---------------------------------------------------------------------------------|------------|-------------------------------|
| ** **        | ** ** | ** ** | ** ** | ** **                                                                      |
| David J. Moore    |       | 54         |       | Chairman of the Board  and Chief Executive Officer                              |
| Robert J. Perkins |       | 59         |       | Director                                                                        |
| Tony Schmitz      |       | 48         |       | Director                                                                        |
| Arnie Semsky      |       | 61         |       | Director                                                                        |
| Brian Silva       |       | 50         |       | Director                                                                        |
| Val Zammit        |       | 59         |       | Director                                                                        |
| Jonathan K. Hsu   |       | 35         |       | Executive Vice President  , Chief Operating Officer and Chief Financial Officer |
| Mark E. Moran     |       | 45         |       | Executive Vice President, General Counsel and  Secretary                        |

 

*David J. Moore*has been our Chief Executive Officer and a director since February 1998,and has served as Chairman of our board of directors since January 2002.Mr. Moore was President of Petry Interactive, an Internet advertisingnetwork and a predecessor to our Company, from December 1995 toFebruary 1998. From 1993 to 1994, Mr. Moore was President ofGeomedica, an online service for physicians, which he sold to Reuters. From1982 to 1992, Mr. Moore was a Group Vice President at Hearst/ABC-ViacomEntertainment Services, a media company, where he participated in the launch ofCable Health Network, Lifetime Television, Lifetime Medical Television, aservice targeted to physicians, and HealthLink Television, a physician waitingroom television service. From 1980 to 1982, Mr. Moore had a televisionadvertising sales position with Turner Broadcasting. Mr. Moore is a memberof The Executive Committee of the Interactive Advertising Bureau and serves asthe chairman of the board of directors of Local Matters, Inc. and as adirector of OurStage, Inc. Mr. Moore received a Bachelor of Artsdegree in Communications from Northern Illinois University.

*Robert J. Perkins*has been a director since October 2001. Mr. Perkins has served asPresident of Consensus Research Group, Inc., a global marketing researchand consulting firm headquartered in New York City, since 2001. From 1999 to2001, Mr. Perkins was a partner at the Peppers and Rogers Group, a leadingglobal customer relationship management consulting firm. In 1998 he founded andbecame CEO of Chamber Communications, a for-profit branch of the U.S. Chamberof Commerce. He was Chief Marketing Officer at Playboy Enterprises from 1996 to1998 and at Calvin Klein Inc. from 1994 to 1996. Prior to that,Mr. Perkins was Senior Vice President of Marketing at Pizza Hut from 1991to 1994. Before beginning his business career, Mr. Perkins was a USAFInstructor Pilot in T-38A supersonic, fighter-type aircraft.Mr. Perkins received a Masters of Arts degree from Texas Tech Universityand a Bachelor of Business Administration degree from the University of Iowa.

*Tony Schmitz* has been a director since August 2004.Mr. Schmitz has served as President of Pine Street Capital Partners, aventure capital fund, since October 2004. Mr. Schmitz also served asa consultant to our Company from November 2004 to December 2004 andserved as Chief Technology Officer of our Company from January 2003through October 2004. From February 2001 to January 2003,Mr. Schmitz was the Chief Executive Officer of Insight First, Inc.From May 2000 to February 2001, Mr. Schmitz was the ChiefStrategy Officer of Insight First. Mr. Schmitz was managing partner atmarchFIRST (formerly 

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*USWeb/CKS)from June 1998 to May 2000. Mr. Schmitz also served as ChiefTechnology Officer at Gray Peak Technologies from June 1997 toJune 1998 and as a principal at Reach Networks from 1988 to 1997.Mr. Schmitz currently serves on the Board of Directors of StreetEasy andas board observer to the Board of Directors of Velocity Technology Solutions,and has been nominated to serve on the Board of Directors of SendWordNowCommunications, Inc. Mr. Schmitz obtained a Bachelor of Sciencedegree in Business from the State University of New York at Albany.*

*Arnie***Semsky has been a director since June 1998.Mr. Semsky has been self-employed as a media advisor sinceJanuary 1999. He previously served as the Executive Vice President,Worldwide Media Director and Board member of the BBDO Worldwide unit of OmnicomGroup, the parent company of a group of advertising agencies, for20 years. Prior to that time, he was Vice President, National TV for GreyAdvertising. Mr. Semsky is a senior advisor for ESPN and the ESPN/ABCSports Customer Marketing and Sales unit. Mr. Semsky currently serves onthe Board of Directors of Interep and the John A. Reisenbach Foundation. He ison the Board of Advisors of several Internet companies, including Rapt Inc. andBrandPort, Inc. Mr. Semsky received a Bachelor of Arts degree inEnglish from Pace University.

*Brian Silva* has been a director since May 2006. SinceMarch 2006, Mr. Silva has been the Senior Vice President of HumanResources at Gentiva Health Services, Inc., a provider of home healthcareservices. From September 1995 to February 2006, Mr. Silva wasSenior Vice President -Human Resources & Administration and CorporateSecretary for Linens N Things, Inc., an international retailer of homefurnishings. Mr. Silva serves on the Dean’s Advisory Board of St. John’sUniversity and is an adjunct professor of Human Resources at New York Instituteof Technology Graduate School of Education. Mr. Silva received a Bachelorof Arts degree from St. Johns University, a Master of Science degree fromColumbia University in Organization Psychology and a Master of Arts degree inHuman Resources Management and Labor Relations from New York Institute ofTechnology.

*Val Zammit* has been a director since October 2001.Mr. Zammit has been a self-employed consultant on financial and accountingmatters to a number of companies since 2001, and previously served as Presidentand Chief Executive Officer of True North Diversified Companies from 1998 to2001. From 1988 to 1998 Mr. Zammit was Chief Financial Officer and ViceChairman of Bozell, Jacobs, Kenyon & Eckhardt. He also previously heldpositions at Young & Rubicam and the accounting firm, PriceWaterhouse. Mr. Zammit received a Bachelor of Arts degree in Accountingfrom Manhattan College.

*Jonathan K. Hsu*has served as our Chief Operating Officer since July 2006, as well asExecutive Vice President and our Chief Financial Officer sinceJanuary 2004, as our Senior Vice President - Corporate Development fromMarch 2002 to January 2004, and as our Vice President - CorporateDevelopment from November 2001 to March 2002. Mr. Hsu served asVice President - Corporate Development of Real Media, Inc. fromMarch 2000 to November 2001. From June 1998 to March 2000,Mr. Hsu was a senior associate in the Global Mergers and Acquisitions Groupof JP Morgan Chase Securities. From September 1995 to June 1998,Mr. Hsu was a partner in American Lead Ventures. Mr. Hsu obtained aMasters of Business Administration degree in Finance and Strategic Managementfrom the Wharton School of Business and a Bachelor of Arts degree in Economicsfrom Harvard University.

*MarkE. Moran* has served as our Executive Vice Presidentsince March 2002 and as our Senior Vice President from April 1998 toMarch 2002. He has also served as our General Counsel and Secretary sinceApril 1998. From June 1993 to April 1998, Mr. Moran was anassociate attorney at the law firm of Proskauer Rose LLP. From April 1986to May 1993, Mr. Moran was a financial analyst in the SecuritiesProcessing Division of The Bank of New York. Mr. Moran received a JurisDoctorate degree from Fordham Law School, a Masters of Business Administrationdegree in Finance from Fordham Graduate School of Business, and a Bachelor ofArts degree in Economics from The University of Virginia.

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**OTHER KEY EMPLOYEES**

*Ari Bluman*has served as our Senior Vice President—U.S. Sales and Operations since November 2005,as our Senior Vice President—Web Alliance fromJanuary 2005 to November 2005, as our Vice President—Direct Solutions from October 2002 to January 2005and as our Vice President—Inside Sales fromFebruary 1998 to September 2001. From September 2001 toOctober 2002 Mr. Bluman was Vice President of Sales at NowMarketing, Inc. Mr. Bluman received a Bachelor of Arts degree inPolitical Science from the University of Maryland.

*Anthony Borruso*has served as our Chief Infrastructure Officer sinceJanuary 2007. From May 2006 to November 2006, Mr. Borrusowas Vice President—Technologyat LTB Media. From May 2003 to April 2006, Mr. Borruso was ChiefTechnology Officer of 121 Communications. From February 2002 toMay 2003, Mr. Borruso served as a consultant working primarily inHong Kong. From July 1999 to December 2001, Mr. Borruso was VicePresident—Operations and Engineering of AirMedia. Mr. Borruso received aBachelor of Arts degree in Computer Science from New York University.

*Jae Woo Chung*has served as President—24/7 RealMedia (Asia), focusing on rolling out our business throughout Asia, sinceJanuary 2005 and as President—Real Media Koreafrom April 1998 to December 2004. Mr. Chung has also served asthe President of K.K. 24-7 Search, our Japanese subsidiary that isjointly owned with Dentsu, Inc., since September 2005. FromApril 1997 to February 1998, Mr. Chung worked as a SeniorConsultant for LG EDS. Mr. Chung received a degree in IndustrialEngineering from Hanyang University in Korea and a Masters of BusinessAdministration degree from Keio University in Japan. He also studied at KelloggGraduate School of Business at Northwestern University as an exchange student.

*Oleg Vishnepolsky* has served asour Chief Technology Officer since January 2007.  From December 2005 toDecember 2006, Mr. Vishnepolsky was Vice President*—*Publishing and Search at AOL Time Warner.  FromJuly 2001 to August 2005, Mr. Vishnepolsky was Vice President*—*Marketing Automationand Ad Management Engineering at DoubleClick Inc.  From January 2000 toJuly 2001, Mr. Vishnepolsky was Chief Technology Officer and Vice President*—*Technology atInforocket/LiveAdvice.  From June 1995 to January 2000, Mr. Vishnepolskywas Vice President*—*Engineering atSBC/Prodigy. From September 1993 to June 1995, Mr. Vishnepolsky was VicePresident at Prudential Securities. From January 1983 to August 1993, Mr.Vishnepolsky was an Advisory Programmer at IBM Watson Research, where hereceived an Outstanding Technical Achievement Award from John Akers, IBM’sChief Executive Officer at the time. Mr. Vishnepolsky received a Masters ofComputer Science degree from Pace University, an equivalent to a Masters ofNuclear Physics degree from the Moscow Engineering Physics Institute and aBachelor of Arts degree from New York University.

**AUDIT COMMITTEE**

We have an Audit Committeeof the Board of Directors that acts pursuant to a separate written charterapproved by the Board of Directors, a current copy of which is available freeof charge on our website athttp://www.247realmedia.com/about/audit_committee_charter.html. The members ofour Audit Committee are Mr. Zammit (Chair), Mr. Perkins andMr. Silva. The Audit Committee selects and engages our independent auditors,reviews and evaluates our audit and control functions, reviews the results andscope of the audit and other services provided by our independent auditors, andperforms such other duties as may from time to time be determined by the Boardof Directors. The Board of Directors has determined that Mr. Zammit is an“audit committee financial expert” as defined in Item 401(h) ofRegulation S-K. Each of Mr. Zammit, Mr. Perkins andMr. Silva is “independent” within the meaning of Rule 4200 of theNASD Marketplace Rules and the Exchange Act rules. The Audit Committeeheld four meetings during the fiscal year ended December 31, 2006.

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**SECTION 16(a) BENEFICIALOWNERSHIP REPORTING COMPLIANCE**

Under the securities lawsof the United States, our directors, executive officers and any persons holdingmore than 10 percent of our common stock are required to report theirownership of common stock and any changes in that ownership, on a timely basis,to the SEC. In mid-2003, the SEC amended its rules to require thatsubstantially all Section 16 reports be filed within two business days ofa reportable event, and that all filings be effected through the SEC’s EDGARfiling system. Based on our review of such reports and written representationsfurnished to us, all such required reports were filed on a timely basis in2006, except that a Form 4 was filed on March 30, 2006 for David J.Moore to report his exercise of stock options effective March 24, 2006, aForm 4 was filed on November 21, 2006 for each of Robert J.Perkins, Tony Schmitz, Arnie Semsky and Val Zammit to report their grant ofstock options effective October 31, 2006, a Form 4 was filed onNovember 22, 2006 for Brian Silva to report his grant of stock optionseffective October 31, 2006 and a Form 4 was filed on January 5,2007 for David J. Moore to report his shares of common stock transferredbetween direct beneficial ownership and indirect beneficial ownership thrufamily trusts effective November 3, 2006 and to report his charitablecontribution of shares of common stock effective December 29, 2006.

**CODE OF CONDUCT**

Our Code of Conduct, which has been authorized by ourBoard of Directors, can be found on our Web site athttp://www.247realmedia.com/about/247RM_Code-of-Conduct.pdf and a copy will beprovided to any person without charge, upon request sent to:

24/7 Real Media, Inc.132 W. 31st StreetNew York, NY 1001Attn:  Investor Relations

The Code of Conduct isapplicable to all our directors, officers and employees (including our ChiefExecutive Officer, Chief Financial Officer and Chief Operating Officer andGlobal Controller). If we make any amendments to the code of ethics for ourprincipal executive officer, principal financial officer, principal accountingofficer or controller, or any person performing similar functions (other thantechnical, administrative, or other non-substantive amendments), or grant anywaivers, including implicit waivers, from a provision of this code to suchpersons, we will disclose the nature of the amendment or waiver, its effectivedate and to whom it applies on our Web site or in a report on Form 8-Kfiled with the SEC.

**ITEM 11.   EXECUTIVECOMPENSATION**

The information called forby this item will be filed with the SEC as an amendment to this Annual Reporton Form 10-K in accordance with General Instruction G(3) toForm 10-K.

**ITEM 12.   SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS.**

The information called forby this item will be filed with the SEC as an amendment to this Annual Reporton Form 10-K in accordance with General Instruction G(3) toForm 10-K.

**ITEM 13.   CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS.**

The information called forby this item will be filed with the SEC as an amendment to this Annual Reporton Form 10-K in accordance with General Instruction G(3) toForm 10-K.

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**ITEM 14.   PRINCIPALACCOUNTING FEES AND SERVICES.**

The information called forby this item will be filed with the SEC as an amendment to this Annual Reporton Form 10-K in accordance with General Instruction G(3) toForm 10-K.

**PART IV**

**ITEM 15.   EXHIBITS,FINANCIAL STATEMENT SCHEDULES.**

(a)(1)   Our consolidated financial statements andthe reports of the independent registered public accounting firm are includedimmediately following the Index to Consolidated Financial Statements on page F-1.

(2)   All financial statement schedules not listedabove have been omitted since they are either not applicable or the informationis contained elsewhere in our consolidated financial statements or the notesthereto.

(3)   Exhibits. The Exhibit Index immediatelyfollows the certification on the signature pages to this Annual Report onForm 10-K.

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**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

| ** **                                                                   | ** ** | **Page** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|
| Reports of Independent Registered Public Accounting  Firm                    |       | F-2      |       |
| Consolidated Balance Sheets                                                  |       | F-4      |       |
| Consolidated Statements of Operations                                        |       | F-5      |       |
| Consolidated Statements of Stockholders’ Equity and  Comprehensive Loss |       | F-6      |       |
| Consolidated Statements of Cash Flows                                        |       | F-7      |       |
| Notes to Consolidated Financial Statements                                   |       | F-8      |       |

 

F-1

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

TheBoard of Directors and Stockholders24/7 Real Media, Inc.:

We have audited theaccompanying consolidated balance sheets of 24/7 Real Media, Inc. andSubsidiaries as of December 31, 2006 and 2005 and the related consolidatedstatements of operations, stockholders’ equity and comprehensive loss and cashflows for each of the three years in the period ended December 31, 2006.These consolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basis forour opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of 24/7 Real Media, Inc. andSubsidiaries as of December 31, 2006 and 2005, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2006 in conformity with United States generally acceptedaccounting principles.

As discussed in Note 11 tothe consolidated financial statements, the Company changed the manner in whichit accounts for stock-based compensation in 2006.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2006, based on criteria establishedin Internal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) and our report dated March 13,2007 expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting.

**GOLDSTEINGOLUB KESSLER LLP**New York, New YorkMarch 13, 2007

F-2

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

TheBoard of Directors and Stockholders24/7 Real Media, Inc.:

We have audited management’sassessment, included in the accompanying Management’s Report on Internal Controlover Financial Reporting, that 24/7 Real Media, Inc. maintained effectiveinternal control over financial reporting as of December 31, 2006, basedon criteria established in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizationsof the Treadway Commission (COSO). 24/7 Real Media, Inc.’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the company’sinternal control over financial reporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, management’sassessment that 24/7 Real Media, Inc. maintained effective internalcontrol over financial reporting as of December 31, 2006 is fairly stated,in all material respects, based on**criteria established in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Also in our opinion, 24/7 Real Media, Inc. maintained, in all materialrespects, effective internal control over financial reporting as of December 31,2006, based on**criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements of 24/7 Real Media, Inc.as of and for the year ended December 31, 2006, and our report dated March 13,2007 expressed an unqualified opinion on those financial statements.

**GOLDSTEIN GOLUB KESSLERLLP****New** York,New YorkMarch 13, 2007

F-3

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**24/7REAL MEDIA, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except share and  pershare data)**

| ** **                                                                                                                           | ** ** | **December 31,** | ** **          | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|---------------------|-----------------------|------------|
| ** **                                                                                                                           | ** ** | **2006**              | ** **          | **2005**              | ** ** |
| **ASSETS**                                                                                                                           |       |                  |                |                  |       |
| Current assets:                                                                                                                      |       |                  |                |                  |       |
| Cash and cash equivalents                                                                                                            |       | $                     | 59,390              |                  | $          | 40,009 |   |
| Accounts receivable, less allowances of $2 ,755 and  $2,306, respectively                                                            |       | 55,490                |                | 38,316                |       |
| Prepaid expenses and other current assets                                                                                            |       | 2,687                 |                | 2,369                 |       |
| Total current assets                                                                                                                 |       | 117,567               |                | 80,694                |       |
| Property and  equipment, net                                                                                                         |       | 8,072                 |                | 7,131                 |       |
| Goodwill                                                                                                                             |       | 39,573                |                | 39,573                |       |
| Intangible  assets, net                                                                                                              |       | 7,609                 |                | 9,715                 |       |
| Other assets                                                                                                                         |       | 3,837                 |                | 5,691                 |       |
| Total assets                                                                                                                         |       | $                     | 176,658             |                  | $          | 142,804 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                        |       |                  |                |                  |       |
| Current  liabilities:                                                                                                                |       |                  |                |                  |       |
| Accounts payable                                                                                                                     |       | 31,981                |                | $                     | 19,396     |   |
| Accrued liabilities                                                                                                                  |       | 19,961                |                | 23,987                |       |
| Deferred revenue                                                                                                                     |       | 3,609                 |                | 3,218                 |       |
| Subordinated convertible debentures                                                                                                  |       | 7,500                 |                | 14,542                |       |
| Total current liabilities                                                                                                            |       | 63,051                |                | 61,143                |       |
| Subordinated  convertible debentures                                                                                                 |       | 7,500                 |                | —                |       |
| Warrant liability                                                                                                                    |       | —                |                | 897                   |       |
| Other long-term  liabilities                                                                                                         |       | 776                   |                | 489                   |       |
| Total liabilities                                                                                                                    |       | 71,327                |                | 62,529                |       |
| Commitments and  contingencies                                                                                                       |       |                  |                |                  |       |
| Minority  interests in consolidated subsidiaries                                                                                     |       | 1,673                 |                | 1,556                 |       |
| Stockholders’  equity:                                                                                                          |       |                  |                |                  |       |
| Preferred stock; $.01 par value; 10,000,000 shares  authorized, no shares issued and outstanding                                     |       | —      |                | —                |       |
| Common stock; $.01 par value;  350,000,000 shares authorized; 49,778,970 and 46,227,772 shares issued and  outstanding, respectively |       | 498                   |                | 462                   |       |
| Additional paid-in capital                                                                                                           |       | 1,210,046             |                | 1,177,715             |       |
| Accumulated other comprehensive income                                                                                               |       | 2,090                 |                | 896                   |       |
| Accumulated deficit                                                                                                                  |       | (1,108,976            | )                   | (1,100,354            | )          |
| Total stockholders’ equity                                                                                                      |       | 103,658          |                | 78,719                |       |
| Total liabilities  and stockholders’ equity                                                                                     |       | $                | 176,658   |                  | $          | 142,804 |   |

 

 

See accompanying notes to consolidated financial statements.

F-4

----

**24/7 REAL MEDIA,INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except share and per share data)**

| ** **                                                                                                       | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                                                                                                         |       |                                       |       |   |   |   |   |
| Media                                                                                                            |       | $                                          | 84,851     |   | $ | 65,363 |   | $ | 49,879 |   |
| Search                                                                                                           |       | 86,202                                     |       | 51,430 |   | 16,439 |   |
| Technology                                                                                                       |       | 29,190                                     |       | 23,001 |   | 18,937 |   |
| Total revenues                                                                                                   |       | 200,243                                    |       | 139,794 |   | 85,255 |   |
| Cost of revenues:                                                                                                |       |                                       |       |   |   |   |   |
| Media                                                                                                            |       | 57,531                                     |       | 44,562 |   | 35,197 |   |
| Search                                                                                                           |       | 65,590                                     |       | 36,490 |   | 10,571 |   |
| Technology (inclusive of $510, $41 and $0 of stock-based  compensation, respectively)                            |       | 6,293                                      |       | 4,289 |   | 3,462 |   |
| Total cost of revenues                                                                                           |       | 129,414                                    |       | 85,341 |   | 49,230 |   |
| Gross profit                                                                                                     |       | 70,829                                     |       | 54,453 |   | 36,025 |   |
| Operating expenses:                                                                                              |       |                                       |       |   |   |   |   |
| Sales and marketing (inclusive of $4,621, $541 and  $250 of stock-based compensation, respectively)              |       | 31,629                                     |       | 23,120 |   | 16,897 |   |
| General and administrative (inclusive of $13,104,  $1,391 and $284 of stock-based compensation, respectively)    |       | 33,897                                     |       | 20,985 |   | 14,510 |   |
| Product development (inclusive of $2,212, $254 and $4  of stock-based compensation, respectively)                |       | 10,047                                     |       | 6,087 |   | 4,544 |   |
| Amortization of intangible assets and deferred  financing costs                                                  |       | 3,403                                      |       | 4,391 |   | 4,331 |   |
| Restructuring costs                                                                                              |       | —                                     |       | 973 |   | 841 |   |
| Impairment of intangible assets                                                                                  |       | —                                     |       | — |   | 896 |   |
| Impairment of property and equipment                                                                             |       | —                                     |       | — |   | 787 |   |
| Total operating expenses                                                                                         |       | 78,976                                     |       | 55,556 |   | 42,806 |   |
| Loss from operations                                                                                             |       | (8,147                                     | )          | (1,103 | ) | (6,781 | ) |
| Interest income  (expense), net                                                                                  |       | 772                                        |       | (213 | ) | (463 | ) |
| Change in fair  value of warrant liability                                                                       |       | (176                                       | )          | (381 | ) | 2,040 |   |
| Recovery of  investment                                                                                          |       | —                                     |       | 2,340 |   | — |   |
| Impairment of  marketable securities                                                                             |       | —                                     |       | (588 | ) | (1,052 | ) |
| Gain on sale of  marketable securities                                                                           |       | —                                     |       | 16 |   | — |   |
| Gain on legal  settlement                                                                                        |       | —                                     |       | — |   | 2,896 |   |
| Other income  (expense), net                                                                                     |       | (243                                       | )          | 153 |   | 228 |   |
| Income (loss)  before provision for income taxes and minority interest in operations of  consolidated subsidiary |       | (7,794                                     | )          | 224 |   | (3,132 | ) |
| Provision for  income taxes                                                                                      |       | (692                                       | )          | (314 | ) | (23 | ) |
| Minority interest  in operations of consolidated subsidiary                                                      |       | (136                                       | )          | 128 |   |   |   |
| Net income (loss)                                                                                                |       | $                                          | (8,622     | ) | $ | 38 |   | $ | (3,155 | ) |
| Dividends on  preferred stock                                                                                    |       | —                                     |       | (25 | ) | (306 | ) |
| Net income (loss)  attributable to common stockholders                                                           |       | $                                          | (8,622     | ) | $ | 13 |   | $ | (3,461 | ) |
| Basic net income  (loss) per share attributable to common stockholders                                           |       | $                                          | (0.18      | ) | $ | — |   | $ | (0.10 | ) |
| Weighted average  shares outstanding used in basic net income (loss) per share                                   |       | 48,508,739                                 |       | 45,350,466 |   | 35,373,973 |   |
| Diluted net income  (loss) per share attributable to common stockholders                                         |       | $                                          | (0.18      | ) | $ | — |   | $ | (0.10 | ) |
| Weighted average shares  outstanding used in diluted net income (loss) per share                                 |       | 48,508,739                                 |       | 47,694,027 |   | 35,373,973 |   |

 

See accompanying notes to consolidated financial statements.

F-5

----

**24/7REAL MEDIA, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYAND COMPREHENSIVE LOSS(in thousands, except share data)**

| ** **                                        | ** ** | **Convertible**                                         | ** ** | **Common Stock** | ** **    | **Additional** | ** ** | **Deferred**      | ** ** | **Other**         | ** ** | ** **       | ** ** | **Total**              | ** **       |
|---------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------|---------------|----------------|------------|-------------------|------------|-------------------|------------|------------------|------------|------------------------|------------------|
| ** **                                        | ** ** | **Preferred Stock**                                | ** ** | **Voting**            | ** **    | **Paid-in**    | ** ** | **Stock**         | ** ** | **Comprehensive** | ** ** | **Accumulated**  | ** ** | **Stockholders'**      | ** **       |
| ** **                                        | ** ** | **Shares**                                              | ** ** | **Amount**            | ** **    | **Shares**     | ** ** | **Amount**        | ** ** | **Capital**       | ** ** | **Compensation** | ** ** | **Income (loss)** | ** **       | **Deficit** | ** ** | **Equity** | ** ** |
| **Balance  as of December 31, 2003**              |       | 828,250                                                 |       |                  | $ 8      |           |       | $ 23,367,421 |       |              | $ 234 |             |       |                   | $ 1,106,984 |   |   |   | $ (257 | ) |   |   | $ 305 |   |   |   | $ (1,097,237 | ) |   |   | $ 10,037 |   |   |
| Net loss                                          |       | —                                                  |       |                  | —        |           |       | —            |       |              | —     |             |       |                   | —           |   |   |   | — |   |   |   | — |   |   |   | (3,155 | ) |   |   | (3,155 | ) |   |
| Cumulative foreign  currency translation          |       | —                                                  |       |                  | —        |           |       | —            |       |              | —     |             |       |                   | —           |   |   |   | — |   |   |   | 1,158 |   |   |   | — |   |   |   | 1,158 |   |   |
| Comprehensive loss                                |       |                                                    |       |                  |          |           |       |              |       |              |       |             |       |                   |             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,997 | ) |   |
| Exercise of stock  options                        |       | —                                                  |       |                  | —        |           |       | 657,141           |       |              | 7          |             |       |                   | 835              |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 842 |   |   |
| Issuance of common  stock to employees            |       | —                                                  |       |                  | —        |           |       | 107,870           |       |              | —     |             |       |                   | 611              |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 611 |   |   |
| Conversion of  warrants into common stock         |       | —                                                  |       |                  | —        |           |       | 7,260             |       |              | —     |             |       |                   | 74               |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 74 |   |   |
| Renegotiation of  warrant liability               |       | —                                                  |       |                  | —        |           |       | —            |       |              | —     |             |       |                   | 966              |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 966 |   |   |
| Issuance of common  stock                         |       | —                                                  |       |                  | —        |           |       | 6,760,000         |       |              | 68         |             |       |                   | 37,179           |   |   |   | — |   |   |   |    — |   |   |   | — |   |   |   | 37,247 |   |   |
| Issuance of common  stock for acquired businesses |       | —                                                  |       |                  | —        |           |       | 6,590,707         |       |              | 66         |             |       |                   | 27,182           |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 27,248 |   |   |
| Conversion of  preferred stock                    |       | (750,250                                                | )          |                  | (7            | )              |       | 7,306,668         |       |              | 73         |             |       |                   | (66              | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Deferred stock  compensation                      |       | —                                                  |       |                  | —        |           |       | —            |       |              | —     |             |       |                   | —           |   |   |   | 240 |   |   |   | — |   |   |   | — |   |   |   | 240 |   |   |
| **Balance as of December 31, 2004**               |       | 78,000                                                  |       |                  | $ 1      |           |       | 44,797,067        |       |              | $ 448 |             |       |                   | $ 1,173,765 |   |   |   | $ (17 | ) |   |   | $ 1,463 |   |   |   | $ (1,100,392 | ) |   |   | $ 75,268 |   |   |
| Net income                                        |       | —                                                  |       |                  | —        |           |       | —            |       |              | —     |             |       |                   | —           |   |   |   | — |   |   |   | — |   |   |   | 38 |   |   |   | 38 |   |   |
| Cumulative foreign  currency translation          |       | —                                                  |       |                  | —        |           |       | —            |       |              | —     |             |       |                   | —           |   |   |   | — |   |   |   | (567 | ) |   |   | — |   |   |   | (567 | ) |   |
| Comprehensive loss                                |       | —                                                  |       |                  | —        |           |       | —            |       |              | —     |             |       |                   | —           |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (529 | ) |   |
| Exercise of stock  options                        |       | —                                                  |       |                  | —        |           |       | 711,690           |       |              | 7          |             |       |                   | 1,652            |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,659 |   |   |
| Issuance of common  stock to employees            |       | —                                                  |       |                  | —        |           |       | 73,262            |       |              | 1          |             |       |                   | 2,303            |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 2,304 |   |   |
| Conversion of  preferred stock                    |       | (78,000                                                 | )          |                  | (1            | )              |       | 645,753           |       |              | 6          |             |       |                   | (5               | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Deferred stock  compensation                      |       | —                                                  |       |                  | —        |           |       | —            |       |              | —     |             |       |                   | —           |   |   |   | 17 |   |   |   | — |   |   |   | — |   |   |   | 17 |   |   |
| **Balance  as of December 31, 2005**              |       | $        — |       |                  | $ — |           |       | 46,227,772        |       |              | $ 462 |             |       |                   | $ 1,177,715 |   |   |   | $  — |   |   |   | $ 896 |   |   |   | $ (1,100,354 | ) |   |   | $ 78,719 |   |   |
| Net loss                                          |       | —                                                  |       |                  | —        |           |       | —            |       |              | —     |             |       |                   | —           |   |   |   | — |   |   |   | — |   |   |   | (8,622 | ) |   |   | (8,622 | ) |   |
| Cumulative foreign  currency translation          |       | —                                                  |       |                  | —        |           |       | —            |       |              | —     |             |       |                   | —           |   |   |   | — |   |   |   | 1,194 |   |   |   | — |   |   |   | 1,194 |   |   |
| Comprehensive loss                                |       | —                                                  |       |                  | —        |           |       | —            |       |              | —     |             |       |                   | —           |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (7,428 | ) |   |
| Exercise of stock  options                        |       | —                                                  |       |                  | —        |           |       | 2,024,301         |       |              | 20         |             |       |                   | 7,703            |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 7,723 |   |   |
| Issuance of common  stock to employees            |       | —                                                  |       |                  | —        |           |       | 1,014,859         |       |              | 10         |             |       |                   | 19,799           |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 19,809 |   |   |
| Conversion of  warrants into common stock         |       | —                                                  |       |                  | —        |           |       | 55,718            |       |              | 1          |             |       |                   | 408              |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 409 |   |   |
| Issuance of common  stock for acquired business   |       | —                                                  |       |                  | —        |           |       | 454,988           |       |              | 5          |             |       |                   | 3,745            |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 3,750 |   |   |
| Issuance of common  stock for services            |       | —                                                  |       |                  | —        |           |       | 1,332             |       |              | —     |             |       |                   | 12               |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 12 |   |   |
| Expiration of  warrant liability                  |       | —                                                  |       |                  | —        |           |       | —            |       |              | —     |             |       |                   | 664              |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 664 |   |   |
| **Balance  as of December 31, 2006**              |       | $        — |       |                  | $ — |           |       | 49,778,970        |       |              | $ 498 |             |       |                   | $ 1,210,046 |   |   |   | $  — |   |   |   | $ 2,090 |   |   |   | $ (1,108,976 | ) |   |   | $ 103,658 |   |   |

 

See accompanying notes to consoldiated financial statements. 

F-6

----

**24/7 REAL MEDIA, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)**

| ** **                                                                                          | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                                               |       |                                       |       |   |   |   |   |
| Net income (loss)                                                                                   |       | $                                          | (8,622     | ) | $ | 38 |   | $ | (3,155 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and  amortization                                                                      |       | 3,799                                      |       | 2,867 |   | 1,829 |   |
| Provision for doubtful  accounts and sales reserves                                                 |       | 2,316                                      |       | 2,033 |   | 1,063 |   |
| Amortization of  intangible assets and deferred financing costs                                     |       | 3,403                                      |       | 4,391 |   | 4,331 |   |
| Amortization of debt  discount                                                                      |       | 458                                        |       | 611 |   | 611 |   |
| Non-cash compensation                                                                               |       | 20,447                                     |       | 2,227 |   | 538 |   |
| Accrued interest on debt                                                                            |       | 151                                        |       | 151 |   | 151 |   |
| Change in fair value of  warrant liability                                                          |       | 176                                        |       | 381 |   | (2,040 | ) |
| Recovery of investment                                                                              |       | —                                     |       | (2,340 | ) | — |   |
| Impairment of marketable  securities                                                                |       | —                                     |       | 588 |   | 1,052 |   |
| Gain on sale of  marketable securities                                                              |       | —                                     |       | (16 | ) | — |   |
| Minority interest in  operations of consolidated subsidiary                                         |       | 136                                        |       | (128 | ) | — |   |
| Impairment of intangible  assets                                                                    |       | —                                     |       | — |   | 896 |   |
| Gain from legal  settlement                                                                         |       | —                                     |       | — |   | (2,896 | ) |
| Impairment of property  and equipment                                                               |       | —                                     |       | — |   | 787 |   |
| Changes in operating assets and liabilities, net of  effect of acquisitions and dispositions:       |       |                                       |       |   |   |   |   |
| Accounts  receivable                                                                                |       | (19,490                                    | )          | (12,125 | ) | (10,995 | ) |
| Prepaid expense and  other current assets                                                           |       | (433                                       | )          | 198 |   | (1,397 | ) |
| Notes and amounts  receivable                                                                       |       | —                                     |       | 143 |   | 510 |   |
| Other assets                                                                                        |       | 437                                        |       | (255 | ) | (5,239 | ) |
| Accounts payable  and accrued liabilities                                                           |       | 11,907                                     |       | 11,475 |   | 2,774 |   |
| Deferred revenue                                                                                    |       | 391                                        |       | (4 | ) | 474 |   |
| Net cash provided by  (used in) operating activities                                                |       | 15,076                                     |       | 10,235 |   | (10,706 | ) |
| Cash flows from investing activities:                                                               |       |                                       |       |   |   |   |   |
| Capital expenditures,  including capitalized software                                               |       | (3,261                                     | )          | (6,246 | ) | (2,713 | ) |
| Proceeds from sale of  marketable securities                                                        |       | —                                     |       | 1,272 |   | — |   |
| Proceeds from sale and  maturities of short-term investments                                        |       | —                                     |       | 2,032 |   | — |   |
| Recovery of investment                                                                              |       | —                                     |       | 2,340 |   | — |   |
| Cash paid for investment                                                                            |       | —                                     |       | — |   | (2,032 | ) |
| Cash paid for  acquisitions, net                                                                    |       | —                                     |       | — |   | (17,663 | ) |
| Net cash used in  investing activities                                                              |       | (3,261                                     | )          | (602 | ) | (22,408 | ) |
| Cash flows from financing activities:                                                               |       |                                       |       |   |   |   |   |
| Proceeds from exercise of  stock options and conversion of warrants                                 |       | 7,723                                      |       | 1,655 |   | 840 |   |
| Payment of capital lease  obligations                                                               |       | (279                                       | )          | (65 | ) | (86 | ) |
| Cash paid for  acquisitions                                                                         |       | (1,250                                     | )          | — |   | — |   |
| Proceeds from note  receivable                                                                      |       | 200                                        |       | — |   | — |   |
| Proceeds from minority  investor of consolidated subsidiary                                         |       | —                                     |       | 1,729 |   | — |   |
| Proceeds from issuance of  common stock, net                                                        |       | —                                     |       | — |   | 37,247 |   |
| Net cash provided  by financing activities                                                          |       | 6,394                                      |       | 3,319 |   | 38,001 |   |
| Net change in cash  and cash equivalents                                                            |       | 18,209                                     |       | 12,952 |   | 4,887 |   |
| Effect of foreign  currency on cash                                                                 |       | 1,177                                      |       | (633 | ) | 1,158 |   |
| Cash and cash equivalents  at beginning of year                                                     |       | 40,009                                     |       | 27,690 |   | 21,645 |   |
| Cash and cash equivalents at end of year                                                            |       | $                                          | 59,395     |   | $ | 40,009 |   | $ | 27,690 |   |

 

See accompanying notes to consolidated financial statements.

F-7

----

**NOTE 1—ORGANIZATIONAND OPERATIONS OF THE COMPANY**

24/7 Real Media, Inc.,together with its subsidiaries, (the “Company”) provides online advertising andsearch engine marketing (“SEM”) strategies to meet the needs of a broadrange of Web publishers and advertisers since 1995. As of December 31,2006, the Company principally operated in North America, Europe, Asia andAustralia and provided the following products and services:

·       *Media*, consisting of Web site representation servicesprovided through the Global Web Alliance, a global alliance of Web sitesrepresented by the Company, and web advertising services, through whichadvertisers can purchase ad inventory and run ad campaigns on the Global WebAlliance.

·       *Search*, primarilyconsisting of managed search engine marketing services, including keyword bidmanagement and paid-inclusion services provided using the Company’s proprietaryDecide DNA technology, and Web site optimization services, each of which isdesigned to help advertisers promote their Web sites in or in association withrelevant search results displayed by search engines and to maximize theirsearch marketing budgets.

·       *Technology*,**primarilyconsisting of the Company’s proprietary Open AdStream (“OAS”) platform, thefoundation of our proprietary online advertisement delivery and managementtechnology. The Company licenses the OAS platform to customers that host itlocally on their servers and provides services from software hosted centrallyon its servers as an application service provider.

**NOTE 2—SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

(a)           Basis of Presentation

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

(b)          Use of Estimates

The preparation ofconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America, or GAAP, requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates. On an ongoing basis, the Companyevaluates its estimates, including those related to revenue recognition,accruals, allowance for doubtful accounts, fair value of acquired intangibleassets and goodwill, useful lives of intangible assets and property andequipment, among others. The Company bases its estimates on historicalexperience and on various other assumptions that are believed to be reasonable,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities.

(c)           Reclassifications

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

(d)          Cash and Cash Equivalents

The Company considers all highly liquid securitieswith original maturities of three months or less to be cash equivalents. Cashand cash equivalents consist principally of money market accounts andshort-term commercial paper.

F-8

----

At both December 31,2006 and 2005, the Company maintained $0.5 million in letters of credit,secured by cash, related to office leases. Cash secured by letters of creditexpiring within one year are classified as other current assets, and cashsecured by letters of credit with maturities greater than one year areclassified as other assets, on the consolidated balance sheets.

(e)           Investments

Investments consist of securities with statedmaturities of three months or more and marketable securities consisting ofregistered corporate equity securities. The Company classifies the marketablesecurities as available-for-sale in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*. Available-for-salesecurities are carried at fair value, with the unrealized gains or losses, netof tax, reported as a separate component of stockholders’ equity. Realizedgains and losses and the cost of available-for-sale securities sold arecomputed on the basis of the specific identification method.

Investments in non-marketable equity securities ofcompanies in which the Company owns less than 20% of the company’s stock anddoes not have the ability to exercise significant influence are accounted foron the cost basis.

In accordance withSFAS No.115 and Staff Accounting Bulletin (“SAB”) No. 59, *Accounting for Non-Current Marketable Equity Securities*, theCompany assesses, on an ongoing basis, the need to record impairment losses oninvestments, and records such losses when the impairment is determined to beother-than-temporary.

(f)             Accounts Receivable

Accounts receivable are recorded at the invoicedamount, net of allowance for doubtful accounts and sales allowance. The Companydoes not require collateral. The Company maintains an allowance for doubtfulaccounts to reserve for potentially uncollectible receivables and a salesallowance to reserve for potential credits issued to customers. The allowancesare estimates calculated based on an analysis of current business and economicrisks, customer credit-worthiness, specific identifiable risks such asbankruptcies, terminations or discontinued customers, or other factors that mayindicate a potential loss.

As a normal part ofthe business, the Company has receivables that are invoiced in the monthfollowing the completion of the earnings process. All unbilled receivables arebilled within 30 days after each month-end. Unbilled receivables are includedin accounts receivable on the consolidated balance sheets and amounted toapproximately $2.5 million and $7.9 million for the years ended December 31,2006 and 2005, respectively.

(g)           Concentration of CreditRisk

Financial instruments that potentially subject theCompany to concentrations of credit risk consist principally of cashequivalents, accounts receivable and debentures. The fair value of cashequivalents and accounts receivable instruments approximate their financialstatement amount because of the short-term maturity of these instruments. Thefair value of the debentures approximates their financial statement carryingvalue based on interest rates for similar borrowing.

At times, cash may exceed the federally insuredlimits. In addition, the majority of the Company’s cash is managed by onefinancial institution.

Accounts receivable aretypically unsecured. To appropriately manage credit risk, the Company performsongoing evaluations of customer credit and limits the amount of creditextended, but generally no collateral is required. The Company maintainsreserves for estimated credit losses and these losses have generally beenwithin management’s expectations.

F-9

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(h)          Significant Customersand Suppliers

No single customer accounted for greater than 10% ofnet revenues for the years ended December 31, 2006, 2005 and 2004.

Substantially all Media revenue is generated fromadvertising inventory provided by partner Web sites. Two of the Company’spartner Web sites represented approximately 30.3%, 25.3% and 25.2% of theCompany’s Media revenue for 2006, 2005 and 2004, respectively. Search revenueis generated from relationships with search engines, and substantially allSearch revenue is derived from two such relationships. These arrangementsare often short-term or subject to termination upon short notice.

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

(i)             Property andEquipment; Capitalized Software

Property and equipment are recorded at cost and areusually depreciated using the straight-line method over the shorter of theestimated useful lives of the related assets, which are generally three to fiveyears, and the lease term.

Cost of software developed or obtained for internaluse is accounted for in accordance with Statement of Position (“SOP”) No. 98-1,*Accounting for the Costs of ComputerSoftware Developed or Obtained for Internal Use*. Costs incurredduring the preliminary project stage are expensed as incurred. Costs incurredto develop or obtain software for internal use are capitalized during theapplication development stage. Costs incurred during the post-implementation oroperation stage are expensed as incurred. The capitalized cost of internal usesoftware is charged over the estimated useful life of two to three years.

As required by SFASNo. 86, *Accounting for the Costs ofComputer Software To Be Sold, Leased, or Otherwise Marketed*, theCompany requires certain product development costs to be capitalized when aproduct’s technological feasibility has been established by completion of aworking model of the product; capitalization ends when a product is availablefor general release to customers. Capitalized software is depreciated using thegreater of the amount computed using (a) the ratio that current grossrevenues for a product bear to the total of current and anticipated futuregross revenues for that product and (b) the straight-line method over theremaining estimated economic life of the software, generally four years. Amountscapitalized under SFAS No. 86 were not material for the years ended December 31,2006 and 2005.

(j)              BusinessCombinations

The Company’sacquisitions are accounted for as purchase business combinations in accordancewith SFAS No. 141, *BusinessCombinations*, and SFAS No. 142, *Goodwill and Other Intangible Assets*. The Company allocatesa portion of the purchase price to identifiable tangible and intangible assetsbased on their respective estimated fair values, and records as goodwill anyremaining unallocated portion of the purchase price. Intangible assets includetrademarks, customer relationships, acquired technology and a covenant not tocompete. Such intangible assets are amortized on a straight-line basis overtheir estimated useful lives, which are generally two to seven years, exceptfor trademarks that have an indefinite life.

(k)          Impairment of Long-LivedAssets

The Companyevaluates goodwill and indefinite lived intangible assets on an annual basisand whenever events or changes in circumstances indicate that the carryingamount may not be fully recoverable. Long-lived assets, including property andequipment, long-term assets and amortizable intangible assets are reviewed forimpairment whenever events or changes in circumstances indicate that the carryingamount may not be fully recoverable. Conditions that would necessitate animpairment assessment include a significant decline in the observable marketvalue of an asset, a significant change in the extent or manner in which anasset is used, or a significant adverse change that would indicate that thecarrying amount of an asset or group of assets is not recoverable. The Companyassesses impairment in 

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accordancewith the requirements of SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*. The Companyassesses the impairment of goodwill and intangible assets in accordance withthe provisions of SFAS No. 142, *Goodwilland Other Intangible Assets*. The Company determines therecoverability of the assets by comparing the carrying amount of the assets tonet future cash flows that the assets are expected to generate. The impairmentrecognized is the amount by which the carrying amount exceeds the fair marketvalue of the assets.

(l)             Income Taxes

The Companyaccounts for income taxes using the asset and liability method. Under thismethod, deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases, and operating loss and tax credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to be recoveredor settled. The effect on deferred tax assets and liabilities of a change intax rates is recognized in results of operations in the period that the taxchange occurs.

(m)      Foreign Currency Translation

Assets andliabilities denominated in foreign functional currencies are translated at theexchange rate as of the balance sheet date. Revenues, costs and expensesdenominated in foreign functional currencies are translated at the weightedaverage exchange rate for each period. Translation adjustments are recorded asa separate component of stockholders’ equity. Gains or losses from foreigncurrency transactions are included in the consolidated statements of operationsand were immaterial for the years ended December 31, 2006, 2005 and 2004.

(n)          Revenue Recognition;Cost of Revenue; Deferred Revenue

*Media*

Media revenue is generated from fees paid by clientadvertisers for the advertising impressions they purchase. The Companytypically offer advertisers a pricing model based on a cost-per-thousandimpressions, or CPM, which enables an advertiser to pay a fee based on thenumber of times its advertisement is displayed. E-mail related revenue isderived from delivering advertisements to e-mail lists for advertisers.Agreements are primarily short-term and revenue is recognized as services aredelivered, provided that no significant Company obligations remain outstandingand collection of the resulting receivable is probable. The Company becomesobligated to make royalty payments to Web sites and e-mail lists that havecontracted with the Company in the period the advertising impressions ore-mails are delivered. Such expenses are classified as cost of revenue in theaccompanying consolidated statements of operations.

*Search*

Search revenue is primarily based on either apercentage of a client’s spend with the search engines or cost-per-click, orCPC, fees paid by client advertisers. CPC fees are generated each time usersclick on Web site listings that the Company submitted into search enginedatabases and are directed to the client advertisers’ Web sites. Agreements areprimarily short-term and revenue is recognized as services are delivered,provided that no significant Company obligations remain outstanding andcollection of the resulting receivable is probable. The Company becomesobligated to make payments to search engines that have contracted with theCompany in the period in which the clicks occur. Such expenses are classifiedas cost of revenue in the accompanying consolidated statements of operations.

When the Company provides search engine marketingservices as an agent for a fixed commission, or in other transactions inwhich it does not have principal risk and reward, the Company recognizesrevenue on a net basis. To a lesser extent, the Company also generates revenuefrom fees paid by search engines that employ the Company to optimize thesubmission of Web site listings and report on advertising campaigns for theiradvertisers. The Company typically charges a fee based on a percentage of therevenue 

F-11

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generated by the searchengine from advertisers that have Web site listing submissions built andoptimized by the Company.

*Technology*

Technology revenue is derived primarily from licensingof the Company’s software, hosted advertisement serving, and softwaremaintenance and technical support services. The Company recognizes revenue fromadvertisement serving hosted centrally on its servers upon delivery. TheCompany recognizes revenue from software licensing agreements in accordancewith SOP No. 97-2, *SoftwareRevenue Recognition*, and SAB No. 104, *Revenue Recognition*, upon delivery of thesoftware, which is generally when the software is made available for download,there is persuasive evidence of an arrangement, collection is reasonablyassured, the fee is fixed or determinable, and vendor-specific objectiveevidence exists to allocate the total fees to all elements of the arrangement.Contracts that bundle the software license with maintenance and technicalsupport are recognized ratably over the contract term. The Company recognizesrevenue from software maintenance and technical support contracts ratably overthe term of the agreement, which typically does not exceed one year.

Expenses related to the Company’s Technology revenueare primarily payroll costs incurred to deliver and support the software, andhosting, bandwidth and license fees paid to third-party software vendors. Theseexpenses are classified as cost of revenue in the accompanying consolidatedstatements of operations.

*Deferred Revenue*

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

(o)          Stock-Based Compensation

Effective January 1, 2006, the Company adoptedthe revised SFAS No. 123, *Share-BasedPayment* (“SFAS No. 123R”), using the modified prospectivetransition method and accordingly prior periods have not been restated to reflectthe impact of SFAS No. 123R. Under SFAS No. 123R, stock-basedcompensation related to awards granted prior to its adoption is expensed overthe remaining portion of the requisite service period using the same fair valuemeasurements which were used in calculating pro forma stock-based compensationexpense under SFAS No. 123. For awards granted on or after January 1,2006, stock-based compensation is expensed over the requisite service period.

Prior to theadoption of SFAS No. 123R, the Company accounted for stock-basedcompensation using the intrinsic value method under the provisions ofAccounting Principles Board (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees*, and Financial Accounting StandardsBoard (“FASB”) interpretation No. 44, *Accounting for CertainTransactions Involving Stock Compensation—an interpretation of APB Opinion No. 25,*and complied with the disclosure provisions of SFAS No. 123, *Accounting for Stock-Based Compensation,*and SFAS No. 148,*Accounting for Stock-Based Compensation—Transitionand Disclosure.* Under APB Opinion No. 25, stock-basedcompensation is recognized based on the difference, if any, on the date ofgrant between the fair value of the Company’s common stock and the amount anemployee must pay to acquire the common stock.

(p)          Restructuring Estimates

The Companyaccounts for restructuring activities in accordance with SFAS No. 146, *Accounting for Costs Associated with Exit or Disposal Activities*.Restructuring-related liabilities include estimates for, among other things,involuntary terminations of employees and disposition of lease obligations. Keyvariables in determining such estimates include timing of sublease rentals,estimates of sublease rental 

F-12

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paymentamounts and tenant improvement costs, and estimates for brokerage and otherrelated costs. The Company periodically evaluates and, if necessary, adjuststhe estimates based on currently available information.

(q)          Warrant Liability

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

(r)            AdvertisingCosts

Costs of advertisingand promoting the Company’s products and services are expensed as incurred.Such costs are included in sales and marketing on the statement of operationsand total approximately $2.5 million, $2.2 million and $1.1 millionfor the years ended December 31, 2006, 2005 and 2004, respectively.

(s)            Basicand Diluted Net Income (Loss) Per Share

Net income (loss) per share is presented in accordancewith the provisions of SFAS No. 128, *EarningsPer Share* (“EPS”). Basic EPS excludes dilution for potentiallydilutive securities and is computed by dividing income or loss available tocommon shareholders by the weighted average number of common shares outstandingfor the period. Diluted EPS reflects the potential dilution that could occur ifsecurities or other contracts to issue common stock were exercised or convertedinto common stock and resulted in the issuance of common stock. Potentialcommon shares consist of incremental common shares issuable upon the exerciseof stock options and warrants and the vesting of restricted stock (using thetreasury stock method) and the conversion of subordinated convertibledebentures and preferred stock (using the if-converted method).

Diluted net loss per share is equal to basic net lossper share since all potentially dilutive securities are anti-dilutive for theyear ended December 31, 2006. Diluted net loss per common share for theyear ended December 31, 2006 does not include the effects of options topurchase 7.1 million shares of common stock; 3.7 million shares of unvestedrestricted stock; 0.5 million common stock warrants and 1.7 millionshares of common stock related to the subordinated convertible debentures, onan “as if” converted basis, as the effect of their inclusion is anti-dilutiveduring such period.

Dilutednet income per common share for the year ended December 31, 2005 does notinclude the effects of options to purchase approximately 4.1 millionshares of common stock; 0.4 million in common stock warrants; 0.4 millionshares of preferred stock and 1.7 million shares of common stock relatedto the subordinated convertible debentures, on an “as if” converted basis, asthe effect of their inclusion is anti-dilutive during such period. Thefollowing is a reconciliation of the weighted average common shares outstandingused in computing diluted net income (loss) per share:

| Weighted average  common shares outstanding used in basic net income(loss)   |   | 45,350,466 |   |
|------------------------------------------------------------------------------|--------|------------|--------|
| Add:                                                                         |   |       |   |
| Dilutive effect of stock options                                             |   | 1,163,813  |   |
| Dilutive effect of common stock warrants                                     |   | 106,529    |   |
| Dilutive effect of unvested restricted stock                                 |   | 1,073,219  |   |
| Weighted average common  shares outstanding used in diluted net income(loss) |   | 47,694,027 |   |

 

 

F-13

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Diluted net lossper share is equal to basic net loss per share since all potentially dilutivesecurities are anti-dilutive for the year ended December 31, 2004. Dilutednet loss per common share for the year ended December 31, 2004 does not includethe effects of options to purchase 4.5 million shares of common stock;10,000 shares of unvested restricted stock; 0.6 million common stockwarrants; 0.6 million shares of preferred stock; and 1.7 millionshares of common stock related to the subordinated convertible debentures, onan “as if” converted basis, as the effect of their inclusion is anti-dilutiveduring such period.

(t)             RecentAccounting Pronouncements

In July 2006 the FASB issued FinancialInterpretation Number 48, *Accounting for Uncertaintyin Income Taxes*, (“FIN 48”) as an interpretation of SFASNo. 109, *Accounting for Income Taxes*.FIN 48 provides that the tax effects from an uncertain tax position berecognized in a company’s financial statements only if the tax position ismore-likely-than-not of not being sustained upon examination by the taxauthorities, based on the technical merits of the position. ThisInterpretation also provides guidance on derecognition, classification,interest, penalties, accounting in interim periods, disclosure, and transition.FIN 48 will be effective beginning January 1, 2007. The Company iscurrently evaluating the effects of adopting FIN 48 on its consolidatedfinancial statements. Differences between the amounts recognized in thestatements of financial position prior to the adoption of FIN 48 and theamounts reported after adoption should be accounted for as a cumulative-effectadjustment recorded to the beginning balance of retained earnings.

In September 2006, the FASB issued SFASNo. 157, *Fair Value Measurement*, whichclarifies the definition of fair value, establishes guidelines for measuringfair value, and expands disclosures regarding fair value measurements. SFASNo. 157 does not require any new fair value measurements and eliminatesinconsistencies in guidance found in various prior accounting pronouncements.SFAS No. 157 will be effective for the Company on January 1, 2008.The Company is currently evaluating the impact of adopting SFAS No. 157 onits consolidated financial statements.

In September 2006, theSecurities and Exchange Commission (“SEC”) released SAB No. 108, *Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements*. SAB No. 108provides interpretive guidance on the SEC’s views on how the effects of thecarryover or reversal of prior year misstatements should be considered inquantifying a current year misstatement. The adoption of SAB No. 108 didnot have a material impact of the Company’s financial position, cash flow orresults of operations.

**NOTE 3—ACQUISITIONSAND UNAUDITED PRO FORMA SUMMARY**

(a)           Acquisitionof Decide Holdings Pty Limited (“Decide”)

On August 19, 2004, the Company completed itsacquisition of Decide, a leading provider of search engine marketing inAustralia and Europe. The acquisition combined the Company’s global audienceand Decide’s search technology to allow the Company to create a more relevant,comprehensive and higher quality offering. Pursuant to the acquisitionagreements, the Company acquired all of the outstanding shares of Decide for$15.0 million in cash, approximately 4.5 million shares of its commonstock, valued at $12.6 million, and approximately $1.1 million intransaction fees. Additionally, the Company was required to pay up to anadditional $2.5 million in cash and issue $7.5 million in shares of commonstock (up to a maximum of 2.3 million shares) to the selling shareholders ofDecide if Decide achieved certain performance targets. At December 31,2005, the Company accrued and reflected as additional goodwill $5.0 million forthe contingent earn-out obligation as a result of the achievement of certainperformance targets for 2005. The earn-out obligation was settled by thepayment of $1.25 million in cash and the issuance of 454,988 shares of theCompany’s common stock, valued at $3.75 million, in March 2006.

F-14

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The purchase price in excess of fair value of nettangible liabilities assumed of $28.8 million has been allocated asfollows: $20.0 million to goodwill and $8.8 million to intangibleassets.

Of the $8.8 million of intangible assets,$1.1 million was assigned to trademarks that are not subject to amortization.The remaining $7.7 million of intangible assets have a weighted-averageuseful life of approximately five years. The intangible assets that make upthat amount include acquired technology totaling $6.6 million (five yearweighted-average useful life), customer relationships totaling $1.0 million(five year weighted-average useful life) and non-compete agreements totaling$0.1 million (two year weighted-average useful life).

The $20.0 million as well as the additional $5.0 millionof goodwill was assigned to the Search segment and, of that amount, none isdeductible for tax purposes.

Thenet tangible liabilities assumed consist of the following:

| **Asset / Liability** | ** ** | ** ** | ** ** | **Amount** | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|
| Cash and cash  equivalents      |       | $          | 305        |       |
| Other current  assets           |       | 1,692      |       |
| Fixed assets                    |       | 616        |       |
| Other assets                    |       | 180        |       |
| Accrued  liabilities            |       | (2,838     | )          |
| Long-term  liabilities          |       | (21        | )          |
|                            |       | $          | (66        | )          |

                                                                                                           

(b)          Acquisition of RealMedia Korea Co. Ltd.

On January 6,2004, the Company completed its acquisition of Real Media Korea Co. Ltd., nowknown as 24/7 Real Media, Inc. (“24/7 Real Media Korea”), a leader ininteractive marketing in South Korea, by acquiring the approximately 90.4% ofthe outstanding shares of 24/7 Real Media Korea that the Company did notalready own. The Company believed the combined assets will further its positionas a global leader in interactive marketing. The Company paid totalconsideration of $20.1 million in exchange for the 24/7 Real Media Koreashares, which consisted of $5.0 million in cash, approximately 2.1 millionshares of the Company’s common stock valued at $14.6 million andapproximately $0.5 million in transaction costs. At acquisition,approximately 0.9% of the outstanding shares of 24/7 Real Media Korea were heldin an employee stock union established under Korean law. The employees agreedto transfer their shares to the Company upon vesting in accordance with theterms and conditions of the stock union and Korean law. As of December 31,2006, the Company owned approximately 99.4% of 24/7 Real Media Korea. Foraccounting purposes, the effective date of the acquisition is January 1,2004. There was no material activity between the effective date and the acquisitiondate.

The purchase price in excess of fair value of nettangible assets acquired of $16.1 million has been allocated as follows:$11.9 million to goodwill and $4.2 million to intangible assets.

Of the $4.2 million of intangible assets, $0.7 millionwas assigned to trademarks that are not subject to amortization. The remaining$3.5 million of intangible assets have a weighted-average useful life ofapproximately six years. The intangible assets that make up that amount includeacquired technology of $0.5 million (six year weighted-average usefullife), customer relationships of $2.4 million (seven year weighted-averageuseful life) and a non-compete agreement of $0.6 million (five yearweighted-average useful life).

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The $11.9 million of goodwill was assigned to theMedia and Technology segments in the amounts of $11.2 million and $0.7 million,respectively. Of that total amount, none is deductible for tax purposes.

Thenet tangible assets acquired consist of the following:

| **Asset / Liability** | ** ** | ** ** | ** ** | **Amount** | ** ** |
|---------------------------------|------------|------------|------------|------------|------------|
| Cash and cash  equivalents      |       | $          | 3,469      |       |
| Other current  assets           |       | 5,151      |       |
| Fixed assets                    |       | 170        |       |
| Non-current  assets             |       | 384        |       |
| Accrued  liabilities            |       | (5,159     | )          |
|                            |       | $          | 4,015      |       |

 

(c)           Acquisition of InsightFirst, Inc. (“Insight”)

On January 21, 2003, the Company acquired certainassets of Insight First, Inc., including specific contracts, andintangibles and employee relationships related to Insight’s Web analyticssolution, including the intellectual property relating to specific products, inexchange for approximately 0.7 million shares of the Company’s commonstock valued at approximately $1.1 million and $0.2 million in cash.In addition, the Company had a contingent obligation to pay additional earn-outconsideration of up to $1.0 million, in either cash or common stock, atthe Company’s discretion, subject to achievement of earn-out targets relatingto revenue generated by the acquired business in fiscal year 2004 and 2003. Theearn-out target for 2003 was not achieved. The Company initially estimated thatthe target for 2004 was achieved. Accordingly, the earn-out liability ofapproximately $0.3 million was accrued and included as an addition toacquired technology as of December 31, 2004. The acquired technology wasamortized over an expected benefit period of four years. In December 2004,the Company recorded an impairment charge related to the analytics technologyacquired with Insight due to significant rewrites of the underlying softwarecode. The unamortized balance of $0.9 million, inclusive of the earn-outliability of approximately $0.3 million initially estimated to be due tothe former owners of Insight, was reflected as impairment of intangible assetson the consolidated statement of operations at December 31, 2004. During 2005,the Company determined that the earn-out threshold for 2004 was not achievedand accordingly, reversed and reflected the accrued earn-out liability as otherincome on the consolidated statements of operations.

Thepurchase price in excess of the fair value of net tangible assets andliabilities acquired of $1.3 million was allocated to acquired technology.The net tangible assets acquired consist of the following:

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

 

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(d)          Summary of PurchasePrice Allocation

Thefollowing summarizes the purchase price allocation for each of theacquisitions:

| ** **                         | ** ** | ** **      | ** ** | **Net Tangible** | ** ** | ** **             | ** ** |
|------------------------------------|------------|-----------------|------------|-----------------------|------------|------------------------|------------|
| ** **                         | ** ** | **Acquisition** | ** ** | **Assets**            | ** ** | **Intangibles /** | ** ** |
| **Acquired Entity**           | ** ** | ** **      | ** ** | **Costs**             | ** ** | **(Liabilities)**      | ** ** | **Goodwill** | ** ** |
| **Year  Ended December 31, 2003:** |       |            |       |                  |       |                   |       |   |   |   |   |   |   |
| Insight First                      |       |            | $          | 1,261                 |       |                   |       | $ | 3 |   |   |   | $ | 1,258 |   |   |
| **Year  Ended December 31, 2004:** |       |            |       |                  |       |                   |       |   |   |   |   |   |   |
| 24/7 Real Media  Korea             |       |            | $          | 20,180                |       |                   |       | $ | 4,015 |   |   |   | $ | 16,165 |   |   |
| Decide Holdings  Pty Limited       |       |            | 28,707     |                  |       |                   | (66        | ) |   |   | 28,773 |   |   |
|                               |       |            | $          | 48,887                |       |                   |       | $ | 3,949 |   |   |   | $ | 44,938 |   |   |
|                                    |            |                 |            |                       |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |

 

(e)           Unaudited Pro FormaSummary

Theresults of operations for each of Decide and 24/7 Real Media Korea have beenincluded in the Company’s consolidated statements of operations since therespective date of completion of the acquisition. The following unaudited proforma information presents a summary of the results of operations of theCompany assuming the acquisitions of Decide and 24/7 Real Media Korea at thebeginning of the period presented:

| ** **                                                                  | ** ** | **Year Ended December 31, 2004**                               | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **(in thousands, except  share and per share data)** | ** ** |
| Total revenue.                                                              |       |                                                                               | $          | 91,949 |   |   |
| Net loss  attributable to common stockholders .                             |       |                                                                               | (3,956     | ) |   |
| Basic and diluted  net loss attributable to common  stockholders per share  |       |                                                                               | $          | (0.10 | ) |   |
| Weighted average common  shares used in   net loss per share calculation(1) |       |                                                                               | 38,250,851 |   |   |

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(1)          The weighted averagecommon shares used to compute pro forma basic and diluted net loss per sharefor the year ended December 31, 2004 include the 4.5 million and 2.1 millionshares of common stock issued for Decide and 24/7 Real Media Korea,respectively, as if the shares were issued at the beginning of the periodpresented.

The pro forma summary isnot necessarily indicative of the operating results that would have beenachieved had the transactions been in effect as of the beginning of the periodspresented and should not be construed as being representative of futureresults.

**NOTE 4—JOINTVENTURE**

*K.K. 24-7Search*

On September 5, 2005, the Company signed a jointventure agreement with Dentsu, Inc. to deliver search engine marketing(“SEM”) services to the Japanese market. The partnership, K.K. 24-7Search, in which Dentsu owns a significant minority interest, simultaneouslyentered into an agreement to be the exclusive provider of SEM services toDentsu’s extensive client base. Under the terms of the agreement, Dentsu willcontribute its extensive Japanese marketing industry knowledge and connectionsto the joint venture, and will consign to the joint venture all SEM servicesprovided to its clients. The Company will license its Decide DNA technology tothe joint venture, as well as provide SEM expertise and operational management.

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Upon inception, theCompany made an initial investment of $1.9 million, representing a 51%ownership interest in the joint venture, and therefore, has consolidated thefinancial results of the joint venture. Minority interest is presentedseparately on the consolidated balance sheets and statements of operations.

*Denstu 24/7 SearchHoldings, B.V.*

On November 1, 2006,the Company and Dentsu expanded their search engine marketing partnership.Through a new holding company in The Netherlands, Dentsu 24/7 Search Holdings,B.V., the Company and Dentsu will establish new operations within otherstrategically important advertising markets throughout Asia and the PacificRim, including China, India, Korea, Thailand and Taiwan. Under the terms of theagreement, the Company and Dentsu will each provide initial capital of $5.0million, which will be used to fund operations in the identified expansioncountries. The Company will license its Decide DNA technology to the newoperating subsidiaries. Initial management of the new venture will befully-supported by K.K. 24-7 Search.

**NOTE 5—BALANCESHEET COMPONENTS**

(a)           Propertyand Equipment

| ** **                                      | ** ** | **December 31,**   | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| Computer  equipment and software(1)             |       | $                       | 17,966     |   | $ | 13,405 |   |
| Furniture and  fixtures                         |       | 1,101                   |       | 1,028 |   |
| Leasehold  improvements                         |       | 2,091                   |       | 1,985 |   |
|                                            |       | 21,158                  |       | 16,418 |   |
| Less accumulated  depreciation and amortization |       | (13,086                 | )          | (9,287 | ) |
|                                            |       | $                       | 8,072      |   | $ | 7,131 |   |

----

(1)          Includes capitalizedsoftware and equipment acquired under capital leases of approximately$0.7 million.

Depreciationexpense amounted to $3.8 million, $2.9 million and $1.8 million for the yearsended December 31, 2006, 2005 and 2004, respectively, and is included ingeneral and administrative expenses.

(b)          Intangible Assets, Net

The $39.6 million in goodwill as of December 31,2006 and 2005 related $25.0 million to Decide, $12.0 million to 24/7 Real MediaKorea, $1.1 million to 24/7 Canada (formerly ClickThrough), $1.1 million toReal Media and $0.4 million to 24/7 Search (formerly Website Results).

F-18

----

The$7.6 million in intangible assets, net at December 31, 2006 related $5.0million to Decide and $2.6 million to 24/7 Real Media Korea. The $9.7 millionin intangible assets, net, at December 31, 2005 related $6.6 million toDecide, and $3.1 million to 24/7 Real Media Korea.

| ** **                     | ** ** | **December 31,**   | ** ** |
|--------------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Goodwill                       |       | $                       | 39,573     |   | $ | 39,573 |   |
| Technology                     |       | 13,195                  |       | 13,195 |   |
| Less accumulated  amortization |       | (9,434                  | )          | (8,018 | ) |
| Net technology                 |       | 3,761                   |       | 5,177 |   |
| Other intangible  assets(1)    |       | 6,296                   |       | 6,296 |   |
| Less accumulated  amortization |       | (2,448                  | )          | (1,758 | ) |
| Net other  intangible assets   |       | 3,848                   |       | 4,538 |   |
| Gross intangible  assets       |       | 19,491                  |       | 19,491 |   |
| Less accumulated  amortization |       | (11,882                 | )          | (9,776 | ) |
| Net intangible assets          |       | $                       | 7,609      |   | $ | 9,715 |   |

----

(1)          Includes $1.8 millionof  trademarks not subject toamortization.

Amortizationexpense related to acquired technology and other intangible assets for 2006 andthe five succeeding fiscal years is as follows (in thousands):

| ** ** | ** ** | **Useful Life** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** |
|------------|------------|----------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Technology |       | 4 - 7 years          |       | $        | 1,420      |     | $          | 1,420    |       | $        | 1,420      |     | $          | 872      |       | $ | 44 |   |   | $ | — |   |   |
| Other      |       | 2 - 7 years          |       | 685      |       | 648      |       | 648      |       | 448      |       | 329      |       |     | —     |   |   |
|       |       |                 |       | $        | 2,105      |     | $          | 2,068    |       | $        | 2,068      |     | $          | 1,320    |       | $ | 373 |   |   | $ | — |   |   |

 

(c)           OtherAssets

| ** **                               | ** ** | **December 31,**   | ** ** |
|------------------------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(in thousands)** | ** ** |
| Lycos transition  cost (see Note 15 (b)) |       | $                       | 1,913      |   | $ | 2,813 |   |
| Note receivable                          |       | 300                     |       | 500 |   |
| Advance royalties                        |       | —                  |       | 540 |   |
| Deferred  financing costs (see Note 9)   |       | —                  |       | 398 |   |
| Other                                    |       | 1,624                   |       | 1,440 |   |
|                                     |       | $                       | 3,837      |   | $ | 5,691 |   |

 

F-19

----

(d)          AccruedLiabilities

| ** **                    | ** ** | **December 31,**   | ** ** |
|-------------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                    | ** ** | **(in thousands)** | ** ** |
| Cost of goods  sold           |       | $                       | 7,041      |   | $ | 9,822 |   |
| Personnel  costs(1)           |       | 4,332                   |       | 3,192 |   |
| Accrued taxes                 |       | 3,550                   |       | 2,838 |   |
| Professional fees             |       | 1,129                   |       | 1,021 |   |
| Restructuring and  exit costs |       | 788                     |       | 1,191 |   |
| Accrued earn-out              |       | —                  |       | 5,000 |   |
| Accrued other                 |       | 3,121                   |       | 923 |   |
|                          |       | $                       | 19,961     |   | $ | 23,987 |   |

----

(1)          Personnel costs includecash and stock-based compensation, commissions earned by the Company’s salesstaff for the most recent period, as well as out-of-pocket expenses incurred byemployees. All such balances as of December 31, 2006, except approximately$0.6 million, have subsequently been settled.

(e)           Warrant Liability

In connection with the placement of the Company’spreferred stock and subordinated convertible debentures, the Company issued warrantsto investors to purchase shares of the Company’s common stock. The Companyagreed to register the shares issuable upon exercise of the warrants and to paypenalties for a delayed filing or a failure to file a registration statementprior to the agreed deadline. The Company also agreed to pay penalties if theregistration statement becomes temporarily or permanently unavailable for useby the warrant holders. Pursuant to EITF 00-19, the Company reflected thevalue of the warrants as a warrant liability on its consolidated balance sheetsand the liability will be reclassified to equity upon exercise or conversion.The fair value of the outstanding warrants is evaluated at each reportingperiod with any resulting change in the fair value being reflected in theconsolidated statements of operations.

The Company’s requirement to maintain the registrationstatement related to the warrants issued in connection with the placement ofthe Company’s preferred stock expired during 2006. Accordingly, the remaining liabilityat the date of expiration of $0.7 million was reclassified to additional paidin capital.

In June 2004, theCompany amended the registration rights agreement related to the subordinatedconvertible debentures. The amendment provided that the Company was no longerobligated to pay any filing or maintenance penalties pursuant to theregistration rights agreement with respect to the warrants issued to theholders of the debentures. Accordingly, the Company reclassified the warrantliability related to the debentures of $1.0 million to additional paid incapital.

**NOTE 6—RESTRUCTURING COSTS**

During the years ended December 31, 2005 and2004, restructuring costs of approximately $1.0 million and $0.8 million,respectively, were recorded by the Company in accordance with the provisions ofSFAS No. 146,*Accounting for Costs Associated with Exitor Disposal Activities*.

The 2005 restructuring related to the Company’s formerheadquarters in New York.

The 2004 restructuring involved the involuntarytermination of employees and exiting of the office in Munich, Germany. The $0.8million charge consists of severance of $0.6 million and office closing costsof $0.2 million.

F-20

----

Thefollowing sets forth the activities in the Company’s restructuring reserve,which is included in accrued expenses in the 2006 and 2005 consolidated balancesheets:

| ** **                      | ** ** | **Beginning  Balance** | ** ** | **Current  Year  Provision** | ** ** | **Current  Year  Utilization** | ** ** | **Ending  Balance** | ** ** |
|---------------------------------|------------|------------------------|------------|------------------------------|------------|--------------------------------|------------|---------------------|------------|
| **2006**                        | ** ** |                   | ** ** | ** **                   |       |                           | ** ** | ** **          |       |   | ** ** | ** ** |   | ** ** | ** ** |
| Office closing  costs           |       |                   | $          | 1,191                        | ** ** |                           |       | $                   | —     | ** ** |   |   | $ | 403 | ** ** |   | $ | 788 |   |
| **2005**                        | ** ** |                   | ** ** | ** **                   |       |                           | ** ** | ** **          |       |   | ** ** | ** ** |   | ** ** | ** ** |
| Employee  termination benefits. |       |                   | $          | 369                          | ** ** |                           |       | $                   | —     | ** ** |   |   | $ | 369 | ** ** |   | $ | — |   |
| Office closing  costs           |       |                   | 529        | ** **                   |       |                           | 973        | ** **          |       |   | 311 | ** ** |   | 1,191 |   |
|                            |       |                   | $          | 898                          | ** ** |                           |       | $                   | 973        | ** ** |   |   | $ | 680 | ** ** |   | $ | 1,191 |   |

 

**NOTE 7—IMPAIRMENTOF MARKETABLE SECURITIES**

The Company received400,000 shares of chinadotcom Corporation as part of a legal settlement in June 2004,which the Company classified as available-for-sale. During the fourth quarterof 2004 and the first quarter of 2005, the Company determined the decline inthe share price was other-than-temporary and wrote down the value of the sharesto the market price, as determined by the quoted market price at the time ofthe impairment. Accordingly, the Company recorded a $0.6 million and $1.1million impairment charge in 2005 and 2004, respectively.

**NOTE 8—INCOME TAXES**

Thecomponents of income (loss) before provision for income taxes in theconsolidated subsidiary are as follows:

| ** **                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                 | ** ** | **(in thousands)**                    | ** ** |
| U.S. net income  (loss)    |       | $                                          | (7,425     | ) | $ | 3,846 |   | $ | (2,940 | ) |
| Foreign net  income (loss) |       | (505                                       | )          | (3,494 | ) | (192 | ) |
|                       |       | $                                          | (7,930     | ) | $ | 352 |   | $ | (3,132 | ) |

 

Theprovision (benefit) for income taxes is composed of the following:

| ** **                                | ** ** | **Year Ended December 31,**               | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **     2004     ** | ** ** |
| ** **                                | ** ** | **(in thousands)**                                  | ** ** |
| Current:                                  |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| United States federal                     |       |                                                     | $          | 100 |   |   |   | $ | 234 |   |   |   | $ | 18 |   |   |
| State                                     |       |                                                     | 167        |   |   |   | 60 |   |   |   | — |   |   |
| Foreign                                   |       |                                                     | 425        |   |   |   | 20 |   |   |   | 5 |   |   |
| Total current provision for income taxes  |       |                                                     | 692        |   |   |   | 314 |   |   |   | 23 |   |   |
| Deferred:                                 |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |
| United States federal                     |       |                                                     | —     |   |   |   | — |   |   |   | — |   |   |
| State                                     |       |                                                     | —     |   |   |   | — |   |   |   | — |   |   |
| Foreign                                   |       |                                                     | —     |   |   |   | — |   |   |   | — |   |   |
| Total deferred provision for income taxes |       |                                                     | —     |   |   |   | — |   |   |   | — |   |   |
| Provision for income  taxes               |       |                                                     | $          | 692 |   |   |   | $ | 314 |   |   |   | $ | 23 |   |   |

 

F-21

----

Theprovision for income taxes differs from the amount computed by applying thefederal statutory income tax rate to income before income taxes as follows:
|                                                                                              | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                   | ** ** | **(in thousands)**                    | ** ** |
| Income tax at the  United States federal statutory rate of 35 percent    |       | $                                          | (2,599     | ) | $ | 1,346 |   | $ | (1,029 | ) |
| State income  taxes, net of federal benefit                                                  |       | 58                                         |       | 21 |   | — |   |
| Change in  valuation allowance                                                               |       | 2,708                                      |       | (1,307 | ) | 1,034 |   |
| Foreign Tax                                                                                  |       | 425                                        |       | 20 |   | — |   |
| Other                                                                                        |       | 100                                        |       | 234 |   | 18 |   |
|                                                                                         |       | $                                          | 692        |   | $ | 314 |   | $ | 23 |   |

 

The Tax Reform Act of 1986 contains provisions undersection 382 of the Internal Revenue Code (“IRC Section 382”) that limitthe federal net operating loss carryfoward that may be used in any given yearin the event of specified occurrences, including significant ownership change.The Company retained independent tax specialists to perform an analysis todetermine the applicable annual limitation applied to the utilization of thenet operating loss carryforwards due to ownership changes. The IRCSection 382 study and analysis was completed in the first quarter of 2007,and, as a result of the study, changes in ownership have limited the Company’suse of net operating losses against forecasted taxable income. Followingcompletion of the study, the Company’s available net operating loss has beenrecalculated to $24.3 million. This amount, which will expire in various yearsthrough 2022, may be offset against future taxable income.

F-22

----

Thetax effects of temporary differences and tax loss carryforwards that give riseto significant portions of federal and state deferred tax assets and deferredtax liabilities at December 31, 2006 and 2005 are presented below.

| ** **                                                              | ** ** | **December 31,**   | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                              | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** **                                                              | ** ** | **(in thousands)** | ** ** |
| Deferred tax assets:                                                    |       |                    |       |   |   |
| Net operating  loss carryforward                                        |       | 5,498                   |       | 8,580 |   |
| Deferred revenue                                                        |       | 1,479                   |       | 526 |   |
| Deferred rent                                                           |       | 229                     |       | 135 |   |
| Reserve for sales  allowance                                            |       | 151                     |       | 377 |   |
| Accounts  receivable principally due to allowance for doubtful accounts |       | 260                     |       | 185 |   |
| Amortization of  goodwill and other intangibles                         |       | 3,646                   |       | 2,925 |   |
| Accrued  compensation                                                   |       | 501                     |       | 457 |   |
| Accrued  restructuring                                                  |       | 315                     |       | 477 |   |
| Accrued merger                                                          |       | 17                      |       | 42 |   |
| Accrued warrant                                                         |       | —                  |       | 359 |   |
| Capital loss  carryover                                                 |       | 670                     |       | 670 |   |
| Impairment charge                                                       |       | —                  |       | 50 |   |
| Stock option  expense                                                   |       | 2,921                   |       | — |   |
| Other                                                                   |       | —                  |       | 144 |   |
| Gross deferred tax assets                                               |       | 15,687                  |       | 14,927 |   |
| Less: valuation  allowance                                              |       | (14,712                 | )          | (14,297 | ) |
| Net deferred tax  assets                                                |       | 975                     |       | 630 |   |
| Deferred tax  liabilities:                                              |       |                    |       |   |   |
| Property and  equipment, principally due to differences in depreciation |       | (975                    | )          | (630 | ) |
| Gross deferred  tax liabilities                                         |       | (975                    | )          | (630 | ) |
| Net deferred tax asset  (liability)                                     |       | $                       | —     |   | $ | — |   |
|                                                                         |            |                         |            |  |  |  |  |

 

At December 31, 2006, the Company had approximately$13.7 million of U.S. net operating loss carryforwards.  As a result of various equity transactions,the Company has undergone an “ownership change” as defined by Section 382 ofthe Internal Revenue Code. Accordingly, utilization of a substantial part ofthe net operating loss carryforward is limited. Approximately $4.0 million ofU.S. net operating loss are available for 2007 and the remaining amount islimited to $0.65 million per year, expiring in various years through 2022. Dueto the Company’s history of operating losses and the Section 382 limitation,there is substantial uncertainty surrounding whether the Company willultimately realize the deferred tax assets. Accordingly, these assets have beenfully reserved. During 2006 the valuation allowance increased by $0.4 millionand during 2005 the valuation allowance decreased by $55.3 million.

The Company is subject toroutine tax examinations by taxing authorities at the federal, state and locallevels in the U.S. and by various levels in foreign countries. As of December31, 2006, there are several reviews being conducted and Management is of theopinion that the ultimate outcome of these examinations would not have amaterial adverse impact on the financial position or results of operations ofthe Company.

F-23

----

**NOTE 9—2% SUBORDINATEDCONVERTIBLE DEBENTURES**

On September 26, 2003, the Company completed theplacement of $15.0 million of subordinated convertible debentures due September 2006(“Debentures”). The Debentures are convertible into shares of the Company’scommon stock at $8.75 per share, which is subject to adjustment. In September 2006,on the terms and conditions set forth in the Debentures, the holder elected toextend the maturity of the Debentures until September 2009. The Debenturescontinue to bear interest at the rate of 2% to be paid semi-annually. TheCompany may elect to pay the principal of, and interest on, the debentures incash, shares of its common stock or a combination of cash and shares of itscommon stock.

If the Company elects to pay all or a portion of theprincipal amount due under the Debentures at maturity in shares of its commonstock, rather than in cash, the maturity date conversion price will be equal to90% of the average of the daily volume-weighted average prices of the Company’scommon stock on the NASDAQ Global Market (or such other market on which thecommon stock are then listed) for the fifteen consecutive trading daysimmediately preceding the maturity date. If the Company elects to make interestpayments due under the Debentures in shares of its common stock, the interestconversion price will be equal to 90% of the average of the dailyvolume-weighted average prices of the Company’s common stock on the NASDAQGlobal Market (or such other market on which the common stock are then listed)for the five consecutive trading days immediately preceding the interestpayment date. Interest expense on the Debentures amounted to approximately $0.3million for each of the years ended December 31, 2006, 2005 and 2004.

If specific conditions set forth in the Debentures aresatisfied, the Company may require the holder to convert the Debentures intoshares of the Company’s common stock at the conversion rate then in effect, orthe Company may prepay the Debentures prior to the maturity date, for an amountin cash equal to 150% of the amount prepaid. In addition, based on conditionsmet, the holder has the right, in its sole discretion, to require the Companyto immediately redeem up to $7.5 million principal amount of the Debentures incash. The redemption right constitutes an embedded derivative. The value ofthis embedded derivative at December 31, 2006 is immaterial to thefinancial position of the Company. The Company reviews the value of thederivative on a quarterly basis, in accordance with SFAS No. 149, *Amendment of Statement 133 on DerivativeInstruments and Hedging Activities*.

The holder of the Debentures also acquired a five-yearwarrant (the “Warrants”) to purchase 0.4 million shares of the Company’s commonstock at $9.5685 per share, which the Company valued at $1.8 million usinga Black-Scholes pricing model with the following factors: risk free interestrate of 1.48%, volatility of 143%, dividend yield of 0% and a life of2.5 years. The aggregate fair market value of the Warrants was reflectedas a reduction of the face amount of the Debentures on the consolidated balancesheet and was amortized over the initial term of the Debentures, using theeffective interest method. Accordingly, the carrying value of the Debentureswas increased over three years beginning October 2003. Pursuant to EITFIssue No. 00-19, since the effective registration of the securitiesunderlying the warrants was an event outside the control of the Company, theCompany recorded the fair value of the warrants as long-term liabilities. Inconnection with the amendment to the registration rights agreement entered intoduring 2004, the Company reclassified the fair value of the warrants,approximately $1.0 million, on the amendment date to additional paid incapital. Interest expense attributable to the amortization of the warrantsamounted to approximately $0.5 million, $0.6 million and $0.6 million for theyears ended December 31, 2006, 2005 and 2004, respectively.

In connection with theissuance of the Debentures and Warrants, the Company incurred placement agentfees, legal fees and other expenses of approximately $1.2 million andissued warrants to the placement agent. The warrants to purchase 86,000 sharesof common stock at an exercise price of $10.068 are in the same form and on thesame terms and conditions as the Warrants issued to the investor. The Companyincluded the value of the warrants, approximately $0.4 million, using thefactors above, and the cash placement fees of $1.2 million in other assets onthe consolidated balance sheet. Collectively, the debt issuance costs of $1.6 millionwere amortized over three years, the initial term of the Debentures. 

F-24

----

Approximately$0.4 million, $0.5 million and $0.6 million of deferred costs are included inamortization expense for the years ended December 31, 2006, 2005 and 2004,respectively.

**NOTE 10—EQUITYINSTRUMENTS**

(a)           Preferred Stock

The Company’s preferred stock accrued and accumulateddividends at a rate of 6% per year, compounded monthly, payable when, as and ifdeclared by the Company’s Board of Directors. Accordingly, the accrueddividends are reflected as “preferred stock dividends” on the consolidatedstatements of operations. All accrued dividends must be paid before anydividends may be declared or paid on the common stock, and shall be paid as anincrease in the liquidation preference of the preferred stock payable upon asale, merger, liquidation, dissolution or winding up of the Company. Accruedbut unpaid dividends are cancelled upon conversion of the preferred stock.

All shares ofpreferred stock issued have been converted into shares of common stock as of December 21,2006.

(b)          CommonStock

*Secondary Offering*

On March 30, 2004,the Company completed a secondary stock offering in which a total of 8.0million shares of common stock were sold at $6.00 per share. Of the sharessold, the Company sold 6.0 million shares and selling stockholders sold 2.0million shares. The Company and the selling stockholders received proceeds netof underwriting discounts and commission, and before other offering expenses,of $33.8 million and $11.3 million, respectively. In connection with theoffering, the Company and selling stockholders granted to the underwriters anoption to purchase up to an additional 1.2 million shares of common stock at$6.00 per share less underwriting discounts and commissions for the purpose ofcovering over-allotments. Of the additional shares offered, approximately 0.8million shares and 0.4 million shares were offered by the Company and by theselling stockholders, respectively. The underwriters exercised theover-allotment option in April 2004. The Company and selling stockholdersreceived additional proceeds of $4.3 million and $2.3 million, respectively,net of underwriting discounts and commissions and before other offeringexpenses.

*Other Issuances*

In March 2006, the Company issued approximately0.4 million shares of common stock, valued at $3.7 million, in connection withthe earn-out provisions due to the former shareholders of Decide.

On August 19, 2004, the Company issuedapproximately 4.5 million shares of common stock, valued at $12.6 million, inconnection with the acquisition of Decide (see Note 3).

On January 6, 2004,the Company issued approximately 2.1 million shares of common stock, valued at$14.6 million, in connection with the acquisition of 24/7 Real Media Korea (seeNote 3).

F-25

----

*Additional Paid-inCapital*

During the year ended December 31, 2006, theCompany’s additional paid-in capital increased by $32.3 million, primarily dueto $19.8 million in employee stock-based compensation, $7.7 million fromexercise of stock options, $3.7 million related to earn-out provisions in aprior acquisition, $0.7 million related to the reclassification of the warrantliability, and $0.4 million related to cashless exercises of warrants.

*Reserved Shares*

Sharesreserved for future issuance as of December 31, 2006 are as follows:
|                                                                     | ** ** | **Reserved** | ** ** |
|---------------------------------------------------------------------|------------|--------------|------------|
| ** **                                                          | ** ** | **Shares**   | ** ** |
| Reserved for  issued and outstanding warrants.                      |       | 525,188      |       |
| Reserved for  stock incentives under the 1998 Stock Incentive Plan. |       | 802,423      |       |
| Reserved for  stock incentives under the 2001 Stock Incentive Plan. |       | 243,098      |       |
| Reserved for stock  incentives under the 2002 Stock Incentive Plan  |       | 9,620,453    |       |

 

(c)           Warrants

Warrantactivity during the periods indicated was as follows:
|                                   | ** ** | ** **            | ** ** | **Weighted Average** | ** ** |
|-----------------------------------|------------|-----------------------|------------|---------------------------|------------|
| ** **                        | ** ** | **Warrants (1)** | ** ** | **Exercise Price**   | ** ** |
| Outstanding at  December 31, 2003 |       |                  | 3,103,717  |                      |       |   | $ | 7.45 |   |   |
| Granted                           |       |                  | —     |                      |       |   | — |   |   |
| Exercised                         |       |                  | (42,428    | )                         |       |   | 1.21 |   |   |
| Canceled                          |       |                  | (114,542   | )                         |       |   | 6.12 |   |   |
| Outstanding at  December 31, 2004 |       |                  | 2,946,747  |                      |       |   | $ | 7.61 |   |   |
| Granted                           |       |                  | —     |                      |       |   | — |   |   |
| Exercised                         |       |                  | —     |                      |       |   | — |   |   |
| Canceled                          |       |                  | —     |                      |       |   | — |   |   |
| Outstanding at  December 31, 2005 |       |                  | 2,946,747  |                      |       |   | $ | 7.61 |   |   |
| Granted                           |       |                  | —     |                      |       |   | — |   |   |
| Exercised                         |       |                  | (320,805   | )                         |       |   | 1.21 |   |   |
| Canceled                          |       |                  | —     |                      |       |   | — |   |   |
| Outstanding at December  31, 2006 |       |                  | 2,625,942  |                      |       |   | $ | 8.39 |   |   |

 

----

(1)          On February 27,2004, the Company completed a one-for-five reverse split of its common stock. Asa result of the reverse split, every five shares of its common stock werecombined into one share of common stock. The reverse split did not affect thenumber of warrants outstanding, however, the conversion ratio was adjustedaccordingly.

Warrants outstanding at December 31,2006 consist of warrants issued in connection with the issuance of the Company’sSeries C preferred stock in June 2003 and the September 2003placement of the Debentures (see Note 9). Warrants generally expire five yearsfrom the date of grant.

**NOTE 11—STOCK PLANS AND STOCK-BASED COMPENSATION**

The Company maintains the 1998 Stock Incentive Plan,2001 Equity Compensation Plan, 2001 Stock Incentive Plan for Non-Officers, 2002Equity Compensation Plan, 2002 Stock Incentive Plan and plans assumed throughacquisitions which are collectively referred to as the “Stock Plans.” The StockPlans provide for the grant of any or all of the following types of awards: (i) stockoptions, including incentive 

F-26

----

and non-qualified stockoptions; (ii) stock appreciation rights, in tandem with stock options orfree standing; and (iii) restricted stock to eligible participants. Theawards must generally be priced to be at least 85% of the fair market value ofthe Company’s common stock at the date of the grant (100% in the case ofincentive stock options). Thevesting of these awards vary subject to the participant’s period of futureservice or to the Company’s or the option holder’s attainment of designatedperformance goals, or otherwise at the discretion of the Board of Directors.The majority of the Company’s awards vest over three years.

Effective January 1,2006, the Company adopted the SFAS No. 123R, using the modifiedprospective transition method and therefore has not restated prior periods’results. Under the fair value recognition provisions of SFAS No. 123R, theCompany recognizes stock-based compensation net of an estimated forfeiturerate, and therefore only recognizes stock-based compensation cost for thoseshares expected to vest over the requisite service period of the award. Prior to the adoption of SFAS No. 123R,the Company accounted for awards using the intrinsic value method under APBOpinion No. 25 and FIN 44,**and accordingly,only recognized stock-based compensation related to restricted stock awards andaccounted for forfeitures as they occurred. The Company also complied with thedisclosure provisions of SFAS No. 123 and SFAS No. 148.

(a)   Stock Options

Thefair value of stock option grants is determined using the Black-Scholes optionpricing model with the following weighted average assumptions:
|                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected dividend  yield(1)  |       | 0        | %          | 0        | %          | 0        | %          |
| Risk-free  interest rate(2)  |       | 4.42     | %          | 3.53     | %          | 2.41     | %          |
| Expected life (in  years)(3) |       | 3.0      |       | 2.5      |       | 2.7      |       |
| Expected volatility(4)       |       | 63       | %          | 99       | %          | 131      | %          |

 

----

(1)          The Company currentlyhas no history or expectation of paying cash dividends on its common stock.

(2)          The risk-free interestrate is based on yields from United States Treasury zero-coupon issues for aterm consistent with the expected life of the awards in effect at the time ofgrant.

(3)          The expected life ofawards granted under the Plans is based on the vesting period of the awards andon historical exercise patterns, which the Company believes are representativeof future behavior.

(4)          The expected volatilityof the Company’s common stock on the date of grant is based on a historicalvolatility of the common stock over a period equal to the expected life of theaward, adjusted for historical trend.

The weighted average fair value per option at the dateof grant for stock options granted during the years ended December 31,2006, 2005 and 2004 was $3.28, $2.89 and $4.58, respectively.

F-27

----

Stockoption activity for the years ended December 31, 2006, 2005 and 2004 issummarized as follows (in thousands, except share amounts and as noted):
|                                                     | ** ** | ** **  | ** ** | ** **                | ** ** | **Weighted Average** | ** ** | ** **    | ** ** |
|-----------------------------------------------------|------------|-------------|------------|---------------------------|------------|---------------------------|------------|---------------|------------|
| ** **                                          | ** ** | ** **  | ** ** | **Weighted**              | ** ** | **Remaining**             | ** ** | **Aggregate** | ** ** |
| ** **                                          | ** ** | ** **  | ** ** | **Average Exercise** | ** ** | **Contractual Life** | ** ** | **Intrinsic** | ** ** |
| ** **                                          | ** ** | **Options** | ** ** | **Price**                 | ** ** | **(in years)**       | ** ** | **Value**     | ** ** |
| Outstanding at  December 31, 2003                   |       |        | 3,386      |                      |       |                      | $          | 5.85          |       |   |   |   |   |   |   |   |   |   |
| Granted                                             |       |        | 2,044      |                      |       |                      | 6.41       |          |       |   |   |   |   |   |   |   |   |
| Exercised                                           |       |        | (657       | )                         |       |                      | 1.29       |          |       |   |   |   |   |   |   |   |   |
| Canceled                                            |       |        | (281       | )                         |       |                      | 10.79      |          |       |   |   |   |   |   |   |   |   |
| Outstanding at  December 31, 2004                   |       |        | 4,492      |                      |       |                      | $          | 6.62          |       |   |   |   |   |   |   |   |   |   |
| Granted                                             |       |        | 6,775      |                      |       |                      | 5.04       |          |       |   |   |   |   |   |   |   |   |
| Exercised                                           |       |        | (712       | )                         |       |                      | 2.33       |          |       |   |   |   |   |   |   |   |   |
| Canceled                                            |       |        | (960       | )                         |       |                      | 7.58       |          |       |   |   |   |   |   |   |   |   |
| Outstanding at  December 31, 2005                   |       |        | 9,595      |                      |       |                      | $          | 5.74          |       |   |   |   |   |   |   |   |   |   |
| Granted                                             |       |        | 536        |                      |       |                      | 7.08       |          |       |   |   |   |   |   |   |   |   |
| Exercised                                           |       |        | (2,024     | )                         |       |                      | 3.81       |          |       |   |   |   |   |   |   |   |   |
| Canceled                                            |       |        | (980       | )                         |       |                      | 5.62       |          |       |   |   |   |   |   |   |   |   |
| Outstanding at  December 31, 2006                   |       |        | 7,127      |                      |       |                      | $          | 6.36          |       |   |   | 7.6 |   |   |   | $ | 29,566 |   |   |
| Vested and exercisable  at December 31, 2004(1)     |       |        | 4,082      |                      |       |                      | $          | 7.06          |       |   |   |   |   |   |   |   |   |   |
| Vested and  exercisable at December 31, 2005        |       |        | 4,091      |                      |       |                      | $          | 6.39          |       |   |   |   |   |   |   |   |   |   |
| Vested and  exercisable at December 31, 2006        |       |        | 3,789      |                      |       |                      | $          | 7.01          |       |   |   | 6.7 |   |   |   | $ | 18,038 |   |   |
| Options available for  grant at December 31, 2006 . |       |        | 3,083      |                      |       |                      |       |          |       |   |   |   |   |   |   |   |   |

 

----

(1)          In October 2004,the Board of Directors accelerated the vesting of all unvested stock optionspreviously awarded to employees and officers with an exercise price of $5.00 orhigher. As a result, options to purchase approximately 1.7 million shares ofcommon stock became exercisable immediately.

The aggregate intrinsic value in the table aboverepresents the total pretax intrinsic value (the aggregate difference betweenthe closing stock price of the Company common stock on the last trade date ofthe year ended December 31, 2006 and the exercise price for in-the-moneyoptions) that would have been received by the option holders if allin-the-money options had been exercised on December 31, 2006. Theintrinsic value for options exercised during the year ended December 31,2006 was $11.1 million.

Nonvestedshare activity under the Plans was as follows:

| ** **                      | ** ** | ** **  | ** ** | **Weighted**                  | ** ** |
|---------------------------------|------------|-------------|------------|-------------------------------|------------|
| ** **                      | ** ** | ** **  | ** ** | **Average Grant**        | ** ** |
| ** **                      | ** ** | **Options** | ** ** | **Date Fair Value** | ** ** |
| Nonvested at  December 31, 2005 |       |        | 5,470      |                          |       |   | $ | 2.95 |   |   |
| Granted                         |       |        | 536        |                          |       |   | $ | 3.28 |   |   |
| Vested                          |       |        | (1,821     | )                             |       |   | $ | 2.95 |   |   |
| Forfeited                       |       |        | (847       | )                             |       |   | $ | 4.80 |   |   |
| Nonvested at  December 31, 2006 |       |        | 3,338      |                          |       |   | $ | 3.00 |   |   |

 

F-28

----

Thefollowing table summarizes additional information regarding outstanding andexercisable stock options at December 31, 2006 (in thousands, except shareamounts and as noted):

| ** **                                  | ** ** | ** **      | ** ** | **Weighted Average** | ** ** | ** **                | ** ** | ** **      | ** ** | ** **                | ** ** |
|---------------------------------------------|------------|-----------------|------------|---------------------------|------------|---------------------------|------------|-----------------|------------|---------------------------|------------|
| ** **                                  | ** ** | ** **      | ** ** | **Remaining**             | ** ** | ** **                | ** ** | ** **      | ** ** | ** **                | ** ** |
| **Range of Exercise**             | ** ** | **Number**      | ** ** | **Contractual Life** | ** ** | **Weighted Average** | ** ** | **Number**      | ** ** | **Weighted Average** | ** ** |
| **Prices (in dollars)**           | ** ** | **Outstanding** | ** ** | **(in years)**       | ** ** | **Exercise Price**   | ** ** | **Exercisable** | ** ** | **Exercise Price**   | ** ** |
|    $0.00  -$2.00                  |       |            | 1,103      |                      |       |                      | 4.8        |            |       |                      | $          | 1.12 |   |   |   | $ | 1,103 |   |   |   | $ | 1.12 |   |   |
|      $2.1  - $5.00 |       |            | 2,709      |                      |       |                      | 8.0        |            |       |                      | $          | 4.19 |   |   |   | $ | 1,228 |   |   |   | $ | 4.14 |   |   |
|     $5.1  - $10.00           |       |            | 3,168      |                      |       |                      | 8.3        |            |       |                      | $          | 6.65 |   |   |   | $ | 1,369 |   |   |   | $ | 6.69 |   |   |
|  $1.01 -  $320.00                      |       |            | 147        |                      |       |                      | 5.1        |            |       |                      | $          | 80.06 |   |   |   | $ | 89 |   |   |   | $ | 124.40 |   |   |
|                                        |       |            | $          | 7,127                     |       |                      |       | 7.6             |       |                      |       | $ | 6.36 |   |   |   | $ | 3,789 |   |   |   | $ | 7.01 |   |   |
|                                             |            |                 |            |                           |            |                           |            |                 |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As a result of adopting SFAS No. 123R, theCompany recorded pretax compensation expense of $6.8 million for the year endedDecember 31, 2006. Stock-based compensation is included in each expensecategory that includes salary expense. The Company has recorded a fullvaluation allowance on the deferred tax asset related to stock-basedcompensation and therefore, no tax benefit is recognized for the year ended December 31,2006.

During 2006, the Company modified certain agreementsto issue options to purchase the Company’s common stock in conjunction with theseparation of certain employees. As a result of the modifications, stock optiongrants were vested or cancelled as of modification date. In accordance withSFAS No. 123R, the Company recognized approximately $0.4 million inincremental stock-based compensation costs, or the excess of the fair value ofthe replacement award over the fair value of the original award which wascancelled as of the modification date.

SFAS No. 123R requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periodsif actual forfeitures differ from the initial forecast. For year ended December 31,2006, the Company recorded additional expense of $0.9 million related to arevision in forecasted forfeitures. As of December 31, 2006, there were$3.8 million of unrecognized compensation costs related to outstanding stockoption awards, net of forecasted forfeitures, expected to be recognized throughthe year 2010.

Prior to the adoption of SFAS No. 123R, theCompany accounted for stock-based awards using the intrinsic value method underthe provisions of APB Opinion No. 25*.*Under this method, stock-based compensation was recognized to theextent that the exercise price is less than the market price for the underlyingstock on the date of grant. The following table illustrates the effects on netincome (loss) attributable to common shareholders and net income (loss) pershare attributable to common shareholders if the Company had applied the fairvalue recognition provisions of SFAS No. 123R to stock-basedcompensation (in thousands, except per share amounts):

F-29

----

 

| ** **                                                                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income (loss)  attributable to common stockholders:                                                                              |       |     |       |     |       |
| As reported                                                                                                                          |       | $        | 13         |     | $          | (3,461 | ) |
| Deduct: Total  stock-based compensation expense determined under fair value based method for  all awards, net of related tax effects |       | 6,051    |       | 8,813    |       |
| Pro forma                                                                                                                            |       | $        | (6,038     | )        | $          | (12,274 | ) |
| Basic net income  (loss) per share attributable                                                                                      |       |     |       |     |       |
| to common  stockholders:                                                                                                             |       |     |       |     |       |
| As reported                                                                                                                          |       | $        | —     |     | $          | (0.10 | ) |
| Pro forma                                                                                                                            |       | $        | (0.13      | )        | $          | (0.35 | ) |
| Diluted net  income (loss) per share attributable                                                                                    |       |     |       |     |       |
| to common  stockholders:                                                                                                             |       |     |       |     |       |
| As reported                                                                                                                          |       | $        | —     |     | $          | (0.10 | ) |
| Pro forma                                                                                                                            |       | $        | (0.13      | )        | $          | (0.35 | ) |

 

*(b) RestrictedStock*

The Company has entered into agreements to issueshares of restricted stock to certain employees. The awards vest over variousperiods, generally three years, contingent upon employment with the Company onthe dates of vesting. The restricted stock awards have a fair value equal tothe respective market price of the Company’s common stock at the date of grant.The restricted stock awards require no payment from the employee andcompensation cost is valued based on the market price on the grant date and isexpensed over the vesting period.

Restricted stock awards activity for the year ended December 31,2006 is summarized as follows (in thousands, except share amounts and asnoted):

| ** **                     | ** ** | ** ** | ** ** | **Weighted Average** | ** ** | **Weighted Average**      | ** ** |
|--------------------------------|------------|------------|------------|---------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | ** ** | ** ** | **Grant Date**       | ** ** | **Remaining Contractual** | ** ** |
| ** **                     | ** ** | **Shares** | ** ** | **Fair Value**       | ** ** | **Life (in years)**  | ** ** |
| Unvested at  December 31, 2003 |       | 40         |       |                      | $          | 1.70                           |       |   |   |   |   |   |
| Granted                        |       | —     |       |                      | —     |                           |       |   |   |   |   |
| Vested                         |       | (30        | )          |                      | $          | 1.70                           |       |   |   |   |   |   |
| Forfeited                      |       | —     |       |                      | —     |                           |       |   |   |   |   |
| Unvested at  December 31, 2004 |       | 10         |       |                      | 1.70       |                           |       |   |   |   |   |
| Granted                        |       | 3,304      |       |                      | 4.84       |                           |       |   |   |   |   |
| Vested                         |       | (14        | )          |                      | 2.17       |                           |       |   |   |   |   |
| Forfeited                      |       | (246       | )          |                      | 3.35       |                           |       |   |   |   |   |
| Unvested at  December 31, 2005 |       | 3,054      |       |                      | $          | 4.96                           |       |   |   |   |   |   |
| Granted                        |       | 2,047      |       |                      | 8.29       |                           |       |   |   |   |   |
| Vested                         |       | (1,026     | )          |                      | 3.99       |                           |       |   |   |   |   |
| Forfeited                      |       | (389       | )          |                      | 6.03       |                           |       |   |   |   |   |
| Unvested at December 31,  2006 |       | 3,686      |       |                      | $          | 6.97                           |       |   |   | 1.6 |   |   |

 

Compensation expense related to vesting of restrictedstock awards totaled $13.0 million, $2.2 million and $0.2 million for the yearsended December 31, 2006, 2005 and 2004, respectively. As of December 31,2006, there were $15.4 million of unrecognized compensation costs related tounvested restricted stock awards, net of forecasted forfeitures, expected to berecognized through the year 2010.

During 2006, the Companymodified certain agreements to issue restricted stock originally expected tovest on January 1, 2007 in conjunction with the separation of an employee.As a result of the modification, shares of restricted stock were vested as ofthe modification date. In accordance with SFAS No. 123R, the 

F-30

----

Companyrecognized approximately $0.1 million in incremental stock-based compensationcosts, or the excess of the fair value of the replacement award over the fairvalue of the original award which was cancelled.

SFAS No. 123Rrequires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from the initialforecast. For the year ended December 31, 2006, the Company recorded abenefit of $0.3 million related to a revision in forecasted forfeitures.

**NOTE 12—RECOVERY OF INVESTMENT**

In 2005, the Companyreceived $2.3 million as a return on an investment in Bidland Systems, Inc.(“Bidland”). The return was a result of the settlement of litigation betweenBidland and another party, and the subsequent dissolution and liquidation ofBidland. In 2000, Bidland ceased operations and, accordingly, the Companyrecorded an impairment charge related to the cost-based investment.

There were no returns oninvestments for the years ended December 31, 2006 or 2004.

**NOTE 13—SUPPLEMENTAL CASH FLOW INFORMATION**

Capital lease obligationsincurred during 2006 amounted to approximately $1.0 million.

The Company capitalizedapproximately $0.8 million and $1.1 million of computer equipment that wasreceived but unpaid at December 31, 2006 and 2004, respectively.

Cash paid for interest wasapproximately $0.3 million, $0.3 million and $0.2 million forthe years ended December 31, 2006, 2005 and 2004, respectively.

*Non-Cash Investing and Financing Activities*

In 2005, the Companyaccrued $5.0 million related to achievement of certain performance targetsfrom the acquisition of Decide. The $5.0 million was reflected as aliability at December 31, 2005 and additional goodwill on the consolidatedbalance sheets. The earn-out obligation was settled by the payment of $1.25 millionin cash and the issuance of 454,988 shares of the Company’s common stock,valued at $3.75 million, in March 2006.

Warrants to purchase64,161 shares of the Company’s common stock at an average of $1.21 per sharewere exercised during 2006 for 55,718 shares of the Company’s common stock incashless exercises of warrants. As a result of the exercises, approximately$0.4 million of the related warrant liability was reclassified toadditional paid in capital.

Warrants to purchase8,486 shares of the Company’s common stock at an average of $1.21 pershare were exercised during 2004 in exchange for 7,260 shares of theCompany’s common stock in cashless exercises of warrants.

During 2004, the Companyissued approximately 6.6 million shares of common stock, valued at$27.2 million, for the acquisition of Decide and 24/7 Real Media Korea.

F-31

----

**NOTE 14—BENEFITPLANS**

The Company established a 401(k) Plan on January 1,1999, that is available to all full-time U.S. employees. Employees maycontribute up to 70% percent of their salary, not to exceed the maximum dollarlimitation under the Internal Revenue Code Section 402(g). The Companydoes not currently match employee contributions.

As required by local laws,the Company maintains defined contribution plans for its European employees. Theonly expense the Company incurs related to these plans is for administrativeservices, which is not material.

**NOTE 15—COMMITMENTSAND CONTINGENCIES**

**COMMITMENTS**

(a)           Capital Leases andOperating Leases

The Company leases office equipment under capitallease agreements and various facilities and certain equipment under operatinglease agreements. The operating lease agreements include the space for theCompany’s corporate headquarters, sales offices and various types of equipmentfor varying periods of time, with the last lease expiring in December 2015.Rent and utilities expense from all operating leases amounted to $2.9 million,$2.7 million and $2.3 million for the years ended 2006, 2005 and2004, respectively.

Futureminimum payments under non-cancelable capital leases and operating leases at December 31,2006 are as follows:

| **Year Ending  December 31,**       | ** ** | ** **              | ** ** | **Capital Leases** | ** ** | **Operating Leases** | ** ** | **Subleases** | ** ** |
|------------------------------------------|------------|-------------------------|------------|-------------------------|------------|---------------------------|------------|---------------|------------|
| ** **                               | ** ** | **(in thousands)** | ** ** |
| 2007                                     |       |                    | $          | 571                     |       |                      |       | $             | 3,630      |   |   |   | $ | (714 | ) |   |
| 2008                                     |       |                    | 275        |                    |       |                      | 3,297      |          |       |   | (486 | ) |   |
| 2009                                     |       |                    | —     |                    |       |                      | 2,198      |          |       |   | — |   |   |
| 2010                                     |       |                    | —     |                    |       |                      | 1,966      |          |       |   | — |   |   |
| 2011                                     |       |                    | —     |                    |       |                      | 1,763      |          |       |   | — |   |   |
| Thereafter                               |       |                    | —     |                    |       |                      | 2,760      |          |       |   | — |   |   |
| Total minimum  lease payments            |       |                    | 846        |                    |       |                      | $          | 15,614        |       |   |   | $ | (1,200 | ) |   |
| Less amount  representing interest       |       |                    | (31        | )                       |       |                      |       |          |       |   |   |   |   |
| Present value of  minimum lease payments |       |                    | 815        |                    |       |                      |       |          |       |   |   |   |   |
| Less current  portion                    |       |                    | 544        |                    |       |                      |       |          |       |   |   |   |   |
| Long-term portion                        |       |                    | $          | 271                     |       |                      |       |          |       |   |   |   |   |   |

 

(b)          Lycos, Inc. Services Agreement

The Company pre-paid a total of $2.0 million ofroyalties to Lycos during 2004 and 2005 and retained 25% of quarterly royaltiesdue to Lycos until the date on which the full amount of pre-paid royalties hasbeen recouped or otherwise paid in cash by Lycos. As of December 31, 2006,the Company has a net amount of $0.5 million in prepaid royalties, all ofwhich is expected to be recouped in the short-term.

In addition to the royalties, the Company paid Lycos a$4.5 million transition fee, which the Company recorded as an other assetand is amortizing the fee over the term of the agreement of five years.Amortization related to the transition fee was $0.9 million for each ofthe years ended December 31, 2006, 2005 and 2004. In accordance withSFAS No. 144, the Company periodically evaluates the recoverabilityof this asset.

F-32

----

Although Lycoscanceled the Web site representation component of the services agreement as of December 31,2006, the Company believes that the prepaid royalties will be recouped and thatthe transition fee was not impaired as the technology services component of theservices agreement is still in effect.

(c)           Indemnifications

In connection with theCompany’s commercial agreements, it provides indemnifications of varying scopeand terms to customers, business partners and other parties with respect tocertain matters, including, but not limited to, losses arising out of itsbreach of such agreements and out of intellectual property infringement claimsmade by third parties.

**LITIGATION**

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

**NOTE 16—SEGMENTS**

TheCompany’s business is comprised of three reportable segments: Media, Search andTechnology. As a result of the acquisition of Decide, the Company has beenreporting Search as a separate segment from Media. Management of the Companyrelies on an internal management reporting process that provides revenue andsegment operating income (loss) before depreciation, amortization, stock-basedcompensation, restructuring charges and impairment expense (“segment operatingincome (loss)”) for making financial decisions and allocating resources amongsegments. Segment operating income (loss) is an appropriate measure ofevaluating the operational performance of the Company’s segments. However, thismeasure should be considered in addition to, and not as a substitute for, orsuperior to, income (loss) from operations or other measures of financialperformance prepared in accordance with GAAP. The Company has adjusted priorperiod segment disclosure to conform to the current presentation. Thesummarized segment information as of and for the years ended December 31,2006, 2005 and 2004 are as follows:

| ** **                                                      | ** ** | **Media**               | ** ** | **Search** | ** ** | **Technology** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------|------------|------------|------------|----------------|------------|-----------|------------|
| ** **                                                      | ** ** | **(in thousands)** | ** ** |
| **2006**                                                        |       |                    |       |       |       |           |       |      |       |   |   |
| Revenues                                                        |       | $                       | 84,851     |       | $          | 86,202         |       |      | $          | 29,190 |   |   | $ | 200,243 |   |
| Segment operating income                                        |       | 7,908                   |       | 1,092      |       |           | 10,502     |      |       | 19,502 |   |
| Depreciation                                                    |       | 387                     |       | 597        |       |           | 2,815      |      |       | 3,799 |   |
| Amortization of intangible assets and deferred  financing costs |       | 1,475                   |       | 1,690      |       |           | 238        |      |       | 3,403 |   |
| Stock-based compensation                                        |       | 6,238                   |       | 6,845      |       |           | 7,364      |      |       | 20,447 |   |
| Income (loss) from operations                                   |       | (192                    | )          | (8,040     | )          |           | 85         |      |       | (8,147 | ) |
| **2005**                                                        |       |                    |       |       |       |           |       |      |       |   |   |
| Revenues                                                        |       | $                       | 65,363     |       | $          | 51,430         |       |      | $          | 23,001 |   |   | $ | 139,794 |   |
| Segment operating income (loss)                                 |       | 5,117                   |       | (351       | )          |           | 4,589      |      |       | 9,355 |   |
| Depreciation                                                    |       | 278                     |       | 646        |       |           | 1,943      |      |       | 2,867 |   |
| Amortization of intangible assets and deferred  financing costs |       | 1,981                   |       | 1,579      |       |           | 831        |      |       | 4,391 |   |
| Stock-based compensation                                        |       | 610                     |       | 747        |       |           | 870        |      |       | 2,227 |   |
| Restructuring                                                   |       | 252                     |       | 228        |       |           | 493        |      |       | 973 |   |
| Income (loss) from operations                                   |       | 1,996                   |       | (3,551     | )          |           | 452        |      |       | (1,103 | ) |

 

F-33

----

 

| ** **                                                      | ** ** | **Media**               | ** ** | **Search** | ** ** | **Technology** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------|------------|------------|------------|----------------|------------|-----------|------------|
| ** **                                                      | ** ** | **(in thousands)** | ** ** |
| **2004**                                                        |       |                    |       |       |       |           |       |      |       |   |   |
| Revenues                                                        |       | $                       | 49,879     |       | $          | 16,439         |       |      | $          | 18,937 |   |   | $ | 85,255 |   |
| Segment operating income (loss)                                 |       | 1,021                   |       | (610       | )          |           | 2,030      |      |       | 2,441 |   |
| Depreciation                                                    |       | 585                     |       | 239        |       |           | 1,005      |      |       | 1,829 |   |
| Amortization of intangible assets and deferred  financing costs |       | 1,865                   |       | 1,151      |       |           | 1,315      |      |       | 4,331 |   |
| Restructuring                                                   |       | 124                     |       | 449        |       |           | 268        |      |       | 841 |   |
| Stock-based compensation                                        |       | 152                     |       | 200        |       |           | 186        |      |       | 538 |   |
| Impairment of intangible assets                                 |       | —                  |       | —     |       |           | 896        |      |       | 896 |   |
| Impairment of property and equipment                            |       | —                  |       | 25         |       |           | 762        |      |       | 787 |   |
| Loss from operations                                            |       | (1,705                  | )          | (2,674     | )          |           | (2,402     | )         |       | (6,781 | ) |
| **Total  assets (1):**                                          |       |                    |       |       |       |           |       |      |       |   |   |
| December 31, 2006                                               |       | $                       | 53,622     |       | $          | 62,768         |       |      | $          | 11,740 |   |   | $ | 128,130 |   |
| December 31, 2005                                               |       | $                       | 47,316     |       | $          | 53,352         |       |      | $          | 14,325 |   |   | $ | 114,993 |   |
| December 31, 2004                                               |       | $                       | 45,570     |       | $          | 36,849         |       |      | $          | 11,639 |   |   | $ | 94,058 |   |

----

(1)             Not inclusive of corporate segment assetsof $48,528, $27,811, and $27,340, respectively.

| ** **        | ** ** | **United  States**      | ** ** | **United  Kingdom** | ** ** | **South  Korea** | ** ** | **Other –  International** | ** ** | **Total** | ** ** |
|-------------------|------------|-------------------------|------------|---------------------|------------|------------------|------------|---------------------------------|------------|-----------|------------|
| ** **        | ** ** | **(in thousands)** | ** ** |
| **2006**          |       |                    |       |                |       |             |       |                            |       |      |       |   |   |
| Revenues          |       | $                       | 79,226     |                | $          | 39,439           |       | $                               | 28,448     |      |       | $ | 53,130 |   |   | $ | 200,243 |   |
| Long-lived assets |       | 11,253                  |       | 675                 |       | 15,150           |       |                            | 32,013     |      |       | 59,091 |   |
| **2005**          |       |                    |       |                |       |             |       |                            |       |      |       |   |   |
| Revenues          |       | $                       | 62,555     |                | $          | 27,919           |       | $                               | 14,481     |      |       | $ | 34,839 |   |   | $ | 139,794 |   |
| Long-lived assets |       | 11,747                  |       | 762                 |       | 15,738           |       |                            | 33,863     |      |       | 62,110 |   |
| **2004**          |       |                    |       |                |       |             |       |                            |       |      |       |   |   |
| Revenues          |       | $                       | 42,739     |                | $          | 14,796           |       | $                               | 12,568     |      |       | $ | 15,152 |   |   | $ | 85,255 |   |
| Long-lived assets |       | 11,603                  |       | 351                 |       | 16,512           |       |                            | 30,432     |      |       | 58,898 |   |

 

F-34

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**NOTE 17—SELECTEDQUARTERLY FINANCIAL DATA—UNAUDITED**

Thefollowing is a summary of selected quarterly financial data for the years endedDecember 31, 2006 and 2005 (in thousands, except per share data):

| ** **                                                               | ** ** | **For the Three Month Periods Ended** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                               | ** ** | **March 31,**                                             | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| **2006**                                                                 |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                                                  |       |                                                           | $          | 42,941 |   |   | $ | 48,176 |   |   | $ | 49,143 |   |   |   | $ | 59,983 |   |   |
| Gross profit                                                             |       |                                                           | 15,674     |   |   | 17,470 |   |   | 17,458 |   |   |   | 20,227 |   |   |
| Income (loss)  from operations                                           |       |                                                           | (7,257     | ) |   | 154 |   |   | (1,354 | ) |   |   | 310 |   |   |
| Change in fair  value of warrant liability                               |       |                                                           | (252       | ) |   | 133 |   |   | 22 |   |   |   | (79 | ) |   |
| Net income (loss)                                                        |       |                                                           | (7,516     | ) |   | 489 |   |   | (1,368 | ) |   |   | (227 | ) |   |
| Net income (loss)  attributable to common stockholders                   |       |                                                           | (7,516     | ) |   | 489 |   |   | (1,368 | ) |   |   | (227 | ) |   |
| Basic net income (loss) per share attributable to  common stockholders   |       |                                                           | $          | (0.16 | ) |   | $ | 0.01 |   |   | $ | (0.03 | ) |   |   | $ | — |   |   |
| Diluted net  income (loss) per share attributable to common stockholders |       |                                                           | $          | (0.16 | ) |   | $ | 0.01 |   |   | $ | (0.03 | ) |   |   | $ | — |   |   |
| **2005**                                                                 |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                                                  |       |                                                           | $          | 29,070 |   |   | $ | 33,886 |   |   | $ | 35,117 |   |   |   | $ | 41,721 |   |   |
| Gross profit                                                             |       |                                                           | 11,811     |   |   | 13,627 |   |   | 13,570 |   |   |   | 15,445 |   |   |
| Restructuring                                                            |       |                                                           | 973        |   |   | — |   |   | — |   |   |   | — |   |   |
| Income (loss)  from operations                                           |       |                                                           | (1,923     | ) |   | (38 | ) |   | (117 | ) |   |   | 975 |   |   |
| Change in fair  value of warrant liability                               |       |                                                           | 150        |   |   | (110 | ) |   | (384 | ) |   |   | (37 | ) |   |
| Recovery of  investment                                                  |       |                                                           | 2,100      |   |   | — |   |   | — |   |   |   | 240 |   |   |
| Impairment of  marketable securities                                     |       |                                                           | (588       | ) |   | — |   |   | — |   |   |   | — |   |   |
| Gain (loss) on  sale of marketable securities                            |       |                                                           |       | — |   | 7 |   |   | (25 | ) |   |   | 34 |   |   |
| Net income (loss)                                                        |       |                                                           | (406       | ) |   | (190 | ) |   | (765 | ) |   |   | 1,399 |   |   |
| Net income (loss)  attributable to common stockholders                   |       |                                                           | (418       | ) |   | (200 | ) |   | (768 | ) |   |   | 1,399 |   |   |
| Basic net income (loss) per share attributable to  common stockholders   |       |                                                           | $          | (0.01 | ) |   | $ | — |   |   | $ | (0.02 | ) |   |   | $ | 0.03 |   |   |
| Diluted net income  (loss) per share attributable to common stockholders |       |                                                           | $          | (0.01 | ) |   | $ | — |   |   | $ | (0.02 | ) |   |   | $ | 0.03 |   |   |

 

F-35

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**NOTE 18—VALUATIONAND QUALIFYING ACCOUNTS**

| ** **                       | ** ** | **Balance at**     | ** ** | **Additions**       | ** ** | ** **     | ** ** | ** **                   | ** ** |
|----------------------------------|------------|-------------------------|------------|---------------------|------------|----------------|------------|------------------------------|------------|
| ** **                       | ** ** | **Beginning of**   | ** ** | **Charged to** | ** ** | ** **     | ** ** | **Balance at End** | ** ** |
| ** **                       | ** ** | **Period**              | ** ** | **Expense**         | ** ** | **Deductions** | ** ** | **of Period**           | ** ** |
| ** **                       | ** ** | **(in thousands)** | ** ** |
| **2006**                         |       |                    |       |                |       |           |       |                         |       |   |   |   |   |   |   |   |   |
| Allowance for  doubtful accounts |       |                    | $          | 1,950               |       |           |       | $                            | 1,675      |   |   |   | $ | (1,287 | ) |   |   | $ | 2,338 |   |   |
| Reserve for sales  allowance     |       |                    | 356        |                |       |           | 641        |                         |       |   | (580 | ) |   |   | 417 |   |   |
| Total                            |       |                    | $          | 2,306               |       |           |       | $                            | 2,316      |   |   |   | $ | (1,867 | ) |   |   | $ | 2,755 |   |   |
| **2005**                         |       |                    |       |                |       |           |       |                         |       |   |   |   |   |   |   |   |   |
| Allowance for  doubtful accounts |       |                    | $          | 1,210               |       |           |       | $                            | 1,516      |   |   |   | $ | (776 | ) |   |   | $ | 1,950 |   |   |
| Reserve for sales  allowance     |       |                    | 517        |                |       |           | 517        |                         |       |   | (678 | ) |   |   | 356 |   |   |
| Total                            |       |                    | $          | 1,727               |       |           |       | $                            | 2,033      |   |   |   | $ | (1,454 | ) |   |   | $ | 2,306 |   |   |
| **2004**                         |       |                    |       |                |       |           |       |                         |       |   |   |   |   |   |   |   |   |
| Allowance for  doubtful accounts |       |                    | $          | 902                 |       |           |       | $                            | 519        |   |   |   | $ | (211 | ) |   |   | $ | 1,210 |   |   |
| Reserve for sales  allowance     |       |                    | 69         |                |       |           | 544        |                         |       |   | (96 | ) |   |   | 517 |   |   |
| Total                            |       |                    | $          | 971                 |       |           |       | $                            | 1,063      |   |   |   | $ | (307 | ) |   |   | $ | 1,727 |   |   |

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Deductions against the allowance for doubtful accountsor reserves for sales allowance represent write-offs of amounts deemeduncollectible and credits issued to customers, respectively.

F-36

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized.

|     | 24/7 REAL MEDIA, INC. |
|----------|-----------------------|
|     | By:                   | /s/ DAVID J. MOORE |
|     |                  | David J. Moore |
| * * | * *              | *Chief Executive Officer* |
|     |                  | Date: March 16,  2007 |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this reporthas been signed below by the following persons on behalf of the registrant andin the capacities and on the dates indicated:
| Signature             | ** ** | **Title**                         | ** ** | **Date**            |
|-----------------------|------------|-----------------------------------|------------|---------------------|
| /s/ DAVID J. MOORE    |       | Chairman of the Board             |       | March 16, 2007 |
| David J. Moore        |       | andChief Executive Officer        |       |                |
|                  |       | (Principal Executive Officer)     |       |                |
| /s/ JONATHAN K. HSU   |       | Executive Vice  President, Chief  |       | March 16, 2007 |
| Jonathan K. Hsu       |       | Chief Operating Officer and Chief |       |                |
|                  |       | Financial Officer                 |       |                |
|                  |       | (Principal Financial Officer and  |       |                |
|                  |       | Principal Accounting Officer)     |       |                |
| /s/ ROBERT J. PERKINS |       | Director                          |       | March 16, 2007 |
| Robert J. Perkins     |       |                              |       |                |
| /s/ ARNIE SEMSKY      |       | Director                          |       | March 16, 2007 |
| Arnie Semsky          |       |                              |       |                |
| /s/ TONY SCHMITZ      |       | Director                          |       | March 16, 2007 |
| Tony Schmitz          |       |                              |       |                |
| /s/ BRIAN SILVA       |       | Director                          |       | March 16, 2007 |
| Brian Silva           |       |                              |       |                |
| /s/ VAL ZAMMIT        |       | Director                          |       | March 16, 2007 |
| Val Zammit            |       |                              |       |                |

 

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(c)           Exhibit Index.

Exhibitsand Financial Statement Schedule/Index

|        | **Exhibit Number** | ** ** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                 |
|--------|-------------------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 2.1                     |       |       | Agreement and  Plan of Merger, dated October 30, 2001, between 24/7 Real  Media, Inc., Continuum Holding Corp., PubliGroupe USA Holding, Inc.  and Real Media, Inc. (Incorporated by reference to Exhibit 2.1 to  the Registrant’s filing on Form 8-K filed November 1, 2001)                                                           |
|   | 2.3                     |       |       | Asset Purchase  Agreement, dated as of January 12, 2003, by and among 24/7 Real  Media, Inc., Insight First, Inc., and certain stockholder’s name  therein. (Incorporated by reference to Exhibit 2.1 to the Registrant’s  filing on Form 8-K filed January 23, 2003)                                                                   |
|   | 2.4                     |       |       | Stock Purchase  Agreement, dated January 22, 2002, by and among 24/7 Real Media, inc.,  IMAKE Software & Services, Inc. and Schaszberger Corp.  (Incorporated by reference to Exhibit 1.1 to the Registrant’s filing on  Form 8-K filed February 6, 2002)                                                                                |
|   | 2.5                     |       |       | Share Acquisition  Agreement, dated as of December 16, 2003, by and among 24/7 Real  Media, Inc., and Real Media Korea Co. Ltd. (“RMK”) and other selling  shareholder’s of RMK (the “Selling Shareholders”). (Incorporated by reference  to Exhibit 2.1 to the Registrant’s filing on Form 8-K filed  January 12, 2004) |
|   | 2.6                     |       |       | Registration  Rights Agreement, dated as of August 19, 2004, by and among 24/7 Real  Media, Inc. and the Decide Selling Shareholders. (Incorporated by  reference to Exhibit 2.3 to the Registrant’s filing on Form 8-K  on August 20, 2004)                                                                                                      |
|   | 3.1                     |       |       | Amended and  Restated Certificate of Incorporation of the Company. (1)                                                                                                                                                                                                                                                                                                          |
|   | 3.2                     |       |       | By-laws of the  Company. (1)                                                                                                                                                                                                                                                                                                                                                    |
|   | 4.1                     |       |       | Specimen Common  Stock Certificate. (Incorporated by reference to Exhibits to the Registrant’s  Registration Statement on Form S-1 filed June 14, 1998)                                                                                                                                                                                                          |
|   | 4.2                     |       |       | Securities  Purchase Agreement, dated September 26, 2003, by and between the Company  and The Riverview Group LLC (“Riverview”). (Incorporated by reference to  Exhibit 4.1 to the Registrant’s filing on Form 8-K filed on  September 29, 2003)                                                                                             |
|   | 4.3                     |       |       | Form of  Debenture issued to Riverview. (Incorporated by reference to Exhibit 4.2  to the Registrant’s filing on Form 8-K on September 29, 2003)                                                                                                                                                                                                       |
|   | 4.4                     |       |       | Form of  Warrant to purchase Common Stock issued to Riverview. (Incorporated by  reference to Exhibit 4.3 to the Registrant’s filing on Form 8-K  on September 29, 2003)                                                                                                                                                                               |
|   | 4.5                     |       |       | Registration  Rights Agreement, dated as of September 26, 2003, by and between the  Company and Riverview. (Incorporated by reference to Exhibit 4.4 to the  Registrant’s filing on Form 8-K filed on September 29, 2003)                                                                                                                              |
|   | 10.1                    |       |       | 1998 Stock Incentive  Plan. (1)                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.2                    |       |       | 2001 Stock  Incentive Plan for Non-Officers. (2)                                                                                                                                                                                                                                                                                                                                |
|   | 10.3                    |       |       | 2001 Equity  Compensation Plan. (2)                                                                                                                                                                                                                                                                                                                                             |
|   | 10.4                    |       |       | Form of  Stock Option Agreement. (1)                                                                                                                                                                                                                                                                                                                                       |
|   | 10.5                    |       |       | 2002 Equity  Compensation Plan. (Incorporated by reference to Exhibit 10.6 to the Registrant’s  filing on Form 10-K filed on March 31, 2003)                                                                                                                                                                                                                |
|   | 10.6                    |       |       | GlobalCenter  Master Service Agreement, dated May 1, 1998. (1)                                                                                                                                                                                                                                                                                                             |
|        |                         |            |            |                                                                                                                                                                                                                                                                                                                                                                                 |  |  |

----

 

|        | 10.7  |   |   | 2002 Stock  Incentive Plan. (Incorporated by reference to the Registrant’s Proxy  Statement filed on August 9, 2002)                                                                                                                                                |
|--------|-------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.8  |   |   | Letter Agreement,  dated May 23, 2003, by and among 24/7 Real Media Inc., Real  Media, Inc. and PubliGroupe USA Holding, Inc. (Incorporated by  reference to Exhibit 10.1 to the Registrant’s filing on Form 8-K  filed June 12, 2003)     |
|   | 10.9  |   |   | Services Agreement  between Lycos, Inc. and 24/7 Real Media, Inc. dated  February 11, 2004. (Incorporated by reference to Exhibit 99.2 to  the Registrant’s filing on Form 8-K filed February 11, 2004)                                    |
|   | 10.10 |   |   | Amendment  No. 1 to Services Agreement, dated as of December 7, 2004, by and  between 24/7 Real Media, Inc. and Lycos, Inc. (Incorporated by  reference to Exhibit 10.1 to the Registrant’s filing on Form 8-K  on December 14, 2004) |
|   | 10.11 |   |   | Consulting  Agreement, dated as of November 1, 2004, by and between 24/7 Real  Media, Inc., and Pine Street Capital Partners. (Incorporated by  reference to Exhibit 10.1 to the Registrant’s filing on Form 10-Q  on November 9, 2004)         |
|   | 10.12 |   |   | Employment  Agreement, dated as of March 14, 2006, by and between 24/7 Real  Media, Inc. and David J. Moore. (3) (Incorporated by reference to  Exhibit 10.12 to the Registrant’s filing on Form 10-K on  March 15, 2006)                  |
|   | 10.13 |   |   | Employment  Agreement, dated as of March 14, 2006, by and between 24/7 Real  Media, Inc. and Mark E. Moran. (3) (Incorporated by reference to  Exhibit 10.13 to the Registrant’s filing on Form 10-K on  March 15, 2006)                   |
|   | 10.14 |   |   | Employment  Agreement, dated as of March 14, 2006, by and between 24/7 Real  Media, Inc. and Jonathan K. Hsu. (Incorporated by reference to  Exhibit 10.14 to the Registrant’s filing on Form 10-K on  March 15, 2006).                         |
|   | 21.1  |   |   | List of  Subsidiaries of the Company. (3)                                                                                                                                                                                                                                     |
|   | 23.1  |   |   | Consent of  Goldstein Golub Kessler LLP. (3)                                                                                                                                                                                                                                  |
|   | 31.1  |   |   | Certification by  Chief Executive Officer pursuant to Rule 13a-14(a) promulgated  under the Securities Exchange Act of 1934, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. (3)                                                        |
|   | 31.2  |   |   | Certification by  Chief Financial Officer pursuant to Rule 13a-14(a) promulgated  under the Securities Exchange Act of 1934, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. (3)                                                        |
|   | 32.1  |   |   | Certification by  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)                                                                                                            |
|   | 32.2  |   |   | Certification by Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)                                                                                                            |

----

 

(1)          Incorporated byreference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1filed June 4, 1998 (File No. 333-56085). TFSM’s certificate ofincorporation has since been amended as follows: Certificate of Amendment,filed with the Delaware Secretary of State on June, 28, 2000; Certificate ofOwnership and Merger, filed with the Delaware Secretary of State on November 9,2001; Certificate of Designation, filed with the Delaware Secretary of State onJuly 1, 2002 and incorporated by reference to Exhibit 4.1 filed tothe Registrant’s filings on Form 8-K filed July 12, 2002 (File No. 000-29768);Certificate of Designation, filed with the Delaware Secretary of State on July 1,2002 and incorporated by reference to Exhibit 4.1 filed to the Registrantsfilings on Amended Form 8-K filed July 12, 2002 (File No. 000-29768);Certificate of Increase filed with the Delaware 

----

Secretary of State on September 12,2002; Certificate of Designation, filed with the Delaware Secretary of State onSeptember 19, 2002 and incorporated by reference to Exhibit 4.1 filedto the Registrant’s filings on Form 8-K filed October 4, 2002(File No. 000-29768); Certificate of Designation, filed with theDelaware Secretary of State on May 27, 2003 and incorporated by referenceto Exhibit 4.1 filed to the Registrant’s filings on Form 8-Kfiled June 12, 2003 (File No. 000-29768); Certificate ofDesignation, filed with the Delaware Secretary of State on May 27, 2003and incorporated by reference to Exhibit 4.2 filed to the Registrant’sfilings on Form 8-K filed June 12, 2003 (File No. 000-29768);Certificate of Increase, filed with the Delaware Secretary of State on June 4,2003; Certificate of Amendment of Restated Certificate, filed with the DelawareSecretary of State on August 29, 2003; and Certificate of Amendment, filedwith the Delaware Secretary of State on February 26, 2004.

(2)          Incorporated byreference to Exhibits to the Registrant’s Registration Statement on Form S-8filed February 28, 2001 (File No. 333-56308).

(3)          Filed herewith.

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