##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q



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



For the quarterly period ended June 30, 2003



OR



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



Commission File Number: 0-29361



---



AQUANTIVE, INC.

(Exact name of registrant as specified in its charter)



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



506 Second Avenue,
9th Floor

Seattle, Washington 98104

(Address of principal executive offices)



(206) 816-8800

(Registrants telephone number, including area code)



---



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



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



The number of shares of the registrants Common Stock outstanding as of
August 1, 2003 was 59,631,146.



---



---

##### Table of Contents

AQUANTIVE, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2003



TABLE OF CONTENTS



|        |  |                                                                                       |  | Page
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|        |  | PART I.    FINANCIAL INFORMATION                                                      |  |     
|        |  |                                                                                      
|Item 1. |  | Condensed Consolidated Financial Statements                                           |  | 6   
|        |  |                                                                                      
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 14  
|        |  |                                                                                      
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 33  
|        |  |                                                                                      
|Item 4. |  | Controls and Procedures                                                               |  | 33  
|        |  |                                                                                      
|        |  | PART II.    OTHER INFORMATION                                                         |  |     
|        |  |                                                                                      
|Item 1. |  | Legal Proceedings                                                                     |  | 34  
|        |  |                                                                                      
|Item 2. |  | Changes in Securities and Use of Proceeds                                             |  | 35  
|        |  |                                                                                      
|Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  | 36  



2



---

##### Table of Contents

AQUANTIVE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands except per share amounts)

(unaudited)



|                                                                                                                                                               |  | June 30, 2003 |         |   | December 31,2002 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | -
|ASSETS                                                                                                                                                         |  |               |         |   |                  |  
|Current assets:                                                                                                                                                |  |               |         |   |                  |  
|Cash and cash equivalents                                                                                                                                      |  | $             | 25,430  |   |                  | $
|Short-term investments                                                                                                                                         |  |               | 91,810  |   |                  |  
|Accounts receivable, net of allowances of $2,026 and $1,785, respectively                                                                                      |  |               | 47,668  |   |                  |  
|Other receivables                                                                                                                                              |  |               | 1,421   |   |                  |  
|Prepaid expenses and other current assets                                                                                                                      |  |               | 1,600   |   |                  |  
|                                                                                                                                                               |  |               |         |   |                  |  
|Total current assets                                                                                                                                           |  |               | 167,929 |   |                  |  
|Property and equipment, net                                                                                                                                    |  |               | 5,358   |   |                  |  
|Goodwill                                                                                                                                                       |  |               | 2,292   |   |                  |  
|Other intangible assets, net                                                                                                                                   |  |               | 1,979   |   |                  |  
|Other assets                                                                                                                                                   |  |               | 416     |   |                  |  
|                                                                                                                                                               |  |               |         |   |                  |  
|Total assets                                                                                                                                                   |  | $             | 177,974 |   |                  | $
|                                                                                                                                                               |  |               |         |   |                  |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                           |  |               |         |   |                  |  
|Current liabilities:                                                                                                                                           |  |               |         |   |                  |  
|Accounts payable                                                                                                                                               |  | $             | 40,797  |   |                  | $
|Accrued expenses                                                                                                                                               |  |               | 6,022   |   |                  |  
|Pre-billed media                                                                                                                                               |  |               | 5,274   |   |                  |  
|Deferred revenue                                                                                                                                               |  |               | 5,369   |   |                  |  
|Notes payable                                                                                                                                                  |  |               | 694     |   |                  |  
|                                                                                                                                                               |  |               |         |   |                  |  
|Total current liabilities                                                                                                                                      |  |               | 58,156  |   |                  |  
|Deferred income taxes                                                                                                                                          |  |               | 17      |   |                  |  
|                                                                                                                                                               |  |               |         |   |                  |  
|Total liabilities                                                                                                                                              |  |               | 58,173  |   |                  |  
|                                                                                                                                                               |  |               |         |   |                  |  
|Shareholders equity:                                                                                                                                          |  |               |         |   |                  |  
|Common stock, $0.01 par value; 200,000 shares authorized; 59,377 and 58,380 shares issued and outstanding at June 30, 2003 and
December 31, 2002, respectively |  |               | 594     |   |                  |  
|Paid-in capital                                                                                                                                                |  |               | 217,744 |   |                  |  
|Deferred stock compensation                                                                                                                                    |  |               | (499    | ) |                  |  
|Subscription receivable                                                                                                                                        |  |               | (146    | ) |                  |  
|Accumulated deficit                                                                                                                                            |  |               | (98,512 | ) |                  |  
|Accumulated other comprehensive income                                                                                                                         |  |               | 620     |   |                  |  
|                                                                                                                                                               |  |               |         |   |                  |  
|Total shareholders equity                                                                                                                                     |  |               | 119,801 |   |                  |  
|                                                                                                                                                               |  |               |         |   |                  |  
|Total liabilities and shareholders equity                                                                                                                     |  | $             | 177,974 |   |                  | $
|                                                                                                                                                               |  |               |         |   |                  |  



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



3



---

##### Table of Contents

AQUANTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME (LOSS)

(in thousands except per share amounts)

(unaudited)



|                                                                                                                                      |  | Three Months Ended June 30, |        |      | Six Months Ended June 30, |       
|------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- | ------------------------- | ------
|                                                                                                                                      |  | 2003                        |        | 2002 |                           |       
|Revenue                                                                                                                               |  | $                           | 51,961 |      | $                         | 30,394
|Expenses:                                                                                                                             |  |                             |        |      |                           |       
|Cost of revenue                                                                                                                       |  |                             | 37,413 |      |                           | 22,031
|Client support (excluding amortization of deferred stock compensation of $217, $427, $438 and $849, respectively)                     |  |                             | 6,107  |      |                           | 3,507 
|Product development (excluding amortization of deferred stock compensation of $37, $182, $72 and $384,
respectively)                  |  |                             | 761    |      |                           | 1,566 
|Selling, general, and administrative (excluding amortization of deferred stock compensation of $47, $149, $94 and $297,
respectively) |  |                             | 4,565  |      |                           | 4,241 
|Depreciation and amortization of property and equipment                                                                               |  |                             | 774    |      |                           | 1,157 
|Amortization of deferred stock compensation                                                                                           |  |                             | 301    |      |                           | 758   
|Amortization of intangible assets                                                                                                     |  |                             | 72     |      |                           |      
|                                                                                                                                      |  |                             |        |      |                           |       
|Total expenses                                                                                                                        |  |                             | 49,993 |      |                           | 33,260
|                                                                                                                                      |  |                             |        |      |                           |       
|Income (loss) from operations                                                                                                         |  |                             | 1,968  |      |                           | (2,866
|Interest and other income, net                                                                                                        |  |                             | 507    |      |                           | 1,110 
|                                                                                                                                      |  |                             |        |      |                           |       
|Income (loss) before cumulative effect on prior years of change in accounting principle and provision for income
taxes                |  |                             | 2,475  |      |                           | (1,756
|Provision for income taxes                                                                                                            |  |                             | 97     |      |                           |      
|                                                                                                                                      |  |                             |        |      |                           |       
|Net income (loss) before cumulative effect on prior years of change in accounting principle                                           |  |                             | 2,378  |      |                           | (1,756
|Cumulative effect on prior years of change in accounting principle                                                                    |  |                             |       |      |                           |      
|                                                                                                                                      |  |                             |        |      |                           |       
|Net income (loss)                                                                                                                     |  | $                           | 2,378  |      | $                         | (1,756
|                                                                                                                                      |  |                             |        |      |                           |       
|Basic and diluted net income (loss) per share before cumulative effect on prior years of change in accounting
principle               |  | $                           | 0.04   |      | $                         | (0.03 
|Cumulative effect on prior years of change in accounting principle                                                                    |  |                             |       |      |                           |      
|                                                                                                                                      |  |                             |        |      |                           |       
|Basic net income (loss) per share                                                                                                     |  | $                           | 0.04   |      | $                         | (0.03 
|                                                                                                                                      |  |                             |        |      |                           |       
|Diluted net income (loss) per share                                                                                                   |  | $                           | 0.03   |      | $                         | (0.03 
|                                                                                                                                      |  |                             |        |      |                           |       
|Shares used in computing basic net income (loss) per share                                                                            |  |                             | 59,099 |      |                           | 58,409
|                                                                                                                                      |  |                             |        |      |                           |       
|Shares used in computing diluted net income (loss) per share                                                                          |  |                             | 68,104 |      |                           | 58,409
|                                                                                                                                      |  |                             |        |      |                           |       
|Comprehensive income (loss):                                                                                                          |  |                             |        |      |                           |       
|Net income (loss)                                                                                                                     |  | $                           | 2,378  |      | $                         | (1,756
|Items of comprehensive income (loss)                                                                                                  |  |                             | 42     |      |                           | 28    
|                                                                                                                                      |  |                             |        |      |                           |       
|Comprehensive income (loss)                                                                                                           |  | $                           | 2,420  |      | $                         | (1,728
|                                                                                                                                      |  |                             |        |      |                           |       



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



4



---

##### Table of Contents

AQUANTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                                   |  | Six Months Ended June 30, |        
|-------------------------------------------------------------------------------------------------- |  | ------------------------- | -------
|                                                                                                   |  | 2003                      |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |  |                           |        
|Net income (loss)                                                                                  |  | $                         | 4,254  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                           |        
|Depreciation and amortization                                                                      |  |                           | 2,447  
|Impairment of intangible assets                                                                    |  |                           |       
|Non-cash compensation expense                                                                      |  |                           | 326    
|Changes in assets and liabilities:                                                                 |  |                           |        
|Accounts receivable                                                                                |  |                           | (21,081
|Other receivables, prepaid expenses and other current assets                                       |  |                           | (1,307 
|Other assets                                                                                       |  |                           | 427    
|Accounts payable                                                                                   |  |                           | 9,292  
|Accrued expenses                                                                                   |  |                           | (896   
|Pre-billed media                                                                                   |  |                           | 1,517  
|Deferred revenue                                                                                   |  |                           | 2,815  
|Deferred income taxes                                                                              |  |                           | 17     
|                                                                                                   |  |                           |        
|Net cash (used in) provided by operating activities                                                |  |                           | (2,189 
|                                                                                                   |  |                           |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |  |                           |        
|Purchases of property and equipment                                                                |  |                           | (2,867 
|Purchases of marketable securities, net                                                            |  |                           | (2,604 
|                                                                                                   |  |                           |        
|Net cash (used in) provided by investing activities                                                |  |                           | (5,471 
|                                                                                                   |  |                           |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |  |                           |        
|Payment of notes payable                                                                           |  |                           | (875   
|Proceeds from issuance of common stock and exercises of common stock options, net                  |  |                           | 1,717  
|                                                                                                   |  |                           |        
|Net cash provided by (used in) financing activities                                                |  |                           | 842    
|                                                                                                   |  |                           |        
|Net (decrease) increase in cash and cash equivalents                                               |  |                           | (6,818 
|Cash and cash equivalents, beginning of period                                                     |  |                           | 32,248 
|                                                                                                   |  |                           |        
|Cash and cash equivalents, end of period                                                           |  | $                         | 25,430 
|                                                                                                   |  |                           |        



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



5



---

##### Table of Contents

AQUANTIVE, INC.

NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2003

(in thousands except per share amounts)

(unaudited)



1. Organization and Operations of the Company



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



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



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



2. Summary of Significant Accounting Policies



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



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



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



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



6



---

##### Table of Contents

AQUANTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2003

(in thousands except per share amounts)

(unaudited)



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



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



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



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



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



7



---

##### Table of Contents

AQUANTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2003

(in thousands except per share amounts)

(unaudited)



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



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



|           |  | Three Months Ended June 30, |   |  | Six Months Ended June 30, |  
|---------- |  | --------------------------- | - |  | ------------------------- | -
|           |  | 2003                        |   |  | 2002                      |  
|Customer A |  | 34                          | % |  | 27                        | %
|Customer B |  | 18                          | % |  | 21                        | %
|Customer C |  | *                           |   |  | 12                        | %



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



|           |  | June 30, 2003 |   |  | December 31, 2002 |  
|---------- |  | ------------- | - |  | ----------------- | -
|Customer A |  | 33            | % |  | 15                | %
|Customer B |  | 15            | % |  | 26                | %
|Customer C |  | 14            | % |  | 13                | %

---

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



Computation of Basic and Diluted Net Income (Loss) Per Share: Net income (loss) per share has been calculated under Statement of Financial
Accounting Standards (SFAS) No. 128 Earnings per Share. Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding. Unvested outstanding shares subject to repurchase rights are
excluded from the calculation. During the three and six months ended June 30, 2003, using the treasury stock method, 9,005 and 8,047, respectively, common stock equivalent shares related to stock options are included in the calculation
of diluted net income (loss) per share, as their effect is dilutive. During the three and six months ended June 30, 2002, common stock equivalent shares related to stock options are excluded from the calculation of diluted net income (loss) per
share, as their effect is anti-dilutive. Accordingly, basic and diluted loss per share during the three and six months ended June 30, 2002 are equivalent.



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



8



---

##### Table of Contents

AQUANTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2003

(in thousands except per share amounts)

(unaudited)



Stock-Based Compensation:The Company has elected to apply the disclosure-only
provisions of SFAS No. 123, Accounting for Stock-Based Compensation. In accordance with the provisions of SFAS No. 123, the Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for its stock option plans. The Company has recorded approximately $493, $796, $864, and $1,636 as compensation expense for the issuance of non-qualified stock options for the three and six months ended June
30, 2003 and 2002, respectively.



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



|                                                                                               |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|---------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | -
|                                                                                               |  | 2003                        |        |   | 2002                      |  
|Net income (loss), as reported                                                                 |  | $                           | 2,378  |   |                           | $
|Add: stock-based employee compensation expense included in reported net income (loss)          |  |                             | 301    |   |                           |  
|Deduct: total stock-based compensation determined under fair value based method for all awards |  |                             | (1,968 | ) |                           |  
|                                                                                               |  |                             |        |   |                           |  
|Pro forma net income (loss), fair value method for all stock-based awards                      |  | $                           | 711    |   |                           | $
|                                                                                               |  |                             |        |   |                           |  
|Basic net income (loss) per share:                                                             |  |                             |        |   |                           |  
|As reported                                                                                    |  | $                           | 0.04   |   |                           | $
|Pro forma                                                                                      |  | $                           | 0.01   |   |                           | $
|Diluted net income (loss) per share:                                                           |  |                             |        |   |                           |  
|As reported                                                                                    |  | $                           | 0.03   |   |                           | $
|Pro forma                                                                                      |  | $                           | 0.01   |   |                           | $



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



|                                         |  | June 30,  |  
|---------------------------------------- |  | --------- | -
|                                         |  | 2003      |  
|Weighted average risk-free interest rate |  | 2.93-3.54 | %
|Expected lives (in years)                |  | 1-6.5     |  
|Expected dividend yields                 |  |          |  
|Expected volatility                      |  | 111       | %



9



---

##### Table of Contents

AQUANTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2003

(in thousands except per share amounts)

(unaudited)



Recent Accounting Pronouncements:



In November 2002, the EITF reached a consensus on Issue 00-21, Revenue
Arrangements with Multiple Deliverables, addressing how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. Revenue arrangements with multiple deliverables are
divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of
undelivered items; and (3) delivery of any undelivered item is probable. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values, with the amount allocated to the delivered item being
limited to the amount that is not contingent on the delivery of additional items or meeting other specified performance conditions. The final Consensus will be applicable to agreements entered into in fiscal periods beginning after June 15, 2003
with early adoption permitted. The provisions of this Consensus are not expected to have a significant effect on the Companys financial position or operating results.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity. This Statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. This
Statement must be applied to all instruments that exist as of the beginning of the financial reporting period beginning after June 15, 2003. The application of this Statement is not expected to have a material impact on the Companys financial
statements.



3. Earning (Loss) Per Share



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



|                                                                      |  | Three Months Ended June 30, |        |      | Six Months Ended June 30, |       
|--------------------------------------------------------------------- |  | --------------------------- | ------ | ---- | ------------------------- | ------
|                                                                      |  | 2003                        |        | 2002 |                           |       
|Net income (loss) available for common shareholders (A)               |  | $                           | 2,378  |      | $                         | (1,756
|                                                                      |  |                             |        |      |                           |       
|Gross weighted average common shares outstanding                      |  |                             | 59,123 |      |                           | 58,649
|Less: Weighted average common shares subject to repurchase            |  |                             | 24     |      |                           | 240   
|                                                                      |  |                             |        |      |                           |       
|Shares used in computation of basic net income (loss) per share (B)   |  |                             | 59,099 |      |                           | 58,409
|                                                                      |  |                             |        |      |                           |       
|Add: Dilutive effect of employee stock options                        |  |                             | 9,005  |      |                           |      
|                                                                      |  |                             |        |      |                           |       
|Shares used in computation of diluted net income (loss) per share (C) |  |                             | 68,104 |      |                           | 58,409
|                                                                      |  |                             |        |      |                           |       
|Basic net income (loss) per share (A/B)                               |  | $                           | 0.04   |      | $                         | (0.03 
|                                                                      |  |                             |        |      |                           |       
|Diluted net income (loss) per share (A/C)                             |  | $                           | 0.03   |      | $                         | (0.03 
|                                                                      |  |                             |        |      |                           |       



10



---

##### Table of Contents

AQUANTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2003

(in thousands except per share amounts)

(unaudited)



4. Segment Reporting



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



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



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



Reconciling items include the elimination of intersegment revenue, as Atlas DMT provides the Atlas Digital Marketing Suite to Avenue A and corporate
expense and other non-recurring items not allocated to segments. Intersegment revenue is recorded at market rates as if the transactions occurred with third parties. All of the digital marketing services sales are to external customers. Digital
marketing technologies sales to external customers were $2,203, $3,613, $192, and $249 during the three and six months ended June 30, 2003 and 2002, respectively. Segment information for the three and six months ended June 30, 2003 and 2002 is as
follows:



|                                    |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|----------------------------------- |  | --------------------------- | ------ | - | ------------------------- | -
|                                    |  | 2003                        |        |   | 2002                      |  
|Revenue:                            |  |                             |        |   |                           |  
|Digital marketing services          |  | $                           | 49,758 |   |                           | $
|Digital marketing technologies      |  |                             | 7,749  |   |                           |  
|Intersegment eliminations           |  |                             | (5,546 | ) |                           |  
|                                    |  |                             |        |   |                           |  
|Total revenue                       |  | $                           | 51,961 |   |                           | $
|                                    |  |                             |        |   |                           |  
|Income (loss) from operations:      |  |                             |        |   |                           |  
|Digital marketing services          |  |                             | 1,014  |   |                           | $
|Digital marketing technologies      |  |                             | 3,045  |   |                           |  
|Reconciling amounts                 |  |                             | (2,091 | ) |                           |  
|                                    |  |                             |        |   |                           |  
|Total income (loss) from operations |  |                             | 1,968  |   |                           | $
|                                    |  |                             |        |   |                           |  



The Company had no
material sales to international customers.



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



11



---

##### Table of Contents

AQUANTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2003

(in thousands except per share amounts)

(unaudited)



5. Acquisition



Effective November 25, 2002, the Company acquired 100% of the stock of i-FRONTIER, Corp., a Philadelphia-based, full-service interactive advertising
agency. Management believes that the purchase of i-FRONTIER further enhances the Companys digital marketing services with the addition of a strong client portfolio, especially in the pharmaceutical industry. In connection with the acquisition,
the Company paid $5,000 in cash in exchange for all of the outstanding common stock of i-FRONTIER. The Company also incurred $191 in acquisition costs, for a total initial purchase price of $5,191. The purchase agreement also includes future
contingent payments in 2004 and 2006, which will be determined based upon the revenue and earnings of the i-FRONTIER operating unit through December 31, 2005. In the event that i-FRONTIER achieves results consistent with managements current
forecasts, we estimate that future payments will range from $8,000 to $12,500. However, these payments will be adjusted based on actual earnings over the four years ending December 31, 2005 and only will be recorded when actually determined, due to
the uncertainty of achieving these results. The future contingent payments, when and if made, will be recorded as goodwill.



6. Intangible Assets



The Company adopted SFAS No. 142 on January 1, 2002 and completed a transitional impairment test for the intangible assets recorded in connection with the
purchase of Avenue A/NYC LLC during September 1999. Upon adoption of SFAS No. 142, the Company reclassified all previously recorded intangible assets as goodwill, as those assets related to workforce and customer base, did not meet the criteria
under SFAS No. 142 for separate identification. Furthermore, as a result of the impairment test, during the quarter ended March 31, 2002, the Company recorded an impairment charge of $1,330 that has been recognized as a cumulative effect of a change
in accounting principle in the accompanying consolidated financial statements. This impairment charge impacted the Digital Marketing Services segment. In connection with the acquisition of i-FRONTIER in November 2002, the Company recorded
goodwill and intangible assets with definite lives. As of June 30, 2003, goodwill was $2,292 and the intangible assets related to customer relationships, developed technology, and a non-compete agreement with net book values of $1,634, $193, and
$152, respectively.



7. Stock Repurchase Program



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



12



---

##### Table of Contents

AQUANTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2003

(in thousands except per share amounts)

(unaudited)



8. Legal Proceedings



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



13



---

##### Table of Contents

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



The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements
and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The discussion in this report contains forward-looking statements that involve risks and uncertainties, such as our objectives, expectations and intentions. Our
actual results could differ materially from results that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled
Additional Factors that May Affect Our Business, Future Operating Results and Financial Condition, included elsewhere in this report. When used in this document, the words believes, expects,
anticipates, intends, plans and similar expressions, are intended to identify certain of these forward-looking statements. However, these words are not the exclusive means of identifying such statements. In
addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The cautionary statements made in this document should be read as being applicable to all
related forward-looking statements wherever they appear in this document. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any
forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made in this report and in our other reports filed with the Securities and
Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations. Unless the context requires otherwise in this Quarterly Report the terms aQuantive,
the Company, we, us and our refer to aQuantive, Inc. and its subsidiaries, and references to Avenue A refer to the Avenue A operating unit, i-FRONTIER refer to i-FRONTIER,
Corp., an operating unit and wholly-owned subsidiary of aQuantive Inc., and Atlas DMT refer to Atlas DMT LLC, a wholly owned subsidiary of aQuantive, Inc.



Overview



We are a digital marketing services and technology company that helps marketers acquire, retain, and grow customers across digital media. We are organized
into two lines of business, digital marketing services, including our Avenue A and i-FRONTIER operating units, and digital marketing technologies, through our Atlas DMT operating unit.



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



14



---

##### Table of Contents

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



Critical Accounting Policies and Judgments



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



Revenue Recognition



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



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



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



|                             |  | Three Months Ended June 30, |         |   | Six Months Ended June 30,
|---------------------------- |  | --------------------------- | ------- | - | -------------------------
|                             |  | 2003                        |         |   | 2002                     
|                             |  | (in thousands)             
|Revenue, as reported         |  | $                           | 51,961  |   |                          
|Less cost of media purchases |  |                             | (36,755 | ) |                          
|                             |  |                             |         |   |                          
|Net revenue                  |  | $                           | 15,206  |   |                          
|                             |  |                             |         |   |                          



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



15



---

##### Table of Contents

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



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



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



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



Accounting for Acquisitions



In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, Business Combinations, which addresses financial accounting and reporting for business combinations. In connection with our acquisition of i-FRONTIER in November 2002, we allocated the cost of the acquisition to the assets
acquired and liabilities assumed based on their estimated fair values at date of acquisition in accordance with SFAS No. 141. As a result, the excess of the purchase price over the value of the net tangible assets acquired was allocated to the
following (in thousands):



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



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



Accounting for Goodwill and Certain Other Intangibles



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



16



---

##### Table of Contents

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



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



Accounting for Stock-Based
Compensation



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



Accounting for Income Taxes



We account for income taxes in accordance with SFAS 109, Accounting for Income Taxes.The objectives of accounting for income taxes are to recognize the amount of taxes payable for the current
year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in an entitys financial statements or tax returns.



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



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



Estimates and Assumptions Related to Financial Statements



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



17



---

##### Table of Contents

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



Results of Operations



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



|                                                                                                                       |  | Three Months Ended June 30,              |        |  | Six Months Ended June 30, |  
|---------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------ |  | ------------------------- | -
|                                                                                                                       |  | 2003                                     |        |  | 2002                      |  
|                                                                                                                       |  | (in thousands except percentage amounts) |       
|Revenue                                                                                                                |  | $                                        | 51,961 |  | 100.0                     | %
|Expenses:                                                                                                              |  |                                          |        |  |                           |  
|Cost of revenue                                                                                                        |  |                                          | 37,413 |  | 72.0                      | %
|Client support                                                                                                         |  |                                          | 6,107  |  | 11.7                      | %
|Product development                                                                                                    |  |                                          | 761    |  | 1.5                       | %
|Selling, general and administrative                                                                                    |  |                                          | 4,565  |  | 8.8                       | %
|Depreciation and amortization of property and equipment                                                                |  |                                          | 774    |  | 1.5                       | %
|Amortization of deferred stock compensation                                                                            |  |                                          | 301    |  | 0.6                       | %
|Amortization of intangible assets                                                                                      |  |                                          | 72     |  | 0.1                       | %
|                                                                                                                       |  |                                          |        |  |                           |  
|Total expenses                                                                                                         |  |                                          | 49,993 |  | 96.2                      | %
|                                                                                                                       |  |                                          |        |  |                           |  
|Income (loss) from operations                                                                                          |  |                                          | 1,968  |  | 3.8                       | %
|Interest income, net                                                                                                   |  |                                          | 507    |  | 1.0                       | %
|                                                                                                                       |  |                                          |        |  |                           |  
|Income (loss) before cumulative effect on prior years of change in accounting principle and provision for income
taxes |  |                                          | 2,475  |  | 4.8                       | %
|Provision for income taxes                                                                                             |  |                                          | 97     |  | 0.2                       | %
|                                                                                                                       |  |                                          |        |  |                           |  
|Net income (loss) before cumulative effect on prior years of change in accounting principle                            |  |                                          | 2,378  |  | 4.6                       | %
|Cumulative effect of change in accounting principle                                                                    |  |                                          |       |  |                          |  
|                                                                                                                       |  |                                          |        |  |                           |  
|Net income (loss)                                                                                                      |  | $                                        | 2,378  |  | 4.6                       | %
|                                                                                                                       |  |                                          |        |  |                           |  



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



|                             |  | Three Months Ended June 30, |         |   | Six Months Ended June 30, |  
|---------------------------- |  | --------------------------- | ------- | - | ------------------------- | -
|                             |  | 2003                        |         |   | 2002                      |  
|                             |  | (in thousands)              |        
|Revenue, as reported         |  | $                           | 51,961  |   |                           | $
|Less cost of media purchases |  |                             | (36,755 | ) |                           |  
|                             |  |                             |         |   |                           |  
|Net revenue                  |  | $                           | 15,206  |   |                           | $
|                             |  |                             |         |   |                           |  



18



---

##### Table of Contents

Revenue increased to $52.0 million for the three months ended June 30, 2003 from $30.4 million for the
three months ended June 30, 2002. Revenue increased to $99.5 million for the six months ended June 30, 2003 from $53.9 million for the six months ended June 30, 2002. Revenue from digital marketing services increased to $49.8 million and $95.9
million for the three and six months ended June 30, 2003 from $30.2 million and $53.7 million for the three and six months ended June 30, 2002, respectively. Revenue from digital marketing technologies increased to $2.2 million and $3.6 million for
the three and six months ended June 30, 2003 from $192,000 and $249,000 for the three and six months ended June 30, 2002, respectively. During 2002 and the first six months of 2003, revenue increased each quarter primarily due to increases in
spending for our digital marketing services among our existing customers. We believe many companies are beginning to understand the effectiveness of online media, resulting in increased online budgets through additional incremental advertising
spending and the movement of more traditional marketing spending to non-traditional programs, such as online advertising. During 2002, our digital marketing services were able to help launch major advertising campaign initiatives, where historically
these campaigns were reserved for more traditional advertising media. Our growth has continued into 2003 with the addition of a net total of six new digital marketing services clients.



The increase in revenue was also attributable to digital marketing technologies. We continued to add clients for our Atlas
Digital Marketing Suite, including agencies and direct advertisers. During the three months ended June 30, 2003, our digital marketing technologies line of business was successful in adding a net total of 12 additional clients. Due to the increase
in spending among our client base, revenue from our five largest revenue generating clients decreased to 70% of our total revenue during the three months ended June 30, 2003 compared to 75% during the three months ended March 31, 2003 and 71% during
the three months ended June 30, 2002.



In July 2003, we
announced the loss of one of our clients that was historically one of our five largest revenue generating clients, including during the three months ended June 30, 2003. We will be largely concluding our relationship with this client in the near
term. Consequently, we expect revenue contributions from this client to decline significantly during the three months ended September 30, 2003. During the remainder of 2003, we expect to continue to experience increased revenue from digital
marketing services, with increased contribution from new clients. In addition, we expect digital marketing technologies to continue to grow its revenue from agencies and direct advertisers. Accordingly, we expect total revenues in the range of $200
million to $220 million in 2003.



Net revenue, which excludes
the cost of media purchases, increased to $15.2 million and $30.1 million for the three and six months ended June 30, 2003, from $9.0 million and $16.3 million for the three and six months ended June 30, 2002, respectively. The increase in net
revenue was primarily due to increases in spending from our existing clients and increased revenue contribution from new clients, resulting in increased fees earned from our clients. In addition, revenue from digital marketing technologies increased
significantly during the three and six months ended June 30, 2003, compared to the three and six months ended June 30, 2002, as we continue to add clients for our Atlas Digital Marketing Suite, including external agencies and direct advertisers.



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



|                                              |  | Three Months Ended June 30, |         |   | Six Months Ended June 30,
|--------------------------------------------- |  | --------------------------- | ------- | - | -------------------------
|                                              |  | 2003                        |         |   | 2002                     
|                                              |  | (in thousands)             
|Cost of revenue, as reported                  |  | $                           | 37,413  |   |                          
|Less cost of media purchases                  |  |                             | (36,755 | ) |                          
|                                              |  |                             |         |   |                          
|Cost of revenue, exclusive of media purchases |  | $                           | 658     |   |                          
|                                              |  |                             |         |   |                          



Cost of revenue
consists mainly of the costs of media that we purchase from publishers Web sites, and the variable costs of delivering the advertisements over the Internet. It also consists of costs paid to third parties for email delivery, surveys, and
search engine optimization. Cost of revenue increased to $37.4 million, or 72.0% of revenue, for the three months ended June 30, 2003 from $22.0 million, or 72.5% of revenue, for the three months ended June 30, 2002. Cost of revenue increased to
$70.7 million, or 71.1% of revenue, for the six months ended June 30, 2003 from $38.8 million, or 71.9% of revenue, for the six month ended June 30, 2003. The dollar increases in cost of revenue were primarily due to increases in the volume of
advertising space we purchased for our clients, as spending for our services increased among existing and new clients. Due to the expected growth in revenue from existing clients and increased contribution from new clients, we anticipate cost of
revenue in the range of $145 million to $160 million in 2003.



19



---

##### Table of Contents

The cost of revenue exclusive of media purchases decreased to $658,000 for the three months ended June
30, 2003, from $668,000 during the three months ended June 30, 2002. The decrease in cost of revenue exclusive of media purchases was due to the timing and use of services such as survey delivery, search engine optimization, and email. This decrease
is offset by an increase in the variable cost of delivering advertisements over the Internet, specifically bandwidth costs, as the volume of ads served has increased. The cost of revenue exclusive of media purchases increased to $1.3 million for the
six months ended June 30, 2003 from $1.1 million for the six months ended June 30, 2002. The increase in cost of revenue exclusive of media purchases is due to an increased use of services such as survey delivery, search engine optimization, and
email. In addition, bandwidth costs continue to increase due to the increased volume of ads served.



Client support. Client support expenses consist primarily of salaries and related expenses for client support personnel, including employees within
our digital marketing services client teams and client service employees within digital marketing technologies. Client support expenses also include employees who support other functions such as the Strategic Partnership Program and Customer Insight
services. Client support expenses increased to $6.1 million, or 11.7% of revenue, for the three months ended June 30, 2003 from $3.5 million, or 11.5% of revenue, for the three months ended June 30, 2002. Client support expenses increased to $12.3
million, or 12.4% of revenue, for the six months ended June 30, 2003, from $6.8 million, or 12.7% of revenue, for the six months ended June 30, 2002. The dollar increases in client support expenses were primarily due to the increased headcount
associated with the addition of i-FRONTIER. In addition, headcount in client support personnel increased to support increased spending by our digital marketing services clients and the new clients added in our digital marketing technologies line of
business. The increase in client support expenses as a percentage of revenue during the three months ended June 30, 2003 was due to the increased headcount associated with the addition of new clients, while the associated revenue from new clients
increased at a slower rate. The decrease in client support expenses as a percentage of revenue during the six months ended June 30, 2003 was primarily due to increased revenue from existing clients, while headcount and the related expenses for
client support staff increased at a slower rate. In general, increased spending from existing clients requires only modest increases in client support costs, while the addition of new clients increases the need for client support staff, resulting in
more significant increases in client support costs.



Product
development.Product development expenses consist of salaries and related expenses for product development as well as research and development personnel. In addition, product development expenses include the costs of software development and the
costs incurred in preparing our Atlas Digital
Marketing Suite for marketing to external clients. Product development expenses decreased to $761,000, or 1.5% of revenue, for the three months ended June 30, 2003, from $1.6 million, or 5.2% of revenue, for the three months ended June 30, 2002.
Product development expenses decreased to $1.9 million, or 1.9% of revenue, for the six months ended June 30, 2003, from $3.3 million, or 6.1% of revenue, for the six months ended June 30, 2002. The dollar and percentage decreases in product
development expenses were primarily due to the capitalization of certain direct costs incurred in the development of our Atlas Digital Marketing Suite and decreased personnel costs due to the reduction in force that occurred in September 2002.



Selling, general and administrative. Selling, general
and administrative expenses consist primarily of salaries and related expenses for executive, sales, finance, marketing, human resource and administrative personnel, professional fees, and other general corporate expenses including rent. In
addition, these expenses include marketing costs such as trade shows and the costs of advertising our services in trade publications. Selling, general and administrative expenses increased to $4.6 million, or 8.8% of revenue, for the three months
ended June 30, 2003, from $4.2 million, or 13.9% of revenue, for the three months ended June 30, 2002. Selling, general and administrative expenses increased to $8.8 million, or 8.9% of revenue, for the six months ended June 30, 2003 from $7.9
million, or 14.6% of revenue, for the six months ended June 30, 2002. The dollar increases in selling, general and administrative expenses were primarily due to increased headcount, additional professional services expenses associated with the
increased corporate governance requirements, and an increase in sales and marketing efforts associated with our digital marketing technologies line of business. The decreases in selling, general and administrative costs as a percentage of revenue
were primarily due to revenue growth from existing and new clients that exceeded the growth in headcount and related expenses. In general, client support expenses increase as our revenues from digital marketing services and digital marketing
technologies increases. In addition, our selling expenses will also increase as digital marketing technologies revenue increases. We can support increased spending from digital marketing services and technologies clients with modest increases in
general and administrative expenses.



Depreciation and
amortization of property and equipment. Depreciation and amortization of property and equipment consists primarily of depreciation expense on computer equipment, furniture and fixtures, and software costs and amortization expense of leasehold
improvements. Depreciation and amortization of property and equipment decreased to $774,000, or 1.5% of revenue, for the three months ended June 30, 2003 from $1.2 million, or 3.8% of revenue, for the three months ended June 30, 2002. Depreciation
and amortization of property and equipment decreased to $1.7 million, or 1.7% of revenue, for the six months ended June 30, 2003 from $2.3 million, or 4.3% of revenue, for the six months ended June 30, 2002. The dollar and percentage decreases were
primarily due to certain assets becoming fully depreciated, partially offset by the purchase of new equipment.



20



---

##### Table of Contents

Amortization of deferred stock compensation. Amortization of deferred stock compensation consists
of expenses related to employee stock option grants with option exercise prices below the fair value of our common stock as of the date of grant. Deferred stock compensation is being amortized on an accelerated basis over the four-year vesting
period of the applicable options. Amortization of deferred stock compensation decreased to $301,000, or 0.6% of revenue, for the three months ended June 30, 2003 from $758,000, or 2.5% of revenue, for the three months ended June 30, 2002.
Amortization of deferred stock compensation decreased to $604,000, or 0.6% of revenue, for the six months ended June 30, 2003, from $1.5 million, or 2.8% of revenue, for the six months ended June 30, 2002. The dollar and percentage decreases were
primarily related to the decrease in deferred stock compensation due to our use of the accelerated method of amortization for our employee stock compensation arrangements plus the reversal of balances of unamortized stock-based compensation as a
result of employee terminations. We anticipate that all deferred stock compensation recorded as a result of options granted prior to our initial public offering will be fully amortized by the end of 2003.



Amortization of intangible assets. Amortization of intangible assets
relates to the customer base and non-compete agreement recorded in connection with the purchase of i-FRONTIER in November 2002. Amortization of the intangible asset associated with the purchased technology is recorded as cost of revenue and was
$20,000 and $40,000 during the three and six months ended June 30, 2003, respectively. Amortization of intangible assets was $72,000 and $0 during the three months ended June 30, 2003 and 2002, respectively. Amortization of intangible assets was
$132,000 and $0 during the six months ended June 30, 2003 and 2002, respectively. As of June 30, 2003, intangible assets consisted of a non-compete agreement, customer relationships, and developed technology with net book value of $152,000, $1.6
million, and $193,000, respectively. The intangible assets are amortized on a straight-line basis over useful lives of five, seven, and three years, respectively.



Interest and other income, net. Net interest and other income consist primarily of earnings on our cash, cash
equivalents and short-term investments. Net interest income decreased to $507,000, or 1.0% of revenue, for the three months ended June 30, 2003 from $1.1 million, or 3.7% of revenue, for the three months ended June 30, 2002. Net interest income
decreased to $1.0 million, or 1.0% of revenue during the six months ended June 30, 2003 from $2.4 million, or 4.4% of revenue, during the six months ended June 30, 2002. The dollar and percentage decreases were primarily due to lower returns on our
invested funds due to the declining interest rates experienced in the economy.



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



Liquidity and Capital
Resources



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



As of June 30, 2003, we had cash and cash equivalents of
$25.4 million and short-term investments of $91.8 million. We have a $5.5 million equipment term loan facility with a bank, of which $694,000 is outstanding as of June 30, 2003.



Net cash used in operating activities was $2.2 million for the six months ended June 30, 2003. Net cash used in operating
activities during the six months ended June 30, 2003 includes an increase in accounts receivable due to the timing of collections received. The temporary increase in accounts receivable reversed itself in July 2003. Net cash provided by operating
activities was $1.9 million for the six months ended June 30, 2002.



Net cash used in investing activities was $5.5 million for the six months ended June 30, 2003, which was related to the purchase of software and equipment and the purchase of short-term investments. Net cash provided by investing activities
was $19.0 million for the six months ended June 30, 2002, which was primarily related to net proceeds from the sale of marketable securities, offset by purchases of equipment.



Net cash provided by financing activities was $842,000 for the six months ended June 30, 2003, which related to proceeds
from the sale of securities offset by payments on our equipment loan. Net cash used in financing activities was $591,000 for the six months ended June 30, 2002, which related to payments on our equipment loan offset by proceeds from sales of
securities.



21



---

##### Table of Contents

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



In March 2007, we entered into an agreement with an entity that will provide
sales and service support to Atlas DMT in the United Kingdom. Under the agreement, we will pay the entity commissions based on a specified percentage of qualifying revenues. If the contract is terminated by Atlas DMT, we will pay the lesser of a
specified percentage of qualifying revenues or $1,000,000.



The
i-FRONTIER purchase agreement includes potential contingent payments in 2004 and 2006, which are determined by the operating results of our i-FRONTIER operating unit for the four years ending December 31, 2005. We estimate that future payments will
range from $8.0 million to $12.5 million. This estimate will be adjusted based on actual revenue and earnings over the four years ending December 31, 2005. Our estimates require judgment, based on estimating the future earnings of
i-FRONTIER. We cannot assure you that actual future payments will not be materially different than our current estimates.



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



Since our inception, we have significantly increased our operating expenses. Due to the estimated increase in revenue in 2003, we currently anticipate that we will continue to experience some growth in our operating
expenses and such expenses will be a material use of our cash resources. We believe that our current cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures
for at least the next 12 months.



Recent Accounting Pronouncements



In November 2002, the EITF reached a consensus on Issue
00-21, Revenue Arrangements for Multiple Deliverables, addressing how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. Revenue arrangements with multiple
deliverables are divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of
the fair value of undelivered items; and (3) delivery of any undelivered item is probable. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values, with the amount allocated to the
delivered item being limited to the amount that is not contingent on the delivery of additional items or meeting other specified performance conditions. The final consensus will be applicable to agreements entered into in fiscal periods beginning
after June 15, 2003 with early adoption permitted. We do not believe there will be a material financial statement impact upon adoption of EITF Issue 00-21.



22



---

##### Table of Contents

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This Statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities
and equity. The statement must be applied to all instruments that exist as of the beginning of the financial reporting period beginning after June 15, 2003. The application of this Statement is not expected to have a material impact on our financial
statements.



23



---

##### Table of Contents

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



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



We are subject to risks frequently encountered by companies in the
Internet advertising market



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



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



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



| |  |  | continue to develop and upgrade our technologies to keep pace with the growth of the Internet advertising market and changes in technology;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



We have a history of losses and may not maintain profitability, which we first achieved in the quarter ended December 31,
2002



We incurred net losses of $105.1 million for the
period from our inception on July 1, 1997 through September 30, 2002. As of June 30, 2003, our accumulated deficit was $98.5 million. We expect to continue to make additional operating and capital expenditures and, as a result, we will need to
generate additional revenue to maintain profitability, which we first achieved in the quarter ended December 31, 2002. We cannot assure you that we will generate sufficient revenue to maintain profitability. If our revenue grows more slowly than we
anticipate or declines, or if our operating expenses exceed our expectations, we may be unable to maintain profitability.



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



Our quarterly operating results have fluctuated in the past and are likely
to continue to do so in the future. It is possible that in the future our operating results in a particular quarter or quarters will not meet the expectations of securities analysts, investors or us. If our operating results fail to meet these
expectations, the market price of our common stock could decline. We believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance and should not be relied upon to predict the future
performance of our stock price. For example, although we recorded a profit in the first and second quarters of 2003, we cannot assure you that we will be profitable in subsequent quarters.



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



| |  |  | fluctuating demand for our advertising services and technologies and changes in the mix of advertisements placed and services provided;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



24



---

##### Table of Contents

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



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



| |  |  | timing variations on the part of advertisers to implement advertising campaigns;
| | - |  | --------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



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



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



25



---

##### Table of Contents

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



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



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



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



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



Our short-term investments represent a significant portion of our cash position. As of June 30, 2003, short-term investments
constituted $91.8 million of our cash position of $117.2 million. If issuers of the short-term debt in which we have invested default or if the market value of such investments becomes impaired, such defaults and impairments could significantly harm
our financial condition.



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



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



26



---

##### Table of Contents

We are substantially dependent on cookie and action tag technology to target our clients
advertising campaigns and measure their effectiveness. Any reduction in our ability to use cookies or action tags or other means to build anonymous user profiles could harm our business. Such a reduction may result from several causes, including
governmental action, technology or litigation. First, governmental bodies concerned with the privacy of Internet users have suggested limiting or eliminating the use of cookies, action tags or user profiling. Bills aimed at regulating the collection
and use of personal data from Internet users are currently pending in Congress and many state legislatures. Also, the Federal Trade Commission and the Department of Commerce have conducted hearings regarding user profiling, the collection of
non-personally identifiable information and online privacy. Outside the United States, privacy concerns have led to legal and technical limitations on the use of cookies, action tags and user profiling. For example, the European Union has adopted a
directive addressing data privacy that limits the collection, disclosure and use of information regarding European Internet users. The European Union has also enacted an electronic communications directive that imposes certain restrictions on the
use of cookies and action tags. The directive also places restrictions on the sending of unsolicited communications. Each European Union member country is required to enact legislation to comply with the provisions of the directive by October 31,
2003. Germany already has imposed its own laws limiting the use of user profiling, and other countries (both in and out of the European Union) may impose similar limitations. Second, users may limit or eliminate the placement of cookies on their
computers by using third-party software that blocks cookies, or by disabling the cookie functions of their Internet browser software. Also, Internet browser software upgrades may result in limitations on the use of cookies or action tags.
Technologies like the Platform for Privacy Preferences (P3P) Project may limit collection of cookie and action tag information. Finally, third parties have brought class action lawsuits against us and other companies relating to the use of cookies,
and we may be subject to similar lawsuits in the future. The results of such lawsuits could limit or eliminate our ability to use cookies and action tags.



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



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



We and some of the underwriters of our initial public offering of common
stock in February 2000 are defendants in a pending consolidated class action lawsuit that alleges violations of federal and state securities laws in connection with our initial public offering. The claims in the lawsuit include, among other things,
allegations of misrepresentations or failures to disclose alleged facts relating to the defendant underwriters compensation and commissions in connection with our initial public offering and alleged agreements between the underwriters and
their customers relating to future purchases of our stock. Class action litigation is often expensive and time-consuming, and the outcome of such litigation is often uncertain. Such lawsuits, regardless of their outcome, may cause us to incur
significant expenses and divert the attention of our management and key personnel from our business operations. In addition, such lawsuits may result in the payment by us of substantial damages, and may otherwise seriously harm our business.



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



Other parties may claim that our technologies, processes or methods infringe their patents. Any such claim may cause us to incur significant expense
and, if successfully asserted against us, may cause us to pay substantial damages and prevent us from using the intellectual property subject to these claims, which could substantially harm our business. For example, in November 2001, we received
correspondence from counsel for 24/7 Real Media, Inc. (24/7 Real Media) alleging that we infringe claims of U.S. Patent No. 6,026,368. In April 2002, we filed a lawsuit against 24/7 Real Media seeking a declaratory judgment that we are not
infringing any claims of this patent and/or that the claims of this patent are invalid. 24/7 Real Media has counterclaimed, seeking dismissal of our claim, alleging current and past infringement of this patent, seeking an injunction precluding us
from using technology allegedly covered by the patent through the life of the patent, and seeking reasonable royalty or lost profits for alleged past infringement. We filed a motion for partial summary judgment of non-infringement, which was granted
on July 3, 2003. The parties have stipulated that, if the Courts order is affirmed on appeal, neither party will pursue any of their remaining claims in the case. The district court entered its final judgment, and 24/7 Real Media has appealed.
In addition, in July 2003, Unicast Communications Corp. alleged that we infringe a claim of U.S. Patent No. 6,516,338. This patent may cover some of the technologies, processes or methods we use. In addition, other patents have been issued to third
parties that may cover some of the technologies, processes or methods that we use. We cannot assure you that we would be able to distinguish our technologies, processes or methods from those covered under any of these third-party patents or that
these patents would be invalidated if challenged. The patent field covering Internet-related technologies is rapidly evolving and surrounded by a great deal of uncertainty, and other patents or patent applications relating to the delivery of
Internet advertising may exist of which we are unaware.



27



---

##### Table of Contents

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



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



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



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



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



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



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



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



28



---

##### Table of Contents

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



The loss of
the services of members of our management team or other key personnel could harm our business. Our future success depends to a significant extent on the continued service of our key management, client service, product development, sales and
technical personnel. We do not maintain key person life insurance on any of our executive officers and do not intend to purchase any in the future. Although we generally enter into non-competition agreements with our employees, our business could be
harmed if one or more of our officers or key employees decided to join a competitor or otherwise compete with us.



Our future success also depends on our ability to attract, retain and motivate highly skilled personnel. If we fail to hire and retain a sufficient number
of qualified client service, product development, sales and technical personnel, we may not be able to maintain or expand our business.



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



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



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



The
market for Internet advertising is relatively new, yet competitive. Our digital marketing services, including our Avenue A and i-FRONTIER operating units, compete with interactive advertising agencies, enabling online advertising technology
providers, advertising networks, targeted email service providers and traditional advertising agencies that perform Internet advertising and marketing as part of their services to clients. Our digital marketing technologies, through our Atlas DMT
operating unit, compete with third-party ad serving companies and campaign management technology companies.



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



29



---

##### Table of Contents

Consolidation of Internet advertising networks, large Internet portals and Web publishers may impair
our ability to serve advertisements, to acquire advertising space at favorable rates and to collect campaign data



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



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



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



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



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



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



30



---

##### Table of Contents

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



We may in the future
acquire or make investments in other businesses, or acquire products and technologies, to complement our current business. Any future acquisition or investment may require us to use significant amounts of cash, issue potentially dilutive equity
securities or incur debt. In addition, acquisitions involve numerous risks, any of which could harm our business, including:



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



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



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



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



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



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



| |  |  | responsibility for liabilities of acquired businesses;
| | - |  | ------------------------------------------------------



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



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



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



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



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



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



31



---

##### Table of Contents

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



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



In addition, laws, regulations, and standards may be adopted or amended relating to the taxation of our services. We
received reporting instructions from Washington State tax authorities that require us to pay Washington State business and occupation tax on the media we purchase on behalf of our clients effective February 2003. We expect to assert administrative
remedies with the Washington State tax authorities and evaluate tax strategies that might allow deduction of media purchases in connection with the measure of business and occupation tax. If these efforts are not successful, this business and
occupation tax requirement, and any other tax-related requirements, could substantially increase our cost of conducting business.



In conjunction with third-party contractors, our service offerings include email advertising and marketing services. The market for email advertising and
marketing in general is vulnerable to the negative public perception associated with unsolicited email. Various states and foreign governments have enacted legislation and several bills have been introduced in Congress that limit or prohibit the use
of unsolicited email. Government action, public perception or press reports related to solicited or unsolicited email could reduce the overall demand for email advertising and marketing in general and our email services in particular. In addition,
although our email delivery program is based on the email addressees consent to receive email, or other indication of willingness to receive such emails or as otherwise permitted by law, it is possible that laws, regulations or standards may
be adopted or amended that may require us to change or discontinue our current practices or may subject us to liabilities. Furthermore, we may be the target of lawsuits or enforcement actions if a plaintiff or government agency believes that legal
requirements regarding the delivery of email have not been followed by us or a third-party contractor or that emails have been received contrary to the email addressees wishes. Any of these circumstances could harm our business.



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



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



32



---

##### Table of Contents

Our stock price has been and may continue to be volatile



The trading price of our common stock has been and is likely to continue to
be highly volatile. For example, during the 52-week period ended August 1, 2003, the closing price of our common stock ranged from $1.97 to $12.05 per share. The market price of our common stock may fluctuate significantly in response to a number of
factors, including:



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



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



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



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



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



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



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



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



|ITEM 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- |  | ----------------------------------------------------------



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



|ITEM 4. |  | CONTROLS AND PROCEDURES
|------- |  | -----------------------



Evaluation of Disclosure Controls and Procedures



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



Changes in Internal Controls



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



33



---

##### Table of Contents

PART II. OTHER INFORMATION



|ITEM 1. |  | LEGAL PROCEEDINGS
|------- |  | -----------------



We have been the subject of lawsuits concerning our collection and use of Internet user information. In Chance et al. v. Avenue A, Inc.,
plaintiffs, on behalf of themselves and all others similarly situated throughout the nation, filed a class action complaint against us on or about November 20, 2000 in the United States District Court for the Western District of Washington.
Plaintiffs in two separate suitsWerber v. Avenue A, Inc., and Bowles v. Avenue A, Inc.agreed to join the Chance case as plaintiffs rather than pursue their own individual cases against us. Accordingly, on or about
May 29, 2001, plaintiffs filed a First Amended Consolidated Class Action Complaint in the Chance case adding Werber and Bowles as plaintiffs. The complaint contained the following purported claims relating to our collection and use of
Internet user information: (1) violation of 18 U.S.C. section 2510 et seq. (the Wiretap/Interception section of the Electronic Communications Privacy Act), (2) violation of 18 U.S.C. section 2701 et seq. (the Access to Stored Information section of
the Electronic Communications Privacy Act), (3) violation of 18 U.S.C. section 1030 et seq. (the Computer Fraud and Abuse Act), (4) violation of RCW section 9.73.030 et seq. (the Washington State Wiretap/Interception statute), (5) common law
trespass to personal property and conversion, (6) common law invasion of privacy, (7) unjust enrichment, (8) violation of state consumer protection and deceptive practices statutes, and (9) declaratory judgment. The plaintiffs sought declaratory and
injunctive relief as well as monetary damages and disgorgement of profits. On September 17, 2001, the Court granted our motion for summary judgment and entered judgment in our favor. On October 15, 2001, plaintiffs filed a notice of appeal. On
October 17, 2002, the Court entered an order granting preliminary approval of a nationwide class action settlement of this action. The Court ordered that notice to the class be provided, and scheduled a final approval hearing on March 6, 2003. On
March 7, 2003, the Court entered a final judgment and order of dismissal, granting final approval to the settlement and dismissing the Chance case.



In Lopez v. Avenue A, Inc., the plaintiff, on behalf of himself and all others similarly situated in the State of Texas, filed a class action
complaint against us on or about February 13, 2001, in the District Court of Cameron County, Texas. The complaint contained the following claims relating to our collection and use of Internet user information: (1) common law invasion of privacy, and
(2) unjust enrichment. The plaintiff sought declaratory and injunctive relief as well as monetary damages and disgorgement of profits that we have received in connection with the alleged illegal practices. On or about February 12, 2002, we filed a
notice of removal in federal district court, thereby removing the case to federal court. On July 31, 2002, the federal district court remanded the case to state court. This case is subject to the nationwide class action settlement. Pursuant to the
terms of the settlement and the Courts order of dismissal, an order dismissing the action was entered by the Texas court on May 12, 2003.



In Garcia v. Avenue A, Inc., the plaintiff, on behalf of herself and all others similarly situated in the State of California, filed a class action
complaint against us on or about October 9, 2001, in the Superior Court for San Bernardino County, California. The complaint contained the following claims relating to our collection and use of Internet user information: (1) invasion of privacy in
violation of article I, section 1 of the California Constitution, (2) common law invasion of privacy, (3) violation of California Penal Code §§ 631 et seq. (the California wiretapping and eavesdropping statutes), (4) violation of
California Business & Professions Code §§ 17200 et seq. (the California unfair competition statute), and (5) unjust enrichment. The plaintiff sought declaratory and injunctive relief as well as monetary damages. This case is subject to
the nationwide class action settlement. Pursuant to the terms of the settlement and the Courts order of dismissal, an order dismissing the action was entered by the California court on April 3, 2003.



We have been named as a defendant in a consolidated amended class action
complaint filed in the United States District Court for the Southern District of New York on or about April 19, 2002 and captioned In re Avenue A, Inc. Initial Public Offering Securities Litigation. This consolidated complaint relates to
several previously filed class action complaints filed against us, the first of which was originally filed on or about June 15, 2001. Plaintiffs filed the consolidated complaint on behalf of themselves and all others who acquired our common stock
between February 28, 2000 and December 6, 2000, pursuant or traceable to our prospectus dated February 28, 2000. The complaint also named as defendants Morgan Stanley & Co., Salomon Smith Barney, Inc., Thomas Weisel Partners, LLC, and RBC Dain
Rauscher, Inc., certain of the underwriters of our initial public offering; Brian P. McAndrews, our President and Chief Executive Officer; Nicolas Hanauer, our Chairman of the Board; and Robert Littauer, our former Chief Financial Officer. The
complaint contains the following purported claims against all defendants: (1) violation of 15 U.S.C. section 77k (section 11 of the Securities Act of 1933), and (2) violation of 15 U.S.C. section 78j(b) (section 10(b) of the



34



---

##### Table of Contents

Securities Exchange Act of 1934) and 17 C.F.R. section 240.10b-5 (Exchange Act Rule 10b-5). The complaint contains the following purported claims against the
individual defendants alone: (1) violation of 15 U.S.C. section 77o (section 15 of the Securities Act of 1933), and (2) violation of 15 U.S.C. section 78t(a) (section 20(a) of the Securities Exchange Act of 1934). Plaintiffs seek monetary damages.
The complaint alleges violations of federal securities laws in connection with disclosures contained in our prospectus dated February 28, 2000, for our initial public offering of common stock. The complaint alleges incorrect disclosure or omissions
in our prospectus relating generally to commissions to be earned by the underwriters and certain allegedly improper agreements between the underwriters and certain purchasers of our common stock. It also alleges that the SEC and/or other regulatory
authorities are investigating underwriting practices similar to those alleged in the complaint. We have no knowledge as to whether aQuantive or our initial public offering is the subject of any such investigation.



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



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



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



|ITEM 2. |  | CHANGES IN SECURITIES AND USE OF PROCEEDS
|------- |  | -----------------------------------------



| | (d) |  | Use of Proceeds
| | --- |  | ---------------



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



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



35



---

##### Table of Contents

|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K
|------- |  | --------------------------------



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



| | 31.1 |  | Certification of Brian P. McAndrews Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------



| | 31.2 |  | Certification of Michael Vernon Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------



| | 32.1 |  | Certification of Brian P. McAndrews Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------



| | 32.2 |  | Certification of Michael Vernon Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------



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



On July 17, 2003, we filed a report on Form 8-K regarding a press release announcing that our Avenue A agency will no longer be online agency of record
for AT&T Wireless.



On July 23, 2003, we filed a report on
Form 8-K regarding a press release announcing our second quarter earnings for the fiscal quarter ended June 30, 2003.



On August 4, 2003, we filed a report on Form 8-K regarding a news article published by Dow Jones Newswires, dated August 1, 2003.



36



---

##### Table of Contents

SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 12, 2003.



AQUANTIVE,INC.By:

/S/    MICHAEL VERNONMichael VernonChief Financial Officer(Authorized Officer and Principal Financial Officer)




37



---

##### Table of Contents

INDEX TO EXHIBITS



|Exhibit No. |  | Description                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------
|            | 
|31.1        |  | Certification of Brian P. McAndrews Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002
|            | 
|31.2        |  | Certification of Michael Vernon Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §302 of the Sarbanes-Oxley Act of 2002    
|            | 
|32.1        |  | Certification of Brian P. McAndrews Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002
|            | 
|32.2        |  | Certification of Michael Vernon Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002    



38