**SECURITIESAND**

**EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

# **FORM10-K**

 

**ý****          ****ANNUAL REPORT PURSUANT TOSECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****. **

 

**For the fiscal year ended December 31, 2005.**

 

**o****          ****TRANSITION REPORT PURSUANT TO SECTION13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934****. **

 

**For the transition period from          to          .**

 

**Commission File No. 0-29768**

 

**24/7 REALMEDIA, INC.**

(Exact name of registrant as specified in its charter)

 

| **DELAWARE**                                                    | ** ** | **13-3995672**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

**132 West 31st Street**

**NEW YORK, NEW YORK 10001**

(Address of principal executive offices) (Zip Code)

 

**(212) 231-7100**

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: **NONE**

 

Securities registered pursuant to Section 12(g) of the Act:

 

**COMMON STOCK, PAR VALUE $.01 PERSHARE**

(Title of class)

 

Indicateby check mark if the registrant is a well-known seasoned issuer as defined inRule 405 of the Securities Act.   

YESo      NO ý

 

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Exchange Act.

YESo      NO ý

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.              YES ý      NOo

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.           o

 

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer.  See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct.  (Check one):

 

LARGE ACCELERATED FILER o   ACCELERATEDFILER ý

NON-ACCELERATED FILER o

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

YESo      NO ý

 

Asof June 30, 2005, the last business day of the registrant’s most recentlycompleted second fiscal quarter, the aggregate market value of the votingcommon equity held by non-affiliates of the registrant was $181,572,446, basedupon the last price quoted on the NASDAQ National Market on June 30, 2005 of$4.09.  For purposes of this calculation,the registrant has assumed that its directors and officers and each person whobeneficially owned 10% or more of the outstanding common stock on that date areaffiliates.  The registrant does not haveany non-voting common equity outstanding.

 

The number of outstandingshares of the registrant’s common stock as of February 28, 2006 was 46,645,416.

 

 

----

 

24/7 REAL MEDIA,INC.

2005 ANNUAL REPORTON FORM 10-K

TABLE OF CONTENTS

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

 

Open AdStream® isa registered trademark of 24/7 Real Media, Inc. and Open AdSystemTM, OpenAdvertiserTM, Insight XETM, Insight ACTTM and Decide DNATM are pendingtrademarks of 24/7 Real Media, Inc. All other brand names ortrademarks appearing herein are the property of their respective holders.

 

2

----

 

**PART I**

 

This Annual Report onForm 10-K includes forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. This Act provides a “safe harbor” forforward-looking statements to encourage companies to provide prospectiveinformation about themselves so long as they identify these statements asforward-looking and provide meaningful cautionary statements identifyingimportant factors that could cause actual results to differ from the projectedresults. All statements other than statements of historical fact, includingstatements regarding industry prospects and future results of operations orfinancial position, made in this Annual Report on Form 10-K areforward-looking. We use words such as “anticipates,” “believes,” “expects,” “future”and “intends” and similar expressions to identify forward-looking statements. Forward-looking statements also include anyother passages that relate to expected future events or trends that can only beevaluated by events or trends that will occur in the future.  Forward-looking statements reflectmanagement’s current subjective opinions, expectations, plans or projectionsand are inherently uncertain. Our actual results may differ significantly frommanagement’s expectations, plans or projections. Readers are cautioned not toplace undue reliance on these forward-looking statements, which speak only asof the date hereof. Except as requiredby law, 24/7 Real Media undertakes no obligation to update any forward-lookingor other statements in this news release, whether as a result of newinformation, future events or otherwise. Certain risks and uncertaintiesthat could cause our actual results to differ significantly from management’sexpectations are described in the section entitled “Risk Factors” and elsewherein this Annual Report on Form 10-K. We undertake no obligation to publiclyrelease any revisions to these forward-looking statements to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events. Readers are urged, however, to review the risk factorsset forth in reports that we file from time to time with the Securities andExchange Commission (the “SEC”). Unless the context requires otherwise in thisAnnual Report on Form 10-K, the terms “24/7 Real Media,” the “Company,” “we,” “us”and “our” refer to 24/7 Real Media, Inc. and its consolidated subsidiaries.

 

**ITEM 1.  BUSINESS.**

 

**24/7REAL MEDIA OVERVIEW**

 

24/7Real Media offers a suite of media services and software products and servicesfor the online advertising needs of Web publishers and advertisers, includingWeb representation, search engine marketing (“SEM”) services, onlineadvertisement serving and Web site analytics. We work closely with Web publishersand advertisers to implement integrated solutions to sell and deliveradvertising on Web sites and manage online campaignplanning, execution, measurement and analysis.

 

We areone of the few established global providers of Internet media representationservices and online advertising technology. We sell our products and servicesworldwide from 20 sales locations in 12 countries throughout North America,Europe, Asia and Australia.  Ourpatent-protected technology is the foundation for our award-winning advertisingdelivery, management and Web analytics platform.  We have three principal lines of business: MediaSolutions, Search Solutions and Technology Solutions.

 

***Media Solutions.***Our Media Solutions segmentis comprised principally of the 24/7 Web Alliance, through which we primarilyrepresent Web sites with brand names, quality content and global reach. Our 24/7 Web Alliance, a global allianceof over 1,500 affiliated Web sites, aggregates advertising inventory andtargets audience segments to attract advertisers worldwide. We promote ourmedia representation services to Web publishers seeking to increase advertisingrevenue from their Web sites

 

3

----

 

andmaximize revenue from their existing advertising inventory. We also promote our24/7 Web Alliance to advertisers seeking online strategies to target audiences,build their brands and generate greater customer response and greater returnfrom their advertising spending.

 

***Search Solutions.***Through ourSearch Solutions segment we provide performance-based SEM services for theInternet.  Our Search Solutions connectadvertisers with consumers who use search engines to search for information,products and services. We use our proprietary Decide DNA technology andexperience to help advertisers determine the keywords most relevant to theirproducts and services that will lead users from search engines to the advertisers’ Web sites andto help advertisers optimize their search budgets. Through our relationshipswith major search engines, we also help advertisers optimize their Web pagesand receive better placement in search results.

 

***Technology Solutions.***Our Technology Solutions segment includes onlineadvertising and analytics software licensed to customers and hosted locally onthe customers’ servers or services provided to customers from software hostedcentrally on our servers. Our Open AdSystem technology platform enables Webpublishers and advertisers to target, convert and retain their best onlinecustomers, maintain customer relationships and safeguard the privacy of Webusers.

 

OurMedia Solutions segment contributed almost half of our revenue in 2005, withour Search Solutions segment contributing approximately one-third and ourTechnology Solutions segment contributing approximately one-sixth.  See Note 19 to the ConsolidatedFinancial Statements for financial information about each of our businesssegments, including revenue, income (loss) from operations and total assets, aswell as revenue and long-lived asset information by geographic area.

 

We were organized under the laws of the State ofDelaware on January 23, 1998, and have been a publicly traded company sinceAugust 1998.  Our corporate headquartersare located at 132 West 31st Street, New York, NY 10001, and ourtelephone number is (212) 231-7100. Our corporate Web site address iswww.247realmedia.com.

 

**THEONLINE ADVERTISING INDUSTRY**

 

***Overview***

 

Onlineadvertising, which began in 1994, has now been in existence for over adecade.  The advertising medium rapidlyincreased in popularity during the late nineties, and, driven by high spendingby dot-com companies, reached its first peak in 2000.  With the dissolution of many of the dot-comcompanies in 2000, however, spending levels dropped drastically.  In contrast, the number of consumers using theInternet continued to steadily increase. Following a troubled online advertising period between 2001 and 2003 dueto the resulting economic recession, Internet advertising once again emerged asa force in 2004 and embraced the large online audience that had continued tobuild.

 

***Web Publishers***

 

Webpublishers aim to profit from content, commerce and advertising on their Websites.  A savvy web publisher will alsoseek to identify and analyze user preferences in order to improve the Web site,thereby strengthening its relationship with its online audience and enhancingits appeal to advertisers.  The currentInternet advertising environment presents a number of challenges.  Web publishers look to Internet advertisingcompanies for assistance in the following areas:

 

4

----

 

•                  ***Increasing Advertising Revenue****.*Webpublishers want to maximize the revenue that they receive from advertising ontheir Web sites.  Critical factors varydepending on the type of Web site.

 

•                  *Smaller Web Sites.* Most Web sites lack thecritical mass of audience necessary to attract attention from prospectiveadvertisers and advertising agencies. As a result, it is not economicallyjustifiable for them to build, maintain and supervise their own sales force.Further, due to the smaller audience, many Web sites do not subdivide theiradvertising sales by content area and, therefore, lose the opportunity tocharge advertisers a premium for targeting specific subsets of their audience.As a result, many Web publishers outsource their advertising sales function tocompanies that represent a portfolio or network of many Web sites.

 

•                  PremiumWeb Sites.  Web sites with high brand recognition and a large online audience want toensure that they sell premium advertising inventory to top advertisers for thebest price.  Premium Web sites may nothave a cost effective way of reaching these advertisers, or may choose tooutsource a portion of their advertising sales so that their employees candedicate their time to other aspects of the business.

 

•                  *Unsold Inventory. *Many Web sites haveadvertising inventory that remains under-sold or unsold.  Web sites may experience diminishing returnsif they try to reduce their excess inventory on their own.  Web publishers may opt to work with companiesrepresenting a portfolio or network of Web sites, giving them theopportunity to generate revenue by reducing or eliminating unsold inventory.

 

•                  ***Delivering and Managing HighVolumes of Advertisements.*****ManyWeb publishers lack the resources to develop and operate the technologyrequired to deliver high volumes of advertisements efficiently, while providingadequate targeting and accurate measurement and billing to advertisers. As aresult, many Web publishers rely on third-party firms to deliver and manageadvertisements and account data on their Web sites.

 

***Advertisers***

 

Advertisersaim to profit from selling products and services and building their brandsonline.  Internet advertising offers avariety of options, including traditional advertising formats, such as banner,pop-up and pop-under advertisements and e-mail, enhanced advertisements, suchas online search and rich media advertisements containing moving graphics,sound and video and SEM campaigns. Advertisers also must consider whether they wish to run generaladvertisement campaigns that reach a broad group of consumers or target moredefined audiences by advertising on select Web sites, through behavioraltargeting or otherwise. Advertisers look to Internet advertising companies withexpertise in the following areas:

 

•                  ***TargetingOnline Audiences.*****With an ever-increasing number of Websites and variety of content, online audiences are increasingly fragmented andharder for advertisers to reach. Advertisers need third-party firms that can provide them with reliabletools to reach and target their desired audience segments online.

 

5

----

 

•                  ***Controlling Costs.*****It has become increasingly costly for advertisers tocoordinate online advertising campaigns across numerous smaller Web sites, towork with premium Web sites and to run campaigns. Web advertising costs havealso increased as a greater number of advertisers compete for ad impressions.Advertisers look to Internet advertising companies that offer themcost-effective ways to advertise their brands and aggregate their onlineaudiences into a larger customer base.

 

•                  ***Structuring AdvertisingCampaigns.*****As theInternet has expanded, the variety of options available to advertisers has alsoincreased.  Advertisers must decide whichWeb sites to work with, what their target audience is and how they can besttarget that audience.  Advertisers needassistance to ensure that their online spending budget is allocatedeffectively.

 

•                  ***ServingAdvertisements and****M**anaging** C**ampaigns.***Advertisersneed software that can deliver advertisements in a variety of formats andmeasure the performance of their campaigns accurately and quickly.  Many advertisers lack the analytical tools toactively manage larger or complex advertising campaigns, target appropriateusers, efficiently run advertising campaigns utilizing a variety of formats andensure the accuracy of measurement and billing. These advertisers may choose to outsource these functions to third-partyproviders.

 

**24/7REAL MEDIA’S SOLUTION**

 

24/7Real Media offers a suite of media services and software products and servicesfor the online advertising needs of Web publishers and advertisers, including Webrepresentation, SEM services, online advertisement serving and analytics. With20 sales locations in 12 countries, we are able to work closely with Webpublishers and advertisers to implement customized, integrated solutions tosell and deliver advertising on Web sites and manage other critical operationsthat meet their needs in a cost-effective way. Through our Media Solutions,Search Solutions and Technology Solutions segments, we are capable ofdelivering the following benefits:

 

•                  ***Comprehensive and Integrated Solutions*****.** With increasinglycomplex advertising campaigns, Web publishers and advertisers need asingle provider of media and technology solutions that can serve an increasednumber of advertisements in a variety of formats, carefully monitor and analyzecustomer traffic and behavior and provide timely and accurate measurement andbilling. We offer a broad range of solutions to Web publishers and advertisersthrough our three principal lines of business, and integrate our Open AdSystemtechnology with all of our products.  Webelieve our integrated solutions and our sophisticated technology reduce theneed for Web publishers and advertisers to work with multiple vendors, makingit less costly for our customers to capitalize on advertising inventory,regardless of the format or the nature of the advertising campaign

 

•                  *Web Publishers.* Our Media, Search and Technology solutionshelp Web publishers build and target audiences on their Web sites, bettermanage the delivery of higher volumes of advertisements and collect andsafeguard valuable information about their Web users and audiences. Our 24/7Web Alliance also enables Web publishers to leverage their advertisinginventory as part of a network of Web sites that offer advertisers broaderreach and improved targeting through deeper content. We also provideadvertising sales and media representation services to a select portfolio ofaffiliated Web sites. We combine our Open AdSystem technology with our Insight 

 

6

----

 

analyticsproducts to offer Web publishers sophisticated tools to measure and understandonline audience behavior.

 

•                  *Advertisers.*Our24/7 Web Alliance allows advertisers to reach and target the audiences ofhundreds of Web sites with cost-effective, custom media solutions both to buildbrand value and generate quality leads. Through our Search Solutions, weconnect advertisers with consumers who use search engines to search forinformation about products and services. Our technology provides advertiserswith an efficient system for measuring, analyzing and actively managingadvertising campaigns across numerous Web sites. This functionality helpsadvertisers more cost-effectively purchase advertisement campaigns fromnumerous Web publishers.

 

•                  ***Reliable Customer Service and Support.*****We provide superior customer service andtechnical support to meet the increasingly sophisticated needs of Webpublishers and advertisers. We believe that continual communication with ourcustomer base is essential to our long-term success. Our customer service andsupport centers are organized to support our global operations and are staffedwith knowledgeable technical and client service teams. Our local presenceenables us to better understand and service the needs of our clients, and wecontinuously strive to improve our customer service and support in response toinput from our clients.

 

•                  ***Local and Global Benefits*****.**Given the vast number of Web sites and the resulting audience fragmentation,Web publishers and advertisers need targeted solutions that enable them toreach global audiences in high-growth online advertising markets locally andworldwide.  With 20 sales locations in 12countries throughout North America, Europe, Asia and Australia, our customersbenefit from proven advertising techniques learned by us worldwide.  We deliver local and global solutions to Webpublishers and advertisers in the languages and according to the laws andcustoms of each local market. For Web publishers, we utilize our global technologydevelopment and support team to facilitate the sale, installation andcustomization of technology solutions in almost any major local market. Foradvertisers, we run advertising campaigns to reach local markets and globallydispersed audiences and to target particular online segments.

 

**24/7REAL MEDIA’S GROWTH STRATEGY**

 

Ourobjective is to continue to expand our position as a leading provider of media,search and technology solutions for Internet advertising. Key components of ourgrowth strategy include the following:

 

***Extend and Enhance Product Line.*****We continually seek to extend and enhanceour media, search and technology product lines. To enhance our media solutions,we look to add Web sites to our 24/7 Web Alliance that have high-quality content,recognizable brand names and audience demographics that are attractive to ourclient advertisers. To enhance and extend our search solutions, we work tostrengthen our relationships with our existing distribution partners and pursueadditional partners. For our technology solutions, we regularly evaluate ourtechnology platform and products and upgrade them to integrate newfunctionalities and respond to industry developments.

 

7

----

 

***Increase Global Presence.*****We continually look for opportunities toexpand our global presence by entering new, high-growth online advertisingmarkets worldwide. We may increase our presence by expanding and leveraging ourcurrent operations. For example, we recently opened an office in Hamburg toexpend our presence in Germany. In Europe, we plan to continue to increase ourpresence by entering new markets and bringing new analytics, search andadvertiser solutions to the market and aggressively targeting the largest Webpublishers that require global service and support.  We may also seek to increase our presence inAsia and elsewhere through strategic acquisitions and alliances, as describedbelow.

 

***Pursue Strategic Acquisitionsand Alliances.*** We continually look for strategic acquisitions andalliances that offer us the opportunity to enhance our technology and mediareach and extend our presence into new and high-growth online advertisingmarkets. We may pursue additional acquisitions, similar to our acquisitions of24/7 Real Media Korea and Decide, that can make us a leading player in ahigh-growth market. We may also pursue acquisitions or other partneringopportunities that augment our ability to provide search servicesworldwide.  For example, we recentlyentered into our joint venture agreement with Dentsu to deliver SEM services tothe Japanese market.

 

***Cross-Sell Into Installed Base.*****We intend to continue providingcomprehensive solutions to the market and to aggressively cross-sell oursolutions. We recently integrated our media, search and technology sales forcesto better accomplish this goal.  Whenmarketing our media representation services, we seek to promote our technologysolutions to Web publishers as a way to better target their online audiencesand make their Web sites more attractive. In addition, we believe significantopportunities exist to sell additional products to our existing customers whoare not currently taking advantage of our full suite of products and services.In particular, we intend to leverage our global reach to sell our products tomulti-national advertisers and publishers that may currently be purchasingservices from different companies in each region in which they operate. We planto cross-sell our technology solutions to Web publishers within our 24/7 WebAlliance to help them actively manage their campaigns. We also plan to promoteour 24/7 Search services to advertisers purchasing inventory in our 24/7 WebAlliance as an additional, cost-effective means of directly targeting consumerswho use search engines.

 

**OURPRINCIPAL LINES OF BUSINESS**

 

**MediaSolutions (“Media”)**

 

***The 24/7 Web Alliance***

 

Throughour 24/7 Web Alliance, a global alliance of over 1,500 affiliated Web sites, weprimarily represent Web sites with brand names, quality content and globalreach. We promote our media representation services to Web publishers seekingto increase advertising revenue from their Web sites and maximize revenue fromtheir existing advertising inventory. We also promote our 24/7 Web Alliance toadvertisers seeking online strategies to target audiences, build their brandsand generate greater customer response and greater return from theiradvertising spending.  We leverage ourOpen AdSystem technology platform and our experienced traffic and accountmanagement staff to help our client advertisers target advertisements to theright segments of our 24/7 Web Alliance audience.  We offer the following options in each of the majorregions in which we operate:

 

8

----

 

•                  ***The 24/7Portfolio.***Our 24/7 Portfolio is a select portfolio of brandname Web sites to which we provide advertising sales and media representationservices. We believe our 24/7 Portfolio Web sites offer our client advertiserspremier brands, quality content and large online audiences.

 

•                  ***24/7Verticals.***Our 24/7 Verticals groups together partner Web sites,categorized by content (sports, travel, women’s interest), demographics (18-34age group, teens) or psychographic characteristics (music, politics). 24/7Verticals enables our client advertisers to target specific audiences segmentsby content across multiple sites with a single advertising buy. Advertisers cancontrol content by identifying specified sites, sections, pages or positions ona page that receives ads and customize their online marketing strategies toimprove reach and response. We believe our 24/7 Verticals solution offersadvertisers one of the most cost-effective marketing solutions for great reach.

 

•                  ***The 24/7Network.***Our 24/7 Network aggregates hundreds of Web sites thatwe believe are attractive to advertisers because they generate a high number ofadvertising impressions and offer a variety of online content. We believe the24/7 Network is a cost-effective marketing solution for advertisers to reachquality audiences, build brand value and obtain responses on Web sites withquality content and brand names.

 

•                  ***TargetingCapabilities and 24/7 OnTarget.***We provide our clientadvertisers with a variety of options for targeting audiences.  24/7 OnTarget, our behavioral targetingsolution, allows advertisers to target Internet users based on their recentbehavior wherever the users are within the 24/7 Web Alliance. 24/7 OnTargetuses our Insight ACT technology.  We alsohave the expertise and technology to target audiences in a variety of otherways, including based on: keyword (serving advertisements related to specificwords entered into a search box by an online consumer), geography (deliveringadvertisements based on specific geographic locations), day parting (specifyinga particular time of day or week during which the advertisement is served) andfrequency capping (limiting the number of times a particular advertisement isdelivered to the same user within specific time periods).

 

Weconsider the following to be some of the key features of our 24/7 Web Alliance:

 

•                  ***Deliversan Attractive Audience*.** The 24/7 Web Alliance consolidates Websites that are attractive to advertisers for several reasons, including theirbrand names, the quality and targeted nature of their published content and thenumber and type of users. We also regularly monitor key audience metrics,including the number of times users view an advertisement on our affiliated Websites, or impressions levels, and the number of new or unique visitors to theWeb sites.

 

•                  ***Includes Desirable WebSites.**** *We require Web sites in our 24/7Web Alliance to comply strictly with specific standards regarding contentquality and brand name recognition, levels of existing and projected page viewsand user demographics.

 

•                  ***OffersGlobal Reach and Exposure.*** The 24/7 Web Alliance attracts aglobal audience, including users in North America, Europe, Asia and other partsof the world, and served approximately 91.2 billion paid impressions in2005. We believe many Web sites in the 24/7 Web Alliance are among the mostfrequently visited Internet destinations, publishing quality content withrecognizable brand names. Through our global sales force, we promote the 24/7

 

9

----

 

Web Alliance toadvertisers worldwide to run international, pan-regional or regionaladvertising campaigns. We also offer advertisers access to single-sitecampaigns on individual Web sites, access to cross sections of the 24/7 WebAlliance to target campaigns to specific content and “run of network”advertising campaigns on all of our partner Web sites.

 

•                  ***ProvidesCustomized, Active Management and Reporting.*** We use our OpenAdSystem platform to actively monitor and manage Web sites across the 24/7 WebAlliance, enabling advertisers to more quickly make campaign refinements. OpenAdSystem helps Web publishers in our 24/7 Web Alliance forecast the amount ofadvertising space available on their site by automatically analyzing historicaldata to project inventory capacity, and by determining the quantity ofavailable inventory and the amount of inventory that already has been sold.

 

***Publishers in the 24/7 Web Alliance***

 

Our24/7 Web Alliance currently includes over 1,500 Web sites represented by 24/7Real Media worldwide. These Web sites trust us to sell their premiumadvertising inventory and their under-utilized advertising inventory to the topinternational advertisers. Using our advanced technology platform, we believewe have developed one of the most cost-effective solutions for Web sites togenerate revenue from their advertising inventory. Our experienced global salesforce ensures that our affiliated Web sites are well-represented to advertisersworldwide and promoted as the leading solution for advertisers to reach theaudiences of these Web sites.

 

Webelieve that inclusion in our 24/7 Web Alliance benefits our affiliated Websites in significant ways. First, inclusion in our 24/7 Network offers ouraffiliated Web sites the technology for managing and delivering Internetadvertising. The affiliated Web sites can avoid the hardware, software andpersonnel costs associated with building and maintaining their ownadvertisement serving technology and, in some cases, their own advertising salesforce. Second, by selling advertising inventory that often would remainunder-sold or unsold, we offer affiliated Web sites a stream of recurringrevenue. Further, we believe that many prominently branded Web sites offeringimpression-based solutions rarely sell their entire advertising inventory. Byusing our 24/7 Portfolio solution, these Web sites gain the opportunity togenerate revenue from their unsold inventory, while protecting the value oftheir Web site’s brand name and the rate they can charge for their advertisinginventory. Third, all of our affiliated Web sites benefit from our experiencedmanagement team, our sales and marketing organization and our worldwide accessto advertisers.

 

Theeffectiveness of our media solutions depends, in part, on the quality of theWeb sites in our 24/7 Web Alliance. We enforce our quality standards byreviewing and periodically auditing Web site content and we reject membershiprequests from Web sites that do not meet our quality standards. Our qualitystandards generally are intended to screen out Web sites with inappropriatecontent, insufficient traffic, illegal activity, fraudulent clicking activityand non-compliance with privacy laws. We also may eliminate Web sites thatencourage users to click on banner advertisements for reasons other than aninterest in our client advertisers’ messages.

 

***Advertisers in the 24/7 Web Alliance***

 

Wefocus our sales and marketing efforts on the leading international advertisersand advertising agencies, many of which have utilized our solutions.Advertisers and advertising agencies typically 

 

10

----

 

implement advertisingcampaigns with written agreements, or insertion orders, governing the natureand duration of the campaign and the Web sites that will run the campaign.Based on the extensive reach of our 24/7 Web Alliance and the breadth of itsonline content, we can package customized advertising solutions for advertisersand advertising agencies. Our sales force works closely with advertisers tocustomize advertising delivery to enhance the effectiveness of advertisingcampaigns.

 

**SearchSolutions (“Search”)**

 

24/7 Search providesperformance-based, SEM services for the Internet. Through 24/7 Search, weconnect advertisers with consumers using search engines to search forinformation about products and services. Our 24/7 Search solution uses ourproprietary Decide DNA technology to help advertisers determine the keywordsmost relevant to their products and services that will lead users from searchengines to the advertisers’ Web sites and to help advertisers optimize theirsearch budgets. Through our relationships with major search engines, whom werefer to as distribution partners, we also help advertisers optimize their Webpages to receive better placement in search results.

 

24/7Search provides the following services:

 

•                  ***Campaign Management*****.** We provide twoprimary services for advertisers running campaigns on pay-for-placement andalgorithmic search engines that are now included in our managed accountservices. These services are:

 

•                  *Pay-for-Placement.*For client advertisers running campaigns on pay-for-placement searchengines, we submit Web site listings into search engine databases and managetheir bidding for keywords related to their Web site listings. Prior to ouracquisition of Decide in August 2004, we charged client advertisers an agreedcost-per-click (“CPC”) whensearch engine users clicked on their Web site listing, and we retained thespread between that agreed CPC and the CPC bid we placed on search engines. Following ouracquisition of Decide, we generally agree on a range of CPC bids with ourclient for keywords we manage for them and retain the difference between therange and the CPC bid we placed on search engines.

 

•                  *PaidInclusion*. For client advertisers running campaigns onalgorithmic search engines, we submit Web sites listings into search enginedatabases. Our client advertisers pay us an agreed CPC when search engine users click on theirWeb site listings. We pay search engines a share of our advertisingrevenue when their users click on our client advertisers’ Web site listings.

 

•                  ***Managed Account Services*****.** For clientsthat employ us for managed account services, we manage all aspects of the SEMprocess across all search engines. Our managed account services include initialsite audits, planning search media campaigns, buying search media, buildingsearch engine submissions, managing pay-per-click and paid-inclusion campaigns,reporting on campaign results, and optimizing campaign performance and searchengine submissions. We typically charge client advertisers a fee based, amongother things, on their total committed budget for our managed account servicesand our achievement of specific performance targets.

 

11

----

 

•                  ***Optimization Services*****.**

 

•                  *ForAdvertisers*. We provide optimization services for clientadvertisers that desire to maintain direct relationships with search engines,which are designed to increase the visibility and relevance of pages in theadvertisers’ Web sites so that they are more likely to be included in theresults of a user’s search on a search engine. We build and optimize advertiserWeb site listings submissions and report campaign results to them. Our clientadvertisers buy search media directly, although we may be involved in theirmedia planning. We typically charge advertisers a fee for optimization servicesdetermined by multiplying an agreed upon CPC by the number of clicks on Website listings we submit to search engines. We may also charge fixed fees forreporting.

 

•                  *For SearchEngines*. We build and optimize advertiser Web site listings submissions forour search engine distribution partners. This service is known as “trusted feedgeneration.” We typically charge a fee based on a percentage of revenuegenerated by the search engine from advertisers that have Web site listingsubmissions built and optimized by us.

 

Currently, we providetrusted feed generation services primarily for Yahoo.  24/7 Search works with clients of Yahoo’s SearchSubmit Pro Program to build and optimize Web site listings, report campaignperformance and provide ongoing optimization. Yahoo employs us to ensure allrelevant deep Web site content is fed accurately into its database on aguaranteed and frequently updated basis. This process requires extensiblemark-up language (“XML”) data feed formatting to facilitate large quantities ofdata transfers. The Yahoo Site Match Xchange service simplifies and automatesthe work required to build, report and optimize XML feeds. Clients provide us,in spreadsheet or simple text file format, the basic data used or referenced inthe client’s Web site that the client would like to include in Overture’s paidinclusion feed.

 

•                  ***ConsultingServices*.**  Our consultingservices include organic search engine optimization services and site audits.We optimize key attributes of client advertiser Web sites to ensure thegreatest opportunity for proper indexing, listing and inclusion in the editorialresults of algorithmic search engines. We do not submit Web site listings foradvertisers as part of our consulting services. Site audits are reviews ofclient advertiser Web sites to determine how best to plan, build and managesearch campaigns.

 

***Decide DNA Technology***

 

Our proprietary DecideDNA technology drives all of our search solutions and was designed exclusivelyas an application to support SEM services. Using Decide DNA, Search Solutionsimplements, measures and optimizes all forms of search engine traffic, withextensive capabilities in pay-for-placement, paid inclusion and organic searchengine listings.

 

***Feed Management*****.** We believe Decide DNA technology provides aflexible automated approach to receiving source content or data from customerWeb sites then loading, structuring and optimizing data in the Decide DNAdatabase. The technology powers the process of creating paid inclusion datafeeds by using data elements within the Decide DNA database and keyword termswithin templates based on the requirements of each of our search enginedistribution partners. Our client data feeds are automatically generated andsubmitted to our distribution partners.

 

12

----

 

***Bid Management*****.** We use Decide DNA technology to move theemphasis of keyword bid strategies from outbidding the competition, a commonstrategy of many bid management tools, to optimizing based on our client’sreturn-on-investment (“ROI”) value and most efficiently using our clients’campaign budgets. Decide DNA technology provides automated management andoptimization of pay-for-placement campaigns on all major search engines. DecideDNA technology optimizes based on evaluating several campaign variables in thefollowing ways:

 

•                  Comparing campaign expenditure as measuredagainst planned and forecast expenditure targets to recommend and/or changekeyword bids to stay within pacing objectives;

 

•                  Comparing the number of clicks deliveredwithin a given campaign budget, based on the set maximum, minimum or averagekeyword bid price for a group of keyword terms;

 

•                  Adjusting keyword bid prices to maintaintarget rankings for our client advertisers’ Web listings in search results;

 

•                  Adjusting keyword bid prices based on ROImetrics and objectives for single and groups of keyword terms;

 

•                  Adjusting keyword bid prices to take advantageof “gap” opportunities, or situations in which we can purchase a keyword for adifferent price with the same performance; and

 

•                  Applying customized optimization rules toachieve desired campaign performance results for our client advertisers. Forexample, maintaining a desired search engine results ranking for a set ofkeywords while achieving a campaign performance target and a bid price target.

 

***Content to Keyword.***** **We believe analyzing data from successful paid inclusion campaigns isone of the best methods of pay-for-placement keyword research. Decide DNAtechnology automates the process of collecting large numbers of keyword termswhere user search queries are matched to individual Web page listings includedin paid inclusion feeds. The system then automatically creates correspondingpay-for-placement listings with titles and descriptions driven by Web pagelistings submitted by us. We believe this can significantly augment theperformance of concurrent SEM.

 

                The following chart illustrates thefeatures and functionality of our Decide DNA technology:

 

**DecideDNA Technology Features and Functionality**

 
| *General Features*            | •      Support  for multiple search products

•      Multiple  data inputs including structured files, URL crawl, keywords

•      Creative  management and optimization of all title and description combinations; can  manage and optimize hundreds of thousands of keywords

•      Intelligent  content optimization and active keyword repository

•      Automated  production of search engine feeds and listings

•      In-depth  traffic and financial reporting and analysis

•      ROI  assessment of creative |
|-------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *Pay-For-Placement  Features* | •      Bid  management of keywords

•      Expenditure  tracking and estimation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

13

----

 
| * *                   | •      Customizable  rules-based keyword optimization

•      Search  engine spend reconciliation

•      Traffic  and budget pacing control                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|----------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| * *                   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *Paid  Inclusion Features* | •      Content  feed management - automate input data from multiple sources

•      Adding  context to content – intelligent content grouping and filtering rules

•      Customizable  rules-based document/product optimization

•      Automated  XML and search engine editorial compliance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *General  Methodology*     | •      Sophisticated  keyword research and document management methods determine comprehensive,  scalable and highly relevant search targeting

•      Utilize  a client’s Web site and database content to create and manage feeds for both  paid inclusion and pay-for-placement distribution

•      Apply  intelligent definition, structure, mark-up and automated optimization to the  keyword and data content

•      Measure  all aspects of traffic generation performance, e.g. traffic by search engine,  search portal, time of day, keyword term, document URL, template version,  content type, etc.

•      Measure  Web site conversion events and customer ROI to a similar degree of detail

•      Automate  the process of utilizing data harvested from paid inclusion activity to  develop comprehensive lists of relevant keyword terms to add to pay-for-placement  search campaigns

•      Use  the concept of “define, test and measure” with multiple variations of  optimization variables to find the best performing content, keywords and  optimization methods

•      Recognize  that all the SEM variables are subject to constant change and that SEM is an  ongoing, continuous optimization process |

 

**TechnologySolutions (“Technology”)**

 

***The Open AdSystem Platform***

 

Ouraward-winning, patent-protected Open AdSystem platform is the foundation of24/7 Real Media’s proprietary technology offering. Our Open AdSystem platformis a format-agnostic advertisement delivery engine capable of deliveringvirtually all types of advertisement formats across the Internet and otherinteractive platforms.

 

24/7Real Media has a comprehensive suite of products based on the Open AdSystemplatform. Key benefits to our customers of our Open AdSystem technology includethe following:

 

•                  *ActiveCampaign Management.*Our Open AdSystem technology enables our customers to actively monitor andmanage their advertising campaigns, allowing them to make more rapid campaignrefinements, and to automatically optimize their campaigns using our yieldmanager tool. Our Open AdSystem technology provides multiple delivery optionsto ensure optimal planning and reporting with respect to advertising campaigns.

 

•                  *SpecificTargeting.* OurOpen AdSystem technology, together with integrated plug-ins and modules,enables our customers to refine the targeting capabilities of our products andservices to their needs. In particular, we leverage our proprietary OpenAdSystem technology platform to offer our customers the ability to targetadvertisements narrowly to particular audience segments and based on theirbehavior.

 

14

----

 

•                  *FlexibleReporting.*Withour Open AdSystem technology, we can generate a broad range of reports usingmany characteristics including site, advertiser, section, viewer andclick-throughs.

 

•                  *InventoryManagement.* OurOpen AdSystem technology helps publishers manage advertising revenue byforecasting the amount of advertising space available on their site. The OpenAdSystem platform automatically analyzes historical data to project futureinventory capacity and determines the quantity of available inventory.

 

•                  *FlexibleFormat Delivery.*With our Open AdSystem technology, our customerscan deliver and manage advertising in many different formats from standardbanner advertisements to rich media advertisements, including streaming media,expanding advertisements, floating advertisements, interactive advertisements,window advertisements, interstitials, full page advertisements and commercialbreaks, and into interactive digital television and on mobile platforms. Webelieve our Open AdSystem technology offers our customers one of the mostversatile advertisement delivery engines available.

 

•                  *Speed, Efficiency andScalability.  *We believe the advertisement delivery architecture of our Open AdSystemtechnology is faster and more efficient than third-party delivery, since theadvertisement comes directly from the Web publisher’s servers. We have designedour Open AdSystem technology to offer high scalability, and believe it offersgreater scalability than other competing products.

 

•                  *DataAccessibility.*Through an XML interface, our customers can export data from our Open AdSystemsoftware. This flexible and open data access allows Open AdSystem to integrateeasily with other enterprise systems such as customer relationship management,billing or reporting.

 

•                  *Ownership and Controlof User Data.  *Strong relationships with online consumers are key to building leadingonline brands that attract top dollars from advertisers. We designed our OpenAdSystem technology to help protect the privacy of online consumers andsafeguard private information.

 

Weupgrade and issue new releases of our OAS technology from time to time.  We recently released and are testing a betaversion of OAS 6.0, which incorporates our Insight XE and Insight ACT asmodules, resulting in better integration of these products.  Future versions of our OAS technology mayalso incorporate our Decide DNA technology, as well as functionalities of ourOpen Advertiser (“OAD”) solution.

 

OurOpen AdSystem technology platform is available to customers through our OpenAdStream Central (“OAS Central”) product, where we host the software centrallyon our servers, or through our Open AdStream Local (“OAS Local”) product, wherewe license the software to customers to run on their local servers.  Both OAS Central and OAS Local offer ourcustomers the Open AdSystem functionalities described above.

 

15

----

 

***Open AdStream Central***

 

We license OAS Central toWeb publishers and distribute it from software hosted centrally on our servers.Our OAS Central solution enables Web publishers to execute advertising programswithout the costs of devoting the in-house resources, time, and personnelrequired to host their own advertisement serving system.  OAS Central provides seamless advertising deliveryand management services for Web publishers and allows them to offer theiradvertisers sophisticated targeting and reporting capabilities, all within asecure, managed environment.  OAS Centralis priced based on a cost-per-thousand impressions (“CPM”) basis.

 

OASCentral continuously monitors advertising delivery for optimum accuracy andperformance, using a fully distributed system architecture with geographic loadbalancing. The system employs a fully redundant infrastructure with multipledata centers, Internet connections, mirrored disk backup and battery andgenerator backups that provide robust, reliable service with rapid scalabilityand performance. We partner with Global Content Delivery Networks for efficientcontent delivery.

 

***Open AdStream Local***

 

Welicense OAS Local to Web publishers, who run the technology on their localservers. OAS Local offers Web publishers control over advertisement delivery, since the Web publishersoperate, control and own the equipment that is serving the advertisements, andcomplete control over how visitor data is used and who has access to it.  OAS Local is an ideal solution for companiesthat have sufficient in-house experience, equipment and data center facilitiesto run an advertisement serving system on their own.  We charge fees to Web publishers foroperating OAS Local on their servers, which typically include a license fee, asoftware maintenance and technical support services fee and a training fee.

 

***The Open Advertiser Solution***

 

OurOAD solution, similar to OAS Central, is an application distributed from ourservers that enables advertisers and their agencies to increase their return oninvestment and to streamline the advertising management process throughanalytical reporting and active campaign management.

 

***The Insight Platform of Audience Management and WebAnalytics Tools***

 

Our Insight software solutions offer Web publishersmarketing intelligence and help advertisers measure, analyze and monetizeaudiences.

 

***Insight XE*** is a Web analytics application thathelps Web publishers measure, analyze and understand the behavior of visitorsto their Web site in natural language. Insight XE employs JavaScript codeembedded in a Web site’s pages, allowing the site owner to assign contextuallyrelevant values to the pages.

 

InsightXE’s features include:

 

•                  *Everyday Business Language.*Insight XE taxonomy allows a Webpublisher to define its site in its own terms, not as pages or URLs.

 

16

----

 

•                  *Audience Segmentation.*Insight XE allows a Web publisher tosegment its audience based on audience behavior, thereby identifying hiddenaffinities for more effective cross-merchandising and marketing.

 

•                  *Relevant Metrics.*Insight XE builds an anonymous profilefor every unique visitor to a Web site. It provides the relevant metrics a Webpublisher needs to understand the way its audience interacts with the Web site.

 

•                  *DataExport.*An XML data router interacts with most commercial enterpriseand desktop applications, allowing users to work with data using the tools oftheir choice.

 

***Insight ACT***, an application that is fully integratedwith OAS, enables a Web publisher to enhance the value of its advertisinginventory by identifying and targeting segments of its audience who may be receptiveto a specific advertiser’s message.

 

InsightACT offers behavioral segmentation and targeting in a three-step process:

 

•      ***A****nalyze.*          Determine which audience attributes aremost beneficial for advertisers.

 

•      ***C****luster.*              Cluster the audience into segments, basedon advertisers’ requests.

 

•      ***T****arget.*                 Deliver targeted messages to the definedaudience clusters.

 

Throughunique identifiers, Insight ACT, in combination with OAS, offers a4-dimensional audience view across:

 

•                  *Content.* What type of content attracts thedesired audience cluster?

 

•                  *Demographic*. What are the known or inferredcharacteristics of the cluster?

 

•                  *Commerce*. What type of products is the clusterlikely to buy?

 

•                  *Advertising.* What is the relevant message to elicit aresponse from the cluster?

 

**SEASONALITY**

 

Historically,our business is subject to some seasonal fluctuations with advertising demanddampened during the summer months of the third quarter each year, particularlyin Europe, and higher revenue in the fourth quarter each year due to increaseddemand for online advertising during the Christmas season.  Our Search segment has continued to growwithout regard to seasonality.

 

**INTERNATIONALOPERATIONS**

 

We are a global provider of Internet mediarepresentation services, with sales locations in North America, Europe, Asiaand Australia.  One of our long-termgrowth strategies has been to expand our international operations, either byleveraging our existing operations or by engaging in strategic acquisitions andpartnerships.  We have increased ourinternational presence over the past few years and, as a result, our revenuehas become increasing dependent on our international operations.  Our Search 

 

17

----

 

segment,in particular, is dependent on revenue from international operations.** **We currently derivemore than half of our total revenue from our foreign operations.

 

Our internationaloperations are subject to the same risks that affect our Company and ourindustry generally, as well as specific risks related to legal and culturalchallenges in foreign countries.  We alsohave risks associated with specific international operations.  While we will continue to strive to expand our international presence,we could face increased competition as existing competitors increase theirpresence or as new companies enter the business overseas.  Increased competition could negatively impactour plans for expansion and decrease our profitability in the affected areas.  See “Risk Factors” for further informationon risks affecting our Company, our industry and our international operations.

 

**SALESAND MARKETING**

 

We sell our products and services worldwide througha sales and marketing organization that includes 20 sales locations in 12countries throughout North America, Europe, Asia and Australia. In the UnitedStates, our sales force is located at our headquarters in New York and oursales locations in Austin, TX, Chicago, IL, Fort Washington, PA, Los Angeles,CA, San Francisco, CA, and Sunnyvale, CA. We also have sales offices inAustralia, Canada, France, Germany, Italy, Spain, Sweden, Switzerland, theUnited Kingdom, Japan and South Korea.

 

We leverage the substantial media expertise of oursales and marketing team to increase the value of advertising campaigns forboth our advertisers and our partner Web sites. We also employ a Web siterelationship department that surveys our partner Web sites and monitorsqualitative indicators of service levels in order to continuously improve ourcustomer service.

 

**PRIVACYPROTECTION**

 

Thegrowth of our business and of the Internet depends on user trust in theintegrity of the Internet and in the businesses that use it. We believe thatfostering user confidence in online privacy is an integral component of ourcommitment to delivering the right message to the right user at the right time.We actively monitor privacy laws and regulations, and we take seriously theprinciples that consumers must have notice and choice and confidence that theirinformation is secure. We are a member of the Network Advertising Initiative(NAI), a cooperation of online advertisers, we participate in the TRUSTe WebSeal program and we have qualified under the EU safe harbor framework developedby the U.S. Department of Commerce in coordination with the EuropeanCommission, which provides guidance on how to provide adequate protection forpersonal data from Europe, as required by the European Union’s Directive onData Protection.  We also designed ourOpen AdSystem technology to help protect the privacy of online consumers andsafeguard private information.

 

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

 

18

----

 

**INTELLECTUALPROPERTY**

 

We ownU.S. Patent No. 6,026,368 entitled “On-Line Interactive System and Methodfor Providing Content and Advertising Information to a Targeted Set of Viewers.”Short-term licensees of the patent include Accipiter, Falk and several smallertechnology providers. The patent, which expires in 2015, embodies pioneeringtechnology in the field of targeted content delivery. The patent relates to anonline system for managing the delivery of targeted advertisements or othercontent that adjusts the priorities associated with such advertisements orcontent in order to satisfy exposure goals or other predetermined criteria. Wealso own U.S. Patent No. 6,601,041 entitled “Method of Providing TargetedAdvertisement to a Computer Mediated Communications Network,” which coversmethods relating to the sequencing of advertising, which we believe furtherextends our competitive advantage.  Thispatent also expires in 2015.

 

InJanuary 2003, we acquired our Web analytics technology, Insight, for whicha patent application currently is pending. The acquired Web analyticstechnology uses a proprietary taxonomy engine to speak the same language that abusiness uses when talking about its customers. It is designed to providerevenue-generating marketing intelligence to Web publishers and to helpcompanies measure, analyze and monetize their interactive audience. Among otherfunctions, the acquired technology is designed to enable marketers to performbehavioral segmentation and clickstream analysis and allow Web publishers andadvertisers to use behavioral information with e-commerce and otherapplications.

 

In2002, we acquired U.S. Patent No. 5,446,919, entitled “Communication System andMethod with Demographically or Psychographically Defined Audiences,” whichbroadly covers communications systems, including interactive and cabletelevision, in which advertisements and other media messages are determined by demographicor psychographic information associated with the user. This patent expires in2012.

 

Open AdStream is our U.S. registered trademark, and wehave pending trademark applications in the United States for Open AdSystem,Open Advertiser, Insight XE, Insight ACT and Decide DNA. We have entered intoconfidentiality and invention assignment agreements with our employees andcontractors, and nondisclosure agreements with parties with whom we conductbusiness in order to limit access to, and disclosure of, our proprietaryinformation.

 

**COMPETITION**

 

Webelieve we are a leader in the highly competitive market of Internetadvertising and marketing services. We believe our ability to compete overalldepends on many factors, including the following:

 

•                  our ability to adapt and scale our existing technology, and develop andbring to market new technologies, as customer needs evolve;

 

•                  the timing and acceptance of newproducts and services and enhancements to existing products and services eitherdeveloped or acquired by us;

 

•                  the performance, functionality, priceand reliability of our products and services;

 

•                  our global sales and marketingefforts;

 

19

----

 

•                  our customer service and supportefforts; and

 

•                  the relative impact of generaleconomic and industry conditions on us and our competitors.

 

We also compete in eachof our lines of business with companies offering similar services.  We monitor our lines of business to ensurethat we remain competitive in each of these areas.  Main competitive drivers in each of our linesof business are the technology offered and its performance, the pricing ofproducts and services and the levels of customer support.

 

***Media Solutions***

 

Ourmedia solutions compete for advertising spending against Web publishers,including some of our customers who have their own sales forces. We alsocompete with a variety of Internet advertising networks and companies thatfacilitate Internet advertising, including ValueClick, Right Media, Burst! andTribal Fusion, as well as some smaller niche online advertising networks. Inaddition to these Web site networks we also compete with large portal sitessuch as AOL, MSN, Yahoo! and Google. We also compete with the traditionaladvertising media of television, radio, cable and print for a share ofadvertisers’ total advertising budgets.

 

***Search Solutions***

 

24/7 Search competes with several other companiesthat provide service optimization, including DoubleClick/Performics,aQuantive/Atlas Search, Did-It, and Impaqt, as well as start-up companies withuntested SEM solutions. In addition, Yahoo! and Google also provide SEMservices for advertisers looking to drive traffic to their Web sites usingperformance-based, keyword search services.

 

***Technology Solutions***

 

We compete against other established providers ofadvertisement serving solutions and several other companies that providethird-party advertisement serving services as well as start-up companies withuntested products and services. Our competitors for advertisement servingsolutions include DoubleClick, Accipiter, Falk and ValueClick.

 

**EMPLOYEES**

 

As of March 1, 2006, we employed approximately 368persons worldwide, including approximately 226 in sales and marketing, 88 intechnology and product development and 54 in accounting, human resources andadministration. We consider our employee relations to be good. Our subsidiariesin France, Spain and Scandinavia are parties to collective bargainingagreements pursuant to and in accordance with applicable law.

 

**WEBSITE ACCESS TO OUR SEC REPORTS**

 

Our Internet websiteaddress is www.247realmedia.com.  Throughour Internet website, we will make available, free of charge, the followingreports as soon as reasonably practicable after electronically filing them with,or furnishing them to, the SEC: our Annual Reports on Form 10-K; our QuarterlyReports on Form 10-Q; our Current Reports on Form 8-K; and amendments to thosereports filed or furnished pursuant to Section 13(a) of the Securities ExchangeAct of 1934, as amended (the “Exchange Act”). Our Proxy Statements for our Annual Stockholder Meetings are alsoavailable through our 

 

20

----

 

Internet website.  Our Internet website and the informationcontained therein or connected thereto are not intended to be incorporated intothis Annual Report on Form 10-K.

 

You may also obtaincopies of our reports without charge by writing to:

 

24/7 Real Media, Inc.

132 West 31stStreet

New York, NY 10001

Attn:  Investor Relations

 

21

----

 

**ITEM 1A.  RISK FACTORS.**

 

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

 

WEMAY NOT BE ABLE TO SUSTAIN OUR PROFITABILITY.

 

We achieved profitabilityin accordance with generally accepted accounting principles in the UnitedStates, or GAAP, for the year ended December 31, 2005 but we may not be able tosustain profitability in the future. We incurred net losses of $3.2 million forthe twelve months ended December 31, 2004. Each of our predecessors had netlosses in every year of their operations. We may incur net losses for the foreseeable future. Even if we domaintain profitability, we may not be able to sustain or increase profitabilityon a quarterly or an annual basis in the future.

 

WE MAY NOT BE ABLE TOSUCCESSFULLY UPGRADE AND INTEGRATE OUR EXISTING PRODUCTS AND TECHNOLOGY.

 

Ourability to compete depends, in part, on our success at upgrading andintegrating our existing products and technology.  From time to time we upgrade and issue newreleases of our existing technology to integrate new functionalities andrespond to industry developments.  Forexample, we recently released and are testing a beta version of OAS 6.0, whichincorporates our Insight XE and Insight ACT technologies as modules, and futureversions of OAS 6.0 may incorporate our Decide DNA technology, as well asfunctionalities of our OAD solution.  Wemay experience bugs, delays, difficulties or increased costs that could hinderor prevent the successful design, integration, development, introduction ormarketing of new releases of our technology. In addition, we must ensure that performance levels of our technologyremain steady when we release new versions to our customers.  Any material delays in introducing a newrelease or performance problems could cause us to lose customers and cause ourrevenue to decline.

 

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

 

We have operations in anumber of international markets, including Australia, Canada, Europe Japan andSouth Korea, and we currently derive more than half our revenue from non-U.S.markets. To date, we have limited experience in marketing, selling anddistributing our solutions internationally. Our international operations aresubject to other risks, including:

 

•                  changes in regulatory requirements;

 

•                  reduced protection for intellectualproperty rights in some countries;

 

•                  potentially adverse tax consequencesand restrictions on cash flow resulting from, among other things:

 

•                  local statutory liquidityrequirements for businesses operating in certain foreign countries;

 

•                  the need to maintain cash balances tomeet short-term capital requirements;

 

•                  operations in foreign countries withhigher tax rates than the United States;

 

22

----

 

•                  the inability to utilize certainforeign tax credits; and

 

•                  the inability to utilize some or allof our losses generated in one or more foreign countries;

 

•                  general import/export restrictionsrelating to encryption technology and/or privacy matters;

 

•                  difficulties and costs of staffingand managing foreign operations;

 

•                  local law requirements governingemployment contracts, which may impose, among other things, minimum noticeperiods and minimum severance payments for involuntary terminations;

 

•                  political and economic instability;

 

•                  fluctuations in currency exchangerates; and

 

•                  seasonal reductions in businessactivity during the summer months in Europe and certain other parts of theworld.

 

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

 

OUR SEARCH BUSINESS ISCURRENTLY OUR FASTEST GROWING BUSINESS SEGMENT, AND WE MAY HAVE INEFFICIENCIESIN OUR BUSINESS MODEL OR MAY BE UNABLE TO CAPITALIZE ON CURRENT OR FUTURESEARCH TRENDS.

 

As companies recognizethe value of targeting advertisements to consumers during the search process,SEM services have become increasingly in demand. As a result, our Searchsegment has been growing faster than our other business segments. The searchindustry is still relatively new, competition is high and there are no establishedparameters for the business. We are working to develop set standards as ourSearch business grows, but we cannot be certain that our current strategieswill be successful in the long-run. As a result, it is difficult to predict howour Search segment will perform in the future. For example, revenue in thesegment has increased significantly in recent periods, but gross margins havedecreased as our lower gross margin managed SEM services business performedbetter than other, higher margin segments. Further, as we work to develop along-term business model for Search we may encounter inefficiencies, such asthe under or over-delivery of campaigns due to programming difficulties, orset-backs, such as outdated methodologies and tools that must be reconfiguredor replaced. There is no guarantee that our current or future Search softwareand techniques will meet our clients’ needs, successfully manage increasinglycomplex campaigns or be profitable for our business.

 

WE ARE UNDERTAKINGSEVERAL GLOBAL INITIATIVES IN ORDER TO BETTER LEVERAGE OUR BUSINESS, AND OUREFFORTS MAY NOT BE SUCCESSFUL OR MAY NOT BE BENEFICIAL TO EACH OF THE OFFICES INWHICH WE OPERATE.

 

In order to realign andbetter leverage our business we have commenced several global initiatives,including harmonizing our global product lines across the offices in which weoperate and creating global standards for product management, development andmarketing, which we will continue 

 

23

----

 

during the course of2006. In order to synchronize our various offices and create a uniformworldwide business model we will need to, among other things, set up uniformprocesses, formalize and build out training courses, set up global informationsharing and communication processes, identify and track productivity and costmeasurements and identify areas of inefficiency and develop global recovery plans.  While we anticipate that the globalrealignment will have cost and efficiency savings for our business, there is noguarantee that our global efforts will be successful over the long run.Additionally, the global business model that we implement for each of ourbusiness segments may not be the ideal standard for each of our offices, andmay result in increased costs and decreased savings for particular offices andlines of business throughout our organization.

 

OUR ACQUISITIONS, WHICHHAVE BEEN CRITICAL TO OUR GROWTH, MAY NOT BE SUCCESSFUL AND COULD ADVERSELYAFFECT OUR ABILITY TO PROJECT RESULTS.

 

We were formed inFebruary 1998 to consolidate three Internet advertising companies, andhave since acquired or entered into joint ventures with many other companies.Most recently, in September 2005, we formed a joint venture with theadvertising company Dentsu to provide our SEM services in Japan. We maycontinue pursuing selective acquisitions of businesses, technologies andproduct lines and additional joint ventures as a key component of our growthstrategy. If we acquire additional companies or expand our business linesthrough joint ventures, we will continue to face risks of integrating andimproving our financial and management controls, advertisement servingtechnology, reporting systems, infrastructure and procedures, and expanding,training and managing our work force. This process of integration may take asignificant period of time and may require the dedication of global resources,personnel and members of management, on a short or long-term basis, which maydistract management’s attention from our other operations. Any futureacquisition, investment or joint venture may result in the use of significantamounts of cash, potentially dilutive issuances of equity securities, theincurrence of debt and amortization expenses related to intangible assets. Inaddition, acquisitions involve numerous risks, including:

 

•                  the difficulties in the integrationand assimilation of the operations, technologies, products and personnel of anacquired business;

 

•                  the diversion of management’sattention from other business concerns;

 

•                  the availability of favorableacquisition financing for future acquisitions; and

 

•                  the potential loss of key seniormanagers or employees of any acquired business.

 

Our inability tosuccessfully integrate any acquired company, or failure to achieve any expectedsynergies of an acquisition or joint venture, could adversely affect ourbusiness.

 

OUR FUTURE REVENUES ANDRESULTS OF OPERATIONS MAY BE DIFFICULT TO FORECAST AND RESULTS IN PRIOR PERIODSMAY NOT BE INDICATIVE OF FUTURE RESULTS.

 

At times in the past andin certain segments, our revenues have grown significantly and have decreasedsignificantly. Accurate predictions of future revenues are difficult because ofthe rapid changes in the markets in which we operate.

 

24

----

 

Our results of operationshave fluctuated and may continue to fluctuate significantly in the future as aresult of a variety of factors, many of which are beyond our control. Thesefactors include:

 

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

 

•      changesin fees paid by advertisers or other clients;

 

•      changesin the amount of royalties payable by us to owners of Web sites or theimposition of new charges or fees by Web site owners;

 

•      thedemand by advertisers and Web publishers for our advertising solutions;

 

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

 

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

 

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

 

•      changesin results of operations brought about by newly acquired businesses or newjoint ventures, which may be exceedingly difficult to predict due to management’slack of history with such businesses or joint ventures;

 

•      changesin governmental regulation of the Internet; and

 

•      generaleconomic conditions.

 

Our future revenues and resultsof operations may be difficult to forecast due to the above factors and thetime we may need to adequately respond to any changes in them. For example,certain of the search engines that we partner with in the management of SEMservices may impose additional charges for using their technology interfaces toassist our clients. Our profit margins may suffer if we are unable to pass someof the costs on to our customers. In addition, our expense levels are based inlarge part on our investment plans and estimates of future revenues. Anyincreased expenses may precede or may not be followed by increased revenues, aswe may be unable to, or may elect not to, adjust spending in a timely manner tocompensate for any unexpected revenue shortfall. As a result, we believe thatperiod-to-period and year-to-year comparisons of our results of operations maynot be meaningful.

 

OUR TECHNOLOGY PRODUCTSAND SERVICES ARE BASED ON OUR PROPRIETARY OPEN ADSYSTEM PLATFORM, AND OURBUSINESS WOULD SUFFER IF OPEN ADSYSTEM WAS DISRUPTED.

 

Open AdSystem is ourproprietary advertisement serving technology and serves as our soleadvertisement serving solution. We have developed a variety of products to workon or with this platform, and our Media business also utilizes Open AdSystemtechnology. We must, among other things, ensure that the technology willcontinue to function efficiently at high volumes, interact properly with ourdatabase, offer the functionality demanded by our customers and assimilate oursales and reporting functions. Customers may become dissatisfied by any systemfailure that interrupts our ability to provide our services to them, includingfailures affecting our ability to deliver advertisements or report 

 

25

----

 

on advertisement deliverywithout significant delay. Sustained or repeated system failures would reducethe attractiveness of our solutions to advertisers, advertising agencies andWeb publishers and result in contract terminations, fee rebates and make-goods,thereby reducing our revenue.  Slowerresponse time or system failures may also result from straining the capacity ofour deployed software or hardware due to an increase in the volume ofadvertising delivered through our servers. To the extent that we do noteffectively address any capacity constraints or system failures, our business,results of operations and financial condition could be materially and adverselyaffected.

 

OUR REVENUE COULD DECLINEIF WE FAIL TO EFFECTIVELY MANAGE ADVERTISING INVENTORY MADE AVAILABLE TO US,AND OUR GROWTH COULD BE IMPEDED IF WE FAIL TO ACQUIRE ACCESS TO NEW ADVERTISINGINVENTORY.

 

Our success depends inpart on our ability to effectively manage advertising inventory made availableto us. The Web publishers that list their unsold advertising inventory with usare not bound by long-term contracts. In addition, Web publishers can changethe amount of inventory they make available to us at any time. If a Webpublisher decides not to make advertising space from its Web sites available tous, we may not be able to replace this advertising space with advertising spacefrom other Web sites that have comparable traffic patterns and userdemographics quickly enough to fulfill our advertisers’ requests. This wouldresult in lost revenue. We expect that our customers’ requirements will becomeincreasingly sophisticated as the Web continues to mature as an advertisingmedium. If we fail to manage our existing advertising space effectively toanticipate or meet our customers’ changing requirements, our revenue coulddecline. Our growth also depends on our ability to expand our advertisinginventory. To attract new advertisers, we must maintain a consistent supply ofattractive advertising space. We intend to expand our advertising inventory byselectively adding to our network new Web publishers that offer attractivedemographics, innovative and quality content and large audiences. Our abilityto attract new Web publishers to our network and to retain Web publisherscurrently in our network will depend on various factors, some of which arebeyond our control. These factors include our ability to introduce new andinnovative product lines and services, our ability to efficiently manage ourexisting advertising inventory, our pricing policies and the cost-efficiency toWeb publishers of outsourcing all or part of their advertising sales. Inaddition, the number of competing intermediaries that purchase advertisinginventory from Web publishers continues to increase. The size of our inventorymay not increase or even remain constant in the future, which could cause ouradvertising revenue to decline significantly.

 

WE COULD LOSE CUSTOMERSOR ADVERTISING INVENTORY IF WE FAIL TO MEASURE IMPRESSIONS, CLICKS AND ACTIONSON ADVERTISEMENTS IN A MANNER THAT IS ACCEPTABLE TO OUR ADVERTISERS AND WEBPUBLISHERS.

 

We earn advertisingrevenue and make payments to Web publishers based on the number of impressions,clicks and actions from advertisements delivered on our network. Advertisers’and Web publishers’ willingness to use our services and join our network willdepend on the extent to which they perceive our delivery of advertisements andour measurements of clicks to be accurate and reliable. Advertisers and Webpublishers often maintain their own technologies and methodologies for countingclicks, and from time to time we have had to resolve differences between ourmeasurements and theirs or regarding over-delivery of advertising impressions.Further, search advertisers are paying much closer attention to allegations ofclick fraud in the industry generally and have become more willing to inquireabout or challenge click counts related to SEM services. Any significantdispute over the proper measurement of clicks or other user responses to advertisementscould cause us to lose customers, advertising inventory and revenue, and couldsubstantially reduce the gross profit margin we generate in our media andsearch businesses.

 

26

----

 

WE DISCLOSE PRO FORMA INFORMATION,WHICH MAY EXCLUDE ITEMS THAT ARE IMPORTANT TO AN INVESTOR’S UNDERSTANDING OFOUR RESULTS OF OPERATIONS.

 

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

 

OUR NET OPERATING LOSSCARRYFORWARDS MAY BE LIMITED.

 

Due to the “change inownership” provisions of the Internal Revenue Code, the availability of our netoperating loss and credit carryforwards may be subject to an annual limitationagainst taxable income in future periods, which could substantially limit theeventual utilization of these carryforwards. We are currently in the process of finalizing a study to determine theamount of net operating losses and annual limitations.

 

WE COULD BE ADVERSELYAFFECTED BY AN IMPAIRMENT OF A SIGNIFICANT AMOUNT OF GOODWILL AND/OR INTANGIBLEASSETS ON OUR BALANCE SHEET.

 

In the course of ouroperating history, we have acquired and disposed of numerous assets andbusinesses. Some of our acquisitions have resulted in the recording of asignificant amount of goodwill and/or intangible assets on our balance sheet.The goodwill and/or intangible assets were recorded because the fair value ofthe net assets acquired was less than the purchase price. We may not realizethe full value of the goodwill and/or intangible assets. As such, we evaluateon at least an annual basis whether events and circumstances indicate that allor some of the carrying value of goodwill and/or intangible assets are nolonger recoverable, in which case we would write off the unrecoverable portionas a charge to our earnings.

 

To improve our operatingperformance, we may decide to acquire other assets or businesses complementaryto our business and, as a result, we may record additional goodwill and/orintangible assets on our balance sheet in the future. The possible write-off ofthe goodwill and/or intangible assets could negatively impact our futureearnings. We will also be required to allocate a portion of the purchase priceof any acquisition to the value of any intangible assets that meet the criteriaspecified in the Statement of Financial Accounting Standards No. 141, “*Business Combinations*,” such as marketing,customer or contract-based intangibles. The amount allocated to theseintangible assets could be amortized over a fairly short period. As a result,our earnings and the market price of our common stock could be negativelyaffected.

 

THE SUCCESS OF OUR 24/7SEARCH OPERATIONS DEPENDS ON A FEW SEARCH ENGINE DISTRIBUTION PARTNERS, AND THELOSS OF ONE OF THEM COULD RESULT IN A SUBSTANTIAL DECREASE IN OUR 24/7 SEARCHREVENUE.

 

We have generated themajority of our global Search revenue from clicks originating on Google andOverture, which is a subsidiary of Yahoo!, through relationships in manycountries in which we operate. We expect that these search engines willcontinue to generate a majority or more of our 24/7 

 

27

----

 

Search revenue for theforeseeable future. The interruption or loss of our relationship with Google orOverture would cause a significant decrease in search revenue. As a result ofconsolidation among search engines, and other SEM companies, we could lose oneor more of our clients or face increased competition from clients thatinternally develop or acquire capabilities similar to our service. In addition,as our search engine clients’ operations continue to evolve, we may be requiredto adjust our business strategy to maintain relationships with our clients. Theloss of, or a change in, one or more of these relationships could have amaterial adverse effect on our Search revenue.

 

OUR MAJOR BUSINESSPARTNERS MAY EXPERIENCE ADVERSE BUSINESS CONDITIONS THAT COULD ADVERSELY AFFECTOUR BUSINESS.

 

We have entered into ajoint venture with Dentsu to promote search engine marketing services in Japan,a strategic business relationship with Lycos, we have major search enginedistribution partners, such as Google and Overture, and we may enter intosimilar relationships with other companies. A substantial portion of ourrevenue is, directly or indirectly, attributable to these majorrelationships.  If one or more of thesecompanies experiences adverse business conditions that may render them unableto meet our expectations for the strategic business relationship or to fulfilltheir contractual obligations to us, such an event could have a materialadverse impact on our business, financial condition and results of operations.

 

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

 

Our success depends, to asignificant extent, upon our senior management and key sales and technicalpersonnel, particularly our Chief Executive Officer, our Chief FinancialOfficer and our Chief Executive Officer of Europe.  The competition for experienced and talentedexecutives, senior managers and technical and sales personnel has becomeintense in our industry.  The loss of theservices of one or more of these persons, other similarly positioned members ofmanagement or other key personnel could materially and adversely affect ourability to develop our business.

 

IN ORDER TO CONTINUE TOOPERATE EFFICIENTLY AND TO GROW OUR BUSINESS, WE WILL NEED TO ATTRACT ANDRETAIN QUALIFIED PERSONNEL AND MANAGE OUR COSTS, WHICH WE MAY BE UNABLE TO DO.

 

Our success depends onour ability to attract and retain qualified technical, sales and marketing,customer support, financial and accounting, and managerial personnel.  We may expand our total workforce and willneed to continue to attract qualified personnel in order to grow our businesssuccessfully.  Additionally, as ourbusiness has escalated, we have increased our reliance on contractors andoutside firms for development.  We maynot be able to attract, integrate and retain the numbers and types ofcandidates that we desire, and we may not be able to retain our contractors andoutside firms and may not be able to replace them.  Even if we are successful in attracting newstaff, we may not be able to increase revenue quickly enough to offset thecosts of the additional personnel.  Anyof these contingencies could cause our business to suffer.

 

We have experienced inthe past, and may continue to experience in the future, particular difficultyin hiring and retaining qualified SEM staff. Competition for SEM staff is veryhigh, and training is difficult because the required skill set is complex andthere is no industry standard.  Search iscurrently one of our fastest growing areas. If we are unable to attract, train and retain qualified search staff, wemay not remain competitive in SEM and could lose business and our customers,which could have an adverse effect on revenue.

 

28

----

 

OUR OPERATIONS AREVULNERABLE TO NATURAL DISASTERS AND OTHER EVENTS, INCLUDING TERRORIST ATTACKS,BECAUSE WE HAVE LIMITED BACKUP SYSTEMS.

 

We have limited backupsystems and have experienced system failures and electrical outages from timeto time in the past, which have disrupted our operations. We have a limiteddisaster recovery plan in the event of damage from fire, floods, typhoons,earthquakes, power loss, telecommunications failures, break-ins and similarevents. Our operations are dependent on our ability to protect our computersystems against these unexpected adverse events.

 

If any of the foregoingoccurs, we may experience a complete system shutdown. Any business interruptioninsurance that we carry is unlikely to be sufficient to compensate us for lossof business in the event of a significant catastrophe.

 

In addition,interruptions in our services could result from the failure of ourtelecommunications providers to provide the necessary data communicationscapacity in the time frame we require. Our Open AdSystem technology resides oncomputer systems located in our data centers housed by Equinix and Savvis inthe United States and Level 3 Communications in Europe. These systems’continuing and uninterrupted performance is critical to our success, as asubstantial portion of the revenue depend on the continuing availability ofthese systems. Despite precautions that we have taken, unanticipated problemsaffecting our systems have from time to time in the past caused, and in thefuture could cause, interruptions in the delivery of our solutions. Ourbusiness, results of operations and financial condition could be materially andadversely affected by any damage or failure that interrupts or delays ouroperations. To improve the performance and to prevent disruption of ourservices, we may have to make substantial investments to deploy additionalservers or one or more copies of our Web sites to mirror our online resources.Although we believe we carry property insurance with adequate coverage limits,our coverage may not be adequate to compensate us for all losses, particularlywith respect to loss of business and reputation that may occur.

 

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

 

OUR NETWORK OPERATIONSMAY BE VULNERABLE TO HACKING, VIRUSES AND OTHER DISRUPTIONS, WHICH MAY MAKE OURPRODUCTS AND SERVICES LESS ATTRACTIVE AND RELIABLE.

 

Internet usagecould decline if any well-publicized compromise of security occurs. “Hacking”involves efforts to gain unauthorized access to information or systems or tocause intentional malfunctions or loss or corruption of data, software,hardware or other computer equipment. Hackers have made many attempts to breach the security of our networkoperations, with minimal disruption to date. If hackers are successful in thefuture, they could misappropriate proprietary information, which could lead tolitigation against us, or cause substantial disruptions in our service. We maybe required to expend capital and other resources to protect our Web siteagainst hackers. Any measures we may take may not be effective. In addition,the inadvertent transmission of computer viruses could expose us to a materialrisk of loss or litigation and possible liability, as well as materially damageour reputation and decrease our user traffic.

 

29

----

 

WE DEPEND ON PROPRIETARYRIGHTS, AND WE FACE THE RISK OF INFRINGEMENT.

 

Our success and abilityto compete are substantially dependent on our internally developed technologiesand trademarks, which we protect through a combination of patent, copyright,trade secret and trademark law. We own three patents in the United States, andhave filed and intend to file additional patent applications in the UnitedStates. In addition, we apply to register our trademarks in the United Statesand internationally. Our patent applications and trademark applications may notbe approved. Even if they are approved, such patents or trademarks may besuccessfully challenged by others or invalidated. If our trademarkregistrations are not approved because third parties own such trademarks, ouruse of such trademarks will be restricted unless we enter into arrangementswith such third parties that may be unavailable on commercially reasonableterms.

 

We generally enter intoconfidentiality or license agreements with our employees, consultants andcorporate partners, and generally control access to and distribution of ourtechnologies, documentation and other proprietary information. Despite ourefforts to protect our proprietary rights from unauthorized use or disclosure,parties may attempt to disclose, obtain or use our solutions or technologies.The steps we have taken may not prevent misappropriation of our solutions ortechnologies, particularly in many foreign countries in which we operate, wherelaws or law enforcement practices may not protect our proprietary rights asfully as in the United States.

 

We have, from time totime, been, and may in the future be, subject to claims of alleged infringementof the trademarks and other intellectual property rights of third parties by usor by Web publishers with Web sites in our 24/7 Web Alliance, or by customerswho employ our Technology solutions.  Wemay be required, or may elect, to indemnify these parties against such claims.Such claims and any resultant litigation could subject us to significantliability for damages and could result in the invalidation of our proprietaryrights. In addition, even if we prevail, such litigation could betime-consuming and expensive to defend, and could result in the diversion ofour time and attention, any of which could materially and adversely affect ourbusiness, results of operations and financial condition. Any claims orlitigation from third parties may also result in limitations on our ability touse the trademarks and other intellectual property subject to such claims orlitigation unless we enter into arrangements with the third parties responsiblefor such claims or litigation, which may be unavailable on commerciallyreasonable terms, if at all.

 

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

 

**RISKSRELATED TO THE MARKET FOR OUR COMMON STOCK.**

 

WE HAVE A VERY SUBSTANTIALOVERHANG OF COMMON STOCK AND FUTURE SALES OF OUR COMMON STOCK WILL CAUSESUBSTANTIAL DILUTION AND MAY NEGATIVELY AFFECT THE MARKET PRICE OF OUR COMMONSTOCK.

 

30

----

 

As of January 31, 2006,there were approximately 46.6 million shares of our common stock outstanding.As of that date, we also had an aggregate of approximately 14.7 millionshares of common stock that may be sold into the market in the future, includingapproximately 9.6 million shares of our common stock issuable uponexercise of options, approximately 0.1 million shares of our common stockissuable upon the exercise of the warrants related to our preferred stock,approximately 2.8 million shares of our common stock issuable upon vesting ofrestricted shares, and approximately 2.2 million shares of our commonstock issuable upon conversion of the debentures and exercise of the relatedwarrants. In addition, if we undertake an additional acquisition or financinginvolving securities convertible into shares of our common stock, the aggregatenumber of shares into which those securities are convertible will furtherincrease our overhang.

 

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

 

OUR ABILITY TO GENERATESUFFICIENT CASH FLOW TO REPAY OUR INDEBTEDNESS DEPENDS ON MANY FACTORS, SOME OFWHICH ARE BEYOND OUR CONTROL.

 

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

 

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

 

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

 

THE POWER OF OUR BOARD OFDIRECTORS TO DESIGNATE AND ISSUE SHARES OF STOCK COULD HAVE AN ADVERSE EFFECTON HOLDERS OF OUR COMMON STOCK.

 

Our Board of Directors isauthorized to issue up to 350,000,000 shares of common stock for suchconsideration as they may consider sufficient, without seeking stockholderapproval. The issuance of 

 

31

----

 

additional shares ofcommon stock in the future would reduce the proportionate ownership and votingpower of current stockholders. Our Amended and Restated Certificate ofIncorporation also authorizes our Board of Directors to issue up to 10,000,000shares of preferred stock, the rights and preferences of which our Board ofDirectors may designate without stockholder approval. The designation andissuance of preferred stock in the future could create additional securitieswith dividend and liquidation preferences prior in right of payment to theoutstanding shares of common stock.

 

EFFECTS OF ANTI-TAKEOVERPROVISIONS COULD INHIBIT THE ACQUISITION OF OUR COMPANY.

 

Some of the provisions ofour Amended and Restated Certificate of Incorporation, our By-laws and Delawarelaw could, among other things, together or separately:

 

•      discourage,delay or prevent potential acquisition proposals;

 

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

 

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

 

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

 

These provisions mayapply even if the action that is limited or prevented might be in the bestinterest of our shareholders.

 

WE DO NOT INTEND TO PAYFUTURE CASH DIVIDENDS.

 

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

 

**RISKSRELATED TO OUR INDUSTRY.**

 

OUR FAILURE TO COMPETESUCCESSFULLY MAY HINDER OUR GROWTH.

 

The markets for Internetadvertising and related products and services are intensely competitive andsuch competition is expected to increase. Our failure to compete successfullymay hinder our growth. We believe that our ability to compete depends upon manyfactors both within and beyond our control, including:

 

•      thedevelopment of new online advertising media and methods;

 

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

 

•      theability to attract and retain qualified personnel;

 

32

----

 

•      changingdemands regarding customer service and support;

 

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

 

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

 

Some of our competitorshave longer operating histories, greater name recognition, larger customerbases and significantly greater financial, technical and marketing resourcesthan ours. In addition, current and potential competitors have established ormay establish cooperative relationships among themselves or with third partiesto increase the ability of their products or services to address the needs ofour prospective clients.  In addition,most online advertising companies are seeking to broaden their business models,so that companies that do not currently compete directly with us may decide tocompete more directly with us in the future. We may be unable to competesuccessfully against current or future competitors.

 

CHANGES IN GOVERNMENTREGULATION COULD DECREASE OUR REVENUES AND INCREASE OUR COSTS.

 

Laws and regulations directlyapplicable to Internet communications, commerce and advertising are becomingmore prevalent, and new laws and regulations are under consideration by theUnited States Congress and state legislatures. Any legislation enacted orrestrictions arising from current or future government investigations or policycould dampen the growth in use of the Internet generally and decrease theacceptance of the Internet as a communications, commercial and advertisingmedium. State governments or governments of foreign countries might attempt toregulate our transmissions or levy sales or other taxes relating to ouractivities. The laws governing the Internet, however, remain largely unsettled,even in areas where there has been some legislative action. It may take yearsto determine whether and how existing laws such as those governing intellectualproperty, privacy, libel and taxation apply to the Internet and Internetadvertising. In addition, the growth and development of Internet commerce mayprompt calls for more stringent consumer protection laws, both in the UnitedStates and abroad, which may impose additional burdens on companies conductingbusiness over the Internet. Our business, results of operations and financialcondition could be materially and adversely affected by the adoption ormodification of laws or regulations relating to the Internet.

 

CHANGES IN LAWS ANDSTANDARDS RELATING TO DATA COLLECTION AND USE PRACTICES AND THE PRIVACY OFINTERNET USERS, OR RELATED LITIGATION, COULD HARM OUR BUSINESS.

 

The U.S. federal andvarious state governments have recently proposed limitations on the collectionand use of information regarding Internet users. In 2004 and 2005, the U.S.Congress proposed several new pieces of legislation that would limit the use oftechnologies deemed to be “spyware”, which some bills have defined to includecookies, Web beacons and javascript, which are required by our products andservices. The effectiveness of our Open AdSystem products and services could besignificantly limited by federal and state regulations limiting the collectionor use of information regarding Internet users. Since many of the proposedfederal and state laws or regulations are being developed, we cannot yetdetermine the impact these regulations may have on our business. In addition,growing public concern about privacy and the collection, distribution and useof personal information has led to self-regulation of these practices by theInternet advertising and direct marketing industry, and to increased federaland state regulation.  Lastly, a numberof civil actions have been brought by federal and 

 

33

----

 

state authorities againstcompanies alleged to have distributed “spyware” without the proper consent ofusers. The Network Advertising Initiative, of which we are a member, hasdeveloped self-regulatory principles for online preference marketing. We arealso subject to various federal and state regulations concerning thecollection, distribution and use of personal information. These laws includethe Children’s Online Privacy Protection Act and state laws that limit orpreclude the use of voter registration and drivers license information, as wellas other laws that govern the collection and use of consumer credit information.While we monitor legislative initiatives, in the event that more onerousfederal or state laws or regulations are enacted or applied to us or to ourclients, our business, financial condition and results of operations could bematerially and adversely affected.

 

PRIVACY CONCERNS MAYPREVENT US FROM COLLECTING USER DATA.

 

Growing concerns aboutthe use of cookies and data collection may limit our ability to develop userprofiles. Web sites typically place small files of information, commonly knownas “cookies,” on a user’s hard drive, generally without the user’s knowledge orconsent. Cookie information is passed to the Web site through the Internet user’sbrowser software. Our Open AdSystem technology enables the use of cookies andother non-personally-identifying information to deliver targeted advertisingand to limit the frequency with which an advertisement is shown to a user. Mostcurrently available Internet browsers allow users to modify their browsersettings to prevent cookies from being stored on their hard drive, andMicrosoft Corporation changed the design and instrumentation of its Web browserto give users the option to accept or reject third-party cookies.  A small minority of users are currentlychoosing to prevent certain cookies. Users can also delete cookies from theirhard drive or modify them at any time. Some Internet commentators and privacyadvocates have suggested limiting or eliminating the use of cookies. Anyreduction or limitation in the use of cookies or increase in the number ofusers blocking cookies could limit the effectiveness of our sales and marketingefforts and impair our profiling and targeting capabilities. Such changes alsocould adversely affect our ability to determine the reach of advertisingcampaigns sold and delivered by us and the frequency with which users of sitesin the 24/7 Web Alliance see the same advertisement.

 

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

 

WE FACE RISKS ASSOCIATEDWITH TECHNOLOGICAL CHANGE.

 

The Internet and Internetadvertising markets are characterized by rapidly changing technologies,evolving industry standards, frequent new product and service introductions andchanging customer demands. Our future success will depend on our ability toadapt to rapidly changing technologies and to enhance existing solutions anddevelop and introduce a variety of new solutions to address our customers’changing demands. We may experience difficulties that could delay or preventthe successful design, development, introduction or marketing of our solutions.In addition, our new solutions or enhancements must meet the requirements ofour current and prospective customers and must achieve significant marketacceptance. Material delays in introducing new solutions and enhancements maycause customers to forego purchases of our solutions and purchase those of ourcompetitors.

 

34

----

 

In addition, the development of commercial softwareand technology that blocks, eliminates or otherwise screens out Internetadvertising may reduce the value of advertising inventory on our 24/7 WebAlliance and the benefits of our technology solutions to our customers. Wecannot guarantee that a new commercial software or technology, for end-users orenterprises, will not be capable of eliminating a portion or all of the advertisementformats, including banners, pop-ups, pop-unders and other formats, that weutilize through our 24/7 Web Alliance or that we currently deliver through ourtechnology solutions. To the extent that our customers refuse to pay foradvertisements that are blocked, or if the use of blocking software exceeds ourexpectations, our business, results of operations and financial condition maybe materially and adversely affected.

 

**ITEM 1B.  UNRESOLVED STAFF COMMENTS**

 

None.

 

35

----

 

**ITEM 2. PROPERTIES.**

 

Our principal executive offices are located at 132West 31st Street, New York, New York. They consist of approximately25,300 square feet under a lease that expires in 2011 and provides for totalannual rent of approximately $0.7 million, subject to increase annually toreflect increases in operating expenses.

 

In addition, we currently lease office space in thefollowing domestic locations:

 

•      Fort Washington, PA

•      Los Angeles, CA

•      San Francisco, CA

•      Sunnyvale, CA

 

We currently lease office space in the followingcountries for our international operations:

 

•      Australia

•      Canada

•      France

•      Germany

•      Japan

•      Spain

•      Sweden

•      Switzerland (European HQ)

•      South Korea

•      United Kingdom

 

We periodically evaluate our facilitiesrequirements.  Some of our facilities aresublet in whole or in part.

 

**ITEM 3. LEGALPROCEEDINGS.**

 

We are not involved in any material pending legalproceedings at this time, and management is not aware of any contemplatedproceeding by any governmental authority.

 

**ITEM 4. SUBMISSION OF MATTERSTO A VOTE OF SECURITIES HOLDERS.**

 

We held our AnnualMeeting of Stockholders on November 1, 2005.

 

The stockholders electedDavid J. Moore and Val Zammit to serve as Class I directors, for three-yearterms expiring at the 2008 Annual Meeting of Stockholders or until the electionand qualification of their respective successors.

 

The stockholders approvedan amendment to our 2002 Stock Incentive Plan to increase the number of sharesthat may be subject to awards thereunder by 7,000,000 and to increase thenumber of incentive shares that may be granted in any one year to an individualto 750,000.

 

36

----

 

The stockholders ratifiedthe appointment of Goldstein Golub Kessler LLP as our independent certifiedpublic accountants for the year ending December 31, 2005.

 

Shares of common stockwere voted as follows:

 
| **Director  Nominee or Proposal**       | ** ** | **For**    | ** ** | **Against /  Withheld** | ** ** | **Abstentions** | ** ** | **Broker Non-  Votes** | ** ** |
|-----------------------------------------|------------|------------|------------|-------------------------|------------|-----------------|------------|------------------------|------------|
|                                    |       |       |       |                    |       |            |       |                   |       |
| David J. Moore                          |       | 39,284,249 |       | 2,382,672               |       | N/A             |       | N/A                    |       |
| Val Zammit                              |       | 39,924,824 |       | 1,742,097               |       | N/A             |       | N/A                    |       |
| Amendment to 2002 Stock  Incentive Plan |       | 14,087,042 |       | 10,933,539              |       | 1,019,383       |       | 15,626,957             |       |
| Ratification of  Accountants            |       | 41,609,848 |       | 39,449                  |       | 17,624          |       | N/A                    |       |

 

37

----

 

**PART II**

 

**ITEM 5. MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES.**

 

From our initialpublic offering on August 13, 1998 until June 2002, our common stockwas traded on the NASDAQ National Market under the symbol “TFSM.” InJune 2002, we transferred our common stock to the NASDAQ SmallCap Market,where it continued to trade under the same symbol. Our common stock wasapproved for re-listing on the NASDAQ National Market effective November 3,2005, where it continues to trade under the symbol “TFSM.” The following tablesets forth the range of high and low bid information (in dollars per share) forour common stock, for the periods indicated, as reported by the NASDAQ SmallCapMarket or the NASDAQ National Market, as applicable.

 

| ** **                       | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------|------------|----------|------------|---------|------------|
| **YEAR ENDED DECEMBER 31, 2004** |       |     |       |    |       |
| First Quarter                    |       | $        | 11.90      |    | $          | 5.78 |   |
| Second Quarter                   |       | 8.20     |       | 3.22    |       |
| Third Quarter                    |       | 5.61     |       | 2.21    |       |
| Fourth Quarter                   |       | 4.67     |       | 2.80    |       |
| **YEAR ENDED DECEMBER 31, 2005** |       |     |       |    |       |
| First Quarter                    |       | $        | 4.60       |    | $          | 2.76 |   |
| Second Quarter                   |       | 4.19     |       | 2.79    |       |
| Third Quarter                    |       | 7.23     |       | 3.85    |       |
| Fourth Quarter                   |       | 8.28     |       | 5.45    |       |

 

On February 28, 2006, thelast reported sale price for our common stock on the NASDAQ National Market was$8.83.

 

OnFebruary 27, 2004, we completed a one-for-five reverse split of our commonstock.  As a result of the reverse split,every five shares of our common stock were combined into one share of commonstock. The reverse split does not affect the number of shares of preferredstock and warrants outstanding, however, the conversion ratio was adjustedaccordingly. All figures relating to common stock, preferred stock, stockoptions, warrants and other equity-linked instruments have been adjusted inthis Form 10-K to reflect the reverse split.

 

HOLDERS OF RECORD

 

Ourauthorized capital stock consists of 350,000,000 shares of common stock, parvalue $0.01 per share, and 10,000,000 shares of preferred stock, par value$0.01 per share.  As of February 28, 2006, there were    shares ofour common stock outstanding. As of March 15, 2006, there were approximately 202holders of record of our common stock.

 

DIVIDENDS

 

Wehave not declared or paid any dividends on our capital stock since ourinception and do not anticipate paying dividends in the foreseeable future. Ourcurrent policy is to retain earnings, if any, to finance the expansion of ourbusiness. The future payment of dividends will depend on the results of 

 

38

----

 

operations, financialcondition, capital expenditure plans and other factors that we deem relevantand will be at the sole discretion of our Board of Directors.

 

SECURITIES AUTHORIZED FORISSUANCE UNDER EQUITY COMPENSATION PLANS

 

The information regardingsecurities authorized for issuance under our equity compensation plans isincluded in Item 12, “Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters - Securities Authorized for IssuanceUnder Equity Compensation Plans” of this Form 10-K.

 

**ITEM 6. SELECTED FINANCIAL DATA.**

 

Thefollowing table sets forth selected consolidated financial data for theCompany. The selected consolidated financial data as of December 31, 2005and 2004, and for each of the years in the three year period endedDecember 31, 2005, has been derived from our audited consolidatedfinancial statements, which are included elsewhere herein. The selectedconsolidated financial data as of December 31, 2003, 2002 and 2001, and foreach of the years in the two-year period ended December 31, 2002, has beenderived from our audited consolidated financial statements, which are notincluded herein. We believe that, due to the numerous acquisitions anddispositions that we made in recent years, the period to period comparisons for2001 through 2005 are not meaningful and should not be relied upon asindicative of future performance.

 

Youshould read the selected consolidated financial data set forth below inconjunction with, and it is qualified in its entirety be reference to, “Management’sDiscussion and Analysis of Financial Condition and Results of Operation” andthe audited consolidated financial statements and the notes thereto includedelsewhere herein.

 

39

----

 
| ** **                                                                                                                                | ** ** | **Year ended December 31,**                            | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                                                                | ** ** | **2005**                                               | ** ** | **2004 (1)** | ** ** | **2003 (2)** | ** ** | **2002 (3)** | ** ** | **2001 (4)** | ** ** |
| ** **                                                                                                                                | ** ** | **(in thousands, except share and per share amounts)** | ** ** |
| **CONSOLIDATED STATEMENTS OF OPERATIONS DATA:**                                                                                           |       |                                                   |       |   |   |   |   |   |   |   |   |
| Revenue                                                                                                                                   |       | $                                                      | 139,794    |   | $ | 85,255 |   | $ | 49,181 |   | $ | 42,558 |   | $ | 46,230 |   |
| Gross profit                                                                                                                              |       | 54,494                                                 |       | 36,025 |   | 23,526 |   | 19,789 |   | 11,162 |   |
| Loss from operations                                                                                                                      |       | (1,103                                                 | )          | (6,781 | ) | (10,035 | ) | (18,244 | ) | (142,111 | ) |
| Income  (loss) before provision for income taxes, minority interest in operations of  consolidated subsidiary and discontinued operations |       | 224                                                    |       | (3,132 | ) | (11,979 | ) | (17,499 | ) | (139,425 | ) |
| Income (loss) before  discontinued operations                                                                                             |       | 38                                                     |       | (3,155 | ) | (12,016 | ) | (17,499 | ) | (139,425 | ) |
| Loss from discontinued  operations                                                                                                        |       | —                                                 |       | — |   | — |   | — |   | (60,170 | ) |
| Net income (loss) from  continuing operations                                                                                             |       | $                                                      | 38         |   | $ | (3,155 | ) | $ | (12,016 | ) | $ | (17,499 | ) | $ | (199,595 | ) |
| Dividends on preferred  stock                                                                                                             |       | (25                                                    | )          | (306 | ) | (617 | ) | (189 | ) | — |   |
| Preferred stock  conversion discount                                                                                                      |       | —                                                 |       | — |   | (1,780 | ) | (6,628 | ) | — |   |
| Net  income (loss) from continuing operations attributable to common stockholders                                                         |       | $                                                      | 13         |   | $ | (3,461 | ) | $ | (14,413 | ) | $ | (24,316 | ) | $ | (199,595 | ) |
|                                                                                                                                      |       |                                                   |       |   |   |   |   |   |   |   |   |
| Basic net income (loss)  per common share:                                                                                                |       |                                                   |       |   |   |   |   |   |   |   |   |
| Income (loss) before  discontinued operations                                                                                             |       | $                                                      | —     |   | $ | (0.09 | ) | $ | (0.71 | ) | $ | (1.65 | ) | $ | (15.69 | ) |
| Loss from discontinued  operations                                                                                                        |       | —                                                 |       | — |   | — |   | — |   | (6.77 | ) |
| Net income (loss) from  continuing operations                                                                                             |       | $                                                      | —     |   | $ | (0.09 | ) | $ | (0.71 | ) | $ | (1.65 | ) | $ | (22.46 | ) |
| Preferred stock  dividends and conversion discount                                                                                        |       | —                                                 |       | (0.01 | ) | (0.15 | ) | (0.64 | ) | — |   |
| Net  income (loss) from continuing operations attributable to common stockholders                                                         |       | $                                                      | —     |   | $ | (0.10 | ) | $ | (0.86 | ) | $ | (2.29 | ) | $ | (22.46 | ) |
|                                                                                                                                      |       |                                                   |       |   |   |   |   |   |   |   |   |
| Weighted  average shares outstanding used in basic net income (loss) per common share                                                     |       | 45,350,466                                             |       | 35,373,973 |   | 16,817,502 |   | 10,600,191 |   | 8,887,705 |   |
|                                                                                                                                      |       |                                                   |       |   |   |   |   |   |   |   |   |
| Diluted net income  (loss) per common share:                                                                                              |       |                                                   |       |   |   |   |   |   |   |   |   |
| Income (loss) before  discontinued operations                                                                                             |       | $                                                      | —     |   | $ | (0.09 | ) | $ | (0.71 | ) | $ | (1.65 | ) | $ | (15.69 | ) |
| Loss from discontinued  operations                                                                                                        |       | —                                                 |       | — |   | — |   | — |   | (6.77 | ) |
| Net income (loss) from  continuing operations                                                                                             |       | $                                                      | —     |   | $ | (0.09 | ) | $ | (0.71 | ) | $ | (1.65 | ) | $ | (22.46 | ) |
| Preferred stock  dividends and conversion discount                                                                                        |       | —                                                 |       | (0.01 | ) | (0.15 | ) | (0.64 | ) | — |   |
| Net  income (loss) from continuing operations attributable to common stockholders                                                         |       | $                                                      | —     |   | $ | (0.10 | ) | $ | (0.86 | ) | $ | (2.29 | ) | $ | (22.46 | ) |
|                                                                                                                                      |       |                                                   |       |   |   |   |   |   |   |   |   |
| Weighted  average shares outstanding used in diluted net income (loss) per common share                                                   |       | 47,694,027                                             |       | 35,373,973 |   | 16,817,502 |   | 10,600,191 |   | 8,887,705 |   |
|                                                                                                                                      |       |                                                   |       |   |   |   |   |   |   |   |   |
| **CONSOLIDATED BALANCE SHEET  DATA:**                                                                                                     |       |                                                   |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                                                                                                |       | $                                                      | 40,009     |   | $ | 27,690 |   | $ | 21,645 |   | $ | 7,674 |   | $ | 6,974 |   |
| Working capital  (deficit)                                                                                                                |       | 19,551                                                 |       | 23,545 |   | 16,021 |   | 909 |   | (8,529 | ) |
| Goodwill                                                                                                                                  |       | 39,573                                                 |       | 34,573 |   | 2,621 |   | 2,621 |   | 7,901 |   |
| Intangible assets, net                                                                                                                    |       | 9,715                                                  |       | 12,676 |   | 3,352 |   | 6,007 |   | 6,617 |   |
| Total assets                                                                                                                              |       | 142,804                                                |       | 121,398 |   | 46,180 |   | 33,967 |   | 45,588 |   |
| Long-term obligations                                                                                                                     |       | 2,942                                                  |       | 7,175 |   | 17,247 |   | 9,603 |   | 4,633 |   |
| Total stockholders’  equity                                                                                                          |       | 78,719                                                 |       | 75,268 |   | 10,037 |   | 5,515 |   | 10,852 |   |

 

----

(1)    Factors affectingcomparability from period to period include our acquisition of 24/7 Real MediaKorea, a provider of media and technology solutions in South Korea, in January2004 and our acquisition of Decide, a provider of search marketing services inEurope and Australia, in August 2004.

 

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

 

(3)    Factors affectingcomparability from period to period include our divestiture of IMAKE Software& Services, Inc., a broadband convergence technology business, in January2002 and our disposition of certain assets related to our U.S. e-mailmanagement product, in May 2002.

 

40

----

 

(4)    Factors affectingcomparability from period to period include our divestitures of Exactis.com,Inc., an e-mail business, Sabela Media, Inc., an advertisement servingtechnology business, and AwardTrack, Inc., an online promotions and purchaserewards business, in May 2001.

 

41

----

 

**ITEM 7. MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.**

 

**OVERVIEW**

 

24/7Real Media is a pioneer in the Internet industry, providing onlineadvertising and SEM strategies since 1995, and has been publicly tradedsince 1998. We have three distinct lines of business, Media, Search and Technology,and operate in twelve countries. Our Media business helps advertisers increasetheir reach through sophisticated targeting and a network of over 1,500affiliated Web sites. Our Search business enables marketers to maximize theirSEM spending and achieve optimum returns on their investments. Our Technologybusiness develops and licenses our powerful technology, which serves as theunderlying engine for everything we do. We have acquired and disposed of numerous businesses during our history,which may affect the comparability of our results from period to period (seethe footnotes to the financial table in Item 6, “Selected Financial Data,” formore detail).

 

***Media Solutions (“Media”)***

 

We sell advertising space for Web publishers in our24/7 Web Alliance, a global alliance of Web sites primarily with brand names,quality content and global reach. Web publishers join the 24/7 Web Alliance toincrease advertising revenues from the available advertising space on their Websites, and we pay them a royalty for their advertising space. We solicitadvertisers seeking online strategies to target audiences, build their brandsand generate greater customer response. Advertisers purchase space through the24/7 Web Alliance to make one purchase across several Web sites and to increasethe return on their advertising spending. We also use targeting technology tobest select advertising space made available through the 24/7 Web Alliance foradvertisers and to improve the performance of under-utilized advertising spacefor Web publishers.

 

We generate Media revenue from fees paid by clientadvertisers for advertising space. We typically sell advertising space on a CPMbasis, enabling a client advertiser to pay a fee based on the number of timesits advertisement is displayed. We typically count an advertising impressioneach time a user’s Web browser requests that our computer servers transmit theadvertisement. We may charge higher CPMs to advertisers that purchase ouradvanced targeting solutions, such as our behavioral targeting solution, incomparison to those that purchase advertising space that requires less specifictargeting.  We have also generatedlimited Media revenue from e-mail advertisement and marketing services.

 

***Search Solutions (“Search”)***

 

We provide SEM services that connect advertisers withconsumers using search engines to find information, products and services. Weleverage our relationships with search engines and our understanding of searchengine algorithms to help advertisers optimize their Web pages and achievebetter placement in algorithmic search engines. We also create Web sitelistings for advertisers and submit their listings into the databases ofpay-for-placement (“P4P”) and paid-inclusion (“PI”) search engine platforms. Wehelp advertisers determine the keywords most relevant to their products andservices and use advanced technology to manage keyword bidding simultaneouslyacross P4P search platforms. Our technology shows advertisers which keywordslead users from search engines to their Web sites and helps them optimize theiradvertising spending to convert click-throughs (users who click on theiradvertisement and are directed to their Web site) into sales.

 

42

----

 

Our Search revenue is primarily based on CPC feespaid by client advertisers. CPC fees are generated each time search engineusers click Web site listings submitted by us into search engine databases andare directed to our client advertisers’ Web sites. To a lesser extent, we alsogenerate revenue from fees paid by advertisers for consulting services andsearch engine optimization services, and from fees paid by search engines thatemploy us to optimize the relevancy of Web site listings and report onadvertising campaigns for their advertisers. We develop direct relationshipswith P4P and algorithmic search engines in order to enhance the services weprovide to our client advertisers. We refer to search engines we work with assearch engine distribution partners.

 

***Technology Solutions (“Technology”)***

 

We provide online advertisement serving and analyticssoftware to customers from software hosted locally on the customers’ servers orfrom software hosted centrally on our servers. Our technology products andservices are all based on our proprietary Open AdSystem platform. We generateTechnology revenue in the following ways:

 

*Open AdStream Central Service.* We charge service fees to Web publishersfor operating our OAS online advertisement serving software centrally from ourservers. We typically charge a service fee determined by multiplying an agreedCPM by the number of advertising impressions served using OAS. The service feemay vary based on the forecasted number of advertising impressions a Webpublisher will serve using our software and the service term, among otherfactors. We typically bill service fees monthly.

 

*Open AdStream Local Software.* We charge fees to Web publishersfor operating our OAS software locally from their own servers. Our licenseagreements typically provide for a license fee, a software maintenance andtechnical support services fee and a training fee. We often base license feeson the forecasted number of advertising impressions a Web publisher will serveusing our software, the use of advanced software modules and the license term.

 

*Open Advertiser Service.* We charge service fees toadvertisers and agencies for operating our OAD advertisement serving softwarecentrally from our servers. We determine our service fee by multiplying the CPMby the number of advertising impressions delivered. We typically bill servicefees monthly. The service fee may vary based on the forecasted number ofadvertising impressions a Web publisher will serve using our software and theservice term, among other factors.

 

*Insight XE Software and Service.*  Our Insight XE solutionoffers Web publishers active campaign reporting and marketing intelligence andhelps advertisers measure, analyze and manage online audiences. We chargeservice fees to Web publishers for operating our XE software centrally on ourservers. We determine the service fees by multiplying an agreed CPM by thenumber of page views measured by our Insight XE software.

 

*InsightACT Software.* Our Insight ACT software, which requiresour OAS and Insight XE software solutions, enables Web publishers to identifyand target segments of their audiences based on user activity. We generaterevenue from Insight ACT on the same basis as the associated OAS and Insight XEarrangements. As of December 31, 2005, we have not generated significantrevenue from Insight ACT.

 

We upgrade and issue newreleases of our OAS technology from time to time.  We recently related and are testing a betaversion of OAS 6.0, which incorporates our Insight XE and Insight ACT as 

 

43

----

 

modules, resulting inbetter integration of these products. Future versions on our OAS technology may also incorporate our DecideDNA technology, as well as functionalities of our Open Advertiser (“OAD”)solution.

 

To alesser extent, we generate revenue by providing professional services chargedat an hourly rate and from fees paid by Web publishers for trafficking theiradvertisements. Trafficking advertisements refers to entering advertisementcreative material and campaign specifications into our OAS software.

 

**CRITICALACCOUNTING POLICIES**

 

###### ***General***

 

Ourconsolidated financial statements are prepared in conformity with accountingprinciples generally accepted in the United States of America. As such, we arerequired to make certain estimates, judgments and assumptions that managementbelieves are reasonable based upon the information available. These estimates,judgments and assumptions affect the reported amounts of assets and liabilitiesand the disclosure of contingent assets and liabilities at the dates of theconsolidated financial statements and the reported amounts of revenues andexpenses during the reporting periods.

 

Thesignificant accounting policies that we believe are the most critical to aid infully understanding and evaluating the reported consolidated financial resultsare the following:

 

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

 

*Media*

 

Our Media revenue isgenerated from fees paid by client advertisers for advertising impressions. Wetypically offer advertisers a pricing model based on CPM, which enables clientadvertisers to pay a fee based on the number of times its advertisement isdisplayed. E-mail related revenue is derived from delivering advertisements toe-mail lists for advertisers. Agreements are primarily short-term and revenueis recognized as services are delivered, provided that no significantobligations remain outstanding and collection of the resulting receivable isprobable. We become obligated to make royalty payments to Web sites and e-maillists that have contracted with us in the period the advertising impressions ore-mails are delivered. Such expenses are classified as cost of revenue in theconsolidated statements of operations.

 

*Search*

 

Our revenue from ourSearch segment is primarily based on CPC fees paid by client advertisers. CPCfees are generated each time users click on Web site listings that we submittedinto search engine databases and are directed to our client advertisers’ Websites. To a lesser extent, we also generate revenue from fees paid by searchengines that employ us to optimize the submission of Web site listings andreport on advertising campaigns for their advertisers. Agreements are primarilyshort-term and revenue is recognized as services are delivered, provided thatno significant obligations remain outstanding and collection of the resultingreceivable is probable. We become obligated to make payments to search enginedistribution partners that have contracted with us in the period in which the clicksoccur. Such expenses are classified as cost of revenue in the consolidatedstatements of operations. When we provide SEM services as an agent for a fixedcommission or in other transactions in which we do not have principal risk andreward, we recognize revenue on a net basis.

 

44

----

 

*Technology*

 

Our Technology revenue isderived primarily from licensing our software, hosted advertisement serving andsoftware maintenance and technical support services. Revenue from advertisementserving hosted centrally on our servers is recognized upon delivery. Revenuefrom software licensing agreements is recognized in accordance with Statementof Position (“SOP”) No. 97-2, *SoftwareRevenue Recognition*, and SEC Staff Accounting Bulletin (“SAB”) No.104, *Revenue Recognition*, upondelivery of the software, which is generally when the software is madeavailable for download, there is persuasive evidence of an arrangement,collection is reasonably assured, the fee is fixed or determinable andvendor-specific objective evidence exists to allocate the total fees to allelements of the arrangement. Contracts that bundle the software license withsoftware maintenance and technical support are recognized ratably over thecontract term. Revenue from software maintenance and technical supportcontracts is recognized ratably over the life of the agreement, which typicallydoes not exceed one year.

 

Expenses related to ourTechnology revenue are primarily payroll costs incurred to deliver and supportthe software, and hosting, bandwidth and license fees paid to third-partysoftware vendors. These expenses are classified as cost of revenue in theconsolidated statements of operations.

 

*DeferredRevenue*

 

Revenue that is billed orcollected in advance of services being completed is deferred until theconclusion of the period of the service to which the advance billing orcollection relates. Deferred revenue is included on the consolidated balancesheets as a current liability until the service is performed and thenrecognized in the period in which the service is completed. Our deferredrevenue primarily consist of advance billings for software licensesubscriptions and software maintenance and technical support services.

 

***Allowance for Doubtful Accounts; Sales Allowance***

 

We maintain an allowancefor doubtful accounts to reserve for potentially uncollectible receivables anda sales allowance to reserve for potential credits issued to customers. Theallowances are estimates calculated based on an analysis of current businessand economic risks, customer credit-worthiness, specific identifiable riskssuch as bankruptcies, terminations or discontinued customers, or other factorsthat may indicate a potential loss.

 

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

 

We evaluate goodwill andindefinite lived intangible assets on an annual basis and whenever events orchanges in circumstances indicate that a carrying amount may not be fullyrecoverable. Long-lived assets, including property and equipment, long-termassets and amortizable intangible assets are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount may not befully recoverable. Conditions that would necessitate an impairment assessmentinclude a significant decline in the observable market value of an asset, asignificant change in the extent or manner in which an asset is used or asignificant adverse change that would indicate that the carrying amount of anasset or group of assets is not recoverable.  We assess impairment in accordance with therequirements of SFAS 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*.  We assess theimpairment of goodwill and intangible assets in accordance with the provisionsof SFAS No. 142, *Goodwill and OtherIntangible Assets*.We determine the recoverability of the assets by comparing the carrying amount ofthe assets to net future cash flows that the assets are expected togenerate.  The 

 

45

----

 

impairment we recognizeis the amount by which the carrying amount exceeds the fair market value of theassets.

 

***Business Combinations***

 

Our acquisitions areaccounted for as purchase business combinations in accordance with SFAS No.141, Business Combinations, and SFAS No. 142, Goodwill and Other IntangibleAssets. We allocate a portion of the purchase price to identifiable tangibleand intangible assets based on their respective fair values, and record asgoodwill any remaining unallocated portion of the purchase price. Intangibleassets include trademarks, customer relationships, acquired technology andcovenants not to compete. Such intangible assets are amortized on astraight-line basis over their estimated useful lives, which are generally twoto seven years, except for trademarks that have an indefinite life.

 

***Contingencies and Litigation***

 

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

 

***Restructuring Activities***

 

We account for restructuring activities inaccordance with SFAS No. 146, *Accounting forCosts Associated with Exit or Disposal Activities*.Restructuring-related liabilities include estimates for, among other things,involuntary terminations of employees and disposition of lease obligations. Keyvariables in determining such estimates include timing of sublease rentals,estimates of sublease rental payment amounts and tenant improvement costs, andestimates for brokerage and other related costs. The Company periodicallyevaluates and, if necessary, adjusts the estimates based on currently availableinformation.

 

***Investments***

 

                SFAS 115, *Accounting for CertainInvestments in Debt and Equity Securities*, and SAB 59, *Accounting for Non-current Marketable**Equity Securities*, provide guidance on determining when an investmentis other-than-temporarily impaired. We review investments quarterly forindicators of other-than-temporary impairment. Each determination requiressignificant judgment. In making a judgment, we evaluate, among other factors,the duration and extent to which the fair value of an investment is less thanits cost, the financial health of the investee, and our intent and ability tohold the investment. Investments with an indicator are further evaluated todetermine the likelihood of a significant adverse effect on the fair value andamount of the impairment as necessary. If market, industry and/or investeeconditions deteriorate, we may incur future impairments.

 

46

----

 

**RESULTSOF OPERATIONS—2005 COMPARED TO 2004**

 

InAugust 2004, we acquired Decide, a leading provider of SEM services in Europe and Australia.  We retained approximately 54 employees fromDecide.  From the time of the acquisitionuntil the end of the fourth quarter of 2004, we systematically transitioned allof our existing Search relationships onto the Decide DNA technologyplatform.  Since the acquisition, thecombination of 24/7 Real Media’s experience and customer relationships with theDecide DNA technology has produced significant growth.  It is not possible to attribute revenue tothese factors individually; therefore, it is not possible to provide a separaterevenue amount attributable to the Decide acquisition.

 

Thefollowing table compares the results of operations for 2005 to the results ofoperations for 2004:

 
| ** **                                                                                                       | ** ** | **Year ended December 31,** | ** ** | **Dollar** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------|------------|
| ** **                                                                                                       | ** ** | **2005**                    | ** ** | **2004**   | ** ** | **Variance** | ** ** |
| ** **                                                                                                       | ** ** | **(in thousands)**          | ** ** |
| Revenues:                                                                                                        |       |                        |       |       |       |   |   |
| Media                                                                                                            |       | $                           | 65,363     |       | $          | 49,879 |   | $ | 15,484 |   |
| Search                                                                                                           |       | 51,430                      |       | 16,439     |       | 34,991 |   |
| Technology                                                                                                       |       | 23,001                      |       | 18,937     |       | 4,064 |   |
| Total  revenues                                                                                                  |       | 139,794                     |       | 85,255     |       | 54,539 |   |
|                                                                                                             |       |                        |       |       |       |   |   |
| Cost of revenues:                                                                                                |       |                        |       |       |       |   |   |
| Media                                                                                                            |       | 44,562                      |       | 35,197     |       | 9,365 |   |
| Search                                                                                                           |       | 36,490                      |       | 10,571     |       | 25,919 |   |
| Technology                                                                                                       |       | 4,248                       |       | 3,462      |       | 786 |   |
| Total  cost of revenues                                                                                          |       | 85,300                      |       | 49,230     |       | 36,070 |   |
|                                                                                                             |       |                        |       |       |       |   |   |
| Gross  profit                                                                                                    |       | 54,494                      |       | 36,025     |       | 18,469 |   |
|                                                                                                             |       |                        |       |       |       |   |   |
| Operating expenses:                                                                                              |       |                        |       |       |       |   |   |
| Sales  and marketing                                                                                             |       | 22,579                      |       | 16,647     |       | 5,932 |   |
| General  and administrative                                                                                      |       | 19,207                      |       | 14,226     |       | 4,981 |   |
| Product  development                                                                                             |       | 5,833                       |       | 4,540      |       | 1,293 |   |
| Amortization  of intangible assets and deferred financing costs                                                  |       | 4,391                       |       | 4,331      |       | 60 |   |
| Stock-based  compensation                                                                                        |       | 2,227                       |       | 538        |       | 1,689 |   |
| Provision  for capital assessment                                                                                |       | 387                         |       | —     |       | 387 |   |
| Restructuring  costs                                                                                             |       | 973                         |       | 841        |       | 132 |   |
| Impairment  of intangible assets                                                                                 |       | —                      |       | 896        |       | (896 | ) |
| Impairment  of property and equipment                                                                            |       | —                      |       | 787        |       | (787 | ) |
|                                                                                                             |       |                        |       |       |       |   |   |
| Total  operating expenses                                                                                        |       | 55,597                      |       | 42,806     |       | 12,791 |   |
|                                                                                                             |       |                        |       |       |       |   |   |
| Loss  from operations                                                                                            |       | (1,103                      | )          | (6,781     | )          | 5,678 |   |
|                                                                                                             |       |                        |       |       |       |   |   |
| Interest expense, net                                                                                            |       | (213                        | )          | (463       | )          | 250 |   |
| Change in fair value of  warrant liability                                                                       |       | (381                        | )          | 2,040      |       | (2,421 | ) |
| Recovery of investment                                                                                           |       | 2,340                       |       | —     |       | 2,340 |   |
| Impairment of  marketable securities                                                                             |       | (588                        | )          | (1,052     | )          | 464 |   |
| Gain on sale of  marketable securities                                                                           |       | 16                          |       | —     |       | 16 |   |
| Gain on legal settlement                                                                                         |       | —                      |       | 2,896      |       | (2,896 | ) |
| Other income (expense),  net                                                                                     |       | 153                         |       | 228        |       | (75 | ) |
|                                                                                                             |       |                        |       |       |       |   |   |
| Income  (loss) before provision for income taxes and minority interest in operations  of consolidated subsidiary |       | 224                         |       | (3,132     | )          | 3,356 |   |
|                                                                                                             |       |                        |       |       |       |   |   |
| Provision for income  taxes                                                                                      |       | (314                        | )          | (23        | )          | (291 | ) |
| Minority interest in  operations of consolidated subsidiary                                                      |       | 128                         |       | —     |       | 128 |   |
|                                                                                                             |       |                        |       |       |       |   |   |
| Net income (loss)                                                                                                |       | $                           | 38         |       | $          | (3,155 | ) | 3,193 |   |
|                                                                                                                  |            |                             |            |            |            |  |  |  |  |  |

 

47

----

 

***Media.***

 

*Revenue*. Media revenue was $65.4million for the year ended December 31, 2005, as compared to $49.9 million forthe year ended December 31, 2004. Media revenue was primarily derived from the24/7 Web Alliance. 24/7 Web Alliance revenue was $64.0 million for the yearended December 31, 2005, as compared to $48.6 million for the year endedDecember 31, 2004, an increase of 31.8%. The improvement primarily related toan increase from 59.3 billion in 2004 to 91.2 billion in 2005 in the number ofadvertising impressions that we sold and delivered.  The remainder of Media revenue came from oure-mail services.

 

*Cost of Revenue*.****Mediacost of revenue consist primarily of fees paid to Web publishers in the 24/7Web Alliance. Cost of revenue also includes advertisement serving costs, whichis an intercompany charge from the Technology segment based on a fixed CPM.

 

*Gross Profit*.**Gross profit margin forMedia were 31.8% in 2005 and 29.4% in 2004. The improvement was the result ofan increase in the number and the diversity of Web publishers in the 24/7 WebAlliance, which decreased the average royalty percentage that we paid to Webpublishers, and an increase in the number of network campaigns we delivered.Advertisement serving costs were $1.8 million for 2005 and $1.5 million for2004.

 

***Search.***

 

*Revenue*. Search revenue was $51.4 million for the year ended December 31,2005, as compared to $16.4 million for the year ended December 31, 2004, anincrease of 212.9%. The increase was due to the addition of new advertiseraccounts and advertiser accounts that we gained as a result of the August 2004Decide acquisition, and the use of the Decide DNA technology we acquired acrossall our accounts. We also believe that the foregoing factors, combinedwith growth in the businesses of our searchengine distribution partners and our increased sales efforts and improvedoperational controls, have contributed to an increase in the average revenueper advertiser account.

 

*Cost of Revenue*. Search cost of revenue consist primarily offees paid to our search engine distribution partners, which are calculated as apercentage of revenues for algorithmic search engines and a fixed CPC forpay-for-placement search engines. Search cost of revenue also includes hostingand bandwidth charges associated with the infrastructure.

 

*GrossProfit*. Gross profit margin for Search were 29.0% in 2005 and35.7% in 2004. The decrease was primarily due to faster growth in our lowermargin Managed Account Service offering relative to the growth in our otherhigh margin product offerings.  Inaddition, the margin for Managed Account Services declined due to the additionof higher quality, high volume accounts, which usually command a better price,as well as increased competition in the marketplace.

 

***Technology.***

 

*Revenue*.****Technology revenue was$23.0 million for the year ended December 31, 2005, as compared to $19.0million for the year ended December 31, 2004, an increase of 21.5%. Theimprovement primarily reflected increased use of Open AdStream Central, throughboth expanded use by existing customers and the addition of new customers. Inparticular, Open AdStream Central delivered 210.9 billion paid impressions in2005, up from 93.6 billion paid impressions in 2004.

 

48

----

 

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

 

*GrossProfit*. Gross profit margin for Technology were 81.5% whichis consistent with the previous year.

 

***Sales and Marketing Expenses.***

 

Salesand marketing expenses consist primarily of compensation and personnel relatedexpenses for sales, account management, business development, affiliaterelations and marketing; and marketing costs such as advertising, trade showsand public and investor relations firms.

 

Salesand marketing expenses were $22.6 million for the year ended December 31, 2005,as compared to $16.6 million for the year ended December 31, 2004.  The increase was primarily due to additionalpersonnel-related costs as thenumber of employees included in sales and marketing increased from 183 atDecember 31, 2004 to 221 at December 31, 2005, and an increase in marketingactivities.  Sales and marketing expensesdecreased as a percentage of revenue from 19.5% in 2004 to 16.2% in 2005, as wecontinued to gain operating leverage.

 

***General and Administrative Expenses******.***

 

Generaland administrative expenses consist primarily of compensation andrelated expenses for executive and administrative personnel; costs related toleasing, maintaining and operating our facilities and systems; insurance; baddebts; fees for professional services; fees associated with the reporting andother obligations of a public company; depreciation and other general andadministrative services. Feesfor professional services include payments to external lawyers, accountants,and other professionals in connection with operating our business, complianceand evaluating and pursuing new opportunities.

 

Generaland administrative expenses were $19.2 million for the year ended December 31,2005, as compared to $14.2 million for the year ended December 31, 2004. Theincrease was due primarily to the increased personnel costs, increasedprofessional fees for compliance efforts and depreciation due to theimprovement and expansion of our infrastructure, as well as variable costs as aresult of our increased revenue, such as provisions for bad debt.  As a percentage of revenue, the expensesdecreased from 16.7% for 2004 to 13.7% for 2005, showing increased leverage ofour global footprint over a larger revenue base.

 

***Product Development Expenses.***

 

Productdevelopment expenses consist primarily of compensation and relatedexpenses for personnel responsible for the development and maintenance offeatures, enhancements, functionality and quality assurance for our software and services and developmentof new products.

 

Productdevelopment expenses were $5.8 million for the year ended December 31, 2005 ascompared to $4.5 million for the year ended December 31, 2004. Theincrease reflects our continued investment in the development and enhancementof our existing products and services, as well as our exploration of newmarkets and product offerings. We capitalized approximately $0.3 million forthe year 

 

49

----

 

endedDecember 31, 2004. The capitalization related to our Decide DNA technology,which we acquired in August 2004 with Decide. We did not capitalizeany expenses related to product development in 2005.

 

***Amortization of Intangible Assets and Deferred Financing Costs.***

 

Amortizationexpense relates to intangible assets that we acquired with 24/7 Search inAugust 2000, Real Media in October 2001, Now Marketing in September 2002,Insight in January 2003, 24/7 Real Media Korea in January 2004 and Decide inAugust 2004; deferred financing costs associated with our subordinatedconvertible debenture offering in September 2003; and a transition payment thatwe paid to Lycos in connection with a strategic business relationship that we entered into in February 2004.

 

Amortizationexpense was $4.4 million for the year ended December 31, 2005 and $4.3 millionfor the year ended December 31, 2004. For 2005, amortization expense related$2.2 million to acquired technology, $0.8 million to other intangible assets,$0.5 million to deferred financing costs and $0.9 million to the transitionpayment to Lycos. For 2004, amortization expense related $2.3 million toacquired technology, $0.7 million to other intangible assets, $0.6 million todeferred financing costs and $0.7 million to the transition payment to Lycos. InDecember 2004, we recorded an impairment charge related to the analyticstechnology that we acquired with Insight due to significant rewrites of theunderlying software code during 2004. The remaining balance of $0.9 million,inclusive of an earn-out liability of approximately $0.3 million initiallyestimated to be due to the former owners of Insight, was considered impaired atDecember 31, 2004.

 

***Stock-Based Compensation******.***

 

Stock-basedcompensation was $2.2 million for the year ended December 31, 2005 and $0.5million for the year ended December 31, 2004. The expense for 2005 related tothe amortization of deferred compensation for restricted shares to be issued tocertain employees. The expense for 2004 consisted of $0.3 million accrued forpotential performance incentives and $0.2 million in amortization of deferredcompensation for restricted shares issued to certain employees.

 

***Provision for Capital Assessment.***

 

We recorded an estimate for an assessment on ourEuropean subsidiaries by local tax authorities.  The authoritiesdisallowed certain intercompany balances which effected the years ending2001 to 2005 and resulted in additional amounts due.  There were nosimilar charges in 2004.

 

***Restructuring Costs******.***

 

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

 

During 2004 we recorded a restructuring charge ofapproximately $0.8 million, as we took steps to align our sales, developmentand administrative organization and reduce corporate overhead, partiallyrelated to redundancies due to the acquisition of Decide. Our efforts involvedthe involuntary termination of approximately 17 employees, as well as chargesfor excess real estate space, primarily at our office in Munich, Germany.

 

50

----

 

***Impairment of Intangibles Assets.***

 

Weperform on-going business reviews and, based on quantitative and qualitativemeasures, assess the need to record impairment losses on long-lived assets usedin operations when impairment indicators are present. Where impairmentindicators are identified, management determines the amount of the impairmentcharge by comparing the carrying values of goodwill and other long-lived assetsto their fair values.

 

InDecember 2004, we determined that the analytics technology that we acquiredwith Insight was impaired due to significant rewrites of the underlyingsoftware code during 2004. We recorded the remaining balance of $0.9 million,inclusive of an earn-out liability of approximately $0.3 million initiallyestimated to be due to the former owners of Insight, as an impairment loss atDecember 31, 2004. We did not have any impairment of intangible assets for theyear ended December 31, 2005.

 

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

 

In thefourth quarter of 2004, we made the strategic decision to integrate OADfunctionalities into our Open AdStream software and, as a result, we reducedour support for OAD. In addition, we have not achieved significant sales of OADsince its commercial release in June 2003. We determined that OAD was impairedat December 31, 2004, and we recorded the net balance of $0.8 million asan impairment loss at that time.****We did not haveany impairment of property or equipment for the year ended December 31, 2005.

 

***Interest Expense, Net******.***

 

Interestexpense, net, relates to our long-term debt and capital lease obligations,offset by interest income related to our cash and cash equivalents. Interestexpense, net was $0.2 million for the year ended December 31, 2005 and $0.5million for the year ended December 31, 2004. Interest expense for 2005 and2004 primarily related to interest paid in cash on the subordinated convertibledebentures that we issued on September 26, 2003 and amortization of thewarrants that we issued with the debentures.

 

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

 

Ourremaining liability relates to warrants outstanding from our preferred stockoffering and is adjusted to fair value at the end of each reporting period.

 

The$0.4 million expense for the year ended December 31, 2005 was due to anincrease in the fair market value of the warrants outstanding, which increasedthe corresponding liability. The increase in the fair market value of thewarrants was primarily due to the higher fair market value of our common stockat December 31, 2005, as compared to the fair market value of our common stockat December 31, 2004.

 

The$2.0 million gain for the year ended December 31, 2004 was due to a decrease inthe fair market value of the warrants outstanding, which reduced thecorresponding liability, and an amendment to the registration rights agreementrelated to the debentures and the warrants, which enabled us to reclassify thewarrant liability of $1.0 million related to the debentures as additionalpaid-in capital.  The decrease in thefair market value of the warrants was primarily due to the lower fair marketvalue of our common stock at December 31, 2004, as compared to the fair marketvalue of our common stock at December 31, 2003.

 

51

----

 

***Recovery of Investment.***

 

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

 

***Impairment of Marketable Securities.***

 

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

 

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

 

During 2005, we sold our shares of our chinadotcomcommon stock, which resulted in proceeds of approximately $1.3 million andrealized an immaterial gain.  Wedid not have a gain or loss on the sale of marketable securities for the yearended December 31, 2004.

 

***Gain on Legal Settlement.***

 

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

 

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

 

Other income, net, of $0.2 million for the yearended December 31, 2005 consisted of earn-out payments received in excessof amounts recorded and reversal of the earn-out liability initially estimatedto be due to the former owners of Insight offset by legal fees associated witha former subsidiary that we shut down, a legal settlement and realized foreigncurrency losses.

 

Other income, net, of $0.2 million for the yearended December 31, 2004 included $0.3 million in amounts recovered from aformer subsidiary and settlement of professional service fees, offset by $0.1million in legal fees and other expenses related to previous patent litigation.

 

***Provision for Income Taxes***

 

The increase in the provision for income taxes in 2005from 2004 of approximately $0.3 million was primarily a result ofincreases in taxes, driven by higher pretax income in 2005 compared to 2004.

 

52

----

 

***Minority Interest in Operations ofConsolidated Subsidiary.***

 

Minority interest in operations of consolidated subsidiary representsthe percentage share of losses attributable to holders who have a minorityinterest in subsidiaries in which we hold an ownership interest that is greaterthan fifty percent, but less than 100 percent, and the results of which weconsolidate in our consolidated financial statements.  This amount relatesto the activity of K.K. 24-7 Search, our joint venture with Dentsu.

 

**RESULTS OF OPERATIONS—2004 COMPARED TO 2003**

 

In August 2004, we acquired Decide, a leading provider of SEM services inEurope and Australia. We retained approximately 54 employees from Decide. It isnot possible to separately attribute revenue to Decide, as we transitioned allof our existing Search relationships to be serviced by Decide’s DNA technologyafter the acquisition.

 

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

 

In January 2003, we acquired Insight, aprovider of Web analytics technology.

 

The following table compares the results ofoperations for 2004 to the results of operations for 2003:

 

53

----

 
| ** **                                                      | ** ** | **Year ended December 31,** | ** ** | **Dollar** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                                      | ** ** | **2004**                         | ** ** | **2003**   | ** ** | **Variance** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**               | ** ** |
| **CONSOLIDATED  STATEMENTS OF OPERATIONS DATA:**                |       |                             |       |       |       |   |   |
| Revenues:                                                       |       |                             |       |       |       |   |   |
| Media                                                           |       | $                                | 49,879     |       | $          | 23,562 |   | $ | 26,317 |   |
| Search                                                          |       | 16,439                           |       | 10,342     |       | 6,097 |   |
| Technology                                                      |       | 18,937                           |       | 15,277     |       | 3,660 |   |
| Total revenues                                                  |       | 85,255                           |       | 49,181     |       | 36,074 |   |
|                                                            |       |                             |       |       |       |   |   |
| Cost of  revenues:                                              |       |                             |       |       |       |   |   |
| Media                                                           |       | 35,197                           |       | 14,676     |       | 20,521 |   |
| Search                                                          |       | 10,571                           |       | 6,947      |       | 3,624 |   |
| Technology                                                      |       | 3,462                            |       | 4,032      |       | (570 | ) |
| Total cost of  revenues                                         |       | 49,230                           |       | 25,655     |       | 23,575 |   |
|                                                            |       |                             |       |       |       |   |   |
| Gross profit                                                    |       | 36,025                           |       | 23,526     |       | 12,499 |   |
|                                                            |       |                             |       |       |       |   |   |
| Operating  expenses:                                            |       |                             |       |       |       |   |   |
| Sales and  marketing                                            |       | 16,647                           |       | 12,584     |       | 4,063 |   |
| General and  administrative                                     |       | 14,226                           |       | 10,865     |       | 3,361 |   |
| Product  development                                            |       | 4,540                            |       | 3,100      |       | 1,440 |   |
| Amortization of  intangible assets and deferred financing costs |       | 4,331                            |       | 2,724      |       | 1,607 |   |
| Stock-based  compensation                                       |       | 538                              |       | 1,316      |       | (778 | ) |
| Restructuring  costs                                            |       | 841                              |       | 1,651      |       | (810 | ) |
| Impairment of  intangible assets                                |       | 896                              |       | 1,321      |       | (425 | ) |
| Impairment of  property and equipment                           |       | 787                              |       | —     |       | 787 |   |
|                                                            |       |                             |       |       |       |   |   |
| Total operating  expenses                                       |       | 42,806                           |       | 33,561     |       | 9,245 |   |
|                                                            |       |                             |       |       |       |   |   |
| Loss from  operations                                           |       | (6,781                           | )          | (10,035    | )          | 3,254 |   |
|                                                            |       |                             |       |       |       |   |   |
| Interest  expense, net                                          |       | (463                             | )          | (343       | )          | (120 | ) |
| Change in fair  value of warrant liability                      |       | 2,040                            |       | —     |       | 2,040 |   |
| Impairment of  marketable securities                            |       | (1,052                           | )          | —     |       | (1,052 | ) |
| Gain on legal  settlement                                       |       | 2,896                            |       | —     |       | 2,896 |   |
| Other income  (expense), net                                    |       | 228                              |       | (1,601     | )          | 1,829 |   |
|                                                            |       |                             |       |       |       |   |   |
| Loss before  provision for income taxes                         |       | (3,132                           | )          | (11,979    | )          | 8,847 |   |
|                                                            |       |                             |       |       |       |   |   |
| Provision for  income taxes                                     |       | (23                              | )          | (37        | )          | 14 |   |
|                                                            |       |                             |       |       |       |   |   |
| Net loss                                                        |       | $                                | (3,155     | )          | $          | (12,016 | ) | $ | 8,861 |   |

 

***Media.***

 

***Revenue*****. Media** revenue isprimarily derived from the 24/7 Web Alliance. 24/7 Web Alliance revenue was$48.6 million for the year ended December 31, 2004, as compared to $21.4million for the year ended December 31, 2003, an increase of 126.5%. Theincrease primarily related to sales of additional advertising inventoryprovided by Lycos and arrangements for inventory acquired with 24/7 Real MediaKorea. The number of impressions delivered through the 24/7 Web Allianceincreased from 24.8 billion in 2003 to 59.3 billion in 2004. 24/7 Real MediaKorea contributed Media revenue of $11.8 million for the year ended December 31,2004. The remainder of Media revenue came from our e-mail services, whichcontributed $1.3million in 2004 and $2.0 million in 2003.

 

54

----

 

*Cost of Revenue*.****Mediacost of revenue consist primarily of fees paid to Web publishers in the 24/7Web Alliance. Cost of revenue also includes advertisement serving costs, whichis an intercompany charge from our Technology segment based on a fixed CPM.

 

*Gross Profit*.**Grossprofit margin for Media were 29.4% in 2004 and 37.7% in 2003. The decrease of8.3 percentage points primarily reflected Web publisher accounts with higherroyalty rates acquired with 24/7 Real Media Korea, which accounted forapproximately 5.1 percentage points of the decrease. The decrease alsoreflected higher royalty rates paid to larger Web sites for their advertisinginventory, primarily Lycos. Advertisement serving costs were $1.5 million for2004 and $1.1 million for 2003, representing 4.2% and 7.2% of total Media costof revenues, respectively.

 

***Search.***

 

*Revenue*. Search revenue was $16.4 million for theyear ended December 31, 2004, as compared to $10.3 million for the yearended December 31, 2003, an increase of 59.0%. The increase was dueprimarily to the addition of new advertiser accounts from our acquisition ofDecide and an increased number of clicks delivered to our clientadvertisers as a result of growth in the businesses of our search enginedistribution partners. The foregoing factors, combined with our sales effortsand improved operational controls, contributed to an increase in the averagerevenue per advertiser account. In May 2003, Inktomi, a search engine thatgenerated $2.1 million of 2003 Search revenue, terminated its distributionagreement with us.

 

*Cost of Revenue*. Search cost of revenue consist primarily offees paid to our search engine distribution partners, which are calculated as apercentage of revenues for algorithmic search engines and a fixed CPC forpay-for-placement search engines. Search cost of revenues also includes hostingand bandwidth charges associated with the infrastructure.

 

*Gross Profit*. Gross profit margin forSearch were 35.7% in 2004 and 32.9% in 2003. The increase was due to a changein product mix primarily as a result of the addition of high marginoptimization services for both advertisers and search engine distributionpartners acquired with Decide. In managed account services, thehigher growth rate of pay-for-placement campaigns relative to the higher marginpaid inclusion campaigns also decreased the overall gross marginpercentage. The gross margin percentage on paid inclusion campaignsremained consistent; however, the gross margin percentage onpay-for-placement campaigns was adversely affected by increased bidprices and competition.

 

***Technology.***

 

*Revenue*.****Technologyrevenue was $19.0 million for the year ended December 31, 2004, ascompared to $15.3 million for the year ended December 31, 2003, anincrease of 24.0%. The improvement reflected increased use of Open AdStreamCentral, through both expanded use by existing customers, the addition of newcustomers, and, to a lesser extent, the addition of customers acquired with24/7 Real Media Korea. In particular, Open AdStream Central delivered 93.6billion paid impressions in 2004, up from 40.1 billion in 2003. 24/7 Real MediaKorea contributed Technology revenue of $0.7 million for the year ended December 31,2004.

 

*Cost of Revenue*. Technology cost ofrevenue consist of costs for hosting, bandwidth, third-party license andsupport fees, support and maintenance of the infrastructure, and includedsalaries and 

 

55

----

 

benefits of related technical personnel. The cost of revenue is offsetby intercompany fees charged to our Media segment for advertisement serving.

 

*Gross Profit*. Gross profit margin forTechnology were 81.7% in 2004 and 73.6% in 2003. The increase in gross profitmargin was due to leveraging the existing cost base over higher revenues anddeclining costs for hosting and bandwidth.

 

***Sales and Marketing Expenses.***

 

Sales and marketing expenses consist primarily ofcompensation and personnel related expenses for sales, account management, businessdevelopment, affiliate relations and marketing; and marketing costs such asadvertising, trade shows and public and investor relations firms.

 

Sales and marketing expenses were $16.6 million forthe year ended December 31, 2004, as compared to $12.6 million for theyear ended December 31, 2003.  Theincrease was primarily due to additional personnel-related costs and anincrease in marketing activities. Sales and marketing expenses decreased as a percentage of revenue from25.6% in 2003 to 19.5% in 2004, as we were able to gain operating leverage. Thenumber of employees included in sales and marketing increased from 104 at December 31,2003 to 183 at December 31, 2004, primarily due to the addition of 34employees from 24/7 Real Media Korea and 35 employees from Decide.

 

***General and Administrative Expenses******.***

 

General and administrative expenses consistprimarily of compensation and related expenses for executive and administrativepersonnel; costs related to leasing, maintaining and operating our facilitiesand systems; insurance; bad debts; fees for professional services; feesassociated with the reporting and other obligations of a public company;depreciation and other general and administrative services. Fees for professional servicesinclude payments to external lawyers, accountants, and other professionals inconnection with operating our business, compliance and evaluating and pursuingnew opportunities.

 

General and administrative expenses were $14.2million for the year ended December 31, 2004 and $10.9 million for theyear ended December 31, 2003. The increase was due primarily to anincrease in the number of executive and administrative personnel from 42 at December 31,2003 to 58 at December 31, 2004, 12 of which related to acquisitions.General and administrative expenses for 2004 also include approximately $1.0million in compliance costs related to the Sarbanes-Oxley Act of 2002. As a percentage of revenue, the expensesdecreased from 22.1% for 2003 to 16.7% for 2004, showing increased leverage ofthese expenses over a larger revenue base.

 

***Product Development Expenses.***

 

Product development expenses consist primarily of compensationand related expenses for personnel responsible for the development andmaintenance of features, enhancements, functionality and quality assurance for our software andservices and development of new products.

 

Product development expenses were $4.5 million forthe year ended December 31, 2004 and $3.1 million for the year ended December 31,2003. We capitalized approximately $0.3 million and $0.4 million for theyears ended December 31, 2004 and 2003, respectively.  Thecapitalization in 2004 related to our Decide DNA technology, which weacquired in August 2004 with Decide.  The capitalization in 2003related to Open Advertiser.  We ceased capitalization related to OpenAdvertiser when it was commercially released in June 2003.  Theremaining increase in year-over-year product 

 

56

----

 

development expenses related to thedevelopment of our Insight SE and Insight ACT products and further enhancementsto our Insight XE and Open AdStream products.  The number of employeesincluded in product development increased from 30 at December 31, 2003 to48 at December 31, 2004, primarily due to our acquisition of Decide.

 

***Amortization of Intangible Assets andDeferred Financing Costs.***

 

Amortization expense relates to intangible assetsthat we acquired with 24/7 Search in August 2000, Real Media in October 2001,Now Marketing in September 2002, Insight in January 2003, 24/7 RealMedia Korea in January 2004 and Decide in August 2004; deferredfinancing costs associated with our subordinated convertible debenture offeringin September 2003; and the transition payment to Lycos in February 2004.

 

Amortization expense was $4.3 million for the yearended December 31, 2004 and $2.7 million for the year ended December 31,2003. For 2004, amortization expense related $2.3 million to acquiredtechnology, $0.7 million to other intangible assets, $0.6 million to deferredfinancing costs and $0.7 million to the transition payment to Lycos. In December 2004,we recorded an impairment charge related to the analytics technology that weacquired with Insight due to significant rewrites of the underlying softwarecode during 2004. The remaining balance of $0.9 million, inclusive of anearn-out liability of approximately $0.3 million initially estimated to be dueto the former owners of Insight, was considered impaired at December 31,2004. Amortization expense for2003 related $2.5 million to acquired technology, $0.1 million to otherintangible assets and $0.1 million to deferred financing costs. In the fourthquarter of 2003, we made the strategic decision to no longer support the 24/7Messenger product that we acquired with Now Marketing. The related acquiredtechnology was amortized until December 31, 2003, and the remainingbalance of $1.3 million was considered impaired at that date.

 

***Stock-Based Compensation******.***

 

Stock-based compensation was $0.5 million for theyear ended December 31, 2004 and $1.3 million for the year ended December 31,2003. The expense for 2004 consisted of $0.3 million accrued for potentialperformance incentives and $0.2 million in amortization of deferredcompensation for restricted shares issued to certain employees. The expense for2003 consisted of $0.6 million in contractual incentives that werepaid in stock in lieu of cash to executives for meeting certain earningstargets, $0.3 million in deferred compensation for restricted sharesissued to certain employees, $0.2 million in discretionary incentives paidin stock and $0.2 million in salary for certain employees who elected toreceive stock instead of cash.

 

***RestructuringCosts******.***

 

During 2004, we recorded arestructuring charge of approximately $0.8 million as we took steps to alignour sales, development and administrative organization and reduce corporateoverhead, partially related to redundancies due to the acquisition of Decide.Our efforts involved the involuntary termination of approximately 17 employees,as well as charges for excess real estate space, primarily at our office inMunich, Germany.  During 2003, we recorded a restructuringcharge of approximately $1.7 million, $0.5 million of which related to theinvoluntary termination of approximately 26 employees and $1.2 million of whichrelated to a revision of the estimate of the cost to dispose of office space atour former corporate headquarters in New York.

 

57

----

 

***Impairment of Intangibles Assets.***

 

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

 

In December 2004, we determined that theanalytics technology that we acquired with Insight was impaired due tosignificant rewrites of the underlying software code during 2004.  We recorded the remaining balance of $0.9million, inclusive of an earn-out liability of approximately $0.3 millioninitially estimated to be due to the former owners of Insight, as an impairmentloss at December 31, 2004.  In thefourth quarter of 2003, we made the strategic decision to no longer support the24/7 Messenger product that we acquired with Now Marketing. We amortized therelated acquired technology until December 31, 2003, and wrote off theremaining balance of $1.3 million as an impairment loss at that time.

 

***Impairment of Property andEquipment.***

 

In the fourth quarter of 2004, we made the strategicdecision to integrate OAD functionalities into our Open AdStream software and,as a result, reduced our support for OAD. In addition, we have not achieved significant sales of OAD since itscommercial release in June 2003.  Wedetermined that OAD was impaired at December 31, 2004, and recorded thenet balance of $0.8 million as an impairment loss at that time.

 

***Interest Expense, Net******.***

 

Interest expense, net, relates to our long-term debtand capital lease obligations, offset by interest income related to our cashand cash equivalents.  Interest expense,net, was $0.5 million for the year ended December 31, 2004 and $0.3million for the year ended December 31, 2003.  Interest expense for 2004 primarily relatedto interest paid in cash on the subordinated convertible debentures that weissued on September 26, 2003 and amortization of the warrants that weissued with the debentures.  Interestexpense in 2003 related to the settlement in the second quarter of 2003 ofthree promissory notes that we had issued to PubliGroupe, the principalshareholder of Real Media, Inc., in connection with our acquisition ofReal Media, Inc. in October 2001, and the subordinated convertibledebentures that we issued in the third quarter of 2003. Interest expense in both periods was offset by interest income from cashin overnight deposits and money market accounts.

 

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

 

Our initial liability related to warrantsoutstanding from our preferred stock and subordinated convertible debentureofferings, and is adjusted to fair market value at the end of each reportingperiod.  The $2.0 million gain for theyear ended December 31, 2004 was due to a decrease in the fair marketvalue of the warrants outstanding, which reduced the corresponding liability,and the amendment to the registration rights agreement related to thedebentures and the warrants, which enabled us to reclassify the warrantliability of $1.0 million related to the debentures as additional paid-incapital.  The decrease in the fair marketvalue of the warrants was primarily due to the lower fair market value of ourcommon stock at December 31, 2004, as compared to the fair market value ofour common stock at the time we issued the warrants.

 

58

----

 

***Impairment of Marketable Securities.***

 

During 2004, we wrote down our available-for-saleinvestment in chinadotcom and recognized an impairment charge of approximately$1.1 million for other-than-temporary declines in the value of theinvestment.  We had no impairmentof marketable securities for the year ended December 31, 2003.

 

***Gain on Legal Settlement.***

 

The $2.9 million gain on legal settlement for 2004related to our legal settlement with chinadotcom.  We received 0.4 million shares of chinadotcomcommon stock valued at the market price on the date of settlement.  There were no material gains related to legalsettlements for the year ended December 31, 2003.

 

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

 

Other income, net, of $0.2 million for the yearended December 31, 2004 included $0.3 million in amounts recovered from aformer subsidiary and settlement of professional service fees, offset by $0.1million in legal fees and other expenses related to previous patent litigation.For the year ended December 31, 2003, other expense, net, of $1.6million included $1.4 million of legal fees related to patent litigationand $0.6 million in legal fees related to litigation with chinadotcom,offset by the reversal of $0.4 million in liabilities related to disposedbusinesses that were no longer considered necessary.

 

***Provision for Income Taxes***

 

The decrease in the provision for income taxes in 2004from 2003 was primarily a result of decreases in taxes, driven by lower pretaxincome in 2004 compared to 2003.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Cash flows for the years ended December 31, 2005,2004 and 2003 were as follows (in thousands):

 
| ** **                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net cash provided by (used in) operating activities |       | $                     | 10,235     |   | $ | (10,706 | ) | $ | (4,756 | ) |
| Net cash used in investing activities               |       | $                     | (602       | ) | $ | (22,408 | ) | $ | (1,452 | ) |
| Net cash provided by financing activities           |       | $                     | 3,319      |   | $ | 38,001 |   | $ | 20,232 |   |

 

Historically, we have financed our operations throughequity financings and long-term debt and more recently through cash generatedby operations. In 2005, net cash provided by operating activities wasapproximately $10.2 million. We used approximately $10.7 million and$4.8 million in 2004 and 2003, respectively, in operating activities. Netcash provided by (used in) operating activities for all periods was generallydue to our net operating income (loss), adjusted for non-cash items included inour 

 

59

----

 

net operating results, as well as changes in variouscomponents of working capital, particularly fluctuations in accountsreceivable.

 

Net cash used in investing activities in 2005 wasapproximately $0.6 million, and consisted of $2.0 million of proceeds frommaturities or short-term investments, $1.3 million of proceeds from the sale ofmarketable securities and $2.3 million from the recovery of an investment,offset by $6.2 million in capital expenditures. Net cash used in investingactivities in 2004 was approximately $22.4 million, and related $2.0 million tothe acquisition of 24/7 Real Media Korea, $15.7 million to the acquisition ofDecide, $2.0 million to short-term investments, and $2.7 million to capitalexpenditures. Net cash used in investing activities in 2003 was approximately$1.5 million, and related $1.3 million to the purchases of computerequipment for general operational purposes and approximately $0.2 million tocash used in the acquisition of Insight and a cash investment in iPromotions.

 

Financing activities provided $3.3 million in 2005 andconsisted of $1.7 million in proceeds received from Dentsu, the minorityinvestor in our consolidated subsidiary, K.K. 24-7 Search, and $1.7 millionreceived from the exercise of common stock options, offset by $0.1 million incapital lease obligations. Net cash provided by financing activities was $38.0million in 2004 and consisted of $37.2 million of net proceeds from oursecondary offering of common stock and $0.8 million of proceeds from theexercise of stock options and common stock warrants. Financing activitiesprovided $20.2 million in 2003, and consisted of $6.7 million of netproceeds from our issuance of preferred stock, $13.8 million of net proceedsfrom our issuance of subordinated convertible debentures and $1.2 million ofproceeds from the exercise of stock options, offset by the settlement of thethree promissory notes that we had issued to PubliGroupe for $1.5 millionin cash and approximately 1.0 million shares of common stock.

 

OnSeptember 26, 2003, we completed the placement to an institutionalaccredited investor of $15.0 million of our subordinated convertibledebentures. If at any time on or after September 26, 2005, the secondanniversary of the initial issuance date, the weighted average price of ourcommon stock is less than $8.75 on any five consecutive trading days, theholder has the right, in its sole discretion, to require that we redeem up to$7.5 million in principal amount of the debentures. This condition has beenmet, and management believes the holder may exercise its right to requireredemption.  Management believes existingcash and investments will be sufficient to meet the obligation to redeem,should the holder exercise its right.

 

TheCompany maintains cash balances at the subsidiary level to meet short-termcapital requirements and to satisfy local statutory liquidityrequirements. These requirements, as well as local tax implications, maylimit the amount of capital that can be repatriated from certainsubsidiaries. These funds are freely available to the subsidiaries foroperational purposes. Specifically, K.K. 24-7 Search has $2.9 million incash as of December 31, 2005 that must be kept in Japan for operationalpurposes.

 

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

 

As a result of various equity transactions, we believethat we have undergone an “ownership change” as defined by Section 382 ofthe Internal Revenue Code. Accordingly, utilization of a substantial 

 

60

----

 

part of the net operating loss carryforward islimited. Based on our preliminary Section 382 study, at December 31,2005, we had approximately $24.3 million of U.S. net operating losscarryforwards. Our net operating loss carryforwards expire in various yearsthrough 2022.  Due to our history ofoperating losses and the Section 382 limitation, there is substantialuncertainty surrounding whether we will ultimately realize our deferred taxassets. Accordingly, these assets have been fully reserved. During 2005 and2004, the valuation allowance decreased by $55.3 million and $1.6 million,respectively. Of the total valuation allowance of $14.3 million at December 31, 2005, tax benefitsrecognized in the future of approximately of $2.4 million will be applieddirectly to additional paid in capital. This amount relates to the tax effectof employee stock option deductions included in our net operating losscarryforward.

 

The Company is subjectedto routine tax examinations by taxing authorities at the federal, state andlocal levels in the US and by various levels in foreign countries.  As of December 31, 2005, there are severalreviews being conducted and Management is of the opinion that the ultimateoutcome of these examinations would not have a material adverse impact on thefinancial position of the Company or the results of its operations.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

 

Commonstock warrants issued in conjunction with our subordinated convertibledebentures are equity-linked derivatives and accordingly represent off-balancesheet arrangements.  In addition, theconversion and redemption features of the subordinated convertible debenturesconstitute an embedded derivative.  Someof the common stock warrants and the conversion and redemption features meetthe scope exception in paragraph 11(a) of the Statement of Financial AccountingStandards No. 133, *Accounting forDerivative Instruments and Hedging Activities*(“SFAS 133”), and areaccordingly not accounted for as derivatives for purposes of SFAS 133, butinstead are accounted for as equity.  Seenote 12 to the financial statements for more information.

 

**CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS ANDCONTINGENCIES**

 

Our contractual obligations at December 31, 2005are as follows (in thousands):

 
| ** **                                          | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------------------|------------|----------------------------|------------|
| ** **                                          | ** ** | **Less than  1 year**      | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** | **Total** | ** ** |
|                                                |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt obligations                          |       | $                          | 15,000     |   | $ | — |   | $ | — |   | $ | — |   | $ | 15,000 |   |
| Purchase obligations                                |       | —                     |       | — |   | — |   | — |   | — |   |
| Acquisition related earn-out payments               |       | 5,000                      |       | — |   | — |   | — |   | 5,000 |   |
| Operating lease obligations, net of sublease income |       | 2,085                      |       | 3,892 |   | 3,699 |   | 4,278 |   | 13,954 |   |
| Capital lease obligations                           |       | 30                         |       | 19 |   | — |   | — |   | 49 |   |
| Warrant liability                                   |       | 897                        |       | — |   | — |   | — |   | 897 |   |
| Other long-term liabilities                         |       | 487                        |       | — |   | — |   | — |   | 487 |   |
| Total                                               |       | $                          | 23,499     |   | $ | 3,911 |   | $ | 3,699 |   | $ | 4,278 |   | $ | 35,387 |   |

 

***Long-Term Debt****.*The $15.0 million of our subordinated convertible debentures, issued onSeptember 26, 2003, mature in September 2006, unless extended oradjusted upon the occurrence of certain events. If at any time on or after September 26,2005, the second anniversary of the date of issuance, the weighted averageprice of our common stock is less than $8.75 on any five consecutive tradingdays, the holder has the right, in its sole discretion, to require that weredeem up to $7.5 million principal amount of the debenture. This condition hasbeen met, and management believes the holder may exercise its right to requireredemption.  Management believes existingcash will be sufficient to meet the obligation to redeem, should the holderexercise its right.  Semi-annual interestpayments at 2% began in January 2004. Both the principal and interest mayotherwise be paid in common stock.

 

61

----

 

***Acquisition Related Earn-out Obligation.***  We are potentially liable for the payment ofearn-out features to the former owners of Decide based on the operating targetsachieved by Decide for the year ended December 31, 2005.  Decide stockholders may receive up to $10.0million, consisting of up to $2.5 million in cash and up to $7.5 million incommon stock.  We estimate that $5.0million will be due under the earn-out and have accrued the amount as of December 31, 2005.

 

***Capital and Operating Leases***. Capitalleases relate to various office equipment. The operating lease agreementsrelate primarily to our offices throughout the United States andinternationally with the last lease expiring in 2015. We have entered intovarious sublease arrangements associated with our excess facilities. Suchsubleases have terms extending through 2008. As of December 31, 2005, wehave restructuring reserves totaling approximately $1.2 million relatingto excess space at some of the facilities, net of amounts estimated to bereceived from our sublease arrangements. Net lease commitments as of December 31,2005 can be summarized as follows:

 
| ** **                              | ** ** | **Capital Leases** | ** ** | **Operating Leases** | ** ** | **Subleases** | ** ** |
|-----------------------------------------|------------|--------------------|------------|----------------------|------------|---------------|------------|
| ** **                              | ** ** | ** **         | ** ** | **(in thousands)**   | ** ** | ** **    | ** ** |
| Year Ending December 31,           |       |               |       |                 |       |          |       |
| 2006                                    |       | $                  | 30         |                 | $          | 2,791         |       | $ | (706 | ) |
| 2007                                    |       | 19                 |       | 2,672                |       | (714          | )          |
| 2008                                    |       | —             |       | 2,420                |       | (486          | )          |
| 2009                                    |       | —             |       | 1,843                |       | —        |       |
| 2010                                    |       | —             |       | 1,856                |       | —        |       |
| Thereafter                              |       | —             |       | 4,278                |       | —        |       |
| Total minimum lease payments            |       | 49                 |       | $                    | 15,860     |          | $          | (1,906 | ) |
| Less amount representing interest       |       | (3                 | )          |                 |       |          |       |
| Present value of minimum lease payments |       | 46                 |       |                 |       |          |       |
| Less current portion                    |       | 31                 |       |                 |       |          |       |
| Long-term portion                       |       | $                  | 15         |                 |       |          |       |   |

 

***Restructuring Expenses***. As of December 31,2005, we had approximately $1.2 million remaining of cash outlay obligationsrelating to lease restructuring and exit costs.

 

***Insurance**Coverage***.We maintain director and officer insurance, which may cover certain liabilitiesarising from our obligation, in certain circumstances, to indemnify ourdirectors and officers and former directors, officers and employees of acquiredcompanies. The indemnification provided by us to our officers anddirectors does not have a stipulated maximum; therefore we are not able todevelop a reasonable estimate of our maximum liability. To date, we havenot incurred material costs as a result of such obligations and have notaccrued any liabilities related to such indemnification obligations in ourfinancial statements.

 

***Indemnifications***. In connection withour commercial agreements, we provide indemnifications of varying scope andterms to customers, business partners and other parties with respect to certainmatters, including, but not limited to, losses arising out of our breach ofsuch agreements and out of intellectual property infringement claims made bythird parties.

 

62

----

 

**IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS**

 

**Stock-BasedCompensation**

 

In December 2004, the Financial AccountingStandards Board (“FASB”) issued the revised SFAS No. 123, *Share-Based Payment* (“SFAS 123R”), whichaddresses the accounting for share-based payment transactions in which aCompany obtains employee services in exchange for (a) equity instrumentsof the Company or (b) liabilities that are based on the fair value of theCompany’s equity instruments or that may be settled by the issuance of suchequity instruments. SFAS 123R eliminates the ability to account for employeeshare-based payment transactions using Accounting Principles Board Opinion (“APB”)No. 25, and requires, instead, that such transactions be accounted forusing the grant-date fair value based method. SFAS 123R will be effective as ofthe beginning of the first interim or annual reporting period that begins afterJune 15, 2005. However, the SEC amended the compliance dates to make SFAS123R effective for the first fiscal year following June 15, 2005 (January 1,2006 for the Company).

 

SFAS 123R applies to all awards granted or modifiedafter the effective date of the statement. In addition, compensation cost forthe unvested portion of previously granted awards that remain outstanding onthe effective date shall be recognized on or after the effective date, as therelated services are rendered, based on the awards’ grant-date fair value aspreviously calculated for the pro-forma disclosure under SFAS 123R.

 

We expect that, upon the adoption of SFAS 123R, wewill apply the modified prospective application transition method, as permittedby the statement. Under such transition method, upon the adoption of SFAS 123R,our financial statements for periods prior to the effective date of thestatement will not be restated. The impact of this statement on our financialstatements and our results of operations in 2006 and beyond will depend uponvarious factors, among them, our future compensation strategy. We expect theeffect of applying SFAS 123R to our results of operations for 2006, as theyrelate to existing option plans, would not be materially different from the proforma effects reported under the disclosure requirements of SFAS 123.

 

63

----

 

**ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

We areexposed to the impact of interest rate changes and foreign currencyfluctuations.

 

**INTERESTRATE RISK**

 

The primary objective of our investment activities isto preserve capital. Cash and cash equivalents are investments with originalmaturities of three months or less. Therefore, changes in the market’s interestrates do not affect the value of the investments as recorded by 24/7 RealMedia. The following table presents the amounts of our financial instrumentsthat are subject to interest rate risk by expected maturity and averageinterest rates as of December 31, 2005 (in thousands, except percentages):

 
| ** **                | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total (1)** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|---------------|------------|
| Cash and cash equivalents |       | $        | 40,009     |     | $          | —   |       | $        | —     |     | $          | —         |       | $             | —     |   | $ | — |   | $ | 40,009 |   |
| Average interest rate     |       | 3.92     | %          |     |       |     |       |     |       |     |       |           |       | 3.92          | %          |
|                           |            |          |            |          |            |          |            |          |            |          |            |                |            |               |            |  |  |  |  |  |  |  |

 

----

(1) Due to theshort-term nature of our cash and cash equivalents, the amount presentedrepresent the fair value as of December 31, 2005.

 

**FOREIGN CURRENCY RISK**

 

International revenuesaccounted for approximately 55.3% of our total revenues during 2005, ascompared to 51.3% during 2004. The growth in our international operations hasincreased our exposure to foreign currency fluctuations. Revenues and relatedexpenses generated from our international subsidiaries are generallydenominated in the functional currencies of the local countries. Primarycurrencies include Euros, British Pounds, Japanese Yen, Korean Won, CanadianDollars and Australian Dollars. The income statements of our internationaloperations are translated into U.S. dollars at the average exchange rates ineach applicable period. To the extent the U.S. dollar weakens against foreigncurrencies, the translation of these foreign currency denominated transactionsresults in increased revenues, operating expenses and net income for ourforeign operations. Similarly, our revenues, operating expenses and net incomewill decrease for our international segments when the U.S. dollar strengthensagainst foreign currencies. Realized foreign currency transaction gains(losses) included in other income in the consolidated statements of operationswere immaterial for the years ended December 31, 2005, 2004 and 2003. Weexpect to use the assets denominated in foreign currencies for projectexecution expenditures in the currency in which they are held, the risk ofrealized translation losses is mitigated.

 

We considered the historical trends in currency exchange rates anddetermined that it was reasonably possible that changes in exchange rates of10% for all currencies could be experienced in the near term.  These changes would have resulted in animmaterial impact on income (loss) before provision for income taxes andminority interest in operations of consolidated subsidiary for the years ended December 31,2005 and December 31, 2004.

 

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

 

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

 

64

----

 

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

 

None.

 

**ITEM9A. CONTROLS AND PROCEDURES**.

 

***Management’s Responsibility for Financial Statements***

*** ***

Our management isresponsible for the integrity and objectivity of all information presented inthis Annual Report on Form 10-K. The consolidated financial statementswere prepared in conformity with accounting principles generally accepted inthe United States of America and include amounts based on management’s bestestimates and judgments. Management believes the consolidated financialstatements fairly reflect the form and substance of transactions and that thefinancial statements fairly represent the Company’s financial position andresults of operations.

 

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

*** ***

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as suchterm is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, we conducted an evaluation of the effectiveness of ourinternal control over financial reporting based on the framework in “*Internal Control – Integrated Framework*” issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Based on ourevaluation under the framework in “*Internal Control –Integrated Framework*,” our management concluded that our internalcontrol over financial reporting was effective as of December 31, 2005.

 

Our management’s assessment of the effectiveness ofour internal control over financial reporting as of December 31, 2005 hasbeen audited by Goldstein Golub Kessler LLP, an independent registered public accountingfirm, as stated in their report which is included in Part IV, Item15 of this Annual Report on Form 10-K.

 

Due toits inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies and procedures may deteriorate.

 

***Changes in Internal Control Over Financial Reporting***

*** ***

Therewere no changes in our internal control over financial reporting during thefourth quarter of the year ended December 31, 2005 that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

***Disclosure Controls and Procedures***

 

Wehave established disclosure controls and procedures to ensure that materialinformation relating to the Company, including its consolidated subsidiaries,is made known to the officers who 

 

65

----

 

certify the Company’s financial reports and to other members of seniormanagement and the Board of Directors.

 

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer, has evaluatedthe effectiveness of our “disclosure controls and procedures” (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of theperiod covered by this report.  Based on such evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded, as of December 31,2005, that the Company’s disclosure controls and procedures are effective toensure that the information required to be disclosed by the Company in thereports that it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in SEC rules andforms, and to ensure that information is accumulated and communicated to ourmanagement, including the Chief Executive Officer, as appropriate to allowtimely decisions regarding required disclosure.

 

**ITEM 9B.OTHER INFORMATION.**

 

There was no informationrequired to be disclosed in a report on Form 8-K during the fourth quarterof the fiscal year ended December 31, 2005 that was not reported on suchform. 

 

66

----

 

**PART III**

 

**ITEM 10.****DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT.**

 

Thefollowing table provides information concerning our current named executiveofficers and directors:

 
| **Name**              | ** ** | **Age** | ** ** | **Position  and Offices Held**                           |
|-----------------------|------------|---------|------------|----------------------------------------------------------|
| David J. Moore        |       | 53      |       | Chairman of the Board and Chief Executive Officer        |
| Robert J. Perkins     |       | 57      |       | Director                                                 |
| Tony Schmitz          |       | 46      |       | Director                                                 |
| Arnie Semsky          |       | 59      |       | Director                                                 |
| Moritz F. Wuttke      |       | 39      |       | Director                                                 |
| Val Zammit            |       | 57      |       | Director                                                 |
| Jonathan K. Hsu       |       | 33      |       | Executive Vice President and Chief Financial Officer     |
| Mark E. Moran         |       | 43      |       | Executive Vice President, General Counsel and  Secretary |
| Christopher J. Wagner |       | 48      |       | Chief Executive Officer, 24/7 Real Media Europe          |

 

*David J. Moore* has been our Chief Executive Officer anda director since February 1998, and has served as Chairman of our board ofdirectors since January 2002. Mr. Moore was President of PetryInteractive, an Internet advertising network and a predecessor to our Company,from December 1995 to February 1998. From 1993 to 1994, Mr. Moorewas President of Geomedica, an online service for physicians, which he sold toReuters. From 1982 to 1992, Mr. Moore was a Group Vice President atHearst/ABC-Viacom Entertainment Services, a media company, where heparticipated in the launch of Cable Health Network, Lifetime Television,Lifetime Medical Television, a service targeted to physicians, and HealthLinkTelevision, a physician waiting room television service. From 1980 to 1982, Mr. Moorehad a television advertising sales position with Turner Broadcasting. Mr. Mooreis a member of The Executive Committee of the Interactive Advertising Bureauand serves on the board of directors of TAC Acquisitions Corp., a publiccompany, and Local Matters, Inc.  Mr. Moorereceived a Bachelor of Arts degree in Communications from Northern IllinoisUniversity.

 

*Robert J. Perkins* has been a directorsince October 2001. Mr. Perkins has served as President of ConsensusResearch Group, Inc., a global marketing research and consulting firmheadquartered in New York City, since 2001. From 1999 to 2001, Mr. Perkinswas a partner at the Peppers and Rogers Group, a leading global customerrelationship management consulting firm. In 1998 he founded and became CEO ofChamber Communications, a for-profit branch of the U.S. Chamber of Commerce. Hewas Chief Marketing Officer at Playboy Enterprises from 1996 to 1998 and atCalvin Klein Inc. from 1994 to 1996. Prior to that, Mr. Perkins wasSenior Vice President of Marketing at Pizza Hut from 1991 to 1994. Beforebeginning his business career, Mr. Perkins was a USAF Instructor Pilot inT-38A supersonic, fighter-type aircraft. Mr. Perkins received a Masters ofArts degree from Texas Tech University and a Bachelor of BusinessAdministration degree from the University of Iowa.

 

*Tony Schmitz* has been a director since August 2004.Mr. Schmitz has served as a Managing Director of Pine Street CapitalPartners, a private equity fund, since September 2004. Mr. Schmitzalso served as a consultant to our Company from November 2004 to December 2004and served as Chief Technology Officer of our Company from January 2003through October 2004. From February 2001 to January 2003, Mr. Schmitzwas the Chief Executive Officer of Insight First, Inc. From May 2000to 

 

67

----

 

February 2001, Mr. Schmitz was the Chief Strategy Officer ofInsight First. Mr. Schmitz was managing partner at marchFIRST (formerlyUSWeb/CKS) from June 1998 to May 2000. Mr. Schmitz also servedas Chief Technology Officer at Gray Peak Technologies from June 1997 to June 1998and as a principal at Reach Networks from 1988 to 1997. Mr. Schmitzobtained a Bachelor of Science degree in Business from the State University ofNew York at Albany.

 

*Arnie Semsky* has been a director since June 1998.Mr. Semsky has been self-employed as a media advisor since January 1999.He previously served as the Executive Vice President, Worldwide Media Directorand Board member of the BBDO Worldwide unit of Omnicom Group, the parentcompany of a group of advertising agencies, for 20 years. Prior to thattime, he was Vice President, National TV for Grey Advertising. Mr. Semskyis a senior advisor for ESPN and the ESPN/ABC Sports Customer Marketing andSales unit. Mr. Semsky currently serves on the Board of Directors ofInterep, SportsVision and the John A. Reisenbach Foundation. He is on the Boardof Advisors of several Internet companies, including BrandEra.com; On2.com; andCoolHunter.com. Mr. Semsky received a Bachelor of Arts degree in Englishfrom Pace University.

 

*Moritz F. Wuttke* has been a director sinceOctober 2001. In November 2005, Mr. Wuttke was nominated CEOAsia Pacific of Publicitas Promotion Network, the international ad salesdivision of PubliGroupe SA. Mr. Wuttke served as the Head of BusinessDevelopment for PubliGroupe SA from October 2001 to November 2005 andwas the Head of e-Business Development for PubliOnline, the new media divisionof PubliGroupe SA, from October 1999 to October 2001. From January 1995to July 1999, Mr. Wuttke was a Managing Director of certain Swiss andGerman interactive media agencies. From April 1994 to March 1995, Mr. Wuttkewas a founder and managing director of OnlinePark GmbH, the first Internetaccess and consumer portal in Germany. Mr. Wuttke sits on the boards ofseveral European and Asian companies, including Swisscom Directories, a yellow pages company,and publishing entities.  He is arequested speaker at international conferences about trends in the worldwidepublishing industry and the impact of electronic media. Mr. Wuttkereceived a Masters degree in Science and Business Administration from theTechnical University of Berlin.

 

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

 

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

 

*Mark E. Moran* has served as our ExecutiveVice President since March 2002 and as our Senior Vice President from April 1998to March 2002. He has also served as our General Counsel and Secretarysince April 1998. From June 1993 to April 1998, Mr. Moran wasan associate attorney at the law firm of Proskauer Rose LLP. From April 1986to May 1993, Mr. Moran was a financial analyst in the Securities 

 

68

----

 

Processing Division of The Bank of New York. Mr. Moran received aJuris Doctorate degree from Fordham Law School, a Masters of BusinessAdministration degree in Finance from Fordham Graduate School of Business, anda Bachelor of Arts degree in Economics from The University of Virginia.

 

*Christopher J. Wagner* has served as Chief Executive Officer of our subsidiary, 24/7 RealMedia Europe, since November 2001, and also served as our Director ofTechnology from January to November 2001 and Director ofBusiness Development from May 2000 to January 2001. Prior to joiningReal Media Europe, Mr. Wagner served as operations analyst of PSINetEurope, an internet services company, from 1998 to 2000.  Mr. Wagner holds a Juris Doctoratedegree from Stanford Law School, a Masters of Public Administration degree witha concentration in financial markets and analysis from Harvard University, anda Bachelor of Music degree from Northwestern University, and is a member of the bars of New York and South Dakota.

 

**OTHER KEYEMPLOYEES**

 

*AriBluman* has served as our Senior Vice President - U.S. Salesand Operations since November 2005, as our Senior Vice President - WebAlliance from January 2005 to November 2005, as our Vice President -Direct Solutions from October 2002 to January 2005 and as our VicePresident - Inside Sales from February 1998 to September 2001.  From September 2001 to October 2002Mr. Bluman was Vice President of Sales at Now Marketing, Inc.  Mr. Bluman received a Bachelor of Artsdegree in Political Science from the University of Maryland.

 

*Jae Woo Chung* has served as President -24/7 Real Media (Asia), focusing on rolling out our business throughout Asia,since January 2005 and as President - Real Media Korea from April 1998to December 2004. Mr. Chung has also served as the President of K.K.24-7 Search, our Japanese subsidiary that is jointly owned with Dentsu, Inc.,since September 2005. From April 1997 to February 1998, Mr. Chungworked as a Senior Consultant for LG EDS. Mr. Chung received a degree in Industrial Engineering from HanyangUniversity in Korea and a Masters of Business Administration degree from KeioUniversity in Korea. He also studied at Kellogg Graduate School of Business atNorthwestern University as an exchange student.

 

*Jeffrey N. Marcus* has served as our ChiefTechnology Officer since September 2004. From December 2000 to August 2004,Mr. Marcus served as Mirror Image Internet’s Vice President, Operationsand Streaming Media. Mr. Marcus served as Vice President, Global Networksof DoubleClick, Inc. from April 2000 to December 2000. From April 1995to April 2000, Mr. Marcus held positions at KPMG, serving as Head ofU.S. National Networking and Telecommunications from 1995 to 1996 and as SeniorManager, Head of International Networking from 1996 to 2000. He also previouslyheld positions at Global Enterprise Services, Inc., the United ParcelService and IBM. Mr. Marcus received a Bachelor of Science degree inElectrical Engineering from Stevens Institute of Technology.

 

**AUDIT COMMITTEE**

 

Wehave an Audit Committee of the Board of Directors that acts pursuant to aseparate written charter, which was adopted and approved by the Board ofDirectors on February 24, 2004. The members of our Audit Committee are Mr. Zammit(Chair), Mr. Perkins and Mr. Wuttke. The Board of Directors hasdetermined that Mr. Zammit is an “audit committee financial expert” asdefined in Item 401(h) of Regulation S-K. Each of Mr. Zammit, Mr. Perkinsand Mr. Wuttke is “independent” as defined in 

 

69

----

 

Rule 4200 of the Marketplace Rules of the NationalAssociation of Securities Dealers, Inc. and the Exchange Act rules.

 

**SECTION 16(a) BENEFICIAL OWNERSHIP REPORTINGCOMPLIANCE**

 

Underthe securities laws of the United States, our directors, executive officers andany persons holding more than 10 percent of our common stock are requiredto report their ownership of common stock and any changes in that ownership, ona timely basis, to the SEC. In mid-2003, the SEC amended its rules torequire that substantially all Section 16 reports be filed within two daysof a reportable event, and that all filings be effected through the SEC’s EDGARfiling system. Based on our review of such reports and written representationsfurnished to us, all such required reports were filed on a timely basis in2005, except that a Form 4 Report was filed on August 9, 2005 forMark E. Moran to report his exercise of stock options effective August 4,2005, a Form 4 was filed on November 22, 2005 for Tony Schmitz toreport his conversion of Series C preferred stock effective August 29,2005, a Form 4 Report was filed on November 21, 2005 for each ofDavid J. Moore, Mark E. Moran, Jonathan K. Hsu and Christopher J. Wagner toreport their grant of stock options and shares of our common stock effective November 15,2005, a Form 4 Report was filed on November 22, 2005 for each ofRobert J. Perkins, Arnie Semsky, Moritz F. Wuttke and Val Zammit to reporttheir grant of stock options effective October 31, 2005 and a Form 4 Reportwas filed in March 2006 for Jonathan K. Hsu and Christopher J. Wagner to reporttheir grant of stock options effective July 2005.

 

**CODE OF ETHICS**

 

Our statement of business conduct and code of ethics,which has been authorized by our Board of Directors, can be found on ourwebsite http://www.247realmedia.com/about/247RM Code-of-Conduct.pdf and a copy will be provided to anyperson without charge, upon request sent to:

 

24/7 Real Media, Inc.

132 W. 31stStreet

New York, NY 1001

Attn:  Investor Relations

 

The statement and code is applicable to all our directors,officers and employees, including our principal executive officer, principalfinancial officer, principal accounting officer or controller, or any personperforming similar functions. If we make any amendments to the code of ethicsfor our principal executive officer, principal financial officer, principalaccounting officer or controller, or any person performing similar functions(other than technical, administrative, or other non-substantive amendments), orgrant any waivers, including implicit waivers, from a provision of this code tosuch persons, we will disclose the nature of the amendment or waiver, itseffective date and to whom it applies on our website or in a report on Form 8-Kfiled with the Securities and Exchange Commission.

 

70

----

 

**ITEM 11.EXECUTIVE COMPENSATION SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION**

 

**EXECUTIVE COMPENSATION**

 

Thefollowing table provides information about the compensation paid or payable byus for each of the last three fiscal years for services rendered in allcapacities to our Chief Executive Officer and each of our other executiveofficers who earned more than $100,000 in 2005 and who served as executiveofficers at the end of 2005.

 
| ** **                                       | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Annual Long Term  Compensation** | ** ** |
|--------------------------------------------------|------------|------------|------------|-------------------------|------------|------------------------------------|------------|
| **Name and Principal Position**                  | ** ** | **Year**   | ** ** | **Annual Salary**       | ** ** | **Bonus**                          | ** ** | **Securities Underlying  Options (#)** | ** ** |
|                                             |       |       |       |                    |       |                               |       |   |   |
| David J. Moore                                   |       | 2005       |       | $                       | 270,450    |                               | $          | 436,025 |   | 1,050,000 |   |
| Chief Executive Officer (1)                      |       | 2004       |       | $                       | 270,450    |                               | $          | 296,595 |   | 120,000 |   |
|                                             |       | 2003       |       | $                       | 262,573    |                               | $          | 421,701 |   | 164,130 |   |
|                                             |       |       |       |                    |       |                               |       |   |   |
| Jonathan K. Hsu                                  |       | 2005       |       | $                       | 200,000    |                               | $          | 167,702 |   | 865,000 |   |
| Chief Financial Officer (2)                      |       | 2004       |       | $                       | 200,000    |                               | $          | 116,260 |   | 80,000 |   |
|                                             |       | 2003       |       | $                       | 176,750    |                               | $          | 135,777 |   | 99,412 |   |
|                                             |       |       |       |                    |       |                               |       |   |   |
| Mark E. Moran                                    |       | 2005       |       | $                       | 185,658    |                               | $          | 134,161 |   | 425,000 |   |
| Executive Vice President and General Counsel (3) |       | 2004       |       | $                       | 185,658    |                               | $          | 91,260 |   | 80,000 |   |
|                                             |       | 2003       |       | $                       | 180,250    |                               | $          | 164,370 |   | 95,147 |   |
|                                             |       |       |       |                    |       |                               |       |   |   |
| Christopher J. Wagner                            |       | 2005       |       | $                       | 200,000    |                               | $          | 116,583 |   | 665,000 |   |
| Chief Executive Officer - Europe (4)             |       | 2004       |       | $                       | 195,638    |                               | $          | 89,400 |   | 80,000 |   |
|                                             |       | 2003       |       | $                       | 195,027    |                               | $          | 36,797 |   | 102,336 |   |

 

----

(1)          Aportion of Mr. Moore’s base salary and bonuses for 2003 and 2004 were paidin shares of our common stock.

 

(2)          Aportion of Mr. Hsu’s base salary and bonuses for 2003 and 2004 were paidin shares of our common stock.

 

(3)          Aportion of Mr. Moran’s base salary and bonuses for 2003 and 2004 were paidin shares of our common stock.

 

(4)          Mr. Wagnerwas named an executive officer in 2003; a portion of Mr. Wagner’s basesalary for 2003 and 2004 was paid in shares of our common stock. Mr. Wagneris paid in Swiss francs; therefore the above amounts reflect an approximateconversion into U.S. dollars based on the monthly exchange rates through theyear. In Swiss francs, Mr. Wagner was paid a base salary of CHF 261,885and a bonus of CHF 151,194 in 2005.

 

**Grant of Options**

 

The following table contains information concerningthe grant of options to each of our executive officers during the year ended December 31,2005. We did not grant any stock appreciation rights in 2005.

 

71

----

 
| ** **            | ** ** | **Individual Grants**                                            | ** ** | ** **                                                                 | ** ** | ** **                     | ** ** |
|-----------------------|------------|------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|--------------------------------|------------|
| **Name**              | ** ** | **Number of  Securities  Underlying  Options  Granted (#)  (1)** | ** ** | **Percent of  Total  Options  Granted to  Employees  in Fiscal  Year (2)** | ** ** | **Exercise  Price  ($/Share)** | ** ** | **Expiration  Date (3)** | ** ** | **Potential Realizable Value  at Assumed Annual Rates  of Stock Price Appreciation  for Option Term (4)** | ** ** |
| ** **            | ** ** | ** **                                                       | ** ** | ** **                                                                 | ** ** | ** **                     | ** ** | ** ** | ** ** | **5%** | ** ** | **10%** | ** ** |
|                  |       |                                                             |       |                                                                       |       |                           |       |   |   |   |   |   |   |
| David J. Moore        |       | 500,000                                                          |       | 7.38                                                                       | %          | $                              | 4.33       |   | 01/03/15 |   | $ | 1,361,557 |   | $ | 3,450,452 |   |
|                  |       | 550,000                                                          |       | 8.12                                                                       | %          | $                              | 6.40       |   | 11/14/16 |   | 2,213,709 |   | 5,609,973 |   |
| **Total:**            |       | 1,050,000                                                        |       | 15.50                                                                      | %          |                           |       |   |   | $ | 3,575,266 |   | $ | 9,060,425 |   |
|                  |       |                                                             |       |                                                                       |       |                           |       |   |   |   |   |   |   |
| Jonathan K. Hsu       |       | 400,000                                                          |       | 5.90                                                                       | %          | $                              | 4.33       |   | 01/03/15 |   | $ | 1,089,245 |   | $ | 2,760,362 |   |
|                  |       | 25,000                                                           |       | 0.37                                                                       | %          | $                              | 4.27       |   | 07/30/16 |   | 67,135 |   | 170,132 |   |
|                  |       | 440,000                                                          |       | 6.49                                                                       | %          | $                              | 6.40       |   | 11/14/16 |   | 1,770,967 |   | 4,487,979 |   |
| **Total:**            |       | 865,000                                                          |       | 12.76                                                                      | %          |                           |       |   |   | $ | 2,927,347 |   | $ | 7,418,473 |   |
|                  |       |                                                             |       |                                                                       |       |                           |       |   |   |   |   |   |   |
| Mark E. Moran         |       | 200,000                                                          |       | 2.95                                                                       | %          | $                              | 4.33       |   | 01/03/15 |   | $ | 544,623 |   | $ | 1,381,181 |   |
|                  |       | 225,000                                                          |       | 3.32                                                                       | %          | $                              | 6.40       |   | 11/14/16 |   | 905,608 |   | 2,294,989 |   |
| **Total:**            |       | 425,000                                                          |       | 6.27                                                                       | %          |                           |       |   |   | $ | 1,450,231 |   | $ | 3,676,170 |   |
|                  |       |                                                             |       |                                                                       |       |                           |       |   |   |   |   |   |   |
| Christopher J. Wagner |       | 200,000                                                          |       | 2.95                                                                       | %          | $                              | 4.33       |   | 01/03/15 |   | $ | 544,623 |   | $ | 1,380,181 |   |
|                  |       | 25,000                                                           |       | 0.37                                                                       | %          | $                              | 4.27       |   | 07/30/16 |   | 67,135 |   | 170,132 |   |
|                  |       | 440,000                                                          |       | 6.49                                                                       | %          | $                              | 6.40       |   | 11/14/16 |   | 1,770,967 |   | 4,487,979 |   |
| **Total:**            |       | 665,000                                                          |       | 9.81                                                                       | %          |                           |       |   |   | $ | 2,382,725 |   | $ | 6,038,292 |   |

 

----

(1)          Alloptions were granted pursuant to the 1998 or 2002 Stock Incentive Plans.

 

(2)          Thetotal number of options granted to directors and employees in 2005 was6,775,300.

 

(3)          Eachoption may be subject to earlier termination if the officer’s employment withus is terminated.

 

(4)          Thedollar gains under these columns result from calculations assuming 5% and 10%hypothetical growth rates as set by the Securities and Exchange Commission andare not intended to forecast future price appreciation, if any, of our commonstock. The gains reflect a future value based upon growth at these prescribedrates. It is important to note that options have value to recipients only ifthe stock price advances beyond the exercise price shown in the table duringthe effective option period.

 

**OptionExercises and Fiscal Year-End Option Values**

 

The followingtable provides information for each of our executive officers with respect tothe value of options exercised during the year ended December 31, 2005 andthe value of outstanding and unexercised options held as of December 31,2005. There were no stock appreciation rights exercised during 2005 and nonewere outstanding as of December 31, 2005.

 

72

----

 
| ** **            | ** ** | **Shares  Acquired** | ** ** | **Value**    | ** ** | **Number of Securities  Underlying Unexercised  Options at December 31, 2005** | ** ** | **Value of Unexercised In-  The-Money Options at   December 31, 2005 (1)** | ** ** |
|-----------------------|------------|----------------------|------------|--------------|------------|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **Name**              | ** ** | **on Exercise**      | ** ** | **Realized** | ** ** | **Exercisable**                                                                     | ** ** | **Unexercisable**                                                               | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
|                  |       |                 |       |         |       |                                                                                |       |                                                                            |       |   |   |   |   |
| David J. Moore        |       | —               |       | $            | —     |                                                                                | 962,886    |                                                                            | 800,000    |   | $ | 4,130,639 |   | $ | 1,269,500 |   |
| Jonathan K. Hsu       |       | —               |       | $            | —     |                                                                                | 424,413    |                                                                            | 640,000    |   | $ | 1,470,052 |   | $ | 1,015,600 |   |
| Mark E. Moran         |       | 30,000               |       | $            | 102,900    |                                                                                | 434,183    |                                                                            | 325,000    |   | $ | 1,725,061 |   | $ | 512,500 |   |
| Christopher J. Wagner |       | —               |       | $            | —     |                                                                                | 385,852    |                                                                            | 540,000    |   | $ | 1,550,657 |   | $ | 714,600 |   |

 

----

(1)          Basedon the closing market price of the common stock as reported by NASDAQ on December 30,2005 of $7.34 per share.

 

**COMPENSATION OF DIRECTORS**

 

Allmembers of the Board of Directors who are not employees or consultants arereimbursed for their expenses for each meeting attended and are eligible toreceive stock options pursuant to the 2002 Stock Incentive Plan. Effective January 2005,members of the Board of Directors are awarded 20,000 options, an additional5,000 options for each Committee membership and an additional 2,500 options foreach Committee chairmanship, on the date of each Annual Meeting ofStockholders, to purchase shares of common stock at the fair market value onthe date of grant, prorated for directors who have served for less than oneyear since their initial grant. These grants vest in three equal annualinstallments. With regard to the compensation for Mr. Schmitz, a formeremployee of the Company, we continue to vest and make available to Mr. Schmitzhis existing stock options granted during his employment with the Company,which will fully vest at the end of 2006. Mr. Schmitz will not receive thestock options granted to the Board of Directors at the 2006 Annual Meeting ofStockholders. Through the 2004 Annual Meeting of Stockholders, each directorwas paid an annual cash fee of $6,000 for attending the meetings of the Boardof Directors and was given a non-qualified option to purchase 3,333 shares ofcommon stock at the fair market rate on the date of the grant. In addition, on January 1,2005 each director was given a one-time grant of 15,000 options to purchaseshares of common stock at the fair market rate on the date of the grant.Directors were also given an additional one-time grant of 5,000 options foreach Committee membership and an additional one-time grant of 2,500 options foreach Committee chairmanship, to purchase shares of common stock at the fairmarket rate on the date of the grant. These one-time grants vested immediately.

 

**EMPLOYMENT AGREEMENTS**

 

We have entered into employment agreements providingfor annual compensation in excess of $100,000 with certain of our executiveofficers. The material terms of the employment agreements generally are asfollows:

 

i.      the employment agreements continued untilterminated by either party;

 

ii.     during theemployment term and thereafter, we will indemnify the executive to the fullestextent permitted by law, in connection with any claim against such executive asa result of 

 

73

----

 

suchexecutive serving as one of our officers or directors or in any capacity at ourrequest in or with regard to any other entity, employee benefit plan orenterprise;

 

iii.    any dispute orcontroversy arising under or in connection with the employment agreement (otherthan injunctive relief) will be settled exclusively by arbitration; and

 

iv.    we may terminatethe agreement at any time with cause (as defined in the agreement) and upon 30days’ notice without cause and, if an executive is terminated without cause(including our giving notice of non-renewal), he will receive severance pay andbonus, plus continued medical benefits generally for a period equal to one ortwo times the severance period.

 

Our employment agreement with David J. Moore providesfor an annual base salary of $270,450 and a target bonus of $400,000 for 2006.If we terminate Mr. Moore without cause, he is entitled to receiveseverance pay in an amount equal to his annual base salary, plus one-half ofthe maximum bonus for which he is eligible during the fiscal year oftermination. If termination is the result of Mr. Moore’s death ordisability, we will pay his estate an amount equal to two years’ of his basesalary at his then current rate of pay.

 

Our employment agreement with Jonathan K. Hsu providesfor an annual base salary of $200,000 and a target bonus of $150,000 for 2006.If we terminate Mr. Hsu without cause, he is entitled to receive severancepay in an amount equal to nine months’ of his base salary, plus the maximumbonus for which he is eligible during the fiscal year of termination.  If termination is result of the result of Mr. Hsu’sdeath or disability, we will pay his estate an amount equal to nine months’ ofhis base salary at his then current rate of pay.

 

Our employment agreement with Mark E. Moran providesfor an annual base salary of $185,658 and a target bonus of $100,000 for 2006.If we terminate Mr. Moran without cause, he is entitled to receiveseverance pay in an amount equal to 4.5 months of his base salary, plusthree-eighths of the maximum bonus for which he is eligible during the fiscalyear of termination. If termination is the result of Mr. Moran’s death ordisability, we will pay to his estate an amount equal to nine months’ basesalary at his then current rate of pay.

 

Our employment agreement with Christopher J. Wagner providesfor an annual base salary of $200,000 and a target bonus of $150,000 for 2006.Pursuant to Swiss law, we contributed Sfr. 44,049 to a compulsory Swiss pensionprogram on behalf of Mr. Wagner in 2005, the amount that we were directedto contribute by the pension plan provider. We may terminate Mr. Wagner’semployment upon six months’ notice of termination or upon making a payment ofbase salary in lieu of such notice.

 

Eachof our executive officers participates in the Company’s standard health, life,disability and other insurance programs.

 

**COMPENSATION COMMITTEE INTERLOCKS AND INSIDERPARTICIPATION**

 

Eachof Messrs. Perkins, Semsky, and Wuttke, the current members of ourCompensation Committee, is an independent, outside director. None of ourexecutive officers serves as a member of the board of directors or compensationcommittee of any entity that has one or more executive officers serving as amember of our Board of Directors or Compensation Committee.

 

74

----

 

**REPORT OF THE COMPENSATION COMMITTEE OF THE BOARDOF DIRECTORS**

 

TheCompensation Committee determines our executive compensation policies. TheCompensation Committee determines the compensation of our executive officersand approves and oversees the administration of our incentive compensationprograms for all employees, including executive officers. The CompensationCommittee has reviewed and is in accord with the compensation paid to ourexecutive officers in 2005.

 

***Compensation Policies and Programs***

 

Ourcompensation program is part of a company-wide program covering all employees.The program’s goals are to attract, retain and motivate employees, and weutilize incentives such that employees and stockholders share the same risks.The compensation program is designed to link each employee’s compensation toour performance. A portion of each employee’s compensation relates to the grantof stock options, and such grants are based on the successful attainment ofstrategic corporate, business unit and individual goals. Grants of stockoptions are of great importance to executives as well as all employees. Anylong-term value to be derived from such grants will be consistent with stockholdergains.

 

Executiveand employee compensation includes salary, employment-related benefits andlong-term incentive compensation:

 

*Salary.*  Salaries are setcompetitively relative to comparable positions within and outside the Internetadvertising industry. An individual’s experience and performance are consideredwhen setting salaries within the range for each position. Annual reviews areheld and adjustments are made based on attainment of individual and companygoals.

 

*Benefits*.  All employees are eligiblefor similar benefits, such as health and life insurance.

 

*Incentive Compensation.*  Anincentive compensation program is established annually. The purpose of thisprogram is to provide financial incentives to executives and employees toachieve annual corporate, business unit, and individual goals. The incentiveprogram also aligns executive and employee interests with those of stockholdersby using grants of stock options. Such grants vest over time therebyencouraging continued employment with us.

 

*Chief Executive Officer.*  Mr. Moore’sbase salary for 2005 was set in accordance with his employment agreement, aswas his annual incentive target, and the incentive payout reflected theachievement of a number of our company’s 2005 business objectives.

 

*Policy With Respect To Compensation Deductibility.*  Ourpolicy with respect to the deductibility limit of Section 162(m) of theCode generally is to preserve the federal income tax deductibility ofcompensation paid when it is appropriate and is in the best interest of us andour stockholders. However, we reserve the right to authorize the payment ofnon-deductible compensation if we deem that it is appropriate.

 

Members of the compensation committee:

 

Moritz Wuttke, ChairRobert PerkinsArnie Semsky

 

75

----

 

**STOCK INCENTIVE PLANS**

 

**1998 Stock Incentive Plan and 2002 Stock IncentivePlan**

 

*Background; Purpose; Eligibility*.

 

The following provisions areapplicable to our 1998 and 2002 Stock Incentive Plans and are intended only asa summary. The incentive plans are intended (i) to offer our employees andconsultants and those of our subsidiaries stock-based incentives and otherequity-based awards, thereby creating a means to raise the level of stockownership by employees and consultants in order to attract, retain and rewardsuch employees and consultants and strengthen the mutuality of interestsbetween such employees and consultants and our stockholders and (ii) tooffer equity-based awards to non-employee directors, thereby attracting,retaining and rewarding such non-employee directors and strengthening themutuality of interests between non-employee directors and stockholders.

 

All of our employees andconsultants are eligible to be granted stock options, stock appreciation rightsand restricted stock.  Our non-employeedirectors are eligible to receive grants of nonqualified stock options and toreceive grants of common stock.

 

*Administration.*

 

The incentive plans areadministered by the Compensation Committee of our Board of Directors, exceptthat with respect to awards to non-employee directors, the Plans areadministered by the Board of Directors. The Compensation Committee has full authority and discretion, subject tothe terms of the incentive plans, to determine who is eligible to receiveawards and the amount and type of awards. The Compensation Committee may grant stock options, stock appreciationrights, and restricted stock under the Plans. Terms and conditions of awards are set forth in written grant agreements.No option may have an exercise price less than the fair market value of thecommon stock at the time of original grant (or, in the case of an incentivestock option granted to a ten percent stockholder, 110% of fair market value).Awards under the incentive plans may not be made on or after the tenthanniversary of the date of its adoption, but awards granted prior to such datemay extend beyond that date. All options granted under the incentive plansexpire no more than ten years from the date of grant.

 

*Available Shares And Other Units.*

 

As of February 28,2006, a maximum of 2,277,309 and 17,400,000 shares of common stock may beissued pursuant to the 1998 Stock Incentive Plan and the 2002 Stock IncentivePlan, respectively. The maximum number of incentives that may be granted to anyindividual for each fiscal year during the term of the incentive plans is750,000. In general, upon the cancellation or expiration of an award, theunissued shares of common stock subject to such awards will again be availablefor awards under the incentive plans. The number of shares of common stockavailable for the grant of awards and the exercise price of an award may beadjusted to reflect any change in our capital structure or business by reasonof certain corporate transactions or events. The 2002 Plan has an automaticincrease of 600,000 shares available for issuance thereunder on the firsttrading day of each calendar year.

 

*Change of Control*

 

The Stock Incentive Planprovides that, unless otherwise provided at the time of grant, all stockincentives granted under the Plan shall fully vest upon the occurrence ofcertain events constituting a change of control of the Company. It hasgenerally been the practice of the Company since 2000 to 

 

76

----

 

provide that stock incentives shall not vestupon a change of control, unless the grantee’s employment is terminated, orconstructively terminated, involuntarily, including as a result of death ordisability, in the two years following the change in control.

 

77

----

 

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

 

Thefollowing table sets forth information regarding beneficial ownership of ourcommon stock as of February 28, 2006, by: (i) each person who we knowto own beneficially more than 5% of the common stock; (ii) each of ourdirectors and named executive officers; and (iii) our current directorsand executive officers as a group.

 
| **Beneficial Owner**                                            | ** ** | **Amount and  Nature of  Beneficial  Ownership** | ** ** | **% Ownership** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------|------------|
| ** **                                                      | ** ** | ** **                                       | ** ** | ** **      | ** ** |
| **Executive Officers and Directors**                            |       |                                             |       |            |       |
|                                                            |       |                                             |       |            |       |
| David J. Moore (2)                                              |       | 1,662,312                                        |       | 3.6             | %          |
| Robert J. Perkins (3)                                           |       | 20,279                                           |       | *               |       |
| Tony Schmitz (4)                                                |       | 144,245                                          |       | *               |       |
| Arnie Semsky (5)                                                |       | 32,468                                           |       | *               |       |
| Moritz F. Wuttke (6)                                            |       | 30,419                                           |       | *               |       |
| Val Zammit (7)                                                  |       | 110,086                                          |       | *               |       |
| Jonathan K. Hsu (8)                                             |       | 475,213                                          |       | 1.0             | %          |
| Mark E. Moran (9)                                               |       | 562,761                                          |       | 1.2             | %          |
| Christopher J. Wagner (10)                                      |       | 438,162                                          |       | *               |       |
| All current directors and officers as a group  (9 persons) (11) |       | 3,475,945                                        |       | 7.5             | %          |
|                                                            |       |                                             |       |            |       |
| **Beneficial Holders of 5% or more**                            |       |                                             |       |            |       |
|                                                            |       |                                             |       |            |       |
| Richard H. Driehaus and Driehaus Capital Management  LLC (12)   |       | 4,179,207                                        |       | 9.0             | %          |
| PubliGroupe USA Holding, Inc. (13)                         |       | 2,509,104                                        |       | 5.4             | %          |
|                                                            |       |                                             |       |            |       |
| Peqout Capital Management, Inc. (14)                       |       | 2,487,100                                        |       | 5.3             | %          |

 

----

*                                         Representsless than 1% of the outstanding common stock.

 

(1)          Percentageis based on total outstanding shares of common stock of 46,645,416 as of February 28,2006. Beneficial ownership is determined in accordance with the rules ofthe Securities and Exchange Commission and generally includes voting orinvestment power with respect to securities, subject to community propertylaws, where applicable. Shares of common stock subject to options or warrantsthat are exercisable within 60 days of February 28, 2006 andbeneficially owned by the person holding such options and warrants are treatedas outstanding for the purpose of computing the percentage ownership for suchperson, but are not treated as outstanding for the purpose of computing thepercentage ownership of any other person. The address for each of 

 

78

----

 

thepersons listed above, unless otherwise specified below, is c/o 24/7 Real Media, Inc.,132 W. 31st Street, New York, NY 10001.

 

(2)          Includes(i) 42,293 shares of common stock held by a family trust and other trustsheld for the benefit of Mr. Moore’s family members, beneficial ownershipof which is disclaimed by Mr. Moore; Mr. Moore’s wife is theco-trustee of each such trust; (ii) 20,697 shares of common stock issuableupon exercise of warrants; and (iii) vested options to purchase 962,886shares of common stock exercisable within 60 days of February 28,2006. Excludes unvested options to purchase 800,000 shares of common stock notexercisable within 60 days of February 28, 2006. The number of sharesof common stock issuable upon exercise of such warrants are subject toanti-dilution adjustments.

 

(3)          Includesvested options to purchase 20,279 shares of common stock exercisable within60 days of February 28, 2006. Excludes unvested options to purchase44,723 shares of common stock not exercisable within 60 days of February 28,2006.

 

(4)          Includes(i) 828 shares of common stock issuable upon exercise of warrants; and (ii) vestedoptions to purchase 143,417 shares of common stock exercisable within60 days of February 28, 2006. Excludes unvested options to purchase26,668 shares of common stock not exercisable within 60 days of February 28,2006. The number of shares of common stock issuable upon exercise of suchwarrants are subject to anti-dilution adjustments.

 

(5)          Includesvested options to purchase 32,468 shares of common stock exercisable within60 days of February 28, 2006. Excludes unvested options to purchase37,223 shares of common stock not exercisable within 60 days of February 28,2006.

 

(6)          Includesvested options to purchase 30,419 shares of common stock exercisable within60 days of February 28, 2006. Excludes unvested options to purchase49,583 shares of common stock not exercisable within 60 days of February 28,2006. Mr. Wuttke is an officer of PubliGroupe, SA, the parent company ofPubliGroupe USA Holding, Inc. Mr. Wuttke disclaims beneficialownership over shares held by PubliGroupe USA Holding, Inc.

 

(7)          Includes(i) 8,279 shares of common stock issuable upon exercise of warrants; and (ii) vestedoptions to purchase 24,584 shares of common stock exercisable within60 days of February 28, 2006. Excludes unvested options to purchase40,973 shares of common stock not exercisable within 60 days of February 28,2006. The number of shares of common stock issuable upon exercise of suchwarrants are subject to anti-dilution adjustments.

 

(8)          Includesvested options to purchase 424,412 shares of common stock exercisable within60 days of February 28, 2006. Excludes unvested options to purchase640,000 shares of common stock not exercisable within 60 days of February 28,2006.

 

(9)          Includesvested options to purchase 434,183 shares of common stock exercisable within60 days of February 28, 2006. Excludes unvested options to purchase325,000 shares of common stock not exercisable within 60 days of February 28,2006.

 

(10)    Includes(i) 1,656 shares of common stock issuable upon exercise of warrants; and (ii) vestedoptions to purchase 385,852 shares of common stock exercisable within60 days of February 28, 2006. Excludes unvested options to purchase540,000 shares of common stock not exercisable within 60 days of February 28,2006. The number of shares of common stock issuable upon exercise of suchwarrants is subject to anti-dilution adjustments.

 

(11)    Includesor excludes, as the case may be, shares as described in the above footnotes.

 

(12)    Theaddress of Richard H. Driehaus and Driehaus Capital Management LLC is 25 EastErie Street, Chicago, IL 60611.

 

79

----

 

(13)    Theaddress of PubliGroupe USA Holding, Inc. is 1100 Santa Monica Blvd, Suite 550,Los Angeles, CA, 90025. Pursuant to a Lock-Up and Standstill Agreement dated October 31,2001, PubliGroupe USA Holding has agreed: (i) through October 2004,without the consent of the Company, not to acquire additional shares of ourcommon stock or take any corporate action inconsistent with the recommendationsof the Board of Directors of the Company, and (ii) through October 2006,to vote its shares at any stockholder meeting in the manner recommended by ourBoard of Directors, as reflected in our proxy statement.

 

(14)    Theaddress of Pequot Capital Management, Inc. is 500 Nyala Farm Road,Westport, CT 06880.

 

**EQUITY COMPENSATION PLAN INFORMATION**

 

The following table sets forth information as of December 31,2005 with respect to shares of the Company’s common stock that may be issuedunder the Company’s existing equity compensation plans. 

 
| **Plan Category**                                           | ** ** | **Number of  securities to be  issued upon  exercise of  outstanding  options, warrants  and rights (a)** | ** ** | **Weighted-average  exercise price of  outstanding  potions, warrants  and rights** | ** ** | **Number of securities  available for future  issuance under equity  compensation plans  (excluding securities  reflected in (a))** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity Compensation Plans approved by security  holders     |       | 9,595,378                                                                                                 |       | $                                                                                   | 5.74       |                                                                                                                                | 4,114,980  |   |
| Equity Compensation Plans not approved by security  holders |       | —                                                                                                    |       | —                                                                              |       | —                                                                                                                              |       |
| **Total**                                                   |       | 9,595,378                                                                                                 |       | $                                                                                   | 5.74       |                                                                                                                                | 4,114,980  |   |

 

**ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**

 

Tony Schmitz, a member of our Board of Directors, wasan employee of the Company through October 2004. Mr. Schmitz servedas a consultant for us from November 2004 through December 2004 for afee of $10,000 per month. The Company continues to vest and make available to Mr. Schmitzhis existing stock options granted while he was an employee, which will fullyvest at the end of 2006.  Mr. Schmitzwill not receive the stock options granted to the Board of Directors until the2006 Meeting of Stockholders.

 

**ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES.**

 

The following is a summary of the fees billed or to bebilled to us by Goldstein Golub Kessler LLP, our principal accountant, forprofessional services rendered for the fiscal years ended December 31,2005 and 2004:

 

80

----

 
| **Fee Category**        | ** ** | **Fiscal 2005  Fees** | ** ** | **Fiscal 2004  Fees** | ** ** |
|-------------------------|------------|-----------------------|------------|-----------------------|------------|
|                    |       |                  |       |                  |       |
| Audit Fees (1)          |       | $                     | 647,500    |                  | $          | 645,720 |   |
| Audit-Related  Fees (2) |       | —                |       | 190,507               |       |
| Tax Fees (3)            |       | —                |       | —                |       |
| All Other Fees  (4)     |       | 2,800                 |       | 28,083                |       |
|                    |       | $                     | 650,300    |                  | $          | 864,310 |   |

 

----

(1) *Audit Fees*. Consistsof fees billed for professional services rendered for the audit of our annualconsolidated financial statements and review of the interim consolidatedfinancial statements included in quarterly reports and services that arenormally provided by Goldstein Golub Kessler LLP in connection with statutoryand regulatory filings or engagements, including the Sarbanes-Oxley of 2002.

 

(2) *Audit-Related Fees*. Consists of fees billed for assurance and related services that are reasonablyrelated to the performance of the audit or review of our consolidated financialstatements and are not reported under “Audit Fees.” These services include duediligence in connection with acquisitions and consultations and consents inconnection with registered offerings of common stock.

 

(3) *Tax Fees*. Consistsof fees billed for professional services for tax compliance, tax advice and taxplanning. These services include preparation of federal and state income taxreturns.

 

(4) *All Other Fees*. Consists of fees for management advisory services other than the servicesreported above.

 

Our previous principal accountant, KPMG LLP, billed us$100,000 in 2004 for their consents to our use of their report on our financialstatements for the fiscal year ended December 31, 2001.

 

**POLICY ON AUDIT COMMITTEEPRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENTAUDITORS.**

 

The Audit Committee’s policy is to pre-approve allaudit and permissible non-audit services provided by the independent auditors.These services may include audit services, audit-related services, taxservices, and other services. Pre-approval is generally provided for up to oneyear, and any pre-approval is detailed as to the particular service or categoryof services and is generally subject to a specific budget. The independentauditors and management are required to periodically report to the AuditCommittee regarding the extent of services provided by the independent auditorsin accordance with this pre-approval and the fees for the services performed todate. The Audit Committee may also pre-approve particular services on acase-by-case basis.

 

No non-audit-related fees, tax fees, or all other feeswere approved by our Audit Committee pursuant to Rule 2-01(c)(7)(i)(C) ofRegulation S-X.

 

The audit reports issued by Goldstein Golub KesslerLLP, dated March 6, 2006, on the consolidated financial statements of theRegistrant as of December 31, 2005 and December 31, 2004 and for thethree years in the period ended December 31, 2005, did not contain anadverse opinion or a disclaimer of opinion, and were not qualified or modified,as to uncertainty, audit scope or accounting principles.

 

During the two most recent fiscal years there were noreportable events as defined in Item304(a)(1)(v) of Regulation S-K.

 

81

----

 

The Audit Committee hasdetermined that the provision of services rendered above for “All Other Fees” is compatible withmaintaining Golstein Golub Kessler LLP’s independence.

 

Through September 30,2005, Goldstein Golub Kessler LLP (the “Firm”) had a continuing relationshipwith American Express Tax and Business Services Inc. (“TBS”) from which itleased auditing staff who are full-time, permanent employees of TBS and throughwhich its partners provided non-audit services. Subsequent to September 30,2005, this relationship ceased and the Firm established a similar relationshipwith RSM McGladrey, Inc. (“RSM”). The Firm has no full-time employees and therefore, none of the auditservices performed were provided by permanent full-time employees of theFirm.  The Firm manages and supervisesthe audit and audit staff, and is exclusively responsible for the opinion renderedin connection with its examination.

 

82

----

 

**PART IV**

 

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

 

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

 

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

 

(3)  Exhibits. The Exhibit Indeximmediately follows the certification on the signature pages to thisAnnual Report on Form 10-K.

 

83

----

 

##### **INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                                                                   | ** ** |
|------------------------------------------------------------------------------|------------|
| Reports of Independent Registered Public Accounting Firm                     |       |
|                                                                         |       |
| Consolidated Balance Sheets                                                  |       |
|                                                                         |       |
| Consolidated Statements of Operations                                        |       |
|                                                                         |       |
| Consolidated Statements of Stockholders’ Equity and Comprehensive  Loss |       |
|                                                                         |       |
| Consolidated Statements of Cash Flows                                        |       |
|                                                                         |       |
| Notes to Consolidated Financial Statements                                   |       |

 

F-1

----

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Directorsand Stockholders24/7 Real Media, Inc.:

 

We have audited theaccompanying consolidated balance sheets of 24/7 Real Media, Inc. as of December 31,2005 and 2004 and the related consolidated statements of operations, stockholders’equity and comprehensive loss and cash flows for each of the three years in theperiod ended December 31, 2005. These consolidated financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of 24/7 Real Media, Inc. as of December 31,2005 and 2004, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2005 inconformity with United States generally accepted accounting principles.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2005, basedon criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) and ourreport dated March 6, 2006 expressed an unqualified opinion thereon.

 

**GOLDSTEIN GOLUB KESSLER LLP**

New York, New YorkMarch 6, 2006

 

F-2

----

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board of Directorsand Stockholders24/7 Real Media, Inc.:

 

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control over FinancialReporting, that 24/7 Real Media, Inc. maintained effective internalcontrol over financial reporting as of December 31, 2005, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). 24/7 Real Media, Inc.’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the company’sinternal control over financial reporting based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accounting principles.A company’s internal control over financial reporting includes those policiesand procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

In our opinion, management’s assessment that 24/7Real Media, Inc. maintained effective internal control over financialreporting as of December 31, 2005 is fairly stated, in all materialrespects, based on**criteria established in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Also in our opinion, 24/7 Real Media, Inc. maintained, in all materialrespects, effective internal control over financial reporting as of December 31,2005, based on**criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

 

F-3

----

 

We have also audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theDecember 31, 2005 consolidated financial statements of 24/7 Real Media, Inc.and our report dated March 6, 2006 expressed an unqualified opinion onthose financial statements.

 

 

**GOLDSTEINGOLUB KESSLER LLP**New York, New York

March 6, 2006

 

F-4

----

 

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

**CONSOLIDATEDBALANCE SHEETS**

**(inthousands, except share and per share data)**

 
| ** **                                                                                                                                                                     | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                     |       |                        |       |                        |       |
| Current assets:                                                                                                                                                                |       |                        |       |                        |       |
| Cash and cash equivalents                                                                                                                                                      |       | $                           | 40,009     |                        | $          | 27,690 |   |
| Short-term investments                                                                                                                                                         |       | —                      |       | 3,876                       |       |
| Accounts receivable, less allowances of $2,306 and  $1,727, respectively                                                                                                       |       | 38,316                      |       | 28,224                      |       |
| Prepaid expenses and other current assets                                                                                                                                      |       | 2,369                       |       | 2,710                       |       |
|                                                                                                                                                                           |       |                        |       |                        |       |
| Total current assets                                                                                                                                                           |       | 80,694                      |       | 62,500                      |       |
|                                                                                                                                                                           |       |                        |       |                        |       |
| Property and  equipment, net                                                                                                                                                   |       | 7,131                       |       | 4,783                       |       |
| Goodwill                                                                                                                                                                       |       | 39,573                      |       | 34,573                      |       |
| Intangible  assets, net                                                                                                                                                        |       | 9,715                       |       | 12,676                      |       |
| Other assets                                                                                                                                                                   |       | 5,691                       |       | 6,866                       |       |
|                                                                                                                                                                           |       |                        |       |                        |       |
| Total assets                                                                                                                                                                   |       | $                           | 142,804    |                        | $          | 121,398 |   |
|                                                                                                                                                                           |       |                        |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                  |       |                        |       |                        |       |
| Current  liabilities:                                                                                                                                                          |       |                        |       |                        |       |
| Accounts payable                                                                                                                                                               |       | $                           | 19,396     |                        | $          | 16,425 |   |
| Accrued liabilities                                                                                                                                                            |       | 23,987                      |       | 11,808                      |       |
| Deferred revenue                                                                                                                                                               |       | 3,218                       |       | 3,222                       |       |
| Subordinated convertible debentures, 2%, due 2006                                                                                                                              |       | 14,542                      |       | 7,500                       |       |
|                                                                                                                                                                           |       |                        |       |                        |       |
| Total current liabilities                                                                                                                                                      |       | 61,143                      |       | 38,955                      |       |
|                                                                                                                                                                           |       |                        |       |                        |       |
| Subordinated  convertible debentures, 2%, due 2006                                                                                                                             |       | —                      |       | 6,431                       |       |
| Warrant  liability                                                                                                                                                             |       | 897                         |       | 516                         |       |
| Other long-term  liabilities                                                                                                                                                   |       | 489                         |       | 207                         |       |
|                                                                                                                                                                           |       |                        |       |                        |       |
| Total liabilities                                                                                                                                                              |       | 62,529                      |       | 46,109                      |       |
|                                                                                                                                                                           |       |                        |       |                        |       |
| Commitments and  contingencies                                                                                                                                                 |       |                        |       |                        |       |
| Minority  interests in consolidated subsidiaries                                                                                                                               |       | 1,556                       |       | 21                          |       |
|                                                                                                                                                                           |       |                        |       |                        |       |
| Stockholders’  equity:                                                                                                                                                    |       |                        |       |                        |       |
| Preferred stock; $.01 par value; 10,000,000 shares  authorized, 78,000 shares issued and outstanding at December 31, 2004,  respectively (liquidation preference of $780) |       | —                      |       | 1                           |       |
| Common stock; $.01 par value; 350,000,000 shares  authorized; 46,227,772 and 44,797,067 shares issued and outstanding,  respectively                                           |       | 462                         |       | 448                         |       |
| Additional paid-in capital                                                                                                                                                     |       | 1,177,715                   |       | 1,173,765                   |       |
| Deferred stock compensation                                                                                                                                                    |       | —                      |       | (17                         | )          |
| Accumulated other comprehensive income                                                                                                                                         |       | 896                         |       | 1,463                       |       |
| Accumulated deficit                                                                                                                                                            |       | (1,100,354                  | )          | (1,100,392                  | )          |
| Total stockholders’ equity                                                                                                                                                |       | 78,719                      |       | 75,268                      |       |
|                                                                                                                                                                           |       |                        |       |                        |       |
| Total liabilities and stockholders’ equity                                                                                                                                |       | $                           | 142,804    |                        | $          | 121,398 |   |

 

See accompanyingnotes to consolidated financial statements.

 

F-5

----

 

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

**CONSOLIDATED STATEMENTS OFOPERATIONS**

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

 
| ** **                                                                                                      | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                      | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                                                                                       |       |                             |       |   |   |   |   |
| Media                                                                                                           |       | $                                | 65,363     |   | $ | 49,879 |   | $ | 23,562 |   |
| Search                                                                                                          |       | 51,430                           |       | 16,439 |   | 10,342 |   |
| Technology                                                                                                      |       | 23,001                           |       | 18,937 |   | 15,277 |   |
| Total revenues                                                                                                  |       | 139,794                          |       | 85,255 |   | 49,181 |   |
|                                                                                                            |       |                             |       |   |   |   |   |
| Cost of  revenues:                                                                                              |       |                             |       |   |   |   |   |
| Media                                                                                                           |       | 44,562                           |       | 35,197 |   | 14,676 |   |
| Search                                                                                                          |       | 36,490                           |       | 10,571 |   | 6,947 |   |
| Technology                                                                                                      |       | 4,248                            |       | 3,462 |   | 4,032 |   |
| Total cost of revenues                                                                                          |       | 85,300                           |       | 49,230 |   | 25,655 |   |
|                                                                                                            |       |                             |       |   |   |   |   |
| Gross profit                                                                                                    |       | 54,494                           |       | 36,025 |   | 23,526 |   |
|                                                                                                            |       |                             |       |   |   |   |   |
| Operating  expenses:                                                                                            |       |                             |       |   |   |   |   |
| Sales and marketing                                                                                             |       | 22,579                           |       | 16,647 |   | 12,584 |   |
| General and administrative                                                                                      |       | 19,207                           |       | 14,226 |   | 10,865 |   |
| Product development                                                                                             |       | 5,833                            |       | 4,540 |   | 3,100 |   |
| Amortization of intangible assets and deferred  financing costs                                                 |       | 4,391                            |       | 4,331 |   | 2,724 |   |
| Stock-based compensation (a)                                                                               |       | 2,227                            |       | 538 |   | 1,316 |   |
| Provision for capital assessment                                                                                |       | 387                              |       | — |   | — |   |
| Restructuring costs                                                                                             |       | 973                              |       | 841 |   | 1,651 |   |
| Impairment of intangible assets                                                                                 |       | —                           |       | 896 |   | 1,321 |   |
| Impairment of property and equipment                                                                            |       | —                           |       | 787 |   | — |   |
|                                                                                                            |       |                             |       |   |   |   |   |
| Total operating expenses                                                                                        |       | 55,597                           |       | 42,806 |   | 33,561 |   |
|                                                                                                            |       |                             |       |   |   |   |   |
| Loss from operations                                                                                            |       | (1,103                           | )          | (6,781 | ) | (10,035 | ) |
|                                                                                                            |       |                             |       |   |   |   |   |
| Interest  expense, net                                                                                          |       | (213                             | )          | (463 | ) | (343 | ) |
| Change in fair  value of warrant liability                                                                      |       | (381                             | )          | 2,040 |   | — |   |
| Recovery of  investment                                                                                         |       | 2,340                            |       | — |   | — |   |
| Impairment of  marketable securities                                                                            |       | (588                             | )          | (1,052 | ) | — |   |
| Gain on sale of  marketable securities                                                                          |       | 16                               |       | — |   | — |   |
| Gain on legal  settlement                                                                                       |       | —                           |       | 2,896 |   | — |   |
| Other income  (expense), net                                                                                    |       | 153                              |       | 228 |   | (1,601 | ) |
|                                                                                                            |       |                             |       |   |   |   |   |
| Income (loss) before provision for income taxes and  minority interest in operations of consolidated subsidiary |       | 224                              |       | (3,132 | ) | (11,979 | ) |
|                                                                                                            |       |                             |       |   |   |   |   |
| Provision for  income taxes                                                                                     |       | (314                             | )          | (23 | ) | (37 | ) |
| Minority  interest in operations of consolidated subsidiary                                                     |       | 128                              |       | — |   | — |   |
|                                                                                                            |       |                             |       |   |   |   |   |
| Net income  (loss)                                                                                              |       | $                                | 38         |   | $ | (3,155 | ) | $ | (12,016 | ) |
|                                                                                                            |       |                             |       |   |   |   |   |
| Dividends on  preferred stock                                                                                   |       | (25                              | )          | (306 | ) | (617 | ) |
| Preferred stock  conversion discount                                                                            |       | —                           |       | — |   | (1,780 | ) |
|                                                                                                            |       |                             |       |   |   |   |   |
| Net income  (loss) attributable to common stockholders                                                          |       | $                                | 13         |   | $ | (3,461 | ) | $ | (14,413 | ) |
|                                                                                                            |       |                             |       |   |   |   |   |
| Basic net  (income) loss per share attributable to common stockholders                                          |       | $                                | 0.00       |   | $ | (0.10 | ) | $ | (0.86 | ) |
|                                                                                                            |       |                             |       |   |   |   |   |
| Weighted average  shares outstanding used in basic net (income) loss per share                                  |       | 45,350,466                       |       | 35,373,973 |   | 16,817,502 |   |
|                                                                                                            |       |                             |       |   |   |   |   |
| Diluted net  (income) loss per share attributable to common stockholders                                        |       | $                                | 0.00       |   | $ | (0.10 | ) | $ | (0.86 | ) |
|                                                                                                            |       |                             |       |   |   |   |   |
| Weighted average  shares outstanding used in diluted net (income) loss per share                                |       | 47,694,027                       |       | 35,373,973 |   | 16,817,502 |   |

 

----

(a) Stock-basedcompensation charges are excluded from the following income statementcategories:

 
| Cost of revenues            |   | $     | 41     |   | $      | — |   | $ | 31    |   |
|-----------------------------|--------|-------|--------|--------|--------|--------|--------|---|-------|--------|
| Sales and  marketing        |   | 541   |   | 250    |   | 339    |   |
| General and  administrative |   | 1,391 |   | 284    |   | 803    |   |
| Product  development        |   | 254   |   | 4      |   | 143    |   |
|                        |   | $     | 2,227  |   | $      | 538    |   | $ | 1,316 |   |

 

See accompanying notes to consolidated financial statements.

 

F-6

----

 

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

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**AND COMPREHENSIVE LOSS**

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

 
| ** **                                                      | ** ** | **Convertible  Preferred Stock** | ** ** | **Common Stock  Voting** | ** ** | **Additional  Paid-in** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                      | ** ** | **Shares**                       | ** ** | **Amount**               | ** ** | **Shares**              | ** ** | **Amount** | ** ** | **Capital** | ** ** |
| **Balance as of December 31, 2002**                        |       | 925,000                          |       | $                        | 9          |                    | 11,843,969 |   | $ | 118 |   | $ | 1,088,680 |   |
| ** **                                                      |       |                             |       |                     |       |                    |       |   |   |   |   |
| Net loss                                                        |       | —                           |       | —                   |       | —                  |       | — |   | — |   |
| Cumulative foreign currency translation                         |       | —                           |       | —                   |       | —                  |       | — |   | — |   |
| Comprehensive loss                                              |       |                             |       |                     |       |                    |       |   |   |   |   |
| Exercise of stock options                                       |       | —                           |       | —                   |       | 695,760                 |       | 7 |   | 942 |   |
| Conversion of warrants into common stock                        |       | —                           |       | —                   |       | 1,538,697               |       | 16 |   | 7,562 |   |
| Issuance (cost) of preferred stock, Series C  and warrants |       | 718,250                          |       | 7                        |       | —                  |       | — |   | (546 | ) |
| Issuance of common stock for acquired business                  |       | —                           |       | —                   |       | 705,219                 |       | 7 |   | 1,086 |   |
| Conversion of preferred stock                                   |       | (815,000                         | )          | (8                       | )          | 6,995,490               |       | 70 |   | (62 | ) |
| Issuance of restricted stock                                    |       | —                           |       | —                   |       | —                  |       | — |   | 310 |   |
| Issuance of common stock to employees                           |       | —                           |       | —                   |       | 598,861                 |       | 6 |   | 711 |   |
| Preferred stock conversion discount                             |       | —                           |       | —                   |       | —                  |       | — |   | 1,780 |   |
| Vesting of restricted common stock                              |       | —                           |       | —                   |       | 29,425                  |       | — |   | (1 | ) |
| Retirement of debt                                              |       | —                           |       | —                   |       | 960,000                 |       | 10 |   | 6,522 |   |
| Amortization of deferred stock compensation                     |       | —                           |       | —                   |       | —                  |       | — |   | — |   |
| **Balance as of December 31, 2003**                        |       | 828,250                          |       | $                        | 8          |                    | 23,367,421 |   | $ | 234 |   | $ | 1,106,984 |   |
| Net loss                                                        |       | —                           |       | —                   |       | —                  |       | — |   | — |   |
| Cumulative foreign currency translation                         |       | —                           |       | —                   |       | —                  |       | — |   | — |   |
| Comprehensive loss                                              |       |                             |       |                     |       |                    |       |   |   |   |   |
| Exercise of stock options                                       |       | —                           |       | —                   |       | 657,141                 |       | 7 |   | 835 |   |
| Conversion of warrants into common stock                        |       | —                           |       | —                   |       | 7,260                   |       | — |   | 74 |   |
| Renegotiation of warrant liability                              |       | —                           |       | —                   |       | —                  |       | — |   | 966 |   |
| Issuance of common stock                                        |       | —                           |       | —                   |       | 6,760,000               |       | 68 |   | 37,179 |   |
| Issuance of common stock for acquired businesses                |       | —                           |       | —                   |       | 6,590,707               |       | 66 |   | 27,182 |   |
| Conversion of preferred stock                                   |       | (750,250                         | )          | (7                       | )          | 7,306,668               |       | 73 |   | (66 | ) |
| Issuance of common stock to employees                           |       | —                           |       | —                   |       | 82,538                  |       | — |   | 625 |   |
| Vesting of restricted common stock                              |       | —                           |       | —                   |       | 25,332                  |       | — |   | (14 | ) |
| Amortization of deferred stock compensation                     |       | —                           |       | —                   |       | —                  |       | — |   | — |   |
| **Balance as of December 31, 2004**                        |       | 78,000                           |       | $                        | 1          |                    | 44,797,067 |   | $ | 448 |   | $ | 1,173,765 |   |
| Net income                                                      |       | —                           |       | —                   |       | —                  |       | — |   | — |   |
| Cumulative foreign currency translation                         |       | —                           |       | —                   |       | —                  |       | — |   | — |   |
| Comprehensive loss                                              |       |                             |       |                     |       |                    |       |   |   |   |   |
| Exercise of stock options                                       |       | —                           |       | —                   |       | 711,690                 |       | 7 |   | 1,652 |   |
| Conversion of preferred stock                                   |       | (78,000                          | )          | (1                       | )          | 645,753                 |       | 6 |   | (5 | ) |
| Issuance of common stock to employees                           |       | —                           |       | —                   |       | 59,262                  |       | 1 |   | 168 |   |
| Vesting of restricted common stock                              |       | —                           |       | —                   |       | 14,000                  |       | — |   | 2,135 |   |
| Amortization of deferred stock compensation                     |       | —                           |       | —                   |       | —                  |       | — |   | — |   |
| **Balance as of December 31, 2005**                        |       | —                           |       | $                        | —     |                    | 46,227,772 |   | $ | 462 |   | $ | 1,177,715 |   |

 

See accompanying notes to consolidated financial statements.

 

F-7

----

 
| ** **                                                      | ** ** | **Deferred  Stock  Compensation** | ** ** | **Other  Comprehensive  Income (loss)** | ** ** | **Accumulated  Deficit** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------|------------|--------------------------|------------|---------------------------------------|------------|
| **Balance  as of December 31, 2002**** **             |       | $                                 | (209       | )                                       | $          | 358                      |       | $                                     | (1,083,441 | ) | $ | 5,515 |   |
| Net loss                                                        |       | —                            |       | —                                  |       | (12,016                  | )          | (12,016                               | )          |
| Cumulative  foreign currency translation                        |       | —                            |       | (53                                     | )          | —                   |       | (53                                   | )          |
| Comprehensive loss                                              |       |                              |       |                                    |       |                     |       | (12,069                               | )          |
| Exercise of  stock options                                      |       | —                            |       | —                                  |       | —                   |       | 949                                   |       |
| Conversion of  warrants into common stock                       |       | —                            |       | —                                  |       | —                   |       | 7,578                                 |       |
| Issuance (cost)  of preferred stock, Series C and warrants |       | —                            |       | —                                  |       | —                   |       | (539                                  | )          |
| Issuance of  common stock for acquired business                 |       | —                            |       | —                                  |       | —                   |       | 1,093                                 |       |
| Conversion of  preferred stock                                  |       | —                            |       | —                                  |       | —                   |       | —                                |       |
| Issuance of  restricted stock                                   |       | (310                              | )          | —                                  |       | —                   |       | —                                |       |
| Issuance of  common stock to employees                          |       | —                            |       | —                                  |       | —                   |       | 717                                   |       |
| Preferred stock  conversion discount                            |       | —                            |       | —                                  |       | (1,780                   | )          | —                                |       |
| Vesting of  restricted common stock                             |       | —                            |       | —                                  |       | —                   |       | (1                                    | )          |
| Retirement of  debt                                             |       | —                            |       | —                                  |       | —                   |       | 6,532                                 |       |
| Amortization of  deferred stock compensation                    |       | 262                               |       | —                                  |       | —                   |       | 262                                   |       |
| **Balance  as of December 31, 2003**** **             |       | $                                 | (257       | )                                       | $          | 305                      |       | $                                     | (1,097,237 | ) | $ | 10,037 |   |
| Net loss                                                        |       | —                            |       | —                                  |       | (3,155                   | )          | (3,155                                | )          |
| Cumulative  foreign currency translation                        |       | —                            |       | 1,158                                   |       | —                   |       | 1,158                                 |       |
| Comprehensive loss                                              |       |                              |       |                                    |       |                     |       | (1,997                                | )          |
| Exercise of  stock options                                      |       | —                            |       | —                                  |       | —                   |       | 842                                   |       |
| Conversion of  warrants into common stock                       |       | —                            |       | —                                  |       | —                   |       | 74                                    |       |
| Renegotiation of  warrant liability                             |       | —                            |       | —                                  |       | —                   |       | 966                                   |       |
| Issuance of  common stock                                       |       | —                            |       | —                                  |       | —                   |       | 37,247                                |       |
| Issuance of  common stock for acquired businesses               |       | —                            |       | —                                  |       | —                   |       | 27,248                                |       |
| Conversion of  preferred stock                                  |       | —                            |       | —                                  |       | —                   |       | —                                |       |
| Issuance of  common stock to employees                          |       | —                            |       | —                                  |       | —                   |       | 625                                   |       |
| Vesting of  restricted common stock                             |       | —                            |       | —                                  |       | —                   |       | (14                                   | )          |
| Amortization of  deferred stock compensation                    |       | 240                               |       | —                                  |       | —                   |       | 240                                   |       |
| **Balance  as of December 31, 2004**** **             |       | $                                 | (17        | )                                       | $          | 1,463                    |       | $                                     | (1,100,392 | ) | $ | 75,268 |   |
| Net income                                                      |       | —                            |       | —                                  |       | 38                       |       | 38                                    |       |
| Cumulative  foreign currency translation                        |       | —                            |       | (567                                    | )          | —                   |       | (567                                  | )          |
| Comprehensive loss                                              |       |                              |       |                                    |       |                     |       | (529                                  | )          |
| Exercise of  stock options                                      |       | —                            |       | —                                  |       | —                   |       | 1,659                                 |       |
| Conversion of  preferred stock                                  |       | —                            |       | —                                  |       | —                   |       | —                                |       |
| Issuance of  common stock to employees                          |       | —                            |       | —                                  |       | —                   |       | 169                                   |       |
| Vesting of  restricted common stock                             |       | —                            |       | —                                  |       | —                   |       | 2,135                                 |       |
| Amortization of  deferred stock compensation                    |       | 17                                |       | —                                  |       | —                   |       | 17                                    |       |
| **Balance  as of December 31, 2005**** **             |       | $                                 | —     |                                    | $          | 896                      |       | $                                     | (1,100,354 | ) | $ | 78,719 |   |

 

See accompanyingnotes to consoldiated financial statements.

 

F-8

----

 

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

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands)**

 
| ** **                                                                                          | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                                               |       |                             |       |   |   |   |   |
| Net income (loss)                                                                                   |       | $                                | 38         |   | $ | (3,155 | ) | $ | (12,016 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                             |       |   |   |   |   |
| Depreciation and amortization                                                                       |       | 2,867                            |       | 1,829 |   | 2,352 |   |
| Provision for doubtful accounts and sales reserves                                                  |       | 2,033                            |       | 1,063 |   | 169 |   |
| Amortization of intangible assets and deferred  financing costs                                     |       | 4,391                            |       | 4,331 |   | 2,724 |   |
| Amortization of debt discount                                                                       |       | 611                              |       | 611 |   | 153 |   |
| Non-cash compensation                                                                               |       | 2,227                            |       | 538 |   | 1,316 |   |
| Accrued interest on notes payable                                                                   |       | 151                              |       | 151 |   | 246 |   |
| Change in fair value of warrant liability                                                           |       | 381                              |       | (2,040 | ) | — |   |
| Recovery of investment                                                                              |       | (2,340                           | )          | — |   | — |   |
| Impairment of marketable securities                                                                 |       | 588                              |       | 1,052 |   | — |   |
| Gain on sale of marketable securities                                                               |       | (16                              | )          | — |   | — |   |
| Minority interest in losses from operations of  consolidated joint venture                          |       | (128                             | )          | — |   | — |   |
| Impairment of intangible assets                                                                     |       | —                           |       | 896 |   | 1,321 |   |
| Gain from legal settlement                                                                          |       | —                           |       | (2,896 | ) | — |   |
| Impairment of property and equipment                                                                |       | —                           |       | 787 |   | — |   |
| Loss on disposal of fixed assets                                                                    |       | —                           |       | — |   | 70 |   |
| Changes in operating assets and liabilities, net of  effect of acquisitions and dispositions:       |       |                             |       |   |   |   |   |
| Accounts receivable                                                                                 |       | (12,125                          | )          | (10,995 | ) | (1,973 | ) |
| Prepaid expense and other current assets                                                            |       | 198                              |       | (1,397 | ) | 550 |   |
| Notes and amounts receivable from disposition                                                       |       | 143                              |       | 510 |   | 612 |   |
| Other assets                                                                                        |       | (255                             | )          | (5,239 | ) | 123 |   |
| Accounts payable and accrued liabilities                                                            |       | 11,475                           |       | 2,774 |   | (157 | ) |
| Deferred revenue                                                                                    |       | (4                               | )          | 474 |   | (246 | ) |
|                                                                                                |       |                             |       |   |   |   |   |
| Net cash provided by (used in) operating activities                                                 |       | 10,235                           |       | (10,706 | ) | (4,756 | ) |
|                                                                                                |       |                             |       |   |   |   |   |
| Cash flows from investing activities:                                                               |       |                             |       |   |   |   |   |
| Proceeds from sale of marketable securities                                                         |       | 1,272                            |       | — |   | — |   |
| Proceeds from sale / maturities of short-term  investments                                          |       | 2,032                            |       | — |   | — |   |
| Recovery of investment                                                                              |       | 2,340                            |       | — |   | — |   |
| Capital expenditures, including capitalized software                                                |       | (6,246                           | )          | (2,713 | ) | (1,252 | ) |
| Cash paid for investment                                                                            |       | —                           |       | (2,032 | ) | (50 | ) |
| Cash paid for acquisitions, net                                                                     |       | —                           |       | (17,663 | ) | (150 | ) |
|                                                                                                |       |                             |       |   |   |   |   |
| Net cash used in investing activities                                                               |       | (602                             | )          | (22,408 | ) | (1,452 | ) |
|                                                                                                |       |                             |       |   |   |   |   |
| Cash flows from financing activities:                                                               |       |                             |       |   |   |   |   |
| Proceeds from exercise of stock options and conversion  of warrants                                 |       | 1,655                            |       | 840 |   | 1,196 |   |
| Payment of capital lease obligations                                                                |       | (65                              | )          | (86 | ) | (48 | ) |
| Proceeds from minority investor of consolidated  joint venture                                      |       | 1,729                            |       | — |   | — |   |
| Proceeds from issuance of common stock, net                                                         |       | —                           |       | 37,247 |   | — |   |
| Proceeds from issuance of preferred stock, net                                                      |       | —                           |       | — |   | 6,749 |   |
| Proceeds from issuance of subordinated convertible  debentures, net                                 |       | —                           |       | — |   | 13,845 |   |
| Retirement of notes payable                                                                         |       | —                           |       | — |   | (1,510 | ) |
|                                                                                                |       |                             |       |   |   |   |   |
| Net cash provided by financing activities                                                           |       | 3,319                            |       | 38,001 |   | 20,232 |   |
|                                                                                                |       |                             |       |   |   |   |   |
| Net change in cash and cash equivalents                                                             |       | 12,952                           |       | 4,887 |   | 14,024 |   |
| Effect of foreign currency on cash                                                                  |       | (633                             | )          | 1,158 |   | (53 | ) |
| Cash and cash equivalents at beginning of year                                                      |       | 27,690                           |       | 21,645 |   | 7,674 |   |
|                                                                                                |       |                             |       |   |   |   |   |
| Cash and cash equivalents at end of year                                                            |       | $                                | 40,009     |   | $ | 27,690 |   | $ | 21,645 |   |

 

See accompanyingnotes to consolidated financial statements.

 

F-9

----

 

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

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**DECEMBER 31, 2005**

 

**NOTE1 - ORGANIZATION AND OPERATIONS OF THE COMPANY**

 

24/7 Real Media, Inc.,together with its subsidiaries, (the “Company”) provides advertising servicesand software solutions for the online advertising needs of Web publishers andadvertisers, including advertising sales, search engine marketing services,online advertisement serving, analytics and audience management.  As of December 31, 2005, the Companyprincipally operated in North America, Europe, South Korea and Australia andprovided the following products and services:

 

•                  *Media*,collectively marketed as the 24/7 Web Alliance, a global alliance of Web sitesrepresented by the Company, through which advertisers can place campaign ordersdirectly with the Company.

 

•                  *Search*, primarily consisting of full budgetmanagement services, including a paid-inclusion service and pay-per-click bidmanagement, optimization services and search engine and consulting services,including natural search engine optimization services designed to help advertiserspromote their Web site in or in association with relevant search resultsdisplayed by the Company’s partner search engines and to optimize their searchmarketing budgets.

 

•                  *Technology*,**primarilyconsisting of Open AdStream and Open Advertiser advertisement delivery andmanagement software and services, the Insight XE web analytics and audiencemanagement software and services and the Insight ACT behavioral targetingservice. The Company licenses software products to customers that are hostedlocally and provides services from software hosted centrally on its servers asan application service provider.

 

**NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

(a) Basis ofPresentation

 

The accompanyingconsolidated financial statements include the accounts of the Company and itsmajority-owned and controlled subsidiaries from their respective dates ofacquisition. The interest of shareholders other than those of the Company isrecorded as minority interest in the accompanying consolidated statements of operationsand consolidated balance sheets. When losses applicable to minority interestholders in a subsidiary exceed the minority interest in the equity capital ofthe subsidiary, these losses are included in the Company’s results, as theminority interest holder has no obligation to provide further financing to thesubsidiary. All significant intercompany transactions and balances have beeneliminated in consolidation.

 

(b) Use of Estimates

 

The preparation ofconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the consolidated financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates. On an ongoing basis, the Company evaluates its estimates,including those related to revenue recognition, accruals, allowance fordoubtful accounts, fair value of acquired intangible assets and goodwill,useful lives of intangible assets and property and equipment, among others. TheCompany bases its estimates on historical experience 

 

F-10

----

 

and on various otherassumptions that are believed to be reasonable, the results of which form thebasis for making judgments about the carrying values of assets and liabilities.

 

(c) Reclassifications

 

Certain reclassificationshave been made to prior year consolidated financial statements to conform tothe current year’s presentation.

 

(d) Cash and CashEquivalents

 

The Company considers allhighly liquid securities with original maturities of three months or less to becash equivalents. Cash and cash equivalents consist principally of money marketaccounts.

 

At December 31, 2005and 2004, the Company maintained $0.5 million and $0.6 million, respectively,in letters of credit, secured by cash, related to office leases. Cash securedby letters of credit expiring within one year are classified as other currentassets, and cash secured by letters of credit with maturities greater than oneyear are classified as other assets, on the consolidated balance sheets.

 

(e) Investments

 

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

 

Investmentsin non-marketable equity securities of companies in which the Company owns lessthan 20% of the company’s stock and does not have the ability to exercisesignificant influence are accounted for on the cost basis. On an ongoing basis,the Company assesses the need to record impairment losses on investments, andrecords such losses when the impairment is determined to beother-than-temporary.

 

(f) AccountsReceivable

 

Accounts receivable arerecorded at the invoiced amount, net of allowance for doubtful accounts andsales allowance. The Company does not require collateral. The Company maintainsan allowance for doubtful accounts to reserve for potentially uncollectiblereceivables and a sales allowance to reserve for potential credits issued tocustomers. The allowances are estimates calculated based on an analysis ofcurrent business and economic risks, customer credit-worthiness, specificidentifiable risks such as bankruptcies, terminations or discontinued customers,or other factors that may indicate a potential loss.

 

As a normal part of thebusiness, the Company has receivables that are invoiced in the month followingthe completion of the earnings process. All unbilled receivables are billedwithin 30 days after each month-end. Unbilled receivables are included inaccounts receivable on the consolidated balance sheets and amounted toapproximately $7.9 million and $5.8 million for the years ended December 31,2005 and 2004, respectively.

 

F-11

----

 

(g) Concentration ofCredit Risk

 

Financial instrumentsthat potentially subject the Company to concentrations of credit risk consistprincipally of cash equivalents, accounts receivable and debentures. The fairvalue of cash equivalents and accounts receivable instruments approximate theirfinancial statement amount because of the short-term maturity of theseinstruments. The fair value of the debentures approximates their financialstatement carrying value based on interest rates for similar borrowing.

 

At times, cash may exceedthe federally insured limits. In addition, the majority of the Company’s cashis managed by one financial institution.

 

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

 

(h) SignificantCustomers and Suppliers

 

No single customeraccounted for greater than 10% of net revenues for the years ended December 31,2005, 2004 and 2003.

 

Substantially all Mediarevenue is generated from advertising inventory provided by partner Websites. Search revenue is generated from relationships with search enginedistribution partners, and substantially all Search revenue is derived from twosuch relationships. In each case, with the exception of Lycos, Inc.,arrangements with the Company’s partners are often short-term or subject totermination upon short notice. Approximately 13.5% of the Company’s 2004 Mediarevenue was derived from advertising inventory provided by Daum CommunicationsCorp, which also owns Lycos, Inc.

 

On a geographic basis,the Company may also experience significant concentration among its customersor partners. The Company examines this concentration on a country-by-countrybasis.

 

(i) Property andEquipment; Capitalized Software

 

Property and equipmentare recorded at cost and are usually depreciated using the straight-line methodover the shorter of the estimated useful lives of the related assets, which aregenerally three to five years, and the lease term.

 

Cost of softwaredeveloped or obtained for internal use is accounted for in accordance withStatement of Position (“SOP”) No. 98-1, *Accountingfor the Costs of Computer Software Developed or Obtained for Internal Use*.Costs incurred during the preliminary project stage are expensed as incurred.Costs incurred to develop or obtain software for internal use are capitalizedduring the application development stage. Costs incurred during thepost-implementation or operation stage are expensed as incurred. Thecapitalized cost of internal use software is charged over the estimated usefullife of two to three years.

 

As required by SFAS No. 86,*Accounting for the Costs of ComputerSoftware To Be Sold, Leased, or Otherwise Marketed*, the Companyrequires certain product development costs to be capitalized when a product’stechnological feasibility has been established by completion of a working modelof the product; capitalization ends when a product is available for generalrelease to customers. Capitalized software is depreciated using the greater ofthe amount computed using (a) the ratio that current gross revenues for a 

 

F-12

----

 

product bear to the totalof current and anticipated future gross revenues for that product and (b) thestraight-line method over the remaining estimated economic life of thesoftware, generally four years.  Amountscapitalized under SFAS 186 were not material for the years ended December 31,2005 and 2004.

 

(j)Business Combinations

 

TheCompany’s acquisitions are accounted for as purchase business combinations inaccordance with SFAS No. 141, *BusinessCombinations*, and SFAS No. 142, *Goodwill and Other Intangible Assets*. The Companyallocates a portion of the purchase price to identifiable tangible andintangible assets based on their respective estimated fair values, and recordsas goodwill any remaining unallocated portion of the purchase price. Intangibleassets include trademarks, customer relationships, acquired technology and acovenant not to compete. Such intangible assets are amortized on astraight-line basis over their estimated useful lives, which are generally twoto seven years, except for trademarks that have an indefinite life.

 

(k)Impairment of Long-Lived Assets

 

The Company evaluatesgoodwill and indefinite lived intangible assets on an annual basis and wheneverevents or changes in circumstances indicate that the carrying amount may not befully recoverable.  Long-lived assets, includingproperty and equipment, long-term assets and amortizable intangible assets arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount may not be fully recoverable. Conditions that wouldnecessitate an impairment assessment include a significant decline in theobservable market value of an asset, a significant change in the extent ormanner in which an asset is used, or a significant adverse change that wouldindicate that the carrying amount of an asset or group of assets is notrecoverable. The Company assesses impairment in accordance with therequirements of SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*. The Companyassesses the impairment of goodwill and intangible assets in accordance withthe provisions of SFAS No. 142, *Goodwilland Other Intangible Assets*. The Company determines therecoverability of the assets by comparing the carrying amount of the assets tonet future cash flows that the assets are expected to generate. The impairmentrecognized is the amount by which the carrying amount exceeds the fair marketvalue of the assets.

 

(l)Income Taxes

 

TheCompany accounts for income taxes using the asset and liability method. Underthis method, deferred tax assets and liabilities are recognized for the futuretax consequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases, and operating loss and tax credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in results of operations in the period thatthe tax change occurs.

 

(m)Foreign Currency Translation

 

Assetsand liabilities denominated in foreign functional currencies are translated atthe exchange rate as of the balance sheet date. Revenues, costs and expensesdenominated in foreign functional currencies are translated at the weightedaverage exchange rate for each period. Translation adjustments are recorded asa separate component of stockholders’ equity. Gains or losses from foreigncurrency transactions are 

 

F-13

----

 

includedin the consolidated statements of operations and were immaterial for the yearsended December 31, 2005, 2004 and 2003.

 

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

 

*Media*

 

Media revenue isgenerated from fees paid by client advertisers for advertising impressions. TheCompany typically offer advertisers a pricing model based on acost-per-thousand impressions, or CPM, which enables client advertisers to paya fee based on the number of times its advertisement is displayed.  E-mail related revenue is derived fromdelivering advertisements to e-mail lists for advertisers. Agreements areprimarily short-term and revenue is recognized as services are delivered,provided that no significant Company obligations remain outstanding andcollection of the resulting receivable is probable. The Company becomesobligated to make royalty payments to Web sites and e-mail lists that havecontracted with the Company in the period the advertising impressions ore-mails are delivered. Such expenses are classified as cost of revenue in theaccompanying consolidated statements of operations.

 

*Search*

 

Search revenue isprimarily based on a cost-per-click, or CPC, fees paid by client advertisers.CPC fees are generated each time users click on Web site listings that theCompany submitted into search engine databases and are directed to our clientadvertisers’ Web sites. To a lesser extent, the Company also generates revenuefrom fees paid by search engines that employ the Company to optimize the submissionof Web site listings and report on advertising campaigns for theiradvertisers.  Agreements are primarilyshort-term and revenue is recognized as services are delivered, provided thatno significant Company obligations remain outstanding and collection of theresulting receivable is probable. The Company becomes obligated to makepayments to search engine distribution partners that have contracted with theCompany in the period in which the clicks occur. Such expenses are classifiedas cost of revenue in the accompanying consolidated statements of operations.

 

When the Company providessearch marketing services as an agent for a fixed commission, or in othertransactions in which it does not have principal risk and reward, the Companyrecognizes revenue on a net basis.

 

*Technology*

 

Technology revenue isderived primarily from licensing of the Company’s software, hostedadvertisement serving, and software maintenance and technical support services.The Company recognizes revenue from advertisement serving hosted centrally onits servers upon delivery. The Company recognizes revenue from softwarelicensing agreements in accordance with SOP No. 97-2, *Software Revenue Recognition*, and StaffAccounting Bulletin (“SAB”) No. 104, *RevenueRecognition*, upon delivery of the software, which is generally whenthe software is made available for download, there is persuasive evidence of anarrangement, collection is reasonably assured, the fee is fixed ordeterminable, and vendor-specific objective evidence exists to allocate thetotal fees to all elements of the arrangement. Contracts that bundle thesoftware license with maintenance and technical support are recognized ratablyover the contract term. The Company recognizes revenue from softwaremaintenance and technical support contracts ratably over the term of theagreement, which typically does not exceed one year.

 

F-14

----

 

Expenses from the Company’sTechnology revenue is primarily payroll costs incurred to deliver and supportthe software, and hosting, bandwidth and license fees paid to third-partysoftware vendors. These expenses are classified as cost of revenue in theaccompanying consolidated statements of operations.

 

*DeferredRevenue*

 

The Company defers revenuebilled or collected in advance of services being completed until the conclusionof the service period to which the advance billing or collection relates.Deferred revenue is included on the consolidated balance sheets as a currentliability until the service is performed and then recognized in the period inwhich the service is completed. The Company’s deferred revenue primarilyconsists of advance billings for software license subscriptions and softwaremaintenance and technical support services.

 

(o) Stock-BasedCompensation

 

TheCompany accounts for non-employee stock-based awards in which goods or servicesare the consideration received for the equity instruments issued based on thefair value of the equity instruments issued in accordance with the guidanceprovided in the consensus opinion of the Emerging Issues Task Force (“EITF”) inconnection with EITF Issue 96-18, *Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or inConjunction With Selling, Goods or Services*.

 

The Company accounts foremployee stock-based compensation arrangements in accordance with provisions ofAccounting Principles Board (“APB”) Opinion No. 25, “*Accountingfor Stock Issued to Employees*,” and Financial Accounting StandardsBoard (“FASB”) interpretation No. 44, “*Accounting for CertainTransactions Involving Stock Compensation—an Interpretation of APB Opinion No. 25*,”and complies with the disclosure provisions of SFAS No. 123, “*Accounting for Stock-Based Compensation*” and SFAS No. 148,“*Accounting for Stock-Based Compensation—Transitionand Disclosure*.” Under APB No. 25, compensation cost isrecognized based on the difference, if any, on the date of grant between thefair value of the Company’s common stock and the amount an employee must pay toacquire the common stock. SFAS No. 148 requires more prominent and morefrequent disclosure in both interim and annual financial statements about themethod of accounting for stock-based compensation and the effect of the methodused on reported results. We adopted the disclosure provisions of SFAS No. 148as of December 31, 2002 and continue to apply the measurement provisionsof APB No. 25.

 

Had the Companydetermined compensation cost based on the fair value at the grant date for itsstock options under SFAS No. 123, the Company’s net income (loss)available to common stockholders would have been adjusted to the pro formaamounts indicated below:

 

F-15

----

 
| ** **                                                                                                                           | ** ** | **2005**                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                           | ** ** | **(in thousands, except per share  amounts)** | ** ** |
| Net income  (loss) available to common stockholders:                                                                                 |       |                                          |       |     |       |     |       |
| As reported                                                                                                                          |       | $                                             | 13         |     | $          | (3,461   | )          | $ | (14,413 | ) |
| Deduct: Total stock-based employee compensation  expense determined under fair-value-based method for all awards, net of tax  effect |       | 6,051                                         |       | 8,813    |       | 4,243    |       |
| Pro forma                                                                                                                            |       | $                                             | (6,038     | )        | $          | (12,274  | )          | $ | (18,656 | ) |
| Basic net income  (loss) per share available to common stockholders:                                                                 |       |                                          |       |     |       |     |       |
| As reported                                                                                                                          |       | $                                             | 0.00       |     | $          | (0.10    | )          | $ | (0.86 | ) |
| Pro forma                                                                                                                            |       | $                                             | (0.13      | )        | $          | (0.35    | )          | $ | (1.11 | ) |
| Diluted net  income (loss) per share available to common stockholders:                                                               |       |                                          |       |     |       |     |       |
| As reported                                                                                                                          |       | $                                             | 0.00       |     | $          | (0.10    | )          | $ | (0.86 | ) |
| Pro forma                                                                                                                            |       | $                                             | (0.13      | )        | $          | (0.35    | )          | $ | (1.11 | ) |
|                                                                                                                                      |            |                                               |            |          |            |          |            |  |  |  |  |  |  |

 

In October 2004, theCompany’s Board of Directors accelerated the vesting of all unvested stockoptions previously awarded to employees and officers with an exercise price pershare of $5.00 or higher. As a result, options to purchase approximately1.7 million shares of common stock became exercisable immediately. Basedon the closing price of the stock at the time of acceleration, none of theoptions had economic value. Under the recently revised SFAS 123, *Share-Based Payment* (“SFAS 123R”), theCompany will apply the expense recognition provisions relating to stock optionsbeginning in the first quarter of 2006. As a result of the acceleration, theCompany expects to reduce the stock-based compensation expense it otherwisewould be required to record by approximately $5.3 million on a pre-tax basis.

 

Theper share weighted-average fair value of stock options granted during 2005,2004 and 2003 was $2.89, $4.58 and $1.15, respectively, on the date of grantusing the Black-Scholes method with the following weighted average assumptions:

 
| ** **                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |     |       |
| Expected  dividend yield  |       | 0        | %          | 0        | %          | 0        | %          |
| Risk-free interest  rate  |       | 3.53     | %          | 2.41     | %          | 1.46     | %          |
| Expected life  (in years) |       | 2.5      |       | 2.7      |       | 2.4      |       |
| Volatility                |       | 99       | %          | 131      | %          | 133      | %          |

 

See“Recent Accounting Pronouncements” below regarding the impact of the adoptionof the revised SFAS 123R.

 

(p)Restructuring Estimates

 

TheCompany accounts for restructuring activities in accordance with SFAS No. 146,*Accounting for Costs Associated with Exit orDisposal Activities*. Restructuring-relatedliabilities include estimates for, among other things, involuntary terminationsof employees and disposition of lease obligations. Key variables in determiningsuch estimates include timing of sublease rentals, estimates of sublease rentalpayment amounts and tenant improvement costs, and estimates for brokerage andother related costs. The 

 

F-16

----

 

Company periodically evaluates and, if necessary,adjusts the estimates based on currently available information.

 

(q)Warrant Liability

 

Warrantliability is presented in accordance with EITF 00-19, *Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock*. EITF00-19 requires freestanding contracts that are settled in a Company’s ownstock, including common stock warrants, to be designated as an equity instrument,asset or liability. Under the provisions of EITF 00-19, a contract designatedas an asset or a liability must be carried at fair value until exercised orexpired, with any changes in fair value recorded in the results of operations.A contract designated as an equity instrument must be included within equity,and no fair value adjustments are required. The Company reviews theclassification of its contracts at each balance sheet date.

 

(r)Advertising Costs

 

Costsof advertising and promoting the Company’s products and services are expensedas incurred. Such costs are included in sales and marketing on the statement ofoperations and total approximately $2.2 million, $1.1 million and $0.9 millionfor the years ended December 31, 2005, 2004 and 2003, respectively.

 

(s) Basic and Diluted NetIncome (Loss) Per Share

 

Netincome (loss) per share is presented in accordance with the provisions of SFAS No. 128,*Earnings Per Share* (“EPS”). BasicEPS excludes dilution for potentially dilutive securities and is computed bydividing income or loss available to common shareholders by the weightedaverage number of common shares outstanding for the period. Diluted EPSreflects the potential dilution that could occur if securities or othercontracts to issue common stock were exercised or converted into common stockand resulted in the issuance of common stock. Potential common shares consistof incremental common shares issuable upon the exercise of stock options andwarrants and the vesting of restricted stock (using the treasury stock method)and the conversion of subordinated convertible debentures and preferred stock(using the if-converted method).

 

Thedilutive effect of stock options and restricted stock was 1.2 million and 1.1million, respectively.

 

Dilutednet income per common share for the year ended December 31, 2005 does notinclude the effects of 0.4 million shares of preferred stock and1.7 million shares of common stock related to the subordinated convertibledebentures, on an “as if” converted basis, as the effect of their inclusion isanti-dilutive during the period. Approximately 4.1 million options and 0.4 million warrants were notincluded as their strike price was higher than the average closing price forthe period.

 

Dilutednet loss per share is equal to basic net loss per share for the year ended December 31,2004 and 2003 since all potentially dilutive securities are anti-dilutive.Diluted net loss per common share for the year ended December 31, 2004 and2003 does not include the effects of options to purchase 4.5 million and3.4 million shares of common stock, respectively; 0.6 million common stockwarrants in 2004 and 2003, 10,000 and 40,000 shares of unvested restrictedstock, respectively; 0.6 million and 8.0 million shares of preferred stockfor 2004 and 2003, respectively; and 1.7 million shares of common stock in2004 and 2003 related to the subordinated convertible debentures, on an “as if”converted basis, as the effect of their inclusion is anti-dilutive during eachperiod.

 

F-17

----

 

(t)Recent Accounting Pronouncements

 

*Share-Based Compensation*

 

In December 2004,the FASB issued the revised SFAS No. 123, *Share-BasedPayment* (“SFAS 123R”), which addresses the accounting forshare-based payment transactions in which the Company obtains employee servicesin exchange for (a) equity instruments of the Company or (b) liabilitiesthat are based on the fair value of the Company’s equity instruments or thatmay be settled by the issuance of such equity instruments. SFAS 123R eliminatesthe ability to account for employee share-based payment transactions using APB No. 25and requires instead that such transactions be accounted for using thegrant-date fair value based method. SFAS 123R would have been effective as ofthe beginning of the first interim or annual reporting period that began after June 15,2005, however the Securities and Exchange Commission (“SEC”) amended thecompliance dates to make SFAS 123R effective for a company’s first fiscal yearfollowing June 15, 2005 (January 1, 2006 for the Company).

 

SFAS123R applies to all awards granted or modified after the effective date of thestatement. In addition, compensation cost for the unvested portion ofpreviously granted awards that remain outstanding on the effective date shallbe recognized on or after the effective date, as the related services arerendered, based on the awards’ grant-date fair value as previously calculatedfor the pro-forma disclosure under SFAS 123.

 

TheCompany expects that, upon the adoption of SFAS 123R it will apply the modifiedprospective application transition method, as permitted by the statement. Undersuch transition method, upon the adoption of SFAS 123R, the Company’s financialstatements for periods prior to the effective date of the statement will not berestated. The impact of this statement on the Company’s financial position andresults of operations in 2006 and beyond will depend upon various factors,among them, the Company’s future compensation strategy. The Company expectsthat the effect of applying this statement to its results of operations for2006 as it relates to existing option plans, would not be materially differentfrom the pro forma effect reported under the disclosure requirements of SFAS 123.

 

*AccountingChanges and Error Corrections*

 

In May 2005, theFASB issued SFAS No. 154, *AccountingChanges and Error Corrections* (“SFAS 154”), a replacement of APBOpinion No. 20, *Accounting Changes*,and SFAS No. 3, *Reporting AccountingChanges in Interim Financial Statements*. SFAS 154 changed therequirements for the accounting for, and reporting of, a change in accountingprinciples. Previously, voluntary changes in accounting principles weregenerally required to be recognized by way of a cumulative effect adjustmentwithin net income during the period of the change. SFAS 154 requiresretrospective application to prior periods’ financial statements, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. SFAS 154 is effective for accounting changes made infiscal years beginning after December 15, 2005; however, the statementdoes not change the transition provisions of any existing accountingpronouncements. The Company does not believe that the adoption of SFAS 154 on January 1,2006 will have a material effect on its financial position, cash flows orresults of operations.

 

F-18

----

 

**NOTE 3 -ACQUISITIONS AND UNAUDITED PRO FORMA SUMMARY**

 

(a)          Acquisition of Decide Holdings Pty Limited (“Decide”)

 

OnAugust 19, 2004, the Company completed its acquisition of Decide, aleading provider of search engine marketing in Australia and Europe. Theacquisition combined the Company’s global audience and Decide’s searchtechnology to allow the Company to create a more relevant, comprehensive andhigher quality offering.  Pursuant to theacquisition agreements, the Company acquired all of the outstanding shares ofDecide for $15.0 million in cash, approximately 4.5 million shares of itscommon stock, valued at $12.6 million, and approximately $1.1 million intransaction fees. Additionally, the Company is required to pay up to anadditional $2.5 million in cash and issue $7.5 million in shares of commonstock (up to a maximum of 2.3 million shares) to the selling shareholders ofDecide if Decide achieves certain performance targets.  At December 31, 2005, the Companyaccrued and reflected as additional goodwill $5.0 million for the contingentearn-out obligation as a result of the achievement of certain performancetargets for 2005.

 

Thepurchase price in excess of fair value of net tangible liabilities assumed of$28.8 million has been allocated as follows: $20.0 million to goodwill and $8.8million to intangible assets.

 

Ofthe $8.8 million of intangible assets, $1.1 million was assigned to trademarksthat are not subject to amortization. The remaining $7.7 million of intangibleassets have a weighted-average useful life of approximately five years. Theintangible assets that make up that amount include acquired technology totaling$6.6 million (five year weighted-average useful life), customer relationshipstotaling $1.0 million (five year weighted-average useful life) and non-competeagreements totaling $0.1 million (two year weighted-average useful life).

 

The$20.0 million as well as the additional $5.0 million of goodwill was assignedto the Search segment and, of that amount, none is deductible for tax purposes.

 

Thenet tangible liabilities assumed consist of the following:

 

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

 

(b)         Acquisition of Real Media Korea Co. Ltd.

 

On January 6, 2004,the Company completed its acquisition of Real Media Korea Co. Ltd., now knownas 24/7 Real Media Korea, Inc. (“24/7 Real Media Korea”), a leader ininteractive marketing in South Korea, by acquiring the approximately 90.4% ofthe outstanding shares of 24/7 Real Media Korea that the Company did notalready own. The Company believed the combined assets will further its positionas a global leader in interactive marketing. The Company paid totalconsideration of $20.1 million in exchange for the 24/7 Real Media Koreashares, which consisted of $5.0 million in cash, approximately 

 

F-19

----

 

2.1 million sharesof the Company’s common stock valued at $14.6 million and approximately$0.5 million in transaction costs. Approximately 0.9% of the outstandingshares of 24/7 Real Media Korea are held in an employee stock union establishedunder Korean law. The employee shareholders agreed to transfer their 24/7 RealMedia Korea shares to the Company upon vesting in accordance with the terms andconditions of the stock union and Korean law. For accounting purposes, theeffective date of the acquisition is January 1, 2004. There was nomaterial activity between the effective date and the acquisition date.

 

The purchase price inexcess of fair value of net tangible assets acquired of $16.1 million has beenallocated as follows: $11.9 million to goodwill and $4.2 million to intangibleassets.

 

Ofthe $4.2 million of intangible assets, $0.7 million was assigned to trademarksthat are not subject to amortization. The remaining $3.5 million of intangibleassets have a weighted-average useful life of approximately six years. Theintangible assets that make up that amount include acquired technology of $0.5million (six year weighted-average useful life), customer relationships of $2.4million (seven year weighted-average useful life) and a non-compete agreementof $0.6 million (five year weighted-average useful life).

 

The$11.9 million of goodwill was assigned to the Media and Technology segments inthe amounts of $11.2 million and $0.7 million, respectively. Of that totalamount, none is deductible for tax purposes.

 

The net tangible assetsacquired consist of the following:

 

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

 

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

 

On January 21,2003, the Company acquired certain assets of Insight First, Inc.,including specific contracts, and intangibles and employee relationshipsrelated to Insight’s Web analytics solution, including the intellectualproperty relating to specific products, in exchange for approximately0.7 million shares of the Company’s common stock valued at approximately$1.1 million and $0.2 million in cash. In addition, the Company has acontingent obligation to pay additional earn-out consideration of up to$1.0 million, in either cash or common stock, at the Company’s discretion,subject to achievement of earn-out targets relating to revenue generated by theacquired business in fiscal year 2004 and 2003. The earn-out target for 2003was not achieved, however the Company initially estimated that the target for2004 was achieved. Accordingly, the earn-out amount of approximately $0.3million was accrued and included as an addition to acquired technology as of December 31,2004.  The acquired technology wasamortized over an expected benefit period of four years. In December 2004,the Company recorded an impairment charge related to the analytics technologythat was acquired with Insight due to significant rewrites of the underlyingsoftware code. The unamortized balance of $0.9 million, inclusive of theearn-out liability of approximately $0.3 million initially estimated to be dueto the former owners of Insight, was impaired at December 31, 2004 andreflected as impairment of intangible assets on the consolidated 

 

F-20

----

 

statement of operations.  During 2005, the Company determined that the earn-outthreshold for 2004 was not achieved and accordingly, reversed and reflected theaccrued earn-out as other income on the consolidated statements of operations.

 

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

 

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

 

(d)         Summaryof Purchase Price Allocation

 

The following summarizesthe purchase price allocation for each of the acquisitions:

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

 

(e) Unaudited ProForma Summary

 

The results of operationsfor each Decide, 24/7 Real Media Korea and Insight have been included in theCompany’s consolidated statements of operations since the respective date ofcompletion of the acquisition. The following unaudited pro forma informationpresents a summary of the results of operations of the Company assuming theacquisitions of Decide, 24/7 Real Media Korea, and Insight at the beginning ofeach period presented:

 
| ** **                                                                 | ** ** | **Year Ended  December 31, 2004**                    | ** ** | **Year Ended  December 31, 2003** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                 | ** ** | **(in thousands, except share and  per share data)** | ** ** |
| ** **                                                                 | ** ** | ** **                                           | ** ** | ** **                        | ** ** |
| Total revenue                                                              |       | $                                                    | 91,949     |                              | $          | 66,083 |   |
| Net loss  attributable to common stockholders                              |       | (3,956                                               | )          | (16,070                           | )          |
| Basic and diluted net loss attributable to common  stockholders per share  |       | $                                                    | (0.10      | )                                 | $          | (0.69 | ) |
| Weighted average common shares used in net loss per  share calculation (1) |       | 38,250,851                                           |       | 23,448,783                        |       |

 

F-21

----

 

----

(1) The weighted average common shares used tocompute pro forma basic and diluted net loss per share for the years ended December 31,2004 and 2003 include the 4.5 million, 2.1 million and 0.7 million shares ofcommon stock issued for Decide, 24/7 Real Media Korea and Insight,respectively, as if the shares were issued at the beginning of each periodpresented.

 

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

 

**NOTE4 – JOINT VENTURE**

 

*K.K.24-7 Search*

 

On September 5,2005, the Company signed a joint venture agreement with Dentsu, Inc. todeliver search engine marketing (“SEM”) services to the Japanese market. Thepartnership, K.K. 24-7 Search, in which Dentsu owns a significant minorityinterest, simultaneously entered into an agreement to be the exclusive providerof SEM services to Dentsu’s extensive client base. Under the terms of theagreement, Dentsu will contribute its extensive Japanese marketing industryknowledge and connections to the joint venture, and will consign to the jointventure all SEM services provided to its clients. The Company will license itsDecide DNA technology to the joint venture, as well as provide SEM expertiseand operational management.

 

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

 

**NOTE5 – BALANCE SHEET COMPONENTS**

 

(a) Short-termInvestments

 

As of December 31,2004, short-term investments consisted of $2.0 million in certificate ofdeposits with original maturities greater than three months from the balancesheet date and $1.8 million in available-for-sale securities. The Company didnot hold short-term investments at December 31, 2005.

 

The Company’savailable-for-sale securities consisted of 400,000 shares of chinadotcom commonstock received as result of a legal settlement, originally valued at $2.9million based on the market price on the date of settlement. Proceeds from thesale of marketable securities were $1.3 million for the year ended December 31,2005 and realized gains as a result of the sales were immaterial. During 2005and 2004, total realized loss based on an other-than-temporary decline in themarket value of the stock, were $0.6 million and $1.1 million, respectively.The Company did not hold any marketable securities at December 31, 2005.

 

F-22

----

 

(b) Property andEquipment

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(in thousands)**    | ** ** |
| Computer equipment and  software (1)            |       | $                     | 13,405     |   | $ | 9,131 |   |
| Furniture and fixtures                          |       | 1,028                 |       | 829 |   |
| Leasehold improvements                          |       | 1,985                 |       | 1,165 |   |
|                                            |       | 16,418                |       | 11,125 |   |
| Less accumulated  depreciation and amortization |       | (9,287                | )          | (6,342 | ) |
|                                            |       | $                     | 7,131      |   | $ | 4,783 |   |

 

----

(1)          Includes equipment acquired under capital leases andcapitalized software.

 

Depreciation expenseamounted to $2.9 million, $1.8 million and $2.4 million for the years ended December 31,2005, 2004 and 2003, respectively and is included in general and administrativeexpenses.

 

Capitalized softwarerelates to our internally developed Open Advertiser (“OAD”) software productand our Decide DNA software product acquired with Decide in August 2004.OAD and Decide DNA had a cost of $1.2 million and $0.4 million, respectively.The net book value of the software products at December 31, 2005 and 2004was $0.2 million and $0.4 million, respectively. The Company capitalizedapproximately $1.2 million in connection with the development of OAD. Thesoftware was being amortized using the straight-line method over the estimateduseful life of four years. In the fourth quarter of 2004, the Company made thestrategic decision to integrate OAD functionalities into its Open AdStreamsoftware. In addition, the Company has not achieved significant salesof OAD since its commercial release in 2003 and has determined to reduce itssupport for OAD as it considers integrating OAD functionality into the OpenAdStream platform. As a result, OAD was considered impaired as of December 31,2004, and accordingly the Company recorded an impairment charge of $0.8million.

 

(c) IntangibleAssets, Net

 

The $39.6 million ingoodwill as of December 31, 2005 relates $25.0 million to Decide, $12.0million to 24/7 Real Media Korea, $1.1 million to 24/7 Canada (formerlyClickThrough), $1.1 million to Real Media and $0.4 million to 24/7 Search(formerly Website Results). The $34.6 million in goodwill as of December 31,2004 related $20.0 million to Decide, $12.0 million to 24/7 Real Media Korea,$1.1 million to 24/7 Canada (formerly ClickThrough), $1.1 million to Real Mediaand $0.4 million to 24/7 Search (formerly Website Results).

 

The $9.7 million inintangible assets, net at December 31, 2005 relates $6.6 million to Decideand $3.1 million to 24/7 Real Media Korea. The $12.7 million in intangibleassets, net, at December 31, 2004 related $8.2 million to Decide, $3.7million to 24/7 Real Media Korea, and $0.8 million to Real Media.

 

F-23

----

 
| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(in thousands)**    | ** ** |
|                           |       |                  |       |   |   |
| Goodwill (1)              |       | $                     | 39,573     |   | $ | 34,573 |   |
|                           |       |                  |       |   |   |
| Technology                     |       | 13,195                |       | 13,195 |   |
| Less accumulated  amortization |       | (8,018                | )          | (5,868 | ) |
| Net  technology                |       | 5,177                 |       | 7,327 |   |
|                           |       |                  |       |   |   |
| Other intangible assets        |       | 6,296                 |       | 6,296 |   |
| Less accumulated  amortization |       | (1,758                | )          | (947 | ) |
| Net  other intangible assets   |       | 4,538                 |       | 5,349 |   |
|                           |       |                  |       |   |   |
| Gross Intangible assets        |       | 19,491                |       | 19,491 |   |
| Less accumulated amortization  |       | (9,776                | )          | (6,815 | ) |
| Net  intangible assets         |       | $                     | 9,715      |   | $ | 12,676 |   |

 

----

(1) Goodwillincreased due to the accrual of the contingent earn-out liability to the formerowners of Decide for the achievement of certain performance targets in 2005.

 

Amortization expenserelated to acquired technology and other intangible assets for 2005 and thefive succeeding fiscal years is as follows (in thousands):

 
| ** ** | ** ** | **Useful Life** | ** ** | **2005**   | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** |
|------------|------------|-----------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** ** | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Technology |       | 4 - 7 years     |       | $          | 2,149      |       | $          | 1,420      |       | $          | 1,420      |       | $          | 1,420      |       | $ | 872 |   | $ | 44 |   |
| Other      |       | 2 - 7 years     |       | 812        |       | 685        |       | 648        |       | 648        |       | 448        |       | 329        |       |
|       |       |            |       | $          | 2,961      |       | $          | 2,105      |       | $          | 2,068      |       | $          | 2,068      |       | $ | 1,320 |   | $ | 373 |   |

 

(d) Other Assets

 
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **(in thousands)**    | ** ** |
| Lycos transition cost  (see Note 18 (b)) |       | $                     | 2,813      |   | $ | 3,713 |   |
| Advance royalties                        |       | 540                   |       | 500 |   |
| Note receivable (see  Note 6)            |       | 500                   |       | 500 |   |
| Deferred financing  costs (see Note 12)  |       | 398                   |       | 928 |   |
| Other                                    |       | 1,440                 |       | 1,225 |   |
|                                     |       | $                     | 5,691      |   | $ | 6,866 |   |

 

F-24

----

 

(e) AccruedLiabilities

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(in thousands)**    | ** ** |
| Royalties                                 |       | $                     | 9,822      |   | $ | 3,797 |   |
| Accrued earn-out                          |       | 5,000                 |       | 250 |   |
| Incentives, commissions  and expenses (1) |       | 3,192                 |       | 2,815 |   |
| Accrued taxes                             |       | 2,838                 |       | 1,670 |   |
| Restructuring and exit  costs             |       | 1,191                 |       | 898 |   |
| Professional fees                         |       | 1,021                 |       | 1,073 |   |
| Accrued other                             |       | 923                   |       | 1,305 |   |
|                                      |       | $                     | 23,987     |   | $ | 11,808 |   |

 

----

(1)  Incentives, commissions and expenses includestock-based compensation, commissions earned by the Company’s sales staff forthe most recent period, as well as out-of-pocket expenses incurred byemployees. All such balances as of December 31, 2005 and 2004, except $0.8million and $0.4 million, respectively, have subsequently been settled.

 

(f) Warrant Liability

 

In connection with theplacement of the Company’s preferred stock and subordinated convertibledebentures, the Company issued warrants to investors to purchase shares of theCompany’s common stock. The Company agreed to register the shares issuable uponexercise of the warrants and to pay penalties for a delayed filing or a failureto file a registration statement prior to the agreed deadline. The Company alsoagreed to pay penalties if the registration statement becomes temporarily orpermanently unavailable for use by the warrant holders. Pursuant to EITF Issue No. 00-19(“EITF 00-19”), *Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock*, the Company reflected the value of the warrants as a warrantliability on its consolidated balance sheets and the liability will bereclassified to equity upon exercise or conversion. The fair value of theoutstanding warrants is evaluated at each reporting period with any resultingchange in the fair value being reflected in the consolidated statements ofoperations.

 

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

 

The fair value of theoutstanding warrants increased approximately $0.4 million during 2005 to $0.9million.

 

**NOTE 6 - DISCONTINUED OPERATIONS**

 

IMAKE Software &Services, Inc. (“IMAKE”)

 

On January 22, 2002,the Company completed the sale of its wholly owned subsidiary, IMAKE, toSchaszberger Corporation for approximately $6.5 million. Of the $6.5million sale price, $2.0 million was in the form of a 6% four-year securednote, approximately $0.5 million was cash consideration and a potential earn-outof up to $4.0 million over the next three years based on gross revenue asdefined in the 

 

F-25

----

 

sale agreements. The note issecured by certain assets of IMAKE and is guaranteed by the buyer. In the eventthat the earn-out is not met within the three year period, the Company isentitled to receive a $1.00 Warrant for common stock equal to the differencebetween $3.0 million and the amount of the actual earn out paid to date.The shares to be received will be based on a third-party outside valuation ofthe buyer at December 31, 2005 and a ratio set forth in the agreement. Theconsideration paid to the Company was determined as a result of arms lengthnegotiations between the buyer and the Company.

 

The Company discountedthe note receivable and recorded the net present value of the earn-out based onits estimates of projected revenues and reflected $0.5 million and$1.5 million, respectively. During 2005, the Company received amounts inexcess of the $1.5 million earn-out recorded. These amounts totalingapproximately $69,000 were recorded as other income on the consolidatedstatements of operations. At December 31, 2005, the note receivable of$0.5 million is included in other assets on the consolidated balance sheets.

 

See Note 22 for thestatus of the note receivable due January 2006.

 

**NOTE 7 - DISPOSAL OF NON-CORE ASSETS**

 

IPromotions, Inc. (“iPromotions”)

 

On January 31, 2003,the Company entered into an Asset Purchase Agreement with iPromotions, a corporationformed by private investors, including some of the Company’s former employees.Pursuant to the terms of the Asset Purchase Agreement, the Company sold to theinvestors specific contracts, equipment, intangibles, and employeerelationships related to the Company’s iPromotions business. The Company alsoinvested approximately $0.1 million in cash in exchange for shares of preferredstock representing a 19.9% interest in iPromotions on a converted basis.Accordingly, the Company effectively sold a majority stake in its iPromotionsbusiness. Prior to the sale, the carrying value of iPromotions was $0.Therefore, there was no gain or loss on the transaction. The cash payment wasrecorded as an investment. In January 2004, iPromotions was acquired by athird-party. As part of the transaction, the Company agreed to give up itsminority stake and accordingly, the Company wrote-off its interest iniPromotions.

 

**NOTE 8 -RESTRUCTURING COSTS**

 

Duringthe years ended December 31, 2005, 2004 and 2003, restructuring costs ofapproximately $1.0 million, $0.8 million and $1.7 million, respectively,were recorded by the Company in accordance with the provisions of SFAS No. 146,*Accounting for Costs Associatedwith Exit or Disposal Activities*.

 

The2005 restructuring related to the Company’s former headquarters in New York.

 

The2004 restructuring involved the involuntary termination of 17 employees andexiting of the office in Munich, Germany. The $0.8 million charge consists ofseverance of $0.6 million and office closing costs of $0.2 million.

 

The2003 restructuring involved the involuntary termination of 26 employees,exiting of one office and a revision of the estimate of the cost to dispose ofexcess office space at the Company’s former corporate headquarters in New York.The $1.7 million charge consists of severance of $0.5 million andoffice closing costs of $1.2 million.

 

F-26

----

 

Thefollowing sets forth the activities in the Company’s restructuring reserve,which is included in accrued expenses in the 2005 and 2004 consolidated balancesheets:

 
| ** **                     | ** ** | **Beginning   Balance** | ** ** | **Current   Year   Provision** | ** ** | **Current   Year   Utilization** | ** ** | **Ending   Balance** | ** ** |
|--------------------------------|------------|-------------------------|------------|--------------------------------|------------|----------------------------------|------------|----------------------|------------|
| **2005**                       |       |                    |       |                           |       |                             |       |                 |       |
| Employee termination  benefits |       | $                       | 369        |                           | $          | —                           |       | $                    | 369        |   | $ | — |   |
| Office closing costs           |       | 529                     |       | 973                            |       | 311                              |       | 1,191                |       |
|                           |       | $                       | 898        |                           | $          | 973                              |       | $                    | 680        |   | $ | 1,191 |   |
|                           |       |                    |       |                           |       |                             |       |                 |       |
| **2004**                       |       |                    |       |                           |       |                             |       |                 |       |
| Employee termination  benefits |       | $                       | 470        |                           | $          | 675                              |       | $                    | 776        |   | $ | 369 |   |
| Office closing costs           |       | 1,165                   |       | 166                            |       | 802                              |       | 529                  |       |
| Other exit costs               |       | 28                      |       | —                         |       | 28                               |       | —               |       |
|                           |       | $                       | 1,663      |                           | $          | 841                              |       | $                    | 1,606      |   | $ | 898 |   |

 

**NOTE 9 –IMPAIRMENT OF MARKETABLE SECURITIES**

 

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

 

**NOTE 10- INCOME TAXES**

 

The components of income(loss) before provision for income taxes and minority interest in consolidatedsubsidiary are as follows:

 
| ** **                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                 | ** ** | **(in thousands)**               | ** ** |
| U.S. net income (loss)     |       | $                                | 3,459      |   | $ | (2,940 | ) | $ | (12,018 | ) |
| Foreign net income  (loss) |       | (3,235                           | )          | (192 | ) | 39 |   |
|                       |       | $                                | 224        |   | $ | (3,132 | ) | $ | (11,979 | ) |

 

F-27

----

 

The provision (benefit) for income taxes is composedof the following:

 
| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                 | ** ** | **(in thousands)**               | ** ** |
| Current:                                   |       |                             |       |   |   |   |   |
| United  States federal                     |       | $                                | 234        |   | $ | 18 |   | $ | 33 |   |
| State                                      |       | 60                               |       | — |   | — |   |
| Foreign                                    |       | 20                               |       | 5 |   | 4 |   |
| Total  current provision for income taxes  |       | 314                              |       | 23 |   | 37 |   |
| Deferred:                                  |       |                             |       |   |   |   |   |
| United  States federal                     |       | —                           |       | — |   | — |   |
| State                                      |       | —                           |       | — |   | — |   |
| Foreign                                    |       | —                           |       | — |   | — |   |
| Total  deferred provision for income taxes |       | —                           |       | — |   | — |   |
| Provision for income  taxes                |       | $                                | 314        |   | $ | 23 |   | $ | 37 |   |

 

The provision for income taxes differs from the amountcomputed by applying the federal statutory income tax rate to income beforeincome taxes as follows:

 
| ** **                                                                      | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                      | ** ** | **(in thousands)**               | ** ** |
| Income tax (benefit) at  the United States federal statutory rate of 35 percent |       | $                                | 78         |   | $ | (1,096 | ) | $ | (4,193 | ) |
| State income taxes, net  of federal benefit                                     |       | 39                               |       | — |   | — |   |
| Change in valuation  allowance                                                  |       | (117                             | )          | 1,096 |   | 4,193 |   |
| Other                                                                           |       | 234                              |       | 18 |   | 33 |   |
|                                                                            |       | $                                | 234        |   | $ | 18 |   | $ | 33 |   |

 

The Tax Reform Act of 1986 contains provisions under section 382of the Internal Revenue Code (“IRC Section 382”) that limit the federalnet operating loss carryfoward that may be used in any given year in the event ofspecified occurrences, including significant ownership change.  The Company retained independent taxspecialists to perform an analysis to determine the applicable annuallimitation applied to the utilization of the net operating loss carryforwardsdue to ownership changes.  The IRC Section 382study and analysis was completed in the first quarter of 2006, and as a resultof the study, changes in ownership have limited the Company’s use of netoperating losses against forecasted taxable income.  Following the completion of the study, theCompany’s available net operating loss has been recalculated to $24.3million.  This amount, which will expirein various years through 2022, may be offset against future taxable income.

 

The tax effects oftemporary differences and tax loss carryforwards that give rise to significantportions of federal and state deferred tax assets and deferred tax liabilitiesat December 31, 2005 and 2004 are presented below.

 

F-28

----

 
| ** **                                                              | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                              | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **                                                              | ** ** | **(in thousands)**    | ** ** |
| Deferred tax assets:                                                    |       |                  |       |   |   |
| Net  operating loss carryforward                                        |       | 8,580                 |       | 65,138 |   |
| Deferred  revenue                                                       |       | 526                   |       | 649 |   |
| Deferred  rent                                                          |       | 135                   |       | — |   |
| Reserve  for sales allowance                                            |       | 377                   |       | 207 |   |
| Accounts  receivable principally due to allowance for doubtful accounts |       | 185                   |       | 178 |   |
| Amortization  of goodwill and other intangibles                         |       | 2,925                 |       | 2,635 |   |
| Stock  based compensation                                               |       | 457                   |       | 351 |   |
| Accrued  restructuring                                                  |       | 477                   |       | 375 |   |
| Accrued  merger                                                         |       | 42                    |       | — |   |
| Accrued  warrant                                                        |       | 359                   |       | — |   |
| Capital  loss carryover                                                 |       | 670                   |       | — |   |
| Impairment  charge                                                      |       | 50                    |       | 421 |   |
| Other                                                                   |       | 144                   |       | — |   |
|                                                                    |       |                  |       |   |   |
| Gross deferred tax  assets                                              |       | 14,927                |       | 69,954 |   |
| Less: valuation  allowance                                              |       | (14,297               | )          | (69,569 | ) |
| Net  deferred tax assets                                                |       | 630                   |       | 385 |   |
|                                                                    |       |                  |       |   |   |
| Deferred tax  liabilities:                                              |       |                  |       |   |   |
| Property  and equipment, principally due to differences in depreciation |       | (630                  | )          | (385 | ) |
| Other                                                                   |       | —                |       | — |   |
|                                                                    |       |                  |       |   |   |
| Gross  deferred tax liabilities                                         |       | (630                  | )          | (385 | ) |
|                                                                    |       |                  |       |   |   |
| Net  deferred tax asset (liability)                                     |       | $                     | —     |   | $ | — |   |
|                                                                         |            |                       |            |  |  |  |  |

 

Due to the Company’shistory of operating losses and Section 382 limitations, there issubstantial uncertainty surrounding whether the Company will ultimately realizeits deferred tax assets. Accordingly, these assets have been fully reserved.During 2005 and 2004, the valuation allowance decreased by $55.3 millionand $1.6 million, respectively. Of the total valuation allowance of $14.3  million,tax benefits, recognized in the future of approximately of $2.4 millionwill be applied directly to additional paid-in capital. This amount relates to thetax effect of employee stock option deductions included in the Company’s netoperating loss carryforward.

 

The Company is subjectedto routine tax examinations by taxing authorities at the federal, state andlocal levels in the US and by various levels in foreign countries.  As of December 31, 2005, there are severalreviews being conducted and Management is of the opinion that the ultimateoutcome of these examinations would not have a material adverse impact on thefinancial position of the Company or the results of its operations.

 

**NOTE 11- RELATED PARTY INSTRUMENTS**

 

Loan Payable

 

In connection with theCompany’s acquisition of Real Media in October 2001, the Company hadissued three promissory notes to PubliGroupe, the principal shareholder of RealMedia, totaling $7.5 million. Mr. Wuttke, who became a member of theCompany’s board of directors after the acquisition, is an officer ofPubliGroupe SA, the parent company of PubliGroupe. One note for$4.5 million had an interest rate of 4.5% with principal and interest dueon October 30, 2006. Two notes for $1.5 million each had an interestrate of 6% with principal and interest due in January 2005 and May 2005.On May 23, 2003, PubliGroupe surrendered for cancellation the threepromissory notes plus accrued interest of 

 

F-29

----

 

approximately$0.5 million in exchange for a cash payment of $1.5 million andapproximately 1.0 million shares of the Company’s common stock, valued at$1.8 million. The common stock issuance and $4.7 million gain oncancellation of debt was recorded as a capital transaction, resulting in a$6.5 million increase of additional paid in capital.

 

**NOTE12 - 2% SUBORDINATED CONVERTIBLE DEBENTURES**

 

On September 26,2003, the Company completed the placement to an institutional accreditedinvestor of $15.0 million of subordinated convertible debentures due September 2006(“Debentures”). The Debentures are convertible into shares of the Company’scommon stock at $8.75 per share. Interest on the Debentures at the rate of 2%is due semi-annually starting in January 2004. The investor also acquireda five-year warrant (the “Warrants”) to purchase 360,564 shares of the Company’scommon stock at $9.5685 per share.

 

The maturity date of theDebentures is subject to extension, and the conversion price is subject toadjustment, on the terms and conditions set forth in the Debenture. Inaddition, on the maturity date the Company may elect to pay the principal ofand interest on the Debentures in cash, shares of its common stock or acombination of cash and shares of its common stock. If the Company elects topay all or a portion of the principal amount due under the Debentures atmaturity in shares of its common stock, rather than in cash, the maturity date conversionprice will be equal to 90% of the average of the daily volume-weighted averageprices of the Company’s common stock on the NASDAQ National Market (or suchother market on which the common stock are then listed or quoted) for thefifteen consecutive trading days immediately preceding the maturity date. TheCompany may elect to make interest payments on the Debentures in cash or sharesof its common stock. If the Company elects to make interest payments due underthe Debentures in shares of its common stock, the interest conversion pricewill be equal to 90% of the average of the daily volume-weighted average pricesof the Company’s common stock on the NASDAQ National Market (or such othermarket in which the common stock are then listed or quoted) for the fiveconsecutive trading days immediately preceding the interest payment date.Interest expense on the Debentures amounted to approximately $0.3 million, $0.3million and $0.1 million for the years ended December 31, 2005, 2004 and2003, respectively.

 

Additionally, if thespecific conditions set forth in the Debentures are satisfied, the Company mayrequire the holder to convert the Debenture into shares of the Company’s commonstock, at the conversion rate then in effect, or the Company may prepay theDebenture prior to the maturity date, for an amount in cash equal to 150% ofthe amount prepaid. In addition, if at any time on or after the secondanniversary of the initial issuance date, the weighted average price of thecommon stock is less than $8.75 on any five trading days after such secondanniversary, the holder shall have the right, in its sole discretion, torequire that the Company immediately redeem up to $7.5 million principal amountof this Debenture, which is being classified as short-term debt on theconsolidated balance sheet. The redemption right constitutes an embeddedderivative. The value of this embedded derivative at December 31, 2005 isimmaterial to the financial position of the Company. The Company reviews thevalue of the derivative on a quarterly basis, in accordance with SFAS No. 133,“*Accounting for Derivative Instruments andHedging Activities*.”

 

The Company valued theWarrants at $1.8 million using a Black-Scholes pricing model with thefollowing factors: risk free interest rate of 1.48%, volatility of 143%,dividend yield of 0% and a life of 2.5 years. The aggregate fair marketvalue of the Warrants was reflected as a reduction of the face amount of theDebentures on the consolidated balance sheets, which is being amortized overthree years, the initial term of the Debentures, using the effective interestmethod. Accordingly, the carrying value of 

 

F-30

----

 

the Debentures will beincreased over the initial term. Pursuant to EITF Issue No. 00-19, sincethe effective registration of the securities underlying the warrants was anevent outside of the control of the Company, the Company recorded the fairvalue of the warrants as long-term liabilities. In connection with theamendment to the registration rights agreement entered into during 2004, theCompany reclassified the value of the warrants (approximately $1.0 million) onthe amendment date to additional paid in capital. Interest expense attributableto the amortization of the warrants amounted to approximately $0.6 million,$0.6 million and $0.2 million for the year ended December 31, 2005, 2004and 2003, respectively.

 

In connection with theissuance of the Debentures and Warrants, the Company incurred placement agentfees, legal fees and other expenses of approximately $1.2 million to bepaid in cash. In addition to the placement fees, the Company issued warrants tothe placement agent. The warrants to purchase 86,000 shares of common stock atan exercise price of $10.068 are in the same form and on the same terms andconditions as the Warrants issued to the investor. The Company included thevalue of the warrants, $0.4 million, determined using the factors above,and the cash placement fees of $1.2 million in other assets on the consolidatedbalance sheets. Collectively, the debt issuance costs of $1.6 million are beingamortized over three years, the initial term of the Debentures. Approximately$0.5 million, $0.6 million and $0.1 million of deferred costs are included inamortization expense for the year ended December 31, 2005, 2004 and 2003,respectively, and at December 31, 2005 and 2004, the unamortized debtissuance costs of $0.4 million and $0.9 million, respectively, are included inother assets on the consolidated balance sheets.

 

**NOTE13 - EQUITY INSTRUMENTS**

 

(a) Preferred Stock

 

The Company’s preferredstock accrue and accumulate dividends at a rate of 6% per year, compoundedmonthly, payable when, as and if declared by the Company’s Board of Directors.Accordingly, the accrued dividends are reflected as “Preferred stock dividends”on the consolidated statements of operations. All accrued dividends must bepaid before any dividends may be declared or paid on the common stock, andshall be paid as an increase in the liquidation preference of the preferredstock payable upon a sale, merger, liquidation, dissolution or winding up ofthe Company. Accrued but unpaid dividends are cancelled upon conversion of thepreferred stock. As of December 31, 2005, accrued but unpaid dividendshave been cancelled.

 

*Series A*

 

On July 2, 2002,Sunra Capital Holdings Limited (“Sunra”), a newly formed investment fundadvised by Merchant’s Group International, purchased $1.6 million of theCompany’s newly created Series A Preferred Stock, $3.4 million of itsnewly created Series A-1 Non-Voting Convertible Preferred Stock, and, on August 13,2002, agreed to purchase an additional $3.0 million of the Series APreferred Stock, for a total investment of $8.0 million. Upon receipt ofshareholder approval on September 10, 2002, the outstanding shares of Series A-1Preferred Stock converted into shares of Series A Preferred Stock andSunra purchased an additional $3.0 million of the Series A PreferredStock (the “September 10, 2002 Series A Preferred Stock transactions”).

 

Each share of Series APreferred Stock was convertible into common stock of the Company at any time atthe option of the holder at a conversion price of $1.02675 per share of commonstock, or 7.8 million shares of common stock on an as-if converted basis. TheCompany also issued warrants to Sunra to 

 

F-31

----

 

purchase 0.8 millionshares of common stock at an exercise price of $1.02675. All of the warrantsissued may be exercised through a cashless exercise and have a five year term.The Company also issued warrants to Merchant’s Group International to purchase0.1 million shares of common stock, valued at $0.1 million, as partialpayment of a placement fee and incurred a total of approximately$0.8 million in other related fees.

 

The Company definitivelyagreed to the initial terms of the September 10, 2002 Series APreferred Stock transactions when the price of the Company’s common stock wasapproximately $1.05 per share. However, Sunra’s conversion of the outstandingshares of Series A-1 Preferred Stock into shares of Series APreferred Stock and purchase of an additional $3.0 million of the Series APreferred Stock, and associated warrants were subject to shareholder approval,which was approved on September 10, 2002 at which time the price of theCompany’s common stock was $2.30 per share.

 

The Company allocated theproceeds received in each of the transactions to the Series A PreferredStock and detachable warrants based on a relative fair value basis. The valueascribed to the five-year detachable warrants, amounting to $1.3 million,was determined using a Black-Scholes pricing model (100% volatility factor,$2.30 fair value at September 10, 2002, $1.05 fair value at July 2,2002, and $1.02675 exercise price, expected life of 5 years and dividendyield of 0%). Pursuant to ETIF Issue No. 00-19, since the effectiveregistration of the securities underlying the warrants was an event outside ofthe control of the Company, the Company recorded the fair value of the warrantsas long-term liabilities. The intrinsic value of the beneficial conversionfeature associated with the July 2, 2002 Series A Preferred Stocktransactions was approximately $0.2 million. The intrinsic value of thebeneficial conversion feature associated with the September 10, 2002 Series APreferred Stock transactions was calculated as the difference between theconversion price of $1.02675 per share of common stock and the fair value ofthe common stock into which the Series A Preferred Stock was convertibleinto on the shareholder approval date of $2.30 per share, or an intrinsic valueof approximately $1.27325 per share, which is greater than the proceedsallocated to the September 10, 2002 Series A Preferred Stocktransactions. Accordingly, the amount of the discount was limited to the amountof cash allocable to the September 10, 2002 Series A Preferred Stocktransactions. Therefore, the Company recorded a non-cash charge of$5.2 million in the third quarter of 2002.

 

As of December 31,2004, all shares of Series A Preferred Stock were converted into shares ofcommon stock.

 

*Series B*

 

In conjunction with theacquisition of Now Marketing in September 2002, the Company issued 0.1million shares of Series B Preferred Stock, which were convertible intoapproximately 1.2 million shares of common stock. The Series BPreferred Stock contained a $1.2 million embedded beneficial conversionfeature.

 

All shares of Series BPreferred Stock were converted into shares of common stock in 2003.

 

*Series C*

 

As of June 6, 2003,the Company completed a private placement (the “Financing”) of approximately$7.2 million of Series C-1 Non-Voting Convertible RedeemablePreferred Stock (the “Series C-1 Preferred Stock”), together with relatedCommon Stock Warrants, to several investment funds and accredited individualinvestors, including members of the Company’s management and Board of

 

F-32

----

 

Directors (the “Investors”).All outstanding shares converted (collectively, the “Conversion”) into sharesof Series C Convertible Preferred Stock (the “Series C PreferredStock”) upon the approval of the Company’s stockholders on July 29, 2003.

 

In connection with theFinancing, the Company also issued two warrants to each Investor to purchaseshares of common stock at an exercise price equal to the conversion price of$1.2079 (the “Conversion Price”), of which (i) one warrant entitles theInvestor to purchase up to an additional 10% of the aggregate number of sharesof common stock issuable upon the conversion of the Series C PreferredStock and only becomes exercisable upon the effective date of Conversion; and (ii) asecond warrant entitles the Investors to purchase up to 4.8% of the aggregatenumber of shares of common stock that would have been issuable upon conversionof the Series C Preferred Stock and only becomes exercisable in the eventthe Investors become entitled to redeem shares of Series C-1 PreferredStock. Each warrant will remain exercisable in the event the Investor becomesentitled to redeem shares of Series C-1 Preferred Stock. Each warrant willremain exercisable until the fifth anniversary of the date on which the warrantfirst became exercisable. All warrants issued pursuant to this transaction maybe exercised through a cashless exercise. The second warrants were cancelledupon Conversion on July 29, 2003.

 

Each share of Series CPreferred Stock is convertible into common stock at any time at the option ofthe holder thereof at the conversion price of $1.2079 per share of commonstock. There will be no change to the conversion ratio of the Series CPreferred Stock based upon the future trading price of the common stock. Theconversion price of the Series C Preferred Stock is subject to adjustmentin the event future issuances of the Company’s equity is at a purchase pricelower than the Conversion Price according to a weighted average formula.

 

At any time after May 31,2005, the Company may automatically convert each share of the then outstanding Series CPreferred Stock into the applicable number of shares of common stock if, amongother things, the common stock is then traded, the average per share closingprice of the common stock is greater than three (3) times the ConversionPrice over a sixty day (60) trading period, the average daily tradingvolume of the common stock over such a period is at least 40,000 shares andthere is an effective registration statement covering the resale of all sharesof common stock issuable upon conversion of any other outstanding shares of Series CPreferred Stock.

 

In connection with theFinancing, the Company also agreed to file a registration statementcovering the resale of the shares of common stock issuable upon conversion ofthe Series C Preferred Stock and upon exercise of all warrants issued tothe Investors. The Company also granted “piggyback” registration rights to theInvestors, on a *pari passu* basiswith existing registration rights holders, which entitles each of the Investorsto participate in registered offerings of the Company’s securities by theCompany.

 

The Company agreed toterms of the Series C Preferred Stock when the $1.2079 conversion priceapproximated fair value of the underlying common stock. However, the Series CPreferred Stock and associated warrants were subject to stockholder approvalwhich occurred on July 29, 2003, at which time the price of the Company’scommon stock was $9.35 per share. Accordingly, the Series C transactioncontained an embedded beneficial conversion feature, which was required to bevalued separately. The Company allocated the proceeds received to the Series CPreferred Stock and detachable warrants based on a relative fair value basis.The $5.4 million value ascribed to the five-year detachable warrants wasdetermined using a Black Scholes pricing model (143% volatility, $9.35 fairvalue at July 29, 2003, $1.2079 exercise price, 1.48% discount rate,average life of 2.5 years and dividend yield of 0%). Pursuant to ETIFIssue No. 00-19, since the effective registration of the securitiesunderlying the warrants was an event outside of the control of the Company, theCompany recorded the fair value of the 

 

F-33

----

 

warrants as long-termliabilities. The intrinsic value of the beneficial conversion feature wascalculated as the difference between the conversion price of $1.2079 and thefair value of the common stock into which the Series C Preferred Stock wasconvertible into on the stockholder approval date of $9.35 per share, or anintrinsic value of $8.15 per share, which is greater than the proceedsallocated. Accordingly, the amount of the discount was limited to the amount ofcash allocable to the transaction. Therefore, the Company recorded a non-cashcharge of approximately $1.8 million in the third quarter of 2003 which isincluded in “Preferred stock conversion discount” on the consolidated statementof operations.

 

As of December 31,2005, all shares of Series C Preferred Stock were converted into shares ofcommon stock.

 

(b) Common Stock

 

*SecondaryStock Offering*

 

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

 

*ReverseSplit of Common Stock*

 

On February 27,2004, the Company completed a one-for-five reverse split of its common stock.As a result of the reverse split, every five shares of the Company’s commonstock were combined into one share of common stock. The reverse split did notaffect the number of shares of preferred stock and warrants outstanding,however, the conversion ratio was adjusted accordingly. All figures relating tocommon stock, preferred stock, stock options, warrants and other equity-linkedinstruments have been adjusted in this Form 10-K to reflect the reversesplit.

 

*Increasein Authorized Shares*

 

On July 29, 2003,the Company’s stockholders approved an amendment to the Company’s Certificateof Incorporation to increase its authorized shares to 360 million shares.

 

*OtherIssuances*

 

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

 

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

 

F-34

----

 

On May 23, 2003, theCompany issued approximately 1.0 million shares of common stock, valued atapproximately $1.8 million, plus $1.5 million in cash, toPubliGroupe, in exchange for forgiveness of three promissory notes and therelated accrued interest (see Note 11).

 

Approximately 30employees including members of senior management volunteered to receive between5 and 20% of their compensation in the form of the Company’s common stock andoptions in lieu of cash from April to December 2003. As a result,approximately 0.2 million shares, valued at $0.2 million, wereissued.

 

On March 17, 2003,the Company issued approximately 0.3 million shares of common stock,valued at approximately $0.3 million, to employees in lieu of cash forachieving contractual performance-based 2002 target bonuses. The bonuses wereaccrued as of December 31, 2002.

 

*AdditionalPaid-in Capital*

 

During the year ended December 31,2005, the Company’s additional paid-in capital increased by $4.0 millionprimarily due to $2.3 million in stock-based compensation related to restrictedshares to be issued to employees and $1.7 million from exercise of stock options.

 

*ReservedShares*

 

Shares reserved for future issuance as of December 31,2005 are as follows:

 
| ** **                                                         | ** ** | **Reserved   Shares** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|
| Reserved for issued and  outstanding warrants                      |       | 589,349               |       |
| Reserved for stock  incentives under the 1998 Stock Incentive Plan |       | 1,002,878             |       |
| Reserved for stock  incentives under the 2001 Stock Incentive Plan |       | 273,528               |       |
| Reserved for stock  incentives under the 2002 Stock Incentive Plan |       | 12,471,819            |       |

 

F-35

----

 

(c) Warrants

 

Warrant activity during theperiods indicated was as follows:

 
| ** **                             | ** ** | **Warrants (1)** | ** ** | **Weighted   Average   Exercise Price** | ** ** |
|----------------------------------------|------------|------------------|------------|-----------------------------------------|------------|
| Outstanding at  December 31, 2002 |       | 8,316,200        |       | $                                       | 2.05       |   |
| Granted                                |       | 6,280,655        |       | 4.20                                    |       |
| Exercised                              |       | (8,687,268       | )          | 1.10                                    |       |
| Canceled                               |       | (2,805,870       | )          | 36.30                                   |       |
| Outstanding at  December 31, 2003 |       | 3,103,717        |       | $                                       | 7.45       |   |
| Granted                                |       | —           |       | —                                  |       |
| Exercised                              |       | (42,428          | )          | 1.21                                    |       |
| Canceled                               |       | (114,542         | )          | 6.12                                    |       |
| Outstanding at  December 31, 2004 |       | 2,946,747        |       | $                                       | 7.61       |   |
| Granted                                |       | —           |       | —                                  |       |
| Exercised                              |       | —           |       | —                                  |       |
| Canceled                               |       | —           |       | —                                  |       |
| Outstanding at December 31,  2005 |       | 2,946,747        |       | $                                       | 7.61       |   |

 

----

(1) OnFebruary 27, 2004, the Company completed a one-for-five reverse split ofits common stock.  As a result of thereverse split, every five shares of its common stock were combined into oneshare of common stock. The reverse split does not affect the number of sharesof warrants outstanding, however, the conversion ratio was adjustedaccordingly. The 2.9 million warrants outstanding at December 31, 2005could be converted into approximately 0.6 million shares of its common stock.

 

Warrants outstanding at December 31,2005 consist of warrants issued in connection with the Company’s Series C(see Note 13(a)) and Debenture (see Note 12) financing. Warrants generallyexpire five years from the date of grant.

 

**NOTE 14 - STOCK INCENTIVE PLANS**

 

1998Stock Incentive Plan

 

During1998, the board of directors and stockholders of the Company approved the 1998Stock Incentive Plan as amended (the “Plan”). The following is a summary of thematerial features of the Plan. This Plan replaced the 1995 Stock Option Plan -Amended, which had been established in 1995 and amended in 1996.

 

Allemployees of and consultants to the Company are eligible under the Plan. TheStock Incentive Committee shall determine eligibility under the Plan. The Planprovides for the grant of any or all of the following types of awards: (i) stockoptions, including incentive stock options and non-qualified stock options; (ii) stockappreciation rights, in tandem with stock options or free standing; and (iii) restrictedstock. In addition, the Plan provides for the non-discretionary award of stockoptions to non-employee directors of the Company.

 

ThePlan allows for an automatic increase in the shares available for issuanceunder the Plan on the first trading day of each calendar year, beginning with2001 by an amount equal to 3% of the total number of 

 

F-36

----

 

sharesof common stock outstanding on the last trading day of the immediatelypreceding calendar year, not to exceed 350,000 shares in any given year.

 

During2001, the total number of shares that may be issued or used for referencepurposes pursuant to the Plan was increased to 1,772,171. The amount wasincreased by 21,866 for the pooling with Sift and 15,427, 59,400, 8,460,17,740, 15,350, 69,850 for the acquisitions of Music Marketing Network, Inc.d/b/a ConsumerNet, IMAKE, Sabela Media, Inc., AwardTrack, Inc.,iPromotions, and Website Results, Inc., respectively, for a total of1,980,263. On January 1, 2002, in accordance with the terms of the Plan,shares available under the Plan were increased by 297,046, for a total of2,277,309.

 

Themaximum number of shares of common stock subject to each of stock options orstock appreciation rights that may be granted to any individual under the Planis 50,000 for each fiscal year during the term of the Plan. If a stockappreciation right is granted in tandem with a stock option, it shall beapplied against the individual limits for both stock options and stock appreciationrights, but only once against the maximum number of shares available under thePlan.

 

Asa result of the adoption of the 2002 Stock Incentive Plan, the Board ofDirectors approved an amendment to the 1998 Stock Incentive Plan to eliminatethe automatic increase of 3% and eliminate any further grants to non-employeedirectors.

 

2001Equity Compensation Plan

 

OnFebruary 26, 2001, the board of directors and stockholders of the Companyapproved the 24/7 Real Media, Inc. 2001 Equity Compensation Plan (“2001Equity Plan”), to offer and issue to certain employees, former employees,advisors and consultants of the Company and its affiliates common stock of theCompany in payment of amounts owed by the Company to such third parties. Theaggregate number of shares of common stock that may be issued shall not exceed250,000 shares.

 

2001Stock Incentive Plan for Non-Officers

 

OnJanuary 2, 2001, the board of directors of the Company approved the24/7 Real Media, Inc. 2001 Stock Incentive Plan for Non-Officers (“2001Plan”). All employees of and consultants to the Company and its affiliates areeligible to be granted non-qualified stock options under this plan, providedthat such persons are not officers. Eligibility under the 2001 Plan and awardamounts shall be determined by the Stock Incentive Committee. A maximum of500,000 shares of common stock may be issued or used for referencepurposes pursuant to the 2001 Plan. The maximum number of shares of commonstock subject to each stock option grant to any individual under the 2001 Planis 50,000 for each fiscal year during the term of the plan.

 

2002Equity Compensation Plan

 

OnApril 22, 2002, the Board of Directors approved the 24/7 Real Media, Inc.2002 Equity Compensation Plan to enable the Company to offer and issue tocertain employees, former employees, advisors and consultants of the Companyand its affiliates its common stock in payment of amounts owed to such thirdparties. The aggregate number of shares of common stock that may be issuedpursuant to the 2002 Equity Compensation Plan shall not exceed 600,000 shares.The Company may from time to time issue to employees, former employees,advisors and consultants to the Company or its affiliates shares of its commonstock in payment or exchange for or in settlement or compromise of amounts dueby the 

 

F-37

----

 

Companyto such persons for goods sold and delivered or to be delivered or servicesrendered or to be rendered. Shares of the Company’s common stock issuedpursuant to the 2002 Equity Compensation Plan will be issued at a price pershare of not less than eighty-five percent (85%) of the fair market value pershare on the date of issuance and on such other terms and conditions asdetermined by the Company. The Chief Executive Officer of the Company isauthorized to issue shares pursuant to and in accordance with the terms of the2002 Equity Compensation Plan, provided that all issuances shall beco-authorized by at least one of the President, any Executive Vice President,the Chief Financial Officer or the General Counsel. The Company may amend theplan at any time.

 

2002Stock Incentive Plan

 

OnSeptember 10, 2002, the Shareholders approved the 2002 Stock IncentivePlan to enable the Company to offer and issue to certain employees, consultantsand non-employee directors of the Company and its affiliates its common stockin order to strengthen the mutuality of interests between such parties and theCompany’s shareholders. The aggregate number of shares of common stock that maybe issued pursuant to the 2002 Stock Incentive Plan shall not exceed 2.0million. During 2003, 2004 and 2005, the shareholders approved amendments tothe 2002 Stock Incentive Plan to increase the number of shares that may besubject to awards thereunder by 2.0 million, 4.0 million and 7.0 million,respectively. The number of shares available under the 2002 Stock IncentivePlan also automatically increases on the first trading day of each calendaryear, beginning with 2003 by an amount equal to 3% of the sum of the commonstock outstanding and the preferred stock on an as if converted basis, up to600,000.

 

OtherStock Incentive Plans

 

Asa result of the acquisition of Exactis.com, Inc., the Company acquiredExactis’ 1996, 1997 and 1999 stock option plans (the “Exactis Plans”). Nofurther options will be granted under these plans. As a result of the sale ofExactis these plans were terminated and no options are currently outstandingunder these plans.

 

F-38

----

 

Stockoption activity during the periods indicated was as follows:

 
| ** **                                             | ** ** | **Options** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|--------------------------------------------------------|------------|-------------|------------|--------------------------------------|------------|
| Outstanding at  December 31, 2002                 |       | 2,451,332   |       | $                                    | 9.85       |   |
| Granted                                                |       | 1,858,176   |       | 1.60                                 |       |
| Exercised                                              |       | (695,760    | )          | 1.35                                 |       |
| Canceled                                               |       | (228,109    | )          | 17.75                                |       |
| Outstanding at  December 31, 2003                 |       | 3,385,639   |       | $                                    | 5.85       |   |
| Granted                                                |       | 2,043,654   |       | 6.41                                 |       |
| Exercised                                              |       | (657,141    | )          | 1.29                                 |       |
| Canceled                                               |       | (280,223    | )          | 10.79                                |       |
| Outstanding at  December 31, 2004                 |       | 4,491,929   |       | $                                    | 6.62       |   |
| Granted                                                |       | 6,775,300   |       | 5.04                                 |       |
| Exercised                                              |       | (711,690    | )          | 2.33                                 |       |
| Canceled                                               |       | (960,161    | )          | 7.58                                 |       |
| Outstanding at  December 31, 2005                 |       | 9,595,378   |       | $                                    | 5.74       |   |
|                                                   |       |        |       |                                 |       |
| Vested at  December 31, 2003                      |       | 2,182,247   |       | $                                    | 7.81       |   |
| Vested at  December 31, 2004                      |       | 4,081,854   |       | $                                    | 7.06       |   |
| Vested at  December 31, 2005                      |       | 4,091,044   |       | $                                    | 6.39       |   |
|                                                   |       |        |       |                                 |       |
| Options available for  grant at December 31, 2005 |       | 4,114,980   |       |                                 |       |

 

The following tablesummarizes information about stock options outstanding at December 31,2005:

 
| **Range  of   Exercise Prices** | ** ** | **Number   Outstanding** | ** ** | **Weighted  Average  Remaining Contractual Life  (years)** | ** ** | **Weighted Average  Exercise Price of  Shares   Outstanding** | ** ** | **Weighted Average  Exercise Price of  Shares Exercisable** | ** ** | **Number   Exercisable** | ** ** |
|---------------------------------|------------|--------------------------|------------|------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------|------------|
| ** **                      | ** ** | ** **               | ** ** | ** **                                                 | ** ** | ** **                                                    | ** ** | ** **                                                  | ** ** | ** **               | ** ** |
| $0.00 - 2.00                    |       | 1,740,808                |       | 6.5                                                        |       | $                                                             | 1.14       |                                                        | $          | 1.14                     |       | 1,703,807 |   |
| 2.01 - 5.00                     |       | 3,791,579                |       | 9.0                                                        |       | 4.20                                                          |       | 4.12                                                        |       | 983,052                  |       |
| 5.01 - 10.00                    |       | 3,973,925                |       | 9.2                                                        |       | 6.55                                                          |       | 6.82                                                        |       | 1,315,119                |       |
| 10.01 - 318.00                  |       | 89,066                   |       | 3.5                                                        |       | 125.48                                                        |       | 125.48                                                      |       | 89,066                   |       |
|                            |       | 9,595,378                |       | 8.6                                                        |       | $                                                             | 5.74       |                                                        | $          | 6.39                     |       | 4,091,044 |   |

 

In October 2004, theBoard of Directors accelerated the vesting of all unvested stock optionspreviously awarded to employees and officers with an exercise price per shareof $5.00 or higher. As a result, options to purchase approximately 1.7million shares of common stock became exercisable immediately (see Note 2(o)).

 

RestrictedStock

 

In January 2005, theCompany entered into agreements to issue 1.7 million shares of restricted stockto certain employees, subsequently adjusted to 1.5 million for forfeitures.Approximately 0.9 million will be 

 

 

F-39

----

 

issued and vestedannually over a three year period contingent upon employment with the Companyon the dates of vesting.  Approximately0.6 million will be issued and vested contingent upon the attainment of aperformance milestone of the Company’s stock, which is outside the control ofthe Company.  In accordance with APB 25,no expense related to these shares is recorded until the Company’s stock pricereaches the milestone.  If the Company’sstock price reaches the milestone, the Company would incur approximately $5.8million in stock-based compensation.

 

In November 2005,the Company entered into agreements to issue 0.8 million shares ofrestricted stock to certain employees over three years.  Approximately 0.1 million shares will beissued and vested in each of November 2006 and 2007; and approximately 0.6million will be issued and vested in November 2008 contingent uponemployment with the Company on the dates of issuance.  The Company also entered into agreements toissue 0.8 million shares of restricted stock to executives which will vest in November 2013.  The restricted shares may be issued andvested earlier if certain performance targets are met for the year ended December 31,2006 and the three-year period ended December 31, 2008.

 

**NOTE 15– RECOVERY OF INVESTMENT**

 

In2005, the Company received $2.3 million as a return on an investment in BidlandSystems, Inc. (“Bidland”). The return was a result of the settlement ofpending litigation between Bidland and another party, and the subsequentdissolution and liquidation of Bidland.  In2000, Bidland ceased operations and, accordingly, the Company recorded animpairment charge related to the cost-based investment.  There were no similar returns on investmentsfor the year ended December 31, 2005.

 

**NOTE 16- SUPPLEMENTAL CASH FLOW INFORMATION**

 

SupplementalCash Flow Information

 

TheCompany capitalized approximately $1.1 million of computer equipment that wasreceived but unpaid at December 31, 2004.

 

During2005, 2004 and 2003, the amount of cash paid for interest was approximately$0.3 million, $0.2 million and $8,000, respectively.

 

During2005, 2004 and 2003 the amount of cash paid for income taxes was approximately$0.2 million, $0.1 million and $0.1 million, respectively.

 

*Non-Cash Investing and Financing Activities*

 

TheCompany accrued $5.0 million related to achievement of certain performancetargets from the acquisition of Decide which will be paid partially in cash in2006.  This amount is reflected as aliability and additional goodwill on the consolidated balance sheets.

 

Warrantsto purchase approximately 8,486 shares of the Company’s common stock at anaverage of $1.21 per share were exercised during 2004 in exchange for approximately7,260 shares of the Company’s common stock in cashless exercises ofwarrants.

 

Warrantsto purchase approximately 1.5 million shares of the Company’s common stockat an average of $1.10 per share were exercised during 2003 in exchange forapproximately 1.3 million shares of the Company’s common stock in cashlessexercises of warrants.

 

F-40

----

 

Inthe second quarter of 2003, approximately 1.0 million shares of commonstock, valued at $1.8 million, were issued in connection with theretirement of the PubliGroupe promissory notes.

 

During2004 and 2003, the Company issued approximately 6.6 million shares of commonstock, valued at $27.2 million, and 0.7 million shares of common stock,valued at $1.1 million, for acquired businesses, respectively.

 

**NOTE 17- BENEFIT PLANS**

 

The Company established a 401(k) Plan on January 1,1999, that is available to all full-time U.S. employees after six months ofemployment.  Employees may contribute upto 70% percent of their salary, not to exceed the maximum dollar limitationunder the Internal Revenue Code Section 402(g). The Company does notcurrently match employee contributions. As required by local laws, the Companymaintains defined contribution plan for its European employees.  The only expense the Company incurs relatedto these plans is for administrative services, which is not material.

 

**NOTE 18- COMMITMENTS AND CONTINGENCIES**

 

COMMITMENTS

 

(a)          CapitalLeases and Operating Leases

 

The Company leases officeequipment under capital lease agreements and various facilities and certainequipment under operating lease agreements. The operating lease agreementsinclude the space for the Company’s corporate headquarters, sales offices andvarious types of equipment for varying periods of time, with the last leaseexpiring in December 2015. Rent and utilities expense from all operatingleases amounted to $2.7 million, $2.3 million and $2.0 million for theyears ended 2005, 2004 and 2003, respectively.

 

Future minimum paymentsunder non-cancelable capital leases and operating leases at December 31,2005 are as follows:

 
| ** **                               | ** ** | **Capital Leases**  | ** ** | **Operating Leases** | ** ** | **Subleases** | ** ** |
|------------------------------------------|------------|---------------------|------------|----------------------|------------|---------------|------------|
| ** **                               | ** ** | **(in  thousands)** | ** ** |
| Year Ending  December 31,           |       |                |       |                 |       |          |       |
| 2006                                     |       | $                   | 30         |                 | $          | 2,791         |       | $ | (706 | ) |
| 2007                                     |       | 19                  |       | 2,672                |       | (714          | )          |
| 2008                                     |       | —              |       | 2,420                |       | (486          | )          |
| 2009                                     |       | —              |       | 1,843                |       | —        |       |
| 2010                                     |       | —              |       | 1,856                |       | —        |       |
| Thereafter                               |       | —              |       | 4,278                |       | —        |       |
| Total minimum lease  payments            |       | 49                  |       | $                    | 15,860     |          | $          | (1,906 | ) |
| Less amount  representing interest       |       | 3                   |       |                 |       |          |       |
| Present value of  minimum lease payments |       | 46                  |       |                 |       |          |       |
| Less current portion                     |       | 31                  |       |                 |       |          |       |
| Long-term portion                        |       | $                   | 15         |                 |       |          |       |   |

 

F-41

----

 

(b) Lycos, Inc.Services Agreement

 

On February 11,2004, the Company entered into a five-year arrangement with Lycos, Inc. (“Lycos”),including an advertising services agreement to provide media sales, atechnology services agreement to provide advertisement serving and analyticstechnology services to Lycos’ U.S. Web properties, and a transition servicesagreement to transition personnel and other services to the Company. TheCompany and Lycos amended the advertising services agreement and the technologyservices agreement on December 7, 2004 and, as amended, Lycos effectivelymay terminate the media services agreement on January 1, 2007.

 

The amended mediaservices agreement provides that Lycos will have the exclusive right to selladvertising, and for the billing and collection of all advertising, onWired.com and Quote.com, until July 1, 2005 and January 1, 2006,respectively.  On or prior to therespective transition dates, the Company will identify twenty advertisingaccounts (“24/7 Accounts”) to which it has sold advertising on Wired.Com andQuote.com.

 

The agreement providesthat Lycos will pay the Company transition commissions based on advertisingsales revenue minus bad debt (“net advertising sales revenue”) as follows:

 

•                  35%of net advertising sales revenue generated from the 24/7 Accounts on Wired.comfor each of July and August 2005, payable on or prior to October 15,2005, provided that the transition commission is capped at 35% of the averagemonthly gross revenues generated from the 24/7 Accounts during the period from January 1,2005 to June 30, 2005;

 

•                  17.5%of net advertising sales revenue generated from the 24/7 Accounts on Wired.comfor each of September and October 2005, payable on or prior to December 15,2005, provided that the transition commission is capped at 17.5% of the averagemonthly gross revenues generated from the 24/7 Accounts during the period from January 1,2005 to June 30, 2005;

 

•                  35%of net advertising sales revenue generated from the 24/7 Accounts on Quote.comfor each of January and February 2006, payable on or prior to April 15,2006, provided that the transition commission is capped at 35% of the averagemonthly gross revenues generated from the 24/7 Accounts during the period from July 1,2005 to December 31, 2005; and

 

•                  17.5%of net advertising sales revenue generated from the 24/7 Accounts on Quote.comfor each of March and April 2006, payable on or prior to June 15,2006, provided that the transition commission is capped at 17.5% of the averagemonthly gross revenues generated from the 24/7 Accounts during the period from July 1,2005 to December 31, 2005.

 

The amended mediaservices agreement reconciled past royalty payments and requires the Company topay quarterly royalties for advertising inventory made available by Lycos asfollows:

 

•                  Inceptionthrough December 31, 2004: $6.2 million, which was paid ininstallments of $5.7 million in 2004 and $0.5 million in February 2005.

 

•                  January 1,2005 through March 31, 2005: 65% of net advertising sales revenue;

 

•                  April 1,2005 through June 30, 2005: 65% of the greater of (i) of netadvertising sales revenue generated during the period and (ii) the minimumCPM revenue for such period;

 

F-42

----

 

•                  July 1,2005 through December 31, 2005: 62.5% of the greater of (i) of netadvertising sales revenue generated during the period and (ii) the minimumCPM revenue for such period;

 

•                  January 1,2006 through the expiration or termination of the media services agreement:62.5% of net advertising sales revenue.

 

Pursuant to the media services agreement minimum CPMrevenue is determined on a quarterly basis by multiplying Lycos’ projectedadvertisement impression level for that quarter by specific CPM prices foradvertising inventory in specific category and unit types.

 

The Company pre-paid atotal of $2.0 million of royalties to Lycos during 2004 and 2005 and will retainan additional 25% of quarterly royalties due to Lycos until the date on whichthe full amount of pre-paid royalties has been recouped or otherwise paid incash by Lycos.  Accordingly, at December 31,2005 the Company has a net $1.0 million in prepaid royalties of which $0.6million is included in prepaid expenses and other current assets and theremaining portion of $0.4 million is included in other assets which will beapplied to future royalties payable to Lycos.

 

In addition to theroyalties, the Company paid Lycos a $4.5 million transition fee, which theCompany recorded as an other asset and is amortizing the fee over the term ofthe agreement of five years. Expected amortization will amount to $0.9 millionfor each of the years ended December 31, 2006, 2007 and 2008 and willamount to $0.1 million for the year ended December 31, 2009. In accordancewith SFAS 144, the Company periodically evaluates the recoverability ofthis asset.

 

(c) AcquisitionEarn-Out Liability

 

The Company has contingentobligations related to its acquisitions of Decide and Insight First, Inc. Theformer Decide stockholders may receive up to an additional $10.0 million,consisting of up to $2.5 million in cash and up to $7.5 million in commonstock, subject to achievement of earn-out targets relating to Decide’s operatingperformance in 2005. At December 31, 2005, the Company accrued andreflected as additional goodwill $5.0 million for the contingent earn-outobligation as a result of the achievement of these targets..

 

The Company initiallyestimated that the earn-out target for Insight was achieved for 2004 and,accordingly, the Company accrued at December 31, 2004, in the consolidatedbalance sheets, the earn-out liability of approximately $0.3 million.  In December 2004, the Company recordedan impairment charge related to the analytics technology that was acquired withInsight due to significant rewrites of the underlying software code. Theunamortized balance of $0.9 million, inclusive of the earn-out liability ofapproximately $0.3 million initially estimated to be due to the former ownersof Insight, was impaired at December 31, 2004 and reflected as impairmentof intangible assets on the consolidated statement of operations.  During 2005, the Company determined that theearn-out threshold for 2004 was not achieved and accordingly, reversed andreflected the accrued earn-out as other income on the consolidated statementsof operations.

 

(d) Indemnifications

 

In connection with theCompany’s commercial agreements, it provides indemnifications of varying scopeand terms to customers, business partners and other parties with respect tocertain matters, including, but 

 

F-43

----

 

not limited to, lossesarising out of its breach of such agreements and out of intellectual propertyinfringement claims made by third parties.

 

LITIGATION

 

TheCompany is not involved in any material pending legal proceedings at this time.

 

**NOTE 19 - SEGMENTS**

 

TheCompany’s business is comprised of three reportable segments: Media, Search andTechnology. As a result of the acquisition of Decide, the Company has beenreporting Search as a separate segment from Media. In order to make financialdecisions and allocate resources among business segments and geographic areas,management relies on an internal management reporting process that providesrevenue and segment operating income in each segment and area. Segmentoperating income (loss) excludes depreciation, amortization of intangibleassets and deferred financing costs, stock based compensation, restructuring,and impairment of assets, as management believes it is an appropriate measureof operating performance.  Revenue isattributed to individual countries primarily based on where sales aregenerated. The Company has adjusted prior period segment disclosure to conformto the current presentation. The summarized segment information as of and forthe three years ended December 31, 2005, are as follows:

 

F-44

----

 
| ** **                                                      | ** ** | **Media**          | ** ** | **Search** | ** ** | **Technology** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------|------------|--------------------|------------|------------|------------|----------------|------------|-----------|------------|
| ** **                                                      | ** ** | **(in thousands)** | ** ** |
| **2005**                                                        |       |               |       |       |       |           |       |      |       |
| Revenues                                                        |       | $                  | 65,363     |       | $          | 51,430         |       | $         | 23,001     |   | $ | 139,794 |   |
| Segment  operating income (loss)                                |       | 5,220              |       | (129       | )          | 4,651          |       | 9,742     |       |
| Depreciation                                                    |       | 278                |       | 646        |       | 1,943          |       | 2,867     |       |
| Amortization  of intangible assets and deferred financing costs |       | 1,981              |       | 1,579      |       | 831            |       | 4,391     |       |
| Stock-based  compensation                                       |       | 610                |       | 747        |       | 870            |       | 2,227     |       |
| Provision  for capital assessment                               |       | 103                |       | 222        |       | 62             |       | 387       |       |
| Restructuring                                                   |       | 252                |       | 228        |       | 493            |       | 973       |       |
| Income  (loss) from operations                                  |       | 1,996              |       | (3,551     | )          | 452            |       | (1,103    | )          |
|                                                            |       |               |       |       |       |           |       |      |       |
| **2004**                                                        |       |               |       |       |       |           |       |      |       |
| Revenues                                                        |       | $                  | 49,879     |       | $          | 16,439         |       | $         | 18,937     |   | $ | 85,255 |   |
| Segment  operating income (loss)                                |       | 1,021              |       | (610       | )          | 2,030          |       | 2,441     |       |
| Depreciation                                                    |       | 585                |       | 239        |       | 1,005          |       | 1,829     |       |
| Amortization  of intangible assets and deferred financing costs |       | 1,865              |       | 1,151      |       | 1,315          |       | 4,331     |       |
| Stock-based  compensation                                       |       | 152                |       | 200        |       | 186            |       | 538       |       |
| Restructuring                                                   |       | 124                |       | 449        |       | 268            |       | 841       |       |
| Impairment  of intangible assets                                |       | —             |       | —     |       | 896            |       | 896       |       |
| Impairment  of property and equipment                           |       | —             |       | 25         |       | 762            |       | 787       |       |
| Loss  from operations                                           |       | (1,705             | )          | (2,674     | )          | (2,402         | )          | (6,781    | )          |
|                                                            |       |               |       |       |       |           |       |      |       |
| **2003**                                                        |       |               |       |       |       |           |       |      |       |
| Revenues                                                        |       | $                  | 23,562     |       | $          | 10,342         |       | $         | 15,277     |   | $ | 49,181 |   |
| Segment  operating loss                                         |       | 433                |       | (1,060     | )          | (43            | )          | (670      | )          |
| Depreciation                                                    |       | 1,054              |       | 404        |       | 894            |       | 2,352     |       |
| Amortization  of intangible assets and deferred financing costs |       | 561                |       | 865        |       | 1,298          |       | 2,724     |       |
| Stock-based  compensation                                       |       | 343                |       | 468        |       | 505            |       | 1,316     |       |
| Restructuring                                                   |       | 365                |       | 391        |       | 895            |       | 1,651     |       |
| Impairment  of intangible assets                                |       | 1,321              |       | —     |       | —         |       | 1,321     |       |
| Loss  from operations                                           |       | (3,211             | )          | (3,188     | )          | (3,636         | )          | (10,035   | )          |
|                                                            |       |               |       |       |       |           |       |      |       |
| **Total assets (1):**                                           |       |               |       |       |       |           |       |      |       |
| December 31, 2005                                               |       | $                  | 47,316     |       | $          | 53,352         |       | $         | 14,325     |   | $ | 114,993 |   |
| December 31, 2004                                               |       | $                  | 45,570     |       | $          | 36,849         |       | $         | 11,639     |   | $ | 94,058 |   |
| December 31, 2003                                               |       | $                  | 6,612      |       | $          | 3,769          |       | $         | 11,173     |   | $ | 21,554 |   |

 

----

(1)Not included in segment assets for 2005, 2004 and 2003 is $27,811, $27,340 and$24,626, respectively.

 
| ** **        | ** ** | **United**         | ** ** | **United**  | ** ** | **South** | ** ** | **Other -**       | ** ** | ** ** | ** ** |
|-------------------|------------|--------------------|------------|-------------|------------|-----------|------------|-------------------|------------|------------|------------|
| ** **        | ** ** | **States**         | ** ** | **Kingdom** | ** ** | **Korea** | ** ** | **International** | ** ** | **Total**  | ** ** |
| ** **        | ** ** | **(in thousands)** | ** ** |
| **2005**          |       |               |       |        |       |      |       |              |       |       |       |
| Revenues          |       | $                  | 62,555     |        | $          | 27,919    |       | $                 | 14,481     |       | $          | 34,839 |   | $ | 139,794 |   |
| Long-lived assets |       | 11,747             |       | 762         |       | 15,738    |       | 33,863            |       | 62,110     |       |
|              |       |               |       |        |       |      |       |              |       |       |       |
| **2004**          |       |               |       |        |       |      |       |              |       |       |       |
| Revenues          |       | $                  | 42,739     |        | $          | 14,796    |       | $                 | 12,568     |       | $          | 15,152 |   | $ | 85,255 |   |
| Long-lived assets |       | 11,603             |       | 351         |       | 16,512    |       | 30,432            |       | 58,898     |       |
|              |       |               |       |        |       |      |       |              |       |       |       |
| **2003**          |       |               |       |        |       |      |       |              |       |       |       |
| Revenues          |       | $                  | 29,499     |        | $          | 9,412     |       | $                 | —     |       | $          | 10,270 |   | $ | 49,181 |   |
| Long-lived assets |       | 9,548              |       | 146         |       | —    |       | 1,569             |       | 11,263     |       |

 

**NOTE 20- SELECTED QUARTERLY FINANCIAL DATA—UNAUDITED**

 

The following is asummary of selected quarterly financial data for the years ended December 31,2005 and 2004:

 

F-45

----

 
| ** **                                             | ** ** | **2005 Quarter Ended**                    | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                             | ** ** | **March 31**                         | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| ** **                                             | ** ** | **(in thousands, except per share data)** | ** ** |
|                                                   |       |                                      |       |   |   |   |   |   |   |
| Revenues                                               |       | $                                         | 29,070     |   | $ | 33,886 |   | $ | 35,117 |   | $ | 41,721 |   |
| Gross profit                                           |       | 11,819                                    |       | 13,635 |   | 13,577 |   | 15,463 |   |
| Amortization                                           |       | 1,140                                     |       | 1,139 |   | 1,140 |   | 972 |   |
| Stock-based  compensation                              |       | 513                                       |       | 440 |   | 493 |   | 780 |   |
| Provision for capital  assessment                      |       | —                                    |       | — |   | — |   | 387 |   |
| Restructuring costs                                    |       | 973                                       |       | — |   | — |   | — |   |
| Income (loss) from  operations                         |       | (1,923                                    | )          | (30 | ) | (110 | ) | 960 |   |
| Change in fair value of  warrant liability             |       | 150                                       |       | (110 | ) | (384 | ) | (37 | ) |
| Recovery of investment                                 |       | 2,100                                     |       | — |   | — |   | 240 |   |
| Impairment of  marketable securities                   |       | (588                                      | )          | — |   | — |   | — |   |
| Gain (loss) on sale of  marketable securities          |       | —                                    |       | 7 |   | (25 | ) | 34 |   |
| Net income (loss)                                      |       | (406                                      | )          | (190 | ) | (765 | ) | 1,399 |   |
| Net income (loss)  attributable to common stockholders |       | (418                                      | )          | (200 | ) | (768 | ) | 1,399 |   |
| Net income (loss) per  common share - basic:           |       |                                      |       |   |   |   |   |   |   |
| Net income (loss)  attributable to common stockholders |       | $                                         | (0.01      | ) | $ | — |   | $ | (0.02 | ) | $ | 0.03 |   |
| Net income (loss) per  common share - diluted:         |       |                                      |       |   |   |   |   |   |   |
| Net income (loss)  attributable to common stockholders |       | $                                         | (0.01      | ) | $ | — |   | $ | (0.02 | ) | $ | 0.03 |   |

 
| ** **                                               |       | **2004  Quarter Ended**                    |       |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **March 31**                          | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** |   |
| ** **                                               |       | **(in  thousands, except per share data)** |       |
| ** **                                               |       | ** **                                 |       |
| Revenues                                                 |       | $                                          | 17,381     |   | $ | 19,597 |   | $ | 20,807 |   | $ | 27,470 |   |
| Gross profit                                             |       | 7,118                                      |       | 8,231 |   | 8,559 |   | 12,117 |   |
| Amortization                                             |       | 788                                        |       | 1,414 |   | 1,068 |   | 1,061 |   |
| Stock-based  compensation                                |       | 199                                        |       | 298 |   | 209 |   | (168 | ) |
| Restructuring costs                                      |       | —                                     |       | 501 |   | — |   | 340 |   |
| Impairment of  intangible assets                         |       | —                                     |       | — |   | — |   | 896 |   |
| Impairment of property  and equipment                    |       | —                                     |       | — |   | — |   | 787 |   |
| Loss from operations                                     |       | (1,218                                     | )          | (1,989 | ) | (1,731 | ) | (1,843 | ) |
| Change in fair value of  warrant liability               |       | 928                                        |       | 881 |   | 266 |   | (35 | ) |
| Gain on legal  settlement                                |       | —                                     |       | 2,896 |   | — |   | — |   |
| Impairment of  investments                               |       | —                                     |       | — |   | — |   | (1,052 | ) |
| Net income (loss)                                        |       | (392                                       | )          | 1,591 |   | (1,590 | ) | (2,764 | ) |
| Net income (loss)  attributable to common stockholders   |       | (510                                       | )          | 1,487 |   | (1,663 | ) | (2,775 | ) |
| Net income (loss) per  common share - basic and diluted: |       |                                       |       |   |   |   |   |   |   |
| Net income (loss)  attributable to common stockholders   |       | $                                          | (0.02      | ) | $ | 0.04 |   | $ | (0.04 | ) | $ | (0.06 | ) |

 

F-46

----

 

**NOTE 21– VALUATION AND QUALIFYING ACCOUNTS**

** **
| **Year  ended December 31,** | ** ** | **Balance at   Beginning of   Period** | ** ** | **Additions   Charged to Expense** | ** ** | **Deductions (1)** | ** ** | **Balance  at End  of Period** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|------------------------------------|------------|--------------------|------------|--------------------------------|------------|
| **2005**                          | ** ** | ** **                             | ** ** | ** **                         | ** ** | ** **         | ** ** | ** **                     | ** ** |
| Allowance for doubtful  accounts  |       | $                                      | 1,210      |                               | $          | 1,516              |       | $                              | (776       | ) | $ | 1,950 |   |
| Reserve for sales  allowance      |       | 517                                    |       | 517                                |       | (678               | )          | 356                            |       |
| Total                             |       | $                                      | 1,727      |                               | $          | 2,033              |       | $                              | (1,454     | ) | $ | 2,306 |   |
|                              |       |                                   |       |                               |       |               |       |                           |       |
| **2004**                          |       |                                   |       |                               |       |               |       |                           |       |
| Allowance for doubtful  accounts  |       | $                                      | 902        |                               | $          | 519                |       | $                              | (211       | ) | $ | 1,210 |   |
| Reserve for sales  allowance      |       | 69                                     |       | 544                                |       | (96                | )          | 517                            |       |
| Total                             |       | $                                      | 971        |                               | $          | 1,063              |       | $                              | (307       | ) | $ | 1,727 |   |
|                              |       |                                   |       |                               |       |               |       |                           |       |
| **2003**                          |       |                                   |       |                               |       |               |       |                           |       |
| Allowance for doubtful  accounts  |       | $                                      | 860        |                               | $          | 409                |       | $                              | (367       | ) | $ | 902 |   |
| Reserve for sales  allowance      |       | 509                                    |       | (240                               | )          | (200               | )          | 69                             |       |
| Total                             |       | $                                      | 1,369      |                               | $          | 169                |       | $                              | (567       | ) | $ | 971 |   |

 

----

(1) Deductionsagainst the allowance for doubtful accounts or reserves for sales allowancerepresent write-offs of amounts deemed uncollectible and credits issued tocustomers, respectively.

 

**NOTE 22 -SUBSEQUENT EVENTS - UNAUDITED**

** **

IMAKE– Note Receivable & Earn-out Receivable

 

Inexchange for the 6% $2.0 million note and related accrued interest ofapproximately $0.7 million and remaining earn-out obligations of $1.3 million,the Company agreed to an immediate cash payment of $0.2 million and a new noteof $3.25 million which is payable in three equal installments on the firstanniversary, the second anniversary and when IMAKE receives funding in excessof $1.0 million or the secondary anniversary. The note is valued at $0.5million on the consolidated balance sheets. See Note 6.

 

F-47

----

 

SIGNATURES

 

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

 
|   | 24/7 REAL MEDIA, INC.     |
|--------|---------------------------|
|   |                      |
|   |                      |
|   | By:                       | /s/ David J. Moore |   |
|   | David  J. Moore           |
|   | *Chief Executive Officer* |
|   |                      |
|   | Date: March 15, 2006 |

 

----

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated:

 
| **Signature**         | ** ** | **Title**                         | ** ** | **Date**            |
|-----------------------|------------|-----------------------------------|------------|---------------------|
|                  |       |                              |       |                |
| /s/ David J. Moore    |       | Chairman of the Board  and        |       | March 15, 2006 |
| David J. Moore        |       | Chief Executive Officer           |       |                |
|                  |       | (Principal Executive  Officer)    |       |                |
|                  |       |                              |       |                |
| /s/ Jonathan K. Hsu   |       | Executive Vice  President and     |       | March 15, 2006 |
| Jonathan K. Hsu       |       | Chief Financial Officer           |       |                |
|                  |       | (Principal Financial  Officer and |       |                |
|                  |       | Principal Accounting  Officer)    |       |                |
|                  |       |                              |       |                |
| /s/ Robert J. Perkins |       | Director                          |       | March 15, 2006 |
| Robert J. Perkins     |       |                              |       |                |
|                  |       |                              |       |                |
| /s/ Arnie Semsky      |       | Director                          |       | March 15, 2006 |
| Arnie Semsky          |       |                              |       |                |
|                  |       |                              |       |                |
| /s/ Tony Schmitz      |       | Director                          |       | March 15, 2006 |
| Tony Schmitz          |       |                              |       |                |
|                  |       |                              |       |                |
| /s/ Moritz F. Wuttke  |       | Director                          |       | March 15, 2006 |
| Moritz F. Wuttke      |       |                              |       |                |
|                  |       |                              |       |                |
| /s/ Val Zammit        |       | Director                          |       | March 15, 2006 |
| Val Zammit            |       |                              |       |                |

 

----

 

(c) Exhibit Index.

 

Exhibits and FinancialStatement Schedule/Index

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                 |
|-------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.1                     |       | Agreement and Plan of  Merger, dated October 30, 2001, between 24/7 Real Media, Inc.,  Continuum Holding Corp., PubliGroupe USA Holding, Inc. and Real  Media, Inc. (Incorporated by reference to Exhibit 2.1 to the Registrant’s  filing on Form 8-K filed November 1, 2001)                                                           |
| 2.3                     |       | Asset Purchase  Agreement, dated as of January 12, 2003, by and among 24/7 Real  Media, Inc., Insight First, Inc., and certain stockholder’s name  therein. (Incorporated by reference to Exhibit 2.1 to the Registrant’s  filing on Form 8-K filed January 23, 2003)                                                                   |
| 2.4                     |       | Stock Purchase  Agreement, dated January 22, 2002, by and among 24/7 Real Media, inc.,  IMAKE Software & Services, Inc. and Schaszberger Corp.  (Incorporated by reference to Exhibit 1.1 to the Registrant’s filing on  Form 8-K filed February 6, 2002)                                                                                |
| 2.5                     |       | Share Acquisition  Agreement, dated as of December 16, 2003, by and among 24/7 Real  Media, Inc., and Real Media Korea Co. Ltd. (“RMK”) and other selling  shareholder’s of RMK (the “Selling Shareholders”). (Incorporated by reference  to Exhibit 2.1 to the Registrant’s filing on Form 8-K filed  January 12, 2004) |
| 2.6                     |       | Registration Rights  Agreement, dated as of August 19, 2004, by and among 24/7 Real  Media, Inc. and the Decide Selling Shareholders. (Incorporated by  reference to Exhibit 2.3 to the Registrant’s filing on Form 8-K on  August 20, 2004)                                                                                                      |
| 3.1                     |       | Amended and Restated  Certificate of Incorporation of the Company. (1)                                                                                                                                                                                                                                                                                                          |
| 3.2                     |       | By-laws of the Company.  (1)                                                                                                                                                                                                                                                                                                                                                    |
| 4.1                     |       | Specimen Common Stock  Certificate. (Incorporated by reference to Exhibits to the Registrant’s  Registration Statement on Form S-1 filed June 14, 1998)                                                                                                                                                                                                          |
| 4.2                     |       | Securities Purchase  Agreement, dated September 26, 2003, by and between the Company and The  Riverview Group LLC (“Riverview”). (Incorporated by reference to  Exhibit 4.1 to the Registrant’s filing on Form 8-K filed on  September 29, 2003)                                                                                             |
| 4.3                     |       | Form of Debenture  issued to Riverview. (Incorporated by reference to Exhibit 4.2 to the  Registrant’s filing on Form 8-K on September 29, 2003)                                                                                                                                                                                                       |
| 4.4                     |       | Form of Warrant to  purchase Common Stock issued to Riverview. (Incorporated by reference to  Exhibit 4.3 to the Registrant’s filing on Form 8-K on  September 29, 2003)                                                                                                                                                                               |
| 4.5                     |       | Registration Rights  Agreement, dated as of September 26, 2003, by and between the Company  and Riverview. (Incorporated by reference to Exhibit 4.4 to the  Registrant’s filing on Form 8-K filed on September 29, 2003)                                                                                                                              |
| 10.1                    |       | 1998 Stock Incentive  Plan. (1)                                                                                                                                                                                                                                                                                                                                                 |
| 10.2                    |       | 2001 Stock Incentive  Plan for Non-Officers. (2)                                                                                                                                                                                                                                                                                                                                |
| 10.3                    |       | 2001 Equity  Compensation Plan. (2)                                                                                                                                                                                                                                                                                                                                             |
| 10.4                    |       | Form of Stock  Option Agreement. (1)                                                                                                                                                                                                                                                                                                                                       |
| 10.5                    |       | 2002 Equity  Compensation Plan. (Incorporated by reference to Exhibit 10.6 to the  Registrant’s filing on Form 10-K filed on March 31, 2003)                                                                                                                                                                                                                |
| 10.6                    |       | GlobalCenter Master  Service Agreement, dated May 1, 1998. (1)                                                                                                                                                                                                                                                                                                             |
| 10.7                    |       | 2002 Stock Incentive  Plan. (Incorporated by reference to the Registrant’s Proxy Statement filed on  August 9, 2002)                                                                                                                                                                                                                                                  |
| 10.8                    |       | Letter Agreement, dated  May 23, 2003, by and among 24/7 Real Media Inc., Real Media, Inc.  and PubliGroupe USA Holding, Inc. (Incorporated by reference to  Exhibit 10.1 to the Registrant’s filing on Form 8-K filed  June 12, 2003)                                                                                                       |
| 10.9                    |       | Services Agreement  between Lycos, Inc. and 24/7 Real Media, Inc. dated  February 11, 2004. (Incorporated by reference to Exhibit 99.2 to  the Registrant’s filing on Form 8-K filed February 11, 2004)                                                                                                                                      |
| 10.10                   |       | Amendment No. 1 to  Services Agreement, dated as of December 7, 2004, by and                                                                                                                                                                                                                                                                                          |

 

----

 
|   |   | between 24/7 Real  Media, Inc. and Lycos, Inc. (Incorporated by reference to  Exhibit 10.1 to the Registrant’s filing on Form 8-K on  December 14, 2004)                                                                                |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.11  |   | Consulting Agreement,  dated as of November 1, 2004, by and between 24/7 Real Media, Inc.,  and Pine Street Capital Partners. (Incorporated by reference to  Exhibit 10.1 to the Registrant’s filing on Form 10-Q on November 9,  2004) |
| 10.12  |   | Employment Agreement,  dated as of March 14, 2006, by and between 24/7 Real Media, Inc.  and David J. Moore. (3)                                                                                                                                       |
| 10.13  |   | Employment Agreement,  dated as of March 14, 2006, by and between 24/7 Real Media, Inc.  and Mark E. Moran. (3)                                                                                                                                        |
| 10.14  |   | Employment Agreement,  dated as of March 14, 2006, by and between 24/7 Real Media, Inc.  and Jonathan K. Hsu. (3)                                                                                                                                      |
| 21.1   |   | List of Subsidiaries of  the Company. (3)                                                                                                                                                                                                                             |
| 23.1   |   | Consent of Goldstein  Golub Kessler LLP. (3)                                                                                                                                                                                                                          |
| 31.1   |   | Certification by Chief  Executive Officer pursuant to Rule 13a-14(a) promulgated under the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002. (3)                                                |
| 31.2   |   | Certification by Chief  Financial Officer pursuant to Rule 13a-14(a) promulgated under the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002. (3)                                                |
| 32.1   |   | Certification by Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)                                                                                                    |
| 32.2   |   | Certification by Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3)                                                                                                    |

 

----

1)              Incorporated byreference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1filed June 4, 1998 (File No. 333-56085). TFSM’s certificate ofincorporation has since been amended as follows: Certificate of Amendment,filed with the Delaware Secretary of State on June, 28, 2000; Certificate ofOwnership and Merger, filed with the Delaware Secretary of State on November 9,2001; Certificate of Designation, filed with the Delaware Secretary of State onJuly 1, 2002 and incorporated by reference to Exhibit 4.1 filed tothe Registrant’s filings on Form 8-K filed July 12, 2002 (File No. 000-29768);Certificate of Designation, filed with the Delaware Secretary of State on July 1,2002 and incorporated by reference to Exhibit 4.1 filed to the Registrantsfilings on Amended Form 8-K filed July 12, 2002 (File No. 000-29768);Certificate of Increase filed with the Delaware Secretary of State on September 12,2002; Certificate of Designation, filed with the Delaware Secretary of State onSeptember 19, 2002 and incorporated by reference to Exhibit 4.1 filedto the Registrant’s filings on Form 8-K filed October 4, 2002 (File No. 000-29768);Certificate of Designation, filed with the Delaware Secretary of State on May 27,2003 and incorporated by reference to Exhibit 4.1 filed to the Registrant’sfilings on Form 8-K filed June 12, 2003 (File No. 000-29768);Certificate of Designation, filed with the Delaware Secretary of State on May 27,2003 and incorporated by reference to Exhibit 4.2 filed to the Registrant’sfilings on Form 8-K filed June 12, 2003 (File No. 000-29768);Certificate of Increase, filed with the Delaware Secretary of State on June 4,2003; Certificate of Amendment of Restated Certificate, filed with the DelawareSecretary of State on August 29, 2003; and Certificate of Amendment, filedwith the Delaware Secretary of State on February 26, 2004.

 

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

 

3)              Filed herewith.

 

----