**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

**(Mark One)**

**x**                                 ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe Year Ended December 31, 2005**

**or**

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

 

**Forthe transition period from                            to**

**Commission file number 000-30135**

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**VALUECLICK, INC.**

(Exact name of registrantas specified in its charter) 

| **Delaware**                     |   | **77-0495335**                        |
|----------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of |   | (I.R.S. Employer  Identification No.) |
| Incorporation or  Organization)  |   |                                  |

 

**30699 RUSSELL RANCH ROAD,SUITE 250WESTLAKE VILLAGE, CALIFORNIA 91362**

(Address of principalexecutive offices, including zip code)

**Registrant’sTelephone Number, Including Area Code: (818) 575-4500**

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

**Common Stock, $0.001 parvalueSeries A Preferred Stock Purchase Rights**(Title of each class)

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes x No o

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or15(d) of the Act. Yes o No x

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference 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 x | Accelerated filer o | Non-accelerated  filer o |
|--------------------------------|---------------------|--------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Act). Yes o No x

As of June 30, 2005,which was the last business day of the registrant’s most recently completedsecond fiscal quarter, the approximate aggregate market value of voting stockheld by non-affiliates of the registrant was $1,016,000,000 (based upon theclosing price for shares of the registrant’s Common Stock as reported by TheNational Market System of the National Association of Securities DealersAutomated Quotation System as of that date). As of March 24, 2006, therewere 102,068,375 shares of the registrant’s Common Stock outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the definitive Proxy Statement for the 2006 Annual Meeting of theStockholders (the “Proxy Statement”), to be filed within 120 days of the end ofthe fiscal year ended December 31, 2005, are incorporated by reference inParts I and III hereof. Except with respect to the information specificallyincorporated by reference in this annual report on Form 10-K, thedefinitive Proxy Statement is not deemed to be filed as part hereof.

 

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**VALUECLICK,INC.ANNUAL REPORT ON FORM 10-KTABLE OF CONTENTS**
|               | ** ** | ** **                                                                                                             | ** ** | **Page** | ** ** |
|---------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| PART I   |       |                                                                                                                   | 1          |     |       |
| ITEM 1.       |       | BUSINESS                                                                                                               |       |     | 1          |   |   |
| ITEM 1A.      |       | RISK  FACTORS                                                                                                          |       |     | 14         |   |   |
| ITEM 1B.      |       | UNRESOLVED STAFF COMMENTS                                                                                              |       |     | 27         |   |   |
| ITEM 2.       |       | PROPERTIES                                                                                                             |       |     | 27         |   |   |
| ITEM 3.       |       | LEGAL  PROCEEDINGS                                                                                                     |       |     | 28         |   |   |
| ITEM 4.       |       | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                    |       |     | 28         |   |   |
| PART II  |       |                                                                                                                   | 29         |     |       |
| ITEM 5.       |       | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |       |     | 29         |   |   |
| ITEM  6.      |       | SELECTED  FINANCIAL DATA                                                                                               |       |     | 29         |   |   |
| ITEM 7.       |       | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS                            |       |     | 33         |   |   |
| ITEM 7A.      |       | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK                              |       |     | 52         |   |   |
| ITEM 8.       |       | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                            |       |     | 53         |   |   |
| ITEM 9.       |       | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE                                  |       |     | 53         |   |   |
| ITEM 9A.      |       | CONTROLS AND PROCEDURES                                                                                                |       |     | 53         |   |   |
| ITEM 9B.      |       | OTHER  INFORMATION                                                                                                     |       |     | 55         |   |   |
| PART III |       |                                                                                                                   | 56         |     |       |
| ITEM 10.      |       | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                                     |       |     | 56         |   |   |
| ITEM 11.      |       | EXECUTIVE COMPENSATION                                                                                                 |       |     | 56         |   |   |
| ITEM 12.      |       | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT AND RELATED STOCKHOLDER MATTERS                        |       |     | 56         |   |   |
| ITEM 13.      |       | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                         |       |     | 57         |   |   |
| ITEM 14.      |       | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                                 |       |     | 57         |   |   |
| PART IV  |       |                                                                                                                   | 58         |     |       |
| ITEM 15.      |       | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                             |       |     | 58         |   |   |
|          |       | SIGNATURES                                                                                                             |       |     |       |   |   |
|          |       | CERTIFICATION OF CEO—Sarbanes-Oxley Act  Section 302                                                         |       |     |       |   |   |
|          |       | CERTIFICATION OF CFO—Sarbanes-Oxley Act  Section 302                                                         |       |     |       |   |   |
|          |       | CERTIFICATION OF CEO—Sarbanes-Oxley Act  Section 906                                                         |       |     |       |   |   |
|          |       | CERTIFICATION OF CFO—Sarbanes-Oxley Act  Section 906                                                         |       |     |       |   |   |

 

*This annual reporton Form 10-K (“Report”), including information incorporated hereinby reference, contains “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934. These statements relate to expectations concerning matters thatare not historical facts. Words such as “projects,” “believes,” “anticipates,” “will,”“estimate,” “plans,” “expects,” “intends,” and similar words and expressionsare intended to identify forward-looking statements. Although we believe thatsuch forward-looking statements are reasonable, we cannot assure you that suchexpectations will prove to be correct. Important language regarding factorswhich could cause actual results to differ materially from such expectationsare disclosed in this Report, including without limitation under the caption “RiskFactors” beginning on page 12 of this Report and in the other documents wefile, from time to time, with the Securities and Exchange Commission, includingour annual report on Form 10-K, quarterly reports on Form 10-Qand current reports on Form 8-K. All forward-looking statementsattributable to ValueClick, Inc. are expressly qualified in their entiretyby such language. We do not undertake to update publicly any forward-lookingstatements for any reason, even if new information becomes available or otherevents occur in the future.*

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**PART I.**

**ITEM 1.**                BUSINESS

**OVERVIEW**

ValueClick is one of theworld’s largest and most comprehensive online marketing services companies. Wesell targeted and measurable online advertising campaigns and programs forapproximately 6,000 advertisers and advertising agency clients, generatingqualified customer leads, online sales and increased brand recognition on theirbehalf with large numbers of online consumers.

Our customers areprimarily direct marketers, brand advertisers and the advertising agencies thatservice these groups. The proposition we offer our customers includes: one ofthe industry’s broadest online marketing services portfolios—includingperformance-based campaigns and programs where marketers only pay foradvertising when it generates a customer lead or product sale; our ability totarget campaigns to reach the online consumers our clients are most interestedin; and, the scale at which we can deliver results for online campaigns.Additionally, our networks provide advertisers with a cost-effective andcomplementary source of online consumers relative to online portals and otherlarge website publishers. Through this approach we have become an industryleader in generating qualified customer leads and online sales for advertisersand one of the industry’s largest display ad networks.

We generate the audiencesfor our advertisers’ campaigns primarily through networks of third-partywebsites and other online publisher partners. We aggregate our publisherpartners’ online advertising inventory into networks, optimize these networksfor specific marketing goals, and deliver the campaigns across the appropriatenetworks’ advertising inventory. We are one of the industry’s largest onlinenetwork providers, with: industry expertise and proprietary technologyplatforms for online advertising inventory aggregation; campaign targeting,delivery and measurement; and, payment settlement and delivery services for ourpublisher partners.

Our publisher partnersenjoy efficient and effective monetization of their online advertisinginventory, including: representation by our direct sales teams in major U.S.and European media markets; participation in large-scale advertiser andadvertising agency campaigns they may not have access to on their own; enhancedmonetization through our campaign optimization technology; and, settlementservices to ensure that publishers receive payment for the inventory utilizedby advertisers. As we do not primarily own and operate websites that competedirectly with our publisher partners for online consumers, we act as a trustedpartner in helping online publishers monetize their online audience andadvertising inventory.

We believe that theeffectiveness of our online marketing services is dependent on the quality ofour networks and our partner relationships. As such, we have establishedstringent quality standards that include publisher rejection from our networksdue to inappropriate content, illegal activity and fraudulent clickingactivity, among other criteria. We enforce these quality standards using acombination of manual and automated auditing processes that continually monitorand review both website content and adherence to advertiser campaignspecifications.

In addition to our onlinemarketing service offerings described above, we offer software that manages thetargeting and delivery of website display ads and emails for customers withtheir own online consumer relationships, as well as software that assistsadvertising agencies and other companies with information management regardingtheir financial, workflow and offline media planning and buying processes.

We derive our revenue fromthree business segments, based on the types of products and services provided.These business segments are Media, Affiliate Marketing and Technology, whichare described in more detail below. For information regarding the operatingperformance and total assets of these segments, see Item 7 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” andnote 17 “Segments and Geographic Information” to the December 31, 2005consolidated financial statements included herein.

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**MEDIA**

ValueClick’s Media segmentprovides a comprehensive suite of online marketing services and tailoredprograms that help marketers increase awareness for their products and brands,attract visitors and generate leads and sales through the Internet. Our Mediasegment has grown both organically and through the acquisition of complementarybusinesses such as Search123.com, completed in May 2003, Hi-Speed Media,completed in December 2003, Pricerunner, completed in August 2004,Webclients and E-Babylon, both completed in June 2005, and Fastclick,completed in September 2005. Our strategic expansion and subsequentintegration within the Media segment has increased our presence in interactivemarketing with powerful offerings that are provided to advertiser andadvertising agency clients in the following product categories:

*Display Advertising Network*

We provide advertisers andadvertising agencies with access to one of the largest and most reputableonline advertising networks in the industry. With a single buy, these marketerscan reach targeted online users on a large-scale, using a variety of onlinedisplay ad units and any of 18 standard channels of online content. Through ouracquisition of Fastclick, we are now one of the largest online display adnetwork operators in the industry, where we partner with third-party websitepublishers and apply our technology platforms and industry expertise to deliverour advertiser clients’ display ad campaigns to the appropriate pages ofour publisher partners’ websites.

With more than 13,500active online publisher relationships in the U.S. and more than 18,000worldwide, our display ad network reached approximately 113 million uniqueInternet users in the U.S. in January 2006 according to published industrydata.

We deliver a variety ofdisplay ad units to the Web pages of our online display ad network andtrack them to evaluate success against the goals of the advertising programs.With traditional banner ads, interstitials, text links, and other online adunits, we attempt to maximize the impact of marketing campaigns by using themost effective placement for each type of campaign. We can also execute a widevariety of rich media applications, providing even greater visual and auditoryimpact for a marketer’s online display advertising campaigns.

We began as aperformance-based marketing network and we continue to offer multiple pricingmodels designed around maximizing our clients’ return on investment. Ourdisplay advertising placements are offered on cost-per-thousand-impression (“CPM”)pricing, whereby our clients pay based on the number of times the targetaudience is exposed to the advertisement, cost-per-click (“CPC”) pricing,whereby payment is triggered only when an interested individual clicks on ourclient’s advertisement, and cost-per-action (“CPA”) pricing, whereby payment istriggered only when a specific, pre-defined action is performed by an online consumer.As discussed in “Lead Generation Marketing” below, we also sell display ads ona cost-per-lead (“CPL”) basis.

The benefits that ouradvertiser and advertising agency clients enjoy in Web advertising include:flexible pricing models; the ability to target and reach significant numbers ofonline consumers in a way that complements media buys on portals and otherlarge online properties; the ability to have a single source for negotiation ofother media buys; and the ability to improve online advertising campaigns in avariety of ways while the campaigns are still running, by optimizing at site,placement and creative levels, based on both response and conversionexperience.

Publishers in our displayad network enjoy efficient and effective monetization of their onlineadvertising inventory, including: representation by our direct sales teams inmajor U.S. and European media markets; participation in large-scale advertiserand advertising agency campaigns they may not be able to access on their own; enhancedmonetization through our campaign optimization technology; and, settlementservices to ensure that publishers receive payment for the inventory utilizedby the advertisers.

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Our automated onlineapplication process for publishers is supported by a team of networkdevelopment and customer service professionals across all ValueClickproperties. Their responsibilities include screening prospective Webpublishers, monitoring network quality, maintaining publisher relationships,consulting with publishers on additional revenue opportunities, and thetrafficking and optimization of client advertising campaigns.

*Lead Generation Marketing*

In our lead generationmarketing services, we manage online campaigns that generate qualified customerinquiries for an advertiser’s product or service. An online consumer generatesa qualified customer inquiry when he or she responds to the advertiser’s offerby providing some personal information (such as their email address, phonenumber and/or mailing address) and requesting to be contacted by theadvertiser. Lead generation advertiser clients only pay us when an onlineconsumer opts in to being contacted by the advertiser.

Weutilize a number of methods to distribute advertiser lead generation offers,including:

·       Opt-inemail lists—where online consumers have agreed to receive advertiser offersthrough email messages;

·       Co-registration—whereonline consumers visiting or registering to use a publisher’s website are alsoinvited to register for advertisers’ offers;

·       Displayads—where publisher partners agree to display online ads focused on generatingcustomer leads for specific offers; and

·       ValueClickowned and operated websites—where we manage websites that host advertiseroffers from which users can choose. ValueClick lead generation websites includesurvey websites, gift card and prize-related websites, and vertical industrycategory websites such as online continuing education and financial services.

Our lead generationcapabilities have been developed organically and through acquisitions,including the recent acquisitions of Hi-Speed Media in December 2003 andWebclients in June 2005.

*Email Marketing*

Our email marketingservices allow marketers to target qualified prospective customers on a largescale with opt-in email lists from our proprietary database of names and from aselect group of email list partners who meet our stringent criteria for dataintegrity, as well as those who comply with all aspects of U.S. federal emaillegislation. Through ValueClick Media’s relationships with quality business andconsumer opt-in email list owners and managers, email marketing clients cantarget audiences within specific selection criteria.

Through our acquisitionsof Hi-Speed Media and Webclients, we now possess a database of approximately80 million opt-in email profiles that comply with U.S. federal emaillegislation. Through this business, we provide marketers with the ability toadvertise their products and services to the target audiences of our emaildatabase within specific selection criteria.

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*Search Marketing*

Searchmarketing allows marketers to find prospective customers who are activelyengaged in researching and buying products and services online. ValueClickMedia’s search offerings are pay-per-click search engines, in which marketersbid for placement within search results and pay only when targeted leads aredelivered to their website. ValueClick Media’s two search offerings are asfollows:

Search123 is ValueClick’sself-service paid search offering that generates its traffic primarily throughsyndication relationships with other search engines, Web portals and contentwebsites.

Simpli is ValueClick’spremium paid search offering. Simpli sources traffic through Simpli.com andwebsites where Simpli typically enables the entire search experience. Simpli’smeta-engine architecture queries leading paid and algorithmic search enginesand presents highly relevant search results. Simpli also offers intelligent “areyou looking for?” technology that allows users to refine their searches.

ValueClick Media searchofferings act as an affordable complement to other pay-per-click searchengines, enabling marketers to realize additional qualified sales leads fromsearch results at a competitive price. ValueClick Media’s search network includeshundreds of online publisher partner websites, which collectively generatehundreds of millions of searches per month.

*Online Comparison Shopping*

Our online comparisonshopping service enables consumers to research and compare products from among thousandsof online and offline merchants through our Pricerunner destination websites.We gather product and merchant data and organize it into a comprehensivecatalog on our destination websites, along with relevant consumer andprofessional reviews. Our service is free for consumers and merchants primarilypay us on a CPC basis when consumers click through to merchant websites fromlistings on our websites. Pricerunner currently runs websites in the UnitedKingdom, Sweden, the United States, Germany, France, and Denmark.

*E-commerce*

We sell a limited numberof consumer products directly to end-user customers through a small number ofCompany-owned e-commerce websites. We entered this business through theacquisition of Hi-Speed Media in 2003, and added to our e-commerce capabilitieswith the acquisition of E-Babylon in June 2005.

**AFFILIATE MARKETING**

Through the combination ofproprietary technology platforms, marketing expertise and a quality advertisingnetwork, our Affiliate Marketing business enables an advertiser to develop itsown fully-commissioned online sales force comprised of third-party affiliatepublishers. We believe we are the largest provider of affiliate marketingservices.

In affiliate marketing, apublisher joins an advertiser’s affiliate marketing program and agrees todistribute the advertiser’s offers in exchange for commissions on leads orsales generated. The publisher places the advertiser’s display ads, text linksor products on their website, in email campaigns, or in search listings, andreceives a commission from the advertiser only when a visitor takes a specificaction, such as filling out a form or making a purchase on the advertiser’swebsite.

ValueClick AffiliateMarketing segment services, outlined below, are offered through ourwholly-owned subsidiaries Be Free, acquired in May 2002, and CommissionJunction, acquired in December 2003. In 2004, we integrated Be Free andCommission Junction and began marketing our affiliate marketing offerings underthe Commission Junction brand name.

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*Affiliate Marketing*

Basedon proprietary technology platforms, our Affiliate Marketing segment provides asuite of comprehensive services that enable an advertiser to manage andoptimize an ongoing affiliate marketing program, including:

·       Recruitingaffiliate publishers to join the advertiser’s program;

·       Managingthe various offers made available to affiliates;

·       Trackingand measuring online consumer traffic and desired actions (e.g., leads, sales)that each affiliate drives to the advertiser’s website;

·       Analyzingthe effectiveness of individual offers and affiliates; and

·       Trackingand processing the payments due to each affiliate for the desired actions theyenable across the advertiser’s program.

Our affiliate marketingservices are offered on a hosted basis to enable marketers to execute their ownaffiliate marketing programs without the expense of building and maintainingtheir own in-house technical infrastructure and resources.

*CJ Marketplace*

To facilitate theadvertiser recruitment of affiliates, we manage CJ Marketplace, an affiliatepublisher network dedicated to our affiliate marketing business. Advertisersupload their offers onto CJ Marketplace, making them available for placement byaffiliates. Affiliates apply to join the advertiser’s program, and uponacceptance, select and place the advertiser’s offers on their websites, inemail campaigns, or in search listings. These links are served and tracked byCommission Junction. When a consumer clicks on one of the affiliate’s links andthen makes an online purchase or fills out a form on the advertiser’s website,that transaction is tracked and recorded by Commission Junction.

CJ Marketplace provides anopen environment whereby affiliates can view payment and conversion statisticsto assess the effectiveness of every advertiser and advertisement, andadvertisers can quickly gauge the quality and potential of every affiliaterelationship in the marketplace, allowing them to maximize the performance andscale of their online advertising campaigns.

Affiliate Marketingrevenues are driven by a combination of fixed fees and variable compensationthat is based on either a percentage of commissions paid to affiliates or on apercentage of transaction revenue generated from the programs managed with ouraffiliate marketing platforms.

In addition to thetransaction-related revenue streams, we also receive service fees from ouradvertiser clients who elect to utilize our Outsourced Program Managementservice and Commission Junction Vantage service offerings. With these services,we assume full responsibility for all aspects of managing the advertiser’sprogram including planning, affiliate recruitment, program review andmanagement, and program administration.

The benefits of ouraffiliate marketing offerings include a large-scale pay-for-performance model,comprehensive technology platforms, professional services, and extensiveexpertise.

**TECHNOLOGY**

Our Technology segmentprovides marketers, advertising agencies, website publishers, and othercompanies with the tools they need to manage both their business operations andmarketing programs effectively. The technology products and services outlinedbelow are offered through our wholly-owned subsidiaries Mediaplex, Inc.and Mediaplex Systems, Inc. (formerly AdWare Systems, Inc.), bothacquired in October 2001.

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*Mediaplex:*

Our Mediaplex subsidiaryis an application services provider (“ASP”) offering technology infrastructuretools and services that enable advertisers and advertising agencies toimplement and manage their own online display advertising and email campaigns,and that assist online publishers with management of their website inventory.Our Mediaplex products are based on our proprietary MOJO® technology platform,which has the ability to automatically configure messages in response toreal-time information from a marketer’s enterprise data system and to provideongoing campaign optimization. Mediaplex’s products are priced primarily on aCPM or email-delivered basis.

Mediaplex’s solutions spanthree primary categories—third-party adserving, publisher ad management andemail campaign management, as outlined below.

*Mediaplex—Third-Party Adserving*

Our third-party adservingproduct, MOJO® Adserver, allows users to configure Web advertising campaigns,serve those campaigns according to time and site placements—commonly known inthe industry as trafficking—and report results from such campaigns through toconversion. MOJO® Adserver operates on the same platform as MOJO® Mail (seeMediaplex—Email Campaign Management below), is Web-based and is available aseither a full-service or self-service offering.

The benefits of ourthird-party adserving technology and services include an intuitive interface,advanced targeting options, response and conversion tracking, near real-timereporting, a choice of full-service or self-service offerings, automatedcreative and placement optimization, the ability to handle rich media, andback-end data feeds for quantitative analysis.

*Mediaplex—Publisher Ad Management*

MOJO® Publisher is an admanagement technology solution for websites and networks and has powered theValueClick Media network since 1999. With MOJO® Publisher, websites andnetworks can quickly implement, manage, sell, and traffic advertising inventoryon their properties, ensuring maximum revenue from those properties.

The benefits of ourpublisher ad management technology and services include flexible configuration,effective inventory management, accurate forecasting, advanced targetingcapabilities, near real-time reporting, conversion tracking, and financialsystem integration.

*Mediaplex—Email Campaign Management*

Either alone or incombination with ValueClick Media’s email marketing solutions described above,our email campaign management product, MOJO® Mail, allows users to configure,traffic and report results for permission-based prospect and customer emailcampaigns. In addition to basic email campaign execution, MOJO® Mail affords auser the ability to populate email messages with dynamic content that is updatedin real-time when the recipient opens the email. The product’s Web-basedinterfaces, MOJO® Works (delivery configuration) and MOJO® Reports (trackingresults), provide a single point of access for email messaging campaigns acrossall platforms, including online advertising and wireless devices. The system,available in both full-service and self-service offerings, provides the abilityto target prospect customer and audience segments with tailored offers andcreative message versions, and to track through to conversion activity in nearreal-time.

The benefits of our emailcampaign management technology include an intuitive interface, systematic listmanagement and segmentation, advanced targeting options, unsubscribe and bouncemanagement, near real-time reporting, response and conversion tracking,back-end data feeds for quantitative analysis, a choice of full-service orself-service offerings, the ability to handle rich media programs, andintegration with our email marketing solutions described above.

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*Mediaplex Systems:*

Our Mediaplex Systemssubsidiary is an ASP that delivers high-quality, Web-based enterprisemanagement systems to advertising agencies, marketing communications companies,public relations agencies, and other large corporate advertisers. The solutionsthat Mediaplex Systems provides span three primary categories—agencymanagement, media management and content management, as outlined below.Mediaplex Systems’ revenue is generated primarily from monthly service feespaid by customers over the contractual service period.

The benefits offered byour enterprise management solutions include increased productivity, improvedtracking and monitoring of business processes, ease of implementation,exceptional customer service, Web-based ASP, and significant scalability.

*Mediaplex Systems—Agency Management*

Ouragency management systems consist of the following:

·       AdVaultPRODUCTION: A comprehensive Web-based business management system, this moduleefficiently monitors workflow and enables control of the complex day-to-dayactivities involved in tracking, producing and billing jobs. Cost and timetracking and analysis, bid comparisons, automated email task assignmentnotification, status reporting, purchase order generation, expense tracking,and production billing are combined in a single menu-driven package designedfor ease of use.

·       AdVaultFINANCIALS: A robust multi-company, multi-office financial system that providesfor the managing of accounts receivable, accounts payable, general ledger,budgeting, and cost accounting functions.

*Mediaplex Systems—Media Management*

Ourmedia management systems enable media planners in corporate marketingdepartments and advertising agencies to plan, execute, track, analyze, and billfor media buys for network broadcast, spot broadcast, national cable, localcable, syndication, newspaper, magazine and trade publications, and outdoormedia channels. Media planners use these systems to record the availableadvertising opportunities and their corresponding cost and choose theconfiguration that best meets their campaign needs. They can then generate amedia plan that consists of the media placements they have selected. Differentsystems are available for each type of media buying:

·       AdVaultBROADCAST: A tool for making, tracking and analyzing spot broadcast,syndication and local cable media buys.

·       AdVaultNETWORK: A tool for making, tracking and analyzing network broadcast, nationalcable and syndication media buys. The system also enables efficient invoicingand payment capabilities for the commercial schedule.

·       AdVaultPRINT: A tool providing all of the functionality needed to estimate, contractfor, buy, bill, and pay for advertisements scheduled in newspapers, magazinesand trade publications. In addition, Ad Vault PRINT can handle outdoormedia buys such as billboards.

*Mediaplex Systems—Content Management*

Content Depot is aWeb-based digital asset management solution that stores, indexes, retrieves,and plays/views digital assets such as documents, audio files, video files, andgraphics. Content Depot is designed for both easy installation and use, and istargeted at any business that needs an affordable way to manage and utilizetheir digital assets.

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**INTERNATIONALOPERATIONS**

We currently haveinternational operations in the United Kingdom, Germany, France, and Sweden.All of these operations are wholly-owned subsidiaries. Prior to March 26,2004, we had operations in Japan through our majority owned subsidiary,ValueClick Japan. We completed the sale of our 59% equity interest inValueClick Japan to livedoor Co., Ltd., a Japanese Internet and technologyproduct and services company, on March 26, 2004.

In August 1999, wecommenced operations in the European market with ValueClick Europe Ltd., awholly-owned subsidiary of ValueClick, Inc., based in the United Kingdom.In 2000, we expanded in Europe by opening wholly-owned subsidiaries in Paris,France and Munich, Germany. In August 2004, we acquired Pricerunner AB, aleading provider of online comparison shopping services in Europe, based inSweden. Employees in our international subsidiaries totaled 199 as of December 31,2005. For additional information regarding our international operations, seenote 17 “Segments and Geographic Information” to our consolidatedfinancial statements contained in this annual report on Form 10-K.

**TECHNOLOGYPLATFORMS**

Our proprietaryapplications are constructed from established, readily available technologies.These technologies are crafted into applications whose main objective is tooutperform offerings of our competitors. Some of the basic components ourproducts are built on come from leading software and hardware providers such asOracle, IBM, Sun, Dell, EMC, and Cisco while some components are constructedfrom leading Open Source software projects such as Apache Web Server, FreeBSDand Perl. By striking the proper balance between using commercially availablesoftware and Open Source software, we direct our technology expenditures towarddeveloping distinguishing application functionality while minimizingthird-party technology supplier costs.

We build inhigh-performance, availability and reliability into our product offerings, andeach offering outperforms industry-wide acceptable performance measurements. Wesafeguard against the potential for service interruptions at our third-partytechnology vendors by engineering failsafe controls into our criticalcomponents. ValueClick delivers its hosted solutions primarily from fiveco-location centers, geographically disbursed within the United States.ValueClick applications are monitored 24 hours a day, 365 days a yearby specialized monitoring systems that aggregate alarms to a human staffednetwork operations center. If a problem occurs, appropriate engineers arenotified and corrective action is taken.

Our continued investmentin ValueClick’s technology infrastructure helps to ensure that our productofferings remain innovative, competitive and cost-effective.

**SALES,MARKETING AND CUSTOMER SERVICE**

We market our products andservices primarily through direct marketing, print advertising and onlineadvertising throughout the year. We also market them through the ValueClickproperties’ websites, trade show participation and other media events. Inaddition, we actively pursue public relations programs to promote our brands,products and services to potential network Web publishers and advertisers, aswell as to industry analysts.

**Customers**

We sell our products andservices to a variety of advertisers and advertising agencies primarily throughour internal sales team. We make extensive use of telemarketing and e-marketingstrategies. Each of our account executives assists the advertisers he or sheservices with all aspects of media planning and design of their advertisingcampaigns and their related technology needs. These services and productsinclude advertisement purchasing and placement, assessment of campaign resultsand optimization of campaign performance and related technology platforms.

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**Competition**

We face intensecompetition in the Internet advertising market. We expect that this competitionwill continue to intensify in the future as a result of industry consolidationand the continuing maturation of the industry. We compete with a diverse andlarge pool of advertising, media and Internet companies.

Ourability to compete depends upon several factors, including the following:

·       ourability to aggregate a large network of small- to medium-sized websitesefficiently;

·       thetiming and market acceptance of new solutions and enhancements to existingsolutions developed by us;

·       ourcustomer service and support efforts;

·       oursales and marketing efforts;

·       theease of use, performance, price, and reliability of solutions developed by us;and

·       ourability to remain price competitive while maintaining our gross margins.

Additional competitivefactors include, but are not limited to, our and each of our competitor’s:reputation, knowledge of the advertising market, financial controls,geographical coverage, relationships with clients, technological capability,and quality and breadth of services.

**Seasonalityand Cyclicality**

We believe that ourbusiness is subject to seasonal fluctuations with the fourth quarter generallybeing our strongest. Marketers generally place fewer advertisements during thefirst and third calendar quarters of each year, and direct marketers generallymail substantially more marketing materials in the third calendar quarter ofeach year. In addition, expenditures by advertisers and direct marketers varyin cycles and tend to reflect the overall economic conditions, as well asbudgeting and buying patterns. Furthermore, user traffic on the Internet tendsto decrease during the summer months which results in fewer advertisements tosell and deliver. A decline in the general economy or in the economic prospectsof advertisers and direct marketers could adversely affect our revenue.

**INTELLECTUALPROPERTY RIGHTS**

We currently rely on acombination of copyright, trademark and trade secret laws and restrictions ondisclosure to protect our intellectual property rights. Our success depends onthe protection of the proprietary aspects of our technology as well as ourability to operate without infringing on the proprietary rights of others. Wealso enter into proprietary information and confidentiality agreements with ouremployees, consultants and commercial partners and control access to, anddistribution of, our software documentation and other proprietary information.We have registered the trademark “ValueClick” in the United States and theEuropean Union. We currently have thirteen pending U.S. patent applications. Inaddition, we have been granted eight patents. We do not know if our currentpatent applications or any future patent application will result in a patentbeing issued within the scope of the claims we seek, if at all, or whether anypatents we may have or may receive will be challenged or invalidated. Althoughpatents are only one component of the protection of intellectual propertyrights, if our patent applications are denied, it may result in increasedcompetition and the development of products substantially similar to our own.In addition, it is difficult to monitor unauthorized use of technology,particularly in foreign countries where the laws may not protect our proprietaryrights as fully as in the United States, and our competitors may independentlydevelop technology similar to those of our own. We will continue to assessappropriate occasions for seeking patent and other intellectual propertyprotections for those aspects of our technology that we believe constituteinnovations providing significant competitive advantages.

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In October 2005, wepurchased a perpetual, non-exclusive license from BTG International, Inc.(“BTG”) to use the BTG technologies for purposes of providing affiliatemarketing services to Barnesandnoble.com (“B&N”). In connection with thePatent License Agreement, BTG and B&N also entered into a ConfidentialRelease and Settlement Agreement under which BTG and B&N agreed to ceaseany and all current or future claims related to the technology in question.

In December 2002, wepurchased a perpetual, non-exclusive license from 24/7 Real Media for the ‘368’patent under a Patent License Agreement. In connection with the Patent LicenseAgreement, 24/7 Real Media also agreed to terminate their lawsuit against usfor patent infringement. The terms of the Patent License and SettlementAgreement are confidential.

**CORPORATEHISTORY AND RECENT ACQUISITIONS**

We commenced operations asValueClick, LLC, a California limited liability company, on May 1, 1998.Prior to the formation of ValueClick, LLC, the ValueClick Internet advertisingbusiness began in July 1997 as a line of business within Web-IgniteCorporation, a company wholly-owned by the founding member of ValueClick, LLC.The reorganization and formation of ValueClick, LLC was effected by thetransfer of the Internet advertising business of Web-Ignite to ValueClick, LLC.On December 31, 1998, ValueClick, LLC reorganized as ValueClick, Inc.,a Delaware corporation. On March 30, 2000, we completed our initial publicoffering of common stock. Our common stock is publicly traded and is reportedon the NASDAQ National Market under the symbol “VCLK.”

*Fastclick, Inc.*   OnSeptember 27, 2005, we acquired 97% of the outstanding shares of Fastclick, Inc.(“Fastclick”) common stock upon the closing of its tender offer for all sharesof Fastclick common stock. On September 29, 2005, we acquired theremaining 3% of outstanding shares of Fastclick common stock, at which time Fastclickbecame a wholly-owned subsidiary of ValueClick. Fastclick provides onlineadvertising services and technologies, and has developed an advertising networkof more than 9,000 third-party publisher websites. Combined with ValueClick’sexisting market position in online media services, the addition of Fastclick toour suite of products and services positions ValueClick as one of the largestonline advertising network providers.

The results of Fastclick’soperations are included in our consolidated financial statements from thebeginning of the accounting period nearest to the date of acquisition, October 1,2005. The results of operations of Fastclick for the period from the closing ofthe tender offer at midnight on September 27, 2005 through September 30,2005 are not significant. Under the terms of the acquisition agreement,ValueClick acquired all of the outstanding capital stock of Fastclick for anaggregate purchase price of approximately $215.7 million, consisting ofapproximately 15.6 million shares of ValueClick common stock valued atapproximately $202.5 million, stock options assumed valued at approximately$12.6 million, and transaction costs of the acquisition of approximately$600,000.

*Web Marketing Holdings, Inc..*   OnJune 24, 2005, we completed the acquisition of Web Marketing Holdings, Inc.(“Webclients’), a leading provider of online marketing services including leadgeneration, opt-in email distribution, and promotional and industry-focusedonline content. Webclients’ business activities complement our media andaffiliate marketing businesses, and can be leveraged across our advertiserbase.

The results of Webclients’operations are included in our consolidated financial statements from thebeginning of the accounting period nearest to the date of acquisition, July 1,2005. The results of operations of Webclients for the period from June 24,2005 through June 30, 2005 are not significant. Under the terms of theacquisition agreement, ValueClick acquired all of the outstanding capital stockof Webclients for an aggregate purchase price of approximately$142.5 million, consisting of cash of $122.2 million, approximately 1.8million shares of ValueClick common stock valued at approximately $18.4million, stock options assumed valued at approximately $1.5 million, andtransaction costs of the 

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acquisitionof approximately $420,000. The stock portion of the consideration representedapproximately 14.0% of the total purchase price.

*E-Babylon, Inc.**  *On June 13, 2005, we completedthe acquisition of E-Babylon, Inc. (“E-Babylon”), a leading onlinemarketer of ink jet cartridges and toner. E-Babylon expands our e-commercechannel and provides an infrastructure with the capability to support all ofour current e-commerce initiatives.

The results of E-Babylon’soperations are included in our consolidated financial statements from thebeginning of the accounting period nearest to the date of acquisition, June 1,2005. The results of operations of E-Babylon for the period from June 1,2005 through June 12, 2005 are not significant. Under the terms of theacquisition agreement, ValueClick acquired all of the outstanding capital stockof E-Babylon for an aggregate purchase price of approximately$14.8 million, consisting of cash of $14.7 million and transaction costsof the acquisition of approximately $112,000.

*Pricerunner AB.**  *On August 6, 2004, we completed the acquisitionof Pricerunner AB (“Pricerunner”), a leading provider of online comparisonshopping services in Europe. With the addition of Pricerunner, we have expandedour suite of performance-based online marketing solutions into the area ofcomparison shopping. Together with our other services, Pricerunner increasedour competitive position in Europe and the United States. In the second quarterof 2005, we launched Pricerunner in the United States, offering consumers abroad range of products from offline and online retailers throughout thecountry.

The results of Pricerunner’soperations are included in our consolidated financial statements from thebeginning of the accounting period nearest to the date of acquisition, August 1,2004. The results of operations of Pricerunner for the period from August 1,2004 through August 5, 2004 are not significant. Under the terms of theacquisition agreement, ValueClick acquired all of the outstanding capital stockof Pricerunner for an aggregate purchase price of approximately$30.1 million, including cash of approximately $26.9 million,approximately 263,000 shares of ValueClick common stock valued at approximately$2.0 million, and transaction costs of the acquisition of approximately $1.2million.

*Hi-Speed Media, Inc.**  *On December 17, 2003, wecompleted the acquisition of Hi-Speed Media, Inc. (“Hi-Speed Media”), a providerof email marketing and e-commerce services.

The results of Hi-Speed Media’s operations areincluded in our consolidated financial statements from the beginning of theaccounting period nearest to the date of acquisition, January 1, 2004. Theresults of operations of Hi-Speed Media for the period from December 17,2003 through December 31, 2003 are not significant. Under the terms of theacquisition agreement, ValueClick acquired all of the outstanding capital stockof Hi-Speed Media for an aggregate purchase price of approximately$10.5 million, including cash of $9.0 million, stock options assumedvalued at approximately $0.4 million and transaction costs of $1.1 million. Wealso agreed to provide additional cash consideration of up to $1.0 millionper quarter, contingent upon the achievement of certain revenue and operatingincome milestones over the eight quarters beginning January 1, 2004.Contingent cash consideration earned for the years ended December 31, 2005and 2004 totaled approximately $3.6 million and $2.3 million, respectively, andwere reflected as an increase in goodwill.

*Commission Junction, Inc.*   On December 7, 2003, we completed the acquisition of CommissionJunction, Inc. (“Commission Junction”), an affiliate marketing businesswhich provides technology and services that enable advertisers to manage, trackand analyze a variety of online marketing programs.

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The results of Commission Junction’s operations areincluded in our consolidated financial statements from the beginning of theaccounting period nearest to the date of acquisition, December 1, 2003.The results of operations of Commission Junction for the period from December 1,2003 through December 6, 2003 are not significant. Pursuant to the termsof the acquisition agreement, ValueClick acquired all of the outstandingcapital stock of Commission Junction for an aggregate purchase price ofapproximately $62.1 million, consisting of approximately 3.0 millionshares of ValueClick common stock, valued at approximately $29.5 million,approximately $26.1 million in cash and transaction costs of theacquisition of approximately $0.4 million. Additionally, outstanding options toacquire common stock of Commission Junction were converted into an aggregate ofapproximately 1.2 million options to acquire ValueClick common stockvalued at approximately $6.1 million.

*Search123.com Inc.**  *On May 30, 2003, we completedthe acquisition of Search123.com Inc. (“Search123”), a search marketingcompany that allows marketers to find prospective customers who are activelyengaged in researching and buying products and services online.

The results of Search123’soperations are included in our consolidated financial statements from thebeginning of the accounting period nearest to the date of acquisition, June 1,2003. The results of operations of Search123 for the period from May 30, 2003through May 31, 2003 are not significant. The aggregate consideration paidfor Search123 was approximately $4.9 million, consisting of a cash paymentof approximately $3.2 million, the assumption of a net working capitaldeficit of approximately $1.5 million and transaction costs of theacquisition of approximately $200,000.

**PRIVACY**

We may collect personally identifiable information ona permitted basis. We store this data securely and do not use the data withoutthe explicit, knowing permission of the user when we collect the data on behalfof our clients. We rely on our clients to treat such data with the appropriateprecaution and responsibility as stated in their privacy policies. In addition,we use non-personally identifiable information provided by websites, pursuantto their privacy policies, about their viewers’ general demographics andinterests in order to target appropriate advertising to the websites.

Moreover, if our clients have databases of theircustomers, we can use this data on behalf of those clients, again pursuant totheir privacy policies. The premise is that both the website providing the adspace and the advertiser (1) have a relationship with the customer, oropt-in, (2) have an opportunity to share their privacy policies with theircustomers, and (3) provide an opportunity to opt-out.

Our clients retain the right to use data which theyhave obtained through explicit permission from an Internet user; for example,if a customer of our client provides an email address to receive informationand updates. We rely on our clients’ consumer privacy policies, as well as theprivacy practices of the publisher websites included in each campaign.

We collect certain technical data (such as type ofbrowser, operating system, domain type, date and time of viewer’s response)when serving Internet advertisements. This type of information is defined bythe Network Advertising Initiative as non-personally identifiable information (“AdDelivery and Reporting Data”). We may retain this Ad Delivery and Reporting Dataindefinitely.

We use “cookies,” among other techniques, to measureand report non-personalized information to advertisers, such as the number ofpeople who see their advertisements or emails and the number of times peoplesee the advertisement. A cookie is a small file that is stored in a Web-user’shard drive. Cookies cannot read information from the user’s hard drive; ratherthey allow sites and advertisers to track advertising effectiveness and toensure that viewers do not receive the same advertisements repeatedly. Cookies,by themselves, cannot be used to identify any user if the user does not provideany personally 

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identifiable information.They can be used to allow personalization features such as stock portfoliotracking and targeted news stories.

We are compliant with thePlatform for Privacy Protection Project, or P3P, compliance criteria. P3P isthe most current privacy standard effort in the industry, providing simple andautomated privacy controls for users. Please refer to the section entitled “GovernmentEnforcement Actions, Changes in Government Regulation and Industry Standards,Including But Not Limited To, Spyware and Privacy Matters, Could DecreaseDemand For Our Services and Increase Our Costs of Doing Business” in Item 1A “RiskFactors” of this annual report on Form 10-K for further detailsabout our compliance with privacy regulations.

**EMPLOYEES**

As of December 31,2005, we had 815 employees in the U.S. and 199 employees in our internationallocations. None of these employees are covered by collective bargainingagreements. Management believes that our relations with our employees are good.

**EXECUTIVE OFFICERS**

See Part III, Item 10“Directors and Executive Officers of the Registrant” of this annual report on Form 10-Kfor information about executive officers of the registrant.

**WEBSITEACCESS TO OUR PERIODIC SEC REPORTS**

Our primary Internet address is www.valueclick.com. Wemake our Securities and Exchange Commission (“SEC”) periodic reports (Forms 10-Qand Forms 10-K) and current reports (Forms 8-K), andamendments to these reports, available free of charge through our website assoon as reasonably practicable after they are filed electronically with theSEC. We may from time to time provide important disclosures to investors byposting them in the investor relations section of our website, as allowed bySEC rules.

Materials we file with theSEC may be read and copied at the SEC’s Public Reference Room at450 Fifth Street, N.W., Washington, D.C. 20549. Information on theoperation of the Public Reference Room may be obtained by calling the SECat 1-800-SEC-0330. The SEC also maintains an Internet websiteat www.sec.gov that contains reports, proxy and information statements, andother information regarding our Company that we file electronically with theSEC.

**CODE OF ETHICS AND BUSINESS CONDUCT**

We have adopted a Code of Ethics and Business Conduct(the “Code”) for our principal executive, financial and accounting, and otherofficers, and our directors, employees, agents, and consultants. The Code ispublicly available on our website at www.valueclick.com under “Corporate Info.”Among other things, the Code addresses such issues as conflicts of interest,corporate opportunities, confidentiality, fair dealing, protection and properuse of Company assets, compliance with applicable laws (including insidertrading laws), and reporting of illegal or unethical behavior.

Within the Code,ValueClick has established an accounting ethics complaint procedure for allemployees of the Company and its subsidiaries. The complaint procedure is foremployees who may have concerns regarding accounting, internal accountingcontrols and auditing matters. The Company treats all complaints confidentiallyand with the utmost professionalism. If an employee desires, he or she maysubmit any concerns or complaints on an anonymous basis, and his or herconcerns or complaints will be addressed in the same manner as any othercomplaints. The Company does not, and will not, condone any retaliation of anykind against an employee who comes forward with an ethical concern orcomplaint.

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**ITEM 1A.**        RISKFACTORS

*You shouldcarefully consider the following risks before you decide to buy shares of ourcommon stock. The risks and uncertainties described below are not the only onesfacing us. Additional risks and uncertainties, including those risks set forthin “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” below, may also adversely impact and impair our business. If any ofthe following risks actually occur, our business, results of operations orfinancial condition would likely suffer. In such case, the trading price of ourcommon stock could decline, and you may lose all or part of the money you paidto buy our stock.*

*This annual report on Form 10-K containsforward-looking statements based on the current expectations, assumptions,estimates, and projections about us and our industry. These forward-lookingstatements involve risks and uncertainties. Our actual results could differmaterially from those discussed in these forward-looking statements as a resultof certain factors, as more fully described in this section and elsewherein this annual report on Form 10-K. We do not undertake to updatepublicly any forward-looking statements for any reason, even if new informationbecomes available or other events occur in the future.*

**INTEGRATINGOUR ACQUIRED OPERATIONS MAY DIVERT MANAGEMENT’S ATTENTION AWAY FROM OURDAY-TO-DAY OPERATIONS.**

We have grown in part because of business combinationswith other companies, and we expect to continue to evaluate and consider futureacquisitions. Acquisitions generally involve significant risks, includingdifficulties in the assimilation of operations, services, technologies, andcorporate culture of the acquired companies, diversion of management’sattention from other business concerns, overvaluation of the acquiredcompanies, and the acceptance of the acquired companies’ products and servicesby our customers. The integration of our acquired operations, products andpersonnel may place a significant burden on management and our internalresources. The diversion of management attention and any difficultiesencountered in the integration process could harm our business. We consummatedthe acquisitions of Search123, Commission Junction, Hi-Speed Media,Pricerunner, E-Babylon, Webclients, and Fastclick on May 30, 2003, December 7,2003, December 17, 2003, August 6, 2004, June 13, 2005, June 24,2005, and September 29, 2005, respectively. Because of the number ofacquisitions we completed in the past several years, the differences in thecustomer base and functionality of Search123, Commission Junction, Hi-SpeedMedia, Pricerunner, E-Babylon, Webclients, and Fastclick and our products,these acquisitions may present materially higher product, sales and marketing,customer support, research and development, facilities, information systems,accounting, personnel, and other integration challenges than those we havefaced in connection with our prior acquisitions and may delay or jeopardize thecomplete integration of certain businesses we had acquired previously.

If we finance futureacquisitions by using equity or convertible debt securities, this would diluteour existing stockholders. Any amortization of intangible assets, or othercharges resulting from the costs of these acquisitions, could have an adverseeffect on the results of our operations. In addition, we may pay more for anacquisition than the acquired products, services, technology, or businesses areultimately worth.

**IF WEFAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR EXPENSES COULD INCREASE AND OURMANAGEMENT’S TIME AND ATTENTION COULD BE DIVERTED.**

As we continue to increasethe scope of our operations, we will need an effective planning and managementprocess to implement our business plan successfully in the rapidly evolvingInternet advertising market. Our business, results of operations and financialcondition will be substantially harmed if we are unable to manage our expandingoperations effectively. We plan to continue to expand our sales and marketing,customer support and technology organizations. Past growth has placed, and anyfuture growth will continue to place, a significant strain on our managementsystems and resources. We will likely need to continue to improve our financialand managerial controls and our reporting systems and 

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procedures.In addition, we will need to expand, train and manage our work-force. Ourfailure to manage our growth effectively could increase our expenses and divertmanagement’s time and attention.

**WE MIGHT NOT REMAIN PROFITABLE.**

Although we achieved profitability in 2003 and havebeen profitable ever since, events could arise that prevent us from achievingnet income in future periods.

Because we have arelatively limited operating history, it may be difficult to evaluate ourbusiness and prospects. You should consider our prospects in light of therisks, expenses and difficulties frequently encountered by early-stagecompanies in the rapidly-changing Internet market. These risks include, but arenot limited to, our ability to:

·       maintainand increase our inventory of advertising space on websites and with email listowners and newsletter publishers;

·       maintainand increase the number of advertisers that use our products and services;

·       continueto expand the number of products and services we offer and the capacity of oursystems;

·       adaptto changes in Web advertisers’ promotional needs and policies, and thetechnologies used to generate Web advertisements;

·       respondto challenges presented by the large number of competitors in the industry;

·       adaptto changes in legislation regarding Internet usage, advertising and commerce;

·       adaptto changes in technology related to online advertising filtering software; and

·       adaptto changes in the competitive landscape.

If we are unsuccessful inaddressing these risks and uncertainties, our business, results of operationsand financial condition could be materially and adversely affected.

**IFADVERTISING ON THE INTERNET LOSES ITS APPEAL TO DIRECT MARKETING COMPANIES, OURREVENUE COULD DECLINE.**

Our Media segmentaccounted for 69.3% of our revenue for the year ended December 31, 2005 inpart by delivering advertisements that generate impressions, click-throughs andother actions to our advertisers’ websites. This business model may notcontinue to be effective in the future for a number of reasons, including thefollowing: click rates have always been low and may decline as the number ofbanner advertisements on the Web increases; Internet users can install “filter”software programs which allow them to prevent advertisements from appearing ontheir computer screens or email boxes; Internet advertisements are, by theirnature, limited in content relative to other media; direct marketing companiesmay be reluctant or slow to adopt online advertising that replaces, limits orcompetes with their existing direct marketing efforts; and direct marketingcompanies may prefer other forms of Internet advertising we do not offer,including certain forms of search engine placements. If the number of directmarketing companies who purchase online advertising from us does not continueto grow, we may experience difficulty in attracting publishers, and our revenuecould decline.

**IFOUR BUSINESS MODEL IS NOT ACCEPTED BY INTERNET ADVERTISERS OR WEB PUBLISHERS,OUR REVENUE COULD DECLINE.**

Historically, a significant portion of our revenue hasbeen derived from our Media segment. Although we intend to continue to grow ourAffiliate Marketing and Technology segments, we expect that our Media segmentwill continue to generate a substantial amount of our revenue in the future.Our Media segment 

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includes products andservices that are based on a cost-per-click (“CPC”), cost-per-action (“CPA”),cost-per-lead (“CPL”) or cost-per-thousand-impressions (“CPM”) pricing model.Our ability to generate significant revenue from advertisers will depend, inpart, on our ability to demonstrate the effectiveness of our various pricingmodels to advertisers and to Web publishers; and, on our ability to attract andretain advertisers and Web publishers by differentiating our technology andservices from those of our competitors. One component of our strategy is toenhance advertisers’ ability to measure their return on investment and track theperformance and effectiveness of their advertising campaigns. To date, not alladvertisers have taken advantage of the most sophisticated tools we offer fortracking Internet users’ activities after they have reached advertisers’websites. We will not be able to assure you that our strategy will succeed.

Intense competition amongwebsites, Internet search services and Internet advertising services has led tothe proliferation of a number of alternative pricing models for Internetadvertising. These alternatives, and the likelihood that additional pricingalternatives will be introduced, make it difficult for us to project the levelsof advertising revenue or the margins that we, or the Internet advertisingindustry in general, will realize in the future. Moreover, an increase in theamount of advertising on the Web may result in a decline in click rates. Sincewe rely heavily on performance-based pricing models to generate revenue, anydecline in click rates may make our pricing models less viable or lessattractive solutions for Web publishers and advertisers, and our revenue coulddecline.

**OURREVENUE COULD DECLINE IF WE FAIL TO EFFECTIVELY MANAGE OUR EXISTING ADVERTISINGSPACE AND OUR GROWTH COULD BE IMPEDED IF WE FAIL TO ACQUIRE NEW ADVERTISINGSPACE.**

Our success depends in part on our ability toeffectively manage our existing advertising space. The Web publishers and emaillist owners that list their unsold advertising space with us are not bound bylong-term contracts that ensure us a consistent supply of advertising space,which we refer to as inventory. In addition, websites can change the amount ofinventory they make available to us at any time. If a Web publisher or emaillist owner decides not to make advertising space from its websites, newslettersor email lists available to us, we may not be able to replace this advertisingspace with advertising space from other websites or email list owners that havecomparable traffic patterns and user demographics quickly enough to fulfill ouradvertisers’ requests. This would result in lost revenue.

We expect that our customers’ requirements will becomemore sophisticated as the Web matures as an advertising medium. If we fail tomanage our existing advertising space effectively to meet our customers’ changingrequirements, our revenue could decline. Our growth depends on our ability toexpand our advertising inventory. To attract new customers, we must maintain aconsistent supply of attractive advertising space. We intend to expand ouradvertising inventory by selectively adding to our networks new Web publishersand email list owners that offer attractive demographics, innovative andquality content and growing Web user traffic and email volume. Our ability toattract new Web publishers and email list owners to our networks and to retainWeb publishers and email list owners currently in our networks will depend onvarious factors, some of which are beyond our control. These factors include:our ability to introduce new and innovative product lines and services, ourability to efficiently manage our existing advertising inventory, our pricingpolicies, and the cost-efficiency to Web publishers and email list owners ofoutsourcing their advertising sales. In addition, the number of competingintermediaries that purchase advertising inventory from Web publishers andemail list owners continues to increase. We will not be able to assure you thatthe size of our inventory will increase or even remain constant in the future.

Our pay-per-click searchservice is dependent upon a limited number of sources to direct Internet usersto our search service. Our sources for users conducting searches are members ofour affiliate network, including portals, browsers, or other affiliates and ourown websites. Revenues are generated when users conducting searches aredirected to advertisers through a paid search link in our search results. 

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The moretraffic our sources direct to our advertisers through our search technology,the more revenue we will generate. Unfavorable changes in our relationship withthese sources or loss of these relationships would adversely affect our revenueand results of operations.

**WE MAY FACEINTELLECTUAL PROPERTY ACTIONS THAT ARE COSTLY OR COULD HINDER OR PREVENT OURABILITY TO DELIVER OUR PRODUCTS AND SERVICES.**

We may be subject to legalactions alleging intellectual property infringement (including patentinfringement), unfair competition or similar claims against us. Companies mayapply for or be awarded patents or have other intellectual property rightscovering aspects of our technology or business. One of the primary competitorsof our Search123 subsidiary, Overture Services, Inc., purports to be theowner of U.S. Patent No. 6,269,361, which was issued on July 31, 2001and is entitled “System and method for influencing a position on a searchresult list generated by a computer network search engine.” Overture hasaggressively pursued its alleged patent rights by filing lawsuits against otherpay-per-click search engine companies such as MIVA and Google. MIVA and Googlehave asserted counter-claims against Overture including, but not limited to,invalidity, unenforceability and non-infringement. BTG International, Inc.(“BTG”) purports to own two patents related to affiliate marketing. The patentsallegedly cover methods and apparatuses for “Attaching Navigational HistoryInformation to Universal Resource Locator Links on a World Wide Web Page” (U.S.Patent No. 5,712,979) and for “Tracking the Navigational Path of a User onthe World Wide Web” (U.S. Patent No. 5,717,860). BTG has broughtsuit to enforce its patent rights against, among others, Barnesandnoble.com andAmazon.com.

**IFTHE TECHNOLOGY THAT WE CURRENTLY USE TO TARGET THE DELIVERY OF ONLINEADVERTISEMENTS AND TO PREVENT FRAUD ON OUR NETWORKS IS RESTRICTED OR BECOMESSUBJECT TO REGULATION, OUR EXPENSES COULD INCREASE AND WE COULD LOSE CUSTOMERSOR ADVERTISING INVENTORY.**

Websites typically placesmall files of non-personalized (or “anonymous”) information, commonly known ascookies, on an Internet user’s hard drive, generally without the user’sknowledge or consent. Cookies generally collect information about users on anon-personalized basis to enable websites to provide users with a morecustomized experience. Cookie information is passed to the website through anInternet user’s browser software. We currently use cookies to track an Internetuser’s movement through the advertiser’s website and to monitor and preventpotentially fraudulent activity on our networks. Most currently availableInternet browsers allow Internet users to modify their browser settings toprevent cookies from being stored on their hard drive, and some users currentlydo so. Internet users can also delete cookies from their hard drives at anytime. Some Internet commentators and privacy advocates have suggested limitingor eliminating the use of cookies, and legislation (including, but not limitedto, Spyware legislation such as U.S. House of Representatives Bill HR 29 the “SpyAct”) has been introduced in some jurisdictions to regulate the use of cookietechnology. The effectiveness of our technology could be limited by anyreduction or limitation in the use of cookies. If the use or effectiveness ofcookies were limited, we would have to switch to other technologies to gatherdemographic and behavioral information. While such technologies currentlyexist, they are substantially less effective than cookies. We would also haveto develop or acquire other technology to prevent fraud. Replacement of cookiescould require significant reengineering time and resources, might not becompleted in time to avoid losing customers or advertising inventory, and mightnot be commercially feasible. Our use of cookie technology or any othertechnologies designed to collect Internet usage information may subject us tolitigation or investigations in the future. Any litigation or government actionagainst us could be costly and time-consuming, could require us to change ourbusiness practices and could divert management’s attention.

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**WECOULD LOSE CUSTOMERS OR ADVERTISING INVENTORY IF WE FAIL TO MEASUREIMPRESSIONS, CLICKS AND ACTIONS ON ADVERTISEMENTS IN A MANNER THAT ISACCEPTABLE TO OUR ADVERTISERS AND WEB PUBLISHERS.**

We earn revenue fromadvertisers and make payments to Web publishers based on the number ofimpressions, clicks and actions from advertisements delivered on our networksof websites and email lists. Advertisers’ and Web publishers’ willingness touse our services and join our networks will depend on the extent to which theyperceive our measurements of impressions, clicks and actions to be accurate andreliable. Advertisers and Web publishers often maintain their own technologiesand methodologies for counting impressions, clicks and actions, and from timeto time we have had to resolve differences between our measurements and theirs.Any significant dispute over the proper measurement of user responses toadvertisements could cause us to lose customers or advertising inventory.

**IF WEFAIL TO COMPETE EFFECTIVELY AGAINST OTHER INTERNET ADVERTISING COMPANIES, WECOULD LOSE CUSTOMERS OR ADVERTISING INVENTORY AND OUR REVENUE AND RESULTS OFOPERATIONS COULD DECLINE.**

The Internet advertising markets are characterized byrapidly changing technologies, evolving industry standards, frequent newproduct and service introductions, and changing client demands. Theintroduction of new services embodying new technologies and the emergence ofnew industry standards and practices could render our existing servicesobsolete and unmarketable or require unanticipated technology or otherinvestments. Our failure to adapt successfully to these changes could harm ourbusiness, results of operations and financial condition.

The market for Internet advertising and relatedservices is highly competitive. We expect this competition to continue toincrease because there are no significant barriers to entry. Increasedcompetition may result in price reductions for advertising space, reducedmargins and loss of our market share. Our principal competitors include othercompanies that provide advertisers with Internet advertising solutions andcompanies that offer pay-per-click search services. We directly compete with anumber of competitors in the CPC market segment, such as Advertising.com,acquired by AOL. We compete in the performance-based marketing segment with CPLand CPA performance-based companies such as Advertising.com, Performics,acquired by DoubleClick, Direct Response, acquired by Digital River, andLinkshare, acquired by Rakuten, and we compete with other Internet advertisingnetworks that focus on the traditional CPM model, including 24/7 Real Media.Further, both Google and Yahoo have announced plans to pursue the creation ofdisplay ad networks. We also compete with pay-per-click search companies such asOverture, acquired by Yahoo, Google and MIVA. In addition, we now compete inthe online comparison shopping market with focused comparison shopping websitessuch as Shopping.com, acquired by eBay, Kelkoo, acquired by Yahoo, NexTag,Shopzilla, acquired by EW Scripps, and Pricegrabber, acquired by Experian, andwith search engines and portals such as Yahoo, Google and MSN, and with onlineretailers such as Amazon.com and eBay. Large websites with brand recognition,such as Yahoo, AOL and MSN, have direct sales personnel and substantialproprietary inventory that provide significant competitive advantages comparedto our networks and have a significant impact on pricing for onlineadvertising. These companies have longer operating histories, greater name recognitionand have greater financial, technical and sales and marketing resources than wehave.

Competition foradvertising placements among current and future suppliers of Internetnavigational and informational services, high-traffic websites and Internetservice providers, or ISPs, as well as competition with other media foradvertising placements, could result in significant price competition,declining margins and reductions in advertising revenue. Google has madeavailable offline public-domain works through its search engine, which createsadditional competition for advertisers. In addition, as we continue to expandthe scope of our Web services, we may compete with a greater number of Webpublishers and other media companies across an increasing range of differentWeb services, including in 

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verticalmarkets where competitors may have advantages in expertise, brand recognitionand other areas. If existing or future competitors develop or offer servicesthat provide significant performance, price, creative or other advantages overthose offered by us, our business, results of operations and financialcondition would be negatively affected. We will also compete with traditionaladvertising media, such as direct mail, television, radio, cable, and print, fora share of advertisers’ total advertising budgets. Many current and potentialcompetitors enjoy competitive advantages over us, such as longer operatinghistories, greater name recognition, larger customer bases, greater access toadvertising space on high-traffic websites, and significantly greaterfinancial, technical and sales and marketing resources. As a result, we may notbe able to compete successfully. If we fail to compete successfully, we couldlose customers or advertising inventory and our revenue and results ofoperations could decline.

**OURREVENUE AND RESULTS OF OPERATIONS COULD BE NEGATIVELY IMPACTED IF INTERNETUSAGE AND THE DEVELOPMENT OF INTERNET INFRASTRUCTURE DO NOT CONTINUE TO GROW.**

Our business and financial results will depend on continuedgrowth in the use of the Internet. Internet usage may be inhibited for a numberof reasons, such as: inadequate network infrastructure; security concerns;inconsistent quality of service; and, unavailability of cost-effective,high-speed service.

If Internet usage grows,our infrastructure may not be able to support the demands placed on it and ourperformance and reliability may decline. In addition, websites have experiencedinterruptions in their service as a result of outages and other delays occurringthroughout the Internet network infrastructure, and as a result of sabotage,such as electronic attacks designed to interrupt service on many websites. TheInternet could lose its viability as a commercial medium due to delays in thedevelopment or adoption of new technologies required to accommodate increasedlevels of Internet activity. If use of the Internet does not continue to grow,or if the Internet infrastructure does not effectively support our growth, ourrevenue and results of operations could be materially and adversely affected.

**OURLONG-TERM SUCCESS MAY BE MATERIALLY ADVERSELY AFFECTED IF THE MARKET FORE-COMMERCE DOES NOT GROW OR GROWS SLOWER THAN EXPECTED.**

Because many of ourcustomers’ advertisements encourage online purchasing, our long-term successmay depend in part on the growth and market acceptance of e-commerce. Ourbusiness may be adversely affected if the market for e-commerce does notcontinue to grow or grows slower than now expected. A number of factors outsideof our control could hinder the future growth of e-commerce, including thefollowing:

·       thenetwork infrastructure necessary for substantial growth in Internet usage maynot develop adequately or our performance and reliability may decline;

·       insufficientavailability of telecommunication services or changes in telecommunicationservices could result in inconsistent quality of service or slower responsetimes on the Internet;

·       negativepublicity and consumer concern surrounding the security of e-commerce couldimpede our growth; and

·       financialinstability of e-commerce customers.

In particular, anywell-publicized compromise of security involving Web-based transactions coulddeter people from purchasing items on the Internet, clicking on advertisements,or using the Internet generally, any of which could cause us to lose customersand advertising inventory and which could materially, adversely affect ourrevenue and results of operations.

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**WEDEPEND ON KEY PERSONNEL, THE LOSS OF WHOM COULD HARM OUR BUSINESS.**

The successful integration of the companies we haveacquired will depend in part on the retention of personnel critical to ourcombined business operations due to, for example, unique technical skills ormanagement expertise. We may be unable to retain existing management, finance,engineering, sales, customer support, and operations personnel that arecritical to the success of the integrated company, resulting in disruption ofoperations, loss of key information, expertise or know-how, and unanticipatedadditional recruitment and training costs, and otherwise diminishinganticipated benefits of these acquisitions.

Our future success issubstantially dependent on the continued service of our key senior management.Our employment agreements with our key personnel are short-term and on anat-will basis. We do not have key-person insurance on any of our employees. Theloss of the services of any member of our senior management team, or of anyother key employees, could divert management’s time and attention, increase ourexpenses and adversely affect our ability to conduct our business efficiently.Our future success also depends on our continuing ability to attract, retainand motivate highly skilled employees. We may be unable to retain our keyemployees or attract, assimilate or retain other highly qualified employees inthe future. We have experienced difficulty from time to time in attracting thepersonnel necessary to support the growth of our business, and may experiencesimilar difficulties in the future.

**DELAWARELAW AND OUR STOCKHOLDER RIGHTS PLAN CONTAIN ANTI-TAKEOVER PROVISIONS THAT COULDDETER TAKEOVER ATTEMPTS THAT COULD BE BENEFICIAL TO OUR STOCKHOLDERS.**

Provisions of Delaware lawcould make it more difficult for a third-party to acquire us, even if doing sowould be beneficial to our stockholders. Section 203 of the DelawareGeneral Corporation Law may make the acquisition of the Company and the removalof incumbent officers and directors more difficult by prohibiting stockholdersholding 15% or more of our outstanding voting stock from acquiring the Company,without the board of directors’ consent, for at least three years from the datethey first hold 15% or more of the voting stock. In addition, our StockholderRights Plan has significant anti-takeover effects by causing substantialdilution to a person or group that attempts to acquire us on terms not approvedby our board of directors.

**SYSTEMFAILURES COULD SIGNIFICANTLY DISRUPT OUR OPERATIONS, WHICH COULD CAUSE US TOLOSE CUSTOMERS OR ADVERTISING INVENTORY.**

Our success depends on thecontinuing and uninterrupted performance of our systems. Sustained or repeatedsystem failures that interrupt our ability to provide services to customers,including failures affecting our ability to deliver advertisements quickly andaccurately and to process users’ responses to advertisements, would reducesignificantly the attractiveness of our solutions to advertisers and Webpublishers. Our business, results of operations and financial condition couldbe materially and adversely affected by any damage or failure that impacts dataintegrity or interrupts or delays our operations. Our computer systems arevulnerable to damage from a variety of sources, including telecommunicationsfailures, power outages, malicious or accidental human acts, and naturaldisasters. We lease data center space in El Segundo, San Jose and Sunnyvale,California; Louisville, Kentucky; Mechanicsburg, Pennsylvania; Ashburn,Virginia; Stockholm, Sweden, and several small scale data centers or office locationsthroughout the United States and Europe. Therefore, any of the above factorsaffecting any of these areas could substantially harm our business. Moreover,despite network security measures, our servers are potentially vulnerable tophysical or electronic break-ins, computer viruses and similar disruptiveproblems in part because we cannot control the maintenance and operation of ourthird-party data centers. Despite the precautions taken, unanticipated problemsaffecting our systems could cause interruptions in the delivery of oursolutions in the future and our ability to provide a record of past 

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transactions.Our data centers and systems incorporate varying degrees of redundancy. Alldata centers and systems may not automatically switch over to their redundantcounterpart. Our insurance policies may not adequately compensate us for anylosses that may occur due to any failures in our systems.

**WE MAY EXPERIENCECAPACITY CONSTRAINTS THAT COULD REDUCE OUR REVENUE.**

Our future success dependsin part on the efficient performance of our software and technology, as well asthe efficient performance of the systems of third-parties. As the numbers ofWeb pages and Internet users increase, our services and infrastructure maynot be able to grow to meet the demand. A sudden and unexpected increase in thevolume of advertising delivered through our servers or in click rates couldstrain the capacity of the software or hardware that we have deployed. Anycapacity constraints we experience could lead to slower response times orsystem failures and adversely affect the availability of advertisements, thenumber of advertising views delivered and the level of user responses received,which would harm our revenue. To the extent that we do not effectively addresscapacity constraints or system failures, our business, results of operationsand financial condition could be harmed substantially. We also depend on ISPsthat provide consumers with access to the websites on which our customers’advertisements appear. Internet users have occasionally experienceddifficulties connecting to the Web due to failures of their ISPs’ systems. Anydisruption in Internet access provided by ISPs or failures by ISPs to handlethe higher volumes of traffic expected in the future could materially andadversely affect our revenue.

**IT MAY BEDIFFICULT TO PREDICT OUR FINANCIAL PERFORMANCE BECAUSE OUR QUARTERLY OPERATINGRESULTS MAY FLUCTUATE.**

Our revenue andoperating results may vary significantly from quarter to quarter due to avariety of factors, many of which are beyond our control. You should not relyon period-to-period comparisons of our results of operations as an indicationof our future performance. Our results of operations may fall below theexpectations of market analysts and investors or our own forecasts in somefuture periods. If this happens, the market price of our common stock may fall.The factors that may affect our quarterly operating results include, but arenot limited to, the following:

·       fluctuationsin demand for our advertising solutions;

·       fluctuationsin click, lead, action, and impression rates;

·       fluctuationsin the amount of available advertising space, or views, on our networks;

·       thetiming and amount of sales and marketing expenses incurred to attract newadvertisers;

·       fluctuationsin sales of different types of advertising; for example, the amount ofadvertising sold at higher rates rather than lower rates;

·       seasonalpatterns in Internet advertisers’ spending;

·       fluctuationsin our stock price which may impact the amount of stock-based compensationexpense we are required to record;

·       changesin our pricing policies, the pricing policies of our competitors or the pricingpolicies for advertising on the Internet generally;

·       timingdifferences at the end of each quarter between our payments to Web publishersfor advertising space and our collection of advertising revenue for that space;and

·       costsrelated to acquisitions of technology or businesses.

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Expenditures byadvertisers also tend to be cyclical, reflecting overall economic conditions aswell as budgeting and buying patterns. Any decline in the economic prospects ofadvertisers or the economy generally may alter advertisers’ current orprospective spending priorities, or may increase the time it takes us to closesales with advertisers, and could materially and adversely affect our business,results of operations and financial condition.

**IF WEDO NOT SUCCESSFULLY EXECUTE OUR INTERNATIONAL STRATEGY, OUR REVENUE AND THEGROWTH OF OUR BUSINESS COULD BE HARMED.**

We initiated operations, through wholly-ownedsubsidiaries or divisions, in the United Kingdom in 1999, France and Germany in2000 and Sweden in 2004. Our foreign operations subject us to foreign currencyexchange risks. We currently do not utilize hedging instruments to mitigateforeign currency exchange risks.

Our internationalexpansion will subject us to additional foreign currency exchange risks andwill require management’s attention and resources. We cannot assure you that wewill be successful in our efforts overseas. International operations aresubject to other inherent risks, including, but not limited to:

·       theimpact of recessions in economies outside the United States;

·       changesin and differences between regulatory requirements, domestic and foreign;

·       exportrestrictions, including export controls relating to encryption technologies;

·       reducedprotection for intellectual property rights in some countries;

·       potentiallyadverse tax consequences;

·       difficultiesand costs of staffing and managing foreign operations;

·       politicaland economic instability;

·       tariffsand other trade barriers; and

·       seasonalreductions in business activity.

Our failure to addressthese risks adequately could materially and adversely affect our business,results of operations and financial condition.

**WEMAY BE LIABLE FOR CONTENT DISPLAYED ON OUR NETWORKS OF PUBLISHERS WHICHCOULD INCREASE OUR EXPENSES.**

We may be liable tothird-parties for content in the advertising we deliver if the artwork, text orother content involved violates copyright, trademark, or other intellectualproperty rights of third-parties or if the content is defamatory. Any claims orcounterclaims could be time-consuming, could result in costly litigation andcould divert management’s attention.

**IF WEFAIL TO ESTABLISH, MAINTAIN AND EXPAND OUR BUSINESS AND MARKETING ALLIANCES ANDPARTNERSHIPS, OUR ABILITY TO GROW COULD BE LIMITED, WE MAY NOT ACHIEVEDESIRED REVENUE AND OUR STOCK PRICE MAY DECLINE.**

In order to grow our business, we must generate,retain and strengthen successful business and marketing alliances.

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We depend, and expect tocontinue to depend, on our business and marketing alliances, which arecompanies with which we have written or oral agreements to work together toprovide services to our clients and to refer business from their customers tous. If companies with which we have business and marketing alliances do notrefer their customers to us to perform their online campaign and messagemanagement, our revenue and results of operations could be severely harmed.

**WEWILL BE DEPENDENT UPON TECHNOLOGIES, INCLUDING OUR MOJO, MEDIAPLEX SYSTEMS,COMMISSION JUNCTION, HI-SPEED MEDIA, SEARCH123,  PRICERUNNER, WEBCLIENTS, AND FASTCLICK TECHNOLOGIES, FOR OUR FUTURE REVENUE, AND IF THESETECHNOLOGIES DO NOT GENERATE SUFFICIENT REVENUE, OUR BUSINESS WOULD BE HARMED.**

Our future revenue islikely to be dependent on the acceptance by advertisers and Web publishers ofthe use of our technologies. If these technologies do not perform asanticipated or otherwise do not attract advertisers and Web publishers to useour services, our operations will suffer. In addition, we may incur significantexpenses in the future enhancing our existing and purchased technologies. Ifour revenue generated from the use of our technologies does not cover thesedevelopment costs, our results of operations and financial condition wouldsuffer.

**IFOUR TECHNOLOGIES SUFFER FROM DESIGN DEFECTS, WE MAY NEED TO EXPENDSIGNIFICANT RESOURCES TO ADDRESS RESULTING PRODUCT LIABILITY CLAIMS.**

Our business will beharmed if our technologies suffer from design or performance defects and, as aresult, we could become subject to significant product liability claims.Technologies as complex as our technologies may contain design and/orperformance defects which are not detectable even after extensive internaltesting. Such defects may become apparent only after widespread commercial use.Our contracts with our clients currently do not contain provisions tocompletely limit our exposure to liabilities resulting from product liabilityclaims. Although we have not experienced any product liability claims to date,we cannot assure you that we will not do so in the future. A product liabilityclaim brought against us, which is not adequately covered by our insurance,could materially harm our business.

**TECHNOLOGYSALES AND IMPLEMENTATION CYCLES ARE LENGTHY, WHICH COULD DIVERT OUR FINANCIALAND OTHER RESOURCES, AND ARE SUBJECT TO DELAYS, WHICH COULD RESULT IN DELAYEDREVENUE.**

If the sales andimplementation cycle of our technology products and services are delayed, ourrevenue will likewise be delayed. Our technology sales and implementationcycles are often lengthy, causing us to recognize revenue long after ourinitial contact with a prospective client. During our sales effort, we spendsignificant time educating prospective clients on the use and benefits of ourproducts and services. As a result, the sales cycle for our technology productsand services may range from a few weeks to several months to over one year forour larger clients. The sales cycle is likely to be longer because we believethat clients may require more extensive approval processes related tointegrating internal business information with their advertising campaigns. Inaddition, in order for a client to implement our services, the client must commita significant amount of resources over an extended period of time. Furthermore,even after a client purchases our services, the implementation cycle is subjectto delays. These delays may be caused by factors within our control, such aspossible technology defects, as well as those outside our control, such asclients’ budgetary constraints, internal acceptance reviews, functionalityenhancements, lack of appropriate client personnel to implement ourapplications, and the complexity of clients’ advertising needs. Also, failureto deliver service or application features consistent with delivery commitmentscould result in a delay or cancellation of a client agreement.

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**WE MAY NOTBE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY FROM UNAUTHORIZED USE, WHICH COULDDIMINISH THE VALUE OF OUR SERVICES, WEAKEN OUR COMPETITIVE POSITION AND REDUCEOUR REVENUE.**

Our success depends inlarge part on our proprietary technologies, including tracking managementsoftware, our affiliate marketing technologies and our MOJO platform. Inaddition, we believe that our trademarks are key to identifying anddifferentiating our services from those of our competitors. We may be requiredto spend significant resources to monitor and police our intellectual propertyrights. If we fail to successfully enforce our intellectual property rights,the value of our services could be diminished and our competitive position maysuffer.

We rely on a combinationof copyright, trademark and trade secret laws, confidentiality procedures andlicensing arrangements to establish and protect our proprietary rights.Third-party software providers could copy or otherwise obtain and use ourtechnology without authorization or develop similar technology independentlywhich may infringe upon our proprietary rights. We may not be able to detectinfringement and may lose competitive position in the market before we do so.In addition, competitors may design around our technology or develop competingtechnologies. Intellectual property protection may also be unavailable orlimited in some foreign countries.

We generally enter intoconfidentiality or license agreements with our employees, consultants, vendors,clients, and corporate partners, and generally control access to anddistribution of our technologies, documentation and other proprietaryinformation. Despite these efforts, unauthorized parties may attempt todisclose, obtain or use our services or technologies. Our precautions may notprevent misappropriation of our services or technologies, particularly in foreigncountries where laws or law enforcement practices may not protect ourproprietary rights as fully as in the United States.

**IF WEFAIL TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGIES, WE COULD LOSE CUSTOMERSAND ADVERTISING INVENTORY.**

The Internet advertisingmarket is characterized by rapidly changing technologies, evolving industrystandards, frequent new product and service introductions, and changingcustomer demands. The introduction of new products and services embodying newtechnologies and the emergence of new industry standards and practices canrender existing products and services obsolete and unmarketable or requireunanticipated technology investments. Our success will depend on our ability toadapt to rapidly changing technologies, to enhance existing solutions and todevelop and introduce a variety of new solutions to address our customers’ andpublisher partners’ changing demands. For example, advertisers are increasinglyrequiring Internet advertising networks to have the ability to deliveradvertisements utilizing new formats that surpass stationary images andincorporate rich media, such as video and audio, interactivity, and moreprecise consumer targeting techniques. Our systems do not support some types ofadvertising formats, such as certain video and audio formats, and many of thewebsites in our networks have not implemented systems to allow rich mediaadvertisements. In addition, an increase in the bandwidth of Internet accessresulting in faster data delivery may provide new products and services thatwill take advantage of this expansion in delivery capability. If we fail toadapt successfully to such developments, we could lose customers or advertisinginventory. We purchase most of the software used in our business from third-parties.We intend to continue to acquire technologies necessary for us to conduct ourbusiness from third-parties. We cannot assure you that, in the future, thesetechnologies will be available on commercially reasonable terms, or at all. Wemay also experience difficulties that could delay or prevent the successfuldesign, development, introduction or marketing of new solutions. Any newsolution or enhancement that we develop will need to meet the requirements ofour current and prospective customers and may not achieve significant marketacceptance. If we fail to keep pace with technological developments and theintroduction of new industry and technology standards on a cost-effectivebasis, our expenses could increase, and we could lose customers and advertisinginventory.

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**GOVERNMENTENFORCEMENT ACTIONS, CHANGES IN GOVERNMENT REGULATION AND INDUSTRY STANDARDS,INCLUDING BUT NOT LIMITED TO, SPYWARE AND PRIVACY MATTERS, COULD DECREASEDEMAND FOR OUR SERVICES AND INCREASE OUR COSTS OF DOING BUSINESS.**

Laws and regulations thatapply to Internet communications, commerce and advertising are becoming moreprevalent. These regulations could affect the costs of communicating on the Weband could adversely affect the demand for our advertising solutions or otherwiseharm our business, results of operations and financial condition. The UnitedStates Congress has enacted Internet legislation regarding children’s privacy,copyrights, sending of unsolicited commercial email (e.g., the Federal CAN-SPAMAct of 2003), and taxation. The United States Congress has pending legislationregarding Spyware (e.g., H.R. 29, the “Spy Act”) and the New York AttorneyGeneral’s office has sued a major Internet marketer for alleged violations oflegal restrictions against false advertising and deceptive business practicesrelated to Spyware. Other laws and regulations have been adopted and may beadopted in the future, and may address issues such as user privacy, Spyware,pricing, intellectual property ownership and infringement, copyright,trademark, trade secret, export of encryption technology, click fraud,acceptable content, taxation, and quality of products and services. Thislegislation could hinder growth in the use of the Web generally and coulddecrease the acceptance of the Web as a communications, commercial andadvertising medium. The Company does not use any form of SPAM or Spyware andhas policies to prohibit abusive Internet behavior, including prohibiting theuse of SPAM and Spyware by our publisher partners.

Due to the global natureof the Web, it is possible that, although our transmissions originate inCalifornia, Kentucky, Pennsylvania, Virginia, England, and Sweden, thegovernments of other states or foreign countries might attempt to regulate ourtransmissions or levy sales or other taxes relating to our activities. Inaddition, the growth and development of the market for Internet commerce mayprompt calls for more stringent consumer protection laws, both in the UnitedStates and abroad, that may impose additional burdens on companies conductingbusiness over the Internet. The laws governing the Internet remain largelyunsettled, even in areas where there has been some legislative action. It maytake years to determine how existing laws, including those governing intellectualproperty, privacy, libel and taxation, apply to the Internet and Internetadvertising. Our business, results of operations and financial condition couldbe materially and adversely affected by the adoption or modification of laws orregulations relating to the Internet, or the application of existing laws tothe Internet or Internet-based advertising.

**WECOULD BE HELD LIABLE FOR OUR OR OUR CLIENTS’ FAILURE TO COMPLY WITH FEDERAL,STATE AND FOREIGN LAWS GOVERNING CONSUMER PRIVACY.**

Recent growing publicconcern regarding privacy and the collection, distribution and use ofinformation about Internet users has led to increased federal, state andforeign scrutiny and legislative and regulatory activity concerning datacollection and use practices. Any failure by us to comply with applicableforeign, federal and state laws and the requirements of regulatory authoritiesmay result in, among other things, indemnification liability to our clients andthe advertising agencies we work with, administrative enforcement actions andfines, class action lawsuits, cease and desist orders, and civil and criminalliability. Recently, class action lawsuits have been filed alleging violationsof privacy laws by ISPs. The European Union’s directive addressing data privacylimits our ability to collect and use information regarding Internet users.These restrictions may limit our ability to target advertising in most Europeancountries. Our failure to comply with these or other federal, state or foreignlaws could result in liability and materially harm our business.

In addition to governmentactivity, privacy advocacy groups and the high-technology and direct marketingindustries are considering various new, additional or different self-regulatorystandards. This focus, and any legislation, regulations or standardspromulgated, may impact us adversely. Governments, trade associations andindustry self-regulatory groups may enact more burdensome laws, regulations and

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guidelines,including consumer privacy laws, affecting our clients and us. Since many ofthe proposed laws or regulations are just being developed, and a consensus onprivacy and data usage has not been reached, we cannot yet determine the impactthese regulations may have on our business. However, if the gathering ofprofiling information were to be curtailed, Internet advertising would be lesseffective, which would reduce demand for Internet advertising and harm ourbusiness.

Our customers are alsosubject to various federal and state regulations concerning the collection anduse of information regarding individuals. These laws include the Children’sOnline Privacy Protection Act, the Federal Drivers Privacy Protection Act of1994, the privacy provisions of the Gramm-Leach-Bliley Act, the CAN-SPAM Act of2003, H.R. 29, as well as other laws that govern the collection and use ofconsumer credit information. We cannot assure you that our clients arecurrently in compliance, or will remain in compliance, with these laws andtheir own privacy policies. We may be held liable if our clients use ourtechnologies in a manner that is not in compliance with these laws or their ownstated privacy standards.

**OURSTOCK PRICE IS LIKELY TO BE VOLATILE AND COULD DROP UNEXPECTEDLY.**

Our common stock has beenpublicly traded since March 30, 2000. The market price of our common stockhas been subject to significant fluctuations since the date of our initialpublic offering.

The stock market has fromtime to time experienced significant price and volume fluctuations that haveaffected the market prices of securities, particularly securities of technologycompanies. As a result, the market price of our common stock may materiallydecline, regardless of our operating performance. In the past, followingperiods of volatility in the market price of a particular company’s securities,securities class action litigation has often been brought against that company.We may become involved in this type of litigation in the future. Litigation ofthis type is often expensive and diverts management’s attention and resources.

**WE MAY BEREQUIRED TO RECORD A SIGNIFICANT CHARGE TO EARNINGS IF OUR GOODWILL ORAMORTIZABLE INTANGIBLE ASSETS BECOME IMPAIRED.**

As of December 31,2005, we have total intangible assets, including goodwill, of $375.5 million. Weare required under accounting principles generally accepted in the UnitedStates to review our amortizable intangible assets for impairment wheneverevents and circumstances indicate that the carrying value of such assets maynot be recoverable. We are also required to review goodwill for impairment onan annual basis, or between annual tests whenever events and circumstancesindicate that the carrying value of goodwill may not be recoverable.   Events and circumstances considered indetermining whether the carrying value of amortizable intangible assets andgoodwill may not be recoverable include, but are not limited to: significantchanges in performance relative to expected operating results; significantchanges in the use of the assets; significant negative industry or economictrends; a significant decline in the Company’s stock price for a sustainedperiod of time; and changes in the Company’s business strategy. We may berequired to record a significant charge to earnings in a period in which anyimpairment of our goodwill or amortizable intangible assets in determined.

**IF WEFAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE MAY NOT BEABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR PREVENT FRAUD AND OUR STOCKPRICE MAY BE ADVERSELY IMPACTED.**

Effective internalcontrols are necessary for us to provide reliable financial reports and toeffectively prevent fraud. Any inability to provide reliable financial reportsor to prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002requires management to evaluate and assess the effectiveness of our internalcontrol over financial reporting. As a result of our assessment of our internalcontrol over financial reporting as of December 31, 2004, we determinedthat we had a material weakness in our internal control over financialreporting related to the operation of our controls for evaluating and 

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documentingour deferred tax assets. As further described in Item 9A “Controls andProcedures,” we remediated this material weakness during 2005 and determinedthat our internal control over financial reporting was effective as of December 31,2005. In order to continue to comply with the requirements of theSarbanes-Oxley Act, we are required to continuously evaluate and, whereappropriate, enhance our policies, procedures and internal controls. If we failto maintain the adequacy of our internal controls, we could be subject toregulatory scrutiny and investors could lose confidence in the accuracy andcompleteness of our financial reports. We cannot assure you that we will beable to fully comply with the requirements of the Sarbanes-Oxley Act or thatmanagement will conclude that our internal control over financial reporting iseffective. If we fail to fully comply with the requirements of the Sarbanes-OxleyAct, our stock price may decline.

**DECREASEDEFFECTIVENESS OF EQUITY COMPENSATION COULD ADVERSELY AFFECT OUR ABILITY TOATTRACT AND RETAIN EMPLOYEES, AND CHANGES IN ACCOUNTING FOR EQUITY COMPENSATIONWILL ADVERSELY AFFECT EARNINGS.**

We have historically usedstock options as a key component of our employee compensation program in orderto align employees’ interests with the interests of our stockholders, encourageemployee retention, and provide competitive compensation packages. Volatilityor lack of positive performance in our stock price may adversely affect ourability to retain key employees, all of whom have been granted stock options,or attract additional highly-qualified personnel. A portion of our outstandingemployee stock options have exercise prices in excess of our current stockprice. To the extent these circumstances continue or recur, our ability toretain present employees may be adversely affected. In addition, the FinancialAccounting Standards Board (“FASB”) has finalized changes to GAAP that willrequire an expense to be recorded by the Company for employee stock optiongrants and other equity incentives beginning January 1, 2006. Moreover,applicable NASDAQ listing standards relating to obtaining stockholder approvalof equity compensation plans could make it more difficult or expensive for usto grant stock options to employees in the future. As a result, we may incurincreased compensation costs, change our equity compensation strategy or findit difficult to attract, retain and motivate employees, any of which couldmaterially adversely affect our business.

**ITEM1B.**       UNRESOLVED STAFF COMMENTS

None.

**ITEM 2.**                PROPERTIES

We lease a number ofproperties in both domestic and foreign locations.

Our principal corporateoffices are located in Westlake Village, California, where we lease a propertywith approximately 35,000 square-feet of space. This facility is also used byour Media segment’s operations. Other leased facilities used in our Mediasegment operations include a 7,000 square-foot facility in New York, New York,shared with our Technology segment, another 3,900 square-foot facility in NewYork, New York, a 27,500 square-foot facility and a 6,500 square-foot facilityin Harrisburg, Pennsylvania, a 14,900 square-foot facility and a 7,600square-foot facility in Santa Barbara, California, a 8,800 square-foot facilityand a 2,200 square-foot facility in Los Angeles, California, as well as a10,600 square-foot facility in San Francisco, California, shared with ourTechnology segment. In November 2005, we signed a lease, to expand ourprincipal corporate offices, for an additional 5,300 square-foot facility inWestlake Village, California, which is also used by our Media segment’soperations. Additionally, we own land and a building, approximating 61,900square-feet and 23,800 square-feet, respectively, in Simi Valley, California,which is used by our Media segment’s operations.

Leased facilities used inour Affiliate Marketing segment operations include a 12,500 square-footfacility in Marlborough, Massachusetts and a 28,400 square-foot facility inSanta Barbara, California.

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Leased facilities used inour Technology segment operations include a 10,600 square-foot facility in SanFrancisco, California, and a 7,000 square-foot facility in New York, New York,both shared by our Media Segment, and a 20,800 square-foot facility inLouisville, Kentucky.

We also lease small officespace and facilities in: Agoura Hills, California; London, England; Paris,France; Munich, Germany; and, Stockholm, Sweden. Our foreign offices are usedprimarily for our Media segment operations and Affiliate Marketing segmentoperations. In addition, we use third-party co-location facilities that houseour Web servers in: San Jose, California; Los Angeles, California; Sunnyvale,California; El Segundo, California; Louisville, Kentucky; Mechanicsburg,Pennsylvania; Ashburn, Virginia; London, England; and, Stockholm, Sweden. Weare currently pursuing additional office space in response to our historicaland projected growth. For additional information regarding our obligationsunder leases, see note 15 “Commitments and Contingencies” to ourconsolidated financial statements included in this annual report on Form 10-K.

**ITEM 3.**                LEGALPROCEEDINGS

***BTG InternationalInc. v. Barnesandnoble.com***

In September 2004,the Company received a letter from Barnesandnoble.com (“B&N”) requestingthat the Company fully indemnify B&N for the costs and expenses associatedwith a lawsuit for patent infringement filed by BTG International, Inc. (“BTG”)against B&N and other defendants. The complaint alleged that through theuse of certain online advertising technologies, B&N infringed two patentsobtained by BTG purporting to cover methods and apparatuses for “AttachingNavigational History Information to Universal Resource Locator Links on a WorldWide Web Page” (U.S. Patent No. 5,712,979) and for “Tracking theNavigational Path of a User on the World Wide Web” (U.S. Patent No. 5,717,860).On October 6, 2005, the Company and B&N, without acknowledgingwrongdoing, entered into a Patent License Agreement with BTG under which theCompany, for a fee of $502,000, acquired a perpetual, non-exclusive license touse the BTG technologies for purposes of providing services to B&N. Thismatter is now concluded.

***Parrisch et al v.Fastclick, Inc.***

Prior to closing theacquisition of Fastclick, its former directors and the Company were named asdefendants in a putative class action complaint filed on August 17, 2005in the Court of Chancery, County of New Castle, State of Delaware by WalterParrisch, on behalf of himself and the other Fastclick stockholders. Thecomplaint alleged, among other things, that the offer and merger would be abreach of fiduciary duty and that the indicated exchange ratio was unfair to thestockholders of Fastclick. The complaint sought, among other things, injunctiverelief against consummation of the offer and merger, damages in an unspecifiedamount and rescission in the event the offer and merger occurs. The Companybelieves the claims are without merit. This complaint was dismissed withoutprejudice in March 2006.

***Other Matters***

From time to time, theCompany may become subject to additional legal proceedings, claims andlitigation arising in the ordinary course of business. In addition, the Companymay receive letters alleging infringement of patent or other intellectualproperty rights. Other than the matters discussed above, the Company is not aparty to any other material legal proceedings, nor is the Company aware of anyother pending or threatened litigation that would have a material adverseeffect on the Company’s business, operating results, cash flows or financialcondition should such litigation be resolved unfavorably.

**ITEM4.**                SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submittedto a vote of securities holders during the quarter ended December 31,2005.

28

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**PART II.**

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

**Market Information**

Ourcommon stock has traded on The NASDAQ National Market under the symbol “VCLK”since our initial public offering on March 30, 2000. The following tablesets forth, for the periods indicated, the high and low sales prices per shareof our common stock as reported on The NASDAQ National Market. On March 30,2006, the last sale price of our common stock reported by The NASDAQ NationalMarket was $16.83 per share.

| ** **                                    | ** ** | **Price Range of  Common Stock** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                    | ** ** | **High**                                        | ** ** | **Low** | ** ** |
| **Fiscal Year Ended  December 31, 2005** |       |                                            |       |   |   |
| Fourth Quarter                                |       | $                                               | 20.26      |   | $ | 15.26 |   |
| Third Quarter                                 |       | $                                               | 17.64      |   | $ | 12.03 |   |
| Second Quarter                                |       | $                                               | 12.49      |   | $ | 9.01 |   |
| First Quarter                                 |       | $                                               | 14.65      |   | $ | 10.42 |   |

 

| ** **                                    | ** ** | **Price Range of  Common Stock** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                    | ** ** | **High**                                        | ** ** | **Low** | ** ** |
| **Fiscal Year Ended  December 31, 2004** |       |                                            |       |   |   |
| Fourth Quarter                                |       | $                                               | 13.93      |   | $ | 9.02 |   |
| Third Quarter                                 |       | $                                               | 11.94      |   | $ | 6.48 |   |
| Second Quarter                                |       | $                                               | 12.48      |   | $ | 9.47 |   |
| First Quarter                                 |       | $                                               | 11.94      |   | $ | 9.24 |   |

 

**Stockholders**

As of December 31,2005, there were 843 stockholders of record who held shares of our commonstock.

**Dividend Policy**

We have not declared orpaid any cash dividends on our capital stock since our inception and we do notanticipate paying cash dividends in the foreseeable future.

**ITEM 6.**                SELECTEDFINANCIAL DATA

The selected consolidatedfinancial data set forth below with respect to our consolidated statements ofoperations for the years ended December 31, 2005, 2004 and 2003 and withrespect to our consolidated balance sheets as of December 31, 2005 and2004 have been derived from the audited consolidated financial statements ofValueClick which are included elsewhere herein. The consolidated statement ofoperations data for the years ended December 31, 2002 and 2001 and theconsolidated balance sheet data as of December 31, 2003, 2002 and 2001have been derived from our audited consolidated financial statements notincluded herein. The selected financial data for the year ended December 31,2004, for each of the quarters in 2004, and for the second quarter of 2005, hasbeen restated to reflect corrections that are further described in note 2 “Restatementof Previously Issued Financial Statements” to the consolidated financialstatements included in Item 8 “Financial Statements and Supplementary Data”of this annual report on Form 10-K. The selected consolidatedfinancial data set forth below is qualified in its entirety by, and should beread in conjunction with, Item 7 “Management’s Discussion and Analysis of 

29

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FinancialCondition and Results of Operations” and the consolidated financial statementsand the notes to those statements both included elsewhere herein.

**CONSOLIDATEDSTATEMENT OF OPERATIONS DATA**

| ** **                                                                                                       | ** ** | **For the Year Ended December 31,**       | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2005**                                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                                                       | ** ** | ** **                                                         | ** ** | **(As Restated)  (1)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                       | ** ** | **(in thousands, except per share data)** | ** ** |
| **Consolidated Statement of  Operations Data(4):**                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Revenue                                                                                                          |       | $                                                                  | 304,007    |   |   | $ | 169,178 |   |   | $ | 92,516 |   | $ | 62,554 |   | $ | 44,873 |   |
| Cost of revenue                                                                                                  |       | 88,839                                                             |       |   | 50,762 |   |   | 32,024 |   | 21,733 |   | 20,370 |   |
| Gross profit                                                                                                     |       | 215,168                                                            |       |   | 118,416 |   |   | 60,492 |   | 40,821 |   | 24,503 |   |
| Operating expenses:                                                                                              |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Sales and marketing(2)                                                                                           |       | 74,823                                                             |       |   | 36,000 |   |   | 21,162 |   | 17,001 |   | 11,976 |   |
| General and  administrative(2)                                                                                   |       | 40,526                                                             |       |   | 27,168 |   |   | 19,699 |   | 17,784 |   | 13,301 |   |
| Technology(2)                                                                                                    |       | 21,314                                                             |       |   | 15,891 |   |   | 10,504 |   | 10,459 |   | 5,313 |   |
| Stock-based compensation                                                                                         |       | 2,022                                                              |       |   | 739 |   |   | 352 |   | 1,527 |   | 2,699 |   |
| Amortization of  intangible assets                                                                               |       | 12,179                                                             |       |   | 4,111 |   |   | 1,570 |   | 533 |   | 1,875 |   |
| Merger-related costs                                                                                             |       | —                                                             |       |   | — |   |   | — |   | 17 |   | 1,787 |   |
| Restructuring expense  (benefit), net                                                                            |       | (73                                                                | )          |   | (1,003 | ) |   | — |   | 2,320 |   | 515 |   |
| Total operating expenses                                                                                         |       | 150,791                                                            |       |   | 82,906 |   |   | 53,287 |   | 49,641 |   | 37,466 |   |
| Income (loss) from  operations                                                                                   |       | 64,377                                                             |       |   | 35,510 |   |   | 7,205 |   | (8,820 | ) | (12,963 | ) |
| Interest income, net                                                                                             |       | 5,077                                                              |       |   | 3,665 |   |   | 3,364 |   | 5,909 |   | 5,051 |   |
| Gain on sale of  marketable securities                                                                           |       | —                                                             |       |   | — |   |   | — |   | 134 |   | 701 |   |
| Gain on sale of equity  interest in Japan subsidiary                                                             |       | —                                                             |       |   | 8,007 |   |   | — |   | — |   | — |   |
| Other income (expense)                                                                                           |       | —                                                             |       |   | 63 |   |   | — |   | 32 |   | (5 | ) |
| Income (loss) before  income taxes, minority interest and cumulative effect of a change in  accounting principle |       | 69,454                                                             |       |   | 47,245 |   |   | 10,569 |   | (2,745 | ) | (7,216 | ) |
| Income tax expense                                                                                               |       | 28,810                                                             |       |   | 16,153 |   |   | 830 |   | 163 |   | 34 |   |
| Income (loss) before  minority interest and cumulative effect of a change in accounting principle                |       | 40,644                                                             |       |   | 31,092 |   |   | 9,739 |   | (2,908 | ) | (7,250 | ) |
| Minority share of loss  (income) in consolidated subsidiary                                                      |       | —                                                             |       |   | 130 |   |   | 84 |   | (15 | ) | 32 |   |
| Income (loss) before  cumulative effect of a change in accounting principle                                      |       | 40,644                                                             |       |   | 31,222 |   |   | 9,823 |   | (2,923 | ) | (7,218 | ) |
| Cumulative effect of a  change in accounting principle(3)                                                        |       | —                                                             |       |   | — |   |   | — |   | (7,649 | ) | — |   |
| Net income (loss)                                                                                                |       | $                                                                  | 40,644     |   |   | $ | 31,222 |   |   | $ | 9,823 |   | $ | (10,572 | ) | $ | (7,218 | ) |
| Basic net income (loss)  per common share                                                                        |       | $                                                                  | 0.46       |   |   | $ | 0.39 |   |   | $ | 0.13 |   | $ | (0.14 | ) | $ | (0.20 | ) |
| Shares used to calculate  basic net income (loss) per common share                                               |       | 87,722                                                             |       |   | 80,063 |   |   | 74,300 |   | 73,744 |   | 37,058 |   |
| Diluted net income  (loss) per common share                                                                      |       | $                                                                  | 0.45       |   |   | $ | 0.37 |   |   | $ | 0.13 |   | $ | (0.14 | ) | $ | (0.20 | ) |
| Shares used to calculate diluted net income (loss)  per common share                                             |       | 90,857                                                             |       |   | 84,038 |   |   | 78,436 |   | 73,744 |   | 37,058 |   |

----

(1)          See note 2 “Restatementof Previously Issued Financial Statements” to the consolidated financialstatements.

30

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(2)          Excludesstock-based compensation for the following periods (in thousands):

| ** **                  | ** ** | **For the Year Ended December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------------------------|------------|
| ** **                  | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Sales and  marketing        |       | $                                                            | 817        |   | $ | 369 |   | $ | 113 |   | $ | 488 |   | $ | 864 |   |
| General and  administrative |       | 382                                                          |       | 245 |   | 181 |   | 779 |   | 1,376 |   |
| Technology                  |       | 823                                                          |       | 125 |   | 58 |   | 260 |   | 459 |   |
|                        |       | $                                                            | 2,022      |   | $ | 739 |   | $ | 352 |   | $ | 1,527 |   | $ | 2,699 |   |

 

(3)          On January 1, 2002,we adopted the accounting standards set forth in Statement of FinancialAccounting Standards No. 142, “Goodwill and other Intangible Assets” (“SFASNo. 142”). In accordance with the transitional guidance of SFAS No. 142,we completed our impairment assessment in the second quarter of 2002 from theadoption of this standard and determined that goodwill of $7.6 millionrelated to the Bach Systems and ValueClick Japan acquisitions was impaired at January 1,2002 and subsequently reflected a cumulative effect of a change in accountingprinciple for the goodwill impairment.

(4)          Theamounts included in the Consolidated Statement of Operations Data for the yearspresented reflect acquisitions and a disposition as follows:

| Acquisitions                                                | ** ** | ** **          | ** ** | **Date** |
|-------------------------------------------------------------|------------|---------------------|------------|----------|
| Fastclick, Inc.                                        |       | September 2005 |
| Web Marketing  Holdings, Inc. (“Webclients”) |       | June 2005      |
| E-Babylon, Inc.                                        |       | June 2005      |
| Pricerunner AB                                              |       | August 2004    |
| Commission  Junction, Inc.                             |       | December 2003  |
| Hi-Speed  Media, Inc.                                  |       | December 2003  |
| Search123.com Inc.                                     |       | May 2003       |
| Be Free, Inc.                                          |       | May 2002       |
| Mediaplex, Inc.                                        |       | October 2001   |

 

| Disposition      | ** ** | ** **      | ** ** | **Date** |
|------------------|------------|-----------------|------------|----------|
| ValueClick Japan |       | March 2004 |

 

**Consolidated Balance Sheet Data:**

| ** **                                        | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                        | ** ** | ** **                            | ** ** | **(As Restated)  (1)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **(in thousands)**               | ** ** |
| Cash, cash  equivalents and marketable securities |       | $                                     | 240,783    |   |   | $ | 242,583 |   |   | $ | 220,120 |   | $ | 232,978 |   | $ | 163,355 |   |
| Working capital                                   |       | $                                     | 259,797    |   |   | $ | 241,424 |   |   | $ | 213,809 |   | $ | 234,229 |   | $ | 161,928 |   |
| Total assets                                      |       | $                                     | 720,861    |   |   | $ | 384,714 |   |   | $ | 323,099 |   | $ | 263,850 |   | $ | 190,626 |   |
| Total non-current  liabilities                    |       | $                                     | 35,372     |   |   | $ | 14,964 |   |   | $ | 5,676 |   | $ | 4,626 |   | $ | 1,025 |   |
| Total stockholders’  equity                  |       | $                                     | 618,543    |   |   | $ | 328,761 |   |   | $ | 274,207 |   | $ | 231,981 |   | $ | 165,507 |   |

----

(1)          Seenote 2 “Restatement of Previously Issued Financial Statements” to theconsolidated financial statements.

31

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**Quarterly Results**

Thefollowing table sets forth some of our selected financial information for oureight most recent fiscal quarters. In the opinion of our management, this unauditedfinancial information has been prepared on the same basis as the auditedfinancial statements, and includes all adjustments, consisting only of normalrecurring adjustments, necessary to present this information fairly when readin conjunction with our consolidated financial statements and the related notescontained elsewhere herein. These operating results are not necessarilyindicative of results of any future period.

| ** **                                           | ** ** | **For the Three-Month Period Ended**                        | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **Dec. 31,  2005**                                                         | ** ** | **Sept. 30,  2005** | ** ** | **Jun. 30,  2005** | ** ** | **Mar. 31,  2005** | ** ** | **Dec. 31,  2004** | ** ** | **Sept. 30,  2004** | ** ** | **Jun. 30,  2004** | ** ** | **Mar. 31,  2004** | ** ** |
| ** **                                           | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | **(As Restated)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | ** **                                                                      | ** ** | ** ** | ** ** | **(1)** | ** ** | ** ** | ** ** | **–—–—————(As** Restated)(1)——————–– | ** ** |
| ** **                                           | ** ** | **(unaudited)  (in thousands, except per share data)** | ** ** |
| Revenue                                              |       | $                                                                               | 116,607    |   |   | $ | 81,414 |   |   |   | $ | 54,572 |   |   |   | $ | 51,414 |   |   | $ | 54,371 |   |   | $ | 43,492 |   |   | $ | 34,606 |   |   | $ | 36,709 |   |   |
| Cost of revenue                                      |       | 39,270                                                                          |       |   | 22,496 |   |   |   | 13,768 |   |   |   | 13,305 |   |   | 15,011 |   |   | 13,206 |   |   | 11,416 |   |   | 11,129 |   |   |
| Gross profit                                         |       | 77,337                                                                          |       |   | 58,918 |   |   |   | 40,804 |   |   |   | 38,109 |   |   | 39,360 |   |   | 30,286 |   |   | 23,190 |   |   | 25,580 |   |   |
| Operating expenses:                                  |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales and  marketing(2)                              |       | 26,463                                                                          |       |   | 21,993 |   |   |   | 15,044 |   |   |   | 11,323 |   |   | 11,597 |   |   | 9,760 |   |   | 7,198 |   |   | 7,445 |   |   |
| General and  administrative(2)                       |       | 13,020                                                                          |       |   | 10,287 |   |   |   | 8,683 |   |   |   | 8,536 |   |   | 7,624 |   |   | 6,962 |   |   | 5,931 |   |   | 6,651 |   |   |
| Technology(2)                                        |       | 6,568                                                                           |       |   | 5,665 |   |   |   | 4,678 |   |   |   | 4,403 |   |   | 3,984 |   |   | 3,663 |   |   | 4,168 |   |   | 4,076 |   |   |
| Stock-based  compensation                            |       | 1,853                                                                           |       |   | 70 |   |   |   | 45 |   |   |   | 54 |   |   | 203 |   |   | 124 |   |   | 174 |   |   | 238 |   |   |
| Amortization of  intangible assets                   |       | 6,387                                                                           |       |   | 3,107 |   |   |   | 1,448 |   |   |   | 1,237 |   |   | 1,276 |   |   | 1,107 |   |   | 864 |   |   | 864 |   |   |
| Restructuring  expense (benefit), net                |       | (77                                                                             | )          |   | — |   |   |   | 206 |   |   |   | (202 | ) |   | — |   |   | — |   |   | (1,003 | ) |   | — |   |   |
| Total operating  expenses                            |       | 54,214                                                                          |       |   | 41,122 |   |   |   | 30,104 |   |   |   | 25,351 |   |   | 24,684 |   |   | 21,616 |   |   | 17,332 |   |   | 19,274 |   |   |
| Income from  operations                              |       | 23,123                                                                          |       |   | 17,796 |   |   |   | 10,700 |   |   |   | 12,758 |   |   | 14,676 |   |   | 8,670 |   |   | 5,858 |   |   | 6,306 |   |   |
| Interest and other  income, net                      |       | 1,610                                                                           |       |   | 687 |   |   |   | 1,420 |   |   |   | 1,360 |   |   | 1,188 |   |   | 1,001 |   |   | 843 |   |   | 696 |   |   |
| Gain on sale of  equity interest in Japan subsidiary |       | —                                                                          |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   | 8,007 |   |   |
| Income before  income taxes and minority interest    |       | 24,733                                                                          |       |   | 18,483 |   |   |   | 12,120 |   |   |   | 14,118 |   |   | 15,864 |   |   | 9,671 |   |   | 6,701 |   |   | 15,009 |   |   |
| Income tax expense                                   |       | 10,541                                                                          |       |   | 7,481 |   |   |   | 5,353 |   |   |   | 5,435 |   |   | 4,162 |   |   | 3,695 |   |   | 2,561 |   |   | 5,735 |   |   |
| Income before  minority interest                     |       | 14,192                                                                          |       |   | 11,002 |   |   |   | 6,767 |   |   |   | 8,683 |   |   | 11,702 |   |   | 5,976 |   |   | 4,140 |   |   | 9,274 |   |   |
| Minority share of  loss in consolidated subsidiary   |       | —                                                                          |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   |   | — |   |   | — |   |   | 130 |   |   |
| Net income                                           |       | $                                                                               | 14,192     |   |   | $ | 11,002 |   |   |   | $ | 6,767 |   |   |   | $ | 8,683 |   |   | $ | 11,702 |   |   | $ | 5,976 |   |   | $ | 4,140 |   |   | $ | 9,404 |   |   |
| Basic net income  per common share                   |       | $                                                                               | 0.14       |   |   | $ | 0.13 |   |   |   | $ | 0.08 |   |   |   | $ | 0.11 |   |   | $ | 0.14 |   |   | $ | 0.07 |   |   | $ | 0.05 |   |   | $ | 0.12 |   |   |
| Diluted net income  per common share                 |       | $                                                                               | 0.14       |   |   | $ | 0.13 |   |   |   | $ | 0.08 |   |   |   | $ | 0.10 |   |   | $ | 0.14 |   |   | $ | 0.07 |   |   | $ | 0.05 |   |   | $ | 0.11 |   |   |

----

(1)          Asa result of the error described in note 2 “Restatement of Previously IssuedFinancial Statements” to the consolidated financial statements, we are alsorequired to restate our previously reported consolidated statements ofoperations for each of the quarters in 2004 and for the second quarter of 2005.The unaudited impact on the statement of operations for each of these quartersis presented below. The Company intends to file amended quarterly reports on Form 10-Q/Afor the quarters

32

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ended March 31, 2005, June 30, 2005 and September 30,2005 with the Securities and Exchange Commission as soon as practicable afterthe filing of this annual report on Form 10-K. 

| ** **                                                       | ** ** | **For the Three-Month Period Ended**           | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **Jun. 30,  2005**                                            | ** ** | **Dec. 31,  2004** | ** ** | **Sept. 30,  2004** | ** ** | **Jun. 30,  2004** | ** ** | **Mar. 31,  2004** | ** ** |
| ** **                                                       | ** ** | ** **                                                         | ** ** | ** ** | ** ** | **(unaudited)** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **(in thousands, except per share data)** | ** ** |
| Income tax expense  (benefit)—as previously reported        |       | $                                                                  | 4,030      |   | $ | (45,443 | ) |   | $ | 2,053 |   |   | $ | 1,187 |   | $ | 1,691 |   |
| Impact of restatement                                            |       | 1,323                                                              |       | 49,605 |   |   | 1,642 |   |   | 1,374 |   | 4,044 |   |
| Income tax expense—as restated                              |       | $                                                                  | 5,353      |   | $ | 4,162 |   |   | $ | 3,695 |   |   | $ | 2,561 |   | $ | 5,735 |   |
| Net income—as previously reported                           |       | $                                                                  | 8,090      |   | $ | 61,307 |   |   | $ | 7,618 |   |   | $ | 5,514 |   | $ | 13,448 |   |
| Impact of restatement                                            |       | (1,323                                                             | )          | (49,605 | ) |   | (1,642 | ) |   | (1,374 | ) | (4,044 | ) |
| Net income—as restated                                      |       | $                                                                  | 6,767      |   | $ | 11,702 |   |   | $ | 5,976 |   |   | $ | 4,140 |   | $ | 9,404 |   |
| Basic net income per common share—as previously  reported   |       | $                                                                  | 0.10       |   | $ | 0.75 |   |   | $ | 0.09 |   |   | $ | 0.07 |   | $ | 0.17 |   |
| Impact of restatement                                            |       | (0.02                                                              | )          | (0.61 | ) |   | (0.02 | ) |   | (0.02 | ) | (0.05 | ) |
| Basic net income per common share—as restated               |       | $                                                                  | 0.08       |   | $ | 0.14 |   |   | $ | 0.07 |   |   | $ | 0.05 |   | $ | 0.12 |   |
| Diluted net income per common share—as previously  reported |       | $                                                                  | 0.10       |   | $ | 0.73 |   |   | $ | 0.09 |   |   | $ | 0.07 |   | $ | 0.16 |   |
| Impact of restatement                                            |       | (0.02                                                              | )          | (0.59 | ) |   | (0.02 | ) |   | (0.02 | ) | (0.05 | ) |
| Diluted net income  per common share—as restated            |       | $                                                                  | 0.08       |   | $ | 0.14 |   |   | $ | 0.07 |   |   | $ | 0.05 |   | $ | 0.11 |   |

 

(2)          Excludesstock-based compensation for the following periods (in thousands):

| ** **                 | ** ** | **For the Three-Month Period Ended** | ** ** |
|----------------------------|------------|----------------------------------------------------------|------------|
| ** **                 | ** ** | **Dec. 31,  2005**                                  | ** ** | **Sept. 30,  2005** | ** ** | **Jun. 30,  2005** | ** ** | **Mar. 31,  2005** | ** ** | **Dec. 31,  2004** | ** ** | **Sept. 30,  2004** | ** ** | **Jun. 30,  2004** | ** ** | **Mar. 31,  2004** | ** ** |
| Sales and marketing        |       |                                                     | $          | 744 |   |   |   | $ | 28 |   |   |   | $ | 20 |   |   |   | $ | 25 |   |   |   | $ | 101 |   |   |   | $ | 62 |   |   |   | $ | 87 |   |   |   | $ | 119 |   |   |
| General and administrative |       |                                                     | 321        |   |   |   | 27 |   |   |   | 17 |   |   |   | 17 |   |   |   | 67 |   |   |   | 41 |   |   |   | 58 |   |   |   | 79 |   |   |
| Technology                 |       |                                                     | 788        |   |   |   | 15 |   |   |   | 8 |   |   |   | 12 |   |   |   | 35 |   |   |   | 21 |   |   |   | 29 |   |   |   | 40 |   |   |
|                       |       |                                                     | $          | 1,853 |   |   |   | $ | 70 |   |   |   | $ | 45 |   |   |   | $ | 54 |   |   |   | $ | 203 |   |   |   | $ | 124 |   |   |   | $ | 174 |   |   |   | $ | 238 |   |   |

 

**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition andresults of operations should be read in conjunction with our consolidatedfinancial statements and the related notes thereto included elsewhere in thisannual report on Form 10-K beginning on page F-1, andgives effect to the restatement of our 2004 consolidated financial statementsdiscussed in note 2 “Restatement of Previously Issued Financial Statements” toour consolidated financial statements.

The following discussion contains forward-lookingstatements that involve risks and uncertainties including anticipated financialperformance, business prospects, anticipated capital expenditures and othersimilar matters, which reflect management’s best judgment based on factorscurrently known. Actual results could differ materially from those discussedherein. Factors that could cause or contribute to the differences are discussedin Item 1A “Risk Factors” and elsewhere in this annual report on Form 10-K.

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**Overview**

We offer a suite ofproducts and services that enable marketers to advertise and sell theirproducts through all major online marketing channels—display/Web advertising,lead generation marketing, email marketing, search marketing, comparison shopping,and affiliate marketing. We also offer technology infrastructure tools andservices that enable advertisers and advertising agencies to implement andmanage their own online display advertising and email campaigns, and thatassist Web publishers with management of their website inventory. Additionally,we provide technology that assists advertising agencies and other companieswith information management regarding their financial, workflow and offlinemedia planning and buying processes. The broad range of products and servicesthat we provide enables our customers to address all aspects of the marketingprocess, from strategic planning through execution, including resultsmeasurement and campaign refinements. By combining our media, affiliate marketingand technology offerings with our experience in both online and offlinemarketing, we help our customers around the world optimize their marketingcampaigns both on the Internet and through offline media.

In 2005, we acquiredFastclick, Inc. (“Fastclick”), completed on September 29, 2005, WebMarketing Holdings, Inc. (“Webclients”), completed on June 24, 2005,and E-Babylon, Inc. (“E-Babylon”), completed on June 13, 2005. Theresults of operations of Fastclick, Webclients and E-Babylon have been includedin our consolidated results of operations beginning October 1, 2005, July 1,2005 and June 1, 2005, respectively. On August 6, 2004, we completedthe acquisition of Pricerunner AB (“Pricerunner”) and included the results ofoperations of Pricerunner beginning August 1, 2004. On March 26,2004, we sold our 59% equity interest in ValueClick Japan and recorded a one-timegain from the sale of $8.0 million. The results of operations forValueClick Japan, including this one-time gain, are included in our consolidatedresults of operations through March 31, 2004. The results of operations ofValueClick Japan for the period from March 26, 2004 to March 31, 2004were not significant. In 2003, we acquired Hi-Speed Media, Inc. (“Hi-SpeedMedia”), completed on December 17, 2003, Commission Junction, Inc. (“CommissionJunction”), completed on December 7, 2003, and Search123.com Inc. (“Search123”),completed on May 30, 2003. The results of operations of Hi-Speed Media,Commission Junction and Search123 have been included in our consolidatedresults of operations beginning January 1, 2004, December 1, 2003 andJune 1, 2003, respectively. Note 4 “Recent Business Combinations andInvestments” to our consolidated financial statements included in this annualreport on Form 10-K provides unaudited pro-forma revenue, netincome, and basic and diluted net income per common share for the years ended December 31,2005 and 2004 as if these transactions occurred as of January 1, 2004.

We derive our revenue fromthree business segments based on the types of products and services provided.These business segments are Media, Affiliate Marketing and Technology.

*MEDIA—**Our*Media segmentprovides a comprehensive suite of online media services and tailored programsthat help marketers create awareness, attract visitors and generate leads andsales through the Internet. Our Media segment has grown both organically andthrough the acquisition of complementary businesses such as Search123,completed in May 2003, Hi-Speed Media, completed in December 2003,Pricerunner, completed in August 2004, E-Babylon, completed in June 2005,Webclients, completed in June 2005, and Fastclick, completed in September 2005.

We offer advertisers andadvertising agencies a range of online media solutions in the categories ofdisplay/Web advertising, lead generation marketing, email marketing, searchmarketing, comparison shopping, and promotional and industry-focused onlinecontent that are described in detail in Item 1 “Business” of this document. Toaccomplish this, we have partnered with thousands of online publishers toprovide advertisers and advertising agencies with access to one of the largestand most reputable online advertising networks in the industry and we haveemployed rigorous network quality control and advanced proprietary targetingtechnology. We also sell a limited number of consumer products directly toend-user consumers through a small number of our own e-commerce websites.

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Our Media services aresold on a variety of pricing models, including cost-per-thousand-impression (“CPM”),cost-per-click (“CPC”), cost-per-lead (“CPL”), and cost-per-action (“CPA”).

*AFFILIATE MARKETING—**Our*AffiliateMarketing segment operates through our wholly-owned subsidiaries Be Free,acquired in May 2002, and Commission Junction, acquired in December 2003.In 2004, we integrated Be Free and Commission Junction and began marketing ouraffiliate marketing offerings under the Commission Junction brand name.

Our affiliate marketingbusiness includes technology and services that enable advertisers to manage,track and analyze a variety of online marketing programs. Specifically, ouraffiliate marketing services enable our advertiser clients to: buildrelationships with affiliate publisher partners; manage the offers they make availableto their affiliate partners; track the online traffic, leads and sales thatthese offers drive to the advertiser’s website(s); analyze the effectiveness ofthe offers and affiliate partners; and track the commissions due to theiraffiliate partners. We do not use any form of SPAM or Spyware and we havepolicies to prohibit abusive Internet behavior, including prohibiting the useof SPAM and Spyware by our publisher partners.

We offer affiliatemarketing services that address the needs of advertisers that seek to build andmanage a private-labeled network of third-party online publishers, as well asadvertisers that wish to conduct an affiliate marketing program through ourexisting network of third-party online affiliate publishers. Affiliate Marketingsegment revenues are driven by a combination of fixed fees and variablecompensation that is generally based on either a percentage of commissions paidto affiliates or on a percentage of transaction revenue generated from theprograms managed with our affiliate marketing platforms.

*TECHNOLOGY—**Our*Technologysegment operates through our wholly-owned subsidiaries Mediaplex and MediaplexSystems, which were acquired in October 2001.

Our Mediaplex subsidiaryis an applications service provider (“ASP”) offering technology infrastructuretools and services that enable advertisers and advertising agencies toimplement and manage their own online display advertising and email campaigns,and that assist online publishers with management of their website inventory. Mediaplex’sproducts are based on its proprietary MOJO® technology platform, which has theability to automatically configure messages in response to real-timeinformation from a marketer’s enterprise data system and to provide ongoingcampaign optimization. Mediaplex’s revenues are primarily derived from softwareaccess and use charges. These fees vary based on the client’s use of thetechnology.

Mediaplex Systems is anASP delivering Web-based enterprise management systems to advertising agencies,marketing communications companies, public relations agencies, and other largecorporate advertisers. Mediaplex Systems’ revenue is generated primarily frommonthly service fees paid by customers over the contractual service periods.

The following tableprovides revenue, gross profit, operating expenses, and income from operationsinformation for each of our three business segments. In years prior to 2005,management utilized gross profit as the operating measure for assessing theperformance of each business segment. Further, in years prior to 2005,management allocated corporate expenses to each segment utilizing aquantitative allocation methodology. As a result of the acquisitions ofFastclick, Webclients and E-Babylon in the period from June 2005 through September 2005as described in note 4 “Recent Business Combinations and Investments” to theconsolidated financial statements included in Item 8 “Financial Statements andSupplementary Data” of this annual report on Form 10-K, managementnow utilizes an internal management reporting process that places more emphasison income from operations before stock-based compensation, amortization ofintangible assets, restructuring benefit, net, and corporate expenses formaking business and financial decisions and allocating resources. Income fromoperations by segment, as shown below, excludes the effects of stock-basedcompensation, amortization of intangible assets, 

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restructuringbenefit, net, and corporate expenses.  Corporate expenses consist of those costs notdirectly attributable to a business segment, and include: salaries and benefitsfor the Company’s executive, finance, legal, corporate governance, humanresources, and facilities organizations; fees for professional serviceproviders including audit and legal; insurance; and other corporate expenses. Allprior periods have been adjusted for the new presentation. A reconciliation ofsegment income from operations to consolidated income from operations and areconciliation of segment revenue to consolidated revenue are also provided inthe following table.

Mediasegment revenue includes sales of certain affiliate marketing services ofapproximately $13.3 million, $8.3 million and $1.2 million, and technologyservices of approximately $4.4 million, $5.0 million and $3.1 million,made by Media operations outside the United States, for the years ended 2005,2004 and 2003, respectively.

| ** **                               | ** ** | **For the Year Ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                               | ** ** | **(in thousands)**                                      | ** ** |
| **Media  Segment**                       | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                  |       | $                                                            | 210,581    |   | $ | 93,317 |   | $ | 45,761 |   |
| Gross profit                             |       | 127,590                                                      |       | 49,970 |   | 23,212 |   |
| Operating  expenses                      |       | 83,358                                                       |       | 34,017 |   | 18,678 |   |
| Segment income  from operations          |       | $                                                            | 44,232     |   | $ | 15,953 |   | $ | 4,534 |   |
| **Affiliate Marketing Segment**          |       |                                                         |       |   |   |   |   |
| Revenue                                  |       | $                                                            | 77,479     |   | $ | 59,995 |   | $ | 24,302 |   |
| Gross profit                             |       | 68,238                                                       |       | 50,767 |   | 18,829 |   |
| Operating  expenses                      |       | 25,830                                                       |       | 24,670 |   | 13,187 |   |
| Segment income  from operations          |       | $                                                            | 42,408     |   | $ | 26,097 |   | $ | 5,642 |   |
| **Technology Segment**                   |       |                                                         |       |   |   |   |   |
| Revenue                                  |       | $                                                            | 24,229     |   | $ | 22,233 |   | $ | 23,559 |   |
| Gross profit                             |       | 18,955                                                       |       | 17,263 |   | 18,451 |   |
| Operating  expenses                      |       | 10,987                                                       |       | 11,132 |   | 12,017 |   |
| Segment income  from operations          |       | $                                                            | 7,968      |   | $ | 6,131 |   | $ | 6,434 |   |
| **Total segment income from operations** |       | $                                                            | 94,608     |   | $ | 48,181 |   | $ | 16,610 |   |
| Corporate  expenses                      |       | (16,103                                                      | )          | (8,824 | ) | (7,483 | ) |
| Stock-based  compensation                |       | (2,022                                                       | )          | (739 | ) | (352 | ) |
| Amortization of  intangible assets       |       | (12,179                                                      | )          | (4,111 | ) | (1,570 | ) |
| Restructuring  benefit, net              |       | 73                                                           |       | 1,003 |   | — |   |
| **Consolidated  income from operations** |       | $                                                            | 64,377     |   | $ | 35,510 |   | $ | 7,205 |   |
| **Reconciliation of segment revenue:**   |       |                                                         |       |   |   |   |   |
| Media                                    |       | $                                                            | 210,581    |   | $ | 93,317 |   | $ | 45,761 |   |
| Affiliate  Marketing                     |       | 77,479                                                       |       | 59,995 |   | 24,302 |   |
| Technology                               |       | 24,229                                                       |       | 22,233 |   | 23,559 |   |
| Inter-segment  eliminations              |       | (8,282                                                       | )          | (6,367 | ) | (1,106 | ) |
| **Consolidated revenue**                 |       | $                                                            | 304,007    |   | $ | 169,178 |   | $ | 92,516 |   |

 

**RESULTSOF OPERATIONS—Fiscal Years Ended December 31, 2005 and 2004**

***Revenue.***   Consolidatednet revenue for the year ended December 31, 2005 was $304.0 million,representing a 79.7% increase over the prior year total of $169.2 million.

Media segment revenueincreased to $210.6 million for the year ended December 31, 2005 comparedto $93.3 million for 2004. The increase of $117.3 million, or 125.7%, in Mediasegment revenue was 

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primarilyattributable to the acquisitions of Pricerunner in August 2004, E-Babylonin June 2005, Webclients in June 2005, and Fastclick in September 2005,accounting for $86.6 million of the increase. The remaining increase of $30.7million, or $32.5 million excluding $1.8 million of revenue recorded byValueClick Japan prior to its sale in March 2004, was due to growth in ourother U.S. and European media operations. Please refer to note 4 “RecentBusiness Combinations and Investments” to the consolidated financial statementsfor further details regarding these acquisitions and unaudited pro-formarevenue information. With our recent acquisitions and the overall growthin online advertising, we expect our Media segment revenue to continue toincrease.

Affiliate Marketingsegment revenue increased to $77.5 million for the year ended December 31,2005 compared to $60.0 million in 2004. This increase of $17.5 million, or29.1%, was due to a continued increase in the number of customers and anincrease in transaction volumes associated with both new and existingcustomers.

Technology segment revenuewas $24.2 million for the year ended December 31, 2005 compared to $22.2million in 2004, an increase of $2.0 million, or 9.0%. The increase inrevenue was primarily related to new client wins and increased volumes of adserving for existing clients during 2005. Technology segment revenue is highlyconcentrated with a few significant customers. A loss of, or significantreduction in business from, one or more of these customers could have asignificant negative impact on the revenue of this segment.

There is no guarantee thatrevenue will continue to grow at historical rates, that we will closeadditional acquisitions in future periods or that any potential futureacquisitions will provide the same revenue impact as historical acquisitions.

***Cost of Revenue and Gross Profit.***   Costof revenue for the Media segment consists primarily of amounts that we pay towebsite publishers on ValueClick’s online advertising networks. We pay thesepublishers on a CPC, CPA, CPL or CPM basis. Cost of revenue for the Media,Affiliate Marketing and Technology segments also includes labor costs,depreciation on revenue-producing technologies and Internet access costs. Costof revenue for the Media segment also includes e-commerce product costs andshipping and handling costs. Consolidated cost of revenue was $88.8 million forthe year ended December 31, 2005 compared to $50.8 million in 2004, anincrease of $38.0 million, or 75.0%. The consolidated gross margin has remainedconsistent at 70.8% and 70.0% respectively, for the years ended December 31,2005 and 2004, respectively.

Cost of revenue for theMedia segment increased $39.6 million, or 91.5%, to $83.0 million for the yearended December 31, 2005 compared to $43.3 million in 2004. The increase incost of revenue was primarily related to the corresponding increase in Mediasegment revenue. Our Media segment gross margin of 60.6% for the year ended December 31,2005 compared to 53.5% in 2004 reflects a greater mix of higher-margincomparison shopping, promotional and industry-focused online content, ande-commerce revenue in 2005. Fastclick, acquired in late September 2005,historically has generated a lower overall gross margin than the Media segment’shistorical gross margin, which may result in lower overall gross marginrecorded by the Media segment in future periods.

Cost of revenue for theAffiliate Marketing segment remained consistent at $9.2 million for the yearsended December 31, 2005 and 2004, respectively. Our Affiliate Marketinggross margin increased to 88.1% for 2005 from 84.6% in 2004. This increase wasprimarily associated with the operating leverage of our affiliate marketingsegment infrastructure, supporting significantly higher revenue levels, andlower depreciation expense. As the gross margin for the Affiliate Marketing segmentis highly dependent upon revenue due to the existing operating leverage, anyincreases or decreases in segment revenue may have a significant impact onsegment gross margin.

Technology segment cost ofrevenue was $5.3 million for the year ended December 31, 2005 compared to$5.0 million in 2004 due to higher depreciation expense as a result of capitalequipment additions to our computing infrastructure. Our technologysegment gross margin increased to 78.2% for 

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2005from 77.6% in 2004. The increase was primarily associated with the operatingleverage of our technology segment infrastructure, supporting higher revenuelevels. As the gross margin for the Technology segment is highly dependent uponrevenue due to the existing operating leverage, any increases or decreases insegment revenue may have a significant impact on segment gross margin.

***Operating Expenses:***

*Sales and Marketing.*   Salesand marketing expenses consist primarily of compensation of sales andmarketing, network development and related support teams, certain onlineadvertising costs, sales commissions, travel, advertising, trade shows, andmarketing materials. Total sales and marketing expenses for the year ended December 31,2005 were $74.8 million compared to $36.0 million in 2004, an increaseof $38.8 million, or 107.8%. Sales and marketing expenses increaseddue primarily to the inclusion of sales and marketing expenses aggregatingapproximately $21.6 million for Pricerunner, acquired in August 2004,E-Babylon, acquired in June 2005, Webclients, acquired in June 2005,and Fastclick, acquired in September 2005, all of which are included inthe Media segment. Additionally, increases in online advertising costs ofapproximately $10.8 million related to our lead generation and e-commerceactivities from our historical businesses, and increases in our worldwide salesstaff contributed to the remaining increase in sales and marketing expenses.Our sales and marketing costs as a percentage of revenue increased to 24.6% forthe year ended December 31, 2005 compared to 21.3% in 2004, primarilydriven by the higher online advertising costs described above. We expect salesand marketing costs to continue to increase as a result of our recentacquisitions of Fastclick, Webclients and E-Babylon, the recent launch ofPricerunner in the United States and the expected overall growth in ourbusiness.

*General andAdministrative.*   General and administrativeexpenses consist primarily of facilities costs, executive and administrativecompensation, depreciation, professional services fees, and insurance costs. Totalgeneral and administrative expenses increased to $40.5 million for theyear ended December 31, 2005 compared to $27.2 million in 2004, anincrease of $13.3 million, or 49.2%. Our general and administrative costs as apercentage of revenue decreased to 13.3% for the year ended December 31,2005 compared to 16.1% in 2004, primarily as a result of the operating leverageassociated with higher revenue. Total general and administrative expensesincreased primarily due to the inclusion of general and administrative expensestotaling approximately $6.9 million for Pricerunner, E-Babylon, Webclients, andFastclick and increased personnel costs to support both the growth in ourbusiness and compliance with Sarbanes-Oxley. As a result of our acquisitions in2005 and the expected overall growth in our business, we expect higher generaland administrative costs in future periods.

*Technology.*   Technologycosts include expenses associated with the maintenance of our technologyplatforms, including the salaries and related expenses for our softwareengineering department, as well as costs for contracted services and supplies.Technology costs for the year ended December 31, 2005 were $21.3 millioncompared to $15.9 million in 2004, an increase of $5.4 million, or 34.1%.Our technology costs as a percentage of revenue decreased to 7.0% for the yearended December 31, 2005 compared to 9.4% in 2004, primarily as a result ofthe operating leverage associated with higher revenue. The increase in totaltechnology expenses was due primarily to the acquisitions of Pricerunner,E-Babylon, Webclients, and Fastclick and the overall growth in our business.

***Segment Income from Operations.***   Mediasegment income from operations for the year ended December 31, 2005increased 177.3% to $44.2 million, from $16.0 million in the prior year, andrepresented 21.0% and 17.1% of Media segment revenue in these respective periods.The increase of $28.3 million in Media segment income from operations waslargely attributable to the acquisitions of Pricerunner in August 2004,E-Babylon in June 2005, Webclients in June 2005, and Fastclick in September 2005,accounting for approximately $20.0 million of the increase. The remainingincrease was largely a result of the operating leverage associated with thehigher revenue generated by our historical businesses as describedabove. Total operating expenses for the Media segment increased by $49.3million, or 145.0%, for the year ended December 31, 2005 as compared tothe prior year. This increase was 

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primarilyattributable to the inclusion of operating expenses of approximately $32.5million for Pricerunner, E-Babylon, Webclients, and Fastclick, increases inonline advertising costs of approximately $10.8 million related to our leadgeneration and e-commerce activities from our historical businesses, and theoverall growth in our business.

Affiliate Marketingsegment income from operations for the year ended December 31, 2005increased 62.5% to $42.4 million, from $26.1 million in the prior year, andrepresented 54.7% and 43.5% of Affiliate Marketing segment revenue in theserespective periods. The increase of $16.3 million in Affiliate Marketingsegment income from operations was attributable to the higher revenue and grossmargin as described above. Total operating expenses for the AffiliateMarketing segment increased by $1.2 million, or 4.7%, for the year ended December 31,2005 as compared to the prior year. This increase was due to the overallgrowth in the Affiliate Marketing business.

Technology segment incomefrom operations for the year ended December 31, 2005 increased 30.0% to$8.0 million, from $6.1 million in the prior year, and represented 32.9% and27.6% of Technology segment revenue in these respective periods. Theincrease of $1.8 million in Technology segment income from operations wasattributable to the higher revenue as described above. Total operating expensesfor the Technology segment remained flat at $11.0 and $11.1 million,respectively, for the years ended December 31, 2005 and 2004.

***Stock-Based Compensation.******  ***Stock-basedcompensation expense for the year ended December 31, 2005 was $2.0 millioncompared to $739,000 in 2004. The increase is due to $1.7 million ofstock-based compensation associated with 0.3 million share-equivalent StockAppreciation Rights (“SARs”) issued to certain former employees of Fastclick inOctober 2005. The purpose of the SARs was to provide certain individualswith an inducement to remain with the combined organization subsequent to theacquisition date. The SARs vest over either a four- or eight-quarter periodbeginning October 1, 2005. The intrinsic value of the SARs that vest eachquarter will be settled in cash the following quarter.  The impact of the SARs in future periodscannot be specifically predicted at this time as the stock-based compensationexpense to be recorded in the future is dependent upon the performance of ourcommon stock over the SARs’ vesting period and the continued employment of theemployees who were issued the SARs. Assuming that the closing price of ourcommon stock remains unchanged from December 31, 2005 and assuming theemployees who were issued the SARs and who were still employed by the Companyas of December 31, 2005 remain with the Company, the stock-basedcompensation expense associated with the SARs for the year ending December 31,2006 would be approximately $2.3 million. A ten percent ratable increase in theprice of the Company’s common stock throughout 2006 would increase thestock-based compensation expense associated with the SARs by approximately$200,000.

Stock-based compensationfor the year ended December 31, 2005 also includes $270,000 of amortizationrelated to the intrinsic value of unvested common stock options assumed inbusiness combinations, compared to $739,000 in the prior year.  The decrease is due to certain options assumedin business combinations from prior years becoming fully vested during 2005.

The adoption of SFAS No. 123(revised 2004), “Share-Based Payment,” or SFAS No. 123R as of January 1,2006 is expected to have a significant impact on the Company’s consolidatedreported results of operations. As of December 31, 2005, the Company hasapproximately $30.0 million of pro-forma deferred stock-based compensationassociated with unvested stock options determined under the fair value methodof SFAS 123. This pro-forma deferred stock-based compensation will be amortizedto expense under the provisions of SFAS 123R over the vesting period of theoptions. The remaining vesting period for such unvested options ranges up to4 years, with a weighted-average remaining vesting period of approximately2 years. This amount is not reflective of the total stock-basedcompensation expense that will be recorded in the future. The specific impactof the adoption of SFAS No. 123R cannot be predicted at this time becauseit will depend on the fair value and number of share-based payments granted inthe future, as well as the structure of future stock-based awards.

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***Amortization of Intangible Assets.***   Amortizationof intangible assets for the year ended December 31, 2005 was $12.2million compared to $4.1 million in 2004. This expense represents theamortization of intangible assets acquired through business combinations. Theincrease compared to the prior year was due to the intangible assets purchasedin the Pricerunner, E-Babylon, Webclients, and Fastclick acquisitions. Weanticipate a higher level of amortization expense in future periods as a resultof the intangible assets acquired in 2005.

***Restructuring Benefit, net.***   Restructuringbenefit, net, for the years ended December 31, 2005 and 2004 was $73,000and $1.0 million, respectively. During the second quarter of 2004, we reverseda previously established restructuring allowance of $1.0 million as a result ofa decision to relocate back to a facility originally vacated in 2002 which wasreoccupied in the fourth quarter of 2004. During the first quarter of 2005, wereversed the remaining restructuring allowance of $588,000, based on a decisionmade not to exercise a lease buyout provision that would have allowed us toterminate this lease. Additionally, in the first quarter of 2005, we relocatedto new principal corporate facilities and vacated several premises that we hadbeen occupying under operating leases with varying remaining lease terms. Thelease exit charge associated with vacating these leased premises during theyear ended December 31, 2005 was $515,000. As of December 31, 2005,we have a remaining liability of $32,000 equal to the future lease payments wewill continue to incur for the remaining lease terms of the vacated premises,less estimated sublease income. We may incur additional restructuring chargesin the future if we are required to make changes to sublease assumptionsrelated to our vacated facilities.

***Interest Income, net.***   Interestincome, net, consists principally of interest earned on our cash and cashequivalents and marketable securities and is net of interest paid on ourcapital lease obligations and short-term debt. Interest income, net, was $5.1million for the year ended December 31, 2005 compared to $3.7 millionfor the year ended December 31, 2004. The increase was primarilyattributable to the effects of increasing average investment yields from 2004as a result of interest rate increases from mid-2004 through the end of2005, offset by interest paid on our short-term debt of $794,000. We expect ournet interest income to increase in subsequent periods as a result of paying offour short-term debt in September 2005 and as a result of recent interestrate increases by the Federal Reserve Board.

***Income Tax Expense.***   Forthe year ended December 31, 2005, we recorded an income tax expense of$28.8 million compared to $16.2 million in 2004. The increase in the effectiveincome tax rate for the year ended December 31, 2005 to 41.5% from 34.2%for the year ended December 31, 2004 was primarily due to the recognitionof net operating loss carryforwards and other deferred tax benefits in 2004. Theeffective income tax rate reflects our anticipated pre-tax profitability andtaxable income by tax jurisdiction. If our domestic businesses continue to growfaster than our foreign businesses or if we acquire more U.S.-based businessesin the future, we may be subject to increasing effective income tax rates as aresult of the generally higher domestic tax rates as compared to foreignjurisdictions.

**RESULTSOF OPERATIONS—Fiscal Years Ended December 31, 2004 and 2003**

***Revenue.***   Consolidatednet revenue for the year ended December 31, 2004 was $169.2 million, representinga 82.9% increase over the prior year total of $92.5 million.

Media segment revenue increased to $93.3 million forthe year ended December 31, 2004 compared to $45.8 million for 2003. Theincrease of $47.5 million, or 103.9%, in Media segment revenue was largelyattributable to the inclusion of a full year of Search123 operations, acquiredin May 2003, a full year of Hi-Speed Media operations, acquired in December 2003,and five months of Pricerunner operations, acquired in August 2004, in the2004 period. Such Media acquisitions accounted for $29.2 million, or 61.5%, ofthe $47.5 million increase in 2004 Media segment revenue over 2003. Theremaining increase of $18.3 million was a result of strong performance by ourU.S. and European media teams and the general improvement of the online mediamarket in the U.S. and Europe, offset by a decrease in 2004 revenue from 2003of $5.7 million resulting from the sale of our Japan subsidiary in March 2004.

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Affiliate Marketing segment revenue increased to $60.0million for the year ended December 31, 2004 compared to $24.3 million in2003. This increase of $35.7 million, or 146.9%, was primarily attributable tothe inclusion of a full year of Commission Junction operations, acquired inDecember 2003, representing $32.4 million of the 2004 increase over 2003.The remaining $3.3 million of the Affiliate Marketing 2004 segment revenueincrease over 2003 represents growth by our U.S. Affiliate Marketing team existingprior to the Commission Junction acquisition, offset by the impact oftransferring customer relationships and related revenue from our formerAffiliate Marketing brand to Commission Junction in 2004.

Technology segment revenuewas $22.2 million for the year ended December 31, 2004 compared to $23.6million for in 2003, a decrease of $1.4 million, or 5.6%. Revenueincreases related to an increase in our customer base and transaction volumeincreases were offset by a decline in pricing resulting from industry pricingpressures.

***Cost of Revenue and Gross Profit.***   Consolidatedcost of revenue was $50.8 million for the year ended December 31, 2004compared to $32.0 million in 2003, an increase of $18.8 million, or 58.5%. Theconsolidated gross margin improved to 70.0% for the year ended December 31,2004 compared to 65.4% in 2003, resulting primarily from a greater mix ofhigher-margin Affiliate Marketing segment revenue in 2004.

Cost of revenue for theMedia segment increased $20.8 million, or 92.2%, to $43.3 million for the yearended December 31, 2004 compared to $22.5 million in 2003. The increase incost of revenue was primarily related to the corresponding increase in Mediasegment revenue. Our Media segment gross margin of 53.5% for the year ended December 31,2004 compared to 50.7% in 2003 reflects a greater mix of higher-margincomparison shopping revenue in 2004.

Cost of revenue for theAffiliate Marketing segment was $9.2 million for the year ended December 31,2004 compared to $5.5 million in 2003, an increase of 68.6%. The increase wasprincipally due to the inclusion of a full year of Commission Junctionoperations, acquired in December 2003. Our Affiliate Marketing grossmargin increased to 84.6% for 2004 from 77.5% in 2003. This increase was primarilyassociated with the operating leverage of our affiliate marketing segmentinfrastructure, supporting significantly higher revenue levels.

Technology segment cost ofrevenue of $5.0 million in 2004 remained comparable to 2003 cost of revenue of$5.1 million. Our technology segment gross margin remained consistent at77.6% and 78.3%, respectively, for 2004 and 2003.

***Operating Expenses:***

*Sales and Marketing.*   Salesand marketing expenses for the year ended December 31, 2004 were$36.0 million compared to $21.2 million for 2003, an increase of$14.8 million, or 70.1%. The increase in sales and marketing expenses wasdue primarily to the inclusion of sales and marketing expenses for Search123,Commission Junction and Hi-Speed Media for a full year and the addition ofPricerunner for five months in 2004, accounting for approximately $14.2 millionof the increase. The remaining increase of $0.6 million is due to increasedsales staff in the U.S and Europe and increased commissions related to higherrevenue, offset by the sale of ValueClick Japan in March 2004. Our salesand marketing costs as a percentage of revenue decreased to 21.3% for the yearended December 31, 2004 from 22.9% for 2003 due primarily to increasedproductivity of our sales teams.

*General andAdministrative.*   General and administrativeexpenses increased to $27.2 million for the year ended December 31,2004 from $19.7 million in 2003, an increase of $7.5 million, or37.9%. Our general and administrative costs as a percentage of revenuedecreased to 16.1% for the year ended December 31, 2004 from 21.3% for2003 as a result of the operating leverage associated with higher revenue. Totalgeneral and administrative expenses increased primarily due to the inclusion ofa full year 

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of expense forSearch123, Commission Junction and Hi-Speed Media and five months forPricerunner, accounting for an approximate $8.6 million increase, as well as anincrease in fees for external professional advisors and employee costsassociated with Sarbanes-Oxley compliance efforts, offset by the sale ofValueClick Japan in March 2004.

*Technology.*   Technologycosts were $15.9 million for the year ended December 31, 2004compared to $10.5 million for 2003, an increase of $5.4 million, or 51.3%. Ourtechnology costs as a percentage of revenue decreased to 9.4% for the yearended December 31, 2004 from 11.4% for 2003 as a result of the operatingleverage associated with higher revenue. The increase in total technology costswas due to the inclusion of a full year of expense for Search123, CommissionJunction and Hi-Speed Media and five months of technology expense forPricerunner, totaling $5.8 million, offset by the sale of ValueClick Japan in March 2004.

***Segment Income from Operations.***   Mediasegment income from operations for the year ended December 31, 2004increased to $16.0 million, from $4.5 million in the prior year, andrepresented 17.1% and 9.9% of Media segment revenue in these respective periods.The increase of $11.5 million in Media segment income from operations waslargely attributable to the acquisitions of Pricerunner in August 2004,Hi-Speed Media in December 2003 and Search123 in May 2003, accountingfor approximately $7.4 million of the increase. The remaining increase waslargely a result of the operating leverage associated with the higher revenuegenerated by our historical businesses as described above. Total operatingexpenses for the Media segment increased by $15.3 million, or 82.1%, for theyear ended December 31, 2004 as compared to the prior year. Thisincrease was primarily attributable to the inclusion of operating expenses ofapproximately $13.2 million for Pricerunner, Hi-Speed Media and Search123 andthe overall growth in the Media business.

Affiliate Marketingsegment income from operations for the year ended December 31, 2004increased 362.5% to $26.1 million, from $5.6 million in the prior year, andrepresented 43.5% and 23.2% of Affiliate Marketing segment revenue in theserespective periods. The increase of $20.5 million in Affiliate Marketingsegment income from operations was attributable to the higher revenue and grossmargin as described above. Total operating expenses for the AffiliateMarketing segment increased by $11.5 million, or 87.1%, for the year ended December 31,2004 as compared to the prior year. This increase was principally due tothe inclusion of a full year of Commission Junction operating expenses in 2004.

Technology segment incomefrom operations for the year ended December 31, 2004 decreased 4.7% to$6.1 million, from $6.4 million in the prior year, and represented 27.6% and27.3% of Technology segment revenue in these respective periods. Totaloperating expenses for the Technology segment decreased to $11.1 million forthe year ended December 31, 2004 from $12.0 million in 2003.

***Stock-Based Compensation.***   Stock-basedcompensation expense for the year ended December 31, 2004 amounted to$739,000 compared to $352,000 in 2003. The increase in stock-based compensationfrom the year ended December 31, 2003 relates to a full year ofamortization of deferred stock-based compensation recorded in 2004 for stockoptions assumed in the Hi-Speed Media and Commission Junction acquisitions in December 2003.

***Amortization of Intangible Assets.***   Amortizationof intangible assets for the year ended December 31, 2004 was $4.1 millioncompared to $1.6 million in 2003. The increase in 2004 compared to 2003 was dueto the intangible assets purchased in the 2004 Pricerunner acquisition and afull year of amortization of the intangible assets purchased in the Hi-SpeedMedia, Commission Junction and Search123 acquisitions.

***Restructuring Benefit, net.***   Restructuringbenefit, net, for the year ended December 31, 2004 was $1.0 millionwith no comparable expense or benefit in the 2003 year. In the second quarterof 2002 and in the fourth quarter of 2001, the Company recorded restructuringcharges of $2.3 million and $0.5 million, 

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respectively. Theserestructuring charges were the result of certain personnel redundancies andconsolidation of certain leased facilities, for which the Company was committedto pay through 2010. The Company relocated back to a previously vacated leasedfacility in November 2004 and, accordingly, in the second quarter of 2004,reversed $1.0 million of the related restructuring charge originallyestablished.

***Interest Income, net.***   Interestincome was $3.7 million for the year ended December 31, 2004 comparedto $3.4 million for 2003. The increase of $0.3 million was primarilyattributable to the effects of increasing average investment yields from 2003as a result of interest rate increases during 2004.

***Gain on Sale of Equity Interest in Japan Subsidiary.******  ***Gain on saleof equity interest in Japan subsidiary for the year ended December 31,2004 was $8.0 million, which represents the pre-tax gain recognized from thesale of our equity interest of approximately 59% in ValueClick Japan, Inc.on March 26, 2004, net of related transaction expenses.

***Income Tax Expense.***   Ourincome tax expense increased from $0.8 million in 2003 to $16.2 million in 2004.The effective income tax rate also increased from 7.8% in 2003 to 34.2% in 2004.The increase in the effective income tax rate in 2004 from 2003 resultedprimarily from our increased worldwide profitability, particularly in ourdomestic businesses which are taxed at generally higher rates than our foreignbusinesses.

***Minority Share of Loss of ValueClick Japan.******  ***For theyear ended December 31, 2004, the minority share of the loss generated byValueClick Japan was $130,000 compared to $84,000 for the year ended December 31,2003. We accounted for our interest in ValueClick Japan on a consolidated basisfor financial reporting purposes, resulting in a minority interest in the netincome generated or net losses incurred by ValueClick Japan.

**Liquidityand Capital Resources**

Since our inception, wehave financed our operations through working capital generated from operations,equity financing and corporate development activities. In June 2005, weborrowed $91.7 million under a Master Repurchase Agreement with a majorfinancial institution to finance a portion of the acquisition of Webclients,which closed in June 2005. In September 2005, we fully repaid allprincipal and interest due under the Master Repurchase Agreement and nobalances were outstanding as of December 31, 2005. As of December 31,2005, we do not have any committed borrowing availability under the Master RepurchaseAgreement or any other similar arrangement. Our ability to borrow funds in thefuture under the terms of the Master Repurchase Agreement, or any other similararrangement, is subject to new credit approval procedures by the applicablefinancial institution, and will depend on, among other factors, the nature ofthe marketable securities we own in the future. At December 31, 2005, ourcombined cash and cash equivalents and marketable securities balances totaled$240.8 million.

Net cash provided byoperating activities totaled $60.7 million for the year ended December 31,2005 compared to $46.6 million in 2004 and $15.9 million in 2003. Theincrease in net cash provided by operating activities of $14.1 million from2004 to 2005 was due primarily to the increase of $9.4 million in our netincome and an increase in the impact of non-cash items of $24.1 million in 2005compared to 2004, primarily related to higher depreciation and amortization ofapproximately $8.9 million, lower tax benefit from deferred income taxes of$4.6 million, and the gain on sale of our equity interest in our Japansubsidiary in 2004 of approximately $8.0 million, offset by negative workingcapital changes in 2005 of $12.4 million compared to positive working capitalchanges in 2004 of $7.0 million. The negative working capital change in 2005was primarily the result of higher accounts receivable of $25.8 millionassociated with our increased revenue, partially offset by an increase in ouraccounts payable and other accrued expenses of $7.6 million and an increase of$5.3 million in net income taxes payable. The increase in net cash provided byoperating activities from 2003 to 2004 of $30.6 million was attributableprimarily to 

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increasedincome from operations, adjusted for non-cash items, including the gain on saleof our equity interest in our Japan subsidiary of approximately $8.0 million,increased depreciation and amortization of approximately $2.8 million, and taxbenefits from stock option exercises of $11.5 million.

The net cash used ininvesting activities for the year ended December 31, 2005 of $48.2 millionwas primarily the result of net cash used of $59.6 million in the acquisitionsof E-Babylon, Webclients and Fastclick, and $9.0 million of equipmentpurchases, offset by net proceeds from the sale of marketable securities of$20.4 million. For the year ended December 31, 2004, net cash used ininvesting activities of $66.1 million resulted primarily from the use of$26.7 million for the acquisition of Pricerunner, net purchases ofmarketable securities of $35.7 million and $6.0 million of equipment purchases,offset by net proceeds from the sale of our equity interest in our Japansubsidiary of $2.4 million. For the year ended December 31, 2003, net cashused in investing activities totaled $0.5 million, resulting primarilyfrom the use of $18.5 million for acquisitions and $3.2 million for equipmentpurchases, offset by the net reduction of marketable securities of $22.0million, which were used to fund acquisitions and purchases of ValueClickcommon stock pursuant to the Stock Repurchase Program.

Net cash provided byfinancing activities for the year ended December 31, 2005 of $8.5 millionwas primarily attributable to proceeds received from the exercises of commonstock options of $14.4 million, partially offset by the repurchase of $5.7million of the Company’s common stock. Net cash provided by financingactivities for the year ended December 31, 2004 of $8.7 million wasprimarily attributable to proceeds received from the exercises of common stockoptions of $11.0 million, partially offset by the repurchase of $2.2 million ofthe Company’s common stock. For the year ended December 31, 2003, net cashused in financing activities of $8.8 million resulted from the use of$9.2 million for market purchases of ValueClick common stock pursuant tothe Stock Repurchase Program and the repayment of $1.8 million on notespayable and capital leases, offset by net proceeds received from the exercisesof stock options of $2.2 million.

*Stock Repurchase Program*

In September 2001,the board of directors authorized a $10 million Stock Repurchase Programto purchase outstanding shares of ValueClick common stock from time to time atprevailing market prices in the open market or through unsolicited negotiatedtransactions depending on market conditions. The Stock Repurchase Program wasincreased by the board of directors to $30 million in February 2002,to $50 million in July 2002, to $75 million in November 2002,and to $95 million in August 2004. Under the program, the purchasesare funded from available working capital, and the repurchased shares may beretired, held in treasury or used for ongoing stock issuances such as issuancesunder employee stock plans. There is no guarantee as to the exact number ofshares that will be repurchased by us and we may discontinue purchases at anytime that management determines additional purchases are not warranted. Duringthe year ended December 31, 2005, the Company repurchased 587,000 sharesof its common stock under the Stock Repurchase Program. As of December 31,2005, and since the initiation of the Stock Repurchase Program, the Company hasrepurchased approximately 25.7 million shares of the Company’s commonstock for approximately $75.9 million. As of December 31, 2005, theCompany is authorized to spend up to an additional $19.1 million topurchase shares of the Company’s outstanding common stock under the StockRepurchase Program. All shares have been retired subsequent to theirrepurchase.

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*Commitments andContingencies*

Contractualobligations at December 31, 2005 are as follows (in thousands):

| ** **                         | ** ** | **Payments due by period** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| Lease obligations:                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital leases, including interest |       | $                                         | 172        |   |   | $ | 172 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Operating leases (1)               |       | 17,595                                    |       |   | 4,796 |   |   |   | 7,959 |   |   |   | 4,544 |   |   |   | 296 |   |   |
| Purchase  obligations (2)          |       | 1,375                                     |       |   | 1,354 |   |   |   | 18 |   |   |   | 3 |   |   |   | — |   |   |
| Total contractual  obligations     |       | $                                         | 19,142     |   |   | $ | 6,322 |   |   |   | $ | 7,977 |   |   |   | $ | 4,547 |   |   |   | $ | 296 |   |   |

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(1)          The operating leaseobligations shown in the table have not been reduced by minimum non-cancelablesublease rentals aggregating $1.1 million. The Company remains secondarilyliable under these leases in the event that the sublessee defaults under thesublease terms. The Company does not believe that material payments will berequired as a result of the secondary liability provisions of the primary leaseagreements.

(2)          Purchase obligationsinclude agreements to purchase goods or services that are enforceable, legallybinding and specify all significant terms. Purchase obligations excludeagreements that are cancelable without penalty.

Othercommercial commitments as of December 31, 2005 are as follows (inthousands):

| ** **                 | ** ** | **Other Commercial Commitments** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **Total**                                  | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| Standby letters  of credit |       | $                                          | 690        |   |   | $ | 105 |   |   |   | — |   |   |   | $ | 585 |   |   |   | — |   |   |
|                            |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The standby letters of credit are maintained pursuantto certain of the Company’s lease agreements.**Thestandby letters of credit remain in effect at declining levels through theterms of the related leases. Certificates of deposit of $605,000 maintained bythe Company at financial institutions that issued the standby letters of creditare included in cash and cash equivalents as of December 31, 2005.

In the ordinary course of business, we may provideindemnifications of varying scope and terms to customers, vendors, lessors,business partners, and other parties with respect to certain matters, including,but not limited to, losses arising out of our breach of such agreements,services to be provided by us, or from intellectual property infringementclaims made by third-parties. In addition, we have entered into indemnificationagreements with our directors and certain of our officers that will require us,among other things, to indemnify them against certain liabilities that mayarise by reason of their status or service as directors or officers. We havealso agreed to indemnify certain former officers, directors and employees ofacquired companies in connection with the acquisition of such companies. Wemaintain director and officer insurance, which may cover certain liabilitiesarising from our obligation to indemnify our directors and officers and formerdirectors, officers and employees of acquired companies, in certaincircumstances.

It is not possible to determine the maximum potentialamount of exposure under these indemnification agreements due to the limitedhistory of prior indemnification claims and the unique facts and circumstancesinvolved in each particular agreement. Such indemnification agreements may notbe subject to maximum loss clauses.

We have no other off-balance sheet obligations orguarantees.

We believe that our existing cash and cash equivalentsand our marketable securities are sufficient to meet our anticipated cash needsfor working capital, capital expenditures and contractual obligations for at 

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least the next twelvemonths. However, it is possible that we may need or elect to raise additionalfunds to fund our activities beyond the next year or to consummate acquisitionsof other businesses, products or technologies. We could raise such funds byselling more stock to the public or to selected investors, or by borrowingmoney. In addition, even though we may not need additional funds, we may stillelect to sell additional equity securities or obtain credit facilities forother reasons. We cannot assure you that we will be able to obtain additionalfunds on commercially favorable terms, or at all. If we raise additional fundsby issuing additional equity or convertible debt securities, the ownershippercentages of existing stockholders would be reduced. In addition, the equityor debt securities that we issue may have rights, preferences or privilegessenior to those of the holders of our common stock.

Although we believewe have sufficient capital to fund our activities for at least the next twelvemonths, our future capital requirements may vary materially from those nowplanned. The amount of capital that we will need in the future will depend onmany factors, including:

·                    themarket acceptance of our products and services;

·                    thelevels of advertising that will be required to promote our products andservices and achieve and maintain a competitive position in the marketplace;

·                    ourbusiness, product, capital expenditure and technology plans, and product andtechnology roadmaps;

·                    capitalimprovements to new and existing facilities;

·                    technologicaladvances;

·                    ourcompetitors’ response to our products and services;

·                    ourStock Repurchase Program;

·                    ourpursuit of strategic transactions; and

·                    ourrelationships with our customers and publisher partners.

**CriticalAccounting Policies and Estimates**

Management’s discussion and analysis of financialcondition and results of operations is based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. The preparation of thesefinancial statements requires us to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenue and expenses, and relateddisclosure of contingent assets and liabilities. On an ongoing basis, weevaluate our estimates and assumptions, including those related to revenuerecognition, allowance for doubtful accounts receivable, investments, incometaxes, impairment of goodwill and other intangible assets, and contingenciesand litigation. We base our estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates and assumptions.

We apply thefollowing critical accounting policies in the preparation of our consolidatedfinancial statements:

·                    ***Revenue Recognition.******  ***We recognize revenue inaccordance with Staff Accounting Bulletin (“SAB”) No. 104, “RevenueRecognition in Financial Statements.” Under SAB No. 104, we recognizerevenue when the following criteria have been met: persuasive evidence of anarrangement exists, the fees are fixed or determinable, no significant Companyobligations 

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remain, and collection ofthe related receivable is reasonably assured. To date, our agreements have notrequired a guaranteed minimum number of click-throughs or actions.

Our Media segment revenue is recognized in the periodthat the advertising impressions, click-throughs or actions occur, whenlead-based information is delivered or, for our e-commerce business, whenconsumer products are shipped, provided that no significant company obligationsremain, collection of the resulting receivable is reasonably assured, andprices are fixed or determinable. Additionally, consistent with the provisionsof EITF Issue No. 99-19, “Reporting Revenue Gross as a Principalversus Net as an Agent,” we recognize revenue as a principal in mediatransactions. Accordingly, revenue is recognized on a gross basis andcorresponding publisher expenses are recorded as a component of cost ofrevenue.

Our Affiliate Marketing and Technology segment revenueis generated primarily from fees for campaign management services, applicationmanagement services and professional services. Campaign management servicesrevenue and professional services revenue are recognized when the relatedservices are performed, provided no significant obligations remain, collectionof the resulting receivable is reasonably assured and fees are fixed ordeterminable. Application management services revenue consists of monthlyrecurring fees for hosting services and is recognized over the periods duringwhich the services are performed, provided no significant Company obligationsremain, collection of the resulting receivable is reasonably assured, and feesare fixed or determinable. Application management services provide customersrights to access software applications, hardware for the application access andcustomer service. Our customers do not have the right to take possession of thesoftware at any time during or after the hosting agreement. Accordingly, asprescribed by EITF Issue No. 00-3, “Application of AICPA Statementof Position 97-2 to Arrangements That Include the Right to Use SoftwareStored on Another Entity’s Hardware,” our revenue recognition for AffiliateMarketing and Technology segments is outside the scope of Statement of Position(“SOP”) No. 97-2, “Software Revenue Recognition.” Additionally,consistent with the provisions of EITF Issue No. 99-19, “ReportingRevenue Gross as a Principal versus Net as an Agent,” the Company recognizesrevenue as an agent in affiliate marketing transactions. Accordingly, servicefee revenue is recognized on a net basis as any publisher expenses are theresponsibility of the Company’s advertising customer. Contracts for applicationmanagement services that provide for additional payments if usage exceedsdesignated minimum monthly, quarterly or annual volume levels are recognized asrevenue in the month, quarter or year in which minimum volume is exceeded.

Our affiliate marketing customers have return policiesthat allow their consumers to return previously purchased product under certaincircumstances. Based upon the terms of our agreements with our affiliatemarketing customers, when one of their consumers returns a product, we arerequired to refund the transaction fees that we earned related to the originalconsumer purchase. We also experience direct sales returns related to oure-commerce customers based upon the terms of our transactions with thesecustomers. For revenue transactions subject to a right of return, we arerequired to record a provision for sales returns, which is recorded as a reductionto our revenue, based upon an estimate of the amount of future returns. Indetermining our estimate for future returns, we rely upon historical returnsdata relative to historical sales volumes and known facts and circumstancesthat may not be reflected in the historical returns information. Historically,actual returns have not significantly differed from our estimates. However,factors including changes in the economic and industry environment may resultin future actual returns experience that is different than our estimates.

We recorded a provision for sales returns ofapproximately $5.7 million and $4.0 million as a reduction to our revenueduring the years ended December 31, 2005 and 2004, respectively. Theprovision for sales returns in periods prior to 2004 was not significant, asthe majority of the 

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provision for sales returns recorded in 2004 and 2005related to the business operations of entities acquired in December 2003(Hi-Speed Media and Commission Junction) and June 2005 (E-Babylon). Weexpect the actual amount of sales returns in whole dollar terms to increase inthe future in conjunction with our anticipated increase in affiliate marketingand e-commerce revenue. If our assumptions with regard to the historicalreturns ratios were to change such that our estimated returns ratios were toincrease by a factor of 10%, the result would be an increase in the December 31,2005 allowance for sales returns of $218,000 and a corresponding decrease torevenue for the year then ended.

·                    ***Allowance for Doubtful AccountsReceivable.******  ***Weestimate our allowance for doubtful accounts receivable using two methods. First,we evaluate specific accounts where information indicates the customers mayhave an inability to meet financial obligations, such as due to bankruptcy, andreceivable amounts outstanding for an extended period beyond contractual terms.In these cases, we use assumptions and judgment, based on the best availablefacts and circumstances, to record a specific allowance for those customersagainst amounts due to reduce the receivable to the amount expected to becollected. These specific allowances are re-evaluated and adjusted asadditional information is received. Second, an allowance is established for allcustomers based on a range of loss percentages applied to receivables agingcategories. These percentages are based on historical collection and write-offexperience.  The amounts calculated fromeach of these methods are analyzed to determine the total amount reserved.Historically, actual write-offs of doubtful accounts have not significantlydiffered from our estimates. However, factors including higher than expecteddefault rates may result in future write-offs greater than our estimates.

As of December 31, 2005, we recorded an allowancefor doubtful accounts receivable of $4.7 million, which represents anallowance percentage of 5.9% of our gross accounts receivable balance of $79.3million. If our assumptions and estimates regarding the ultimate collectibilityof our outstanding accounts receivable balances changed to warrant a 100 basispoint increase in the ending allowance percentage, the result would be anincrease in the December 31, 2005 allowance for doubtful accountsreceivable of approximately $800,000 and a corresponding decrease in ouroperating income for the year then ended.

·                    ***Investments.******  ***We record an impairmentcharge when we believe an asset has experienced a decline in value that isother than temporary. Future adverse changes in market conditions or pooroperating results of underlying investments could result in losses or aninability to recover the carrying value of the investments that may not bereflected in an investment’s current carrying value, thereby possibly requiringan impairment charge in the future. Factors considered by management in assessingwhether an other-than-temporary impairment has occurred include: the nature ofthe investment; whether the decline in fair value is attributable to specificadverse conditions affecting the investment; the financial condition of theinvestee; the severity and the duration of the impairment; and whether theCompany has the ability to hold the investment. When it is determined that another-than-temporary impairment has occurred, the investment is written down tomarket value at the end of the period in which it is determined that another-than-temporary decline has occurred.

As of December 31, 2005, we have net unrealizedlosses of $1.2 million on a marketable securities portfolio with a total fairvalue of $193.9 million. Our marketable securities portfolio consists ofhigh-grade municipal, corporate and U.S. government agencies obligations.Management has determined that the unrealized losses as of December 31,2005 do not represent an other-than-temporary decline in value, primarily dueto both our assessment that there are no specific adverse conditions affectingthe investments or the related investees’ credit ratings or ability to satisfytheir obligations in full, and our ability to hold any individual investmentthrough a downturn in market value which may be caused by short-term interestrate movements. If our 

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assessment regarding these factors were to change, wemay be required to record an impairment charge equal to the difference betweenthe fair value of the securities and the amortized cost of the securities. Asof December 31, 2005, if the determination was made that the currentdecline in market value of certain investments was other than temporary, therelated impairment charge could be as much as $1.2 million. Further, futureadverse conditions impacting our marketable securities portfolio, such asadverse changes in the financial condition or credit ratings of debt issuers,or adverse changes in the overall economic environment, may result in futureimpairment charges greater than this amount.

·                    ***Income Taxes*.****  ** We use the asset and liability method ofaccounting for income taxes in accordance with SFAS No. 109, “Accountingfor Income Taxes.” Under this method, income tax expense is recognized for theamount of taxes payable or refundable for the current year and for deferred taxliabilities and assets for the future tax consequences of events that have beenrecognized in an entity’s financial statements or tax returns. Management mustmake judgments, assumptions and estimates to determine our provision for incometaxes and also our deferred tax assets and liabilities and any valuationallowance to be recorded against a deferred tax asset. Our judgments,assumptions and estimates relative to the provision for income taxes take intoaccount enacted tax laws, our interpretation of tax laws and possible outcomesof audits if and when conducted by tax authorities. Changes in tax laws or ourinterpretation of tax laws and the resolution of tax audits, if and whenconducted by tax authorities, could significantly impact the amounts providedfor income taxes in our consolidated financial statements.

As of December 31, 2005, we have gross deferredtax assets of $31.8 million, relating to net operating loss carryforwards andcertain other temporary differences. As of December 31, 2005, based uponboth positive and negative evidence available, we have determined it is morelikely than not that certain deferred tax assets may not be realizable.Accordingly, we have recorded a valuation allowance of $1.3 million againstthese deferred tax assets as of December 31, 2005. Should we determinethat we will not be able to realize all or part of our net deferred tax assetsrecorded as of December 31, 2005 in the future, an adjustment to the netdeferred tax assets would reduce income in the period such determination wasmade.

We may also have available up to an additional $127.8million and $85.8 million of net operating loss carryforwards, on a pre-taxbasis, for federal and state purposes, respectively, which are not reflected inour deferred tax assets as of December 31, 2005. We believe that we may beable to establish with the Internal Revenue Service and state tax authoritiesthat we are entitled, under the Internal Revenue Code and interpretationsthereof, to some or all of the benefit of these net operating losses in futureperiods. However, this tax position is subject to certain assumptions andinterpretations of the relevant legislative and judicial history that may ormay not be accepted by the tax authorities. We have determined that the futuretax benefits associated with these net operating loss carryforwards arecontingent upon the ultimate outcome of an uncertain tax position and we cannotassert that it is more likely than not that these assumptions andinterpretations underlying our complex tax calculations would be upheld underexamination. Therefore, we have not recorded a deferred tax asset related tothese net operating loss carryforwards. If our income tax position with regardto these net operating loss carryforwards were to be upheld under examination,we would record an income tax benefit in the period that such determination wasmade.

·                    ***Impairment of Goodwill and Other Intangible Assets*.****  **As of December 31, 2005, we had goodwilland other intangible assets with net balances of $273.2 million and $102.2million, respectively. Goodwill is tested for impairment at the reporting unitlevel on an annual basis as of December 31st orbetween annual tests whenever facts and circumstances indicate that goodwillmight be impaired. As of December 31, 2005, our five reporting unitsconsisted of the Affiliate 

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Marketing and Technologyoperating segments, in addition to three components of the Media operatingsegment: U.S. media (excluding Hi-Speed Media); Europe media; and Hi-SpeedMedia. Application of the goodwill impairment test requires certain estimatesand assumptions, including the identification of reporting units, assigningassets and liabilities to reporting units, and determining the fair value ofeach reporting unit. We have determined the fair value of each reporting unitusing a discounted cash flow approach, giving consideration to the marketvaluation approach. Significant judgments required to estimate the fair valueof each reporting unit include, but are not limited to, estimating futurerevenue growth rates, estimating future operating margins and determiningappropriate discount rates. Changes in these estimates and assumptions couldmaterially affect the determination of fair value for each reporting unit whichcould result in goodwill impairment. We completed our annual goodwillimpairment test as of December 31, 2005 and determined that no adjustmentto the carrying value of goodwill for any of our reporting units was required.Based on our 2005 impairment test, there would have to be a significantunfavorable change to our estimates and assumptions used in such calculationsfor an impairment to exist.

We amortize other intangible assets over theirestimated economic useful lives. We record an impairment charge on these assetswhen we determine that their carrying value may not be recoverable. Indetermining if impairment exists, we estimate the undiscounted cash flows to begenerated from the use and ultimate disposition of these assets. If impairmentis indicated based on a comparison of the assets’ carrying values and theundiscounted cash flows, the impairment loss is measured as the amount by whichthe carrying amount of the assets exceeds the fair market value of the assets.Our estimates of future cash flows attributable to our other intangible assetsrequire significant judgments and assumptions, including anticipated industryand economic conditions. Different assumptions and judgments could materiallyaffect the calculation of the fair value of the other intangible assets whichcould trigger impairment. There was no impairment of our other intangibleassets as of December 31, 2005.

·                    ***Contingencies and Litigation.***Weevaluate contingent liabilities including threatened or pending litigation inaccordance with SFAS No. 5, “Accounting for Contingencies” and recordaccruals when the outcome of these matters is deemed probable and the liabilityis reasonably estimable. We make these assessments based on specific facts andcircumstances of each matter.

**RecentlyIssued Accounting Standards**

In November 2005, theFASB issued Staff Position Financial Accounting Standards (“FAS”) 115-1/124-1,“The Meaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments,” (“FSP 115-1”) which provides guidance on determiningwhen investments in certain debt and equity securities are considered impaired,whether that impairment is other-than-temporary, and on measuring such impairmentloss. FSP 115-1 also includes accounting considerations subsequentto the recognition of an other-than temporary impairment and requires certaindisclosures about unrealized losses that have not been recognized asother-than-temporary impairments. FSP 115-1 is required to beapplied to reporting periods beginning after December 15, 2005. TheCompany does not believe the adoption of FSP 115-1 will have amaterial impact on its consolidated financial position or results ofoperations.

In June 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections, areplacement of APB Opinion No. 20, Accounting Changes, and SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154changes the requirements for the accounting for, and reporting of, a change inaccounting principle. Previously, most voluntary changes in accountingprinciples were required to be recognized by way of a cumulative effectadjustment within net income during the period of the change. SFAS No. 154requires retrospective application to prior period financial 

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statements,unless it is impracticable to determine either the period-specific effects orthe cumulative effect of the change. SFAS No. 154 is effective foraccounting changes made in fiscal years beginning after December 15, 2005;however, SFAS No. 154 does not change the transition provisions of anyexisting accounting pronouncements. The Company will apply the requirements ofSFAS No. 154 on accounting changes made on or after January 1, 2006.

In December 2004, theFASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” orSFAS No. 123R, which is a revision of SFAS No. 123, “Accountingfor Stock-Based Compensation,” or SFAS 123. SFAS No. 123R requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the financial statements based on their grant datefair values and does not allow the previously permitted pro-forma disclosure asan alternative to financial statement recognition. SFAS No. 123Rsupersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,”and related interpretations, and amends SFAS No. 95, “Statement ofCash Flows.” SFAS No. 123R is effective for the Company beginning inthe first quarter of fiscal 2006. The Company will utilize the modifiedprospective transition method allowed by SFAS No. 123R and will alsoamortize stock-based compensation utilizing the straight-line method over theoptions’ vesting period.

The adoption of theSFAS No. 123R fair value method is expected to have a significantimpact on the Company’s consolidated results of operations. As ofDecember 31, 2005, the Company has approximately $30.0 million ofpro-forma deferred stock-based compensation associated with unvested stockoptions determined under the fair value method of SFAS 123. This pro-formadeferred stock-based compensation will be amortized to expense under theprovisions of SFAS 123R over the vesting period of the options. The remainingvesting period for such unvested options ranges up to 4 years, with a weighted-averageremaining vesting period of approximately 2 years. This amount is notreflective of the total stock-based compensation expense that will be recordedin the future. The specific impact of adoption of SFAS No. 123R cannot bepredicted at this time because it will depend on the fair value and number ofshare-based payments granted in the future, as well as the structure of futurestock-based awards. However, had we adopted SFAS 123R in prior periods,the magnitude of the impact of that standard would have approximated the impactof SFAS 123 assuming the application of the Black-Scholes option pricingmodel as described in the disclosure of pro-forma net income and pro-formanet income per share in note 1 “Organization and Summary of SignificantAccounting Policies” to our consolidated financial statements.

SFAS No. 123Ralso requires the benefit of tax deductions in excess of recognizedcompensation cost to be reported as a financing cash flow, rather than as anoperating cash flow as required under current literature. This requirement willreduce net operating cash flows and increase net financing cash flows inperiods after adoption if the benefit of such tax deductions exceeds the recognizedcompensation expense.

**Inflation**

Inflation was not amaterial factor in either revenue or operating expenses during the fiscal yearsended December 31, 2005, 2004 and 2003.

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

**INTEREST RATE RISK**

The primary objective of our investment activities isto preserve capital while at the same time maximizing yields withoutsignificantly increasing risk. We are exposed to the impact of interest ratechanges and changes in the market values of our investments. Our interestincome is sensitive to changes in the general level of U.S. interest rates. Inthis regard, changes in U.S. interest rates affect the interest earned on ourcash equivalents and marketable debt securities. Our exposure to market raterisk for changes in interest rates relates primarily to our investmentportfolio. We have not used derivative financial instruments in our investmentportfolio. We invest a portion of our excess cash in debt instruments ofhigh-quality issuers and, by policy, limit the amount of credit exposure to anyone issuer. We protect and preserve our invested funds by limiting default,market and reinvestment risk. Investments in both fixed-rate and floating-rateinterest-earning instruments carry a degree of interest rate risk. Fixed-ratesecurities may have their fair market value adversely impacted due to a rise ininterest rates, while floating-rate securities may produce less income thanexpected if interest rates fall. Due in part to these factors, our futureinvestment income may fall short of expectations due to changes in interestrates, or we may suffer losses in principal if forced to sell securities, whichhave declined in market value due to changes in interest rates.

Marketable securities as of December 31, 2005consist of high-grade municipal, corporate and U.S. government agenciessecurities with maturities of less than two years. Management’s internalinvestment policy requires a weighted-average time to maturity of the overallinvestment portfolio to be no greater than 365 days and allows for auction-ratesecurities to be weighted based on the auction reset date. As of December 31,2005, our investment in marketable securities had a weighted-average time tomaturity of approximately 248 days. We classify all of our investments asavailable-for-sale. Available-for-sale securities are carried at fair value,with unrealized gains and losses, net of tax, reported in a separate componentof stockholders’ equity. As of December 31, 2005, unrealized losses in ourinvestments in marketable securities aggregated $1.2 million.

During the year ended December 31,2005, our investments in marketable securities yielded an effective interestrate of 2.57%. If interest rates were to decrease 100 basis points, the resultwould be an annual decrease in our interest income related to our cash and cashequivalents and marketable securities of approximately $1.9 million.

**FOREIGN CURRENCY RISK**

We transact business in various foreign countries andare thus subject to exposure from adverse movements in foreign currencyexchange rates. This exposure is primarily related to revenue and operatingexpenses for ValueClick and Pricerunner Europe, which denominate theirtransactions primarily in British pounds and Swedish Krona. The effect offoreign exchange rate fluctuations for the year ended December 31, 2005was not material to the consolidated results of operations. If there were anadverse change of 10% in overall foreign currency exchange rates over an entireyear, the result of translations would be a reduction of revenue ofapproximately $4.9 million, a reduction of income before income taxes of$0.7 million and a reduction of net assets, excluding intercompany balances, of$3.1 million. Historically, we have not hedged our exposure to exchange ratefluctuations. Accordingly, we may experience economic loss and a negativeimpact on earnings, cash flows or equity as a result of foreign currency exchangerate fluctuations. We assess the need to utilize financial instruments to hedgecurrency exposures on an ongoing basis. As of December 31, 2005, we had$21.7 million in cash and cash equivalents denominated in foreigncurrencies, primarily the British Pound and Swedish Krona.

Our international businessis subject to risks typical of an international business, including, but notlimited to, differing economic conditions, changes in political climate,differing tax structures, other 

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regulationsand restrictions, and foreign exchange rate volatility. Accordingly, our futureresults could be materially and adversely affected by changes in these or otherfactors.

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

The Company’s financialstatements, schedules and supplementary data, as listed under Item 15, appearin a separate section of this annual report on Form 10-K beginningon page F-1.

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

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES

**Restatementof Previously Issued Financial Statements and Impact on Disclosure Controls andProcedures and Internal Control over Financial Reporting as of December 31,2004**

As discussed in note 2 “Restatement of PreviouslyIssued Financial Statements” to the consolidated financial statements containedin Item 8 “Financial Statements and Supplementary Data” of this annualreport on Form 10-K, the Company has restated its 2004 annualconsolidated financial statements to correct an error related to the Company’s2004 provision for income taxes. As a result of this error, the Company willalso restate its consolidated quarterly financial statements for each quarterof 2004 and for the first three quarters of 2005.

In the Company’s annual report on Form 10-Kfor the year ended December 31, 2004, Company management had concludedthat the Company’s internal control over financial reporting and disclosurecontrols and procedures were ineffective as of December 31, 2004 due tothe identification of a “material weakness” in the operation of controls forevaluating and documenting the assessment of valuation allowances recordedagainst deferred tax assets. A material weakness is defined as a controldeficiency, or combination of control deficiencies, that results in a more thanremote likelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected. In connection with therestatement described above, management concluded that there was a materialweakness as of December 31, 2004 in the Company’s controls with respect tothe evaluation and documentation of deferred tax assets, and that such materialweakness is in addition to the above-noted material weakness in the operationof controls for evaluating and documenting the assessment of valuationallowances recorded against deferred tax assets, as management of the Companyreported as of December 31, 2004.

During the firstthree quarters of 2005, the Company implemented the following controls andprocesses to remediate the material weaknesses described above:

(i)            re-evaluated thedesign effectiveness of the Company’s deferred tax processes and adjusted thecalculation of its deferred tax balances,

(ii)        filled a newly-createdDirector of Taxation position to enhance the Company’s internal income taxexpertise, and

(iii)    engaged an accounting firm(not affiliated with its former or current independent registered publicaccounting firms) to provide an additional review function with respect to thecalculation of the Company’s provision for income taxes.

In addition, during the fourth quarter of 2005, theCompany conducted detailed studies of certain aspects of its accounting forincome taxes, including its ability to utilize the benefit of acquired netoperating losses (NOLs) in its tax filings.

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Management has concludedthat the newly-implemented controls and processes discussed above weredesigned, in place and operating effectively at December 31, 2005 toproperly account for the Company’s deferred tax assets, and therefore that thematerial weaknesses described above have been remediated as of December 31,2005.

**Disclosure Controls and Procedures**

The Company maintains disclosure controls andprocedures that are designed to ensure that the information required to bedisclosed in the Company’s reports under the Securities Exchange Act of 1934,as amended (the “Exchange Act”), is recorded, processed, summarized, andreported within the time periods specified in the SEC’s rules and forms,and that such information is accumulated and communicated to management,including the Company’s Chief Executive Officer (“CEO”) and Chief FinancialOfficer (“CFO”), as appropriate, to allow timely decisions regarding requireddisclosure. In designing and evaluating the disclosure controls and procedures,management recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives.

In connection with thepreparation of this annual report on Form 10-K as of December 31,2005, an evaluation was performed under the supervision and with theparticipation of the Company’s management, including the CEO and CFO, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Rule 13a-15(e) under the ExchangeAct). Based on this evaluation, the Company’s CEO and CFO have concluded thatits disclosure controls and procedures are effective at the reasonableassurance level as of December 31, 2005 to ensure that the informationrequired to be disclosed by it in reports or submitted under the Exchange Actis recorded, processed, summarized, and reported within the time periodsspecified in the rules and forms of the SEC and that such information isaccumulated and communicated to management, including the Company’s CEO andCFO, as appropriate, to allow timely decisions regarding required disclosure.

**Management’sReport on Internal Control over Financial Reporting**

The Company’s management is responsible forestablishing and maintaining adequate internal control over financial reportingas defined in Rules 13a-15(f) and 15d-15(f) underthe Exchange Act. The Company’s internal control over financial reporting isdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. The Company’sinternal control over financial reporting includes those policies andprocedures that:

(i)            pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of its assets,

(ii)        provide reasonableassurance that transactions are recorded as necessary to permit preparation ofconsolidated financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures are being made onlyin accordance with authorizations of the Company’s management and directors,and

(iii)    provide reasonable assuranceregarding prevention or timely detection of any unauthorized acquisition, useor disposition of the Company’s assets that could have a material effect on theconsolidated financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect financial statementmisstatements. Also, projections of any evaluation of internal controleffectiveness 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 or procedures may deteriorate.

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The Company’s management has assessed theeffectiveness of the Company’s internal control over financial reporting as of December 31,2005. In making this assessment, management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”) in *Internal Control-Integrated Framework*. Based on thisevaluation, the Company’s management has concluded that the Company’s internalcontrol over financial reporting was effective as of December 31, 2005.

Management excluded from the assessment of the Company’sinternal control over financial reporting as of December 31, 2005 certainelements of the internal control over financial reporting of Webclients andFastclick, because Webclients and Fastclick were acquired by the Company inpurchase business combinations during 2005. Subsequent to the acquisitions,certain elements of the acquired businesses’ internal control over financialreporting and related processes were integrated into the Company’s existingsystems and internal control over financial reporting. Those controls that werenot integrated have been excluded from management’s assessment of theeffectiveness of the Company’s internal control over financial reporting as of December 31,2005. The excluded elements represent controls over accounts of approximately4.9% of the Company’s consolidated assets as of December 31, 2005 and19.9% of its consolidated revenue for the year then ended.

The Company’s assessmentof the effectiveness of its internal control over financial reporting as of December 31,2005 has been audited by PricewaterhouseCoopers LLP, an independent registeredpublic accounting firm, as stated in their report which appears in this annualreport on Form 10-K.

**Changesin Internal Control over Financial Reporting**

As described in note 4 “Recent Business Combinationsand Investments,” we acquired Pricerunner AB (“Pricerunner”) on August 6,2004 and E-Babylon, Inc. (“E-Babylon”) on June 13, 2005. The Company’sevaluation of the effectiveness of internal control over financial reporting asof December 31, 2005 includes the controls and processes of Pricerunnerand E-Babylon. During 2005, Company management reviewed the controls andprocesses at Pricerunner and E-Babylon and made enhancements as deemednecessary, none of which have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting, toconform their controls and processes to the Company’s existing controls andprocesses as well as to its overall internal control environment.

During the quarter ended December 31,2005 the Company (i) integrated certain elements of the internal controlover financial reporting of Webclients and Fastclick, both wholly-ownedsubsidiaries acquired during 2005, and (ii) conducted tax studies ofcertain aspects of the Company’s accounting for income taxes, including itsability to utilize the benefit of acquired NOLs in its tax filings. Other thanthese changes, there were no changes in the Company’s internal control overfinancial reporting during the quarter ended December 31, 2005 that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

**ITEM 9B.**       OTHERINFORMATION

During the fourth quarter of 2005, the Company enteredinto new Indemnification Agreements with the members of the Company’s Board ofDirectors and with the Company’s executive officers. The new IndemnificationAgreements replaced the Company’s preexisting Indemnification Agreements withits officers and directors. The new Indemnification Agreements, among otherthings, indemnify the Company’s officers and directors from all reasonablecosts associated with the defense of lawsuits or other legal actions broughtagainst the officers and directors as a result of legitimate actions performedin the scope of their employment or other functions on behalf of the Company. Theform of the indemnification agreement is included as Exhibit 10.1 to thisannual report on Form 10-K.

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On May 25, 2005, theCompany filed a current report on Form 8-K to announce the promotionof Scott H. Ray to Chief Financial Officer. The Company’s preexistingemployment agreement with Mr. Ray is included as Exhibit 10.13 tothis annual report on Form 10-K.

**PART III.**

**ITEM 10.**         DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item is incorporated byreference from our definitive Proxy Statement for the 2006 Annual Meeting ofStockholders to be held June 5, 2006.

We have adopted a Code ofEthics and Business Conduct (the “Code”) within the meaning of Item 406(b) ofRegulation S-K. The Code applies to our principal executive, financial andaccounting, and other officers, and our directors, employees, agents, andconsultants. The Code is publicly available on our website atwww.valueclick.com under “Corporate Info.” If we make substantive amendments tothe Code or grant any waiver, including any implicit waiver, to our principalexecutive, financial or accounting, or other officers, or persons performingsimilar functions, we will disclose the nature of such amendment or waiver onour website or in a current report on Form 8-K in accordance withapplicable rules and regulations.

**ITEM 11.**         EXECUTIVECOMPENSATION

The information requiredby this Item is incorporated by reference from our definitive Proxy Statementfor the 2006 Annual Meeting of Stockholders to be held June 5, 2006.

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

**EquityCompensation Plan Information**

Thefollowing table provides aggregated information with respect to ourcompensation plans under which equity securities of ValueClick are authorizedfor issuance as of December 31, 2005:

| **Plan category**                                         | ** ** | ** ** | ** ** | **Number of securities  to be issued upon  exercise of outstanding  options, warrants  and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights(1)** | ** ** | **Number of securities  remaining available  for future issuance  under equity  compensation plans(3)** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders        |       |       | 7,844,757  |                                                                                                                                             |       |                                                                                                           | $          | 10.05                                                                                                                                      |       |   |   | 3,341,292 |   |   |
| Equity  compensation plans not approved by security holders(2) |       |       | 1,693,200  |                                                                                                                                             |       |                                                                                                           | $          | 10.42                                                                                                                                      |       |   |   | — |   |   |
| Total                                                          |       |       | 9,537,957  |                                                                                                                                             |       |                                                                                                           | $          | 10.11                                                                                                                                      |       |   |   | 3,341,292 |   |   |

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(1)          For additionalinformation with respect to the outstanding option pricing categories as of December 31,2005, refer to note 11 “Stock Options” to the consolidated financialstatements included in Item 8 “Financial Statements and Supplementary Data.”

(2)          The equity compensationplans not approved by security holders represent stock option plans assumed inbusiness combinations. Such plans for Mediaplex and Be Free were indirectlyapproved in the related stockholder approvals of the respective mergers. Thematerial features of these assumed stock option plans are described innote 11 “Stock Options” to the consolidated financial statements includedin Item 8 “Financial Statements and Supplementary Data.”

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(3)          The 2002 Stock IncentivePlan provides for an automatic increase on January 1 of each year equal to1% of the total outstanding shares of ValueClick common stock as of the lastday of the previous year. An additional 1,018,979 shares were made availableunder the 2002 Stock Incentive Plan effective January 1, 2006, which arenot included in the 3,341,292 shares shown above.

The remaining informationrequired by this Item is incorporated by reference from our definitive ProxyStatement for the 2006 Annual Meeting of Stockholders to be held June 5,2006.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

None.

**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporatedby reference from our definitive Proxy Statement for the 2006 Annual Meeting ofStockholders to be held June 5, 2006.

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**PART IV.**

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

(a)           Documents filed as partof this annual report on Form 10-K:

1.                *FinancialStatements.**  *Thefollowing consolidated financial statements of ValueClick, Inc. areincluded in a separate section of this annual report on Form 10-Kcommencing on the pages referenced below: 

|                                                                                                                               | ** ** | **Page** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| ValueClick, Inc.  Consolidated Financial Statements                                                                      |       |     |
| Report of PricewaterhouseCoopers LLP, Independent  Registered Public Accounting Firm                                          |       | F-2      |
| Report of Deloitte & Touche LLP, Independent  Registered Public Accounting Firm                                      |       | F-4      |
| Consolidated  Balance Sheets at December 31, 2005 and 2004 (as restated)                                                 |       | F-5      |
| Consolidated Statements of Operations for the years  ended December 31, 2005, 2004 (as restated) and 2003           |       | F-6      |
| Consolidated Statements of Stockholders’ Equity for  the years ended December 31, 2005, 2004 (as restated) and 2003 |       | F-7      |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2005, 2004 (as restated) and 2003           |       | F-8      |
| Notes to Consolidated Financial Statements                                                                                    |       | F-10     |

 

2.                *FinancialStatement Schedule.**  *Thefollowing financial statement schedule of ValueClick, Inc. is included ina separate section of this annual report on Form 10-K commencing onthe pages referenced below. All other schedules have been omitted becausethey are not applicable, not required, or the information is included in theconsolidated financial statements or notes thereto.

| Schedule II—Valuation and  Qualifying Accounts |   | F-41 |
|-----------------------------------------------------|--------|------|

 

3.                *Exhibits.**  *The following exhibits are filed as part of,or are incorporated by reference in, this annual report on Form 10-K:

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| Exhibit   Number | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **Description   of Document** |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|
| 2.1              |       | Agreement and Plan of  Merger, dated as of June 13, 2005, by and among ValueClick and E-Babylon, Inc.                                                                                                                                                                                                                                                                                                                                |
| 2.2(1)           |       | Agreement and  Plan of Merger, dated as of June 10, 2005, by and among ValueClick,  Spider Acquisition Corporation and Web Marketing Holdings, Inc.                                                                                                                                                                                                                                                                                  |
| 2.3(2)           |       | Agreement and  Plan of Merger and Reorganization, dated as of August 10, 2005, among  ValueClick, Fastclick, Inc. and FC Acquisition Sub, Inc.                                                                                                                                                                                                                                                                                  |
| 2.4(3)           |       | Agreement and  Plan of Merger, dated as of August 6, 2004, by and among ValueClick and  Pricerunner AB                                                                                                                                                                                                                                                                                                                                    |
| 2.5(4)           |       | Stock Purchase  Agreement, dated January 29, 2004, by and among ValueClick and livedoor  Co., Ltd (formerly Edge Co., Ltd), a Japanese Corporation                                                                                                                                                                                                                                                                                        |
| 2.6              |       | Agreement and  Plan of Merger, dated as of December 7, 2003, by and among ValueClick,  HS Acquisition Corporation and Hi-Speed Media, Inc.                                                                                                                                                                                                                                                                                           |
| 2.7(5)           |       | Agreement and  Plan of Merger, dated as of October 9, 2003, by and among ValueClick,  NCJ Acquisition Corporation and Commission Junction, Inc.                                                                                                                                                                                                                                                                                      |
| 2.8(6)           |       | Agreement and  Plan of Merger, dated as of May 30, 2003, by and among ValueClick,  Search123.com Acquisition Corporation and Search123                                                                                                                                                                                                                                                                                               |
| 2.9(7)           |       | Agreement and  Plan of Merger, dated as of March 20, 2002, by and among ValueClick,  Bravo Acquisition I Corporation and Be Free, Inc.                                                                                                                                                                                                                                                                                          |
| 3.1              |       | Second Amended  and Restated Certificate of Incorporation of ValueClick                                                                                                                                                                                                                                                                                                                                                                        |
| 3.2              |       | Amended and Restated  Bylaws of ValueClick                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.1              |       | See  Exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation  and Bylaws for ValueClick, Inc. defining the rights of holders of common  stock of ValueClick, Inc.                                                                                                                                                                                                                                               |
| 4.2(8)           |       | Specimen stock  certificate for the ValueClick common stock                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.3(9)           |       | Rights Agreement,  dated as of June 4, 2002, between ValueClick, Inc. and Mellon  Investor Services LLC, a New Jersey limited liability company, which  includes the form of Certificate of Designation for the Series A junior  participating preferred stock as Exhibit A, the form of Rights  Certificate as Exhibit B and the Summary of Rights to Purchase  Series A Preferred Stock as Exhibit C |
| 10.1             |       | Form of  Indemnification Agreement by and between ValueClick and directors and  executive officers                                                                                                                                                                                                                                                                                                                                        |
| 10.2(8)          |       | Deed of  Assignment, dated January 1, 1999 by and between Web-Ignite Corporation  and ValueClick                                                                                                                                                                                                                                                                                                                                          |
| 10.3(8)          |       | Trademark  Assignment, dated as of May 1, 1998 from Web-Ignite Corporation to  ValueClick                                                                                                                                                                                                                                                                                                                                                 |
| 10.4(8)          |       | Exchange  Agreement, dated December 31, 1998, by and between ValueClick and  ValueClick, LLC                                                                                                                                                                                                                                                                                                                                         |
| 10.5(8)          |       | Bill of Sale and  Assignment and Assumption of Liabilities, dated December 31, 1998                                                                                                                                                                                                                                                                                                                                                       |
| 10.6(8)          |       | License and  Option Agreement, dated January 1, 1999, by and between ValueClick, LLC  and ValueClick Japan, Inc. in effect from January 1, 1999 to  December 17, 1999                                                                                                                                                                                                                                                      |
| 10.7(8)          |       | Share Purchase  Agreement, dated December 31, 1999, by and between ValueClick and  James R. Zarley                                                                                                                                                                                                                                                                                                                                   |

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| 10.8(8)         |   | License  Agreement, dated August 17, 1999, between ValueClick and ValueClick Europe,  Limited                                                                             |
|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9(10)†  |   | 1999 Stock Option  Plan, as amended, and form of option agreement                                                                                                              |
| 10.10(11)† |   | 2002 Stock  Incentive Plan and form of option agreement                                                                                                                        |
| 10.11(12)† |   | Key Employee  Agreement between ValueClick and James R. Zarley dated January 1,  2002                                                                                |
| 10.12(13)† |   | Key Employee  Agreement between ValueClick and Samuel J. Paisley dated January 1, 2002                                                                                    |
| 10.13†     |   | Key Employee  Agreement between ValueClick and Scott H. Ray dated October 8, 2002                                                                                         |
| 10.14(14)† |   | Key Employee  Agreement between ValueClick and Peter Wolfert dated January 1, 2002                                                                                        |
| 10.15(8)        |   | Intercompany  License Agreement dated December 19, 1999, between ValueClick and  ValueClick Japan, Inc.                                                              |
| 16.1(15)        |   | Letter from  PricewaterhouseCoopers LLP to the Securities and Exchange Commission dated  July 2, 2004                                                                     |
| 16.2(16)        |   | Letter from  Deloitte & Touche LLP to the Securities and Exchange Commission  dated July 20, 2005                                                                |
| 21.1            |   | Subsidiaries of  ValueClick                                                                                                                                                    |
| 23.2            |   | Consent of  Deloitte & Touche LLP                                                                                                                                     |
| 31.1            |   | Certification of  CEO Pursuant to Securities Exchange Act Rules 13a-14(a) and  15d-14(a), as adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |
| 31.2            |   | Certification of  CFO Pursuant to Securities Exchange Act Rules 13a-14(a) and  15d-14(a), as adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |
| 32.1            |   | Certification of CEO and  CFO Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                              |

 

----

†                     Indicatesa management contract or compensatory arrangement.

(1)          Incorporated byreference to Exhibit 2.1 to the current report on Form 8-Kfiled by ValueClick on June 29, 2005.

(2)          Incorporated byreference to Exhibit 2.1 to the current report on Form 8-Kfiled by ValueClick on August 12, 2005.

(3)          Incorporated by referenceto Exhibit 2.1 to the annual report on Form 10-K filed byValueClick on March 31, 2005.

(4)          Incorporated byreference to Exhibit 2.2 to the annual report on Form 10-Kfiled by ValueClick on March 31, 2005.

(5)          Incorporated byreference to Exhibit 2.1 to the current report on Form 8-K/Afiled by ValueClick on February 23, 2004.

(6)          Incorporated byreference to Exhibit 2.1 to the current report on Form 8-Kfiled by ValueClick on June 11, 2003.

(7)          Incorporated byreference to Exhibit 2.1 to the current report on Form 8-Kfiled by ValueClick on March 11, 2002.

60

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(8)          Incorporated byreference from Registration Statement on Form S-1 (File No. 333-88765),as amended, originally filed with the Securities and Exchange Commission on October 12,1999.

(9)          Incorporated byreference to Exhibit 4 to the current report on Form 8-K filedby ValueClick on June 14, 2002.

(10)   Incorporated by reference fromRegistration Statement on Form S-8 (File No. 333-61278)originally filed with the Securities and Exchange Commission on April 19,2001.

(11)   Incorporated by reference fromRegistration Statement on Form S-8 (File No. 333-89396)originally filed with the Securities and Exchange Commission on May 30, 2002.

(12)   Incorporated by reference to Exhibit 10.14to the annual report on Form 10-K filed by ValueClick on March 28,2003.

(13)   Incorporated by reference to Exhibit 10.15to the annual report on Form 10-K filed by ValueClick on March 28,2003.

(14)   Incorporated by reference to Exhibit 10.16to the annual report on Form 10-K filed by ValueClick on March 28,2003.

(15)   Incorporated by reference to Exhibit 16.1to the current report on Form 8-K filed by ValueClick on July 2,2004.

(16)   Incorporated by reference to Exhibit 16.1to the current report on Form 8-K filed by ValueClick on July 15,2005.

61

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**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**
|                                                                                                                                           | ** ** | **Page** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| ValueClick, Inc.  Consolidated Financial Statements                                                                                  |       |     |       |
| Report of PricewaterhouseCoopers LLP, Independent  Registered Public Accounting Firm                                                      |       | F-2      |       |
| Report of Deloitte & Touche LLP, Independent  Registered Public Accounting Firm                                                  |       | F-4      |       |
| Consolidated  Balance Sheets at December 31, 2005 and 2004 (as restated)                                                             |       | F-5      |       |
| Consolidated Statements of Operations for the years  ended December 31, 2005, 2004 (as restated) and 2003             |       | F-6      |       |
| Consolidated Statements of Stockholders’ Equity for  the years ended December 31, 2005, 2004 (as restated) and 2003   |       | F-7      |       |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2005, 2004 (as restated) and 2003                  |       | F-8      |       |
| Notes to Consolidated Financial Statements                                                                                                |       | F-10     |       |
| Schedule II—Valuation and Qualifying Accounts                                                                                        |       | F-41     |       |

 

F-1

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholders ofValueClick, Inc.

We have completed anintegrated audit of ValueClick Inc.’s 2005 consolidated financial statementsand of its internal control over financial reporting as of December 31,2005 and an audit of its 2003 consolidated financial statements in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates). Our opinions, based on ouraudits, are presented below.  The Company’s2004 consolidated financial statements were audited by other auditors.

*Consolidated financial statements and financial statementschedule*

In our opinion, the consolidated balance sheet as of December 31,2005 and the related consolidated statements of operations, of stockholders’equity and of cash flows for each of the years ended December 31, 2005 andDecember 31, 2003 present fairly, in all material respects, thefinancial position of ValueClick, Inc. and its subsidiaries at December 31,2005 and the results of their operations and their cash flows for each of theyears ended December 31, 2005 and December 31, 2003, in conformitywith accounting principles generally accepted in the United States of America. In addition, in our opinion, the financialstatement schedule listed in the index appearing under Item 15(a) (2) presentsfairly, in all material respects, the information set forth therein for each ofthe years ended December 31, 2005 and December 31, 2003 when read inconjunction with the related consolidated financial statements. Thesefinancial statements and financial statement schedule are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements and financial statement schedule based on our audits. Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An audit offinancial statements includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

*Internal controlover financial reporting*

Also, in our opinion, management’s assessment,included in Management’s Report on Internal Control over Financial Reportingappearing under Item 9A, that the Company maintained effective internal controlover financial reporting as of December 31, 2005 based on criteriaestablished in *Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), is fairly stated, in all material respects, based on those criteria.Furthermore, in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31,2005, based on criteria established in *Internal Control -Integrated Framework* issued by the COSO. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express opinions on management’s assessmentand on the effectiveness of the Company’s internal control over financialreporting based on our audit. We conducted our audit of internal control overfinancial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother 

F-2

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procedures as we considernecessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinions.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) 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 (iii) 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, internal controlover financial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

As described in Management’sReport on Internal Control over Financial Reporting, management has excludedfrom its assessment of internal control over financial reporting as of December 31,2005 certain elements of the internal control over financial reporting ofWebclients and Fastclick, because Webclients and Fastclick were acquired by theCompany in purchase business combinations during 2005. Subsequent to theacquisitions, certain elements of the acquired businesses’ internal controlover financial reporting and related processes were integrated into the Company’sexisting systems and internal control over financial reporting. Those controlsthat were not integrated have been excluded from management’s assessment of theeffectiveness of internal control over financial reporting as of December 31,2005. We have also excluded these elements of the internal control overfinancial reporting of the acquired businesses from our audit of the Company’sinternal control over financial reporting. The excluded elements represent controlsover accounts of approximately  4.9% ofthe Company’s consolidated assets as of December 31, 2005 and 19.9% ofconsolidated revenue for the year then ended.

/s/ PRICEWATERHOUSECOOPERSLLP

Los Angeles, CaliforniaMarch 30, 2006

F-3

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Stockholders ofValueClick, Inc.**Westlake Village, California

We have audited the accompanying consolidated balancesheet of ValueClick, Inc. and itsconsolidated subsidiaries (the “Company”) as of December 31, 2004,and the related consolidated statements of operations, stockholders’ equity,and cash flows for the year then ended. Our audit also included theaccompanying financial statement schedule II for the year ended December 31,2004. These financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and financial statement schedule based onour 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 the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.

In our opinion, such 2004 consolidated financialstatements present fairly, in all material respects, the financial position ofthe Company as of December 31, 2004, and the results of its operations andits cash flows for the year then ended in conformity with accounting principlesgenerally accepted in the United States of America. Also, in our opinion, suchfinancial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

As discussed in Note 2 tothe consolidated financial statements, the consolidated financial statementsfor the year ended December 31, 2004 have been restated.

/s/ DELOITTE & TOUCHE LLP

Los Angeles, CaliforniaMarch 31, 2005 (March 31, 2006 as to the effects of the restatementdiscussed in Note 2)

F-4

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**VALUECLICK, INC.CONSOLIDATED BALANCE SHEETS**
|                                                                                                                                                                            | ** ** | **As of December 31,**                 | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **2005**                                              | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                 | ** ** | ** **                                            | ** ** | **(As Restated  see note 2)** | ** ** |
| ** **                                                                                                                                                                 | ** ** | **(in thousands,  except share data)** | ** ** |
| **Assets**                                                                                                                                                                 |       |                                                  |       |   |   |   |   |
| Current assets:                                                                                                                                                            |       |                                                  |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                 |       | $                                                     | 46,875     |   |   | $ | 28,295 |   |   |
| Marketable securities,  at fair value                                                                                                                                      |       | 193,908                                               |       |   | 214,288 |   |   |
| Accounts receivable, net  of allowance for doubtful accounts of $4,692 and $2,973 as of  December 31, 2005 and 2004, respectively                                     |       | 74,636                                                |       |   | 32,036 |   |   |
| Inventories                                                                                                                                                                |       | 1,349                                                 |       |   | 435 |   |   |
| Prepaid expenses and  other current assets                                                                                                                                 |       | 2,914                                                 |       |   | 2,163 |   |   |
| Income taxes receivable                                                                                                                                                    |       | 442                                                   |       |   | — |   |   |
| Deferred tax assets                                                                                                                                                        |       | 6,619                                                 |       |   | 5,196 |   |   |
| Total current assets                                                                                                                                                       |       | 326,743                                               |       |   | 282,413 |   |   |
| Property and equipment,  net                                                                                                                                               |       | 17,509                                                |       |   | 8,571 |   |   |
| Goodwill                                                                                                                                                                   |       | 273,215                                               |       |   | 52,224 |   |   |
| Intangible assets, net                                                                                                                                                     |       | 102,245                                               |       |   | 25,648 |   |   |
| Deferred tax assets,  less current portion                                                                                                                                 |       | —                                                |       |   | 14,793 |   |   |
| Other assets                                                                                                                                                               |       | 1,149                                                 |       |   | 1,065 |   |   |
| Total assets                                                                                                                                                               |       | $                                                     | 720,861    |   |   | $ | 384,714 |   |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                              |       |                                                  |       |   |   |   |   |
| Current liabilities:                                                                                                                                                       |       |                                                  |       |   |   |   |   |
| Accounts payable and  accrued expenses                                                                                                                                     |       | $                                                     | 64,299     |   |   | $ | 38,288 |   |   |
| Income taxes payable                                                                                                                                                       |       | 880                                                   |       |   | 964 |   |   |
| Deferred revenue                                                                                                                                                           |       | 1,598                                                 |       |   | 1,498 |   |   |
| Capital lease  obligations                                                                                                                                                 |       | 169                                                   |       |   | 239 |   |   |
| Total current  liabilities                                                                                                                                                 |       | 66,946                                                |       |   | 40,989 |   |   |
| Income taxes payable,  less current portion                                                                                                                                |       | 17,745                                                |       |   | 10,432 |   |   |
| Capital lease  obligations, less current portion                                                                                                                           |       | —                                                |       |   | 169 |   |   |
| Deferred tax liabilities                                                                                                                                                   |       | 16,771                                                |       |   | 2,865 |   |   |
| Other non-current  liabilities                                                                                                                                             |       | 856                                                   |       |   | 1,498 |   |   |
| Total liabilities                                                                                                                                                          |       | 102,318                                               |       |   | 55,953 |   |   |
| Commitments and contingencies (note 15)                                                                                                                                    |       |                                                  |       |   |   |   |   |
| Stockholders’ equity:                                                                                                                                                 |       |                                                  |       |   |   |   |   |
| Convertible preferred  stock, $0.001 par value; 20,000,000 shares authorized; no shares issued or  outstanding at December 31, 2005 and 2004                          |       | —                                                |       |   | — |   |   |
| Common stock, $0.001 par  value; 500,000,000 shares authorized; 101,897,934 and 82,032,522 shares  issued and outstanding at December 31, 2005 and 2004, respectively |       | 102                                                   |       |   | 82 |   |   |
| Additional paid-in  capital                                                                                                                                                |       | 617,612                                               |       |   | 361,662 |   |   |
| Deferred stock-based  compensation                                                                                                                                         |       | (638                                                  | )          |   | (221 | ) |   |
| Accumulated other comprehensive  (loss) income                                                                                                                             |       | (2,958                                                | )          |   | 399 |   |   |
| Retained earnings  (accumulated deficit)                                                                                                                                   |       | 4,425                                                 |       |   | (33,161 | ) |   |
| Total stockholders’  equity                                                                                                                                           |       | 618,543                                               |       |   | 328,761 |   |   |
| Total liabilities and stockholders’ equity                                                                                                                            |       | $                                                     | 720,861    |   |   | $ | 384,714 |   |   |

 

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

F-5

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**VALUECLICK, INC.CONSOLIDATED STATEMENTSOF OPERATIONS**
|                                                                                                                              | ** ** | **For the Year Ended December 31,**       | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2005**                                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                                   | ** ** | ** **                                                         | ** ** | **(As Restated  see note 2)** | ** ** | ** ** | ** ** |
| ** **                                                                                                                   | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenue                                                                                                                      |       | $                                                                  | 304,007    |   |   | $ | 169,178 |   |   | $ | 92,516 |   |
| Cost of revenue                                                                                                              |       | 88,839                                                             |       |   | 50,762 |   |   | 32,024 |   |
| Gross profit                                                                                                                 |       | 215,168                                                            |       |   | 118,416 |   |   | 60,492 |   |
| Operating expenses:                                                                                                          |       |                                                               |       |   |   |   |   |   |   |
| Sales and marketing (excludes stock-based  compensation of $817, $369 and $113 for 2005, 2004 and 2003, respectively)        |       | 74,823                                                             |       |   | 36,000 |   |   | 21,162 |   |
| General and administrative (excludes stock-based  compensation of $382, $245 and $181 for 2005, 2004 and 2003, respectively) |       | 40,526                                                             |       |   | 27,168 |   |   | 19,699 |   |
| Technology (excludes stock-based compensation of  $823, $125 and $58 for 2005, 2004 and 2003, respectively)                  |       | 21,314                                                             |       |   | 15,891 |   |   | 10,504 |   |
| Stock-based compensation                                                                                                     |       | 2,022                                                              |       |   | 739 |   |   | 352 |   |
| Amortization of intangible assets                                                                                            |       | 12,179                                                             |       |   | 4,111 |   |   | 1,570 |   |
| Restructuring benefit, net                                                                                                   |       | (73                                                                | )          |   | (1,003 | ) |   | — |   |
| Total operating expenses                                                                                                     |       | 150,791                                                            |       |   | 82,906 |   |   | 53,287 |   |
| Income from operations                                                                                                       |       | 64,377                                                             |       |   | 35,510 |   |   | 7,205 |   |
| Gain on sale of  equity interest in ValueClick Japan                                                                         |       | —                                                             |       |   | 8,007 |   |   | — |   |
| Interest income,  net                                                                                                        |       | 5,077                                                              |       |   | 3,665 |   |   | 3,364 |   |
| Other income                                                                                                                 |       | —                                                             |       |   | 63 |   |   | — |   |
| Income before income taxes and minority interest                                                                             |       | 69,454                                                             |       |   | 47,245 |   |   | 10,569 |   |
| Income tax  expense                                                                                                          |       | 28,810                                                             |       |   | 16,153 |   |   | 830 |   |
| Income before minority interest                                                                                              |       | 40,644                                                             |       |   | 31,092 |   |   | 9,739 |   |
| Minority share of  loss in consolidated subsidiary                                                                           |       | —                                                             |       |   | 130 |   |   | 84 |   |
| Net income                                                                                                                   |       | $                                                                  | 40,644     |   |   | $ | 31,222 |   |   | $ | 9,823 |   |
| Basic net income per common share                                                                                            |       | $                                                                  | 0.46       |   |   | $ | 0.39 |   |   | $ | 0.13 |   |
| Diluted net income per common share                                                                                          |       | $                                                                  | 0.45       |   |   | $ | 0.37 |   |   | $ | 0.13 |   |
| Weighted-average  shares used to calculate net income per common share:                                                      |       |                                                               |       |   |   |   |   |   |   |
| Basic                                                                                                                        |       | 87,722                                                             |       |   | 80,063 |   |   | 74,300 |   |
| Diluted                                                                                                                      |       | 90,857                                                             |       |   | 84,038 |   |   | 78,436 |   |
|                                                                                                                              |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

F-6

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**VALUECLICK, INC.CONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITY**

| ** ** | ** ** | **Preferred Stock**                                  | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Treasury** | ** ** | **Deferred  Stock-Based** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Retained  Earnings  (Accumulated** | ** ** | **Total  Stockholders’** | ** ** |
|------------|------------|-----------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|---------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|-------------------------------|------------|
| ** ** | ** ** | **Shares**                                                | ** ** | **Amount**            | ** ** | **Shares**              | ** ** | **Amount**   | ** ** | **Capital**               | ** ** | **Stock**                             | ** ** | **Compensation**                     | ** ** | **Income (Loss)**        | ** ** | **Deficit)** | ** ** | **Equity** | ** ** |
| ** ** | ** ** | **(in thousands, except share data)** | ** ** |
|            |            |                                                           |            |                       |            |                         |            |              |            |                           |            |                                       |            |                                      |            |                               |            |  |  |  |  |

| Balance at  December 31, 2002                                                                                     |   |   | — |   |   |   | $      | — |   |        | 99,118,475  |   |   | $      | 99     |   |    |   | $      | 370,438 |   |   | $      | (60,883 | )      |   | $      | (473   | )      |   |    | $      | (2,994 | )      |    |   | $      | (74,206 | )      |   |   | $ | 231,981 |   |   |
|------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|-------------|-------------|--------|--------|--------|--------|--------|---------|--------|--------|---------|--------|--------|--------|---------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|---------|--------|--------|---------|--------|--------|--------|---|---------|--------|--------|
| Amortization of  deferred stock-based compensation                                                                     |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | —  |   |   | —  |   |   | 352    |    |   |   | — |   |   |   | —  |   |   |   | 352     |   |   |
| Exercise of common  stock options                                                                                      |   |   | — |   |   |   | — |   |   | 2,085,969   |        |   | 2      |   |   |   | 2,186   |   |   | —  |   |   | — |    |   |   | — |   |   |   | —  |   |   |   | 2,188   |   |   |
| Deferred  stock-based compensation                                                                                     |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | 1,042   |   |   | —  |   |   | (1,042 | )       |   |   | — |   |   |   | —  |   |   |   | —  |   |   |
| Issuance of shares  in business combination—Commission Junction                                                   |   |   | — |   |   |   | — |   |   | 3,018,586   |        |   | 3      |   |   |   | 29,428  |   |   | —  |   |   | — |    |   |   | — |   |   |   | —  |   |   |   | 29,431  |   |   |
| Assumed options in  the Commission Junction and Hi-Speed Media business combinations                                   |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | 6,521   |   |   | —  |   |   | — |    |   |   | — |   |   |   | —  |   |   |   | 6,521   |   |   |
| Purchase of  treasury stock                                                                                            |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | —  |   |   | (9,161  | )      |   | — |    |   |   | — |   |   |   | —  |   |   |   | (9,161  | )      |   |
| Retirement of  treasury stock                                                                                          |   |   | — |   |   |   | — |   |   | (26,269,256 | )           |   | (26    | )      |   |   | (70,018 | )      |   | 70,044  |   |   | — |    |   |   | — |   |   |   | —  |   |   |   | —  |   |   |
| Comprehensive income:                                                                                                  |   |   |   |   |   |   |   |   |   |        |        |   |   |   |   |   |    |   |   |    |   |   |   |    |   |   |   |   |   |   |    |   |   |   |    |   |   |
| Net income                                                                                                             |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | —  |   |   | —  |   |   | — |    |   |   | — |   |   |   | 9,823   |   |   |   | 9,823   |   |   |
| Change in market  value of marketable securities, net of tax                                                           |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | —  |   |   | —  |   |   | — |    |   |   | 87     |   |   |   | —  |   |   |   | 87      |   |   |
| Foreign currency  translation                                                                                          |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | —  |   |   | —  |   |   | — |    |   |   | 2,985  |   |   |   | —  |   |   |   | 2,985   |   |   |
| Total  comprehensive income                                                                                            |   |   |   |   |   |   |   |   |   |        |        |   |   |   |   |   |    |   |   |    |   |   |   |    |   |   |   |   |   |   |    |   |   |   | 12,895  |   |   |
| Balance at  December 31, 2003                                                                                     |   |   | — |   |   |   | — |   |   | 77,953,774  |        |   | 78     |   |   |   | 339,597 |   |   | —  |   |   | (1,163 | )       |   |   | 78     |   |   |   | (64,383 | )      |   |   | 274,207 |   |   |
| Amortization of  deferred stock-based compensation                                                                     |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | —  |   |   | —  |   |   | 739    |    |   |   | — |   |   |   | —  |   |   |   | 739     |   |   |
| Deferred  stock-based compensation adjustment for forfeited   stock options                                            |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | (203    | )      |   | —  |   |   | 203    |    |   |   | — |   |   |   | —  |   |   |   | —  |   |   |
| Exercise of common  stock options                                                                                      |   |   | — |   |   |   | — |   |   | 4,119,089   |        |   | 4      |   |   |   | 10,963  |   |   | —  |   |   | — |    |   |   | — |   |   |   | —  |   |   |   | 10,967  |   |   |
| Issuance of shares  in business combination—Pricerunner                                                           |   |   | — |   |   |   | — |   |   | 263,467     |        |   | — |   |   |   | 1,967   |   |   | —  |   |   | — |    |   |   | — |   |   |   | —  |   |   |   | 1,967   |   |   |
| Purchase and  retirement of treasury   stock                                                                           |   |   | — |   |   |   | — |   |   | (303,808    | )           |   | — |   |   |   | (2,206  | )      |   | —  |   |   | — |    |   |   | — |   |   |   | —  |   |   |   | (2,206  | )      |   |
| Tax benefit from  the exercise of stock options (As Restated—see  note 2)                                         |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | 11,544  |   |   | —  |   |   | — |    |   |   | — |   |   |   | —  |   |   |   | 11,544  |   |   |
| Comprehensive income:                                                                                                  |   |   |   |   |   |   |   |   |   |        |        |   |   |   |   |   |    |   |   |    |   |   |   |    |   |   |   |   |   |   |    |   |   |   |    |   |   |
| Net income (As  Restated—see   note 2)                                                                       |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | —  |   |   | —  |   |   | — |    |   |   | — |   |   |   | 31,222  |   |   |   | 31,222  |   |   |
| Change in market  value of marketable securities, net of tax                                                           |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | —  |   |   | —  |   |   | — |    |   |   | (1,260 | )      |   |   | —  |   |   |   | (1,260  | )      |   |
| Add:  Reclassification adjustments for marketable securities                                                           |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | —  |   |   | —  |   |   | — |    |   |   | 143    |   |   |   | —  |   |   |   | 143     |   |   |
| Foreign currency  translation                                                                                          |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | —  |   |   | —  |   |   | — |    |   |   | 1,995  |   |   |   | —  |   |   |   | 1,995   |   |   |
| Less:  Reclassification adjustments for accumulated translation adjustment of Japan  subsidiary included in net income |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | —  |   |   | —  |   |   | — |    |   |   | (557   | )      |   |   | —  |   |   |   | (557    | )      |   |
| Total  comprehensive income (As Restated—see note 2)                                                              |   |   |   |   |   |   |   |   |   |        |        |   |   |   |   |   |    |   |   |    |   |   |   |    |   |   |   |   |   |   |    |   |   |   | 31,543  |   |   |
| Balance at  December 31, 2004 (As Restated—see note 2)                                                       |   |   |   |   |   |   |   |   |   | 82,032,522  |        |   | 82     |   |   |   | 361,662 |   |   | —  |   |   | (221   | )       |   |   | 399    |   |   |   | (33,161 | )      |   |   | 328,761 |   |   |
| Amortization of  deferred stock-based compensation                                                                     |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | —  |   |   | —  |   |   | 270    |    |   |   | — |   |   |   | —  |   |   |   | 270     |   |   |
| Deferred  stock-based compensation adjustment for forfeited stock options                                         |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | (18     | )      |   | —  |   |   | 18     |    |   |   | — |   |   |   | —  |   |   |   | —  |   |   |
| Exercise of common  stock options                                                                                      |   |   | — |   |   |   | — |   |   | 3,015,936   |        |   | 3      |   |   |   | 14,440  |   |   | —  |   |   | — |    |   |   | — |   |   |   | —  |   |   |   | 14,443  |   |   |
| Issuance of shares  in business combinations—Webclients and Fastclick                                             |   |   | — |   |   |   | — |   |   | 17,436,864  |        |   | 17     |   |   |   | 220,832 |   |   | —  |   |   | — |    |   |   | — |   |   |   | —  |   |   |   | 220,849 |   |   |
| Assumed options in  the Webclients and Fastclick business combinations                                                 |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | 14,122  |   |   | —  |   |   | — |    |   |   | — |   |   |   | —  |   |   |   | 14,122  |   |   |
| Deferred  stock-based compensation                                                                                     |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | 705     |   |   | —  |   |   | (705   | )       |   |   | — |   |   |   | —  |   |   |   | —  |   |   |
| Purchase and  retirement of   treasury stock                                                                           |   |   | — |   |   |   | — |   |   | (587,388    | )           |   | — |   |   |   | (2,599  | )      |   | —  |   |   | — |    |   |   | — |   |   |   | (3,058  | )      |   |   | (5,657  | )      |   |
| Tax benefit from  stock option exercises                                                                               |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | 8,468   |   |   | —  |   |   | — |    |   |   | — |   |   |   | —  |   |   |   | 8,468   |   |   |
| Comprehensive income:                                                                                                  |   |   |   |   |   |   |   |   |   |        |        |   |   |   |   |   |    |   |   |    |   |   |   |    |   |   |   |   |   |   |    |   |   |   |    |   |   |
| Net income                                                                                                             |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | —  |   |   | —  |   |   | — |    |   |   | — |   |   |   | 40,644  |   |   |   | 40,644  |   |   |
| Change in market  value of marketable securities, net of tax                                                      |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | —  |   |   | —  |   |   | — |    |   |   | (17    | )      |   |   | —  |   |   |   | (17     | )      |   |
| Foreign currency  translation                                                                                          |   |   | — |   |   |   | — |   |   | —      |        |   | — |   |   |   | —  |   |   | —  |   |   | — |    |   |   | (3,340 | )      |   |   | —  |   |   |   | (3,340  | )      |   |
| Total comprehensive  income                                                                                            |   |   |   |   |   |   |   |   |   |        |        |   |   |   |   |   |    |   |   |    |   |   |   |    |   |   |   |   |   |   |    |   |   |   | 37,287  |   |   |
| Balance at  December 31, 2005                                                                                     |   |   | — |   |   |   | $      | — |   |        | 101,897,934 |   |   | $      | 102    |   |    |   | $      | 617,612 |   |   | $      | —  |   |   | $      | (638   | )      |   |    | $      | (2,958 | )      |    |   | $      | 4,425   |   |   |   | $ | 618,543 |   |   |

 

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

F-7

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**VALUECLICK, INC.CONSOLIDATED STATEMENTSOF CASH FLOWS**
|                                                                                    | ** ** | **For the Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                         | ** ** | ** **                                                   | ** ** | **(As Restated  see note 2)** | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                                      | ** ** |
| Cash flows from  operating activities:                                             |       |                                                         |       |   |   |   |   |   |   |
| Net income                                                                         |       | $                                                            | 40,644     |   |   | $ | 31,222 |   |   | $ | 9,823 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                                         |       |   |   |   |   |   |   |
| Depreciation and amortization                                                      |       | 19,246                                                       |       |   | 10,299 |   |   | 7,531 |   |
| Restructuring benefit, net                                                         |       | (73                                                          | )          |   | (1,003 | ) |   | — |   |
| Provision for doubtful accounts receivable                                         |       | 2,164                                                        |       |   | 1,308 |   |   | 1,213 |   |
| Inventory write-down                                                               |       | —                                                       |       |   | 199 |   |   | — |   |
| Stock-based compensation                                                           |       | 270                                                          |       |   | 739 |   |   | 352 |   |
| Tax benefit from stock option exercises                                            |       | 12,833                                                       |       |   | 11,544 |   |   | — |   |
| Minority interest in ValueClick Japan                                              |       | —                                                       |       |   | (130 | ) |   | (84 | ) |
| Gain on sale of equity interest in ValueClick Japan                                |       | —                                                       |       |   | (8,007 | ) |   | — |   |
| Benefit from deferred income taxes                                                 |       | (2,021                                                       | )          |   | (6,614 | ) |   | (112 | ) |
| Changes in  operating assets and liabilities, net of effects of acquisitions:      |       |                                                         |       |   |   |   |   |   |   |
| Accounts receivable                                                                |       | (25,844                                                      | )          |   | (9,510 | ) |   | (8,106 | ) |
| Prepaid expenses, inventories and other assets                                     |       | 1,279                                                        |       |   | (866 | ) |   | 567 |   |
| Accounts payable and accrued expenses                                              |       | 7,561                                                        |       |   | 6,783 |   |   | 4,657 |   |
| Income taxes receivable/payable                                                    |       | 5,332                                                        |       |   | 10,921 |   |   | 449 |   |
| Deferred revenue                                                                   |       | (218                                                         | )          |   | 235 |   |   | 523 |   |
| Other non-current liabilities                                                      |       | (496                                                         | )          |   | (561 | ) |   | (885 | ) |
| Net cash provided by operating activities                                          |       | 60,677                                                       |       |   | 46,559 |   |   | 15,928 |   |
| Cash flows from  investing activities:                                             |       |                                                         |       |   |   |   |   |   |   |
| Proceeds from the maturity and sale of marketable  securities                      |       | 199,785                                                      |       |   | 131,730 |   |   | 25,792 |   |
| Purchases of marketable securities                                                 |       | (179,422                                                     | )          |   | (167,464 | ) |   | (3,758 | ) |
| Acquisition of businesses, net of cash acquired                                    |       | (59,562                                                      | )          |   | (26,707 | ) |   | (18,513 | ) |
| Purchases of property and equipment                                                |       | (9,036                                                       | )          |   | (6,009 | ) |   | (3,241 | ) |
| Proceeds from sale of equity interest in ValueClick  Japan, net                    |       | —                                                       |       |   | 2,351 |   |   | — |   |
| Purchases of intangible assets                                                     |       | —                                                       |       |   | — |   |   | (811 | ) |
| Net cash used in investing activities                                              |       | (48,235                                                      | )          |   | (66,099 | ) |   | (531 | ) |
| Cash flows from  financing activities:                                             |       |                                                         |       |   |   |   |   |   |   |
| Purchase of treasury stock                                                         |       | (5,657                                                       | )          |   | (2,206 | ) |   | (9,161 | ) |
| Proceeds from short-term debt                                                      |       | 91,684                                                       |       |   | — |   |   | — |   |
| Repayment of short-term debt and capital lease  obligations                        |       | (91,924                                                      | )          |   | (44 | ) |   | (1,833 | ) |
| Proceeds from exercises of stock options                                           |       | 14,443                                                       |       |   | 10,967 |   |   | 2,188 |   |
| Net cash provided by (used in) financing activities                                |       | 8,546                                                        |       |   | 8,717 |   |   | (8,806 | ) |
| Effect of foreign currency translations                                            |       | (2,408                                                       | )          |   | 2,476 |   |   | 2,985 |   |
| Net increase (decrease) in cash and cash equivalents                               |       | 18,580                                                       |       |   | (8,347 | ) |   | 9,576 |   |
| Cash and cash  equivalents, beginning of period                                    |       | 28,295                                                       |       |   | 36,642 |   |   | 27,066 |   |
| Cash and cash  equivalents, end of period                                          |       | $                                                            | 46,875     |   |   | $ | 28,295 |   |   | $ | 36,642 |   |
|                                                                                    |            |                                                              |            |  |  |  |  |  |  |  |  |  |  |  |

 

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

F-8

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**VALUECLICK, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**
|                                                     | ** ** | **For the Year Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                          | ** ** | **2005**                                                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                          | ** ** | ** **                                                   | ** ** | **(As Restated  see note 2)** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                                      | ** ** |
| Supplemental disclosures  of cash flow information: |       |                                                         |       |   |   |   |   |   |   |
| Cash paid for interest                              |       | $                                                            | 807        |   |   | $ | 26 |   |   | $ | 52 |   |
| Cash paid for income taxes                          |       | $                                                            | 12,730     |   |   | $ | 634 |   |   | $ | 511 |   |
| Non-cash investing and  financing activities:       |       |                                                         |       |   |   |   |   |   |   |
| Issuance of common stock in business combinations   |       | $                                                            | 220,849    |   |   | $ | 1,967 |   |   | $ | 29,431 |   |
| Stock options assumed in business combinations      |       | $                                                            | 14,122     |   |   | $ | — |   |   | $ | 6,521 |   |
|                                                     |            |                                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

F-9

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**VALUECLICK, INC.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**1. Organization andSummary of Significant Accounting Policies**

**Organizationand Basis of Presentation**

ValueClick, Inc., and its subsidiaries (“ValueClick”or “the Company”) offer a suite of products and services that enable marketersto advertise and sell their products through all major online marketingchannels—display/Web advertising, lead generation marketing, email marketing,search marketing, comparison shopping, and affiliate marketing. The Companyalso offers technology infrastructure tools and services that enableadvertisers and advertising agencies to implement and manage their own onlinedisplay advertising and email campaigns, and that assist online publishers withmanagement of their website inventory. Additionally, the Company providessoftware that assists advertising agencies and other companies with informationmanagement regarding their financial, workflow and offline media planning andbuying processes. The broad range of products and services that the Companyprovides enables its customers to address all aspects of the marketing process,from strategic planning through execution, including results measurement andcampaign refinements. By combining the Company’s media, affiliate marketing andtechnology offerings with its experience in both online and offline marketing,the Company helps its customers around the world optimize their marketingcampaigns both on the Internet and through offline media.

The Company derives its revenue from three businesssegments based on the types of products and services provided. These businesssegments are Media, Affiliate Marketing and Technology.

*MEDIA*—ValueClick’s Media segment provides a comprehensive suite of onlinemedia services and tailored programs that help marketers create awareness fortheir products and brands, attract visitors and generate leads and salesthrough the Internet. The Company’s Media segment has grown both organicallyand through the acquisition of complementary businesses such as Search123.com,completed in May 2003, Hi-Speed Media, completed in December 2003,Pricerunner, completed in August 2004, E-Babylon, completed in June 2005,Webclients, completed in June 2005, and Fastclick, completed in September 2005.

The Company offers advertisers and advertisingagencies a range of online media solutions in the categories of display/Webadvertising, lead generation marketing, email marketing, search marketing, andcomparison shopping. The Company has aggregated thousands of online publishersto provide advertisers and advertising agencies with access to one of thelargest online advertising networks. The Company also sells a limited number ofconsumer products directly to end-user customers through Company-owned e-commercewebsites.

The Company’s Media services are sold on a variety ofpricing models, including cost-per-thousand-impression (“CPM”), cost-per-click(“CPC”), cost-per-lead (“CPL”), and cost-per-action (“CPA”).

*AFFILIATE MARKETING*—ValueClick’s Affiliate Marketing segment operatesthrough its wholly-owned subsidiaries Be Free, acquired in May 2002, andCommission Junction, acquired in December 2003. In 2004, the Companyintegrated Be Free and Commission Junction and began marketing its affiliatemarketing offerings under the Commission Junction brand name.

The Company’s Affiliate Marketing segment offerstechnology and services that enable advertisers to manage, track and analyze avariety of online marketing programs. Specifically, the Company’s affiliatemarketing services enable its advertiser clients to: build relationships withaffiliate (i.e., publisher) partners; manage the offers they make available totheir affiliate partners; track the online traffic, leads 

F-10

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and sales that theseoffers drive to the advertiser’s website(s); analyze the effectiveness of theoffers and affiliate partners; and, track the commissions due to theiraffiliate partners.

ValueClick’s affiliate marketing services address theneeds of advertisers that seek to build and manage a private-labeled network ofthird-party online publishers, as well as advertisers that wish to conduct anaffiliate marketing program through the Company’s existing network ofthird-party online affiliate publishers. Affiliate Marketing segment revenuesare driven by a combination of fixed fees and variable compensation that isgenerally based on either a percentage of commissions paid to affiliates or ona percentage of transaction revenue generated from the programs managed withthe Company’s affiliate marketing platforms.

*TECHNOLOGY*—ValueClick’s Technology segment operates through itswholly-owned subsidiaries Mediaplex and Mediaplex Systems, which wereacquired in October 2001.

Mediaplex is an applications service provider (“ASP”)offering technology infrastructure tools and services that enable advertisersand advertising agencies to implement and manage their own online displayadvertising and email campaigns, and that assist online publishers withmanagement of their website inventory. Mediaplex’s products are based on itsproprietary MOJO® technology platform, which has the ability to automaticallyconfigure messages in response to real-time information from a marketer’senterprise data system and to provide ongoing campaign optimization. Revenuesare primarily derived from software access and use charges. Mediaplex’sproducts are priced primarily on a CPM or email-delivered basis.

Mediaplex Systems is anASP delivering Web-based information management systems to advertisingagencies, marketing communications companies, public relations agencies, andother large corporate advertisers. The solutions that Mediaplex Systemsprovides span three primary categories—Agency Management, Media Management andContent Management. Mediaplex Systems’ revenue is generated primarily frommonthly service fees paid by customers over the contracted service periods.

**Principles of Consolidation**

The consolidated financial statements include theaccounts of the Company, its majority-owned subsidiary and its wholly-ownedsubsidiaries. The Company’s majority-owned subsidiary, ValueClick Japan, Inc.,was sold on March 26, 2004 to livedoor Co., Ltd., as described in note 5.The operating results of ValueClick Japan are included in the Company’soperating results through March 31, 2004. The results of ValueClick Japanfor the period from March 26, 2004 to March 31, 2004 were notsignificant. All material intercompany transactions and balances have beeneliminated in consolidation.

The consolidated financialstatements include the accounts of the Company and its subsidiaries from thebeginning of the month nearest to the dates of consummation of their respectiveacquisitions, the acquisition date of majority voting control or the date ofdisposition, as the impact of this convention is not significant.

**Basisof Presentation and Use of Estimates**

Accounting principles generally accepted in the UnitedStates require management of the Company to make estimates and assumptions inthe preparation of these consolidated financial statements that affect thereported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenue and expenses during the reporting period. Actual resultscould differ from these estimates and assumptions.

The most significant areasthat require management judgment and which are susceptible to possible changein the near term include revenue recognition related to sales returns,allowance for doubtful accounts receivable, investments, income taxes,impairment of goodwill and other intangible assets, and 

F-11

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contingenciesand litigation.  The accounting policiesfor these areas are discussed in other notes to these consolidated financialstatements.

**Cash and Cash Equivalents**

The Company considers allshort-term highly liquid investments with an original maturity at the date ofpurchase of three months or less to be cash equivalents. At December 31,2005 and 2004, cash equivalents consisted of money market accounts andcertificates of deposit. Included in cash and cash equivalents as of December 31,2005 and 2004 are $605,000 and $566,000, respectively, of certificates ofdeposit used to collateralize standbyletters of credit in connection with the Company’s facility leases as describedin note 15.

**Marketable Securities**

Marketable securities areclassified as available-for-sale and accordingly are recorded at fair value,based on quoted market rates, with unrealized gains and losses reflected as aseparate component of stockholders’ equity, net of tax, until realized or untila determination is made that an other-than-temporary decline in market valuehas occurred. Factors considered by management in assessing whether another-than-temporary impairment has occurred include: the nature of the investment;whether the decline in fair value is attributable to specific adverseconditions affecting the investment; the financial condition of the investee;the severity and the duration of the decline; and whether the Company has boththe ability and intent to hold the investment. When it is determined that another-than-temporary impairment has occurred, the investment is written down toits market value at the end of the period in which it is determined that theother-than-temporary decline has occurred, with a corresponding charge toresults of operations. The cost of securities sold is based upon the specificidentification method.

**AccountsReceivable and Allowance for Doubtful Accounts Receivable**

Trade receivables are stated at gross invoice amountless an allowance for doubtful accounts receivable.

The Company estimates itsallowance for doubtful accounts receivable using two methods. First, theCompany evaluates specific accounts where information indicates the customersmay have an inability to meet financial obligations, such as bankruptcyproceedings and receivable amounts outstanding for an extended period beyondcontractual terms. In these cases, the Company uses assumptions and judgment,based on the best available facts and circumstances, to record a specificallowance for those customers against amounts due to reduce the receivable tothe amount expected to be collected. These specific allowances are re-evaluatedand adjusted as additional information is received. Second, an allowance isestablished for all customers based on a range of loss percentages applied toreceivables aging categories. These percentages are based on historicalcollection and write-off experience. The amounts calculated from each of thesemethods are analyzed to determine the total amount of the allowance.

**Inventories**

Inventories consistprimarily of finished goods and are stated at the lower of cost or market valuedetermined using the First-In-First-Out (“FIFO”) method. The Company reducesits inventory value for estimated obsolete and slow-moving inventory in anamount equal to the difference between the cost of inventory and the netrealizable value based upon assumptions about future demand and marketconditions.

F-12

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**Property and Equipment**

Property and equipment arestated at historical cost less accumulated depreciation and amortization.Depreciation and amortization expense are computed using the straight-linemethod over the estimated useful lives of the assets, generally, three yearsfor computer equipment and software, three to five years for furniture andequipment, the shorter of five years or the term of the lease for leaseholdimprovements, three years for vehicles, and 30 years for buildings.

**Business Combinations**

The Company accounts forits acquisitions utilizing the purchase method of accounting. Under thepurchase method of accounting, the total consideration paid is allocated to theunderlying assets and liabilities, based on their respective estimated fairvalues. The excess of the purchase price over the estimated fair values of thenet assets acquired is recorded as goodwill. Determining the fair value ofcertain acquired assets and liabilities, identifiable intangible assets inparticular, is subjective in nature and often involves the use of significantestimates and assumptions including, but not limited to: estimates of revenuegrowth rates; determination of appropriate discount rates; estimates ofadvertiser and publisher turnover rates; and estimates of terminal values. Theseassumptions are generally made based on available historical information. Definite-livedidentifiable intangible assets are generally amortized on a straight-linebasis, as this basis approximates the expected cash flows from those assets.

**Goodwill**

The Company tests goodwillfor impairment in accordance with the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 142, “Goodwill and Other IntangibleAssets,” (see note 6). Accordingly, goodwill is tested for impairment atleast annually at the reporting unit level or whenever events or circumstancesindicate that goodwill might be impaired. The Company has determined itsreporting units based on the guidance in SFAS No. 142 and Emerging IssuesTask Force (“EITF”) Issue D-101, “Clarification of Reporting UnitGuidance in Paragraph 30 of FASB Statement No. 142.” As of December 31,2005, the Company’s reporting units consisted of the Affiliate Marketing andTechnology operating segments, in addition to three components of the Mediaoperating segment: U.S. media (excluding Hi-Speed Media), Europe media andHi-Speed Media. The Company has elected to test for goodwill impairmentannually as of December 31. The Company determined that there was noimpairment of goodwill as of December 31, 2005, 2004 and 2003.

**Long-lived Assets**

Management evaluates therecoverability of the Company’s identifiable intangible assets and otherlong-lived assets in accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-lived Assets,” which generally requires theassessment of these assets for recoverability when events or circumstancesindicate a potential impairment exists. Events and circumstances considered bythe Company in determining whether the carrying value of identifiableintangible assets and other long-lived assets may not be recoverable include,but are not limited to: significant changes in performance relative to expectedoperating results; significant changes in the use of the assets; significantnegative industry or economic trends; a significant decline in the Company’sstock price for a sustained period of time; and changes in the Company’sbusiness strategy. In determining if an impairment exists, the Companyestimates the undiscounted cash flows to be generated from the use and ultimatedisposition of these assets. If an impairment is indicated based on acomparison of the assets’ carrying values and the undiscounted cash flows, theimpairment loss is measured as the amount by which the carrying amount of theassets exceeds the fair market value of the assets.

F-13

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**Revenue Recognition**

The Company recognizesrevenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “RevenueRecognition in Financial Statements.” Under SAB No. 104, the Company recognizes revenue when thefollowing criteria have been met: persuasive evidence of an arrangement exists,the fees are fixed or determinable, no significant Company obligations remain,and collection of the related receivable is reasonably assured.

The Company’s Mediasegment revenue is recognized in the period that the advertising impressions,click-throughs or actions occur, when lead-based information is delivered or,for our e-commerce business, when consumer products are shipped, provided thatno significant Company obligations remain, collection of the resultingreceivable is reasonably assured, and prices are fixed or determinable.Additionally, consistent with the provisions of EITF Issue No. 99-19,“Reporting Revenue Gross as a Principal versus Net as an Agent,” the Companyrecognizes revenue as a principal in media transactions. Accordingly, revenueis recognized on a gross basis and corresponding publisher expenses arerecorded as a component of cost of revenue.

Revenue for the Company’sAffiliate Marketing and Technology segments is generated primarily from feesfor campaign management services, application management services andprofessional services. Campaign management services revenue and professionalservices revenue are recognized when the related services are performed,provided no significant Company obligations remain, collection of the resultingreceivable is reasonably assured and fees are fixed or determinable.Application management services revenue consists of monthly recurring fees forhosting services and is recognized over the periods during which the servicesare performed, provided no significant Company obligations remain, collectionof the resulting receivable is reasonably assured, and fees are fixed ordeterminable. The Company’s application management services provide customersrights to access software applications, hardware for the application access andcustomer service. The Company’s customers do not have the right to takepossession of the software at any time during or after the hosting agreement.Accordingly, as prescribed by EITF Issue No. 00-3, “Application ofAICPA Statement of Position 97-2 to Arrangements That Include the Rightto Use Software Stored on Another Entity’s Hardware,” the Company’s revenuerecognition for Affiliate Marketing and Technology segments is outside the scopeof Statement of Position (“SOP”) No. 97-2, “Software RevenueRecognition.” Additionally, consistent with the provisions of EITF Issue No. 99-19,“Reporting Revenue Gross as a Principal versus Net as an Agent,” the Companyrecognizes revenue as an agent in affiliate marketing transactions.Accordingly, service fee revenue is recognized on a net basis as any publisherexpenses are the responsibility of the Company’s advertising customer.Contracts for application management services that provide for additionalpayments if usage exceeds designated minimum monthly, quarterly or annualvolume levels are recognized as revenue by the Company in the month, quarter oryear in which minimum volume is exceeded.

Deferred revenue consistsof fees received or billed in advance of the delivery or completion of servicesand implementation fees. Deferred revenue for fees received or billed inadvance of the delivery or completion of services is recognized when theservices are provided and no significant Company obligations remain. Deferredrevenue for implementation fees is recognized over the estimated customerlives. The Company does not engage in barter transactions.

The Company estimatesprovisions for sales returns which are recorded as a reduction to revenues. Theprovision for sales returns reflects an estimate of product returns fromconsumers of the Company’s affiliate marketing customers and product returnsfrom the Company’s e-commerce customers. In determining the estimate for salesreturns, the Company relies upon historical data, contract information andother factors. The estimated provision for sales returns can vary from actualresults. More or less product may be returned from consumers of the Company’saffiliate marketing customers and from the Company’s e-commerce customersas compared to what was estimated. These factors and unanticipated 

F-14

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changesin the economic and industry environment could make the sales return estimatesdiffer from actual returns**.**

**Cost of Revenue**

Cost of revenue consistsof payments related to publisher websites, online newsletters and email listsin the Company’s advertising networks, labor costs, telecommunication costs,and depreciation of equipment related to the Company’s revenue-generatingtechnology infrastructure. The Company becomes obligated to make paymentsrelated to third-party publisher websites, online newsletters and email listsin the period the advertising impressions, click-throughs, actions orlead-based information are delivered or occur. Such expenses are classified ascost of revenue in the corresponding period in which the revenue is recognizedin the accompanying consolidated statement of operations. Additionally, cost ofrevenue of the Company’s Media segment e-commerce business includes productcosts and shipping and handling costs.

**Sales and Marketing**

Sales and marketingexpenses include advertising, salaries, sales commissions, employee benefits,travel, and related expenses for the Company’s sales force and marketingpersonnel.

Advertising costs areexpensed as incurred and totaled $34.5 million, $4.9 million and $272,000 forthe years ended December 31, 2005, 2004 and 2003, respectively.

**General andAdministrative**

General and administrativeexpenses include facilities costs, professional service fees, depreciation,salaries, benefits, and related expenses for the Company’s executive, finance,legal, human resources, and other administrative personnel, insurance and othergeneral overhead costs.

**Technology**

Technology costs includeexpenses associated with the maintenance of the Company’s technology platforms,including the salaries and related expenses for the Company’s softwareengineering department, as well as costs for contracted services and supplies.With the exception of certain internal use software qualifying forcapitalization, all technology costs have been expensed as incurred. TheCompany follows the guidance of SOP No. 98-1, “Accounting for theCosts of Computer Software Developed or Obtained for Internal Use.” Allcapitalized software development costs were fully amortized as of December 31,2005. Capitalized software development costs were amortized for periods up to18 months.

**Stock-basedCompensation**

Certain options have beengranted or assumed with exercise prices below the market value of theunderlying common stock on the grant date or assumption date in businesscombinations. At December 31, 2005, the Company has eleven stock optionplans which are described more fully in note 11. The Company accounts forits employee stock option plans in accordance with the provisions of AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees” and the related interpretations of Financial Accounting StandardsBoard (“FASB”) Interpretation (“FIN”) No. 44, “Accounting for CertainTransactions involving Stock Compensation.” Accordingly, compensation expenserelated to employee stock options is recorded only if, on the date of thegrant, the fair value of the underlying stock exceeds the exercise price.

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During the year ended December 31,2005, the Company issued 0.3 million share-equivalent Stock Appreciation Rights(“SARs”) and recorded $1.7 million of stock-based compensation associated withthe SARs, which is included in *Stock-based compensation*in the consolidated statement of operations. The SARs vest over either a four-or eight-quarter period beginning October 1, 2005. The intrinsic value ofthe SARs that vest each quarter will be settled in cash the following quarter. TheSARs are accounted for as variable awards and, as such, are marked-to-marketeach reporting period and the stock-based compensation expense associated withthe SARs is determined using the accelerated expense attribution method, inaccordance with FIN No. 28, “Accounting for Stock Appreciation Rights andOther Variable Stock Option Award Plans.”

Thefollowing table illustrates the effect on net income and net income per shareif the Company had applied the fair value recognition provisions of SFAS No. 123,“Accounting for Stock-Based Compensation,” using the Black-Scholes optionpricing model, to stock-based employee compensation (in thousands, except pershare data).
|                                                                                                                      | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                           | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                           | ** ** | ** **                                 | ** ** | **(As Restated  see note 2)** | ** ** | ** ** | ** ** |
| Net income:                                                                                                          |       |                                       |       |   |   |   |   |   |   |
| As reported                                                                                                          |       | $                                          | 40,644     |   |   | $ | 31,222 |   |   | $ | 9,823 |   |
| Add: employee  stock-based compensation expense included in reported net income, net of  related tax effects         |       | 1,271                                      |       |   | 671 |   |   | 230 |   |
| Less: employee  stock-based compensation expense determined under the fair value method, net  of related tax effects |       | (5,808                                     | )          |   | (1,566 | ) |   | (5,650 | ) |
| Pro-forma                                                                                                            |       | $                                          | 36,107     |   |   | $ | 30,327 |   |   | $ | 4,403 |   |
| Basic net income  per share:                                                                                         |       |                                       |       |   |   |   |   |   |   |
| As reported                                                                                                          |       | $                                          | 0.46       |   |   | $ | 0.39 |   |   | $ | 0.13 |   |
| Pro-forma                                                                                                            |       | $                                          | 0.41       |   |   | $ | 0.38 |   |   | $ | 0.06 |   |
| Diluted net  income per share:                                                                                       |       |                                       |       |   |   |   |   |   |   |
| As reported                                                                                                          |       | $                                          | 0.45       |   |   | $ | 0.37 |   |   | $ | 0.13 |   |
| Pro-forma                                                                                                            |       | $                                          | 0.40       |   |   | $ | 0.36 |   |   | $ | 0.06 |   |
|                                                                                                                      |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**ForeignCurrency Translation**

The Company’s foreignsubsidiaries record their assets, liabilities and results of operations intheir respective functional currencies. The Company translates its subsidiaries’financial statements into U.S. dollars for purposes of consolidation.

Assets and liabilities ofthe Company’s foreign subsidiaries are translated at the period-end exchangerate while revenue and expenses, gains and losses are translated at the averagerates in effect for the period.  Exceptfor certain intercompany balances that have been designated as short-term innature in 2005, the effects of these translation adjustments are reported in aseparate component of stockholders’ equity as *Othercomprehensive income*. The effects of the translation adjustments forthose intercompany balances that have been designated as short-term in natureare included in general and administrative expenses and were not significantfor the year ended December 31, 2005. Prior to 2005, all intercompanybalances were designated as long-term in nature.

Transaction gains andlosses related to transactions with third-parties denominated in other than thefunctional currency were not significant for the years ended December 31,2005, 2004 and 2003.

F-16

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**Concentrationof Credit Risk and Significant Customers**

Financial instruments thatpotentially subject the Company to concentration of credit risk consist of cashand cash equivalents, marketable securities and accounts receivable. Cash andcash equivalents are deposited in the local currency with a limited number offinancial institutions in the United States and Europe. The balances in theUnited States held at any one financial institution may be in excess of FederalDeposit Insurance Corporation (“FDIC”) insurance limits and certain balances inEurope may not be insured. Marketable securities are held in local currencywith two major financial institutions and are generally not insured.

Credit is extended tocustomers based on an evaluation of their financial condition and otherfactors. The Company generally does not require collateral or other security tosupport accounts receivable. The Company performs ongoing credit evaluations ofits customers and maintains an allowance for potential bad debts. At December 31,2005 and 2004, no customer comprised more than 10% of accounts receivable. Forthe years ended December 31, 2005, 2004 and 2003, no customer comprised more than 10% of total revenue.

**FairValue of Financial Instruments**

The Company’s financialinstruments, including cash and cash equivalents, net accounts receivable,accounts payable, and accrued expenses, are carried at historical cost basis.At December 31, 2005 and 2004, the carrying amounts of these instrumentsapproximated their fair values because of the short-term nature of theseinstruments. The Company’s marketable securities are carried at fair marketvalue as discussed in note 3.

**Income Taxes**

ValueClick uses the assetand liability method of accounting for income taxes in accordance with SFAS No. 109,“Accounting for Income Taxes.” Under this method, deferred tax assets andliabilities are recognized for the future tax consequences attributable to thedifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and the future tax benefits ofnet operating loss carryforwards, capital loss carryforwards, and tax creditcarryforwards. Deferred tax assets and liabilities are measured using enactedtax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inthe results of operations in the period that includes the enactment date. Avaluation allowance is provided to reduce the deferred tax assets reported if,based on the weight of the available positive and negative evidence, it is morelikely than not some portion or all of the deferred tax assets will not berealized. A liability (including interest if applicable) is established in theconsolidated financial statements to the extent a current benefit has been recognizedon a tax return for matters that are considered contingent upon the outcome ofan uncertain tax position. The Company does not record deferred tax assets inits consolidated financial statements for future tax benefits that arecontingent upon the ultimate outcome of uncertain tax positions.

**Basicand Diluted Net Income Per Common Share**

Basic net income percommon share is computed by dividing net income by the weighted-average numberof shares of common stock outstanding for the period. Diluted net income percommon share is computed using the weighted-average number of common sharesoutstanding for the period, and, if dilutive, potential common sharesoutstanding during the period. Potential common shares consist of theincremental common shares issuable upon the exercise of stock options, determinedusing the treasury stock method.

F-17

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**ComprehensiveIncome**

The Company has adoptedthe provisions of SFAS No. 130, “Reporting Comprehensive Income.” SFAS No. 130establishes standards for reporting comprehensive income and its components infinancial statements. Comprehensive income, as defined, includes all changes inequity (net assets) during a period from non-owner sources. The elements ofcomprehensive income, other than net income, relate to foreign currencytranslation adjustments and unrealized gains/losses on marketable securities forthe years ended December 31, 2005, 2004 and 2003. As of December 31,2005 the accumulated balance of the foreign currency translation adjustment andunrealized losses on marketable securities were $1.8 million and $1.2 million,respectively. The Company has recorded a full valuation allowance against therelated deferred tax asset associated with the unrealized losses on marketablesecurities due to the uncertainty as to whether such losses and relateddeferred tax asset will be realized.

**Reclassifications**

Certain reclassificationshave been made to prior year amounts to conform to the current presentation. Asdiscussed in note 17, the Company revised the presentation of segment incomefrom operations in 2005. All segment information presented for prior periodshas been updated to conform to the current presentation.

**Business Segments**

The Company uses the “managementapproach” defined in SFAS No. 131 “Disclosures About Segments at anEnterprise and Related Information,” to identify its operating segments. Themanagement approach designates the internal organization used by management formaking operating decisions and assessing performance as the basis foridentifying the Company’s reportable segments. See note 17 for furtherinformation regarding the Company’s business segments.

**RecentlyIssued Accounting Standards**

In November 2005, theFASB issued FASB Staff Position (“FSP”) 115-1/124-1, “The Meaningof Other-Than-Temporary Impairment and Its Application to Certain Investments,”(“FSP 115-1”) which provides guidance on determining wheninvestments in certain debt and equity securities are considered impaired,whether that impairment is other-than-temporary, and on measuring suchimpairment loss. FSP 115-1 also includes accounting considerationssubsequent to the recognition of an other-than temporary impairment andrequires certain disclosures about unrealized losses that have not beenrecognized as other-than-temporary impairments. FSP 115-1 isrequired to be applied to reporting periods beginning after December 15,2005. The Company does not believe the adoption of FSP 115-1 willhave a material impact on its consolidated financial position or results ofoperations.

In June 2005, theFASB issued SFAS No. 154, “Accounting Changes and Error Corrections, areplacement of APB Opinion No. 20, Accounting Changes, and SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154changes the requirements for the accounting for, and reporting of, a change inaccounting principle. Previously, most voluntary changes in accountingprinciples were required to be recognized by way of a cumulative effectadjustment within net income during the period of the change. SFAS No. 154requires retrospective application to prior period financial statements, unlessit is impracticable to determine either the period-specific effects or thecumulative effect of the change. SFAS No. 154 is effective foraccounting changes made in fiscal years beginning after December 15, 2005;however, SFAS No. 154 does not change the transition provisions of anyexisting accounting pronouncements. The Company will apply the requirements ofSFAS No. 154 on accounting changes made on or after January 1, 2006.

F-18

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In December 2004, theFASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” orSFAS No. 123R, which is a revision of SFAS No. 123, “Accountingfor Stock-Based Compensation,” or SFAS 123. SFAS No. 123R requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the financial statements based on their grant datefair values and does not allow the previously permitted pro-forma disclosure asan alternative to financial statement recognition. SFAS No. 123Rsupersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,”and related interpretations, and amends SFAS No. 95, “Statement ofCash Flows.” SFAS No. 123R is effective for the Company beginning inthe first quarter of fiscal 2006. The Company will utilize the modifiedprospective transition method allowed by SFAS No. 123R and will alsoamortize stock-based compensation utilizing the straight-line method over theoptions’ vesting period.

The adoption of theSFAS No. 123R fair value method is expected to have a significantimpact on the Company’s consolidated results of operations. As of December 31,2005, the Company has approximately $30.0 million of pro-forma deferredstock-based compensation associated with unvested stock options determinedunder the fair value method of SFAS 123. This pro-forma deferred stock-basedcompensation will be amortized to expense under the provisions of SFAS 123Rover the vesting period of the options. The remaining vesting period for suchunvested options ranges up to 4 years, with a weighted-average remainingvesting period of approximately 2 years.  This amount is not reflective of the totalstock-based compensation expense that will be recorded in the future. Thespecific impact of adoption of SFAS No. 123R cannot be predicted at thistime because it will depend on the fair value and number of share-basedpayments granted in the future, as well as the structure of future stock-basedawards. However, had the Company adopted SFAS 123R in prior periods, themagnitude of the impact of that standard would have approximated the impact ofSFAS 123 assuming the application of the Black-Scholes option-pricingmodel as described in the disclosure of pro-forma net income and pro-formanet income per share in note 1 to the consolidated financial statements.

SFAS No. 123Ralso requires the benefit of tax deductions in excess of recognizedcompensation cost to be reported as a financing cash flow, rather than as anoperating cash flow as required under current literature. This requirement willreduce net operating cash flows and increase net financing cash flows inperiods after adoption if the benefit of such tax deductions exceeds therecognized compensation expense.

**2.**   Restatementof Previously Issued Financial Statements

Subsequent to the issuanceof the Company’s 2004 consolidated financial statements, the Company determinedthat it should not have recognized the tax benefit of certain acquired netoperating losses (“acquired NOLs”) in its 2004 consolidated financialstatements because of uncertainty as to whether the Company’s tax treatment ofthe acquired NOLs would be upheld under examination by the relevant taxauthorities. As a result, the accompanying consolidated financial statements asof and for the year ended December 31, 2004 have been restated from the amountspreviously reported.

A summary of thesignificant effects of the restatement on the 2004 consolidated statement ofoperations and consolidated balance sheet is provided below. The restatementdoes not impact the previously reported net cash flows from operating,investing or financing activities. 

F-19

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**ConsolidatedStatement of Operations**
|                                      | ** ** | **Year ended December 31, 2004**               | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                           | ** ** | **As Previously  Reported**                                   | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                           | ** ** | **(in thousands, except per share data)** | ** ** |
| Income tax expense (benefit)         |       |                                                               | $          | (40,512 | ) |   |   | $ | 56,665 |   |   |   | $ | 16,153 |   |   |
| Income before minority interest      |       |                                                               | $          | 87,757 |   |   |   | $ | (56,665 | ) |   |   | $ | 31,092 |   |   |
| Net income                           |       |                                                               | $          | 87,887 |   |   |   | $ | (56,665 | ) |   |   | $ | 31,222 |   |   |
| Basic net income  per common share   |       |                                                               | $          | 1.10 |   |   |   | $ | (0.71 | ) |   |   | $ | 0.39 |   |   |
| Diluted net  income per common share |       |                                                               | $          | 1.05 |   |   |   | $ | (0.68 | ) |   |   | $ | 0.37 |   |   |
|                                      |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**ConsolidatedBalance Sheet**
|                                            | ** ** | **As of December 31, 2004** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                 | ** ** | **As Previously  Reported**                | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                         | ** ** |
| Deferred tax assets, current               |       |                                            | $          | 5,411 |   |   |   | $ | (215 | ) |   |   | $ | 5,196 |   |   |
| Total current assets                       |       |                                            | $          | 282,628 |   |   |   | $ | (215 | ) |   |   | $ | 282,413 |   |   |
| Goodwill                                   |       |                                            | $          | 50,884 |   |   |   | $ | 1,340 |   |   |   | $ | 52,224 |   |   |
| Deferred tax assets, less current portion  |       |                                            | $          | 61,630 |   |   |   | $ | (46,837 | ) |   |   | $ | 14,793 |   |   |
| Total assets                               |       |                                            | $          | 430,426 |   |   |   | $ | (45,712 | ) |   |   | $ | 384,714 |   |   |
| Income taxes payable, less current portion |       |                                            | $          | — |   |   |   | $ | 10,432 |   |   |   | $ | 10,432 |   |   |
| Total liabilities                          |       |                                            | $          | 45,521 |   |   |   | $ | 10,432 |   |   |   | $ | 55,953 |   |   |
| Additional paid-in capital                 |       |                                            | $          | 361,141 |   |   |   | $ | 521 |   |   |   | $ | 361,662 |   |   |
| Retained earnings (accumulated deficit)    |       |                                            | $          | 23,504 |   |   |   | $ | (56,665 | ) |   |   | $ | (33,161 | ) |   |
| Total  stockholders’ equity           |       |                                            | $          | 384,905 |   |   |   | $ | (56,144 | ) |   |   | $ | 328,761 |   |   |
|                                            |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**3.**   MarketableSecurities

Marketablesecurities consisted of the following as of December 31, 2005 (inthousands):
|                              | ** ** | **Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
|------------------------------|------------|----------|------------|-----------------------|------------|------------------------|------------|--------------------------------|------------|
| Municipal obligations        |       | $        | 29,473     |                  |       | $                      | —     |                           |       |   | $ | (20 | ) |   | $ | 29,453 |   |
| U.S. agencies obligations    |       | 100,432  |       |                  | —     |                   |       |                           | (751       | ) |   | 99,681 |   |
| Corporate obligations        |       | 65,199   |       |                  | —     |                   |       |                           | (425       | ) |   | 64,774 |   |
| Total marketable  securities |       | $        | 195,104    |                  |       | $                      | —     |                           |       |   | $ | (1,196 | ) |   | $ | 193,908 |   |

 

Marketablesecurities consisted of the following as of December 31, 2004 (inthousands):
|                              | ** ** | **Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
|------------------------------|------------|----------|------------|-----------------------|------------|------------------------|------------|--------------------------------|------------|
| Municipal obligations        |       | $        | 40,759     |                  |       | $                      | —     |                           |       |   | $ | (14 | ) |   | $ | 40,745 |   |
| U.S. agencies obligations    |       | 70,978   |       |                  | 2          |                   |       |                           | (554       | ) |   | 70,426 |   |
| Corporate obligations        |       | 103,729  |       |                  | —     |                   |       |                           | (612       | ) |   | 103,117 |   |
| Total marketable  securities |       | $        | 215,466    |                  |       | $                      | 2          |                           |       |   | $ | (1,180 | ) |   | $ | 214,288 |   |

 

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Auction rate securities(included in municipal obligations and totaling $24.2 million as of December 31,2005 and $36.7 million as of December 31, 2004) are securities that arestructured with short-term reset dates of generally less than 90 days but withmaturities in excess of 90 days. At the end of the reset period, investors cansell or continue to hold the securities at par value. These securities areclassified in the table below based on their legal stated maturity date.

Thefollowing table summarizes the amortized cost and estimated fair value ofmarketable securities classified by the remaining maturity of the security asof December 31, 2005 (in thousands): 
|                                      | ** ** | **Cost** | ** ** | **Estimated  Fair  Value** | ** ** |
|--------------------------------------|------------|----------|------------|----------------------------|------------|
| Due within one year                  |       | $        | 111,031    |                       | $          | 110,328 |   |
| Due after one year through two years |       | 59,864   |       | 59,371                     |       |
| Due after two years                  |       | 24,209   |       | 24,209                     |       |
| Total                                |       | $        | 195,104    |                       | $          | 193,908 |   |

 

Realized gains and lossesfrom sales of marketable securities were not significant for the years ended December 31,2005, 2004 or 2003, and are included in interest income, net, in theconsolidated statements of operations. The Company recognizes realized gainsand losses upon sale of marketable securities using the specific identificationmethod.

Marketvalues were determined for each individual security in the investmentportfolio. The unrealized losses related to these investments are primarily dueto changes in interest rates and are considered to be temporary in nature. Thefollowing table summarizes the fair value and gross unrealized losses ofinvestments aggregated by type of investment instrument and length of time thatindividual securities have been in a continuous unrealized loss position as of December 31,2005 (in thousands):

| ** **                | ** ** | **Less Than 12 Months** | ** ** | **12 Months or Greater** | ** ** | **Total**       | ** ** |
|---------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|-----------------|------------|
|                           | ** ** | **Fair  Value**                        | ** ** | **Unrealized  Losses**                  | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| Municipal obligations     |       | $                                      | 29,453     |                                    |       | $               | (20        | ) |   | $ | — |   |   | $ | — |   |   | $ | 29,453 |   |   | $ | (20 | ) |   |
| U.S. agencies obligations |       | 57,034                                 |       |                                    | (422       | )               |       | 42,647 |   |   | (329 | ) |   | 99,681 |   |   | (751 | ) |   |
| Corporate obligations     |       | 28,904                                 |       |                                    | (241       | )               |       | 35,870 |   |   | (184 | ) |   | 64,774 |   |   | (425 | ) |   |
| Total                     |       | $                                      | 115,391    |                                    |       | $               | (683       | ) |   | $ | 78,517 |   |   | $ | (513 | ) |   | $ | 193,908 |   |   | $ | (1,196 | ) |   |

 

As of December 31,2004, there were no material unrealized losses with a holding period greaterthan one year. See note 1 for the Company’s policy on recordingother-than-temporary declines in the Company’s marketable securities portfolio.

**4.**   RecentBusiness Combinations and Investments

***Purchases***

***Fastclick.***   On September 27,2005, the Company acquired 97% of the outstanding shares of Fastclick commonstock upon the closing of its tender offer for all shares of Fastclick commonstock. On September 29, 2005, the Company acquired the remaining 3% ofoutstanding shares of Fastclick common stock, at which time Fastclick became awholly-owned subsidiary of the Company. Fastclick provides online advertisingservices and technologies, and has developed an advertising network of morethan 9,000 third-party publisher websites. Combined with ValueClick’s existingmarket position in online media services, the addition of Fastclick to theCompany’s suite of products and services positions ValueClick as one of thelargest online advertising network providers. This factor contributed to apurchase price in excess of 

F-21

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the fair value ofFastclick’s net tangible and intangible assets acquired, and, as a result, theCompany has recorded goodwill in connection with this transaction.

The results of Fastclick’soperations are included in the Company’s consolidated financial statements fromthe beginning of the accounting period nearest to the date of acquisition, October 1,2005. The results of operations of Fastclick for the period from the closing ofthe tender offer at midnight on September 27, 2005 through September 30,2005 are not significant. Under the terms of the merger agreement, ValueClickacquired all of the outstanding capital stock of Fastclick for an aggregatepurchase price of approximately $215.7 million, consisting ofapproximately 15.6 million shares of ValueClick common stock valued atapproximately $202.5 million (based on the average ValueClick common stockprice at the public announcement date and several trading days before and afterthat date), stock options assumed valued at approximately $12.6 million usingthe Black-Scholes option-pricing model, and transaction costs of theacquisition of approximately $600,000.

Theallocation of the purchase price to the assets acquired and liabilities assumedbased on the estimated fair values and the useful lives, in years, assigned tointangible assets were as follows (in thousands):
| Cash acquired                                     |       |            |       | $          | 80,577     |   |
|---------------------------------------------------|------------|-----------------|------------|------------|------------|--------|
| Other tangible assets acquired                    |       |            |       | 14,862     |       |
| ** **                                        | ** ** | **Useful life** | ** ** | ** ** | ** ** |
| Amortizable  intangible assets:                   |       |            |       |       |       |
| Customer,  affiliate and advertiser relationships |       | 7               |       | 28,800     |       |
| Trademark, trade  name and domain name            |       | 0.5             |       | 400        |       |
| Developed  technology                             |       | 3               |       | 1,300      |       |
| Covenants not to  compete                         |       | 1-3             |       | 4,600      |       |
| Goodwill                                          |       |            |       | 112,892    |       |
| Total assets  acquired                            |       |            |       | 243,431    |       |
| Liabilities  assumed                              |       |            |       | (27,763    | )          |
| Total                                             |       |            |       | $          | 215,668    |   |

 

During the quarter ended December 31,2005, the Company finalized the valuation related to the identifiableintangible assets acquired in the Fastclick acquisition, resulting in changesto the purchase price allocation previously reported in the Company’s financialstatements for the three-month period ended September 30, 2005. Based uponthe results of this final valuation, the identifiable intangible assetsresulting from this acquisition decreased by approximately $16.2 million fromthe preliminary valuation, goodwill increased by approximately $10.6 million,and the remaining difference is primarily due to lower deferred tax liabilitiesrelated to the decrease in identifiable intangible assets.

***Webclients.***   On June 24, 2005, theCompany completed the acquisition of Webclients, a leading provider of onlinemarketing services including lead generation, opt-in email distribution, andpromotional and industry-focused online content. Webclients’ businessactivities complement the Company’s media and affiliate marketing businesses,and can be leveraged across the Company’s advertiser base. These factorscontributed to a purchase price in excess of the fair value of Webclients’ nettangible and intangible assets acquired, and, as a result, the Company hasrecorded goodwill in connection with this transaction.

The results of Webclients’operations are included in the Company’s consolidated financial statements fromthe beginning of the accounting period nearest to the date of acquisition, July 1,2005. The results of operations of Webclients for the period from June 24,2005 through June 30, 2005 are not significant. 

F-22

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Underthe terms of the agreement, ValueClick acquired all of the outstanding capitalstock of Webclients for an aggregate purchase price of approximately$142.5 million, consisting of cash of $122.2 million, approximately 1.8million shares of ValueClick common stock valued at approximately $18.4 million(based on the average ValueClick common stock price at the public announcementdate and several trading days before and after that date), stock optionsassumed valued at approximately $1.5 million using the Black-Scholesoption-pricing model, and transaction costs of the acquisition of approximately$420,000. The stock portion of the consideration represented approximately14.0% of the total purchase price.

Theallocation of the purchase price to the assets acquired and liabilities assumedbased on the estimated fair values and the useful lives, in years, assigned tointangible assets were as follows (in thousands):
| Cash acquired                                     |       |            |       | $          | 953        |   |
|---------------------------------------------------|------------|-----------------|------------|------------|------------|--------|
| Other tangible assets acquired                    |       |            |       | 19,425     |       |
| ** **                                        | ** ** | **Useful life** | ** ** | ** ** | ** ** |
| Amortizable  intangible assets:                   |       |            |       |       |       |
| Customer,  affiliate and advertiser relationships |       | 7               |       | 30,800     |       |
| Trademark, trade  name and domain name            |       | 10              |       | 10,500     |       |
| Developed  technology                             |       | 3               |       | 1,500      |       |
| Covenants not to  compete                         |       | 3               |       | 5,200      |       |
| Goodwill                                          |       |            |       | 100,728    |       |
| Total assets  acquired                            |       |            |       | 169,106    |       |
| Liabilities  assumed                              |       |            |       | (26,558    | )          |
| Total                                             |       |            |       | $          | 142,548    |   |

 

During the quarter ended December 31,2005, the Company finalized the valuation related to the identifiableintangible assets acquired in the Webclients acquisition, resulting in changesto the purchase price allocation previously reported in the Company’s financialstatements for the three-month period ended September 30, 2005. Based uponthe results of this final valuation, the identifiable intangible assetsresulting from this acquisition increased by approximately $15.2 million fromthe preliminary valuation, goodwill decreased by approximately $8.9 million,and the remaining difference is primarily due to higher deferred taxliabilities related to the increase in identifiable intangible assets.

***E-Babylon.****  *On June 13, 2005, the Companycompleted the acquisition of E-Babylon, a leading marketer of ink jetcartridges and toner. E-Babylon expands the Company’s e-commerce channel andprovides an infrastructure with the capability to support all of the Company’scurrent e-commerce initiatives. These factors contributed to a purchase pricein excess of the fair value of E-Babylon’s net tangible and intangible assetsacquired, and, as a result, the Company has recorded goodwill in connectionwith this transaction.

The results of E-Babylon’soperations are included in the Company’s consolidated financial statements fromthe beginning of the accounting period nearest to the date of acquisition, June 1,2005. The results of operations of E-Babylon for the period from June 1,2005 through June 12, 2005 are not significant. Under the terms of theagreement, ValueClick acquired all of the outstanding capital stock ofE-Babylon for an aggregate purchase price of approximately $14.8 million,consisting of cash of $14.7 million and transaction costs of the acquisition ofapproximately $112,000.

F-23

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Theallocation of the purchase price to the assets acquired and liabilities assumedbased on the estimated fair values and the useful lives, in years, assigned tointangible assets were as follows (in thousands):
| Cash acquired                          |       |            |       | $          | 631        |   |
|----------------------------------------|------------|-----------------|------------|------------|------------|--------|
| Other tangible assets acquired         |       |            |       | 4,575      |       |
| ** **                             | ** ** | **Useful life** | ** ** | ** ** | ** ** |
| Amortizable  intangible assets:        |       |            |       |       |       |
| Customer  relationships                |       | 2               |       | 3,800      |       |
| Trademark, trade  name and domain name |       | 5               |       | 1,600      |       |
| Developed  technology                  |       | 3               |       | 130        |       |
| Covenants not to  compete              |       | 5               |       | 240        |       |
| Goodwill                               |       |            |       | 8,111      |       |
| Total assets  acquired                 |       |            |       | 19,087     |       |
| Liabilities  assumed                   |       |            |       | (4,299     | )          |
| Total                                  |       |            |       | $          | 14,788     |   |

 

During the quarter ended December 31,2005, the Company finalized the valuation related to the identifiableintangible assets acquired in the E-Babylon acquisition, resulting in changesto the purchase price allocation previously reported in the Company’s financialstatements for the three-month period ended September 30, 2005. Based uponthe results of this final valuation, the identifiable intangible assetsresulting from this acquisition increased by approximately $1.7 million fromthe preliminary valuation, goodwill decreased by approximately $1.0 million,and the remaining difference is primarily due to higher deferred taxliabilities related to the increase in identifiable intangible assets.

***Pricerunner.******  ***On August 6,2004, the Company completed the acquisition of Pricerunner, a leading providerof online comparison shopping services in Europe. With the addition ofPricerunner, the Company was able to expand its suite of performance-basedonline marketing solutions into the area of comparison shopping. Together withthe Company’s current services, the acquisition is expected to increase theCompany’s competitive position in Europe and the United States. These factorscontributed to a purchase price in excess of the fair value of Pricerunner’snet tangible and intangible assets acquired, and, as a result, the Company hasrecorded goodwill in connection with this transaction. In the second quarter of2005, the Company launched Pricerunner in the United States, offering consumersa broad range of products from offline and online retailers throughout thecountry.

The results of Pricerunner’soperations are included in the Company’s consolidated financial statements fromthe beginning of the accounting period nearest to the date of acquisition, August 1,2004. The results of operations of Pricerunner for the period from August 1,2004 through August 5, 2004 are not significant. Under the terms of theagreement, ValueClick acquired all of the outstanding capital stock ofPricerunner for an aggregate purchase price of approximately$30.1 million, consisting of cash of $26.9 million, approximately263,000 shares of ValueClick common stock valued at approximately $2.0 million(based on the average ValueClick common stock price at the public announcementdate and several trading days before and after that date), and transactioncosts of the acquisition of approximately $1.2 million. The stock portionof the consideration represented approximately 6.5% of the total purchaseprice.

F-24

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Theallocation of the purchase price to the assets acquired and liabilities assumedbased on the estimated fair values was as follows (in thousands):
| Cash acquired                                             |   | $      | 2,710  |   |
|-----------------------------------------------------------|--------|--------|--------|--------|
| Other tangible assets acquired                            |   | 4,085  |   |
| Amortizable  intangible assets:                           |   |   |   |
| Customer,  affiliate and advertiser related relationships |   | 7,900  |   |
| Trademark, trade  name and domain name                    |   | 5,100  |   |
| Developed  technology                                     |   | 500    |   |
| Covenants not to  compete                                 |   | 200    |   |
| Goodwill                                                  |   | 14,679 |   |
| Total assets  acquired                                    |   | 35,174 |   |
| Liabilities assumed                                       |   | (5,054 | )      |
| Total                                                     |   | $      | 30,120 |   |

 

***Hi-Speed Media.******  ***On December 17, 2003,the Company completed its acquisition of Hi-Speed Media, a provider of emailmarketing and e-commerce services. Hi-Speed Media’s business activitiescomplement and provide scale to ValueClick’s existing media businesses. Thisfactor contributed to a purchase price in excess of the fair value of Hi-SpeedMedia’s net tangible and intangible assets acquired, and, as a result, theCompany has recorded goodwill in connection with this transaction.

The results of Hi-SpeedMedia’s operations are included in the Company’s consolidated financialstatements from the beginning of the accounting period nearest to the date ofacquisition, January 1, 2004. The results of operations of Hi-Speed Mediafor the period from December 17, 2003 through December 31, 2003 arenot significant. Under the terms of the agreement, ValueClick acquired all ofthe outstanding capital stock of Hi-Speed Media for an aggregate purchase priceof approximately $10.5 million, including cash of  approximately $9.0 million and transactioncosts of approximately $1.1 million. In connection with the transaction,Hi-Speed Media’s outstanding employee stock options were converted into optionsto purchase approximately 81,000 shares of ValueClick common stock valued atapproximately $0.4 million using the Black-Scholes option pricing model. TheCompany also agreed to provide additional cash consideration of up to$1.0 million per quarter, contingent upon the achievement of certainrevenue and operating income milestones over the eight quarters beginning January 1,2004. Contingent cash consideration earned for the years ended December 31,2005 and 2004 totaled approximately $3.6 million and $2.3 million, respectively,and was reflected as an increase in goodwill. Identifiable intangible assetsand goodwill of approximately $3.8 million and $13.9 million,respectively, have been recorded related to this acquisition.

***Commission Junction.******  ***On December 7,2003, the Company completed its acquisition of Commission Junction, anaffiliate marketing business, which provides technology and services thatenable advertisers to manage, track and analyze a variety of online marketingprograms. Commission Junction’s business activities complement and providescale to the Company’s existing affiliate marketing business. This factorcontributed to a purchase price in excess of the fair value of CommissionJunction’s net tangible and intangible assets acquired, and, as a result, the Companyhas recorded goodwill in connection with this transaction.

The results of CommissionJunction’s operations are included in the Company’s consolidated financialstatements from the beginning of the accounting period nearest to the date ofacquisition, December 1, 2003. The results of operations of CommissionJunction for the period from December 1, 2003 through 

F-25

----

December 6,2003 are not significant. Pursuant to the terms of the agreement, ValueClickacquired all of the outstanding capital stock of Commission Junction for anaggregate purchase price of approximately $62.1 million, consisting ofapproximately 3.0 million shares of ValueClick common stock valued atapproximately $29.5 million, approximately $26.1 million in cash andtransaction costs of $0.4 million. Additionally, outstanding options toacquire common stock of Commission Junction were converted into an aggregate of1.2 million options to acquire ValueClick common stock valued atapproximately $6.1 million using the Black-Scholes option pricing model.Identifiable intangible assets and goodwill of approximately $9.7 millionand $24.0 million, respectively, have been recorded related to thisacquisition.

***Search123.com******  ***On May 30,2003, the Company completed its acquisition of Search123.com (“Search123).Search123 is a search marketing company that allows marketers to findprospective customers who are actively engaged in researching and buyingproducts and services online. Search123’s business activities complement theCompany’s existing media business. This factor contributed to a purchase pricein excess of the fair value of Search123’s net tangible and intangible assetsacquired, and, as a result, the Company has recorded goodwill in connectionwith this transaction.

The results of Search123’soperations are included in the Company’s consolidated financial statements fromthe beginning of the accounting period nearest to the date of acquisition, June 1,2003. The results of operations of Search123 for the period from May 30,2003 through May 31, 2003 are not significant. Pursuant to the terms ofthe agreement, ValueClick acquired all of the outstanding capital stock ofSearch123 for an aggregate purchase price of approximately $4.9 million,consisting of a cash payment of approximately $3.2 million, the assumptionof a net working capital deficit of approximately $1.5 million andtransaction costs of approximately $200,000. Identifiable intangible assets andgoodwill of approximately $1.4 million and $2.8 million,respectively, have been recorded related to this acquisition.

Thehistorical operating results of acquired entities prior to the respectiveacquisition dates have not been included in the Company’s historical operatingresults. Pro-forma data (unaudited) for the years ended December 31, 2005and 2004 as if the acquisitions of Fastclick, Webclients, E-Babylon, andPricerunner had been effective as of the beginning of each year, and excludingthe results of the Company’s investment in ValueClick Japan (see note 5) as ifthe sale had been effective January 1, 2004, is as follows (in thousands,except per share data):
|                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Revenue                              |       | $        | 407,363    |     | $          | 304,121 |   |
| Net income                           |       | $        | 40,278     |     | $          | 12,029 |   |
| Basic net income per common share    |       | $        | 0.40       |     | $          | 0.12 |   |
| Diluted net  income per common share |       | $        | 0.39       |     | $          | 0.12 |   |

 

Pro-forma results ofoperations for the year ended December 31, 2004 include a non-recurringstock-based compensation charge of $4.9 million and a non-recurring impairmentcharge of $5.9 million related to a derivative instrument, both included in thehistorical operating results of Webclients. These pro-forma results ofoperations are not necessarily indicative of future operating results.

F-26

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**5.**   Sale of ValueClick Japan

On March 26, 2004,the Company completed the sale of its approximate 59% equity interest inValueClick Japan, Inc. to livedoor Co., Ltd., a Japanese Internet andtechnology product and services company. The Company received net cash proceedsof $2.4 million. In addition, the Company has continued to provide services tothis entity, including licensing of technology and technical support under acancelable support agreement, for specified fees. This transaction resulted ina gain on sale of approximately $8.0 million. The sale did not qualify as adiscontinued operation given the significance of the Company’s technologysupport agreement on this entity’s continuing operations. The operating resultsof ValueClick Japan are included in the Company’s operating results throughMarch 31, 2004. The results of operations of ValueClick Japan for theperiod from March 26, 2004 through March 31, 2004 were notsignificant.

**6.**   Goodwilland Intangible Assets

In accordance with theprovisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” theCompany does not amortize goodwill, but rather tests goodwill for impairmentannually as of December 31 at the reporting unit level using a fair valueapproach.  No goodwill impairment wasrecorded as a result of the Company’s annual impairment test for the yearsended December 31, 2005, 2004 and 2003. The Company determined itsreporting units based on the guidance in SFAS No. 142 and EITF D-101.As of December 31, 2005, the Company’s reporting units consisted of theAffiliate Marketing and Technology operating segments, in addition to threecomponents of the Media operating segment: U.S. media (excluding Hi-SpeedMedia), Europe media and Hi-Speed Media. As required by SFAS No. 142,the Company assigned goodwill to its reporting units. Below is assignedgoodwill by reporting unit as of December 31, 2005 and 2004 (inthousands):
|                      | ** ** | **2005**   | ** ** | **2004**                                     | ** ** |
|----------------------|------------|------------|------------|----------------------------------------------|------------|
| ** **           | ** ** | ** ** | ** ** | **(As Restated  see note 2)** | ** ** |
| **Reporting Units**  |       |       |       |                                         |       |   |   |
| Affiliate  Marketing |       | $          | 23,969     |                                         |       | $ | 24,551 |   |   |
| Technology           |       | —     |       |                                         | —     |   |   |
| Media:               |       |       |       |                                         |       |   |   |
| U.S. media           |       | 212,648    |       |                                         | 2,812      |   |   |
| Europe media         |       | 14,625     |       |                                         | 14,625     |   |   |
| Hi-Speed Media       |       | 21,973     |       |                                         | 10,236     |   |   |
| Total goodwill       |       | $          | 273,215    |                                         |       | $ | 52,224 |   |   |

 

For the year ended December 31, 2005, the netincrease in goodwill was due to the acquisitions of Fastclick, Webclients (bothincluded in the U.S. media reporting unit) and E-Babylon (included in the Hi-SpeedMedia reporting unit) as discussed in note 4, purchase price additions of $3.6million for Hi-Speed Media as a result of contingent cash considerationearned for the year ended December 31, 2005, and a reduction of $0.6million for Commission Junction (included in the Affiliate Marketing reportingunit), $0.8 million for Webclients, and $3.0 million for Fastclick relating totax benefits from exercises of nonqualified employee stock options that wereassumed and fully vested at the time of acquisition. As of December 31,2005, $55.3 million of goodwill is tax deductible. No portion of goodwill wastax deductible as of December 31, 2004.

F-27

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TheCompany’s acquired intangible assets are being amortized on a straight-linebasis over the following weighted-average useful lives (in years):
|                                                   | ** ** | **Weighted-Average  Useful Life** | ** ** |
|---------------------------------------------------|------------|----------------------------------------|------------|
| Customer,  affiliate and advertiser relationships |       |                                   | 7          |   |   |
| Trademark and  domain name                        |       |                                   | 11         |   |   |
| Developed  technology                             |       |                                   | 4          |   |   |
| Covenants not to  compete                         |       |                                   | 3          |   |   |
| Total                                             |       |                                   | 7          |   |   |

 

Thegross carrying amounts and accumulated amortization of the Company’s acquiredintangible assets were as follows at December 31, 2005 and 2004 (inthousands): 
|                                                  | ** ** | **Gross  Balance** | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|-------------------------------|------------|-------------------------------|------------|
| December 31, 2005:                          |       |               |       |                          |       |                          |       |   |   |   |   |
| Customer, affiliate and advertiser relationships |       | $                  | 84,421     |                          |       | $                             | (11,218    | ) |   |   | $ | 73,203 |   |   |
| Trademark, trade name and domain name            |       | 18,184             |       |                          | (1,592     | )                             |       |   | 16,592 |   |   |
| Developed technology                             |       | 8,015              |       |                          | (4,061     | )                             |       |   | 3,954 |   |   |
| Covenants not to compete                         |       | 10,494             |       |                          | (1,998     | )                             |       |   | 8,496 |   |   |
| Total intangible  assets                         |       | $                  | 121,114    |                          |       | $                             | (18,869    | ) |   |   | $ | 102,245 |   |   |
| December 31, 2004:                          |       |               |       |                          |       |                          |       |   |   |   |   |
| Customer, affiliate and advertiser relationships |       | $                  | 21,021     |                          |       | $                             | (3,265     | ) |   |   | $ | 17,756 |   |   |
| Trademark, trade name and domain name            |       | 5,684              |       |                          | (276       | )                             |       |   | 5,408 |   |   |
| Developed technology                             |       | 5,085              |       |                          | (2,805     | )                             |       |   | 2,280 |   |   |
| Covenants not to compete                         |       | 454                |       |                          | (250       | )                             |       |   | 204 |   |   |
| Total intangible assets                          |       | $                  | 32,244     |                          |       | $                             | (6,596     | ) |   |   | $ | 25,648 |   |   |

 

Intangible assets acquired during 2005 and 2004include: customer, affiliate and advertiser relationships; acquired technology;trademark and trade names; and other intangibles that are being amortized overthe periods benefited, ranging from 0.5 to 15 years.

In2005, $35.1 million, $48.0 million and $5.8 million were added to theintangible asset balances, respectively, related to the purchase of Fastclick,Webclients and E-Babylon. In 2004, $13.7 million of intangible assets wereacquired related to the purchase of Pricerunner. Amortization expense relatedto intangible assets was $12.2 million, $4.1 million and $1.6 million for theyears ended December 31, 2005, 2004 and 2003, respectively. Estimatedintangible asset amortization expense for the next five years ending December 31and thereafter is as follows (in thousands):

| 2006       |   | $ | 21,873 |   |
|------------|--------|---|--------|--------|
| 2007       |   | $ | 18,162 |   |
| 2008       |   | $ | 15,344 |   |
| 2009       |   | $ | 12,486 |   |
| 2010       |   | $ | 12,159 |   |
| Thereafter |   | $ | 22,221 |   |

 

F-28

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**7.**   Propertyand Equipment

Propertyand equipment consisted of the following as of December 31, 2005 and 2004(in thousands):
|                                                  | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Land                                             |       | $                                     | 1,470      |   | $ | — |   |
| Building                                         |       | 1,330                                 |       | — |   |
| Computer equipment  and purchased software       |       | 31,734                                |       | 24,778 |   |
| Furniture and  equipment                         |       | 3,936                                 |       | 2,863 |   |
| Vehicles                                         |       | 74                                    |       | 41 |   |
| Leasehold  improvements                          |       | 2,440                                 |       | 731 |   |
|                                             |       | 40,984                                |       | 28,413 |   |
| Less: accumulated  depreciation and amortization |       | (23,475                               | )          | (19,842 | ) |
|                                             |       | $                                     | 17,509     |   | $ | 8,571 |   |

 

Total depreciationexpense, including the amortization of leasehold improvements, for the yearsended December 31, 2005, 2004 and 2003 was approximately $7.1 million,$6.2 million and $6.0 million, respectively.

**8.**   AccountsPayable, Accrued Expenses and Short-Term Debt

Accountspayable and accrued expenses consisted of the following as of December 31,2005 and 2004 (in thousands):
|                                                        | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                             | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Accounts payable,  including amounts due to publishers |       | $                                     | 33,457     |   | $ | 21,994 |   |
| Advertiser  deposits                                   |       | 5,823                                 |       | 4,906 |   |
| Accrued salaries  and benefits                         |       | 7,001                                 |       | 3,309 |   |
| Other accrued  expenses                                |       | 18,018                                |       | 8,079 |   |
|                                                   |       | $                                     | 64,299     |   | $ | 38,288 |   |

 

In June 2005, inconnection with the closing of the acquisition of Webclients as discussed innote 4, the Company entered into a Master Repurchase Agreement (“RepurchaseAgreement”) with a financial institution under which the Company borrowed $91.7million and pledged securities with an estimated fair value of $94.2 million ascollateral. Under the terms of the Repurchase Agreement, the Company wasrequired to pay interest at the Federal Funds rate plus 30 basis points. Forthe year ended December 31, 2005, the Company incurred interest expense of$794,000 (at an average annual rate of 3.73%) which is included in Interestincome, net on the consolidated statement of operations. The Company repaid alloutstanding principal and interest due under the Repurchase Agreement as of September 30,2005.

**9.**   IncomeTaxes

Thecomponents of income before income taxes and minority interest are as follows(in thousands):
|                                                   | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| United States                                     |       | $                                          | 63,909     |   | $ | 43,968 |   | $ | 11,204 |   |
| Foreign                                           |       | 5,545                                      |       | 3,277 |   | (635 | ) |
| Income before income  taxes and minority interest |       | $                                          | 69,454     |   | $ | 47,245 |   | $ | 10,569 |   |

 

F-29

----

Theprovision for income taxes for the years ended December 31, 2005, 2004 and2003 is comprised of the following provision (benefit) components (inthousands):
|                    | ** ** | **Year Ended December 31,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **         | ** ** | ** **                                 | ** ** | **(As Restated  see note 2)** | ** ** | ** ** | ** ** |
| Current            |       |                                       |       |   |   |   |   |   |   |
| Federal            |       | $                                          | 22,805     |   |   | $ | 17,954 |   |   | $ | 566 |   |
| State              |       | 6,207                                      |       |   | 4,886 |   |   | 321 |   |
| Foreign            |       | 1,819                                      |       |   | (73 | ) |   | 55 |   |
|               |       | 30,831                                     |       |   | 22,767 |   |   | 942 |   |
| Deferred:          |       |                                       |       |   |   |   |   |   |   |
| Federal            |       | (1,182                                     | )          |   | (5,815 | ) |   | (30 | ) |
| State              |       | (293                                       | )          |   | (1,289 | ) |   | — |   |
| Foreign            |       | (546                                       | )          |   | 490 |   |   | (82 | ) |
|               |       | (2,021                                     | )          |   | (6,614 | ) |   | (112 | ) |
| Income tax expense |       | $                                          | 28,810     |   |   | $ | 16,153 |   |   | $ | 830 |   |

 

The income tax benefit of employee stock optionsexercised during 2005 and 2004 in the amount of approximately $8.5 million and$11.5 million, respectively, was recorded in additional paid-in capital and didnot therefore result in a benefit on the statements of operations. During 2004,$13.3 million of a valuation allowance previously recorded against deferred taxassets relating to net operating loss carryforwards of certain acquiredentities was reversed and recorded as a decrease to goodwill based uponmanagement’s conclusion that it was more likely than not that these netoperating loss carryforwards would be realized before their expiration. Further,as described in note 6, the Company recorded a decrease to goodwill in 2005 of$3.9 million related to tax benefits from exercises of nonqualified employeestock options that were assumed and fully vested at the time of acquisition.

Thecomponents of the deferred tax assets at December 31, 2005 and 2004 are asfollows (in thousands):
|                                                             | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                  | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                  | ** ** | ** **                            | ** ** | **(As Restated  see note 2)** | ** ** |
| Deferred tax assets:                                        |       |                                  |       |   |   |   |   |
| Net operating loss carryforwards                            |       | $                                     | 15,035     |   |   | $ | 17,688 |   |   |
| Depreciation and amortization                               |       | 11,112                                |       |   | 5,933 |   |   |
| Other                                                       |       | 5,683                                 |       |   | 3,812 |   |   |
| Gross deferred tax assets                                   |       | 31,830                                |       |   | 27,433 |   |   |
| Valuation allowance                                         |       | (1,308                                | )          |   | (1,744 | ) |   |
| Net deferred tax assets                                     |       | 30,522                                |       |   | 25,689 |   |   |
| Deferred tax  liabilities:                                  |       |                                  |       |   |   |   |   |
| Acquired intangible assets                                  |       | 40,103                                |       |   | 8,565 |   |   |
| Other                                                       |       | 571                                   |       |   | — |   |   |
| Total deferred tax liabilities                              |       | 40,674                                |       |   | 8,565 |   |   |
| Net deferred tax (liabilities) assets                       |       | $                                     | (10,152    | ) |   | $ | 17,124 |   |   |
| Current portion  of net deferred tax assets                 |       | $                                     | 6,619      |   |   | $ | 5,196 |   |   |
| Long-term portion  of net deferred tax (liabilities) assets |       | (16,771                               | )          |   | 11,928 |   |   |
| Net deferred tax  (liabilities) assets                      |       | $                                     | (10,152    | ) |   | $ | 17,124 |   |   |

 

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In evaluating the need for a valuation allowance at December 31,2005 and 2004, the Company evaluated both positive and negative evidence inaccordance with the requirements of SFAS No. 109, “Accounting for IncomeTaxes.” As of December 31, 2005, based upon both positive and negativeevidence, the Company determined it is more likely than not that certaindeferred tax assets may not be realizable. As of December 31, 2005 and2004, the valuation allowance attributable to deferred tax assets was $1.3million and $1.7 million, respectively, representing an overall decrease of$0.4 million. The decrease in the valuation allowance relates primarily to realizationof tax benefits associated with foreign net operating loss carryforwards.

At December 31, 2005, the Company had netoperating loss carryforwards for federal and state purposes of $34.8 millionand $21.3 million, respectively. The federal and state net operating losscarryforwards begin/began to expire in 2012 and 2004, respectively. As of December 31,2005, the Company may have available an additional $127.8 million and $85.8million of net operating loss carryforwards for federal and state purposes,respectively, which are not reflected in the above summary of deferred taxassets. The Company believes that it may be able to establish with the taxauthorities that it is entitled, under the Internal Revenue Code andinterpretations thereof, to some or all of the benefit of these net operatinglosses in future periods. However, this tax position is subject to certainassumptions and interpretations of the relevant legislative and judicialhistory that may or may not be accepted by the tax authorities. The Company hasdetermined that the future tax benefits associated with these net operatingloss carryforwards are contingent upon the ultimate outcome of an uncertain taxposition as the Company cannot assert that it is more likely than not thatthese assumptions and interpretations underlying its complex tax calculationswould be upheld under examination. Therefore the Company has not recorded adeferred tax asset related to these net operating loss carryforwards.

Theoverall effective tax rate differs from the statutory federal tax rate for theyears ended December 31, 2005, 2004 and 2003 as follows:
|                                                                            | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                 | ** ** | ** **                                 | ** ** | **(As Restated  see note 2)** | ** ** | ** ** | ** ** |
| Tax provision based  on the federal statutory rate                         |       | 35.0                                       | %          |   | 35.0 | % |   | 34.0 | % |
| State income  taxes, net of federal benefit                                |       | 5.9                                        |       |   | 4.5 |   |   | 3.0 |   |
| Stock-based  compensation                                                  |       | 0.1                                        |       |   | 0.4 |   |   | 2.2 |   |
| Research and  experimentation credit                                       |       | (0.4                                       | )          |   | (1.1 | ) |   | — |   |
| Effects of  foreign income                                                 |       | (0.4                                       | )          |   | (0.5 | ) |   | (0.3 | ) |
| Adjustment to  valuation allowance, net of purchase accounting adjustments |       | (0.6                                       | )          |   | (1.7 | ) |   | (34.0 | ) |
| Other, net                                                                 |       | 1.9                                        |       |   | (2.4 | ) |   | 2.9 |   |
|                                                                       |       | 41.5                                       | %          |   | 34.2 | % |   | 7.8 | % |

 

The Company files a consolidated federal incometax return as well as state and foreign tax returns.

As of December 31,2005, withholding and U.S. income taxes have not been provided on approximately$3.8 million of unremitted earnings of certain non-U.S. subsidiaries becausesuch earnings will be permanently reinvested in foreign operations or ifsubsequently remitted, will be offset by appropriate credits for foreign incometaxes paid. Upon remittance, certain foreign countries impose withholding taxesthat are then available, subject to certain limitations, for use as creditsagainst U.S. tax liabilities, if any. The determination of taxes associatedwith the $3.8 million of unremitted earnings is not practicable.

F-31

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**10. Capitalization**

**Treasury Stock**

In September 2001,the board of directors authorized a $10 million Stock Repurchase Programto purchase outstanding shares of ValueClick common stock from time to time atprevailing market prices in the open market or through unsolicited negotiatedtransactions depending on market conditions. The Stock Repurchase Program wasincreased by the board of directors to $30 million in February 2002,to $50 million in July 2002, to $75 million in November 2002,and to $95 million in August 2004. Under the program, the purchasesare funded from available working capital, and the repurchased shares will beretired, held in treasury or used for ongoing stock issuances such as issuancesunder employee stock plans. There is no guarantee as to the exact number ofshares that will be repurchased by the Company and the Company may discontinuepurchases at any time that management determines additional purchases are notwarranted. For the years ended December 31, 2005, 2004 and 2003, theCompany repurchased 587,388, 303,808 and 3,438,183 shares of its common stockunder the Stock Repurchase Program, respectively. As of December 31, 2005,and since the initiation of the Stock Repurchase Program, the Company hadrepurchased a total of approximately 25.7 million shares of its commonstock for approximately $75.9 million. As of December 31, 2005, up to$19.1 million of the Company’s capital may be used to purchase shares ofthe Company’s outstanding common stock under the Stock Repurchase Program.

**Stockholder Rights Plan**

On June 4, 2002, the board of directors ofValueClick, Inc. declared a dividend of one preferred share purchase rightfor each outstanding share of the Company’s common stock. The dividend waspayable on June 14, 2002 to the stockholders of record at the close ofbusiness on that date. Each right entitles the registered holder to purchasefrom the Company one unit consisting of one-thousandth of a share of Series Ajunior participating preferred stock of the Company at a price of $25.00 perunit. The description and terms of the rights are set forth in a RightsAgreement, dated as of June 4, 2002, by and between the Company and MellonInvestor Services LLC, a New Jersey Limited Liability Company, as Rights Agent.

Until the earlier to occur of (i) the close ofbusiness on the tenth day after a public announcement that a person or group ofaffiliated or associated persons has acquired beneficial ownership of 15% ormore of the outstanding common stock or (ii) ten business days (or suchlater date as may be determined by action of the Company’s board of directorsprior to such time as any person becomes an acquiring person) following thecommencement of, or announcement of an intention to make, a tender offer orexchange offer, the consummation of which would result in the bidder’sbeneficial ownership of 15% or more of the outstanding common stock (theearlier of such dates being called the distribution date), the rights will beevidenced by the Company’s common stock certificates.

The rights are not exercisable until the distributiondate. The rights will expire at the close of business on June 4, 2012unless the final expiration date is extended or the rights are earlier redeemedor exchanged by the Company.

The Series A junior participating preferred stockpurchasable upon exercise of the rights will not be redeemable. Each share of Series Ajunior participating preferred stock will be entitled to a dividend of 1,000times the dividend declared per share of common stock. In the event ofliquidation, the holders of the shares of Series A junior participatingpreferred stock will be entitled to a payment of 1,000 times the payment madeper share of common stock. Each share of Series A junior participatingpreferred stock will have 1,000 votes, voting together with the common stock.Finally, in the event of any merger, consolidation or other transaction inwhich shares of common stock are exchanged, each share of Series A juniorparticipating preferred stock will be entitled to receive 1,000 times theamount received per share of common stock. These rights are protected bycustomary anti-dilution provisions.

F-32

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The terms of the rights may be amended by the board ofdirectors of the Company without the consent of the holders of the rightsexcept that from and after such time that there is an acquiring person noamendment may adversely affect the interests of the holders of the rights.

Until a right isexercised, the holder of a right will have no rights by virtue of ownership asa stockholder of the Company, including, without limitation, the right to voteor to receive dividends.

**11. Stock Options**

**1999Stock Option Plan and 2002 Stock Incentive Plan**

On May 13, 1999, the Board of Directors adoptedand the stockholders approved the 1999 Stock Option Plan (the “1999 Stock Plan”).A total of 5,000,000 shares of common stock were reserved for issuance underthe 1999 Stock Plan.

On May 23, 2002, the Board of Directors adoptedand the stockholders approved the 2002 Stock Incentive Plan and reserved anadditional 10,000,000 shares of common stock for issuance under this plan. The2002 Stock Incentive Plan replaced the 1999 Stock Plan and all available sharesunder the 1999 Stock Plan were transferred to the 2002 Stock Incentive Plan(collectively “the 2002 Stock Plan”). The total number of common sharesreserved under the 2002 Stock Plan is 15,000,000, of which 3,341,292 shareswere available for future grant at December 31, 2005. The 2002 Stock Planprovides for an automatic increase on January 1 of each year equal to 1%of the total outstanding shares of ValueClick common stock as of the last dayof the previous year. Accordingly, an additional 1,018,979 shares were madeavailable under the 2002 Stock Plan effective January 1, 2006, bringingthe total shares available for future grant at January 1, 2006 to4,360,271.

The 2002 Stock Plan provides for the granting ofnon-statutory and incentive stock options to employees, officers, directors,and consultants of the Company. Options granted to new employees generallybegin vesting on the new employee’s date of employment, and vest over afour-year period, with one-fourth vesting on the first anniversary date and theremainder vesting pro-rata monthly over the remaining three years and generallyexpire ten years from the date of grant. Options granted to existing employeestypically vest on a monthly pro-rata basis over a four-year period and alsogenerally expire ten years from the date of grant.

**Assumed Stock Option Plans**

Pursuantto the Company’s business combinations with Fastclick, Webclients, Hi-SpeedMedia, Commission Junction, Be Free, Mediaplex, Z Media, and ClickAgents, theCompany assumed the following stock plans: 
| Name of Plan                                                             | ** ** | ** ** | ** ** | **Number of   Options** | ** ** | **Exercise Prices  Per Share** | ** ** | **Maximum  Exercise Term** | ** ** | **Vesting Periods** | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------------|------------|------------------------------------------|------------|---------------------------------|------------|--------------------------|------------|
| Fastclick—2004 Stock  Plan and 2000 Stock Plan                      |       | 1,293,145  |       | $0.26 to $15.14                   |       |                                     | 10 years   |                            |       | Up to 4 years            |       |
| Webclients—2004  Stock Incentive Plan                                         |       | 349,044    |       | $10.39                            |       |                                     | 10 years   |                            |       | Up to 4 years            |       |
| Hi-Speed  Media—2001 Stock Incentive Plan       |       | 80,710     |       | $1.99                             |       |                                     | 10 years   |                            |       | Up to 4 years            |       |
| Commission  Junction—2001 Stock Incentive Plan and 1999 Stock Option Plan     |       | 1,217,693  |       | $3.45 to $8.62                    |       |                                     | 10 years   |                            |       | Up to 4 years            |       |
| Be Free—1998  Stock Incentive Plan                                            |       | 4,164,875  |       | $0.23 to $68.59                   |       |                                     | 10 years   |                            |       | Up to 4 years            |       |
| Mediaplex—1997  Stock Option Plan                                             |       | 2,762,912  |       | $1.22 to $247.99                  |       |                                     | 10 years   |                            |       | Up to 4 years            |       |
| Z Media—Stock  Option Plan                                                    |       | 419,366    |       | $0.26 to $7.91                    |       |                                     | 10 years   |                            |       | Up to 4 years            |       |
| ClickAgents—Stock Option  Plan                                                |       | 427,269    |       | $0.07 to $3.95                    |       |                                     | 10 years   |                            |       | Up to 4 years            |       |

 

F-33

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Thefollowing table summarizes activity under all of the stock plans for the yearsended December 31, 2005, 2004 and 2003:
|                                                                | ** ** | **Number of  Shares** | ** ** | **Exercise Price  Per Share** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
|----------------------------------------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|-------------------------------------------|------------|
| Options  outstanding at December 31, 2002                 |       | 10,103,288                 |       | $0.07 to $247.99                        |       |                                      | $          | 5.23 |   |   |
| Granted                                                        |       | 2,512,501                  |       | $2.83 to $9.20                          |       |                                      | $          | 7.27 |   |   |
| Assumed from Commission Junction and Hi-Speed Media  |       | 1,298,403                  |       | $1.99 to $8.62                          |       |                                      | $          | 3.47 |   |   |
| Exercised                                                      |       | (2,085,969                 | )          | $0.23 to $7.90                          |       |                                      | $          | 1.05 |   |   |
| Forfeited/expired                                              |       | (780,797                   | )          | $0.07 to $79.02                         |       |                                      | $          | 5.31 |   |   |
| Options  outstanding at December 31, 2003                 |       | 11,047,426                 |       | $0.07 to $247.99                        |       |                                      | $          | 6.15 |   |   |
| Granted                                                        |       | 1,507,689                  |       | $7.16 to $11.70                         |       |                                      | $          | 9.28 |   |   |
| Exercised                                                      |       | (4,119,089                 | )          | $0.07 to $11.00                         |       |                                      | $          | 2.67 |   |   |
| Forfeited/expired                                              |       | (1,060,289                 | )          | $0.07 to $190.86                        |       |                                      | $          | 14.07 |   |   |
| Options  outstanding at December 31, 2004                 |       | 7,375,737                  |       | $0.23 to $247.99                        |       |                                      | $          | 7.59 |   |   |
| Granted                                                        |       | 4,144,436                  |       | $10.80 to $16.88                        |       |                                      | $          | 13.42 |   |   |
| Assumed from Webclients and Fastclick                          |       | 1,642,189                  |       | $0.26 to $15.14                         |       |                                      | $          | 4.93 |   |   |
| Exercised                                                      |       | (3,015,936                 | )          | $0.23 to $16.88                         |       |                                      | $          | 4.79 |   |   |
| Forfeited/expired                                              |       | (608,469                   | )          | $1.44 to $247.99                        |       |                                      | $          | 14.47 |   |   |
| Options outstanding at  December 31, 2005                 |       | 9,537,957                  |       | $0.23 to $225.43                        |       |                                      | $          | 10.11 |   |   |
|                                                                |            |                            |            |                                         |            |                                           |            |  |  |  |  |  |  |  |  |  |  |

 

Options acquired in business combinations during theyears ended December 31, 2005, 2004 and 2003, net of cancellations,resulted in total deferred stock-based compensation of approximately $705,000,$0 and $1,042,000, respectively, which was included in deferred stock-basedcompensation in stockholders’ equity. Deferred stock-based compensation isbeing amortized over the remaining vesting period of each respective option,generally no longer than four years. During the years ended December 31,2005, 2004 and 2003, such compensation expense included in stock-basedcompensation in the consolidated statements of operations amounted toapproximately $270,000, $739,000 and $352,000, respectively.

Additionalinformation with respect to the outstanding stock options as of December 31,2005 is as follows:
|                                                             | ** ** | **Options Outstanding** | ** ** | ** **                 | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|
| ** **                                                  | ** ** | ** **                   | ** ** | ** **                 | ** ** | **Weighted-Average** | ** ** | ** ** | ** ** | **Options Exercisable** | ** ** |
| **Range of Exercise  Prices per Share** | ** ** | ** **                   | ** ** | **Number of  Shares** | ** ** | **Remaining Contractual  Life (In Years)** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Number of  Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
| $0.23 to $2.45                                    |       | 1,237,932                    |       |                       | 6.79       |   |   |   | $ | 2.07 |   |   | 939,863 |   |   | $ | 1.96 |   |   |
| $2.46 to $3.45                                    |       | 1,339,171                    |       |                       | 5.88       |   |   |   | $ | 3.01 |   |   | 1,082,498 |   |   | $ | 3.04 |   |   |
| $3.50 to $8.65                                    |       | 1,765,143                    |       |                       | 7.80       |   |   |   | $ | 7.92 |   |   | 779,281 |   |   | $ | 7.78 |   |   |
| $9.20 to $10.80                                   |       | 1,312,452                    |       |                       | 8.54       |   |   |   | $ | 10.24 |   |   | 444,467 |   |   | $ | 10.14 |   |   |
| $11.43 to $12.87                                  |       | 2,875,601                    |       |                       | 9.42       |   |   |   | $ | 12.78 |   |   | 285,296 |   |   | $ | 12.62 |   |   |
| $13.76 to $49.84                                  |       | 965,162                      |       |                       | 8.95       |   |   |   | $ | 19.33 |   |   | 169,382 |   |   | $ | 31.80 |   |   |
| $52.65 to $200.73                                 |       | 41,961                       |       |                       | 4.14       |   |   |   | $ | 164.86 |   |   | 41,961 |   |   | $ | 164.86 |   |   |
| $225.43                                                     |       | 535                          |       |                       | 4.08       |   |   |   | $ | 225.43 |   |   | 535 |   |   | $ | 225.43 |   |   |
|                                                        |       | 9,537,957                    |       |                       | 8.09       |   |   |   | $ | 10.11 |   |   | 3,743,283 |   |   | $ | 8.48 |   |   |
|                                                             |            |                              |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The options exercisable and the weighted-averageexercise price per share at December 31, 2004 and 2003 were 3,266,574 at$8.96 and 6,034,989 at $6.96, respectively.

During the years ended December 31, 2005, 2004and 2003, the exercise price for all options granted under the 2002 Stock Planequaled the market price at the dates of grants. The weighted-average 

F-34

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estimated fair value ofoptions granted in the years ended December 31, 2005, 2004 and 2003 were$6.28, $3.30 and $2.18, respectively. The weighted-average estimated fair valueof stock options assumed during the years ended December 31, 2005 and 2003were $12.42 and $6.47 per share, respectively. No stock options were assumed in2004.

TheCompany calculated the estimated fair value of each option grant on the date ofgrant using the Black-Scholes option-pricing model as prescribed by SFAS No. 123using the following weighted-average assumptions:
|                            | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Risk-free  interest rates  |       |                                   | 4.0        | % |   |   | 1.8 | % |   |   | 1.5 | % |   |
| Expected lives  (in years) |       |                                   | 3.6        |   |   |   | 2.2 |   |   |   | 2.6 |   |   |
| Dividend yield             |       |                                   | 0          | % |   |   | 0 | % |   |   | 0 | % |   |
| Expected volatility        |       |                                   | 57         | % |   |   | 60 | % |   |   | 57 | % |   |

 

**12. Net Income PerCommon Share**

Thefollowing table sets forth the computation of basic and diluted net income percommon share for the periods indicated (in thousands, except per share data):
|                                                                              | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                   | ** ** | ** **                                 | ** ** | **(As Restated  see note 2)** | ** ** | ** ** | ** ** |
| Numerator:                                                                   |       |                                       |       |   |   |   |   |   |   |
| Net income                                                                   |       | $                                          | 40,644     |   |   | $ | 31,222 |   |   | $ | 9,823 |   |
| Denominator:                                                                 |       |                                       |       |   |   |   |   |   |   |
| Denominator for basic calculation—weighted-average  common shares  |       | 87,722                                     |       |   | 80,063 |   |   | 74,300 |   |
| Weighted-average effect of dilutive securities—stock  options           |       | 3,135                                      |       |   | 3,975 |   |   | 4,136 |   |
| Denominator for diluted calculation                                          |       | 90,857                                     |       |   | 84,038 |   |   | 78,436 |   |
| Net income per common  share:                                                |       |                                       |       |   |   |   |   |   |   |
| Basic                                                                        |       | $                                          | 0.46       |   |   | $ | 0.39 |   |   | $ | 0.13 |   |
| Diluted                                                                      |       | $                                          | 0.45       |   |   | $ | 0.37 |   |   | $ | 0.13 |   |
|                                                                              |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The diluted net income percommon share computations exclude common stock options which were anti-dilutiveas a result of their exercise price being greater than the average market priceof the Company’s common stock for the respective years. The number of sharesexcluded from the diluted net income per common share computation wereapproximately 416,000, 2,860,000 and 1,658,000 for the years ended December 31,2005, 2004 and 2003 respectively.

**13. DefinedContribution Plans**

The Company has varioussavings plans (the “Savings Plans”) that qualify as defined contribution plansunder Section 401(k) of the Internal Revenue Code. Under the SavingsPlans, participating employees may defer a percentage of their eligible pre-taxearnings up to the Internal Revenue Service’s annual contribution limit. Allfull-time employees on the payroll of the Company are eligible to participatein the Savings Plans. The Savings Plans do not permit investment of participantcontributions in the Company’s common stock. Company matching contributions tothe Savings Plans are discretionary. Company contributions to the Savings Plansamounted to $395,000, $376,000 and $152,000 for the years ended December 31,2005, 2004 and 2003, respectively.

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**14. RelatedParty Transactions**

In connection with theWebclients acquisition completed in June 2005, the Company assumed certainlease obligations with a property management partnership owned in part bymanagement of Webclients who remain employees of the Company. For the yearended December 31, 2005, the Company recorded $222,000 in facilitiesexpense associated with this operating lease agreement. As of December 31,2005, the Company has an outstanding amount due to this unaffiliated entity of$8,000, which is reflected in accountspayable and accrued expenses.

**15. Commitmentsand Contingencies**

**Leases**

Futureminimum lease payments under noncancellable operating and capital leases andrelated sublease income, with initial lease terms in excess of one year are asfollows as of December 31, 2005 (in thousands):
| Year Ending December 31:                         | ** ** | ** ** | ** ** | **Operating  Lease  Commitments** | ** ** | **Operating  Sublease  Income** | ** ** | **Capital  Leases** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|-----------------------------------|------------|---------------------------------|------------|---------------------|------------|
| 2006                                                            |       |       | $          | 4,796                             |       |                            |       | $                   | (390       | ) |   |   | $ | 172 |   |   |
| 2007                                                            |       |       | 4,242      |                              |       |                            | (399       | )                   |       |   | — |   |   |
| 2008                                                            |       |       | 3,717      |                              |       |                            | (265       | )                   |       |   | — |   |   |
| 2009                                                            |       |       | 3,052      |                              |       |                            | —     |                |       |   | — |   |   |
| 2010                                                            |       |       | 1,492      |                              |       |                            | —     |                |       |   | — |   |   |
| Thereafter                                                      |       |       | 296        |                              |       |                            | —     |                |       |   | — |   |   |
| Total minimum lease payments                                    |       |       | $          | 17,595                            |       |                            |       | $                   | (1,054     | ) |   |   | 172 |   |   |
| Less amount representing interest                               |       |       |       |                              |       |                            |       |                |       |   | (3 | ) |   |
| Present value of  minimum lease payments, current portion  |       |       |       |                              |       |                            |       |                |       |   | $ | 169 |   |   |

 

Capital leases consist ofequipment leases that totaled $708,000 as of December 31, 2005 and 2004.Accumulated amortization for the years ended December 31, 2005 and 2004amounted to $548,000 and $312,000, respectively. The amortization of assetsrecorded under capital leases is included within depreciation and amortizationexpense in the accompanying statements of operations for each of the years inthe three-year period ended December 31, 2005.

Operating leases consistprimarily of facility leases. Certain of the Company’s operating leases includeescalation clauses that adjust rental expense to reflect changes in priceindices. The Company records rent expense on a straight-line basis over thelease term.

Total rent expense underoperating leases, net of sublease income, was $3.8 million,$2.9 million and $2.6 million for the years ended December 31,2005, 2004 and 2003, respectively.

As of December 31,2005, the Company had the following purchase obligations (in thousands):
|                       | ** ** | **Payments due by period** | ** ** |
|-----------------------|------------|-------------------------------------------|------------|
| ** **            | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| Purchase  obligations |       | $                                         | 1,375      |   |   | $ | 1,354 |   |   |   | $ | 18 |   |   |   | $ | 3 |   |   |   | $ | — |   |   |
|                       |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Purchase obligationsinclude agreements to purchase goods or services that are enforceable, legallybinding and specify all significant terms. Purchase obligations excludeagreements that are cancelable without penalty.

Standbyletters of credit are maintained pursuant to certain of the Company’s leaseagreements.**The standby letters of credit remain ineffect at declining levels through the terms of the related leases. 

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Certificates of deposit of $605,000 in connection withcertain of these standby letters of credit are included in cash and cashequivalents as of December 31, 2005. Commitments under standby letters ofcredit as of December 31, 2005 are scheduled to expire as follows (inthousands):
|                            | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|----------------------------|------------|-----------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| Standby letters  of credit |       | $         | 690        |                            |       | $                  | 105        |               |       |                             | —     |   |   |   | $ | 585 |   |   |   | — |   |   |
|                            |            |           |            |                                 |            |                    |            |                    |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |

 

**Other Commitments**

In the ordinary course ofbusiness, the Company may provide indemnifications of varying scope and termsto customers, vendors, lessors, business partners, and other parties withrespect to certain matters, including, but not limited to, losses arising outof the Company’s breach of such agreements, services to be provided by theCompany, or from intellectual property infringement claims made bythird-parties. In addition, the Company has entered into indemnificationagreements with its directors and certain of its officers that will require theCompany, among other things, to indemnify them against certain liabilities thatmay arise by reason of their status or service as directors or officers. TheCompany has also agreed to indemnify certain former officers, directors andemployees of acquired companies in connection with the acquisition of suchcompanies. The Company maintains director and officer insurance, which maycover certain liabilities arising from its obligation to indemnify its directorsand officers and former directors, officers and employees of acquiredcompanies, in certain circumstances.

It is not possible todetermine the maximum potential amount of exposure under these indemnificationagreements due to the limited history of prior indemnification claims and theunique facts and circumstances involved in each particular agreement. Suchindemnification agreements may not be subject to maximum loss clauses.

**Legal Action**

***BTG InternationalInc. v. Barnesandnoble.com***

On September 28,2004, the Company received a letter from Barnesandnoble.com (“B&N”)requesting that the Company fully indemnify B&N for the costs and expensesassociated with a lawsuit for patent infringement filed by BTG International, Inc.(“BTG”) against B&N and other defendants. The complaint alleged thatthrough the use of certain online advertising technologies, B&N infringedtwo patents obtained by BTG purporting to cover methods and apparatuses for “AttachingNavigational History Information to Universal Resource Locator Links on a WorldWide Web Page” (U.S. Patent No. 5,712,979) and for “Tracking theNavigational Path of a User on the World Wide Web” (U.S. Patent No. 5,717,860).On October 6, 2005, the Company and B&N, without acknowledgingwrongdoing, entered into a Patent License Agreement with BTG under which theCompany, for a fee of $502,000, acquired a perpetual, non-exclusive license touse the BTG technologies for purposes of providing services to B&N. Thismatter is now concluded.

***Parrisch et al v.Fastclick, Inc.***

Prior to closing theacquisition of Fastclick, its former directors and the Company were named asdefendants in a putative class action complaint filed on August 17, 2005in the Court of Chancery, County of New Castle, State of Delaware by Walter Parrisch,on behalf of himself and the other Fastclick stockholders. The complaintalleged, among other things, that the offer and merger would be a breach offiduciary duty and that the indicated exchange ratio was unfair to thestockholders of Fastclick. The complaint sought, among other things, injunctiverelief against consummation of the offer and merger, damages in an unspecifiedamount and rescission in the event the offer and merger occurs. The Companybelieves the claims are without merit. This complaint was dismissed without prejudice in March 2006.

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From time to time, theCompany may become subject to additional legal proceedings, claims andlitigation arising in the ordinary course of business. In addition, the Companymay receive letters alleging infringement of patent or other intellectualproperty rights. Other than the matters discussed above, the Company is not aparty to any other material legal proceedings, nor is the Company aware of anyother pending or threatened litigation that would have a material adverseeffect on the Company’s business, operating results, cash flows or financialcondition should such litigation be resolved unfavorably.

**16. Restructuring andLease Exit Charges**

In the second quarter of 2002 and in the fourthquarter of 2001, the Company recorded restructuring charges of $2.3 million and$515,000, respectively. These restructuring charges were the result of certainpersonnel redundancies and consolidation of certain leased facilities, forwhich the Company was committed to pay through 2010. The Company relocated backto a previously vacated leased facility in November 2004. When thisrelocation decision was reached during the second quarter of 2004, the Companyreversed $1,003,000 of the related restructuring allowance originallyestablished. As part of the preparation of the Company’s consolidated financialstatements as of and for the three-month period ended March 31, 2005, theCompany reassessed the status of this leased facility and decided not toexercise a lease buyout provision that would have allowed the Company to terminatethe lease. As a result, the Company reversed the remaining restructuringallowance of $588,000 and recorded a corresponding benefit which is reflectedin**Restructuring benefit, net in the consolidated statement ofoperations for the year ended December 31, 2005.

During2005, the Company relocated to new principal corporate facilities and vacatedseveral premises that the Company had been occupying under operating leaseswith varying remaining lease terms. The Company recorded a lease exit charge of$515,000 equal to the future lease payments it will continue to incur for theremaining lease terms of the vacated premises, less estimated sublease income. Thetotal lease exit charge associated with vacating these leased premises has beenrecorded in**Restructuring benefit, net in theconsolidated statement of operations for the year ended December 31, 2005.The following table reflects activity in the lease exit charge accrual duringthe years ended December 31, 2005, 2004 and 2003 (in thousands):

| ** **                         | ** ** | **Lease  Exit  Costs** | ** ** |
|------------------------------------|------------|------------------------|------------|
| Accrual at  December 31, 2002 |       | $                      | 2,352      |   |
| Cash payments                      |       | (438                   | )          |
| Accrual at  December 31, 2003 |       | 1,914                  |       |
| Cash payments                      |       | (323                   | )          |
| Restructuring  reserve reversal    |       | (1,003                 | )          |
| Accrual at  December 31, 2004 |       | 588                    |       |
| Costs incurred                     |       | 515                    |       |
| Restructuring  allowance reversals |       | (588                   | )          |
| Cash payments,  net                |       | (483                   | )          |
| Accrual at  December 31, 2005 |       | $                      | 32         |   |

 

The restructuring accrualof $32,000 as of December 31, 2005 is included in accounts payable andaccrued expenses on the Company’s consolidated balance sheet.

**17. Segments andGeographic Information**

ValueClick derives its revenue from three businesssegments based on the types of products and services provided. These businesssegments are Media, Affiliate Marketing and Technology. Media 

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segment revenue includessales of certain affiliate marketing services of approximately $13.3 million,$8.3 million and $1.2 million, and technology services of approximately$4.4 million, $5.0 million and $3.1 million, made by Media operationsoutside the United States, for the years ended 2005, 2004 and 2003,respectively.

In years prior to 2005, management utilized grossprofit as the operating measure for assessing the performance of each businesssegment. Further, in years prior to 2005, management allocated corporateexpenses to each segment utilizing a quantitative allocation methodology. As aresult of the acquisitions of Fastclick, Webclients and E-Babylon in the periodfrom June 2005 through September 2005 as described in note 4,management now utilizes an internal management reporting process that placesmore emphasis on income from operations before stock-based compensation,amortization of intangible assets, restructuring benefit, net, and corporateexpenses for making business and financial decisions and allocating resources.Corporate expenses consist of those costs not directly attributable to abusiness segment, and include: salaries and benefits for the Company’sexecutive, finance, legal, corporate governance, human resources, andfacilities organizations; fees for professional service providers includingaudit and legal; insurance; and other corporate expenses. Income fromoperations by segment, as shown below, excludes the effects of stock-basedcompensation, amortization of intangible assets, restructuring benefit, net,and corporate expenses. All prior periods have been adjusted for the newpresentation.

Revenue,income from operations and total assets, by segment, are as follows (inthousands): 
|                       | ** ** | **Revenue** | ** ** | **Segment Income from  Operations** | ** ** | **Total Assets** | ** ** |
|-----------------------|------------|-------------|------------|-----------------------------------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2005**    | ** ** | **2004**                                      | ** ** | **2003**              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Media                 |       | $           | 210,581    |                                          | $          | 93,317                |       | $ | 45,761 |   | $ | 44,232 |   | $ | 15,953 |   | $ | 4,534 |   | $ | 547,233 |   | $ | 251,733 |   |
| Affiliate Marketing   |       | 77,479      |       | 59,995                                        |       | 24,302                |       | 42,408 |   | 26,097 |   | 5,642 |   | 153,259 |   | 116,219 |   |
| Technology            |       | 24,229      |       | 22,233                                        |       | 23,559                |       | 7,968 |   | 6,131 |   | 6,434 |   | 20,369 |   | 16,762 |   |
| Inter-segment revenue |       | (8,282      | )          | (6,367                                        | )          | (1,106                | )          | — |   | — |   | — |   | — |   | — |   |
| Total                 |       | $           | 304,007    |                                          | $          | 169,178               |       | $ | 92,516 |   | $ | 94,608 |   | $ | 48,181 |   | $ | 16,610 |   | $ | 720,861 |   | $ | 384,714 |   |
|                       |            |             |            |                                               |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Areconciliation of segment income from operations, which excludes stock-basedcompensation, amortization of intangible assets, restructuring benefit, net,and corporate expenses to consolidated income from operations is as follows foreach period: 
|                                      | ** ** | **Segment Income from Operations** | ** ** |
|--------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Segment income  from operations      |       | $                                                 | 94,608     |   | $ | 48,181 |   | $ | 16,610 |   |
| Corporate expenses                   |       | (16,103                                           | )          | (8,824 | ) | (7,483 | ) |
| Stock-based compensation             |       | (2,022                                            | )          | (739 | ) | (352 | ) |
| Amortization of intangible assets    |       | (12,179                                           | )          | (4,111 | ) | (1,570 | ) |
| Restructuring benefit, net           |       | 73                                                |       | 1,003 |   | — |   |
| Consolidated income from  operations |       | $                                                 | 64,377     |   | $ | 35,510 |   | $ | 7,205 |   |

 

Depreciation and amortization expense included in thedetermination of segment income from operations as presented above for theMedia, Affiliate Marketing and Technology segments was approximately $3.0million, $2.3 million and $1.8 million, respectively, for the year ended December 31,2005; approximately $1.7 million, $3.3 million and $1.2 million, respectively,for the year ended December 31, 2004; and approximately $1.5 million, $2.5million and $1.9 million, respectively, for the year ended December 31,2003.

The Company’s operations are domiciled in the UnitedStates with operations in Europe through its wholly-owned subsidiaries,ValueClick Europe, ValueClick France, ValueClick Germany, and Pricerunner AB.Prior to March 26, 2004, the Company had operations in Japan through itsmajority-owned subsidiary, 

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ValueClick Japan. TheCompany sold its equity interest of approximately 59% in ValueClick Japan on March 26,2004 and the operating results of ValueClick Japan are included in the Company’soperating results through March 31, 2004. The results of operations ofValueClick Japan for the period from March 26, 2004 through March 31,2004 were not significant. Revenue is attributed to individual countries basedupon the country in which the customer is located. Geographic long-lived assetsexclude deferred tax assets and other assets.

TheCompany’s geographic information was as follows (in thousands):
|                            | ** ** | **Year Ended  December 31, 2005** | ** ** | ** **                       | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **Revenue**                                      | ** ** | **Income from  Operations** | ** ** | **Long-lived  Assets at  December 31,  2005** | ** ** |
| United States              |       | $                                                | 263,168    |                             |       | $ | 59,463 |   |   |   | $ | 365,761 |   |   |
| Europe                     |       | 49,121                                           |       |                             | 4,914      |   |   |   | 27,208 |   |   |
| Intercompany  eliminations |       | (8,282                                           | )          |                             | —     |   |   |   | — |   |   |
| Total                      |       | $                                                | 304,007    |                             |       | $ | 64,377 |   |   |   | $ | 392,969 |   |   |

 
|                            | ** ** | **Year Ended  December 31, 2004** | ** ** | ** **                               | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                 | ** ** | **Revenue**                                      | ** ** | **Income (Loss)  from  Operations** | ** ** | **Long-lived  Assets at  December 31,  2004** | ** ** |
| United States              |       | $                                                | 142,370    |                                     |       | $ | 32,131 |   |   |   | $ | 57,888 |   |   |
| Japan                      |       | 1,806                                            |       |                                     | (525       | ) |   |   | — |   |   |
| Europe                     |       | 31,369                                           |       |                                     | 3,904      |   |   |   | 28,555 |   |   |
| Intercompany  eliminations |       | (6,367                                           | )          |                                     | —     |   |   |   | — |   |   |
| Total                      |       | $                                                | 169,178    |                                     |       | $ | 35,510 |   |   |   | $ | 86,443 |   |   |

 
|                            | ** ** | **Year Ended  December 31, 2003** | ** ** | ** **                               | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                 | ** ** | **Revenue**                                      | ** ** | **Income (Loss)  from  Operations** | ** ** | **Long-lived  Assets at  December 31,  2003** | ** ** |
| United States              |       | $                                                | 72,888     |                                     |       | $ | 7,779 |   |   |   | $ | 74,402 |   |   |
| Japan                      |       | 7,574                                            |       |                                     | (264       | ) |   |   | 1,349 |   |   |
| Europe                     |       | 13,160                                           |       |                                     | (310       | ) |   |   | 157 |   |   |
| Intercompany  eliminations |       | (1,106                                           | )          |                                     | —     |   |   |   | — |   |   |
| Total                      |       | $                                                | 92,516     |                                     |       | $ | 7,205 |   |   |   | $ | 75,908 |   |   |

 

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**SCHEDULE II**

**VALUECLICK, INC.**

**VALUATIONAND QUALIFYING ACCOUNTS(in thousands)**
|                                              | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions  Charged To  Expense** | ** ** | **Other  Adjustments(1)** | ** ** | **Deductions** | ** ** | **Balance at  End of Period** | ** ** |
|----------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------|------------|---------------------------|------------|----------------|------------|----------------------------------------------|------------|
| Allowance for doubtful  accounts receivable: |       |                                           |       |                                    |       |                      |       |           |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Year ended December 31, 2005            |       |                                           | $          | 2,973                                   |       |                      |       | $              | 2,164      |                                         |       |   | $ | 1,031 |   |   |   | $ | (1,476 | ) |   |   | $ | 4,692 |   |   |
| Year ended December 31, 2004            |       |                                           | $          | 2,060                                   |       |                      |       | $              | 1,308      |                                         |       |   | $ | 183 |   |   |   | $ | (578 | ) |   |   | $ | 2,973 |   |   |
| Year ended  December 31, 2003           |       |                                           | $          | 1,892                                   |       |                      |       | $              | 1,213      |                                         |       |   | $ | 206 |   |   |   | $ | (1,251 | ) |   |   | $ | 2,060 |   |   |
|                                              |            |                                                |            |                                         |            |                           |            |                |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Other adjustmentsrepresent increases in the allowance for doubtful accounts receivable fromacquisitions.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this annual report on Form 10-Kto be signed on its behalf by the undersigned, thereunto duly authorized, inthe City of Westlake Village, State of California, on the 31stday of March, 2006.
|        | VALUECLICK, INC. |
|--------|------------------|
|   | By:              | /s/ JAMES ZARLEY |
|   |             | James Zarley |
|   |             | *President and Chief Executive Officer* |

 

**POWER OF ATTORNEY**

KNOW ALL MEN BY THESE PRESENTS, the undersigned herebyconstitute and appoint each of James R. Zarley and Scott H. Ray their true andlawful attorney-in-fact and agent, with full power of substitution andresubstitution, for them and in their name, place and stead, in any and allcapacities, to sign any and all amendments to this annual report on Form 10-K,and to file the same, with exhibits thereto, and other documents in connectiontherewith, with the Securities and Exchange Commission, granting unto saidattorney-in-fact and agent, full power and authority to do and perform each andevery act and thing requisite or necessary to be done in connection therewith,as fully to all intents and purposes as they might or could do in person,hereby ratifying and confirming all that said attorney-in-fact and agent, orhis respective substitute or substitutes, may lawfully do or cause to be doneby virtue hereof.

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated:
|                              | **Signature** | ** **                                                            | ** ** |                      | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|------------------------------|---------------|-----------------------------------------------------------------------|------------|----------------------|-----------|------------|------------|--|----------|------------|
| /s/ JAMES R. ZARLEY     |          | Chairman of the Board of  Directors,                                  |       | March 31, 2006  |
| James  R. Zarley             |          | Chief Executive Officer  and President  (Principal Executive Officer) |       |                 |
| /s/ SCOTT  H. RAY       |          | Chief Financial  Officer                                              |       | March 31,  2006 |
| Scott  H. Ray                |          | (Principal Financial and  Accounting Officer)                         |       |                 |
| /s/ DAVID  S. BUZBY     |          | Director                                                              |       | March 31,  2006 |
| David  S. Buzby              |          |                                                                  |       |                 |
| /s/ MARTIN  T. HART     |          | Director                                                              |       | March 31,  2006 |
| Martin  T. Hart              |          |                                                                  |       |                 |
| /s/ JEFFREY  F. RAYPORT |          | Director                                                              |       | March 31,  2006 |
| Jeffrey  F. Rayport          |          |                                                                  |       |                 |
| /s/ TOM  A. VADNAIS     |          | Director                                                              |       | March 31,  2006 |
| Tom A. Vadnais               |          |                                                                  |       |                 |

 

 

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