**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

**(Mark One)**

**x**                               ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**For the Year Ended December 31, 2006**

**or**

**o**                                  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from                            to**

**Commissionfile 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:**

| **Title of each class**         |   | **Name of  each exchange on which registered** |
|---------------------------------|--------|------------------------------------------------|
| Common  Stock, $0.001 par value |   | NASDAQ Global  Select Market                   |

 

**Securitiesregistered pursuant to Section 12(g) of the Act:Series A Junior Participating Preferred Stock Purchase Rights**

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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 bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes 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 by referencein Part III of this Form 10-K or any amendment to thisForm 10-K. x

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, 2006,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 $1,467,000,728 (based upon theclosing price for shares of the registrant’s Common Stock as reported by theNASDAQ Global Select Market as of that date). As of February 23, 2007,there were 99,526,827 shares of the registrant’s Common Stock outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the definitive Proxy Statement for the 2007 Annual Meetingof the Stockholders (the “Proxy Statement”), to be filed within 120 days of theend of the fiscal year ended December 31, 2006, are incorporated byreference in Part III 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                                                                                                          |       |   | 11         |   |   |
| ITEM 1B.      |       | UNRESOLVED STAFF COMMENTS                                                                                              |       |   | 25         |   |   |
| ITEM 2.       |       | PROPERTIES                                                                                                             |       |   | 25         |   |   |
| ITEM 3.       |       | LEGAL  PROCEEDINGS                                                                                                     |       |   | 26         |   |   |
| ITEM 4.       |       | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                    |       |   | 26         |   |   |
| PART II  |       |                                                                                                                   | 27         |   |       |
| ITEM 5.       |       | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |       |   | 27         |   |   |
| ITEM  6.      |       | SELECTED  FINANCIAL DATA                                                                                               |       |   | 29         |   |   |
| ITEM 7.       |       | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS                            |       |   | 32         |   |   |
| ITEM 7A.      |       | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET  RISK                                                            |       |   | 51         |   |   |
| ITEM 8.       |       | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                            |       |   | 52         |   |   |
| ITEM 9.       |       | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE                                  |       |   | 52         |   |   |
| ITEM 9A.      |       | CONTROLS AND PROCEDURES                                                                                                |       |   | 52         |   |   |
| ITEM  9B.     |       | OTHER  INFORMATION                                                                                                     |       |   | 53         |   |   |
| PART III |       |                                                                                                                   | 54         |   |       |
| ITEM 10.      |       | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                                     |       |   | 54         |   |   |
| ITEM 11.      |       | EXECUTIVE COMPENSATION                                                                                                 |       |   | 54         |   |   |
| ITEM 12.      |       | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT AND RELATED STOCKHOLDER MATTERS                        |       |   | 54         |   |   |
| ITEM 13.      |       | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND  DIRECTOR INDEPENDENCE                                             |       |   | 55         |   |   |
| ITEM 14.      |       | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                                 |       |   | 55         |   |   |
| PART IV  |       |                                                                                                                   | 56         |   |       |
| ITEM 15.      |       | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                             |       |   | 56         |   |   |
|          |       | 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 11 of this Report and in the other documents wefile, from time to time, with the Securities and Exchange Commission, includingour annual reports 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 undertake no obligation to release publicly any revisionsto any forward-looking statements to reflect events or circumstances after thedate hereof or to reflect the occurrence of unanticipated events.*

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**PART I.**

**ITEM 1.**                BUSINESS

**OVERVIEW**

ValueClick is one of the world’s largest and mostcomprehensive online marketing services companies. We sell targeted andmeasurable online advertising campaigns and programs for advertisers andadvertising agency customers, generating qualified customer leads, online salesand increased brand recognition on their behalf with large numbers of onlineconsumers.

Our customers are primarily direct marketers, brandadvertisers and the advertising agencies that service these groups. Theproposition we offer our customers includes: one of the industry’s broadestonline marketing services portfolios—including performance-based campaigns andprograms where marketers only pay for advertising when it generates a customerlead or product sale; our ability to target campaigns to reach the onlineconsumers our customers are most interested in; and, the scale at which we candeliver results for online advertising campaigns. Additionally, our networks ofonline publishers provide advertisers with a cost-effective and complementarysource of online consumers relative to online portals and other large websitepublishers. Through this approach we have become an industry leader ingenerating qualified customer leads and online sales for advertisers.

We generate the audiences for our advertisers’campaigns primarily through networks of third-party websites and other onlinepublisher partners. We aggregate our publisher partners’ online advertisinginventory into networks, optimize these networks for specific marketing goals,and deliver the campaigns across the appropriate networks’ advertisinginventory. We are one of the industry’s largest online network providers, with:industry expertise and proprietary technology platforms for online advertisinginventory aggregation; campaign targeting and optimization, delivery,measurement, and reporting; and, payment settlement and delivery services.

Our publisher partners enjoy efficient and effectivemonetization of their online advertising inventory through representation byour direct sales teams in major U.S. and European media markets, participationin large-scale advertiser and advertising agency campaigns they may not haveaccess to on their own, enhanced monetization through our proprietary campaignoptimization technology, and settlement services to facilitate payments topublishers for the online inventory utilized by the advertisers. As we do notprimarily own and operate websites that compete directly with our publisherpartners for online consumers, we act as a trusted partner in helping onlinepublishers monetize their online audience and advertising inventory.

We believe that the effectiveness of our onlinemarketing services is dependent on the quality of our networks and ourpublisher partner relationships. As such, we have established stringent qualitystandards that include publisher rejection from our networks due toinappropriate content, illegal activity and fraudulent clicking activity, amongother criteria. We enforce these quality standards using a combination ofmanual and automated auditing processes that continually monitor and reviewboth website content and adherence to advertiser campaign specifications.

We derive our revenue fromfour business segments. These business segments are presented on a worldwidebasis and include Media, Affiliate Marketing, Comparison Shopping, andTechnology, which are described in more detail below. For information regardingthe operating performance and total assets of these segments, see Item 7 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” andnote 16 “Segments and Geographic Information” to the December 31, 2006consolidated 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 create and increase awareness for their productsand brands, attract visitors and generate leads and sales through the Internet.Our Media segment has grown both organically and through the acquisition ofcomplementary businesses such as HiSpeed Media, completed in December 2003,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 to advertiser and advertising agencycustomers in the following product categories:

*Display Advertising*

We provide advertisers and advertising agencies withaccess to one of the largest and most reputable online advertising networks inthe industry. With a single buy, these marketers can reach targeted onlineusers on a large scale, using a variety of online display ad units across ourentire network of publishers, any of 18 standard channels of online contentwithin the network, customized content channels, or a select number of websiteswhere we are authorized to sell inventory on a single-site basis. Through ouracquisition of Fastclick in September 2005, we are now one of the largestonline display advertising network operators in the industry, where we partnerwith third-party website publishers and apply our proprietary technologyplatform and industry expertise to deliver our advertiser customers’ display adcampaigns to the appropriate pages of our publisher partners’ websites.

With 14,000 active online publisher relationships inthe U.S. and 16,000 worldwide, our display advertising network reached 132million unique Internet users in the U.S. in December 2006 according topublished industry data.

We deliver a variety of display ad units to the Web pages ofour online display advertising network publisher partners and track them toevaluate success against the goals of the advertising programs. Withtraditional banner ads, interstitials, text links, and other online ad units,we attempt to maximize the impact of marketing campaigns by using the mosteffective placement for each type of campaign. We also execute a wide varietyof rich media applications, including video ads, providing even greater visualand auditory impact for a marketer’s online display advertising campaigns.

We began as a performance-based marketing network andwe continue to offer multiple pricing models designed around maximizing ourcustomers’ return on investment. Our display advertising placements are offeredon cost-per-thousand-impression (“CPM”) pricing, whereby our customers paybased on the number of times the target audience is exposed to theadvertisement, cost-per-click (“CPC”) pricing, whereby payment is triggeredonly when an interested individual clicks on our customer’s advertisement, andcost-per-action (“CPA”) pricing, whereby payment is triggered only when a specific,pre-defined action is performed by an online consumer. As discussed in “LeadGeneration Marketing” below, we also sell display ads on a cost-per-lead (“CPL”)basis.

The benefits that our advertiser and advertisingagency customers enjoy in display and other Web advertising include, but arenot limited to: flexible pricing models; the ability to target and reachsignificant numbers of online consumers in a way that complements media buys onportals and other large websites; the ability to have a single source fornegotiation of other online media buys; and the ability to improve onlineadvertising campaigns in a variety of ways while the campaigns are stillrunning, by optimizing at site, placement and creative levels, based on bothresponse and conversion experience.

Publishers in our displayadvertising 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 

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able toaccess on their own; enhanced monetization through our campaign optimizationtechnology; and, settlement services to facilitate payments to publishers forthe inventory utilized by the advertisers. Through our proprietary publisherinterface, publishers can control their participation in campaigns as well astheir minimum acceptable level of revenue on an effective cost-per-impressionbasis.

*Lead GenerationMarketing*

Our lead generation capabilities have been developedorganically and through acquisitions, including the acquisitions of HiSpeedMedia in December 2003 and Webclients in June 2005. We believe we areone of the largest providers of lead generation marketing services.

In our lead generation marketing services, through ourproprietary technology platforms, we manage online campaigns that generatequalified customer inquiries for an advertiser’s product or service. An onlineconsumer generates a qualified customer inquiry when he or she responds to theadvertiser’s offer by providing some personal information (such as their emailaddress, phone number and/or mailing address) and requesting to be contacted bythe advertiser. Lead generation advertiser customers only pay us when an onlineconsumer opts in to being contacted by the advertiser.

We utilize a numberof methods to distribute advertiser lead generation offers, including:

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

·       Co-registration—whereonline parties 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

·       ValueClick owned andoperated websites—where we manage websites that host advertiser offers fromwhich visitors can choose. ValueClick lead generation websites include surveywebsites, gift card and prize-related websites, and vertical industry categorywebsites such as online continuing education and financial services.

*Email Marketing*

Our email marketing services allow advertisers totarget qualified prospective customers on a large scale with opt-in email listsfrom our proprietary database of names and from a select group of email listpartners who meet our stringent criteria for data integrity, as well as thosewho comply with all aspects of U.S. federal email legislation. Through ourrelationships with quality business and consumer opt-in email list owners andmanagers, email marketing customers can target audiences within specificselection criteria.

Through our acquisitionsof HiSpeed Media and Webclients, we now possess a database of 97 millionopt-in email profiles that comply with U.S. federal email legislation. Throughthis business, we provide advertisers with the ability to market their productsand services to the target audiences of our email database within specificselection criteria.

*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 HiSpeed Media in 2003, and added to our e-commerce capabilitieswith the acquisition of E-Babylon in June 2005.

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**AFFILIATE MARKETING**

Through the combination of: a large-scalepay-for-performance model built on our proprietary technology platforms;marketing expertise; and a large, quality advertising network, our AffiliateMarketing business enables an advertiser to develop its own fully-commissionedonline sales force comprised of third-party affiliate publishers. We believe weare the largest provider of affiliate marketing services.

In affiliate marketing, a publisher joins an advertiser’saffiliate marketing program and agrees to distribute the advertiser’s offers inexchange for commissions on leads or sales generated. The publisher places theadvertiser’s display ads or text links on their website, in email campaigns, orin search listings, and receives a commission from the advertiser only when avisitor takes an agreed-upon action, such as filling out a form or making apurchase on the advertiser’s website.

Our Affiliate Marketing segment services, outlinedbelow, are offered through our wholly-owned subsidiaries Be Free, acquired in May 2002,Search123.com, acquired in May 2003, 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. OurAffiliate Marketing search services, including search engine marketing (“SEM”)and search syndication, are offered under the Commission Junction and Search123brand names, respectively.

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 our advertiser customers’ recruitment ofaffiliate publishers, we manage CJ Marketplace, an advertising networkdedicated to our affiliate marketing business. Advertisers upload their offersonto CJ Marketplace, making them available for placement by affiliates.Affiliates apply to join the advertiser’s program, and upon acceptance, selectand place the advertiser’s offers on their websites, in email campaigns, or insearch listings. These links are served and tracked by Commission Junction.When a visitor clicks on one of the affiliate’s links and then makes an onlinepurchase or completes an agreed-upon action on the advertiser’s website, thattransaction is tracked and recorded by Commission Junction.

CJ Marketplace provides an open environment wherebyaffiliates can quickly view payment and conversion statistics to assess theeffectiveness of every advertiser relationship 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 Marketing revenues are principally driven bya combination of fixed fees and variable compensation that is based on either apercentage of commissions paid to affiliates or on a percentage of transactionrevenue generated from the programs managed with our affiliate marketingplatforms.

In addition to thetransaction-related revenue streams, we also receive monthly service fees fromour advertiser customers who elect to utilize our Program Management serviceofferings. With these services, we assume full responsibility for all aspectsof managing the advertiser’s program including planning, affiliate recruitment,program review and management, and program administration.

*Search Marketing*

Search marketing allows advertisers to findprospective customers who are actively engaged in researching and buyingproducts and services online. Our CJ Search product provides a fully-managed,comprehensive SEM solution by combining proprietary technology and expertservices to optimize 

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keyword campaigns acrossmajor search and shopping engines, and is specifically designed to complementour advertisers’ affiliate marketing efforts. We use our technology andprocesses to create, manage and optimize pay-per-click, paid inclusion andorganic search campaigns for our advertiser customers. SEM revenues are drivenprimarily by a percentage of the revenue we generate for our advertisercustomers.

In addition to our CJSearch product, Search123 is ValueClick’s self-service paid search offeringthat generates its traffic primarily through syndication relationships withother search engines, Web portals and content websites. Search syndicationrevenues are driven primarily on a CPC basis.

**COMPARISON SHOPPING**

Our online comparison shopping service, consistingprimarily of our Pricerunner destination websites, enables consumers toresearch and compare products from among thousands of online and/or offlinemerchants using our proprietary technology. We gather product and merchant dataand organize it into a comprehensive catalog on our destination websites, alongwith relevant consumer and professional reviews. Our service is free forconsumers and merchants primarily pay us on a CPC basis when consumers clickthrough to merchant websites from listings on our websites.

We acquired Pricerunner inAugust 2004 and we currently have Pricerunner destination websitesoperating in the United Kingdom, Sweden, the United States, Germany, France,Denmark, and Austria. In December 2006, we acquired Shopping.net, based inthe United Kingdom, which provides the Company with additional opportunities tomonetize online traffic and expand our overall comparison shopping presence inEurope.

**TECHNOLOGY**

Our Technology segmentprovides advertisers, advertising agencies, website publishers, and othercompanies with the tools they need to effectively manage both their businessoperations and marketing programs. Our technology products and services areoffered through our wholly-owned subsidiaries Mediaplex, Inc. andMediaplex Systems, Inc., both acquired in October 2001.

*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, among other attributes, to automatically configureadvertisements in response to real-time information from an advertiser’senterprise data system and to provide ongoing campaign optimization. Mediaplex’sproducts are priced primarily on a CPM or email-delivered basis.

*Mediaplex Systems:*

Our Mediaplex Systemssubsidiary is an ASP that uses proprietary technology to deliver Web-basedenterprise management systems to advertising agencies, marketing communicationscompanies, public relations agencies, and other large corporate advertisers.The solutions that Mediaplex Systems provides span two primary categories—agencymanagement and media management. The benefits offered by our enterprisemanagement systems solutions include increased customer productivity, improvedtracking, monitoring and work-flow of business processes, and significantscalability. Mediaplex Systems’ revenue is generated primarily from monthlyservice fees paid by customers over the contractual service periods.

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**INTERNATIONALOPERATIONS**

We currently conduct international operations throughwholly-owned subsidiaries in the United Kingdom, Germany, France, and Sweden.Prior to March 26, 2004, we operated in Japan through our majority ownedsubsidiary, ValueClick Japan. We completed the sale of our 59% equity interestin ValueClick 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 219 as of December 31,2006. For additional information regarding our international operations, seenote 16 “Segments and Geographic Information” to our consolidatedfinancial statements contained in this annual report on Form 10-K.

**TECHNOLOGYPLATFORMS**

Our proprietary applications are constructed fromestablished, readily available technologies. These technologies are craftedinto applications whose main objective is to outperform offerings of ourcompetitors. Some of the basic components our products are built on come fromleading software and hardware providers such as Oracle, Sun, Dell, EMC, NetApp,and Cisco while some components are constructed from leading Open Sourcesoftware projects such as Apache Web Server, MySQL, Perl, and Linux. Bystriking the proper balance between using commercially available software andOpen Source software, our technology expenditures are directed towardmaintaining our technology platforms while minimizing third-party technologysupplier costs.

We build inhigh-performance, availability and reliability into our product offerings, andwe believe each offering outperforms industry-wide acceptable performancemeasurements. We safeguard against the potential for service interruptions atour third-party technology vendors by engineering fail-safe controls into ourcritical components. ValueClick delivers its hosted solutions from co-location facilitieslocated in nine cities, geographically disbursed throughout the United Statesand in Europe. ValueClick applications are monitored 24 hours a day,365 days a year by specialized monitoring systems that aggregate alarms toa human-staffed network operations center. If a problem occurs, appropriateengineers are notified and corrective action is taken.

**SALES, MARKETINGAND 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 publishers and advertiser customers,as well as to industry analysts.

**Customers**

We sell our products andservices to a variety of advertisers and advertising agencies primarily throughour internal sales teams as well as through the use of telemarketing and onlineand offline advertising strategies.

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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 consolidation,the continuing maturation of the industry and low barriers to entry. We competewith a diverse and large pool of advertising, media and Internet companies.

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

·       ourability to aggregate large networks of quality publishers efficiently;

·       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 provided by us;and

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

Additional competitivefactors include, but are not limited to, our: reputation, knowledge of theadvertising market, financial controls, geographical coverage, relationshipswith customers, technological capability, and quality and breadth of productsand services.

**Seasonality and Cyclicality**

We believe that ourbusiness is subject to seasonal fluctuations with the calendar fourth quartergenerally being our strongest. Expenditures by advertisers and advertisingagencies vary in cycles and tend to reflect the overall economic conditions, aswell as budgeting and buying patterns. Furthermore, user traffic on theInternet tends to decrease during the summer months which results in feweradvertisements to sell and deliver.

**INTELLECTUAL PROPERTY 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 U.S. patents. We do not know if ourcurrent patent applications or any future patent application will result in apatent being issued within the scope of the claims we seek, if at all, orwhether any patents we may have or may receive will be challenged orinvalidated. Although patents are only one component of the protection ofintellectual property rights, if our patent applications are denied, it mayresult in increased competition and the development of products substantiallysimilar to our own. In addition, it is difficult to monitor unauthorized use oftechnology, particularly in foreign countries where the laws may not protectour proprietary rights as fully as in the United States, and our competitorsmay independently develop technology similar to our own. We will continue toassess appropriate 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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**CORPORATE HISTORY AND RECENT ACQUISITIONS**

Wecommenced operations as ValueClick, LLC, a California limited liabilitycompany, on May 1, 1998. Prior to the formation of ValueClick, LLC, theValueClick Internet advertising business began in July 1997 as a line ofbusiness within Web-Ignite Corporation, a company wholly owned by the foundingmember of ValueClick, LLC. The reorganization and formation of ValueClick, LLCwas effected by the transfer of the Internet advertising business of Web-Igniteto ValueClick, LLC. On December 31, 1998, ValueClick, LLC reorganized asValueClick, Inc., a Delaware corporation. On March 30, 2000, wecompleted our initial public offering of common stock. Our common stock ispublicly traded and is reported on the NASDAQ Global Select Market under thesymbol “VCLK.”

*Shopping.net.*   OnDecember 1, 2006, we completed the acquisition of all of the outstandingcapital stock of Shopping.net for an aggregate purchase price of $13.9 million,consisting of cash consideration of $13.6 million and transaction costs of theacquisition of $253,000. Of the total cash consideration, $10.9 million waspaid on the closing date and the remaining $2.7 million was accrued and will bepaid within 24 months of the closing date of the acquisition, subject to anyworking capital adjustments identified by us subsequent to the closing date. Shopping.net,located in the United Kingdom, provides the Company with additionalopportunities to monetize online traffic and expand our overall comparisonshopping presence in Europe. The results of Shopping.net’s operations areincluded in our consolidated financial statements beginning on December 1,2006.

*Fastclick, Inc.*   OnSeptember 27, 2005, we acquired 97% of the outstanding shares of Fastclick, Inc.(“Fastclick”) common stock upon the closing of our 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 timeFastclick became a wholly-owned subsidiary of ValueClick. Fastclick providesonline advertising services and technologies, and had developed an advertisingnetwork of more than 9,000 third-party publisher websites. Combined withValueClick’s then-existing market position in online marketing services, theaddition of Fastclick to our suite of products and services positionedValueClick as one of the largest online 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 $215.7 million, consisting of 15.6 millionshares of ValueClick common stock valued at $202.5 million, stock optionsassumed valued at $12.6 million, and transaction costs of the acquisition of$600,000.

*Web Marketing Holdings, Inc.*   OnJune 24, 2005, we completed the acquisition of Web Marketing Holdings, Inc.(“Webclients”), a leading provider of online lead generation marketingservices. Webclients’ business activities complement our other media businessesas well as our affiliate marketing businesses, and have been leveraged acrossour advertiser customer base.

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 $142.5 million,consisting of cash of $122.2 million, 1.8 million shares of ValueClick commonstock valued at $18.4 million, stock options assumed valued at $1.5 million,and transaction costs of the acquisition of $420,000.

*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 expanded our e-commercechannel and provided an infrastructure with the capability to support all ofour e-commerce initiatives.

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The results of E-Babylon’s operations are included inour consolidated financial statements from the beginning of the accountingperiod nearest to the date of acquisition, June 1, 2005. The results ofoperations of E-Babylon for the period from June 1, 2005 through June 12,2005 are not significant. Under the terms of the acquisition agreement,ValueClick acquired all of the outstanding capital stock of E-Babylon for anaggregate purchase price of $14.8 million, consisting of cash of $14.7million and transaction costs of the acquisition of $112,000.

*PricerunnerAB.**  *On August 6,2004, we completed the acquisition of Pricerunner AB (“Pricerunner”), a leadingprovider of online comparison shopping services in Europe. With the addition ofPricerunner, we expanded our suite of performance-based online marketingsolutions into the area of comparison shopping. Together with our otherservices, Pricerunner increased our competitive position in Europe. In thesecond quarter of 2005, we launched Pricerunner in the United States, offeringconsumers a broad range of products from offline and online retailersthroughout the country.

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 $30.1 million, includingcash of $26.9 million, 263,000 shares of ValueClick common stock valued at $2.0million, and transaction costs of the acquisition of $1.2 million.

**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 Web user when we collect the data onbehalf of our customers. We rely on our customers to treat such data with theappropriate precaution and responsibility as stated in their privacy policies.In addition, we use non-personally identifiable information provided bywebsites, pursuant to their consumer privacy policies, about their visitors’general demographics and interests in order to target appropriate advertisingto the websites.

Moreover, if our customers have databases of theirclients, we can use this data on behalf of those customers, again pursuant totheir consumer privacy policies. The premise is that both the website providingthe ad space and the advertiser (1) have a relationship with the customer,or opt-in, (2) have an opportunity to share their consumer privacypolicies with their customers, and (3) provide an opportunity to opt-out.

Our customers retain the right to use data which theyhave obtained through explicit permission from a Web user; for example, if aclient of our customer provides an email address to receive information andupdates. We rely on our customers’ consumer privacy policies and practices, aswell as the consumer privacy policies and practices of the publisher websitesincluded 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 online advertisements. This type of information is defined by theNetwork Advertising Initiative as non-personally identifiable information (“AdDelivery and Reporting Data”). We may retain this Ad Delivery and ReportingData indefinitely.

We use “cookies,” among other techniques, to measureand report non-personally identifiable information to advertisers, such as thenumber of people who see their advertisements or emails and the number of timespeople see the advertisement. A cookie is a small file that is stored in a Webuser’s hard drive. Cookies cannot read information from the Web user’s harddrive; rather they allow websites and advertisers to track advertisingeffectiveness and to ensure that viewers do not receive the same advertisementsrepeatedly. Cookies, by themselves, cannot be used to identify any user if theuser does not 

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provide any personallyidentifiable information. They can be used, however, to allow personalizationfeatures such as stock portfolio tracking 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 Web users. Please refer to the section entitled “GovernmentEnforcement Actions, Changes in Government Regulation and Industry Standards,Including, But Not Limited To, Spyware and Privacy & Email Matters,Could Decrease Demand For Our Products and Services and Increase Our Costs ofDoing Business” in Item 1A “Risk Factors” of this annual report on Form 10-Kfor further details about our compliance with privacy regulations.

**EMPLOYEES**

As of December 31,2006, we had 853 employees in the U.S. and 219 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.

**WEBSITE ACCESS TOOUR 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 at 100 FStreet, N.E., Washington, D.C. 20549. Information on the operation of thePublic Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.The SEC also maintains an Internet website at www.sec.gov that containsreports, proxy and information statements, and other information regarding ourCompany that we file electronically with the SEC.

**CODE OF ETHICS ANDBUSINESS 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 “About Us.” Amongother 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 undertake no obligation torelease publicly any revisions to any forward-looking statements to reflectevents or circumstances after the date hereof or to reflect the occurrence ofunanticipated events.*

**INTEGRATING OUR ACQUIRED OPERATIONS MAY DIVERTMANAGEMENT’S ATTENTION AWAY FROM OUR DAY-TO-DAY OPERATIONS AND HARM OURBUSINESS.**

We have grown inpart because of business combinations with other companies, and we expectto continue to evaluate and consider future acquisitions. Acquisitionsgenerally involve significant risks, including difficulties in the assimilationof operations, services, technologies, and corporate culture of the acquiredcompanies, diversion of management’s attention from other business concerns,overvaluation of the acquired companies, and the acceptance of the acquiredcompanies’ products and services by our customers. The integration of ouracquired operations, products and personnel may place a significant burdenon management and our internal resources. The diversion of management attentionand any difficulties encountered in the integration process could harm ourbusiness. We consummated the acquisitions of Search123.com, CommissionJunction, HiSpeed Media, Pricerunner, E-Babylon, Webclients, Fastclick, andShopping.net on May 30, 2003, December 7, 2003, December 17,2003, August 6, 2004, June 13, 2005, June 24, 2005, September 29,2005, and December 1, 2006, respectively. Because of the number ofacquisitions we have completed in the past several years, the differences inthe customer bases and functionality of acquired products, service offeringsand technologies, and other matters, these acquisitions may present materiallyhigher product, sales and marketing, customer support, research anddevelopment, facilities, information systems, accounting, personnel, and otherintegration challenges than those we have faced in connection with our prioracquisitions and may delay or jeopardize the complete integration of theseacquired businesses.

**IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUREXPENSES COULD INCREASE AND OUR MANAGEMENT’S TIME AND ATTENTION COULD BEDIVERTED.**

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 could be substantially harmed if we are unable to manage ourexpanding operations effectively. We plan to continue to expand our sales andmarketing, customer support, technology, and administrative organizations. Pastgrowth has placed, and any future growth will continue to place, a significantstrain on our management systems and resources. We will likely need to continueto improve our financial and managerial controls and our reporting systems andprocedures. In addition, we will need to expand, train and manage ourwork-force effectively. Our failure to manage our growth and its relatedimplications effectively could increase our expenses and divert management’stime and attention.

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**WE MIGHT NOT REMAINPROFITABLE.**

Although weachieved profitability in 2003 and have been profitable ever since, we facerisks that could prevent us from achieving net income in future periods. Theserisks include, but are not limited to, our ability to:

·       maintainand increase our inventory of advertising space on publisher websites and withemail list owners and newsletter publishers;

·       maintain and increase the number of advertisersthat 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 and increasing number of competitors inthe industry;

·       adaptto changes in legislation or regulation regarding Internet: usage, advertisingand 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.

**IF ADVERTISING ON THE INTERNET LOSES ITS APPEAL, OURREVENUE COULD DECLINE.**

Our Media segmentaccounted for 70.2% of our revenue for the year ended December 31, 2006 inpart by delivering advertisements that generate leads, impressions,click-throughs, and other actions to our advertiser customers’ websites. Thisbusiness model may not continue to be effective in the future for a numberof reasons, including the following: click and conversion rates have alwaysbeen low and may decline as the number of advertisements and ad formats onthe Web increases; Web users can install “filter” software programs which allowthem to prevent advertisements from appearing on their computer screens oremail boxes; Internet advertisements are, by their nature, limited in contentrelative to other media; companies may be reluctant or slow to adoptonline advertising that replaces, limits or competes with their existing directmarketing efforts; companies may prefer other forms of Internetadvertising we do not offer, including certain forms of search engineplacements; companies may reject or discontinue the use of certain forms ofonline promotions that may conflict with their brand objectives; companies maynot utilize online advertising due to concerns of “click-fraud”, particularlyrelated to search engine placements; and, perceived lead quality. If the numberof companies who purchase online advertising from us does not continue to grow,we may experience difficulty in attracting publishers, and our revenuecould decline.

**IF OUR BUSINESS MODEL IS NOT ACCEPTED BY INTERNETADVERTISERS OR WEB PUBLISHERS, OUR REVENUE COULD DECLINE.**

Historically, a significant portion of our revenue hasbeen derived from our Media segment. Although we intend to grow our AffiliateMarketing, Comparison Shopping and Technology segments, we expect that our Mediasegment will continue to generate a substantial amount of our revenue in thefuture. Our Media segment includes products and services that are based on acost-per-action (“CPA”), cost-per-lead (“CPL”), cost-per-thousand-impressions (“CPM”)or cost-per-click (“CPC”) pricing model. Our ability to continue to generatesignificant revenue from advertisers will depend, in part, on our ability tocontinue to demonstrate the effectiveness of our various pricing models toadvertisers and to Web publishers; and, on our ability to attract and retainadvertisers and Web publishers by differentiating our technologies, productsand services from those of our competitors. One component of our strategy is toenhance our 

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advertiser customers’abilities to measure their return on investment and track the performance andeffectiveness of their advertising campaigns. To date, not all of ouradvertiser customers have taken advantage of the most sophisticated tools weoffer for tracking Internet users’ activities after they have reached theadvertisers’ websites. We will not be able to assure you that our strategy willsucceed.

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 and/orconversion rates. Since we rely heavily on performance-based pricing models togenerate revenue, any decline in click and/or conversion rates may makeour pricing models less viable or less attractive solutions for Web publishersand advertisers, and our revenue could decline.

**OUR REVENUE COULD DECLINE IF WE FAIL TO EFFECTIVELYMANAGE OUR EXISTING ADVERTISING SPACE AND OUR GROWTH COULD BE IMPEDED IF WEFAIL TO ACQUIRE NEW ADVERTISING SPACE.**

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, Web publishers or email listowners can change the amount of inventory they make available to us at anytime. If a Web publisher or email list owner decides not to make advertisingspace from its websites, newsletters or email lists available to us, wemay not be able to replace this advertising space with advertising spacefrom other Web publishers or email list owners that have comparable trafficpatterns and user demographics quickly enough to fulfill our advertisers’requests. This would result in lost revenue.

We expect that ouradvertiser customers’ requirements will become more sophisticated as the Webcontinues to mature as an advertising medium. If we fail to manage our existingadvertising space effectively to meet our advertiser 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,but are not limited to: our ability to introduce new and innovative productsand services, our ability to efficiently manage our existing advertisinginventory, our pricing policies, and the cost-efficiency to Web publishers andemail list owners of outsourcing their advertising sales. In addition, thenumber of competing intermediaries that purchase advertising inventory from Webpublishers and email list owners continues to increase. We will not be able toassure you that the size of our advertising inventory will increase or evenremain constant in the future.

**WE MAY FACE INTELLECTUAL PROPERTY ACTIONS THATARE COSTLY OR COULD HINDER OR PREVENT OUR ABILITY TO DELIVER OUR PRODUCTS ANDSERVICES.**

We may be subject tolegal actions alleging intellectual property infringement (including patentinfringement), unfair competition or similar claims against us. Companiesmay apply for or be awarded patents or have other intellectual propertyrights covering aspects of our technologies or businesses. One of the primarycompetitors of our Search123.com subsidiary, Overture Services, Inc.,purports to be the owner of U.S. Patent No. 6,269,361, which was issued onJuly 31, 2001 and is entitled “System and method for influencing aposition on a search result list generated by a computer network search engine.”Overture 

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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 hasbrought suit to enforce its patent rights against, among others,Barnesandnoble.com and Amazon.com. Any litigation alleging intellectualproperty infringement by us could be costly, could require us to change ourbusiness practices, could potentially hinder or prevent our ability to deliverour products and services, and could divert management’s attention.

**IF THE TECHNOLOGY THAT WE CURRENTLY USE TO TARGET THEDELIVERY OF ONLINE ADVERTISEMENTS AND TO PREVENT FRAUD ON OUR NETWORKS ISRESTRICTED OR BECOMES SUBJECT TO REGULATION, OUR EXPENSES COULD INCREASE AND WECOULD LOSE CUSTOMERS OR ADVERTISING INVENTORY.**

Websites typically placesmall files of non-personalized (or “anonymous”) information, commonly known ascookies, on an Internet user’s browser. Cookies generally collect informationabout users on a non-personalized basis to enable websites to provide userswith a more customized experience. Cookie information is passed to the websitethrough an Internet user’s browser software. We currently use cookies to trackan Internet user’s movement through our advertiser customer’s websites and tomonitor and prevent potentially fraudulent activity on our networks. Mostcurrently available Internet browsers allow Internet users to modify theirbrowser settings to prevent cookies from being stored on their hard drive, andsome users currently do so. Internet users can also delete cookies from theirhard drives at any time. Some Internet commentators and privacy advocates havesuggested limiting or eliminating the use of cookies, and legislation has beenintroduced in some jurisdictions to regulate the use of cookie technology. Theeffectiveness of our technology could be limited by any reduction or limitationin the use of cookies. If the use or effectiveness of cookies were limited, wewould have to switch to other technologies to gather demographic and behavioralinformation. While such technologies currently exist, they are substantiallyless effective than cookies. We would also have to develop or acquire othertechnology to prevent fraud on our networks. Replacement of cookies couldrequire significant reengineering time and resources, might not be completed intime to avoid losing customers or advertising inventory, and might not becommercially feasible. Our use of cookie technology or any other technologiesdesigned 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.

**WE COULD LOSE CUSTOMERS OR ADVERTISING INVENTORY IF WEFAIL TO MEASURE IMPRESSIONS, CLICKS AND ACTIONS ON ADVERTISEMENTS IN A MANNERTHAT IS ACCEPTABLE 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 products and services and join our networks will depend on the extentto which they perceive our measurements of impressions, clicks and actions tobe accurate and reliable. Advertisers and Web publishers often maintain theirown technologies and methodologies for counting impressions, clicks andactions, and from time to time we have had to resolve differences between ourmeasurements and theirs. Any significant dispute over the proper measurement ofuser responses to advertisements could cause us to lose customers oradvertising inventory.

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**IF WE FAIL TO COMPETE EFFECTIVELY AGAINST OTHERINTERNET ADVERTISING COMPANIES, WE COULD LOSE CUSTOMERS OR ADVERTISINGINVENTORY AND OUR REVENUE AND RESULTS OF OPERATIONS COULD DECLINE.**

The Internet advertising markets are characterized byrapidly changing technologies, evolving industry standards, frequent newproduct and service introductions, and changing customer demands. Theintroduction of new products and services embodying new technologies and theemergence of new industry standards and practices could render our existingproducts and services obsolete and unmarketable or require unanticipatedtechnology or other investments. Our failure to adapt successfully to thesechanges could harm our business, results of operations and financial condition.

The market for Internet advertising and relatedproducts and services is highly competitive. We expect this competition tocontinue to increase because there are no significant barriers to entry.Increased competition may result in price reductions for advertisingspace, reduced margins and loss of our market share. Our principal competitorsinclude other companies that provide advertisers with Internet advertising solutionsand companies that offer pay-per-click search services. We compete in theperformance-based marketing segment with CPL and CPA performance-basedcompanies such as Advertising.com, Performics, acquired by DoubleClick, DirectResponse, acquired by Digital River, and Linkshare, acquired by Rakuten, and wecompete with other Internet advertising networks that focus on the traditionalCPM model, including 24/7 Real Media. We directly compete with a number ofcompetitors in the CPC market segment, such as Advertising.com, acquired byAOL. Further, both Google and Yahoo have announced plans to pursue the creationof display advertising networks, and Yahoo and eBay have signed a jointmarketing arrangement. We also compete with pay-per-click search companies suchas Overture, acquired by Yahoo, Google and MIVA. In addition, we compete in theonline 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 online advertising inventory that provide significant competitiveadvantages compared to our networks and have a significant impact on pricingfor online advertising overall. These companies have longer operatinghistories, greater name recognition and have greater financial, technical,sales, and marketing resources than we have.

Competition foradvertising placements among current and future suppliers of Internetnavigational and informational services, high-traffic websites and Internetservice providers (“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 our effortsto expand the scope of our Web services, we may compete with a greaternumber of Web publishers and other media companies across an increasing rangeof different Web services, including in vertical markets where competitorsmay have advantages in expertise, brand recognition and other areas. Ifexisting or future competitors develop or offer products or services thatprovide significant performance, price, creative or other advantages over thoseoffered by us, our business, results of operations and financial conditionwould be negatively affected. We also compete with traditional advertisingmedia, such as direct mail, television, radio, cable, and print, for a share ofadvertisers’ total advertising budgets. Many current and potential competitorsenjoy competitive advantages over us, such as longer operating histories,greater name recognition, larger customer bases, greater access to advertisingspace on high-traffic websites, and significantly greater financial, technical,sales, and marketing resources. As a result, we may not be able to competesuccessfully. If we fail to compete successfully, we could lose customers oradvertising inventory and our revenue and results of operations could decline.

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**OUR REVENUE ANDRESULTS OF OPERATIONS COULD BE NEGATIVELY IMPACTED IF INTERNET USAGE AND THEDEVELOPMENT OF INTERNET INFRASTRUCTURE DO NOT CONTINUE TO GROW.**

Our business and financial results will depend oncontinued growth in the use of the Internet. Internet usage may beinhibited for a number of reasons, such as: inadequate network infrastructure;security concerns; inconsistent quality of service; and, unavailability ofcost-effective, high-speed service.

If Internet usage grows,our infrastructure may not be able to support the demands placed on it andour performance and reliability may decline. In addition, websites haveexperienced interruptions in their service as a result of outages and otherdelays occurring throughout the Internet network infrastructure, and as aresult of sabotage, such as electronic attacks designed to interrupt service onmany websites. The Internet could lose its viability as a commercial medium dueto delays in the development or adoption of new technologies required toaccommodate increased levels of Internet activity. If use of the Internet doesnot continue to grow, or if the Internet infrastructure does not effectivelysupport our growth, our revenue and results of operations could be materiallyand adversely affected.

**OUR REVENUE AND RESULTS OF OPERATIONS MAY BEMATERIALLY, ADVERSELY AFFECTED IF THE MARKET FOR E-COMMERCE DOES NOT CONTINUETO GROW OR GROWS SLOWER THAN EXPECTED.**

Because many of ourcustomers’ advertisements encourage online purchasing, our long-term successmay depend in part on the continued growth and market acceptance ofe-commerce. Our business may be adversely affected if the market fore-commerce does not continue to grow or grows slower than expected. A number offactors outside of our control could hinder the future growth of e-commerce,including, but not limited to, the following:

·       thenetwork infrastructure necessary for substantial growth in Internet usage may notdevelop adequately and 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; 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.

**WE DEPEND ON KEY PERSONNEL, THE LOSS OF WHOM COULDHARM 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 thatare critical to the success of the integrated company, resulting in disruptionof operations, loss of key information, expertise or know-how, unanticipatedadditional recruitment and training costs, and otherwise diminishinganticipated benefits of these acquisitions, including loss of revenue andprofitability.

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 

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managementteam, or of any other key employees, could divert management’s time andattention, increase our expenses and adversely affect our ability to conductour business efficiently. Our future success also depends on our continuingability to attract, retain and motivate highly skilled employees. Wemay be unable to retain our key employees or attract, assimilate or retainother highly qualified employees in the future. We have experienced difficultyfrom time to time in attracting or retaining the personnel necessary to supportthe growth of our business, and may experience similar difficulties in thefuture.

**DELAWARE LAW AND OUR STOCKHOLDER RIGHTS PLAN CONTAINANTI-TAKEOVER PROVISIONS THAT COULD DETER TAKEOVER ATTEMPTS THAT COULD BEBENEFICIAL 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 theremoval of incumbent officers and directors more difficult by prohibitingstockholders holding 15% or more of our outstanding voting stock from acquiringthe Company, without our board of directors’ consent, for at least three yearsfrom the date they first hold 15% or more of the voting stock. In addition, ourStockholder Rights Plan has significant anti-takeover effects by causingsubstantial dilution to a person or group that attempts to acquire us on termsnot approved by our board of directors.

**SYSTEM FAILURES COULD SIGNIFICANTLY DISRUPT OUROPERATIONS, WHICH COULD CAUSE US TO LOSE 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 visitors’ responses to advertisements, would reducesignificantly the attractiveness of our solutions to advertisers and Webpublishers. Our business, results of operations and financial condition couldalso be materially and adversely affected by any systems damage or failure thatimpacts data integrity or interrupts or delays our operations. Our computersystems are vulnerable to damage from a variety of sources, includingtelecommunications failures, power outages, malicious or accidental human acts,and natural disasters. We lease data center space in El Segundo, San Jose andSunnyvale, California; 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 ofour third-party data centers. Despite the precautions taken, unanticipatedproblems affecting our systems could cause interruptions in the delivery of oursolutions in the future and our ability to provide a record of pasttransactions. Our data centers and systems incorporate varying degrees ofredundancy. All data centers and systems may not automatically switch overto their redundant counterpart. Our insurance policies may not adequatelycompensate us for any losses that may occur due to any failures in oursystems.

**WE MAY EXPERIENCE CAPACITY CONSTRAINTS THAT COULDREDUCE OUR REVENUE.**

Our future success dependsin part on the efficient performance of our software and technologies, aswell as the efficient performance of the systems of third-parties. As thenumbers of Web pages and Internet users increase, our services andinfrastructure may not be able to grow to meet the demand. A sudden andunexpected increase in the volume of advertising delivered through our serversor in click rates could strain the capacity of the software or hardware that wehave deployed. Any capacity constraints we experience could lead to slowerresponse times or system failures and adversely affect the availability of 

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advertisements,the number of advertising views delivered and the level of user responsesreceived, which would harm our revenue. To the extent that we do noteffectively address capacity constraints or system failures, our business,results of operations and financial condition could be harmed substantially. Wealso depend on ISPs that provide consumers with access to the websites on whichour customers’ advertisements appear. Internet users have occasionallyexperienced difficulties connecting to the Web due to failures of their ISPs’systems. Any disruption in Internet access provided by ISPs or failures by ISPsto handle the higher volumes of traffic expected in the future could materiallyand adversely affect our revenue.

**IT MAY BE DIFFICULT TO PREDICT OUR FINANCIALPERFORMANCE BECAUSE OUR QUARTERLY OPERATING RESULTS 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 stockmay fall. The factors that may affect our quarterly operating resultsinclude, but are not limited to, the following:

·       fluctuationsin demand for our advertising solutions or changes in customer contracts;

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

·       fluctuationsin the cost of online advertising;

·       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 and publisher compensation policies, the pricing and publishercompensation policies of our competitors, the pricing and publishercompensation policies of our advertiser customers, or the pricing policies foradvertising 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;

·       possibleimpairments of the recorded amounts of goodwill, intangible assets, or otherlong-lived assets;

·       thetiming and amount of expenses associated with future litigation orrestructuring activities;

·       newaccounting pronouncements, or new interpretations of existing accounting pronouncements,that impact the manner in which we account for, measure or disclose our resultsof operations, financial position or other financial measures;

·       deteriorationin the credit quality of our accounts receivable and an increase in the relatedprovision;

·       changesin our effective income tax rate; and

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·       costsrelated to acquisitions of technology or businesses.

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 toclose sales with advertisers, and could materially and adversely affect ourbusiness, results of operations and financial condition.

**IF WE DO NOT SUCCESSFULLY EXECUTE OUR INTERNATIONALSTRATEGY, OUR REVENUE, RESULTS OF OPERATIONS AND THE GROWTH OF OUR BUSINESSCOULD BE HARMED.**

We initiated operations, through wholly-owned subsidiariesor divisions, in the United Kingdom in 1999, France and Germany in 2000 andSweden in 2004. Our foreign operations subject us to foreign currency exchangerisks. We currently do not utilize hedging instruments to mitigate foreigncurrency exchange risks.

Our internationalexpansion will subject us to additional foreign currency exchange risks andwill require management’s attention and resources. We cannot assure youthat we will be successful in our efforts overseas. Our internationaloperations and expansion are subject to other inherent risks, including, butnot limited to:

·       theimpact of recessions in economies outside of 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,revenue, results of operations and financial condition.

**WE MAY BE LIABLE FOR CONTENT DISPLAYED ON OURNETWORKS OF PUBLISHERS WHICH COULD 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.

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**IF WE FAIL TO ESTABLISH, MAINTAIN AND EXPAND OURBUSINESS AND MARKETING ALLIANCES, OUR ABILITY TO GROW COULD BE LIMITED, AND OURREVENUE AND RESULTS OF OPERATIONS COULD BE HARMED.**

In order to grow ourbusiness, we must generate, retain and strengthen successful business andmarketing alliances. We depend, and expect to continue to depend, on ourbusiness and marketing alliances, which are companies with which we havewritten or oral agreements to work together to provide services to ourcustomers and to refer business from their clients to us. If companies withwhich we have business and marketing alliances do not refer their customers tous to perform their online campaign management, our revenue and results ofoperations could be harmed.

**IF OUR TECHNOLOGIES SUFFER FROM DESIGN OR PERFORMANCEDEFECTS, WE MAY NEED TO EXPEND SIGNIFICANT RESOURCES TO ADDRESS RESULTINGPRODUCT 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 commercialuse. Our contracts with our customers 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.

**TECHNOLOGY AND AFFILIATE MARKETING SALES ANDIMPLEMENTATION CYCLES MAY BE LENGTHY, WHICH COULD DIVERT OUR FINANCIAL ANDOTHER RESOURCES, AND ARE SUBJECT TO DELAYS, WHICH COULD RESULT IN DELAYEDREVENUE.**

If the sales andimplementation cycles of our technology or affiliate marketing products andservices are delayed, our revenue will likewise be delayed. Our technology andaffiliate marketing sales and implementation cycles are often lengthy, causingus to recognize revenue long after our initial contact with a prospectivecustomer. During our sales effort, we spend significant time educatingprospective customers on the use and benefits of our products and services. Asa result, the sales cycle for these products and services may range from afew weeks to several months to over one year for our larger customers. The salescycle is likely to be longer because we believe that prospective customersmay require more extensive approval processes related to integratinginternal business information with their advertising campaigns. In addition, inorder for technology customers or larger affiliate marketing customers toimplement our services, they must commit a significant amount of resources overan extended period of time, and affiliate marketing customers must convertexisting publishers and recruit and implement new publishers on our technologyplatform. Furthermore, even after a customer purchases our products andservices, the implementation cycle is subject to delays. These delaysmay be caused by factors within our control, such as possible technologydefects, as well as those outside our control, such as customers’ budgetaryconstraints, internal acceptance reviews, functionality enhancements, lack ofappropriate customer personnel to implement our applications, and thecomplexity of customers’ advertising needs. Also, failure to deliver service orapplication features consistent with delivery commitments could result in adelay in revenue recognition or cancellation of a customer agreement.

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**WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUALPROPERTY FROM UNAUTHORIZED USE, WHICH COULD DIMINISH THE VALUE OF OUR PRODUCTSAND SERVICES, WEAKEN OUR COMPETITIVE POSITION AND REDUCE OUR REVENUE.**

Our success depends in large part on ourproprietary technologies, including tracking management software, our affiliatemarketing technologies, our display advertising technologies, our leadgeneration technologies, our comparison shopping technologies, our MOJOplatform, and our Mediaplex Systems technologies. In addition, we believe thatour trademarks are key to identifying and differentiating our products andservices from those of our competitors. We may be required to spendsignificant resources to monitor and police our intellectual property rights.If we fail to successfully enforce our intellectual property rights, the value ofour products and services could be diminished and our competitive positionmay suffer.

We rely on a combination of copyright, trademark andtrade secret laws, confidentiality procedures and licensing arrangements toestablish and protect our proprietary rights. Third-party software providerscould copy or otherwise obtain and use our technologies without authorizationor develop similar technologies independently which may infringe upon ourproprietary rights. We may not be able to detect infringement andmay lose competitive position in the market before we do so. In addition,competitors may design around our technologies 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,customers, 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 products and services or technologies. Ourprecautions may not prevent misappropriation of our products, services ortechnologies, particularly in foreign countries where laws or law enforcementpractices may not protect our proprietary rights as fully as in the UnitedStates.

**IF WE FAIL TO KEEP PACE WITH RAPIDLY CHANGINGTECHNOLOGIES, OUR EXPENSES COULD INCREASE, AND WE COULD LOSE CUSTOMERS ANDADVERTISING 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’ andWeb publisher partners’ changing demands. For example, advertisers areincreasingly requiring Internet advertising networks to have the ability todeliver advertisements 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 and some of the website publishers in our networks do notaccept all types of advertising formats we support. In addition, an increase inthe bandwidth of Internet access resulting in faster data deliverymay provide new products and services that will take advantage of thisexpansion in delivery capability. If we fail to adapt successfully to suchdevelopments, we could lose customers or advertising inventory. We purchasemost of the software used in our business. We intend to continue to acquiretechnologies from third-parties necessary for us to conduct our business fromthird-parties. We cannot assure you that, in the future, these technologieswill be available on commercially reasonable terms, or at all. We may alsoexperience difficulties that could delay or prevent the successful design,development, introduction or marketing of new solutions. Any new solution orenhancement that we develop will need to meet the requirements of our currentand prospective customers and may not achieve 

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significantmarket acceptance. If we fail to keep pace with technological developments andthe introduction of new industry and technology standards on a cost-effectivebasis, our expenses could increase, and we could lose customers and advertisinginventory.

**GOVERNMENT ENFORCEMENT ACTIONS, CHANGES IN GOVERNMENTREGULATION AND INDUSTRY STANDARDS, INCLUDING, BUT NOT LIMITED TO, SPYWARE ANDPRIVACY & EMAIL MATTERS, COULD DECREASE DEMAND FOR OUR PRODUCTS ANDSERVICES AND INCREASE OUR COSTS OF DOING BUSINESS.**

Laws and regulations that apply to Internetcommunications, commerce and advertising are becoming more prevalent. Theseregulations could affect the costs of communicating on the Web and couldadversely affect the demand for our advertising solutions or otherwise harm ourbusiness, results of operations and financial condition. The United StatesCongress has enacted Internet legislation regarding children’s privacy,copyrights, sending of commercial email (e.g., the Federal CAN-SPAM Act of2003), and taxation. The United States Congress has pending legislationregarding spyware (e.g., H.R. 964, the “the Spy Act of 2007”) and the New YorkAttorney General’s office has sued a major Internet marketer for allegedviolations of legal restrictions against false advertising and deceptivebusiness practices related to Spyware. Other laws and regulations have beenadopted and may be adopted in the future, and may address issues suchas user privacy, spyware, “do not email” lists, pricing, intellectual propertyownership and infringement, copyright, trademark, trade secret, export ofencryption technology, click-fraud, acceptable content, taxation, and qualityof products and services. This legislation could hinder growth in the use ofthe Web generally and could decrease the acceptance of the Web as acommunications, commercial and advertising medium. The Company does not use anyform of spam or spyware and has policies to prohibit abusive Internetbehavior, including prohibiting the use of spam and spyware by our Webpublisher 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 commercemay prompt calls for more stringent consumer protection laws, both in theUnited States and abroad, that may impose additional burdens on companiesconducting business over the Internet. The laws governing the Internet remainlargely unsettled, even in areas where there has been some legislative action.It may take years to determine how existing laws, including thosegoverning intellectual property, privacy, libel and taxation, apply to theInternet and Internet advertising. Our business, results of operations andfinancial condition could be materially and adversely affected by the adoptionor modification of industry standards, laws or regulations relating to theInternet, or the application of existing laws to the Internet or Internet-basedadvertising.

**WE COULD BE SUBJECT TO LEGAL CLAIMS, GOVERNMENTENFORCEMENT ACTIONS AND DAMAGE TO OUR REPUTATION AND HELD LIABLE FOR OUR OR OURCUSTOMERS’ FAILURE TO COMPLY WITH FEDERAL, STATE AND FOREIGN LAWS, REGULATIONSOR POLICIES GOVERNING CONSUMER PRIVACY WHICH COULD MATERIALLY HARM OURBUSINESS.**

Recent growing public concern regarding privacy andthe collection, distribution and use of information about Internet users hasled to increased federal, state and foreign scrutiny and legislative andregulatory activity concerning data collection and use practices. The UnitedStates Congress currently has pending legislation regarding privacy and datasecurity measures (e.g., S. 495, the “Personal Data Privacy and Security Act of2007”). Any failure by us to comply with applicable federal, state and foreignlaws and the requirements of regulatory authorities may result in, amongother things, indemnification liability to our customers and the advertisingagencies we work with, administrative enforcement actions and fines, 

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class actionlawsuits, cease and desist orders, and civil and criminal liability. Recently,class action lawsuits have been filed alleging violations of privacy lawsby ISPs. The European Union’s directive addressing data privacy limits ourability to collect and use information regarding Internet users. Theserestrictions 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 government activity, privacy advocacygroups and the high-technology and direct marketing industries are consideringvarious new, additional or different self-regulatory standards. This focus, andany legislation, regulations or standards promulgated, may impact usadversely. Governments, trade associations and industry self-regulatory groupsmay enact more burdensome laws, regulations and guidelines, includingconsumer privacy laws, affecting our customers and us. Since many of theproposed laws or regulations are just being developed, and a consensus onprivacy and data usage has not been reached, we cannot yet determine the impactthese proposed laws or regulations may have on our business. However, ifthe gathering of profiling information were to be curtailed, Internetadvertising would be less effective, which would reduce demand for Internetadvertising and harm our business.

Third-parties may bring class action lawsuits againstus relating to online privacy and data collection. We disclose our informationcollection and dissemination policies, and we may be subject to claims if we actor are perceived to act inconsistently with these published policies. Anyclaims or inquiries could be costly and divert management’s attention, and theoutcome of such claims could harm our reputation and our business.

Our customers are alsosubject to various federal and state laws concerning the collection and use ofinformation regarding individuals. These laws include the Children’s OnlinePrivacy Protection Act, the Federal Drivers Privacy Protection Act of 1994, theprivacy provisions of the Gramm-Leach-Bliley Act, the CAN-SPAM Act of 2003, aswell as other laws that govern the collection and use of consumer creditinformation. We cannot assure you that our customers are currently incompliance, or will remain in compliance, with these laws and their own privacypolicies. We may be held liable if our customers use our technologies in amanner that is not in compliance with these laws or their own stated privacypolicies.

**OUR STOCK PRICE IS LIKELY TO BE VOLATILE AND COULDDROP UNEXPECTEDLY.**

Our common stock has been publicly traded since March 30,2000. The market price of our common stock has been subject to significantfluctuations since the date of our initial public 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 stockmay materially decline, regardless of our operating performance. In thepast, following periods of volatility in the market price of a particularcompany’s securities, securities class action litigation has often beenbrought against that company. We may become involved in this type oflitigation in the future. Litigation of this type is often expensive anddiverts management’s attention and resources.

**WE MAY BE REQUIRED TO RECORD A SIGNIFICANT CHARGETO EARNINGS IF OUR GOODWILL OR AMORTIZABLE INTANGIBLE ASSETS BECOME IMPAIRED.**

As of December 31,2006, we have total intangible assets, including goodwill, of $369.5 million.We are 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 assetsmay not be recoverable. We are also required to review goodwill forimpairment on an annual basis, or between annual tests whenever events andcircumstances indicate that the carrying value of goodwill may not berecoverable. Events and circumstances considered in determining whether thecarrying value of amortizable intangible assets and goodwill may not berecoverable include, but are not 

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limitedto: significant changes in performance relative to expected operating results;significant changes in the use of the assets; significant negative industry oreconomic trends; a significant decline in the Company’s stock price for asustained period of time; and changes in the Company’s business strategy. Wemay be required to record a significant charge to earnings in a period inwhich any impairment of our goodwill or amortizable intangible assets isdetermined.

**WE MAY INCUR LIABILITIES TO TAX AUTHORITIES INEXCESS OF AMOUNTS THAT HAVE BEEN ACCRUED WHICH MAY ADVERSELY IMPACT OURRESULTS OF OPERATIONS AND FINANCIAL CONDITION.**

The preparation of ourconsolidated financial statements requires estimates of the amount of incometax that will become payable in each of the jurisdictions in which we operate.We may be challenged by the taxing authorities in these jurisdictions and, inthe event that we are not able to successfully defend our position, we mayincur significant additional income tax liabilities which may have an adverseimpact on our results of operations and financial condition.

**NEW ACCOUNTING STANDARDS COULD IMPACT OUR RESULTS OFOPERATIONS, FINANCIAL CONDITION AND OTHER FINANCIAL MEASURES.**

From time to time, theFinancial Accounting Standards Board, the SEC and other regulatory bodies mayissue new and revised standards, interpretations and other guidance that changeGenerally Accepted Accounting Principles in the United States (GAAP). Theeffects of such changes may include prescribing an accounting method where nonehad been previously specified, prescribing a single acceptable method ofaccounting from among several acceptable methods that currently exist, orrevoking the acceptability of a current method and replacing it with anentirely different method, among others. Such changes to GAAP could impact ourresults of operations, financial condition and other financial measures.

**IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNALCONTROLS, WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS ORPREVENT FRAUD AND OUR BUSINESS MAY BE HARMED AND OUR STOCK PRICE MAY BEADVERSELY 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 ourinternal control over financial reporting as of December 31, 2004, wedetermined that we had a material weakness in our internal control overfinancial reporting related to the operation of our controls for evaluating anddocumenting the assessment of valuation allowances recorded against ourdeferred tax assets. We remediated this material weakness during 2005 anddetermined that our internal control over financial reporting was effective asof December 31, 2005 and 2006. In order to continue to comply with therequirements of the Sarbanes-Oxley Act, we are required to continuouslyevaluate and, where appropriate, enhance our policies, procedures and internalcontrols. If we fail to maintain the adequacy of our internal controls, wecould be subject to regulatory scrutiny and investors could lose confidence inthe accuracy and completeness of our financial reports. We cannot assure youthat in the future we will be able to fully comply with the requirements of theSarbanes-Oxley Act or that management will conclude that our internal controlover financial reporting is effective. If we fail to fully comply with therequirements of the Sarbanes-Oxley Act, our business may be harmed and our stockprice may decline.

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**DECREASED EFFECTIVENESS OF EQUITY COMPENSATION COULDADVERSELY AFFECT OUR ABILITY TO ATTRACT AND RETAIN EMPLOYEES AND HARM OURBUSINESS, AND RECENTLY ADOPTED 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 affectour ability to retain key employees, all of whom have been granted stockoptions, or to attract additional highly-qualified personnel. At any giventime, a portion of our outstanding employee stock options may have exerciseprices in excess of our then-current stock price. To the extent thesecircumstances occur, our ability to retain employees may be adversely affected.In addition, beginning January 1, 2006 the Company was required to recordstock-based compensation expense related to stock options. This requirement hasnegatively impacted net income for the year ended December 31, 2006 andwill also negatively impact net income for future periods. Moreover, applicableNASDAQ Global Select Market listing standards relating to obtaining stockholderapproval of equity compensation plans could make it more difficult or expensivefor us to grant stock options or other stock-based awards to employees in thefuture. As a result, we may incur increased compensation costs, change ourequity compensation strategy or find it difficult to attract, retain andmotivate employees, any of which could materially, adversely affect ourbusiness.

**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS

None.

**ITEM 2.**                PROPERTIES

As of December 31,2006, the Company leased facilities at the following locations:

·       WestlakeVillage, California (one location totaling 40,300 square-feet)

·       SantaBarbara, California (three locations totaling 50,900 square-feet)

·       Harrisburg,Pennsylvania (two locations totaling 34,000 square-feet)

·       London,England (two locations totaling 29,000 square-feet)

·       Louisville,Kentucky (one location totaling 20,800 square-feet)

·       Marlborough,Massachusetts (one location totaling 12,500 square-feet)

·       LosAngeles, California (two locations totaling 11,000 square-feet)

·       NewYork, New York (two locations totaling 10,900 square-feet)

·       SanFrancisco, California (one location totaling 10,600 square-feet)

We own land and abuilding, approximating 61,900 square-feet and 23,800 square-feet,respectively, in Simi Valley, California. We also lease small office space andfacilities in: Agoura Hills, California; Chicago, Illinois; Paris, France; Munich,Germany; and, Stockholm, Sweden. In addition, we use third-party co-locationfacilities that house our Web servers in: Sunnyvale, California; San Jose,California; Agoura Hills, California; Los Angeles, California; El Segundo,California; Mechanicsburg, Pennsylvania; Ashburn, Virginia; London, England;and, Stockholm, Sweden. We are currently pursuing additional office space inresponse to our historical and projected growth. For additional informationregarding our obligations under leases, see note 14 “Commitments andContingencies” to our consolidated financial statements included in this annualreport on Form 10-K.

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**ITEM 3.**                LEGALPROCEEDINGS

From time to time, theCompany may become subject to legal proceedings, claims and litigation arisingin the ordinary course of business. In addition, the Company may receiveletters alleging infringement of patent or other intellectual property rights.The Company is not currently a party to any material legal proceedings, nor isthe Company aware of any other pending or threatened litigation that would havea material adverse effect on the Company’s business, operating results, cashflows or financial condition should such litigation be resolved unfavorably.

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

No matters were submitted to a vote of securityholders during the quarter ended December 31, 2006.

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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 Global Select Market (including itspredecessor markets) under the symbol “VCLK” since our initial public offeringon March 30, 2000. The following table sets forth, for the periodsindicated, the high and low sales prices per share of our common stock asreported on the NASDAQ Global Select Market. On February 23, 2007, thelast sale price of our common stock reported by the NASDAQ Global Select Marketwas $28.48 per share.

| ** **                                    | ** ** | **Price Range of  Common Stock** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                    | ** ** | **High**                                        | ** ** | **Low** | ** ** |
| **Fiscal Year Ended  December 31, 2006** |       |                                            |       |   |   |
| Fourth Quarter                                |       | $                                               | 25.47      |   | $ | 17.30 |   |
| Third Quarter                                 |       | $                                               | 18.86      |   | $ | 13.15 |   |
| Second Quarter                                |       | $                                               | 18.65      |   | $ | 13.22 |   |
| First Quarter                                 |       | $                                               | 20.98      |   | $ | 15.46 |   |

 

| ** **                                    | ** ** | **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 |   |

 

**Stockholders**

As of December 31,2006, there were 692 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.

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**Stockholder ReturnPerformance Graph**

Setforth below is a graph comparing the cumulative total stockholder return of$100 invested in our common stock on December 31, 2001 throughDecember 31, 2006 relative to the cumulative total return of $100 investedin the Nasdaq Composite Index and the RDG Internet Composite Index calculatedsimilarly for the same period.

**COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN***AmongValueClick, Inc., The NASDAQ Composite IndexAnd The RDG Internet Composite Index

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*                    $100 investedon 12/31/01 in stock or index—including reinvestment of dividends. Fiscal yearending December 31.

 

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**ITEM 6.**                SELECTEDFINANCIAL DATA

The selected consolidated financial data set forthbelow with respect to our consolidated statements of operations for the yearsended December 31, 2006, 2005 and 2004 and with respect to ourconsolidated balance sheets as of December 31, 2006 and 2005 have beenderived from the audited consolidated financial statements of ValueClick whichare included elsewhere herein. The consolidated statement of operations data forthe years ended December 31, 2003 and 2002 and the consolidated balancesheet data as of December 31, 2004, 2003 and 2002 have been derived fromour audited consolidated financial statements not included herein. The selectedconsolidated financial data set forth below is qualified in its entirety by,and should be read in conjunction with both, Item 7 “Management’s Discussionand Analysis of Financial Condition and Results of Operations” of this annualreport on Form 10-K and the consolidated financial statements andthe notes to those consolidated financial statements included in Item 8“Financial Statements and Supplementary Data” of this annual report onForm 10-K.

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**CONSOLIDATEDSTATEMENT OF OPERATIONS DATA**

| ** **                                                                                                       | ** ** | **For the Year Ended December 31,**       | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                       | ** ** | **(in thousands, except per share data)** | ** ** |
| **Consolidated Statement of Operations Data(3):**                                                                | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                                                          |       | $                                                                  | 545,616    |   | $ | 304,007 |   | $ | 169,178 |   | $ | 92,516 |   | $ | 62,554 |   |
| Cost of revenue                                                                                                  |       | 167,861                                                            |       | 88,839 |   | 50,762 |   | 32,024 |   | 21,733 |   |
| Gross profit                                                                                                     |       | 377,755                                                            |       | 215,168 |   | 118,416 |   | 60,492 |   | 40,821 |   |
| Operating expenses:                                                                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Sales and marketing(1)                                                                                           |       | 162,905                                                            |       | 75,640 |   | 36,369 |   | 21,275 |   | 17,489 |   |
| General and  administrative(1)                                                                                   |       | 58,128                                                             |       | 40,908 |   | 27,413 |   | 19,880 |   | 18,563 |   |
| Technology(1)                                                                                                    |       | 32,797                                                             |       | 22,137 |   | 16,016 |   | 10,562 |   | 10,719 |   |
| Amortization of  intangible assets                                                                               |       | 21,801                                                             |       | 12,179 |   | 4,111 |   | 1,570 |   | 533 |   |
| Merger-related costs                                                                                             |       | —                                                             |       | — |   | — |   | — |   | 17 |   |
| Restructuring (benefit)  expense, net                                                                            |       | —                                                             |       | (73 | ) | (1,003 | ) | — |   | 2,320 |   |
| Total operating expenses                                                                                         |       | 275,631                                                            |       | 150,791 |   | 82,906 |   | 53,287 |   | 49,641 |   |
| Income (loss) from  operations                                                                                   |       | 102,124                                                            |       | 64,377 |   | 35,510 |   | 7,205 |   | (8,820 | ) |
| Interest income, net                                                                                             |       | 8,005                                                              |       | 5,077 |   | 3,665 |   | 3,364 |   | 5,909 |   |
| Gain on sale of  marketable securities                                                                           |       | —                                                             |       | — |   | — |   | — |   | 134 |   |
| Gain on sale of equity  interest in Japan subsidiary                                                             |       | —                                                             |       | — |   | 8,007 |   | — |   | — |   |
| Other income                                                                                                     |       | —                                                             |       | — |   | 63 |   | — |   | 32 |   |
| Income (loss) before  income taxes, minority interest and cumulative effect of a change in  accounting principle |       | 110,129                                                            |       | 69,454 |   | 47,245 |   | 10,569 |   | (2,745 | ) |
| Income tax expense                                                                                               |       | 47,555                                                             |       | 28,810 |   | 16,153 |   | 830 |   | 163 |   |
| Income (loss) before  minority interest and cumulative effect of a change in accounting principle                |       | 62,574                                                             |       | 40,644 |   | 31,092 |   | 9,739 |   | (2,908 | ) |
| Minority share of loss  (income) in consolidated subsidiary                                                      |       | —                                                             |       | — |   | 130 |   | 84 |   | (15 | ) |
| Income (loss) before cumulative  effect of a change in accounting principle                                      |       | 62,574                                                             |       | 40,644 |   | 31,222 |   | 9,823 |   | (2,923 | ) |
| Cumulative effect of a change in accounting  principle(2)                                                        |       | —                                                             |       | — |   | — |   | — |   | (7,649 | ) |
| Net income (loss)                                                                                                |       | $                                                                  | 62,574     |   | $ | 40,644 |   | $ | 31,222 |   | $ | 9,823 |   | $ | (10,572 | ) |
| Basic net income (loss) per common share                                                                         |       | $                                                                  | 0.63       |   | $ | 0.46 |   | $ | 0.39 |   | $ | 0.13 |   | $ | (0.14 | ) |
| Weighted-average shares used to calculate basic net  income (loss) per common share                              |       | 99,600                                                             |       | 87,722 |   | 80,063 |   | 74,300 |   | 73,744 |   |
| Diluted net income (loss) per common share                                                                       |       | $                                                                  | 0.62       |   | $ | 0.45 |   | $ | 0.37 |   | $ | 0.13 |   | $ | (0.14 | ) |
| Weighted-average shares used to calculate diluted  net income (loss) per common share                            |       | 101,721                                                            |       | 90,857 |   | 84,038 |   | 78,436 |   | 73,744 |   |

----

(1)          Includes stock-basedcompensation expense for the following periods (in thousands):

| ** **                  | ** ** | **For the Year Ended December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Sales and  marketing        |       | $                                                            | 4,429      |   | $ | 817 |   | $ | 369 |   | $ | 113 |   | $ | 488 |   |
| General and  administrative |       | 5,258                                                        |       | 382 |   | 245 |   | 181 |   | 779 |   |
| Technology                  |       | 2,253                                                        |       | 823 |   | 125 |   | 58 |   | 260 |   |
|                        |       | $                                                            | 11,940     |   | $ | 2,022 |   | $ | 739 |   | $ | 352 |   | $ | 1,527 |   |

 

30

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(2)          On January 1, 2002,we adopted the accounting standards set forth in Statement of FinancialAccounting Standards No. 142, “Goodwill and Other Intangible Assets”(“SFAS No. 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 atJanuary 1, 2002 and subsequently reflected a cumulative effect of a changein accounting principle for the goodwill impairment.

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

| **Acquisitions**                                            | ** ** | ** **          | ** ** | **Date** | ** ** |
|-------------------------------------------------------------|------------|---------------------|------------|----------|------------|
| Shopping.net .                                              |       | December 2006  |       |
| 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  |       |
| HiSpeed  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,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                        | ** ** | **(in thousands)**               | ** ** |
| Cash, cash  equivalents and marketable securities |       | $                                     | 281,594    |   | $ | 240,783 |   | $ | 242,583 |   | $ | 220,120 |   | $ | 232,978 |   |
| Working capital                                   |       | $                                     | 315,576    |   | $ | 259,797 |   | $ | 241,424 |   | $ | 213,809 |   | $ | 234,229 |   |
| Total assets                                      |       | $                                     | 793,266    |   | $ | 720,861 |   | $ | 384,714 |   | $ | 323,099 |   | $ | 263,850 |   |
| Total non-current  liabilities                    |       | $                                     | 62,143     |   | $ | 35,372 |   | $ | 14,964 |   | $ | 5,676 |   | $ | 4,626 |   |
| Total stockholders’  equity                  |       | $                                     | 643,709    |   | $ | 618,543 |   | $ | 328,761 |   | $ | 274,207 |   | $ | 231,981 |   |

 

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, thisunaudited financial information has been prepared on the same basis as theaudited financial statements, and includes all adjustments, consisting only ofnormal recurring adjustments, necessary to present this information fairly whenread in conjunction with our consolidated financial statements and the relatednotes contained elsewhere herein. These operating results are not necessarilyindicative of results of any future period.

| ** **                              | ** ** | **For the Three-Month Period Ended**                        | ** ** |
|-----------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **Dec. 31,  2006**                                                         | ** ** | **Sept. 30,  2006** | ** ** | **Jun. 30,  2006** | ** ** | **Mar. 31,  2006** | ** ** | **Dec. 31,  2005** | ** ** | **Sept. 30,  2005** | ** ** | **Jun. 30,  2005** | ** ** | **Mar. 31,  2005** | ** ** |
| ** **                              | ** ** | **(unaudited)  (in thousands, except per share data)** | ** ** |
| Revenue                                 |       | $                                                                               | 160,436    |   | $ | 137,865 |   | $ | 130,028 |   | $ | 117,287 |   | $ | 116,607 |   |   | $ | 81,414 |   |   | $ | 54,572 |   |   | $ | 51,414 |   |   |
| Cost of revenue                         |       | 47,789                                                                          |       | 38,709 |   | 42,126 |   | 39,237 |   | 39,270 |   |   | 22,496 |   |   | 13,768 |   |   | 13,305 |   |   |
| Gross profit                            |       | 112,647                                                                         |       | 99,156 |   | 87,902 |   | 78,050 |   | 77,337 |   |   | 58,918 |   |   | 40,804 |   |   | 38,109 |   |   |
| Operating  expenses:                    |       |                                                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales and  marketing(1)                 |       | 47,620                                                                          |       | 46,270 |   | 37,641 |   | 31,374 |   | 27,207 |   |   | 22,021 |   |   | 15,064 |   |   | 11,348 |   |   |
| General and  administrative(1)          |       | 15,594                                                                          |       | 14,326 |   | 11,377 |   | 16,831 |   | 13,341 |   |   | 10,314 |   |   | 8,700 |   |   | 8,553 |   |   |
| Technology(1)                           |       | 8,183                                                                           |       | 8,301 |   | 8,267 |   | 8,046 |   | 7,356 |   |   | 5,680 |   |   | 4,686 |   |   | 4,415 |   |   |
| Amortization of  intangible assets |       | 5,234                                                                           |       | 5,462 |   | 5,450 |   | 5,655 |   | 6,387 |   |   | 3,107 |   |   | 1,448 |   |   | 1,237 |   |   |
| Restructuring  (benefit) expense, net   |       | —                                                                          |       | — |   | — |   | — |   | (77 | ) |   | — |   |   | 206 |   |   | (202 | ) |   |
| Total operating  expenses               |       | 76,631                                                                          |       | 74,359 |   | 62,735 |   | 61,906 |   | 54,214 |   |   | 41,122 |   |   | 30,104 |   |   | 25,351 |   |   |
| Income from  operations                 |       | 36,016                                                                          |       | 24,797 |   | 25,167 |   | 16,144 |   | 23,123 |   |   | 17,796 |   |   | 10,700 |   |   | 12,758 |   |   |
| Interest income,  net                   |       | 2,440                                                                           |       | 1,642 |   | 2,005 |   | 1,918 |   | 1,610 |   |   | 687 |   |   | 1,420 |   |   | 1,360 |   |   |
| Income before  income taxes             |       | 38,456                                                                          |       | 26,439 |   | 27,172 |   | 18,062 |   | 24,733 |   |   | 18,483 |   |   | 12,120 |   |   | 14,118 |   |   |
| Income tax expense                      |       | 16,906                                                                          |       | 9,648 |   | 12,728 |   | 8,273 |   | 10,541 |   |   | 7,481 |   |   | 5,353 |   |   | 5,435 |   |   |
| Net income                              |       | $                                                                               | 21,550     |   | $ | 16,791 |   | $ | 14,444 |   | $ | 9,789 |   | $ | 14,192 |   |   | $ | 11,002 |   |   | $ | 6,767 |   |   | $ | 8,683 |   |   |
| Basic net income  per common share      |       | $                                                                               | 0.22       |   | $ | 0.17 |   | $ | 0.14 |   | $ | 0.10 |   | $ | 0.14 |   |   | $ | 0.13 |   |   | $ | 0.08 |   |   | $ | 0.11 |   |   |
| Diluted net income  per common share    |       | $                                                                               | 0.22       |   | $ | 0.17 |   | $ | 0.14 |   | $ | 0.09 |   | $ | 0.14 |   |   | $ | 0.13 |   |   | $ | 0.08 |   |   | $ | 0.10 |   |   |

----

(1)          Includesstock-based compensation expense for the following periods (in thousands):

| ** **                  | ** ** | **For the Three-Month Period Ended** | ** ** |
|-----------------------------|------------|----------------------------------------------------------|------------|
| ** **                  | ** ** | **Dec. 31,  2006**                                  | ** ** | **Sept. 30,  2006** | ** ** | **Jun. 30,  2006** | ** ** | **Mar. 31,  2006** | ** ** | **Dec. 31,  2005** | ** ** | **Sept. 30,  2005** | ** ** | **Jun. 30,  2005** | ** ** | **Mar. 31,  2005** | ** ** |
| Sales and  marketing        |       |                                                     | $          | 835 |   |   |   | $ | 1,145 |   |   |   | $ | 1,173 |   |   |   | $ | 1,276 |   |   |   | $ | 744 |   |   |   | $ | 28 |   |   |   | $ | 20 |   |   |   | $ | 25 |   |   |
| General and  administrative |       |                                                     | 1,231      |   |   |   | 1,264 |   |   |   | 1,397 |   |   |   | 1,366 |   |   |   | 321 |   |   |   | 27 |   |   |   | 17 |   |   |   | 17 |   |   |
| Technology                  |       |                                                     | 366        |   |   |   | 583 |   |   |   | 626 |   |   |   | 678 |   |   |   | 788 |   |   |   | 15 |   |   |   | 8 |   |   |   | 12 |   |   |
|                        |       |                                                     | $          | 2,432 |   |   |   | $ | 2,992 |   |   |   | $ | 3,196 |   |   |   | $ | 3,320 |   |   |   | $ | 1,853 |   |   |   | $ | 70 |   |   |   | $ | 45 |   |   |   | $ | 54 |   |   |

 

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

The following discussion of our financial conditionand results 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.

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The following discussioncontains forward-looking statements based on the current expectations,assumptions, estimates, and projections about us and our industry. Theseforward-looking statements involve risks and uncertainties. Our actual resultscould differ materially from those discussed in these forward-lookingstatements as a result of certain factors, as more fully described in Item1A “Risk Factors” and elsewhere in this annual report on Form 10-K.We undertake no obligation to release publicly any revisions to anyforward-looking statements to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.

**Overview**

We offer a suite of products and services that enablemarketers to advertise and sell their products through all major onlinemarketing channels—display advertising, lead generation marketing, emailmarketing, search marketing, comparison shopping, and affiliate marketing. Wealso offer 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. Additionally, we provide software thatassists advertising agencies and other companies with information managementregarding their financial, workflow and offline media planning and buyingprocesses. The broad range of products and services that we provide enables ouradvertiser customers to address all aspects of the marketing process, fromstrategic planning through execution, including results measurement andcampaign refinements. By combining our media, affiliate marketing, comparisonshopping, and technology offerings with our experience in both online and offlinemarketing, we help our advertiser customers around the world optimize theirmarketing campaigns both on the Internet and through offline media.

On December 1, 2006, we completed the acquisitionof Shopping.net and included the results of operations of Shopping.net in ourconsolidated results of operations beginning as of that date. In 2005, weacquired Fastclick, Inc. (“Fastclick”), completed on September 29,2005, Web Marketing Holdings, Inc. (“Webclients”), completed on June 24,2005, and E-Babylon, Inc. (“E-Babylon”), completed on June 13, 2005.The results of operations of Fastclick, Webclients and E-Babylon have beenincluded in our consolidated results of operations beginning October 1,2005, July 1, 2005 and June 1, 2005, respectively. On August 6,2004, we completed the acquisition of Pricerunner AB (“Pricerunner”) andincluded the results of operations of Pricerunner in our consolidated resultsof operations beginning August 1, 2004. On March 26, 2004, we soldour 59% equity interest in ValueClick Japan and recorded a one-time gain fromthe sale of $8.0 million. The results of operations for ValueClickJapan, including this one-time gain, are included in our consolidated resultsof operations through March 31, 2004. Note 3 “Recent Business Combinationsand Investments” to our consolidated financial statements included in thisannual report on Form 10-K provides unaudited pro-forma revenue, netincome and basic and diluted net income per common share for the years ended December 31,2006 and 2005 as if these transactions occurred as of January 1, 2005.

We derive our revenue fromfour business segments. These business segments are presented on a worldwidebasis and include: Media, Affiliate Marketing, Comparison Shopping, andTechnology. Each of these four business segments is described in Item 1 “Business”of this annual report on Form 10-K. In the fourth quarter of 2006,we changed our internal reporting structure which resulted in changes in ourreportable segments to: a) present segment information on a worldwide productview (whereas prior to the fourth quarter of 2006 all of our operations inEurope, including Affiliate Marketing, Comparison Shopping and Technology, wererecorded in the Media segment); b) present separately the operating results ofour Comparison Shopping segment; and c) include our Search123 product (whichwas previously included in the Media segment) with the Affiliate Marketingsegment in order to consolidate our search engine marketing and searchsyndication product offerings in one segment. In accordance with Statement ofFinancial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related 

33

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Information”, all prior period segmentinformation has been updated to conform to the new segment presentation.

The following tableprovides revenue, gross profit, operating expenses, and income from operationsinformation for each of our four business segments. Segment income fromoperations, as shown below, excludes the effects of: stock-based compensationexpense; amortization of intangible assets; restructuring benefit, net; andcorporate expenses. Corporate expenses consist of those costs not directlyattributable to a business segment, and include: salaries and benefits for theCompany’s executive, finance, legal, corporate governance, human resources, andfacilities organizations; fees for professional service providers includingaudit, legal, tax, and Sarbanes-Oxley compliance; insurance; and othercorporate expenses. A reconciliation of segment income from operations toconsolidated income from operations and a reconciliation of segment revenue toconsolidated revenue are also provided in the following table.

| ** **                                                                                         | ** ** | **For the Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                         | ** ** | **(in thousands)**                                      | ** ** |
| **Media Segment**                                                                                  | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                                            |       | $                                                            | 382,973    |   | $ | 164,835 |   | $ | 64,143 |   |
| Cost of revenue                                                                                    |       | 141,457                                                      |       | 66,966 |   | 31,291 |   |
| Gross profit                                                                                       |       | 241,516                                                      |       | 97,869 |   | 32,852 |   |
| Operating expenses                                                                                 |       | 147,323                                                      |       | 59,559 |   | 23,249 |   |
| Segment income from operations                                                                     |       | $                                                            | 94,193     |   | $ | 38,310 |   | $ | 9,603 |   |
| **Affiliate Marketing Segment**                                                                    | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                                            |       | $                                                            | 112,150    |   | $ | 95,791 |   | $ | 73,945 |   |
| Cost of revenue                                                                                    |       | 19,770                                                       |       | 17,116 |   | 14,699 |   |
| Gross profit                                                                                       |       | 92,380                                                       |       | 78,675 |   | 59,246 |   |
| Operating expenses                                                                                 |       | 34,474                                                       |       | 33,714 |   | 29,853 |   |
| Segment income from operations                                                                     |       | $                                                            | 57,906     |   | $ | 44,961 |   | $ | 29,393 |   |
| **Comparison Shopping Segment**                                                                    | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                                            |       | $                                                            | 26,217     |   | $ | 17,295 |   | $ | 5,695 |   |
| Cost of revenue                                                                                    |       | 2,165                                                        |       | 664 |   | 149 |   |
| Gross profit                                                                                       |       | 24,052                                                       |       | 16,631 |   | 5,546 |   |
| Operating expenses                                                                                 |       | 20,976                                                       |       | 14,597 |   | 3,903 |   |
| Segment income from operations                                                                     |       | $                                                            | 3,076      |   | $ | 2,034 |   | $ | 1,643 |   |
| **Technology Segment**                                                                             | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                                            |       | $                                                            | 25,714     |   | $ | 27,015 |   | $ | 25,462 |   |
| Cost of revenue                                                                                    |       | 5,396                                                        |       | 5,275 |   | 5,105 |   |
| Gross profit                                                                                       |       | 20,318                                                       |       | 21,740 |   | 20,357 |   |
| Operating expenses                                                                                 |       | 12,696                                                       |       | 12,437 |   | 12,815 |   |
| Segment income from operations                                                                     |       | $                                                            | 7,622      |   | $ | 9,303 |   | $ | 7,542 |   |
| **Reconciliation of segment income from operations  to consolidated income from operations:** | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total segment income from operations                                                               |       | $                                                            | 162,797    |   | $ | 94,608 |   | $ | 48,181 |   |
| Corporate expenses                                                                                 |       | (26,932                                                      | )          | (16,103 | ) | (8,824 | ) |
| Stock-based compensation                                                                           |       | (11,940                                                      | )          | (2,022 | ) | (739 | ) |
| Amortization of intangible assets                                                                  |       | (21,801                                                      | )          | (12,179 | ) | (4,111 | ) |
| Restructuring benefit, net                                                                         |       | —                                                       |       | 73 |   | 1,003 |   |
| **Consolidated income from operations**                                                            |       | $                                                            | 102,124    |   | $ | 64,377 |   | $ | 35,510 |   |
| **Reconciliation of segment revenue to  consolidated revenue:**                                    | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Media                                                                                              |       | $                                                            | 382,973    |   | $ | 164,835 |   | $ | 64,143 |   |
| Affiliate Marketing                                                                                |       | 112,150                                                      |       | 95,791 |   | 73,945 |   |
| Comparison Shopping                                                                                |       | 26,217                                                       |       | 17,295 |   | 5,695 |   |
| Technology                                                                                         |       | 25,714                                                       |       | 27,015 |   | 25,462 |   |
| Inter-segment eliminations                                                                         |       | (1,438                                                       | )          | (929 | ) | (67 | ) |
| **Consolidated revenue**                                                                           |       | $                                                            | 545,616    |   | $ | 304,007 |   | $ | 169,178 |   |

 

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**RESULTS OFOPERATIONS—Fiscal Years Ended December 31, 2006 and 2005**

***Revenue.***   Consolidatedrevenue for the year ended December 31, 2006 was $545.6 million,representing a 79.5% increase over the prior year total of $304.0 million.

Media segment revenue increased to $383.0 million forthe year ended December 31, 2006 compared to $164.8 million for 2005. Theincrease of $218.1 million, or 132.3%, in Media segment revenue was primarilyattributable to the acquisitions of E-Babylon in June 2005, Webclients in June 2005,and Fastclick in September 2005, and growth in our other U.S. and Europeanmedia operations. As a result of the integration activities related tothese acquisitions, we are unable to quantify the revenue directly attributableto these acquired businesses for the year ended December 31, 2006. Pleaserefer to note 3 “Recent Business Combinations and Investments” to theconsolidated financial statements for further details regarding theseacquisitions and unaudited pro-forma revenue, net income and net income percommon share information.

Affiliate Marketing segment revenue increased to$112.2 million for the year ended December 31, 2006 compared to $95.8million in 2005. This increase of $16.4 million, or 17.1%, was due to acontinued increase in the number of customers and an increase in transactionvolumes associated with both our new and existing customers, partially offsetby a reduction in revenue from a large customer in this segment.

Comparison Shopping segment revenue increased to $26.2million for the year ended December 31, 2006 compared to $17.3 million in2005. The increase of $8.9 million, or 51.6%, was due to growth in our Europeancomparison shopping operations and the launch of Pricerunner in the UnitedStates in the second quarter of 2005.

Technology segment revenue was $25.7 million for theyear ended December 31, 2006 compared to $27.0 million in 2005, a decreaseof $1.3 million, or 4.8%. The decrease in revenue was primarily related tolower volumes of ad serving for our existing customers during the year ended December 31,2006 compared to the prior year. Technology segment revenue is highlyconcentrated with a few significant customers. A loss of, or reduction ofrevenue from, one or more of these customers could have a significant negativeimpact on the revenue of this segment.

There is no guarantee that revenue will continue togrow at historical rates, that we will close additional acquisitions in futureperiods or that any potential future acquisitions will provide the same revenueimpact as historical acquisitions.

***Cost of Revenue andGross Profit.***   Cost of revenue for the Mediasegment consists primarily of amounts that we pay to website publishers thatare directly related to a revenue-generating event. We pay these publishers ona CPC, CPA, CPL or CPM basis. Cost of revenue for the Media, Affiliate Marketing,Comparison Shopping, 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 costsand shipping and handling costs. Consolidated cost of revenue was $167.9million for the year ended December 31, 2006 compared to $88.8 million in2005, an increase of $79.0 million, or 88.9%. The consolidated gross margindecreased from 70.8% for the year ended December 31, 2005 to 69.2% for theyear ended December 31, 2006. This decrease in consolidated gross marginis a result of the higher revenue growth experienced by our Media segmentcompared to our other segments. As described more fully below, our Mediasegment gross margin is lower than the gross margin generated by our othersegments.

Cost of revenue for the Media segment increased $74.5million, or 111.2%, to $141.5 million for the year ended December 31, 2006compared to $67.0 million in 2005. The increase in cost of revenue wasprimarily related to the corresponding increase in Media segment revenue. OurMedia segment gross margin of 63.1% for the year ended December 31, 2006compared to 59.4% in 2005 reflects: a greater mix of lead generation revenue in2006, which generates a higher gross margin than other components of 

35

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Media segment revenue; andan improved gross margin generated by our display advertising network businessoperations in 2006 compared to 2005. Lead generation revenue generates a highergross margin than other components of the Media segment as certain onlineadvertising costs associated with our lead generation activities are classifiedas sales and marketing expense and not as cost of revenue.

Cost of revenue for the Affiliate Marketing segmentwas $19.8 million for the year ended December 31, 2006 compared to $17.1million in 2005. Our Affiliate Marketing segment gross margin remainedrelatively flat at 82.4% in 2006 and 82.1% in 2005. The slight improvement inAffiliate Marketing segment gross margin was due to operating leverageassociated with the higher revenue as discussed above.

Cost of revenue for the Comparison Shopping segmentwas $2.2 million for the year ended December 31, 2006 compared to $664,000in 2005. Our Comparison Shopping segment gross margin decreased to 91.7% for2006 from 96.2% in 2005 due to: an increase in revenue generated fromrevenue-share arrangements associated with traffic from publisher partners; thelaunch of Pricerunner in the United States in mid-2005; and, due to higherdepreciation expense.

Technology segment cost ofrevenue was $5.4 million for the year ended December 31, 2006 compared to$5.3 million in 2005. Our Technology segment gross margin decreased to79.0% in 2006 from 80.5% in 2005 due to the lower revenue described above andthe relatively fixed nature of the components of cost of revenue for thissegment. As the gross margin for the Technology segment is highly dependentupon revenue due to the existing operating leverage, any increases or decreasesin segment revenue may have a significant impact on segment gross margin.

***Operating Expenses:***

*Salesand Marketing.*   Sales and marketingexpenses consist primarily of compensation and employee benefits of sales andmarketing, network development and related support teams, certain online andoffline advertising costs, travel, trade shows, and marketing materials. Onlineadvertising costs included in sales and marketing expenses are comprisedprimarily of amounts that we pay to website publishers that are not directlyassociated with a revenue-generating event. Sales and marketing expenses forthe year ended December 31, 2006 were $162.9 million compared to$75.6 million in 2005, an increase of $87.3 million, or 115.4%. Salesand marketing expenses increased primarily due to the inclusion of salesand marketing expenses, including online advertising costs, for E-Babylon,acquired in June 2005, Webclients, acquired in June 2005, andFastclick, acquired in September 2005, all of which are included in theMedia segment. Additionally, increases in online advertising costs related toour lead generation and e-commerce activities from our historical businesses,an increase in stock-based compensation expense of $3.6 million, and increasesin our worldwide sales and marketing staff contributed to the increase in salesand marketing expenses. Our sales and marketing expenses as a percentage ofrevenue increased to 29.9% for the year ended December 31, 2006 comparedto 24.9% in 2005, primarily driven by higher online advertising costs asdescribed above.

*Generaland Administrative.*   General and administrativeexpenses consist primarily of facilities costs, executive and administrativecompensation and employee benefits, depreciation, professional services fees,insurance costs, and other general overhead costs. General and administrativeexpenses increased to $58.1 million for the year ended December 31,2006 compared to $40.9 million in 2005, an increase of $17.2 million, or42.1%. General and administrative expenses increased primarily due to theinclusion of incremental months of general and administrative expenses ofE-Babylon, Webclients and Fastclick, an increase of $7.0 million inprofessional services fees including audit, legal, Sarbanes-Oxley compliance,and tax, an increase of $4.9 million in stock-based compensation expense, andincreased compensation and related employee benefit costs to support the growthin our business. Our general and administrative 

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expenses as a percentageof revenue decreased to 10.7% for the year ended December 31, 2006compared to 13.5% in 2005, primarily as a result of the operating leverageassociated with higher revenue.

*Technology.*   Technologyexpenses include costs associated with the maintenance of our technologyplatforms, including compensation and employee benefits for our engineering andnetwork operations departments, as well as costs for contracted services andsupplies. Technology expenses for the year ended December 31, 2006 were $32.8million compared to $22.1 million in 2005, an increase of $10.7 million,or 48.2%. The increase in technology expenses was due primarily to the inclusionof incremental months of technology expenses of E-Babylon, Webclients andFastclick, increased stock-based compensation expense of $1.4 million, and theoverall growth in our business. Our technology expenses as a percentage of revenuedecreased to 6.0% for the year ended December 31, 2006 compared to 7.3% in2005, primarily as a result of the operating leverage associated with higherrevenue.

***Segment Income from Operations.***   Mediasegment income from operations for the year ended December 31, 2006increased 145.9%, or $55.9 million, to $94.2 million, from $38.3 million in theprior year, and represented 24.6% and 23.2% of Media segment revenue in theserespective periods. The improved operating margin in our Media segment was primarilyattributable to the acquisitions of E-Babylon, Webclients, and Fastclick, and theoperating leverage associated with the higher revenue generated by ourhistorical businesses as described above. 

Affiliate Marketing segment income from operations forthe year ended December 31, 2006 increased 28.8%, or $12.9 million, to $57.9million, from $45.0 million in the prior year, and represented 51.6% and 46.9%of Affiliate Marketing segment revenue in these respective periods. The improvedoperating margin in our Affiliate Marketing segment was primarily attributableto the operating leverage associated with the higher revenue as describedabove. 

Comparison Shopping segment income from operations forthe year ended December 31, 2006 increased to $3.1 million, from $2.0 millionin the prior year, and represented 11.7% and 11.8% of Comparison Shoppingsegment revenue in these respective periods. The $1.0 million increase inComparison Shopping segment income from operations was due to the higherrevenue as described above.

Technology segment income from operations for the yearended December 31, 2006 decreased to $7.6 million, from $9.3 million inthe prior year, and represented 29.6% and 34.4% of Technology segment revenuein these respective periods. The decrease in Technology segment incomefrom operations and the decline in the operating margin were attributable tothe lower revenue as described above and the related operating leverage impact.

***Stock-Based Compensation.******  ***We adoptedSFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123(R)”) as of January 1, 2006. SFAS 123(R) requires us torecognize stock-based compensation expense equal to the grant date fair valueof stock options issued to employees and directors. Prior to January 1,2006, we did not record any stock-based compensation expense for stock optionsgranted with an exercise price equal to the fair market value of our commonstock on the date of grant. Stock-based compensation expense for the year endedDecember 31, 2006 amounted to $11.9 million compared to $2.0 million in 2005. Theincrease of $9.9 million was due to stock-based compensation expense recognizedunder SFAS 123(R). 

We currently anticipate total stock-based compensationexpense of approximately $18 million for the year ending December 31,2007. Such amounts may change as a result of higher or lower thananticipated stock option grants to new and existing employees, differencesbetween actual and estimated forfeitures of stock options, fluctuations in themarket value of our common stock, modifications to our existing stock optionprograms, additions of new stock-based compensation programs, or other factors.

***Amortization of Intangible Assets.***   Amortizationof intangible assets for the year ended December 31, 2006 was $21.8million compared to $12.2 million in 2005. This expense represents theamortization of 

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intangible assets acquiredthrough business combinations. The increase compared to the prior year was dueto the intangible assets purchased in the E-Babylon, Webclients, Fastclick, andShopping.net acquisitions. We currently anticipate total amortization ofintangible assets of approximately $21 million for the year endingDecember 31, 2007. 

***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 $8.0million for the year ended December 31, 2006 compared to $5.1 millionfor the year ended December 31, 2005. The increase was primarilyattributable to the interest expense recorded in 2005 related to short-termdebt that was fully repaid in September 2005 (as more fully described in theLiquidity and Capital Resources section below under Short-Term Debt) and theeffects of increasing average investment yields as a result of interest rateincreases in 2005 and 2006.

***Income Tax Expense.***   Forthe year ended December 31, 2006, we recorded an income tax expense of$47.6 million compared to $28.8 million in 2005. The increase in the effectiveincome tax rate for the year ended December 31, 2006 to 43.2% from 41.5%for the year ended December 31, 2005 was primarily due to the higherprofit contribution from our domestic operations, which are generally subjectto higher tax rates than our international operations, and the impact of SFAS123(R). SFAS No. 123(R) provides that income tax effects of share-basedpayments are recognized in the financial statements for those awards which willnormally result in tax deductions under existing tax law. We do not recognize atax benefit for stock-based compensation expense related to incentive stockoptions (“ISOs”) unless the underlying shares are disposed of in adisqualifying disposition. Accordingly, stock-based compensation expenserelated to ISOs is treated as a permanent difference for income tax purposes.Due to this treatment of ISOs, the Company may experience fluctuations inits effective income tax rate during any given accounting period, dependingupon the option exercise patterns of our employees and directors.

**RESULTS OFOPERATIONS—Fiscal Years Ended December 31, 2005 and 2004**

***Revenue.***   Consolidatedrevenue 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 revenue increased to $164.8 million forthe year ended December 31, 2005 compared to $64.1 million for 2004. Theincrease of $100.7 million, or 157.0%, in Media segment revenue was primarilyattributable to the acquisitions of E-Babylon in June 2005, Webclients inJune 2005, and Fastclick in September 2005, accounting for $75.8million of the increase. The remaining increase of $24.9 million was due togrowth in our other U.S. and European media operations, offset by $1.8 millionof revenue recorded by ValueClick Japan prior to its sale in March 2004.Please refer to note 3 “Recent Business Combinations and Investments” tothe consolidated financial statements for further details regarding theseacquisitions and unaudited pro-forma revenue, net income and net income percommon share information.

Affiliate Marketing segment revenue increased to $95.8million for the year ended December 31, 2005 compared to $73.9 million in2004. This increase of $21.8 million, or 29.5%, was due to a continued increasein the number of customers and an increase in transaction volumes associatedwith both our new and existing customers.

Comparison Shopping segment revenue increased to $17.3million for the year ended December 31, 2005 compared to $5.7 million in2004. The increase of $11.6 million, or 203.7%, in Comparison Shopping segmentrevenue was due to: a) a full year of operations of Pricerunner in 2005compared to a partial year in 2004 due to the acquisition of Pricerunner inAugust 2004; and b) growth in our European comparison shopping operations.

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Technology segment revenuewas $27.0 million for the year ended December 31, 2005 compared to $25.5million in 2004, an increase of $1.6 million, or 6.1%. The increase inrevenue was primarily due to the addition of new customers and increasedvolumes of ad serving for our existing customers during 2005.

***Cost of Revenue and Gross Profit.***   Consolidatedcost of revenue was $88.8 million for the year ended December 31, 2005compared to $50.8 million in 2004, an increase of $38.0 million, or 75.0%. Theconsolidated gross margin remained consistent at 70.8% and 70.0% respectively,for the years ended December 31, 2005 and 2004, respectively.

Cost of revenue for theMedia segment increased $35.7 million, or 114.0%, to $67.0 million for the yearended December 31, 2005 compared to $31.3 million in 2004. The increase incost of revenue was primarily related to the corresponding increase in Mediasegment revenue. Our Media segment gross margin of 59.4% for the year endedDecember 31, 2005 compared to 51.2% in 2004 reflects a greater mix ofhigher-margin lead generation revenue and e-commerce revenue in 2005.

Cost of revenue for theAffiliate Marketing segment increased $2.4 million, or 16.4%, to $17.1 millionfor the year ended December 31, 2005 compared to $14.7 million in 2004.Our Affiliate Marketing segment gross margin increased to 82.1% for 2005 from80.1% in 2004. This increase was primarily due to: the operating leverage ofour Affiliate Marketing segment infrastructure associated with higher revenuelevels; and, lower depreciation expense.

Cost of revenue for theComparison Shopping segment was $664,000 for the year ended December 31,2005 compared to $149,000 in 2004. Our Comparison Shopping segment gross margindecreased to 96.2% for 2005 from 97.4% in 2004 primarily due to the launch ofPricerunner in the United States in the second quarter of 2005 and higherdepreciation expense as a result of capital equipment additions to ourcomputing infrastructure.

Technology segment cost ofrevenue was $5.3 million for the year ended December 31, 2005 compared to$5.1 million in 2004 due to higher depreciation expense as a result of capitalequipment additions to our computing infrastructure. Our Technologysegment gross margin remained relatively flat at 80.5% for 2005 and 80.0% for2004.

***Operating Expenses:***

*Sales and Marketing.*   Salesand marketing expenses for the year ended December 31, 2005 were$75.6 million compared to $36.4 million in 2004, an increase of$39.3 million, or 108.0%. Sales and marketing expenses increasedprimarily due to the inclusion of sales and marketing expenses aggregating $16.8million for E-Babylon, acquired in June 2005, Webclients, acquired inJune 2005, and Fastclick, acquired in September 2005, all of whichare included in the Media segment, and $4.8 million for Pricerunner, acquiredin August 2004, which is included in the Comparison Shopping segment.Additionally, increases in online advertising costs related to our leadgeneration and e-commerce activities from our historical businesses, andincreases in our worldwide sales staff contributed to the remaining increase insales and marketing expenses. Our sales and marketing expenses as a percentageof revenue increased to 24.9% for the year ended December 31, 2005compared to 21.5% in 2004, primarily driven by the higher online advertisingcosts described above.

*General andAdministrative.*   Generaland administrative expenses increased to $40.9 million for the year endedDecember 31, 2005 compared to $27.4 million in 2004, an increase of$13.5 million, or 49.2%. General and administrative expenses increasedprimarily due to the inclusion of general and administrative expenses totaling$6.9 million for Pricerunner, E-Babylon, Webclients, and Fastclick andincreased personnel costs and professional services fees to support both thegrowth in our business and compliance with Sarbanes-Oxley. Our general andadministrative expenses as a percentage of revenue decreased to 13.5% for theyear ended December 31, 2005 compared to 16.2% in 2004, primarily as aresult of the operating leverage associated with higher revenue.

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*Technology.*   Technologyexpenses for the year ended December 31, 2005 were $22.1 million comparedto $16.0 million in 2004, an increase of $6.1 million, or 38.2%. Theincrease in technology expenses was due primarily to the acquisitions ofPricerunner, E-Babylon, Webclients, and Fastclick and the overall growth in ourbusiness. Our technology expenses as a percentage of revenue decreased to 7.3%for the year ended December 31, 2005 compared to 9.5% in 2004, primarilyas a result of the operating leverage associated with higher revenue.

***Segment Income fromOperations.***   Mediasegment income from operations for the year ended December 31, 2005increased 298.9% to $38.3 million, from $9.6 million in the prior year, andrepresented 23.2% and 15.0% of Media segment revenue in these respectiveperiods. The increase of $28.7 million in Media segment income fromoperations was attributable to: the acquisitions of E-Babylon, Webclients, andFastclick; and, the operating leverage associated with the higher revenuegenerated by our historical businesses as described above.

Affiliate Marketing segment income from operations forthe year ended December 31, 2005 increased 53.0% to $45.0 million, from$29.4 million in the prior year, and represented 46.9% and 39.7% of AffiliateMarketing segment revenue in these respective periods. The improvedoperating margin in our Affiliate Marketing segment was primarily attributableto the operating leverage associated with the higher revenue as described aboveand lower depreciation expense.

Comparison Shopping segment income from operations forthe year ended December 31, 2005 increased 23.8% to $2.0 million, from$1.6 million in the prior year, and represented 11.8% and 28.8% of ComparisonShopping segment revenue in these respective periods. The decrease in theComparison Shopping segment operating margin in 2005 was due to the launch ofPricerunner in the United States in the second quarter of 2005 and higherdepreciation expense as a result of capital equipment additions to ourcomputing infrastructure.

Technology segment income from operations for the yearended December 31, 2005 increased 23.3% to $9.3 million, from $7.5 millionin the prior year, and represented 34.4% and 29.6% of Technology segmentrevenue in these respective periods. The improved operating margin in ourTechnology segment was primarily attributable to the operating leverageassociated with the higher revenue as described above.

***Stock-BasedCompensation.******  ***Stock-based compensation expense forthe year ended December 31, 2005 was $2.0 million compared to $739,000 in2004. The increase was due to $1.7 million of stock-based compensationassociated with 0.3 million share-equivalent Stock Appreciation Rights (“SARs”)issued to certain former employees of Fastclick in October 2005.Stock-based compensation expense for the year ended December 31, 2005 alsoincludes $270,000 of amortization related to the intrinsic value of unvestedcommon stock options assumed in business combinations, compared to $739,000 in2004. The decrease is due to certain options assumed in business combinationsfrom prior years becoming fully vested during 2005.

***Amortization ofIntangible 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.

***RestructuringBenefit, 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 

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the first quarter of 2005,we relocated to new principal corporate facilities and vacated several premisesthat we had been occupying under operating leases with varying remaining lease terms.The lease exit charge associated with vacating these leased premises during theyear ended December 31, 2005 was $515,000.

***Interest Income,net.***   Interest income, net,was $5.1 million for the year ended December 31, 2005 compared to$3.7 million for the year ended December 31, 2004. The increase wasprimarily attributable to the effects of increasing average investment yieldsfrom 2004 as a result of interest rate increases from mid-2004 throughthe end of 2005, offset by interest paid on our short-term debt of $794,000outstanding during 2005 (as more fully described in the Liquidity and CapitalResources section below under Short-Term Debt).

***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.

**Liquidity andCapital Resources**

Since our inception, we have financed our operationsthrough working capital generated from operations, equity financing andcorporate development activities. At December 31, 2006, our combined cashand cash equivalents and marketable securities balances totaled$281.6 million.

Net cash provided by operating activities totaled $114.2million for the year ended December 31, 2006 compared to$60.7 million in 2005 and $46.6 million in 2004. The increase in net cashprovided by operating activities of $53.6 million from 2005 to 2006 was largelydue to an increase of $21.9 million in our net income adjusted for the impactof non-cash items including depreciation and amortization expense resultingfrom our 2005 and 2006 acquisitions and non-cash, stock-based compensationexpense as a result of the adoption of SFAS 123(R) in 2006, offset by achange in the classification of excess tax benefits from stock option exercisesfrom the operating activities section of the consolidated statement of cashflows to the financing activities section as required by SFAS 123(R). Excesstax benefits are realized tax benefits from tax deductions for exercised stockoptions in excess of the deferred tax asset attributable to stock-basedcompensation expense for such stock options. In addition, we experienced a netpositive working capital change in 2006, largely as a result of a higher incometaxes payable balance, compared to a net negative working capital change in2005 which was largely the result of higher accounts receivable balances. Theincrease in net cash provided by operating activities from 2004 to 2005 of$14.1 million was primarily attributable to increased net income adjusted forthe impact of non-cash items including increased depreciation and amortizationexpense of $8.9 million, and a lower tax benefit from deferred income taxes of$4.6 million.

Net cash used in investing activities for the yearended December 31, 2006 of $32.5 million was the result of net cash usedof $11.1 million for the acquisition of Shopping.net, $10.2 million forproperty and equipment purchases, $10.2 million of net purchases of marketablesecurities, and $1.0 million of additional consideration paid related to ouracquisition of HiSpeed Media in December 2003. For the year ended December 31,2005, net cash used in investing activities of $48.2 million primarilyresulted from the use of $59.6 million for the acquisitions of E-Babylon,Webclients and Fastclick, and $9.0 million of property and equipment purchases,offset by net sales of marketable securities of $20.4 million. For the yearended December 31, 2004, net cash used in investing activities totaled$66.1 million and resulted primarily from the use of $26.7 millionfor the acquisition of Pricerunner, net purchases of marketable securities of$35.7 million, and $6.0 million of property and equipment purchases, offset bynet proceeds from the sale of our equity interest in our Japan subsidiary of$2.4 million.

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Net cash used in financingactivities for the year ended December 31, 2006 of $54.6 million wasprimarily attributable to $103.4 million used to repurchase our common stockunder our stock repurchase program as described below under Stock RepurchaseProgram, offset by proceeds of $30.4 million received from the exercises ofstock options and $18.6 million of excess tax benefits from stock optionexercises. Net cash provided by financing activities for the year ended December 31,2005 of $8.5 million was primarily attributable to proceeds received from theexercises of stock options of $14.4 million, partially offset by the repurchaseof $5.7 million of the Company’s common stock under our Stock RepurchaseProgram. For the year ended December 31, 2004, net cash used in financingactivities of $8.7 million was primarily attributable to proceeds received fromthe exercises of stock options of $11.0 million, partially offset by the repurchaseof $2.2 million of the Company’s common stock under our Stock RepurchaseProgram.

*Short-Term Debt*

In June 2005, inconnection with the closing of the acquisition of Webclients as discussed innote 3 to the consolidated financial statements, we entered into a MasterRepurchase Agreement (“Repurchase Agreement”) with a major financialinstitution under which we borrowed $91.7 million and pledged marketablesecurities with a fair value of $94.2 million as collateral. Under the terms ofthe Repurchase Agreement, the Company was required to pay interest at theFederal Funds rate plus 30 basis points. For the year ended December 31,2005, the Company incurred interest expense related to the Repurchase Agreementof $794,000 at an average annualized rate of 3.73%. The Company repaid alloutstanding principal and interest due under the Repurchase Agreement as of September 30,2005 using a combination of cash generated from operations, maturities ofpreviously pledged marketable securities and cash acquired in the Fastclickacquisition. While we may elect to borrow additional funds in the futureunder a similar agreement, the amount of such borrowing and the related termswill be subject to approval by the financial counter-party and there can be noguarantee that we will be able to borrow upon terms that are favorable to us.

*Stock RepurchaseProgram*

In September 2001, our board of directorsauthorized a stock repurchase program (“the Program”) to allow for therepurchase of shares of our common stock at prevailing market prices in theopen market or through unsolicited negotiated transactions. Since theinception of the Program and through December 31, 2005, our board ofdirectors had authorized a total of $95 million for repurchases under theProgram and we had repurchased a total of 25.7 million shares of our commonstock for $75.9 million. As of December 31, 2005, we had $19.1 millionavailable under the Program. The amounts authorized by our board of directorsexclude broker commissions.

During the year ended December 31,2006, our board of directors authorized two increases to the Program, totalingan additional $150 million, and we repurchased an additional 6.9 millionshares of our common stock for $103.4 million, including brokercommissions. As of December 31, 2006, up to an additional$65.9 million of our capital may be used to repurchase shares of ouroutstanding common stock under the Program. Repurchases have been funded fromavailable working capital and all shares have been retired subsequent to theirrepurchase. There is no guarantee as to the exact number of shares that will berepurchased by us and we may discontinue repurchases at any time thatmanagement or the board of directors determines additional repurchases are notwarranted.

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*Commitments andContingencies*

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

| ** **                     | ** ** | **Payments due by period** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1 to less  than  3 years** | ** ** | **3 to less  than  5 years** | ** ** | **More than  5 years** | ** ** |
| Lease obligations:             |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating leases (1)           |       | $                                         | 17,316     |   |   | $ | 5,712 |   |   | $ | 8,906 |   |   | $ | 2,586 |   |   |   | $ | 112 |   |   |
| Purchase  obligations (2)      |       | 1,416                                     |       |   | 1,165 |   |   | 251 |   |   | — |   |   |   | — |   |   |
| Total contractual  obligations |       | $                                         | 18,732     |   |   | $ | 6,877 |   |   | $ | 9,157 |   |   | $ | 2,586 |   |   |   | $ | 112 |   |   |

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(1)          The operating leaseobligations shown in the table have not been reduced by minimum non-cancelablesublease rentals aggregating $1.8 million. The Company remains secondarilyliable under these leases in the event that any 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, 2006 are as follows (inthousands):

| ** **                 | ** ** | **Other Commercial Commitments** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **Total**                                  | ** ** | **Less than  1 year** | ** ** | **1 to less  than  3 years** | ** ** | **3 to less  than  5 years** | ** ** | **More than  5 years** | ** ** |
| Standby letters  of credit |       | $                                          | 585        |   |   | — |   |   |   | — |   |   |   | $ | 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 $500,000 maintained bythe Company at financial institutions that issued the standby letters of creditare included in cash and cash equivalents as of December 31, 2006.

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 suchagreements, services to be provided by us, or from intellectual propertyinfringement claims made by third-parties. In addition, we have entered intoindemnification agreements with our directors and certain of our officers andemployees that will require us, among other things, to indemnify them againstcertain liabilities that may arise by reason of their status or service asdirectors, officers or employees. We have also agreed to indemnify certainformer officers, directors and employees of acquired companies in connectionwith the acquisition of such companies. We maintain director and officerinsurance, which may cover certain liabilities arising from our obligation toindemnify our directors and certain of our officers, employees and formerofficers, directors 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 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 may be reduced. In addition, the equity ordebt securities that we issue may have rights, preferences or privileges seniorto 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 promotion and advertising that will be required to launch our newproducts and services and achieve and maintain a competitive position in themarketplace;

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

·       capitalimprovements to new and existing facilities;

·       technologicaladvances;

·       ourcompetitors’ responses to our products and services;

·       ourpursuit of strategic transactions, including mergers and acquisitions;

·       ourstock repurchase program; and

·       our relationships with ouradvertiser customers and publisher partners.

**Off-Balance SheetArrangements**

None

**Critical AccountingPolicies 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 theseconsolidated financial statements requires us to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenue, and expenses,and related disclosure of contingent assets and liabilities. On an ongoingbasis, we evaluate our estimates and assumptions, including, but not limitedto, those related to revenue recognition, allowance for doubtful accounts andsales credits, investments, income taxes, goodwill and other intangible assets,and contingencies and litigation. We base our estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates and assumptions.

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

·       ***Revenue Recognition.******  ***We recognize revenuein accordance with Staff Accounting Bulletin (“SAB”) No. 104, “RevenueRecognition in Financial Statements” and Emerging Issues Task Force 

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(“EITF’’) Issue No. 00-21,“Revenue Arrangements with Multiple Deliverables.’’ Accordingly, we recognizerevenue when the following criteria have been met: persuasive evidence of anarrangement exists, no significant Company obligations remain, collection ofthe related receivable is reasonably assured, and the fees are fixed or determinable.To date, our agreements have not required a guaranteed minimum number ofclick-throughs or actions.

OurMedia and Comparison Shopping segment revenue is recognized in the period thatthe advertising impressions, click-throughs or actions occur, when lead-basedinformation is delivered or, for our e-commerce business, when consumerproducts are shipped, provided that no significant Company obligations remain,collection of the resulting receivable is reasonably assured, and the fees arefixed or determinable. We act as a principal in Media and Comparison Shoppingsegment transactions in that we are the primary obligor to the advertisercustomer. In accordance with the provisions of EITF Issue No. 99-19,“Reporting Revenue Gross as a Principal versus Net as an Agent,” (“EITF 99-19”),revenue is recognized in our Media and Comparison Shopping segments on a grossbasis and publisher expenses that are directly related to a revenue-generatingevent are recorded as a component of cost of revenue.

Revenuefor our Affiliate Marketing segment is generated primarily from: commissionfees earned from transactions, including product sales made by our advertisercustomers, occurring on our affiliate marketing networks; fixed monthly feesfrom program management services; fees earned, primarily on a CPC basis, fromsearch syndication services; commission fees earned for our search enginemarketing (“SEM”) services; and, to a lesser extent, implementation fees.Commission fee revenue from transactions on our affiliate marketing networksand from our SEM services are recognized on a net basis in accordance with theprovisions of EITF 99-19 as we act as an agent in these transactions andthe payments to publishers are the contractual obligation of the advertisercustomers. Commission fee revenue is recognized in the period that ouradvertiser customer generates a sale or other agreed-upon action on the Company’saffiliate marketing networks or as a result of our SEM services, provided thatno significant Company obligations remain, collection of the resultingreceivable is reasonably assured, and the fees are fixed or determinable.Program management services fees revenue is recognized over the contractualservice period, provided no significant Company obligations remain, collectionof the resulting receivable is reasonably assured, and the fees are fixed ordeterminable. Search syndication services revenue is recognized on a grossbasis in accordance with the provisions of EITF 99-19, due to the factthat we are the primary obligor to our customer, and publisher expenses thatare directly related to a revenue-generating event are recorded as a componentof cost of revenue. Search syndication services revenue is recognized in theperiod that a visitor to a website in our search syndication network completesa qualified search transaction, provided no significant Company obligationsremain, collection of the resulting receivable is reasonably assured, and thefees are fixed or determinable. Implementation fee revenue is recognized overthe estimated customer lives, provided no significant Company obligationsremain, collection of the resulting receivable is reasonably assured, and thefees are fixed or determinable.

Revenue for our Technologysegment is generated primarily from fixed monthly fees or monthly transactionvolume-based fees earned by us for making our technologies available to our customerson an application services provider (“ASP”) basis. Such revenue is recognizedmonthly provided no significant Company obligations remain, collection of theresulting receivable is reasonably assured, and the fees are fixed ordeterminable. We also generate a nominal amount of other services fee revenuein our Technology segment. Such other services fee revenue is recognized whenthe services are performed, provided no significant Company obligations remain,collection of the resulting receivable is reasonably assured, and the fees arefixed or determinable.

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Our customers do not havethe right to take possession of our software at any time during or after theterm of the relevant customer agreement. Accordingly, as prescribed by EITFIssue No. 00-3, “Application of AICPA Statement of Position 97-2to Arrangements That Include the Right to Use Software Stored on Another Entity’sHardware,” our revenue recognition is outside the scope of Statement ofPosition (“SOP”) No. 97-2, “Software Revenue Recognition.”

Deferred revenue consistsprimarily of the unrecognized portion of implementation fee revenue for ourAffiliate Marketing segment. Prepayments and amounts on deposit from customersare classified as an advertiser deposit liability.

We estimate a provisionfor sales returns which is recorded as a reduction to revenue. The provisionfor sales returns reflects an estimate of product returns from consumers of ourAffiliate Marketing customers and product returns from our e-commercecustomers. In determining the estimate for sales returns, we rely uponhistorical data, contract information and other factors. The estimatedprovision for sales returns can vary from actual results. More or less productmay be returned from consumers of our Affiliate Marketing customers and fromour e-commerce customers as compared to what was estimated. These factorsand unanticipated changes in the economic and industry environment could makethe provision for sales returns estimates differ from actual returns.

Werecorded a provision for sales returns of $7.3 million and $5.7 million as areduction to our revenue during the years ended December 31, 2006 and2005, respectively. The increase in the provision for sales returns is a resultof higher affiliate marketing revenue and e-commerce revenue. If ourassumptions with regard to the historical returns ratios were to change suchthat our estimated returns ratios were to increase by a factor of 10%, theresult would be an increase in the December 31, 2006 allowance for salesreturns of $371,000 and a corresponding decrease to revenue for the year thenended.

·       ***Allowance for Doubtful Accounts andSales Credits.******  ***Weestimate our allowance for doubtful accounts using two methods. First, weevaluate specific accounts where information indicates our customers may havean 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 based upon our historical collections and write-off experience. Theamounts calculated from each of these methods are analyzed to determine thetotal amount of the allowance for doubtful accounts. We also estimate anallowance for sales credits based upon our historical sales credits experience.Historically, actual bad debt write-offs and sales credits have notsignificantly differed from our estimates. However, factors including higherthan expected default rates or sales credits may result in future write-offsgreater than our estimates.

As of December 31,2006, we recorded an allowance for doubtful accounts and sales credits of$4.1 million, which represents an allowance percentage of 3.7% of ourgross accounts receivable balance of $111.9 million. If our assumptions andestimates regarding the ultimate collectibility of our outstanding accountsreceivable balances and/or our sales credits changed to warrant a 100 basispoint increase in the ending allowance percentage, the result would be anincrease in the December 31, 2006 allowance for doubtful accounts andsales credits of approximately $1.1 million and a corresponding decrease in ouroperating income for the year then ended.

·       ***Investments.******  ***We record an impairment chargewhen we believe an asset has experienced a decline in value that is other thantemporary. Future adverse changes in market conditions or poor 

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operating results ofunderlying investments could result in losses or an inability to recover thecarrying value of the investments that may not be reflected in an investment’scurrent carrying value, thereby possibly requiring an impairment charge in thefuture. Factors considered by management in assessing whether another-than-temporary impairment has occurred include: the nature of theinvestment; 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 to maturity. When it isdetermined that an other-than-temporary impairment has occurred, the investmentis written down to market value at the end of the period in which it is determinedthat an other-than-temporary decline has occurred.

As of December 31,2006, we have net unrealized losses of $443,000 on a marketable securitiesportfolio with a total fair value of $204.8 million. Our marketable securitiesportfolio consists of high-grade municipal, corporate and U.S. governmentagencies obligations. Management has determined that the unrealized losses asof December 31, 2006 do not represent an other-than-temporary decline invalue, primarily due to both our assessment that there are no specific adverseconditions noted affecting the investments or the related investees’ creditratings or ability to satisfy their obligations in full, and our ability tohold any individual investment through a downturn in market value which may becaused by short-term interest rate movements. If our assessment regarding thesefactors were to change, we may be required to record an impairment charge equalto the difference between the fair value of the securities and the amortizedcost of the securities. As of December 31, 2006, if the determination wasmade that the current decline in market value of certain of our investments wasother than temporary, the related impairment charge could be as much as $446,000.Further, future adverse conditions impacting our marketable securitiesportfolio, such as adverse changes in the financial condition or credit ratingsof debt issuers, or adverse changes in the overall economic environment, mayresult in future impairment charges greater than this amount.

·       ***Stock-Based Compensation.***On January 1,2006, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS123(R)”) which requires the measurement and recognition of compensation expensefor all share-based awards issued to employees and directors based on estimatedfair values. SFAS 123(R) supersedes our previous accounting underAccounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” (“APB 25”) for periods beginning January l, 2006. In March 2005,the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating toSFAS 123(R). We have applied the provisions of SAB 107 in our adoption of SFAS123(R).

We adopted SFAS 123(R) usingthe modified prospective transition method, which requires the application ofthe accounting standard as of January 1, 2006, the first day of theCompany’s fiscal year. Our consolidated financial statements as of and for theyear ended December 31, 2006 reflect the impact of SFAS 123(R). Inaccordance with the modified prospective transition method, our consolidatedfinancial statements for prior periods have not been restated to reflect, anddo not include, the impact of SFAS 123(R). Stock-based compensation expense forthe year ended December 31, 2006 was $11.9 million, which consisted ofstock-based compensation expense related to employee and director stock optionsof $10.4 million and stock-based compensation expense related to SARs of $1.5million.

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SFAS123(R) requires us to estimate the fair value of stock-based awards on thedate of grant using an option-pricing model. We calculated the estimated fairvalue of our stock options granted during 2006 on the date of grant using theBlack-Scholes option-pricing model and the following weighted-averageassumptions:

| Risk-free interest  rates  |   | 4.7 | %      |
|----------------------------|--------|-----|--------|
| Expected lives  (in years) |   | 3.6 |   |
| Dividend yield             |   | 0   | %      |
| Expected volatility        |   | 49  | %      |

 

Our computation of expected volatility for the yearended December 31, 2006 was based on a combination of historical andmarket-based implied volatility from traded options on the Company’s commonstock. We believe that including market-based implied volatility in thecalculation of expected volatility results in a more accurate measure of thevolatility expected in future periods. Prior to 2006, the computation ofexpected volatility was based entirely on historical volatility. We estimatedthe expected life of each stock option granted in 2006 using the short-cutmethod permissible under SAB 107, which utilizes the weighted-average expectedlife of each tranche of the granted stock option, which was determined based onthe sum of each tranche’s vesting period plus one-half of the period from thevesting date of each tranche to its expiration. The risk-free interest rate isbased on the implied yield available on U.S. Treasury securities with anequivalent remaining term. Based upon the assumptions listed in the abovetable, the weighted-average grant date fair value of stock options issued forthe year ended December 31, 2006 was $6.93. The value of the portion ofstock options that are ultimately expected to vest is recognized as an expenseover the requisite service periods using the straight-line attribution method.If our expectations regarding the number of stock options that ultimately vestare incorrect, we may experience unexpected volatility in the stock-basedcompensation expense ultimately recorded in any given period.

The fair value of stockoptions, as determined by the Black-Scholes option-pricing model, can varysignificantly depending on the assumptions used. For example, an increase toeither the weighted-average expected lives or expected volatility assumptionswill result in a higher stock option fair value. Holding all other assumptionssteady, if our estimate of the weighted-average expected lives were to increaseby a factor of 10% from 3.6 years to 4.0 years, the weighted-average fair valueof stock options issued during the year ended December 31, 2006 would haveincreased to $7.35, resulting in an increase in the aggregate fair value ofstock options granted in the period, and therefore an increase in stock-basedcompensation expense recorded over the vesting period of the stock options, of$571,000. Further, holding all other assumptions steady, if our estimate ofweighted-average expected volatility were to increase by a factor of 10% from49% to 54%, the weighted-average fair value of stock options issued during theyear ended December 31, 2006 would have increased to $7.46, resulting inan increase in the aggregate fair value of stock options granted in the period,and therefore an increase in stock-based compensation expense recorded over thevesting period of the stock options, of $718,000.

·  ***Income Taxes.***    We use the asset and liabilitymethod of accounting for income taxes in accordance with SFAS No. 109,“Accounting for Income Taxes” (“SFAS 109”). Under this method, income taxexpense is recognized for the amount of: (i) taxes payable or refundablefor the current year; and, (ii) deferred tax consequences of temporarydifferences resulting from matters that have been recognized in an entity’sfinancial statements or tax returns. Deferred tax assets and liabilities aremeasured using enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recovered orsettled. The effect on deferred tax assets and liabilities of a change in taxrates is recognized in the results of operations in the period that includesthe enactment date. A valuation allowance is provided to reduce the deferredtax assets 

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reported if, basedon 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 beenrecognized on a tax return for matters that are considered contingent upon theoutcome of an uncertain tax position. Applicable interest is included as acomponent of income tax expense and income taxes payable.

Management must make judgments, assumptions andestimates to determine our provision for income taxes and also our deferred taxassets and liabilities and any valuation allowance to be recorded against adeferred tax asset. Our judgments, assumptions and estimates relative to theprovision for income taxes and related balance sheet accounts take into accountenacted tax laws and regulations, our interpretation of tax laws andregulations and possible outcomes of audits if and when conducted by taxauthorities. Changes in tax laws and regulations, or our interpretation of taxlaws and regulations and the resolution of tax audits, if and when conducted bytax authorities, could significantly impact the amounts recorded related toincome taxes in our consolidated financial statements.

As of December 31, 2006, we have gross deferred taxassets of $30.5 million, relating to net operating loss carryforwards andcertain other temporary differences. As of December 31, 2006, based uponboth positive and negative evidence available, we have determined it is morelikely than not that certain deferred tax assets primarily relating to netoperating loss carryforwards in foreign jurisdictions may not be realizable.Accordingly, we have recorded a valuation allowance of $1.2 millionagainst these deferred tax assets as of December 31, 2006. Should wedetermine in the future that we will be able to realize these deferred taxassets, or not be able to realize all of part of our remaining net deferred taxassets recorded as of December 31, 2006, an adjustment to the net deferredtax assets would impact net income in the period such determination was made.

We may also have available up to an additional $127.8 millionand $85.8 million of net operating loss carryforwards for federal and statepurposes, respectively, the benefit of which has not been reflected in our consolidatedfinancial statements. We believe that we may be able to establish with taxauthorities that we are entitled, under the applicable statutes 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. We havedetermined that the future tax benefits associated with these net operatingloss carryforwards are contingent upon the ultimate outcome of an uncertain taxposition and we have not recorded a benefit related to these net operating losscarryforwards. If our income tax position with regard to these net operatingloss carryforwards were to be upheld under examination, we would record anincome tax benefit in the period that such determination was made. As morefully explained below under “Recently Issued Accounting Standards", we arecurrently evaluating the impact of an interpretation of SFAS 109 relatingto uncertain tax positions, which will be effective for us on January 1,2007.

·       ***Goodwill and Other Intangible Assets*.****  **As of December 31, 2006, we had goodwilland other intangible assets with net balances of $278.1 million and $91.4million, respectively. Goodwill is tested for impairment at the reporting unitlevel on an annual basis as of December 31 or between annual testswhenever facts and circumstances indicate that goodwill might be impaired. Asof December 31, 2006, our reporting units consisted of the Media,Affiliate Marketing, Comparison Shopping, and Technology operating segments.Application of the goodwill impairment test requires certain estimates andassumptions, including the identification of reporting units, assigning assetsand liabilities to reporting units, and determining the fair value of eachreporting unit. We have determined the fair value of each reporting unit usinga discounted cash flow approach, giving consideration to the market valuationapproach. Significant judgments required to estimate the fair 

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value of eachreporting unit include, but are not limited to, estimating future revenuegrowth rates, estimating future operating margins and determining appropriatediscount rates. Changes in these estimates and assumptions could materiallyaffect the determination of fair value for each reporting unit which couldresult in goodwill impairment. We completed our annual goodwill impairment testas of December 31, 2006 and determined that no adjustment to the carryingvalue of goodwill for any of our reporting units was required. Based on our2006 impairment test, there would have to be a significant unfavorable changeto our estimates and assumptions used in such calculations for an impairment toexist.

We amortize otherintangible assets over their estimated economic useful lives. We record animpairment charge on these assets when we determine that their carrying valuemay not be recoverable. In determining if impairment exists, we estimate theundiscounted cash flows to be generated from the use and ultimate dispositionof these assets. If impairment is indicated based on a comparison of the assets’carrying values and the undiscounted cash flows, the impairment loss ismeasured as the amount by which the carrying amount of the intangible assetsexceeds the fair market value of the intangible assets. Our estimates of futurecash flows attributable to our other intangible assets require significantjudgments and assumptions, including anticipated industry and economicconditions. Different assumptions and judgments could materially affect thecalculation of the fair value of the other intangible assets which couldtrigger impairment. There was no impairment of our other intangible assets asof December 31, 2006.

·       ***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 the specific factsand circumstances of each matter.

**Recently Issued Accounting Standards**

In September 2006,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “FairValue Measurements” (“SFAS 157”). This Statement defines fair value as used innumerous accounting pronouncements, establishes a framework for measuring fairvalue under GAAP and expands disclosure related to the use of fair valuemeasures in financial statements. SFAS 157 is effective for theCompany on January 1, 2008. We are in the process of evaluating the impactof SFAS 157 on our consolidated financial position and results of operations.

In September 2006,the SEC released Staff Accounting Bulletin (“SAB”) No. 108, “Considering theEffects of Prior Year Misstatements When Quantifying the Misstatements inCurrent Year Financial Statements” (“SAB 108”), which provides interpretiveguidance on how the effects of the carryover or reversal of prior yearfinancial statement misstatements should be considered in quantifying a currentyear financial statement misstatement. SAB 108 provides transition guidance forcorrecting errors and requires registrants to quantify financial statementmisstatements using both the balance sheet and income statement approaches andto evaluate whether either approach results in an error that is material inlight of relevant quantitative and qualitative factors. In the year of adoptiononly, if the effect is determined to be material, SAB 108 allows registrants torecord the effect as a cumulative-effect adjustment to beginning-of-yearretained earnings. SAB 108 does not change the requirements of SFAS No. 154,“Accounting Changes and Error Corrections—a replacement of APB No. 20 andFASB Statement No. 3”, for the correction of an error in financialstatements. Further, SAB 108 does not change the SEC’s previous guidance in SABNo. 99, “Materiality”, with regard to evaluating the materiality offinancial statement misstatements. We adopted SAB 108 for the fiscal year endedDecember 31, 2006 and such adoption had no impact on our consolidatedfinancial position or results of operations.

In June 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN48 provides guidance on the 

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recognition,measurement, derecognition, classification, and disclosures related touncertain tax positions and interest and penalties related to uncertain taxpositions. Specifically, FIN 48 establishes a “more-likely-than-not” criteriafor evaluating uncertain tax position recognition for financial statementpurposes, based upon the technical merits of the position. FIN 48 is effectivefor the Company as of January 1, 2007. As more fully described above under“Critical Accounting Policies and Estimates”, as of December 31, 2006 wehave not recorded a benefit related to certain net operating losscarryforwards. The amount that we ultimately realize from these net operatingloss carryforwards is subject to an uncertain tax position that depends on theoutcome of examination by tax authorities. Considering all informationcurrently available to us related to factors relevant to the measurement ofthis uncertain tax position, we currently expect to recognize a benefit relatedto these net operating loss carryforwards upon adoption of FIN 48. The impactof such benefit will be recorded as a change in accounting principle, primarilythrough an adjustment to retained earnings, as of January 1, 2007.However, our assessment of the impact of adopting FIN 48 is not yetcomplete. Accordingly, the ultimate amount of the expected benefit, and theclassification of such benefit within the Company’s consolidated balance sheetat January 1, 2007, has not yet been determined.

**Inflation**

Inflation was not amaterial factor in either revenue or operating expenses during the fiscal yearsended December 31, 2006, 2005 and 2004.

**ITEM7A.**        QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

**INTEREST RATE RISK**

The primary objective ofour investment activities is to preserve capital while at the same timemaximizing yields without significantly increasing risk. We are exposed to theimpact of interest rate changes and changes in the market values of our investmentsin marketable securities. Our interest income is sensitive to changes in thegeneral level of U.S. interest rates. Our exposure to market rate risk forchanges in interest rates relates primarily to our marketable securitiesportfolio. We have not used derivative financial instruments in our marketablesecurities portfolio. We invest a portion of our excess cash in debtinstruments of high-quality issuers and, by policy, limit the amount of creditexposure to any one issuer. We protect and preserve our invested funds bylimiting default, market and reinvestment risk. Investments in both fixed-rateand floating-rate interest-earning instruments carry a degree of interest raterisk. Fixed-rate securities may have their fair market value adversely impacteddue to a rise in interest rates, while floating-rate securities may produceless income than expected if interest rates fall. Due in part to these factors,our future investment income may fall short of expectations due to changes ininterest rates, or we may suffer losses in principal if forced to sellsecurities which have declined in market value due to changes in interestrates.

Marketable securities asof December 31, 2006 consist of high-grade municipal, corporate and U.S.government agencies securities with maturities of less than two years. Management’sinternal investment policy requires a weighted-average time to maturity of theoverall investment portfolio to be no greater than 365 days and allows forauction-rate securities to be weighted based on the auction reset date. As ofDecember 31, 2006, our investments in marketable securities had aweighted-average time to maturity of 205 days. We classify all of ourinvestments as available-for-sale. Available-for-sale securities are carried atfair value, with unrealized gains and losses, net of tax, reported in aseparate component of stockholders’ equity. As of December 31, 2006, netunrealized losses in our investments in marketable securities aggregated$443,000.

During the year endedDecember 31, 2006, our investments in marketable securities yielded anannual effective interest rate of 3.59% and an annual taxable equivalent yieldof 4.58%. If interest rates were to decrease 100 basis points, the result wouldbe an annual decrease in our interest income related to our cash and cashequivalents and marketable securities of approximately $2.8 million.

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**FOREIGN CURRENCYRISK**

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 of our foreign subsidiaries, which denominate their transactionsprimarily in British Pounds, Euros and Swedish Krona. The effect of foreigncurrency exchange rate fluctuations for the year ended December 31, 2006was 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 $7.1 million, a reduction of income before income taxes ofapproximately $0.6 million and a reduction of net assets, excludingintercompany balances, of approximately $7.7 million. Historically, we have nothedged our exposure to currency exchange rate fluctuations. Accordingly, we mayexperience economic loss and a negative impact on earnings, cash flows orequity as a result of foreign currency exchange rate fluctuations. We assessthe need to utilize financial instruments to hedge currency exchange rateexposures on an ongoing basis. As of December 31, 2006, we had$28.3 million in cash and cash equivalents and $14.5 million in totalcurrent liabilities denominated in foreign currencies, including the BritishPound, Euro 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 regulations and restrictions, and foreigncurrency exchange rate volatility. Accordingly, our future results could bematerially and adversely affected by changes in these or other factors.

**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 beginning on page F-1.

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

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES

**Disclosure Controlsand 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 31,2006, 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 Exchange Act).Based on this evaluation, the Company’s CEO and CFO have concluded that theCompany’s disclosure controls and procedures are effective at the reasonableassurance level as of December 31, 2006 to ensure that the informationrequired to be disclosed by it in reports or submitted under the Exchange Actis recorded, processed, summarized, 

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andreported within the time periods specified in the rules and forms of theSEC and that such information is accumulated and communicated to management,including the Company’s CEO and CFO, as appropriate, to allow timely decisionsregarding required disclosure.

**Management’s Reporton Internal Control over Financial Reporting**

The Company’smanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act. The Company’s internal control over financialreporting is designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of consolidated financial statementsfor external purposes in accordance with generally accepted accountingprinciples. The Company’s internal control over financial reporting includesthose policies and procedures that:

(i)            pertainto the maintenance 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.

The Company’s management has assessed theeffectiveness of the Company’s internal control over financial reporting as of December 31,2006. 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, 2006.

Company management’s assessmentof the effectiveness of the Company’s internal control over financial reportingas of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, anindependent registered public accounting firm, as stated in their report whichappears in this annual report on Form 10-K.

**Changes in InternalControl over Financial Reporting**

There were no changes inthe Company’s internal control over financial reporting during the three-monthperiod ended December 31, 2006 which have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

**ITEM 9B.**       OTHERINFORMATION

None

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**PART III.**

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

The information required by this Item is incorporatedby reference from our definitive Proxy Statement for the 2007 Annual Meeting ofStockholders to be held June 1, 2007.

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 “About Us.” If we make substantive amendments to theCode 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 with applicablerules and regulations.

**ITEM 11.**         EXECUTIVECOMPENSATION

The information requiredby this Item is incorporated by reference from our definitive Proxy Statementfor the 2007 Annual Meeting of Stockholders to be held June 1, 2007.

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

**Equity CompensationPlan Information**

Thefollowing table provides aggregated information with respect to ourcompensation plans under which equity securities of ValueClick are authorizedfor issuance as of December 31, 2006:

| **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        |       |                                                                                                                                             | 5,022,856  |                                                                                                           |       |                                                                                                                                       | $          | 12.64 |   |   |   | 3,901,711 |   |   |
| Equity  compensation plans not approved by security holders(2) |       |                                                                                                                                             | 441,432    |                                                                                                           |       |                                                                                                                                       | $          | 25.37 |   |   |   | — |   |   |
| Total                                                          |       |                                                                                                                                             | 5,464,288  |                                                                                                           |       |                                                                                                                                       | $          | 13.67 |   |   |   | 3,901,711 |   |   |

 

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(1)          For additionalinformation with respect to the outstanding option pricing categories as of December 31,2006, refer to note 10 “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 Fastclick, Commission Junction,Mediaplex, and Be Free were indirectly approved in the related stockholderapprovals of the respective mergers. The material features of these assumedstock option plans are described in note 10 “Stock Options” to theconsolidated financial statements included in Item 8 “Financial Statements andSupplementary Data.”

(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 994,133 shares were made availableunder the 2002 Stock Incentive Plan effective January 1, 2007, which arenot included in the 3,901,711 shares shown herein.

The remaining informationrequired by this Item is incorporated by reference from our definitive ProxyStatement for the 2007 Annual Meeting of Stockholders to be held June 1,2007.

54

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**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information requiredby this Item is incorporated by reference from our definitive Proxy Statementfor the 2007 Annual Meeting of Stockholders to be held June 1, 2007.

**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporatedby reference from our definitive Proxy Statement for the 2007 Annual Meeting ofStockholders to be held June 1, 2007.

55

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**PART IV.**

**ITEM 15. EXHIBITSAND 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, 2006  and 2005                                                  |       | F-5      |
| Consolidated Statements of Operations for the years  ended December 31, 2006, 2005 and 2004                 |       | F-6      |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31, 2006,  2005 and 2004 |       | F-7      |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2006,  2005 and 2004           |       | F-8      |
| Notes to Consolidated Financial Statements                                                                       |       | F-9      |

 

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-40 |
|-----------------------------------------------------|--------|------|

 

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

56

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| Exhibit   Number | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **Description   of Document** |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|
| 2.1(1)           |       | Agreement and Plan of  Merger, dated as of June 13, 2005, by and among ValueClick and E-Babylon, Inc.                                                                                                                                                                                                                                                                                                                                |
| 2.2(7)           |       | 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(8)           |       | Agreement and  Plan of Merger and Reorganization, dated as of August 10, 2005, among  ValueClick, Fastclick, Inc. and FC Acquisition Sub, Inc.                                                                                                                                                                                                                                                                                  |
| 2.4(9)           |       | Agreement and  Plan of Merger, dated as of August 6, 2004, by and among ValueClick and  Pricerunner AB                                                                                                                                                                                                                                                                                                                                    |
| 2.5(10)          |       | Stock Purchase  Agreement, dated January 29, 2004, by and among ValueClick and livedoor  Co., Ltd (formerly Edge Co., Ltd), a Japanese Corporation                                                                                                                                                                                                                                                                                        |
| 2.6(2)           |       | Agreement and  Plan of Merger, dated as of December 7, 2003, by and among ValueClick,  HS Acquisition Corporation and HiSpeed Media, Inc.                                                                                                                                                                                                                                                                                            |
| 2.7(11)          |       | Agreement and  Plan of Merger, dated as of October 9, 2003, by and among ValueClick,  NCJ Acquisition Corporation and Commission Junction, Inc.                                                                                                                                                                                                                                                                                      |
| 2.8(12)          |       | Agreement and  Plan of Merger, dated as of May 30, 2003, by and among ValueClick, Search123.com  Acquisition Corporation and Search123                                                                                                                                                                                                                                                                                               |
| 2.9(13)          |       | 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(3)           |       | Second Amended  and Restated Certificate of Incorporation of ValueClick                                                                                                                                                                                                                                                                                                                                                                        |
| 3.2(4)           |       | 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(14)          |       | Specimen stock  certificate for the ValueClick common stock                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.3(15)          |       | 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(5)          |       | Form of  Indemnification Agreement by and between ValueClick and directors and  executive officers                                                                                                                                                                                                                                                                                                                                        |
| 10.2(14)         |       | Deed of  Assignment, dated January 1, 1999 by and between Web-Ignite Corporation  and ValueClick                                                                                                                                                                                                                                                                                                                                          |
| 10.3(14)         |       | Trademark  Assignment, dated as of May 1, 1998 from Web-Ignite Corporation to  ValueClick                                                                                                                                                                                                                                                                                                                                                 |
| 10.4(14)         |       | Exchange  Agreement, dated December 31, 1998, by and between ValueClick and  ValueClick, LLC                                                                                                                                                                                                                                                                                                                                         |
| 10.5(14)         |       | Bill of Sale and  Assignment and Assumption of Liabilities, dated December 31, 1998                                                                                                                                                                                                                                                                                                                                                       |
| 10.6(14)         |       | 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(14)         |       | Share Purchase  Agreement, dated December 31, 1999, by and between ValueClick and  James R. Zarley                                                                                                                                                                                                                                                                                                                                   |

57

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| 10.8(14)        |   | License Agreement, dated  August 17, 1999, between ValueClick and ValueClick Europe, Limited                                                                              |
|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9(16)†  |   | 1999 Stock Option  Plan, as amended, and form of option agreement                                                                                                              |
| 10.10(17)† |   | 2002 Stock Incentive  Plan and form of option agreement                                                                                                                        |
| 10.11(18)† |   | Key Employee  Agreement between ValueClick and James R. Zarley dated January 1,  2002                                                                                |
| 10.12(19)† |   | Key Employee  Agreement between ValueClick and Samuel J. Paisley dated January 1, 2002                                                                                    |
| 10.13(6)†  |   | Key Employee  Agreement between ValueClick and Scott H. Ray dated October 8, 2002                                                                                         |
| 10.14(20)† |   | Key Employee  Agreement between ValueClick and Peter Wolfert dated January 1, 2002                                                                                        |
| 10.15(14)       |   | Intercompany  License Agreement dated December 19, 1999, between ValueClick and  ValueClick Japan, Inc.                                                              |
| 10.16†     |   | Amendment to Key Employee Agreement between ValueClick and Scott P.  Barlow dated February 16, 2007                                                                       |
| 16.1(21)        |   | Letter from  PricewaterhouseCoopers LLP to the Securities and Exchange Commission dated  July 2, 2004                                                                     |
| 16.2(22)        |   | Letter from  Deloitte & Touche LLP to the Securities and Exchange Commission  dated July 20, 2005                                                                |
| 21.1            |   | Subsidiaries of  ValueClick                                                                                                                                                    |
| 23.1            |   | Consent of  PricewaterhouseCoopers LLP                                                                                                                                         |
| 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                              |

 

----

†                  Indicates a management contract or compensatoryarrangement.

(1)        Incorporated by reference to Exhibit 2.1 to the annual reporton Form 10-K filed by ValueClick on March 31, 2006.

(2)        Incorporated by reference to Exhibit 2.6 to the annual reporton Form 10-K filed by ValueClick on March 31, 2006.

(3)        Incorporated by reference to Exhibit 3.1 to the annual reporton Form 10-K filed by ValueClick on March 31, 2006.

(4)        Incorporated by reference to Exhibit 3.2 to the annual reporton Form 10-K filed by ValueClick on March 31, 2006.

(5)        Incorporated by reference to Exhibit 10.1 to the annual reporton Form 10-K filed by ValueClick on March 31, 2006.

(6)        Incorporated by reference to Exhibit 10.13 to the annual reporton Form 10-K filed by ValueClick on March 31, 2006.

58

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(7)        Incorporated by reference to Exhibit 2.1 to the current reporton Form 8-K filed by ValueClick on June 29, 2005.

(8)        Incorporated by reference to Exhibit 2.1 to the current reporton Form 8-K filed by ValueClick on August 12, 2005.

(9)        Incorporated by reference to Exhibit 2.1 to the annual reporton Form 10-K filed by ValueClick on March 31, 2005.

(10) Incorporated by reference to Exhibit 2.2 to the annual reporton Form 10-K filed by ValueClick on March 31, 2005.

(11) Incorporated by reference to Exhibit 2.1 to the current reporton Form 8-K/A filed by ValueClick on February 23, 2004.

(12) Incorporated by reference to Exhibit 2.1 to the current reporton Form 8-K filed by ValueClick on June 11, 2003.

(13) Incorporated by reference to Exhibit 2.1 to the current reporton Form 8-K filed by ValueClick on March 11, 2002.

(14) Incorporated by reference from Registration Statement on Form S-1(File No. 333-88765), as amended, originally filed with theSecurities and Exchange Commission on October 12, 1999.

(15) Incorporated by reference to Exhibit 4 to the current report onForm 8-K filed by ValueClick on June 14, 2002.

(16) Incorporated by reference from Registration Statement on Form S-8(File No. 333-61278) originally filed with the Securities andExchange Commission on April 19, 2001.

(17) Incorporated by reference from Registration Statement on Form S-8(File No. 333-89396) originally filed with the Securities andExchange Commission on May 30, 2002.

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

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

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

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

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

59

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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, 2006  and 2005                                                      |       | F-5      |       |
| Consolidated Statements of Operations for the years  ended December 31, 2006, 2005  and 2004                    |       | F-6      |       |
| Consolidated Statements of Stockholders’ Equity for  the years ended December 31, 2006, 2005 and 2004 |       | F-7      |       |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2006, 2005  and 2004                    |       | F-8      |       |
| Notes to Consolidated Financial Statements                                                                           |       | F-9      |       |
| Schedule II—Valuation and Qualifying Accounts                                                                   |       | F-40     |       |

 

F-1

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofValueClick, Inc.

We have completedintegrated audits of ValueClick, Inc.’s 2006 and 2005 consolidatedfinancial statements and of its internal control over financial reporting as ofDecember 31, 2006, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Our opinions, based on our audits,are presented below. The Company’s 2004 consolidated financial statements wereaudited by other auditors.

*Consolidatedfinancial statements and financial statement schedule*

In our opinion, the consolidated balance sheets as of December 31,2006 and 2005 and the related consolidated statements of operations, ofstockholders’ equity and of cash flows for the years ended December 31,2006 and 2005 present fairly, in all material respects, the financial positionof ValueClick, Inc. and its subsidiaries at December 31, 2006 and2005, and the results of their operations and their cash flows for the yearsended December 31, 2006 and 2005 in conformity with accounting principlesgenerally accepted in the United States of America. In addition, in ouropinion, the financial statement schedule listed in the index appearing underItem 15(a) (2) presents fairly, in all material respects, theinformation set forth therein for the years ended December 31, 2006 and2005 when read in conjunction with the related consolidated financialstatements. 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 audits. We conducted our audits of these statements 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 materialmisstatement. An audit of financial statements includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

As discussed in Note 1 tothe consolidated financial statements, the Company changed the manner in whichit accounts for share-based compensation in 2006.

*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, 2006 based on criteriaestablished in Internal Control - Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO), is fairlystated, in all material respects, based on those criteria. Furthermore, in ouropinion, the Company maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2006, based oncriteria established in Internal Control - Integrated Framework issued by theCOSO. The Company’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express opinions on management’s assessment and on the effectivenessof the Company’s internal control over financial reporting based on our audit.We conducted our audit of internal control over financial reporting inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. An audit ofinternal control over financial reporting includes 

F-2

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obtaining an understandingof internal control over financial reporting, evaluating management’sassessment, testing and evaluating the design and operating effectiveness ofinternal control, and performing such other procedures as we consider necessaryin the circumstances. We believe that our audit provides a reasonable basis forour 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 inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

/s/ PricewaterhouseCoopersLLP

Los Angeles, CaliforniaFebruary 28, 2007

F-3

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

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

We have audited the accompanying consolidatedstatements of operations, stockholders’ equity, and cash flows of ValueClick, Inc. and its consolidatedsubsidiaries (the “Company”) for the year ended December 31, 2004.Our audit also included the accompanying financial statement schedule II forthe year ended December 31, 2004. These financial statements and financialstatement schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audit.

We conducted our audit in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the results of operations and cashflows of ValueClick, Inc. and its consolidated subsidiaries for the year ended December31, 2004, in conformity with accounting principles generally accepted in theUnited States of America. Also, in our opinion, such financial statementschedule, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.

/s/ DELOITTE &TOUCHE LLP

Los Angeles, CaliforniaMarch 31, 2005

F-4

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**VALUECLICK, INC.CONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                                                 | ** ** | **As of December 31,**                 | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **2006**                                              | ** ** | **2005** | ** ** |
| ** **                                                                                                                                                                 | ** ** | **(in thousands,  except share data)** | ** ** |
| **Assets**                                                                                                                                                                 | ** ** | ** **                                            | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                            |       |                                                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                  |       | $                                                     | 76,769     |   | $ | 46,875 |   |
| Marketable securities, at fair value                                                                                                                                       |       | 204,825                                               |       | 193,908 |   |
| Accounts receivable, net of allowances of $4,124 and  $4,692 as of December 31, 2006 and 2005, respectively                                                      |       | 107,785                                               |       | 74,636 |   |
| Inventories                                                                                                                                                                |       | 2,626                                                 |       | 1,349 |   |
| Prepaid expenses and other current assets                                                                                                                                  |       | 4,315                                                 |       | 2,914 |   |
| Income taxes receivable                                                                                                                                                    |       | 56                                                    |       | 442 |   |
| Deferred tax assets                                                                                                                                                        |       | 6,614                                                 |       | 6,619 |   |
| Total current assets                                                                                                                                                       |       | 402,990                                               |       | 326,743 |   |
| Property and  equipment, net                                                                                                                                               |       | 18,995                                                |       | 18,256 |   |
| Goodwill                                                                                                                                                                   |       | 278,070                                               |       | 273,215 |   |
| Intangible  assets, net                                                                                                                                                    |       | 91,383                                                |       | 101,498 |   |
| Deferred tax  assets, less current portion                                                                                                                                 |       | 457                                                   |       | — |   |
| Other assets                                                                                                                                                               |       | 1,371                                                 |       | 1,149 |   |
| Total assets                                                                                                                                                               |       | $                                                     | 793,266    |   | $ | 720,861 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                             | ** ** | ** **                                            | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                                                       |       |                                                  |       |   |   |
| Accounts payable and accrued expenses                                                                                                                                      |       | $                                                     | 83,766     |   | $ | 64,299 |   |
| Income taxes payable                                                                                                                                                       |       | 2,532                                                 |       | 880 |   |
| Deferred revenue                                                                                                                                                           |       | 1,116                                                 |       | 1,598 |   |
| Capital lease obligations                                                                                                                                                  |       | —                                                |       | 169 |   |
| Total current liabilities                                                                                                                                                  |       | 87,414                                                |       | 66,946 |   |
| Income taxes  payable, less current portion                                                                                                                                |       | 44,503                                                |       | 17,745 |   |
| Deferred tax  liabilities                                                                                                                                                  |       | 14,368                                                |       | 16,771 |   |
| Other non-current  liabilities                                                                                                                                             |       | 3,272                                                 |       | 856 |   |
| Total liabilities                                                                                                                                                          |       | 149,557                                               |       | 102,318 |   |
| Commitments and  contingencies (note 14)                                                                                                                                   |       |                                                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                 |       |                                                  |       |   |   |
| Convertible preferred stock, $0.001 par value;  20,000,000 shares authorized; no shares issued or outstanding at  December 31, 2006 and 2005                     |       | —                                                |       | — |   |
| Common stock, $0.001 par value; 500,000,000 shares  authorized; 99,413,324 and 101,897,934 shares issued and outstanding at  December 31, 2006 and 2005, respectively |       | 99                                                    |       | 102 |   |
| Additional paid-in capital                                                                                                                                                 |       | 632,884                                               |       | 617,612 |   |
| Deferred stock-based compensation                                                                                                                                          |       | —                                                |       | (638 | ) |
| Accumulated other comprehensive income (loss)                                                                                                                              |       | 5,232                                                 |       | (2,958 | ) |
| Retained earnings                                                                                                                                                          |       | 5,494                                                 |       | 4,425 |   |
| Total stockholders’ equity                                                                                                                                            |       | 643,709                                               |       | 618,543 |   |
| Total liabilities  and stockholders’ equity                                                                                                                           |       | $                                                     | 793,266    |   | $ | 720,861 |   |

 

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

F-5

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**VALUECLICK, INC.CONSOLIDATED STATEMENTS OF OPERATIONS**

| ** **                                                                                                                          | ** ** | **For the Year Ended December 31,**       | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                          | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenue                                                                                                                             |       | $                                                                  | 545,616    |   | $ | 304,007 |   | $ | 169,178 |   |
| Cost of revenue                                                                                                                     |       | 167,861                                                            |       | 88,839 |   | 50,762 |   |
| Gross profit                                                                                                                        |       | 377,755                                                            |       | 215,168 |   | 118,416 |   |
| Operating expenses:                                                                                                                 |       |                                                               |       |   |   |   |   |
| Sales and marketing (includes stock-based  compensation of $4,429, $817 and $369 for 2006, 2005 and 2004,  respectively)       |       | 162,905                                                            |       | 75,640 |   | 36,369 |   |
| General and administrative (includes stock-based compensation  of $5,258, $382 and $245 for 2006, 2005 and 2004, respectively) |       | 58,128                                                             |       | 40,908 |   | 27,413 |   |
| Technology (includes stock-based compensation of  $2,253, $823 and $125 for 2006, 2005 and 2004, respectively)                 |       | 32,797                                                             |       | 22,137 |   | 16,016 |   |
| Amortization of intangible assets                                                                                                   |       | 21,801                                                             |       | 12,179 |   | 4,111 |   |
| Restructuring benefit, net                                                                                                          |       | —                                                             |       | (73 | ) | (1,003 | ) |
| Total operating expenses                                                                                                            |       | 275,631                                                            |       | 150,791 |   | 82,906 |   |
| Income from operations                                                                                                              |       | 102,124                                                            |       | 64,377 |   | 35,510 |   |
| Gain on sale of  equity interest in ValueClick Japan                                                                                |       | —                                                             |       | — |   | 8,007 |   |
| Interest income,  net                                                                                                               |       | 8,005                                                              |       | 5,077 |   | 3,665 |   |
| Other income                                                                                                                        |       | —                                                             |       | — |   | 63 |   |
| Income before income taxes and minority interest                                                                                    |       | 110,129                                                            |       | 69,454 |   | 47,245 |   |
| Income tax  expense                                                                                                                 |       | 47,555                                                             |       | 28,810 |   | 16,153 |   |
| Income before minority interest                                                                                                     |       | 62,574                                                             |       | 40,644 |   | 31,092 |   |
| Minority share of  loss in consolidated subsidiary                                                                                  |       | —                                                             |       | — |   | 130 |   |
| Net income                                                                                                                          |       | $                                                                  | 62,574     |   | $ | 40,644 |   | $ | 31,222 |   |
| Basic net income per common share                                                                                                   |       | $                                                                  | 0.63       |   | $ | 0.46 |   | $ | 0.39 |   |
| Diluted net income per common share                                                                                                 |       | $                                                                  | 0.62       |   | $ | 0.45 |   | $ | 0.37 |   |
| Weighted-average  shares used to calculate net income per common share:                                                             |       |                                                               |       |   |   |   |   |
| Basic                                                                                                                               |       | 99,600                                                             |       | 87,722 |   | 80,063 |   |
| Diluted                                                                                                                             |       | 101,721                                                            |       | 90,857 |   | 84,038 |   |

 

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

F-6

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**VALUECLICK, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

| ** **                                                                                                                                                  | ** ** | **Preferred Stock**                                  | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Deferred  Stock-Based** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Retained  Earnings  (Accumulated** | ** ** | **Total  Stockholders’** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|---------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                                  | ** ** | **Shares**                                                | ** ** | **Amount**            | ** ** | **Shares**              | ** ** | **Amount**                | ** ** | **Capital**                           | ** ** | **Compensation**                     | ** ** | **Income (Loss)**        | ** ** | **Deficit)** | ** ** | **Equity** | ** ** |
| ** **                                                                                                                                                  | ** ** | **(in thousands, except share data)** | ** ** |
| 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 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Exercises of stock  options                                                                                                                                 |       |                                                      | —     |                  |       |                    | —     |                      |       | 4,119,089                             |       |                                 | 4          |                          |       |   | 10,963 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 10,967 |   |   |
| Issuance of shares  in business combination—Pricerunner                                                                                                |       |                                                      | —     |                  |       |                    | —     |                      |       | 263,467                               |       |                                 | —     |                          |       |   | 1,967 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,967 |   |   |
| Repurchase and  retirement of common stock                                                                                                             |       |                                                      | —     |                  |       |                    | —     |                      |       | (303,808                              | )          |                                 | —     |                          |       |   | (2,206 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (2,206 | ) |   |
| Tax benefit from  stock option  exercises                                                                                                                   |       |                                                      | —     |                  |       |                    | —     |                      |       | —                                |       |                                 | —     |                          |       |   | 11,544 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 11,544 |   |   |
| Comprehensive income:                                                                                                                                       |       |                                                      |       |                  |       |                    |       |                      |       |                                  |       |                                 |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                                                                  |       |                                                      | —     |                  |       |                    | —     |                      |       | —                                |       |                                 | —     |                          |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 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                                                                                                                                 |       |                                                      |       |                  |       |                    |       |                      |       |                                  |       |                                 |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 31,543 |   |   |
| Balance at  December 31, 2004                                                                                                                          |       |                                                      |       |                  |       |                    |       |                      |       | 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 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Exercises of 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 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Repurchase and  retirement of common 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 |   |   |
| Reclassification  of deferred stock-based compensation in connection with the adoption of  Statement of Financial Accounting Standards No. 123(R) |       |                                                      | —     |                  |       |                    | —     |                      |       | —                                |       |                                 |       |                          |       |   | (638 | ) |   |   | 638 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Non-cash,  stock-based compensation expense                                                                                                                 |       |                                                      | —     |                  |       |                    | —     |                      |       | —                                |       |                                 |       |                          |       |   | 10,410 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 10,410 |   |   |
| Exercises of stock  options                                                                                                                                 |       |                                                      | —     |                  |       |                    | —     |                      |       | 4,419,809                             |       |                                 | 4          |                          |       |   | 30,377 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 30,381 |   |   |
| Repurchase and  retirement of common stock                                                                                                             |       |                                                      | —     |                  |       |                    | —     |                      |       | (6,904,419                            | )          |                                 | (7         | )                             |       |   | (41,914 | ) |   |   | — |   |   |   | — |   |   |   | (61,505 | ) |   |   | (103,426 | ) |   |
| Tax benefit from  stock option  exercises                                                                                                                   |       |                                                      | —     |                  |       |                    | —     |                      |       | —                                |       |                                 |       |                          |       |   | 17,037 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 17,037 |   |   |
| Comprehensive income:                                                                                                                                       |       |                                                      |       |                  |       |                    |       |                      |       |                                  |       |                                 |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                                                                  |       |                                                      | —     |                  |       |                    | —     |                      |       | —                                |       |                                 |       |                          |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 62,574 |   |   |   | 62,574 |   |   |
| Change in market  value of marketable securities, net of tax                                                                                      |       |                                                      | —     |                  |       |                    | —     |                      |       | —                                |       |                                 |       |                          |       |   | — |   |   |   | — |   |   |   | 753 |   |   |   | — |   |   |   | 753 |   |   |
| Foreign currency  translation                                                                                                                               |       |                                                      | —     |                  |       |                    | —     |                      |       | —                                |       |                                 |       |                          |       |   | — |   |   |   | — |   |   |   | 7,437 |   |   |   | — |   |   |   | 7,437 |   |   |
| Total  comprehensive income                                                                                                                                 |       |                                                      |       |                  |       |                    |       |                      |       |                                  |       |                                 |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 70,764 |   |   |
| Balance at  December 31, 2006                                                                                                                          |       |                                                      | —     |                  |       |                    | $          | —                    |       |                                  | 99,413,324 |                                 |       | $                             | 99         |   |   |   | $ | 632,884 |   |   |   | $ | — |   |   |   | $ | 5,232 |   |   |   | $ | 5,494 |   |   |   | $ | 643,709 |   |   |

 

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

F-7

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**VALUECLICK, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                         | ** ** | **For the Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                                      | ** ** |
| Cash flows from operating activities:                                              |       |                                                         |       |   |   |   |   |
| Net income                                                                         |       | $                                                            | 62,574     |   | $ | 40,644 |   | $ | 31,222 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                                         |       |   |   |   |   |
| Depreciation and  amortization expense                                             |       | 31,065                                                       |       | 19,246 |   | 10,299 |   |
| Restructuring  benefit, net                                                        |       | —                                                       |       | (73 | ) | (1,003 | ) |
| Provision for  doubtful accounts and sales credits                                 |       | 4,818                                                        |       | 3,283 |   | 1,308 |   |
| Inventories  write-down                                                            |       | —                                                       |       | — |   | 199 |   |
| Non-cash,  stock-based compensation expense                                        |       | 10,410                                                       |       | 270 |   | 739 |   |
| Benefit from  deferred income taxes                                                |       | (5,686                                                       | )          | (2,021 | ) | (6,614 | ) |
| Tax benefit from  stock option exercises                                           |       | 18,480                                                       |       | 12,833 |   | 11,544 |   |
| Excess tax benefit  from stock option exercises                                    |       | (18,569                                                      | )          | — |   | — |   |
| Minority interest  in ValueClick Japan                                             |       | —                                                       |       | — |   | (130 | ) |
| Gain on sale of  equity interest in ValueClick Japan                               |       | —                                                       |       | — |   | (8,007 | ) |
| Changes in operating  assets and liabilities, net of effects of acquisitions:      |       |                                                         |       |   |   |   |   |
| Accounts  receivable                                                               |       | (34,694                                                      | )          | (26,963 | ) | (9,510 | ) |
| Prepaid expenses,  inventories and other assets                                    |       | (2,851                                                       | )          | 1,279 |   | (866 | ) |
| Accounts payable  and accrued expenses                                             |       | 19,727                                                       |       | 7,561 |   | 6,783 |   |
| Income taxes  receivable/payable                                                   |       | 29,870                                                       |       | 5,332 |   | 10,921 |   |
| Deferred revenue                                                                   |       | (525                                                         | )          | (218 | ) | 235 |   |
| Other non-current  liabilities                                                     |       | (383                                                         | )          | (496 | ) | (561 | ) |
| Net cash provided  by operating activities                                         |       | 114,236                                                      |       | 60,677 |   | 46,559 |   |
| Cash flows from investing activities:                                              |       |                                                         |       |   |   |   |   |
| Proceeds from the  maturities and sales of marketable securities                   |       | 228,776                                                      |       | 199,785 |   | 131,730 |   |
| Purchases of  marketable securities                                                |       | (238,940                                                     | )          | (179,422 | ) | (167,464 | ) |
| Acquisition of  businesses, net of cash acquired                                   |       | (12,077                                                      | )          | (59,562 | ) | (26,707 | ) |
| Purchases of property  and equipment                                               |       | (10,244                                                      | )          | (9,036 | ) | (6,009 | ) |
| Proceeds from sale  of equity interest in ValueClick Japan, net                    |       | —                                                       |       | — |   | 2,351 |   |
| Net cash used in  investing activities                                             |       | (32,485                                                      | )          | (48,235 | ) | (66,099 | ) |
| Cash flows from financing activities:                                              |       |                                                         |       |   |   |   |   |
| Repurchases and  retirement of common stock                                        |       | (103,426                                                     | )          | (5,657 | ) | (2,206 | ) |
| Proceeds from  exercises of stock options                                          |       | 30,381                                                       |       | 14,443 |   | 10,967 |   |
| Proceeds from  short-term debt                                                     |       | —                                                       |       | 91,684 |   | — |   |
| Repayment of  short-term debt and capital lease obligations                        |       | (169                                                         | )          | (91,924 | ) | (44 | ) |
| Excess tax benefit  from stock option exercises                                    |       | 18,569                                                       |       | — |   | — |   |
| Net cash (used in)  provided by financing activities                               |       | (54,645                                                      | )          | 8,546 |   | 8,717 |   |
| Effect of foreign  currency translations                                           |       | 2,788                                                        |       | (2,408 | ) | 2,476 |   |
| Net increase (decrease)  in cash and cash equivalents                              |       | 29,894                                                       |       | 18,580 |   | (8,347 | ) |
| Cash and cash  equivalents, beginning of period                                    |       | 46,875                                                       |       | 28,295 |   | 36,642 |   |
| Cash and cash  equivalents, end of period                                          |       | $                                                            | 76,769     |   | $ | 46,875 |   | $ | 28,295 |   |
| Supplemental disclosures of cash flow information:                                 |       |                                                         |       |   |   |   |   |
| Cash paid for  interest                                                            |       | $                                                            | 3          |   | $ | 807 |   | $ | 26 |   |
| Cash paid for  income taxes, net                                                   |       | $                                                            | 5,447      |   | $ | 12,730 |   | $ | 634 |   |
| Non-cash investing and financing activities:                                       |       |                                                         |       |   |   |   |   |
| Issuance of common  stock in business combinations                                 |       | $                                                            | —     |   | $ | 220,849 |   | $ | 1,967 |   |
| Stock options  assumed in business combinations                                    |       | $                                                            | —     |   | $ | 14,122 |   | $ | — |   |

 

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

F-8

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**VALUECLICK, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

**Organization andBasis 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 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 advertiser customers to address all aspects of themarketing process, from strategic planning through execution, including resultsmeasurement and campaign refinements. By combining the Company’s media, affiliatemarketing, comparison shopping, and technology offerings with its experience inboth online and offline marketing, the Company helps its advertiser customersaround the world optimize their marketing campaigns both on the Internet andthrough offline media.

The Company derives its revenue from four businesssegments. These business segments are presented on a worldwide basis andinclude: Media, Affiliate Marketing, Comparison Shopping, and Technology.

*MEDIA—**ValueClick’s*Mediasegment provides a comprehensive suite of online marketing services andtailored programs that help marketers create and increase awareness for theirproducts and brands, attract visitors and generate leads and sales through theInternet. The Company’s Media segment has grown both organically and throughthe acquisition of complementary businesses such as HiSpeed Media, completed inDecember 2003, Webclients and E-Babylon, both completed in June 2005,and Fastclick, completed in September 2005.

The Company’s Media segment offers advertisers andadvertising agencies a range of online media solutions in the categories ofdisplay advertising, lead generation marketing and email marketing. The Companyhas aggregated thousands of online publishers to provide advertisers andadvertising agencies with access to one of the largest display advertisingnetworks. The Company also sells a limited number of consumer products directlyto end-user customers through Company-owned e-commerce websites.

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

*AFFILIATEMARKETING—**ValueClick’s*Affiliate Marketingsegment, through the combination of: a large-scale pay-for-performance modelbuilt on the Company’s proprietary technology platforms; marketing expertise;and a large, quality advertising network, enables the Company’s advertisercustomers to develop their own fully-commissioned online sales force comprisedof third-party affiliate publishers.**AffiliateMarketing segment revenues are driven primarily by a combination of fixed feesand variable compensation that is generally based on either a percentage ofcommissions paid to affiliates or on a percentage of transaction revenuegenerated from the programs managed with the Company’s affiliate marketingplatforms.

F-9

----

*COMPARISONSHOPPING—**ValueClick’s*online comparisonshopping service, consisting primarily of the Company’s Pricerunner destinationwebsites, enables consumers to research and compare products from amongthousands of online and/or offline merchants using the Company’s proprietarytechnology. The Company gathers product and merchant data and organizes it intoa comprehensive catalog on its destination websites, along with relevantconsumer and professional reviews. This Company service is free for consumersand merchants primarily pay the Company on a CPC basis when consumers clickthrough to merchant websites from listings on the Company’s websites. TheCompany acquired Pricerunner in August 2004 and currently has Pricerunnerwebsites operating in the United Kingdom, Sweden, the United States, Germany,France, Denmark, and Austria. In December 2006, the Company acquiredShopping.net, based in the United Kingdom, which provides the Company withadditional opportunities to monetize online traffic and expand the Company’soverall comparison shopping presence in Europe.

*TECHNOLOGY—**ValueClick’s*Technologysegment operates through its wholly-owned subsidiaries Mediaplex and MediaplexSystems, which were acquired in October 2001.

Mediaplex is an application services 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, among otherattributes, to automatically configure advertisements in response to real-timeinformation from an advertiser’s enterprise data system and to provide ongoingcampaign optimization. Revenues are primarily derived from software access anduse charges. Mediaplex’s products are priced primarily on a CPM oremail-delivered basis.

Mediaplex Systems is anASP that uses proprietary technology to deliver Web-based enterprise managementsystems to advertising agencies, marketing communications companies, publicrelations agencies, and other large corporate advertisers. The solutions thatMediaplex Systems provides span two primary categories—agency management andmedia management. Mediaplex Systems’ revenue is generated primarily frommonthly service fees paid by customers over the contractual service periods.

**Principles ofConsolidation**

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.(ValueClick Japan”), was sold on March 26, 2004 to livedoor Co., Ltd., asdescribed in note 4. The operating results of ValueClick Japan are included inthe Company’s operating results through March 31, 2004. The results ofValueClick Japan for the period from March 26, 2004 to March 31, 2004were not significant. All material intercompany transactions and balances havebeen eliminated in consolidation.

The consolidated financialstatements include the accounts of the Company and its subsidiaries from the beginningof 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.

**Basis ofPresentation 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.

F-10

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The most significant areasthat require management judgment and which are susceptible to possible changein the near term include the Company’s revenue recognition, allowance fordoubtful accounts and sales credits, investments, stock-based compensation,income taxes, goodwill and other intangible assets, and contingencies andlitigation. The accounting policies for these areas are discussed elsewhere inthese consolidated financial statements.

**Cash and CashEquivalents**

The Company considers allshort-term highly liquid investments with a remaining maturity at the date ofpurchase of three months or less to be cash equivalents. At December 31,2006 and 2005, cash equivalents consisted primarily of money market accounts.

**MarketableSecurities**

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 titled accumulated othercomprehensive income (loss), net of tax, until realized or until adetermination is made that an other-than-temporary decline in market value hasoccurred. 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 impairment; and whether the Company hasthe ability to hold the investment to maturity. 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 another-than-temporary decline has occurred. The cost of marketablesecurities sold is based upon the specific identification method.

**Accounts Receivableand Allowance for Doubtful Accounts and Sales Credits**

Trade receivables are stated at gross invoice amountless an allowance for doubtful accounts and sales credits.

The Company estimates itsallowance for doubtful accounts using two methods. First, the Company evaluatesspecific accounts where information indicates the Company’s customers may havean inability to meet financial obligations, such as due to bankruptcy, andreceivable amounts outstanding for an extended period beyond contractual terms.In these cases, the Company uses assumptions and judgment, based on the bestavailable facts 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 based upon the Company’s historical collection and write-offexperience. The amounts calculated from each of these methods are analyzed todetermine the total amount of the allowance for doubtful accounts. The Companyalso estimates an allowance for sales credits based upon its historical salescredits experience.

**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 of the inventory based upon assumptions about future demandand market conditions.

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**Property andEquipment**

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 purchased software, three to five years forfurniture and equipment, the shorter of five years or the term of the lease forleasehold improvements, three years for vehicles, and 30 years for buildings.

**BusinessCombinations**

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.These assumptions are generally made based on available historical information.Definite-lived identifiable intangible assets are amortized on a straight-linebasis, as this basis approximates the expected cash flows from the Company’s existingdefinite-lived identifiable intangible 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 5). 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 31,2006, the Company’s reporting units consisted of the Media, AffiliateMarketing, Comparison Shopping, and Technology operating segments. The Companyhas elected to test for goodwill impairment annually as of December 31.The Company determined that there was no impairment of goodwill as of December 31,2006, 2005 and 2004.

**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. The Company determined thatthere was no impairment of long-lived assets as of December 31, 2006, 2005and 2004.

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**Revenue Recognition**

The Company recognizes revenue in accordance withStaff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition inFinancial Statements” and EITF 00-21, “Revenue Arrangements with MultipleDeliverables.” Accordingly, the Company recognizes revenue when the followingcriteria have been met: persuasive evidence of an arrangement exists, nosignificant Company obligations remain, collection of the related receivable isreasonably assured, and the fees are fixed or determinable.

The Company’s Media and Comparison Shopping segmentsrevenue is recognized in the period that the advertising impressions,click-throughs or actions occur, when lead-based information is delivered or,for the Company’s e-commerce business, when consumer products are shipped,provided that no significant Company obligations remain, collection of theresulting receivable is reasonably assured, and the fees are fixed ordeterminable. The Company acts as a principal in Media and Comparison Shoppingsegment transactions in that the Company is the primary obligor to theadvertiser customers. In accordance with the provisions of EITF Issue No. 99-19,“Reporting Revenue Gross as a Principal versus Net as an Agent,” (“EITF 99-19”),revenue is recognized in the Company’s Media and Comparison Shopping segmentson a gross basis and publisher expenses that are directly related to arevenue-generating event are recorded as a component of cost of revenue.

Revenue for the Company’s Affiliate Marketing segmentis generated primarily from: commission fees earned from transactions,including product sales made by the Company’s advertiser customers, occurringon the Company’s affiliate marketing networks; fixed monthly fees from programmanagement services; fees earned, primarily on a CPC basis, from searchsyndication services; commission fees earned for the Company’s search enginemarketing (“SEM”) services; and, to a lesser extent, implementation fees.Commission fee revenue from transactions on the Company’s affiliate marketingnetworks and from the Company’s SEM services are recognized on a net basis inaccordance with the provisions of EITF 99-19 as the Company acts as anagent in these transactions and the payments to publishers are the contractualobligation of the advertiser customers. Commission fee revenue is recognized inthe period that the Company’s advertiser customer generates a sale or otheragreed-upon action on the Company’s affiliate marketing networks or as a resultof the Company’s SEM services, provided that no significant Company obligationsremain, collection of the resulting receivable is reasonably assured, and thefees are fixed or determinable. Program management services fees revenue isrecognized over the contractual service period, provided no significant Companyobligations remain, collection of the resulting receivable is reasonablyassured, and the fees are fixed or determinable. Search syndication servicesrevenue is recognized on a gross basis in accordance with the provisions ofEITF 99-19, due to the fact that the Company is the primary obligor to itscustomer, and publisher expenses that are directly related to arevenue-generating event are recorded as a component of cost of revenue. Searchsyndication services revenue is recognized in the period that a visitor to awebsite in the Company’s search syndication network completes a qualifiedsearch transaction, provided no significant Company obligations remain,collection of the resulting receivable is reasonably assured, and the fees arefixed or determinable. Implementation fee revenue is recognized over the estimatedcustomer lives, provided no significant Company obligations remain, collectionof the resulting receivable is reasonably assured, and the fees are fixed ordeterminable.

Revenue for the Company’s Technology segment isgenerated primarily from fixed monthly fees or monthly transaction volume-basedfees earned by the Company for making its technologies available to the Company’scustomers on an ASP basis. Such revenue is recognized monthly, provided nosignificant Company obligations remain, collection of the resulting receivableis reasonably assured, and the fees are fixed or determinable. The Company alsogenerates a nominal amount of other services fee revenue in its Technologysegment. Such other services fee revenue is recognized when the services areperformed, provided no significant Company obligations remain, collection ofthe resulting receivable is reasonably assured, and the fees are fixed ordeterminable.

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The Company’s customers do not have the right to takepossession of the Company’s software at any time during or after the term ofthe relevant customer agreement. Accordingly, as prescribed by EITF Issue No. 00-3,“Application of AICPA Statement of Position 97-2 to Arrangements ThatInclude the Right to Use Software Stored on Another Entity’s Hardware,” theCompany’s revenue recognition is outside the scope of Statement of Position (“SOP”)No. 97-2, “Software Revenue Recognition.”

Deferred revenue consists primarily of theunrecognized portion of implementation fee revenue for the Company’s AffiliateMarketing segment. Prepayments and amounts on deposit from customers areclassified as an advertiser deposit liability.

The Company estimates aprovision for sales returns which is recorded as a reduction to revenue. 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 changes inthe economic and industry environment could make the provision for salesreturns estimates differ from actual returns**.**

**Cost of Revenue**

Cost of revenue consistsof: payments related to website publishers that are directly related to arevenue-generating event; labor costs; telecommunication costs; and,depreciation of equipment related to the Company’s revenue-generatingtechnology infrastructure. The Company becomes obligated to make paymentsrelated to website publishers, online newsletters and email lists in the periodthe advertising impressions, click-throughs, actions or lead-based informationare delivered or occur. Such expenses are classified as cost of revenue in thecorresponding period in which the revenue is recognized in the accompanyingconsolidated statement of operations. Additionally, cost of revenue of theCompany’s Media segment e-commerce business includes product costs and shippingand handling costs.

**Sales and Marketing**

Sales and marketing expenses consist primarily ofcompensation and employee benefits of sales and marketing, network developmentand related support teams, certain online and offline advertising costs,travel, trade shows, and marketing materials. Online advertising costs includedin sales and marketing expenses are comprised primarily of amounts that theCompany pays to website publishers that are not directly associated with arevenue-generating event.

Advertising costs areexpensed as incurred and totaled $99.2 million, $34.5 million and $4.9 millionfor the years ended December 31, 2006, 2005 and 2004, respectively.

**General andAdministrative**

General and administrativeexpenses include facilities costs, executive and administrative compensationand employee benefits, depreciation, professional services fees, insurancecosts, and other general overhead costs.

**Technology**

Technology expensesinclude costs associated with the maintenance of the Company’s technologyplatforms, including compensation and employee benefits associated with theCompany’s engineering and network operations departments, as well as costs forcontracted services and supplies. With the exception 

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ofcertain internal use software qualifying for capitalization, all technologycosts have been expensed as incurred. The Company follows the guidance of SOP No. 98-1,“Accounting for the Costs of Computer Software Developed or Obtained forInternal Use.” No software development costs were capitalized in the yearsended December 31, 2006, 2005 and 2004 and all previously capitalizedsoftware development costs were fully amortized as of December 31, 2005.Capitalized software development costs were amortized for periods up to 18months.

**Stock-basedCompensation**

On January 1, 2006, the Company adopted SFAS No. 123(revised 2004), “Share-Based Payment,” (“SFAS 123(R)”), which requires themeasurement and recognition of compensation expense for all share-based awardsissued by the Company to employees and directors based on estimated fairvalues. SFAS 123(R) supersedes the Company’s previous accountingunder Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees” (“APB 25”) for periods beginning January l, 2006. In March 2005,the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating toSFAS 123(R). The Company has applied the provisions of SAB 107 in its adoptionof SFAS 123(R).

The Company adopted SFAS 123(R) using themodified prospective transition method, which requires the application of the accountingstandard as of January 1, 2006, the first day of the Company’s fiscalyear. The Company’s consolidated financial statements as of and for the yearended December 31, 2006 reflect the impact of SFAS 123(R). In accordancewith the modified prospective transition method, the Company’s consolidatedfinancial statements for periods prior to 2006 have not been restated toreflect, and do not include, the impact of SFAS 123(R). Stock-basedcompensation expense for the year ended December 31, 2006 was $11.9million, which consisted of stock-based compensation expense related toemployee and director stock options of $10.4 million, and stock-basedcompensation expense related to Stock Appreciation Rights (“SARs”) of $1.5million. For the years ended December 31, 2005 and 2004, the Companyrecorded stock-based compensation expense of $2.0 million and $739,000,respectively. Stock-based compensation expense for the year ended December 31,2005 includes $1.7 million related to SARs and $270,000 of amortization relatedto stock options assumed in business combinations. Stock-based compensationexpense of $739,000 for the year ended December 31, 2004 was related tostock options assumed in business combinations. If not for the adoption of SFAS123(R), stock-based compensation expense under APB 25 would have been $1.9million, including the impact of the SARs as described above, for the yearended December 31, 2006. The adoption of SFAS 123(R) in 2006 resultedin a reduction in net income of $6.8 million (net of tax benefits of$3.2 million) and a reduction in basic and diluted net income per commonshare of $0.07. In addition, under SFAS 123( R), the excess income tax benefitrelating to the exercise of stock options ($18.6 million in 2006) is nowshown as a financing activity in the statement of cash flows. Excess taxbenefits are realized tax benefits from tax deductions for exercised stockoptions in excess of the deferred tax asset attributable to the recognizedstock-based compensation expense for such stock options. Such amounts hadpreviously been reported as an operating activity.

SFAS 123(R) requires companies to estimate thefair value of stock-based awards to employees and directors on the date ofgrant using an option-pricing model. The value of the portion of an award thatis ultimately expected to vest is recognized as an expense over the requisiteservice periods using the straight-line attribution method. Prior to theadoption of SFAS 123(R), the Company accounted for stock-based awards toemployees and directors using the intrinsic value method in accordance with APB25 as allowed under SFAS No. 123, “Accounting for Stock-Based Compensation”(“SFAS 123”). Under the intrinsic value method, no stock-based compensationexpense had been recognized in the Company’s consolidated statement ofoperations, other than as related to stock options assumed in businesscombinations and SARs, because the exercise price of the Company’s stockoptions granted to employees and directors equaled the fair market value of theunderlying common stock at the date of grant.

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In November 2005, the Financial AccountingStandards Board (“FASB”) issued FASB Staff Position No. FAS 123(R)-3,“Transition Election Related to Accounting for Tax Effects of Share-BasedPayment Awards” (“FSP 123(R)-3”). The Company has elected to adopt thealternative transition method provided in the FASB Staff Position forcalculating the tax effects of stock-based compensation expense pursuant toSFAS 123(R). The alternative transition method includes a simplified method toestablish the beginning balance of the additional paid-in capital pool (“APICpool”) related to the tax effects of employee and director stock-basedcompensation expense, and to determine the subsequent impact on the APIC pooland the consolidated statements of cash flows of the tax effects of employeeand director stock-based awards that were outstanding upon adoption of SFAS123(R).

SFAS 123(R) prohibitsrecognition of a deferred tax asset for an excess tax benefit that has not beenrealized. The Company will recognize a benefit from stock-based compensationexpense in stockholders’ equity if an incremental tax benefit is realized byfollowing the ordering provisions of the U.S. tax law. In addition, the Companyhas elected to account for the indirect effects of stock-based awards on othertax attributes, such as the research tax credit, through the consolidatedstatements of operations.

**Foreign CurrencyTranslation**

The Company’s foreign subsidiaries record their assets,liabilities and results of operations in their respective functionalcurrencies. The Company translates its subsidiaries’ financial statements intoU.S. dollars each reporting period for purposes of consolidation.

Assets and liabilities of the Company’s foreignsubsidiaries are translated at the period-end currency exchange rates whilerevenue, expenses, gains, and losses are translated at the average currencyexchange rates in effect for the period. Except for certain intercompanybalances that have been designated as short-term in nature, the effects ofthese translation adjustments are reported in a separate component ofstockholders’ equity titled accumulated other comprehensive income. The effectsof the translation adjustments for those intercompany balances that have beendesignated as short-term in nature are included in general and administrativeexpenses and were not significant for the years ended December 31, 2006and 2005. Prior to 2005, all intercompany balances were considered long-term innature.

Transaction gains andlosses related to transactions with third-parties denominated in other than thefunctional currency were not significant for the years ended December 31,2006, 2005 and 2004.

**Concentration ofCredit Risk and Significant Customers**

Financial instruments that potentially subject theCompany to concentration of credit risk consist of cash and cash equivalents,marketable securities and accounts receivable. Cash and cash equivalents aredeposited in the local currency with a limited number of financial institutionsin the United States and Europe. The balances in the United States held at anyone financial institution are generally in excess of Federal Deposit InsuranceCorporation (“FDIC”) insurance limits and certain balances in Europe may not beinsured. Marketable securities are held in local currency with two majorfinancial institutions and, with the exception of the Company’s investments incertain municipal obligations, 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 doubtful accounts and salescredits. At December 31, 2006 and 2005, no customer comprised more than10% of accounts receivable. For the years ended December 31, 2006, 2005and 2004, no customer comprised more than 10% of total revenue.

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**Fair Value ofFinancial 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, 2006 and 2005, 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 2.

**Income Taxes**

The Company uses the assetand liability method of accounting for income taxes in accordance with SFAS No. 109,“Accounting for Income Taxes.” Under this method, income tax expense isrecognized for the amount of: (i) taxes payable or refundable for thecurrent year; and, (ii) deferred tax consequences of temporary differencesresulting from matters that have been recognized in an entity’s financialstatements or tax returns. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years inwhich those temporary differences are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in the results of operations in the period that includes theenactment date. A valuation allowance is provided to reduce the deferred taxassets reported if, based on the weight of the available positive and negativeevidence, it is more likely than not some portion or all of the deferred taxassets will not be realized. A liability (including interest if applicable) isestablished in the consolidated financial statements to the extent a currentbenefit has been recognized on a tax return for matters that are consideredcontingent upon the outcome of an uncertain tax position. Applicable interestis included as a component of income tax expense and income taxes payable.

**Basic and DilutedNet 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 shares outstandingduring the period. Potential common shares consist of the incremental commonshares issuable upon the exercise of stock options, determined using thetreasury stock method. The Company determines potential windfall tax benefitsand shortfalls on stock options on an “as if” basis for purposes of calculatingassumed stock option proceeds under the treasury stock method when determiningthe denominator for diluted net income per common share.

**ComprehensiveIncome**

SFAS No. 130, “ReportingComprehensive Income” establishes standards for reporting comprehensive incomeand its components in financial statements. Comprehensive income, as defined,includes all changes in equity (net assets) during a period from non-ownersources. The elements of comprehensive income, other than net income, relate toforeign currency translation adjustments and unrealized gains/losses onmarketable securities for the years ended December 31, 2006, 2005 and2004. As of December 31, 2006, the accumulated balance of the foreign currencytranslation adjustment and net unrealized losses on marketable securities were$5.7 million and $443,000, respectively. The Company has recorded a fullvaluation allowance against the related deferred tax asset associated with theunrealized losses on marketable securities due to the uncertainty as to whethersuch losses and related deferred tax asset will be realized.

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**Reclassifications**

Certain reclassificationshave been made to prior year amounts 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” (“SFAS 131”) to identify its operatingsegments. The management approach designates the internal organization used bymanagement for making operating decisions and assessing performance as thebasis for identifying the Company’s reportable segments. As discussed in note16, the Company revised the presentation of its segment reporting in 2006. Allsegment information presented for prior periods has been updated to conform tothe current presentation.

**Recently IssuedAccounting Standards**

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements” (“SFAS 157”). This Statement defines fair value asused in numerous accounting pronouncements, establishes a framework formeasuring fair value under GAAP and expands disclosure related to the use offair value measures in financial statements. SFAS 157 is effectivefor the Company on January 1, 2008. The Company is in the process ofevaluating the impact of SFAS 157 on its consolidated financial position andresults of operations.

In September 2006, the SEC released StaffAccounting Bulletin (“SAB”) No. 108, “Considering the Effects of PriorYear Misstatements When Quantifying the Misstatements in Current Year FinancialStatements” (“SAB 108”), which provides interpretive guidance on how theeffects of the carryover or reversal of prior year financial statementmisstatements should be considered in quantifying a current year financialstatement misstatement. SAB 108 provides transition guidance for correctingerrors and requires registrants to quantify financial statement misstatementsusing both the balance sheet and income statement approaches and to evaluate whethereither approach results in an error that is material in light of relevantquantitative and qualitative factors. In the year of adoption only, if theeffect is determined to be material, SAB 108 allows registrants to record theeffect as a cumulative-effect adjustment to beginning-of-year retainedearnings. SAB 108 does not change the requirements of SFAS No. 154, “AccountingChanges and Error Corrections—a replacement of APB No. 20 and FASBStatement No. 3”, for the correction of an error in financial statements.Further, SAB 108 does not change the SEC’s previous guidance in SAB No. 99,“Materiality”, with regard to evaluating the materiality of financial statementmisstatements. The Company adopted SAB 108 for the fiscal year ended December 31,2006 and such adoption had no impact on the Company’s consolidated financialposition or results of operations.

In June 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN48 provides guidance on the recognition, measurement, derecognition,classification, and disclosures related to uncertain tax positions and interestand penalties related to uncertain tax positions. Specifically, FIN 48establishes a “more-likely-than-not” criteria for evaluating uncertain taxposition recognition for financial statement purposes, based upon the technicalmerits of the position. FIN 48 is effective for the Company as of January 1,2007. As more fully described in note 8, as of December 31, 2006 we havenot recorded a benefit related to certain net operating loss carryforwards. Theamount that we ultimately realize from these net operating loss carryforwardsis subject to an uncertain tax position that depends on the outcome ofexamination by tax authorities. Considering all information currently availableto the Company related to factors relevant to the measurement of this uncertaintax position, the Company currently expects to recognize a benefit related tothese net operating loss carryforwards upon adoption of FIN 48. The impact ofsuch benefit will be recorded as a change in accounting principle, primarilythrough an adjustment to retained earnings, as 

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of January 1, 2007.However, the Company’s assessment of the impact of adopting FIN 48 is notyet complete. Accordingly, the ultimate amount of the expected benefit, and theclassification of such benefit within the Company’s consolidated balance sheetat January 1, 2007, has not yet been determined. 

**2. MarketableSecurities**

Marketablesecurities consisted of the following as of December 31, 2006 (inthousands):

| ** **                   | ** ** | **Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
|------------------------------|------------|----------|------------|-----------------------|------------|------------------------|------------|--------------------------------|------------|
| Municipal  obligations       |       | $        | 120,991    |                  |       | $                      | —     |                           |       |   | $ | (107 | ) |   | $ | 120,884 |   |
| U.S. agencies  obligations   |       | 68,597   |       |                  | —     |                   |       |                           | (319       | ) |   | 68,278 |   |
| Corporate  obligations       |       | 15,680   |       |                  | 3          |                   |       |                           | (20        | ) |   | 15,663 |   |
| Total marketable  securities |       | $        | 205,268    |                  |       | $                      | 3          |                           |       |   | $ | (446 | ) |   | $ | 204,825 |   |

 

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 |   |

 

Auction rate securities (included in municipalobligations and totaling $55.1 million as of December 31, 2006 and $24.2million as of December 31, 2005) are securities that are structured withshort-term reset dates of generally less than 90 days but with maturities inexcess of 90 days. At the end of the reset period, investors can sell orcontinue to hold the securities at par value. These securities are classifiedin 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, 2006 (in thousands): 

| ** **                            | ** ** | **Cost** | ** ** | **Estimated  Fair  Value** | ** ** |
|---------------------------------------|------------|----------|------------|----------------------------|------------|
| Due within one  year                  |       | $        | 102,159    |                       | $          | 101,889 |   |
| Due after one  year through two years |       | 47,970   |       | 47,797                     |       |
| Due after two  years                  |       | 55,139   |       | 55,139                     |       |
| Total                                 |       | $        | 205,268    |                       | $          | 204,825 |   |

 

Realized gains and losses from sales of marketablesecurities are included in interest income, net, in the consolidated statementsof operations and were not significant for the years ended December 31,2006, 2005 and 2004. The Company recognizes realized gains and losses upon saleof marketable securities using the specific identification method.

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Marketvalues were determined for each individual security in the investmentportfolio. The unrealized losses related to these investments are attributed tochanges in interest rates and are considered to be temporary in nature. Thefollowing table summarizes, for all investments in an unrealized loss position,the fair value and gross unrealized losses of investments aggregated by type ofinvestment instrument and length of time that individual securities have beenin a continuous unrealized loss position as of December 31, 2006 (inthousands):

| ** **                 | ** ** | **Less Than 12 Months** | ** ** | **12 Months or Greater** | ** ** | **Total**       | ** ** |
|----------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|-----------------|------------|
| ** **                 | ** ** | **Fair  Value**                        | ** ** | **Unrealized  Losses**                  | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| Municipal  obligations     |       | $                                      | 115,722    |                                    |       | $               | (99        | ) |   | $ | 5,162 |   |   | $ | (8 | ) |   | $ | 120,884 |   |   | $ | (107 | ) |   |
| U.S. agencies  obligations |       | 27,796                                 |       |                                    | (139       | )               |       | 40,482 |   |   | (180 | ) |   | 68,278 |   |   | (319 | ) |   |
| Corporate  obligations     |       | —                                 |       |                                    | —     |            |       | 13,648 |   |   | (20 | ) |   | 13,648 |   |   | (20 | ) |   |
| Total                      |       | $                                      | 143,518    |                                    |       | $               | (238       | ) |   | $ | 59,292 |   |   | $ | (208 | ) |   | $ | 202,810 |   |   | $ | (446 | ) |   |

 

Thefollowing table summarizes, for all investments in an unrealized loss position,the fair value and gross unrealized losses of investments aggregated by type ofinvestment instrument and length of time that individual securities have beenin a continuous unrealized loss position as of December 31, 2005 (inthousands):

| ** **                 | ** ** | **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 | ) |   |

 

**3. Recent BusinessCombinations and Investments**

***Purchases***

***Shopping.net.***   OnDecember 1, 2006, the Company completed the acquisition of all of theoutstanding capital stock of Shopping.net for an aggregate purchase price of$13.9 million, consisting of cash consideration of $13.6 million andtransaction costs of the acquisition of $253,000. Of the total cashconsideration, $10.9 million was paid on the closing date and the remaining$2.7 million was accrued and will be paid within 24 months of the closing dateof the acquisition, subject to any working capital adjustments identified bythe Company subsequent to the closing date. Shopping.net, located in the UnitedKingdom, provides the Company with additional opportunities to monetize onlinetraffic and expand its overall comparison shopping presence in Europe. Thisfactor contributed to a purchase price in excess of the fair value ofShopping.net’s net tangible and intangible assets acquired, and, as a result,the Company has recorded goodwill in connection with this transaction. Theresults of Shopping.net’s operations are included in the Company’s consolidatedfinancial statements beginning on December 1, 2006.

F-20

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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 is considered final and was as follows (in thousands):

| Cash acquired                   |       |            |       | $          | 117        |   |
|---------------------------------|------------|-----------------|------------|------------|------------|--------|
| Other tangible  assets acquired |       |            |       | 822        |       |
| ** **                      | ** ** | **Useful life** | ** ** | ** ** | ** ** |
| Amortizable intangible  assets: |       |            |       |       |       |
| Advertiser relationships        |       | 0.5  - 1        |       | 700        |       |
| Domain names                    |       | 4               |       | 9,071      |       |
| Developed websites              |       | 4               |       | 680        |       |
| Covenants not to compete        |       | 3               |       | 30         |       |
| Goodwill                        |       |            |       | 6,200      |       |
| Total assets acquired           |       |            |       | 17,620     |       |
| Liabilities assumed             |       |            |       | (3,689     | )          |
| Total                           |       |            |       | $          | 13,931     |   |

 

***Fastclick.***   OnSeptember 27, 2005, the Company acquired 97% of the outstanding shares ofFastclick common stock upon the closing of its tender offer for all shares ofFastclick common stock. On September 29, 2005, the Company acquired theremaining 3% of outstanding shares of Fastclick common stock, at which timeFastclick became a wholly-owned subsidiary of the Company. Fastclick providesonline advertising services and technologies, and had developed an advertisingnetwork of more than 9,000 third-party publisher websites. Combined withValueClick’s then-existing market position in online marketing services, theaddition of Fastclick to the Company’s suite of products and services positionsValueClick as one of the largest online advertising network providers. Thisfactor contributed to a purchase price in excess of the fair value of Fastclick’snet tangible and intangible assets acquired, and, as a result, the Companyrecorded goodwill in connection with this transaction.

The results of Fastclick’s operations are included inthe Company’s consolidated financial statements from the beginning of theaccounting period nearest to the date of acquisition, October 1, 2005. Theresults of operations of Fastclick for the period from the closing of thetender 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 $215.7 million, consisting of 15.6 million shares ofValueClick common stock valued at $202.5 million (based on the averageValueClick common stock price at the public announcement date and severaltrading days before and after that date), stock options assumed valued at $12.6million using the Black-Scholes option-pricing model, and transaction costs ofthe acquisition of $600,000.

F-21

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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 is considered final and was 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    |   |

 

***Webclients.***   On June 24, 2005, theCompany completed the acquisition of Webclients, a leading provider of onlinelead generation marketing services. Webclients’ business activities complementthe Company’s other media businesses as well as its affiliate marketing businesses,and can be leveraged across the Company’s advertiser customer base. Thesefactors contributed to a purchase price in excess of the fair value ofWebclients’ net tangible and intangible assets acquired, and, as a result, theCompany recorded goodwill in connection with this transaction.

The results of Webclients’ operations are included inthe Company’s consolidated financial statements from the beginning of theaccounting period nearest to the date of acquisition, July 1, 2005. Theresults of operations of Webclients for the period from June 24, 2005through 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 $142.5 million, consisting ofcash of $122.2 million, 1.8 million shares of ValueClick common stock valued at$18.4 million (based on the average ValueClick common stock price at the publicannouncement date and several trading days before and after that date), stockoptions assumed valued at $1.5 million using the Black-Scholes option-pricingmodel, and transaction costs of the acquisition of $420,000.

F-22

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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 is considered final and was 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    |   |

 

***E-Babylon.****  *On June 13, 2005, the Companycompleted the acquisition of E-Babylon, a leading online marketer of ink jetcartridges and toner. E-Babylon expanded the Company’s e-commerce channel andprovided an infrastructure with the capability to support all of the Company’se-commerce initiatives. These factors contributed to a purchase price in excessof the fair value of E-Babylon’s net tangible and intangible assets acquired,and, as a result, the Company recorded goodwill in connection with thistransaction.

The results of E-Babylon’s operations are included inthe Company’s consolidated financial statements from the beginning of theaccounting period nearest to the date of acquisition, June 1, 2005. Theresults of operations of E-Babylon for the period from June 1, 2005through 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 $14.8 million, consistingof cash of $14.7 million and transaction costs of the acquisition of $112,000.

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 is considered final and was 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     |   |

 

F-23

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***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 other services, the acquisition increased the Company’scompetitive position in Europe. These factors contributed to a purchase pricein excess of the fair value of Pricerunner’s net tangible and intangible assetsacquired, and, as a result, the Company recorded goodwill in connection withthis transaction. In the second quarter of 2005, the Company launchedPricerunner in the United States, offering consumers a broad range of productsfrom offline and online retailers throughout the country.

The results of Pricerunner’s operations are includedin the Company’s consolidated financial statements from the beginning of theaccounting period nearest to the date of acquisition, August 1, 2004. Theresults of operations of Pricerunner for the period from August 1, 2004through 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 $30.1 million,consisting of cash of $26.9 million, 263,000 shares of ValueClick commonstock valued at $2.0 million (based on the average ValueClick common stockprice at the public announcement date and several trading days before and afterthat date), and transaction costs of the acquisition of $1.2 million.Identifiable intangible assets and goodwill of $13.7 million and $14.7 million,respectively, were 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, 2006and 2005 as if the acquisitions of Shopping.net, Fastclick, Webclients, and E-Babylonhad been effective as of the beginning of 2005 is as follows (in thousands,except per share data):

| ** **                           | ** ** | **2006**        | ** ** | **2005**        | ** ** |
|--------------------------------------|------------|-----------------|------------|-----------------|------------|
| ** **                           | ** ** | **(pro-forma)** | ** ** | **(pro-forma)** | ** ** |
| Revenue                              |       |            | $          | 549,330         |       |   |   | $ | 409,776 |   |   |
| Net income                           |       |            | $          | 61,932          |       |   |   | $ | 38,239 |   |   |
| Basic net income  per common share   |       |            | $          | 0.62            |       |   |   | $ | 0.38 |   |   |
| Diluted net income per  common share |       |            | $          | 0.61            |       |   |   | $ | 0.37 |   |   |

 

These pro-forma results ofoperations are not necessarily indicative of future operating results.

**4.**Sale ofValueClick 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 $8.0 million. The sale did not qualify as a discontinuedoperation given the significance of the Company’s technology support agreementon this entity’s continuing operations. The operating results of ValueClickJapan are included in the Company’s operating results through March 31, 2004.The results of operations of ValueClick Japan for the period fromMarch 26, 2004 through March 31, 2004 were not significant.

F-24

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**5. Goodwill andIntangible Assets**

Inaccordance with the provisions of SFAS No. 142, “Goodwill and OtherIntangible Assets” (“SFAS 142”), the Company does not amortize goodwill,but rather tests goodwill for impairment annually as of December 31 at thereporting unit level using a fair value approach. No goodwill impairment wasrecorded as a result of the Company’s annual impairment test for the yearsended December 31, 2006, 2005 and 2004. The Company determined itsreporting units based on the guidance in SFAS No. 142 and EITF Issue D-101.As of December 31, 2006, the Company’s reporting units consisted of theMedia, Affiliate Marketing, Comparison Shopping, and Technology operatingsegments. As required by SFAS No. 142, the Company assigned goodwillto its reporting units. Below is assigned goodwill by reporting unit (inthousands):

| ** **           | ** ** | **As of December 31,** | ** ** |
|----------------------|------------|---------------------------------------|------------|
| ** **           | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| **Reporting  Units** | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Media                |       | $                                     | 231,925    |   | $ | 234,425 |   |
| Affiliate  Marketing |       | 30,408                                |       | 30,247 |   |
| Comparison  Shopping |       | 15,737                                |       | 8,543 |   |
| Technology           |       | —                                |       | — |   |
| Total goodwill       |       | $                                     | 278,070    |   | $ | 273,215 |   |

 

For the year ended December 31, 2006, thedecrease in goodwill for Media of $2.5 million was due to adjustmentsidentified upon completion of the pre-acquisition tax returns for acquiredentities, as well as tax benefits from exercises of nonqualified employee stockoptions that were assumed and fully vested at the time of acquisition ofWebclients and Fastclick. The increase in goodwill for Affiliate Marketing of$161,000 was due to the impact of currency exchange rate fluctuations offset bytax benefits from exercises of nonqualified employee stock options that wereassumed and fully vested at the time of acquisition of Commission Junction. Theincrease in goodwill for Comparison Shopping of $7.2 million was due to theacquisition of Shopping.net and the impact of currency exchange ratefluctuations. As of December 31, 2006 and 2005, $51.2 million and $55.3million, respectively, of goodwill is tax deductible.

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          |   |   |
| Trademarks, trade  names and domain names         |       |                                     | 9          |   |   |
| Developed  technologies and websites              |       |                                     | 3          |   |   |
| Covenants not to  compete                         |       |                                     | 3          |   |   |
| Total                                             |       |                                     | 6          |   |   |

 

F-25

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Thegross carrying amounts and accumulated amortization of the Company’s acquiredintangible assets were as follows at December 31, 2006 and 2005 (inthousands): 

| ** **                                       | ** ** | **Gross  Balance** | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|-------------------------------|------------|-------------------------------|------------|
| December 31,  2006:                         |       |               |       |                          |       |                          |       |   |   |   |   |
| Customer, affiliate and advertiser relationships |       | $                  | 86,027     |                          |       | $                             | (25,553    | ) |   |   | $ | 60,474 |   |   |
| Trademarks, trade names and domain names         |       | 27,862             |       |                          | (3,896     | )                             |       |   | 23,966 |   |   |
| Developed technologies and websites              |       | 6,890              |       |                          | (4,432     | )                             |       |   | 2,458 |   |   |
| Covenants not to compete                         |       | 10,547             |       |                          | (6,062     | )                             |       |   | 4,485 |   |   |
| Total intangible  assets                         |       | $                  | 131,326    |                          |       | $                             | (39,943    | ) |   |   | $ | 91,383 |   |   |
| December 31, 2005:                          |       |               |       |                          |       |                          |       |   |   |   |   |
| Customer, affiliate and advertiser relationships |       | $                  | 84,421     |                          |       | $                             | (11,218    | ) |   |   | $ | 73,203 |   |   |
| Trademarks, trade names and domain names         |       | 18,184             |       |                          | (1,592     | )                             |       |   | 16,592 |   |   |
| Developed technologies and websites              |       | 6,150              |       |                          | (2,943     | )                             |       |   | 3,207 |   |   |
| Covenants not to compete                         |       | 10,494             |       |                          | (1,998     | )                             |       |   | 8,496 |   |   |
| Total intangible assets                          |       | $                  | 119,249    |                          |       | $                             | (17,751    | ) |   |   | $ | 101,498 |   |   |

 

In2006, $10.5 million was added to the intangible asset balances related to theacquisition of Shopping.net. In 2005, $35.1 million, $48.0 million and $5.8million were added to the intangible asset balances, respectively, related tothe purchases of Fastclick, Webclients and E-Babylon. Amortization expenserelated to intangible assets was $21.8 million, $12.2 million and $4.1 millionfor the years ended December 31, 2006, 2005 and 2004, respectively.Estimated intangible asset amortization expense for the next five years ending December 31and thereafter is as follows (in thousands):

| 2007       |   | $ | 21,087 |   |
|------------|--------|---|--------|--------|
| 2008       |   | $ | 17,976 |   |
| 2009       |   | $ | 15,109 |   |
| 2010       |   | $ | 14,566 |   |
| 2011       |   | $ | 10,677 |   |
| Thereafter |   | $ | 11,968 |   |

 

**6. Propertyand Equipment**

Propertyand equipment consisted of the following (in thousands):

| ** **                                       | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Land                                             |       | $                                     | 1,470      |   | $ | 1,470 |   |
| Building                                         |       | 1,330                                 |       | 1,330 |   |
| Computer  equipment and purchased software       |       | 41,274                                |       | 33,599 |   |
| Furniture and equipment                          |       | 4,485                                 |       | 3,936 |   |
| Vehicles                                         |       | 74                                    |       | 74 |   |
| Leasehold  improvements                          |       | 2,766                                 |       | 2,440 |   |
|                                             |       | 51,399                                |       | 42,849 |   |
| Less: accumulated  depreciation and amortization |       | (32,404                               | )          | (24,593 | ) |
|                                             |       | $                                     | 18,995     |   | $ | 18,256 |   |

 

Total depreciationexpense, including the amortization of leasehold improvements, for the yearsended December 31, 2006, 2005 and 2004 was $9.3 million, $7.1 million and$6.2 million, respectively.

F-26

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

Accountspayable and accrued expenses consisted of the following (in thousands):

| ** **                                             | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                             | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Accounts payable,  including amounts due to publishers |       | $                                     | 50,955     |   | $ | 33,457 |   |
| Advertiser  deposits                                   |       | 9,924                                 |       | 5,823 |   |
| Accrued salaries  and benefits                         |       | 7,237                                 |       | 7,001 |   |
| Other accrued  expenses                                |       | 15,650                                |       | 18,018 |   |
|                                                   |       | $                                     | 83,766     |   | $ | 64,299 |   |

 

In June 2005, inconnection with the closing of the acquisition of Webclients as discussed innote 3, 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 statements of operations. The Company repaidall outstanding principal and interest due under the Repurchase Agreement as ofSeptember 30, 2005.

**8. Income Taxes**

Thecomponents of income before income taxes and minority interest are as follows(in thousands):

| ** **                                        | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                        | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States                                     |       | $                                          | 104,332    |   | $ | 63,909 |   | $ | 43,968 |   |
| Foreign                                           |       | 5,797                                      |       | 5,545 |   | 3,277 |   |
| Income before income  taxes and minority interest |       | $                                          | 110,129    |   | $ | 69,454 |   | $ | 47,245 |   |

 

Incometax expense is comprised of the following provision (benefit) components (inthousands):

| ** **         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:           |       |                                       |       |   |   |   |   |
| Federal            |       | $                                          | 38,442     |   | $ | 22,805 |   | $ | 17,954 |   |
| State              |       | 12,526                                     |       | 6,207 |   | 4,886 |   |
| Foreign            |       | 2,273                                      |       | 1,819 |   | (73 | ) |
|               |       | 53,241                                     |       | 30,831 |   | 22,767 |   |
| Deferred:          |       |                                       |       |   |   |   |   |
| Federal            |       | (4,474                                     | )          | (1,182 | ) | (5,815 | ) |
| State              |       | (473                                       | )          | (293 | ) | (1,289 | ) |
| Foreign            |       | (739                                       | )          | (546 | ) | 490 |   |
|               |       | (5,686                                     | )          | (2,021 | ) | (6,614 | ) |
| Income tax expense |       | $                                          | 47,555     |   | $ | 28,810 |   | $ | 16,153 |   |

 

The income tax benefit of employee stock optionsexercised during 2006, 2005 and 2004 in the amount of $17.0 million, $8.5million and $11.5 million, respectively, was recorded in additional paid-incapital and did not, therefore, result in a benefit in the consolidatedstatements of operations. During 2004, $13.3 million of a valuation allowancepreviously recorded against deferred tax assets relating to net operating losscarryforwards of certain acquired entities was reversed and recorded as adecrease to goodwill based 

F-27

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upon management’sconclusion that it was more likely than not that these net operating losscarryforwards would be realized before their expiration. The Company recorded adecrease to goodwill of $2.7 million related to tax benefits from exercises in2006 of nonqualified employee stock options that were assumed and fully vestedat the time of acquisition.

Thecomponents of the deferred tax assets and deferred tax liabilities are asfollows (in thousands):

| ** **                                                  | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| Deferred tax assets:                                        |       |                                  |       |   |   |
| Net operating loss carryforwards                            |       | $                                     | 13,193     |   | $ | 15,035 |   |
| Depreciation and amortization                               |       | 10,825                                |       | 11,112 |   |
| Other                                                       |       | 6,466                                 |       | 5,683 |   |
| Gross deferred tax assets                                   |       | 30,484                                |       | 31,830 |   |
| Valuation allowance                                         |       | (1,173                                | )          | (1,308 | ) |
| Net deferred tax assets                                     |       | 29,311                                |       | 30,522 |   |
| Deferred tax  liabilities:                                  |       |                                  |       |   |   |
| Acquired intangible assets                                  |       | 36,404                                |       | 40,103 |   |
| Other                                                       |       | 204                                   |       | 571 |   |
| Total deferred tax liabilities                              |       | 36,608                                |       | 40,674 |   |
| Net deferred tax assets (liabilities)                       |       | $                                     | (7,297     | ) | $ | (10,152 | ) |
| Current portion  of net deferred tax assets (liabilities)   |       | $                                     | 6,614      |   | $ | 6,619 |   |
| Long-term portion  of net deferred tax assets (liabilities) |       | (13,911                               | )          | (16,771 | ) |
| Net deferred tax  assets (liabilities)                      |       | $                                     | (7,297     | ) | $ | (10,152 | ) |

 

In evaluating the need for a valuation allowance atDecember 31, 2006 and 2005, the Company evaluated both positive andnegative evidence in accordance with the requirements of SFAS No. 109,“Accounting for Income Taxes.” As of December 31, 2006, based upon bothpositive and negative evidence, the Company determined it is more likely thannot that certain deferred tax assets may not be realizable. As ofDecember 31, 2006 and 2005, the valuation allowance attributable todeferred tax assets was $1.2 million and $1.3 million, respectively, representingan overall decrease of $0.1 million. The decrease in the valuation allowancerelates primarily to realization of tax benefits associated with state netoperating loss carryforwards.

At December 31, 2006, the Company had netoperating loss carryforwards for federal and state purposes of $29.1 millionand $16.5 million, respectively. The federal and state net operating losscarryforwards begin/began to expire in 2012 and 2004, respectively. As ofDecember 31, 2006, the Company may have available an additional $127.8million and $85.8 million of net operating loss carryforwards for federal andstate purposes, respectively, the benefit of which has not been reflected inthe Company’s consolidated financial statements. The Company believes that it maybe able to establish with the tax authorities that it is entitled, underapplicable statutes and interpretations thereof, to some or all of the benefitof these net operating losses in future periods. However, this tax position issubject to certain assumptions and interpretations of the relevant legislativeand judicial history that may or may not be accepted by the tax authorities.The Company has determined that the future income tax benefits associated withthese net operating loss carryforwards are contingent upon the ultimate outcomeof an uncertain tax position and has not recorded a benefit related to thesenet operating loss carryforwards. Under SFAS 109, if the Company’s income taxposition with regard to these net operating loss carryforwards were to beupheld under tax examination, the Company would record an income tax benefit inthe period that such determination was made. As more fully explained in note 1under “Recently Issued Accounting Standards”, the Company is currentlyevaluating a recently-issued interpretation of SFAS 109 relating to uncertaintax positions, which will be effective for the Company on January 1, 2007.

F-28

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Theoverall effective income tax rate differs from the statutory federal tax rateas follows:

| ** **                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Tax provision  based on the federal statutory rate                         |       | 35.0                                       | %          | 35.0 | % | 35.0 | % |
| State income  taxes, net of federal benefit                                |       | 7.1                                        |       | 5.9 |   | 4.5 |   |
| Stock-based  compensation                                                  |       | 0.7                                        |       | 0.1 |   | 0.4 |   |
| Research and  experimentation credit                                       |       | (0.6                                       | )          | (0.4 | ) | (1.1 | ) |
| Effects of  foreign income                                                 |       | (0.4                                       | )          | (0.4 | ) | (0.5 | ) |
| Adjustment to  valuation allowance, net of purchase accounting adjustments |       | 0.1                                        |       | (0.6 | ) | (1.7 | ) |
| Other, net                                                                 |       | 1.3                                        |       | 1.9 |   | (2.4 | ) |
|                                                                       |       | 43.2                                       | %          | 41.5 | % | 34.2 | % |

 

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

As of December 31,2006, withholding and U.S. income taxes have not been provided on$11.4 million of unremitted earnings of certain non-U.S. subsidiariesbecause such earnings will be permanently reinvested in foreign operations. Thedetermination of taxes associated with the $11.4 million of unremitted earningsis not practicable.

**9. Capitalization**

**Treasury Stock**

In September 2001, the Company’s board ofdirectors authorized a stock repurchase program (“the Program”) to allow forthe repurchase of shares of the Company’s common stock at prevailing marketprices in the open market or through unsolicited negotiated transactions. Sincethe inception of the Program and through December 31, 2005, the Company’sboard of directors had authorized a total of $95 million for repurchases underthe Program and the Company had repurchased a total of 25.7 million shares ofits common stock for $75.9 million. As of December 31, 2005, the Companyhad $19.1 million available under the Program. The amounts authorized by theCompany’s board of directors exclude broker commissions.

During the year ended December 31,2006, the Company’s board of directors authorized two increases to the Program,totaling an additional $150 million, and the Company repurchased an additional6.9 million shares of its common stock for $103.4 million, includingbroker commissions. In accordance with APB Opinion No. 6, “Status ofResearch Bulletins”, the Company allocated the total cost of the repurchasedshares for the year ended December 31, 2006 between additional paid-incapital ($41.9 million) and retained earnings ($61.5 million). As of December 31,2006, up to an additional $65.9 million of the Company’s capitalmay be used to repurchase shares of the Company’s outstanding common stockunder the Program. Repurchases have been funded from available working capitaland all shares have been retired subsequent to their repurchase. There is noguarantee as to the exact number of shares that will be repurchased by theCompany and the Company may discontinue repurchases at any time thatmanagement or the Company’s board of directors determines additionalrepurchases are not warranted.

**Stockholder RightsPlan**

On June 4, 2002, the board of directors of ValueClick, Inc.declared a dividend of one preferred share purchase right for each outstandingshare of the Company’s common stock. The dividend was payable on June 14,2002 to the stockholders of record at the close of business on that date. Eachright entitles the registered holder to purchase from the Company one unitconsisting of one-thousandth of a share of Series A junior participatingpreferred stock of the Company at a price of $25.00 per unit. The description 

F-29

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and terms of the rightsare set forth in a Rights Agreement, dated as of June 4, 2002, by andbetween the Company and Mellon Investor Services LLC, a New Jersey LimitedLiability 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 Company’s outstanding common stock or (ii) ten business days(or such later date as may be determined by action of the Company’s board ofdirectors prior to such time as any person becomes an acquiring person)following the commencement of, or announcement of an intention to make, atender offer or exchange offer, the consummation of which would result in thebidder’s beneficial ownership of 15% or more of the Company’s outstandingcommon stock (the earlier of such dates being called the distribution date),the rights will be evidenced by the Company’s common stock certificates.

The rights are not exercisable until the distribution date.The rights will expire at the close of business on June 4, 2012 unless thefinal expiration date is extended or the rights are earlier redeemed orexchanged 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.

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.

**10. StockOptions**

**1999 Stock OptionPlan 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 for issuance under the 2002 Stock Plan is 15,000,000, of which3,901,711 shares were available for future grant at December 31, 2006.

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The 2002 Stock Planprovides for the granting of non-statutory and incentive stock options to,among other parties, employees, officers and directors of the Company. Stockoptions granted to new employees or officers generally begin vesting on the newemployee’s or officer’s first date of employment, and vest over a four-yearperiod, with one-fourth vesting on the first anniversary date and the remaindervesting pro-rata monthly over the remaining three years, and expire five to tenyears from the date of grant. Stock options granted to existing employees orofficers typically vest on a monthly pro-rata basis over a four-year period andexpire five to ten years from the date of grant. Stock options granted todirectors generally vest over a two-year period and expire ten years from thedate of grant.

**Assumed Stock Plans**

Pursuantto the Company’s business combinations with Fastclick, Webclients, HiSpeedMedia, Commission Junction, Be Free, Mediaplex, Z Media, and ClickAgents, theCompany assumed the stock options and related plans as detailed below. No stockoptions are available for future grants under these 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            |          |
| HiSpeed  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            |          |
|                                                                                |            |            |            |                             |                 |                                          |            |                                 |            |                          |               |  |  |  |

 

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**Plan Activity**

Thefollowing table summarizes activity under all of the Company’s stock plans forthe years ended December 31, 2006, 2005 and 2004:

| ** **                                                                                  | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------|------------|---------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                  | ** ** | ** ** | ** ** | ** **                                  | ** ** | **(in years)**                                  | ** ** | **(in thousands)**             | ** ** |
| Options outstanding  at December 31, 2003                                              |       | 11,047,426 |       |                                        | $          | 6.15                                                 |       |                                |       |   |   |   |   |   |   |   |
| Granted                                                                                     |       | 1,507,689  |       |                                        | $          | 9.28                                                 |       |                                |       |   |   |   |   |   |   |   |
| Exercised                                                                                   |       | (4,119,089 | )          |                                        | $          | 2.67                                                 |       |                                |       |   |   |   |   |   |   |   |
| Forfeited/expired                                                                           |       | (1,060,289 | )          |                                        | $          | 14.07                                                |       |                                |       |   |   |   |   |   |   |   |
| Options  outstanding at December 31, 2004                                              |       | 7,375,737  |       |                                        | $          | 7.59                                                 |       |                                |       |   |   |   |   |   |   |   |
| Granted                                                                                     |       | 4,144,436  |       |                                        | $          | 13.42                                                |       |                                |       |   |   |   |   |   |   |   |
| Assumed from Webclients and Fastclick                                                       |       | 1,642,189  |       |                                        | $          | 4.93                                                 |       |                                |       |   |   |   |   |   |   |   |
| Exercised                                                                                   |       | (3,015,936 | )          |                                        | $          | 4.79                                                 |       |                                |       |   |   |   |   |   |   |   |
| Forfeited/expired                                                                           |       | (608,469   | )          |                                        | $          | 14.47                                                |       |                                |       |   |   |   |   |   |   |   |
| Options  outstanding at December 31, 2005                                              |       | 9,537,957  |       |                                        | $          | 10.11                                                |       |                                |       |   |   |   |   |   |   |   |
| Granted                                                                                     |       | 1,342,625  |       |                                        | $          | 16.99                                                |       |                                |       |   |   |   |   |   |   |   |
| Exercised                                                                                   |       | (4,419,809 | )          |                                        | $          | 6.87                                                 |       |                                |       |   |   |   |   |   |   |   |
| Forfeited/expired                                                                           |       | (996,485   | )          |                                        | $          | 14.27                                                |       |                                |       |   |   |   |   |   |   |   |
| Options  outstanding at December 31, 2006                                              |       | 5,464,288  |       |                                        | $          | 13.66                                                |       |                                |       | 6.31 |   |   |   | $ | 60,970 |   |   |
| Options vested at  December 31, 2006 and expected to vest after December 31, 2006 |       | 4,989,859  |       |                                        | $          | 13.65                                                |       |                                |       | 6.30 |   |   |   | $ | 56,311 |   |   |
| Options exercisable at  December 31, 2006                                              |       | 1,737,234  |       |                                        | $          | 14.01                                                |       |                                |       | 6.27 |   |   |   | $ | 23,221 |   |   |

 

The total intrinsic value of stock options exercisedduring the years ended December 31, 2006, 2005 and 2004 was $54.5 million,$34.7 million and $29.9 million, respectively. The weighted-average estimatedgrant date fair value of stock options granted for the years ended December 31,2006, 2005 and 2004 was $6.93, $7.97 and $3.30, respectively. Theweighted-average estimated grant date fair value of $7.97 for the year ended December 31,2005 includes the weighted-average fair value of stock options assumed inbusiness combinations of $12.42. Excluding stock options assumed in businesscombinations, the weighted-average estimated grant date fair value of stockoptions granted for the year ended December 31, 2005 was $6.28.

As of December 31,2006, there was $25.9 million of total unrecognized stock-based compensationexpense related to unvested stock options. The remaining vesting period forsuch unvested stock options ranges up to 4 years, with a weighted-averageremaining vesting period of 2.4 years.

**Stock AppreciationRights Plan**

In October 2005, theCompany issued 311,000 share-equivalent Stock Appreciation Rights (“SARs”) tocertain former employees of Fastclick. The purpose of the SARs was to providecertain individuals with an inducement to remain with the combined organizationsubsequent to the acquisition date. The SARs vest over either a four- oreight-quarter period beginning October 1, 2005. The intrinsic value of theSARs that vest each quarter will be settled in cash the following quarter. TheSARs are classified as liability awards in accordance with SFAS 123(R). As of December 31,2006, 36,000 SARs remain unvested, with a weighted-average exercise price of$4.12, a remaining contractual term of 0.75 years, and an aggregate intrinsicvalue of $707,000. No SARs have been issued subsequent to October 2005.

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**Valuation andExpense Information under SFAS 123(R)**

Forthe year ended December 31, 2006, the Company recognized stock-basedcompensation expense of $11.9 million, which includes $10.4 million related tostock options and $1.5 million related to SARs. The following table summarizes,by consolidated statement of operations line item for the year ended December 31,2006, the $10.4 million of stock-based compensation expense related to stockoptions (excluding the SARs) that was recorded in accordance with theprovisions of SFAS 123(R) (in thousands):

| ** **                                                                      | ** ** | **Year Ended  December 31, 2006** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Sales and  marketing                                                            |       |                                             | $          | 3,689 |   |   |
| General and  administrative                                                     |       |                                             | 4,958      |   |   |
| Technology                                                                      |       |                                             | 1,763      |   |   |
| Stock-based  compensation expense related to stock options                      |       |                                             | 10,410     |   |   |
| Related income  tax benefits                                                    |       |                                             | (3,354     | ) |   |
| Stock-based compensation  expense related to stock options, net of tax benefits |       |                                             | $          | 7,056 |   |   |

 

The Company has not capitalized as an asset anystock-based compensation expense for the years ended December 31, 2006,2005 and 2004.

Prior to adopting SFAS 123(R), the Company classifiedall tax benefits resulting from the exercise of stock options as an operatingactivity in the consolidated statements of cash flows. SFAS 123(R) requirescash flows resulting from excess tax benefits to instead be classified as afinancing activity. Excess tax benefits are realized tax benefits from taxdeductions for exercised stock options in excess of the deferred tax assetattributable to the recognized stock-based compensation expense for such stockoptions. Pursuant to the requirements of SFAS 123(R), $18.6 million of excesstax benefits for the year ended December 31, 2006 has been classified as afinancing activity in the consolidated statements of cash flows.

TheCompany calculated the estimated fair value of each stock option on the date ofgrant using the Black-Scholes option-pricing model and the followingweighted-average assumptions:

| ** **                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free  interest rates  |       |                                       | 4.7        | % |   |   | 4.0 | % |   |   | 1.8 | % |   |
| Expected lives  (in years) |       |                                       | 3.6        |   |   |   | 3.6 |   |   |   | 2.2 |   |   |
| Dividend yield             |       |                                       | 0          | % |   |   | 0 | % |   |   | 0 | % |   |
| Expected volatility        |       |                                       | 49         | % |   |   | 57 | % |   |   | 60 | % |   |

 

The Company’s computationof expected volatility for the year ended December 31, 2006 was based on acombination of historical and market-based implied volatility from tradedoptions on the Company’s common stock. The Company believes that includingmarket-based implied volatility in the calculation of expected volatilityresults in a more accurate measure of the volatility expected in futureperiods. Prior to 2006, the computation of expected volatility was basedentirely on historical volatility. The Company estimated the expected life ofeach stock option granted in 2006 using the short-cut method permissible underSAB 107, which utilizes the weighted-average expected life of each tranche ofthe granted stock option, which was determined based on the sum of each tranche’svesting period plus one-half of the period from the vesting date of eachtranche to its expiration. The risk-free interest rate is based on the impliedyield available on U.S. Treasury securities with an equivalent remaining term.

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**Pro-formaInformation for Periods Prior to the Adoption of SFAS 123(R)**

Priorto the adoption of SFAS 123(R), the Company accounted for stock-based awards toemployees, officers and directors using the intrinsic value method inaccordance with APB 25. The following table illustrates the effect onstock-based compensation expense, net income and net income per common share ifthe Company had applied the fair value recognition provisions of SFAS 123 toits stock plans for the years ended December 31, 2005 and 2004 (inthousands, except per share data):

| ** **                                                                                                                 | ** ** | **Year Ended December 31,**                           | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                                                                 | ** ** | **     2005     ** | ** ** | **     2004     ** | ** ** |
| Net income, as  reported                                                                                                   |       |                                                                 | $          | 40,644 |   |   |   | $ | 31,222 |   |   |
| Add:                                                                                                                       |       |                                                                 |       |   |   |   |   |   |   |
| Stock-based compensation expense included in  reported net income, net of related tax effects                              |       |                                                                 | 1,271      |   |   |   | 671 |   |   |
| Deduct:                                                                                                                    |       |                                                                 |       |   |   |   |   |   |   |
| Stock-based compensation expense determined under  fair value-based method for all awards, net of related tax effects |       |                                                                 | (5,808     | ) |   |   | (1,566 | ) |   |
| Pro-forma net  income                                                                                                      |       |                                                                 | $          | 36,107 |   |   |   | $ | 30,327 |   |   |
| Net income per  common share:                                                                                              |       |                                                                 |       |   |   |   |   |   |   |
| Basic—as reported                                                                                                     |       |                                                                 | $          | 0.46 |   |   |   | $ | 0.39 |   |   |
| Diluted—as  reported                                                                                                  |       |                                                                 | $          | 0.45 |   |   |   | $ | 0.37 |   |   |
| Basic—pro-forma                                                                                                       |       |                                                                 | $          | 0.41 |   |   |   | $ | 0.38 |   |   |
| Diluted—pro-forma                                                                                                     |       |                                                                 | $          | 0.40 |   |   |   | $ | 0.36 |   |   |

 

**11. Net IncomePer Common 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,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                              | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Numerator:                                                              |       |                                       |       |   |   |   |   |
| Net income                                                              |       | $                                          | 62,574     |   | $ | 40,644 |   | $ | 31,222 |   |
| Denominator:                                                            |       |                                       |       |   |   |   |   |
| Denominator for basic calculation—weighted-average  common  shares |       | 99,600                                     |       | 87,722 |   | 80,063 |   |
| Weighted-average effect of dilutive securities—stock  options      |       | 2,121                                      |       | 3,135 |   | 3,975 |   |
| Denominator for diluted calculation                                     |       | 101,721                                    |       | 90,857 |   | 84,038 |   |
| Net income per common  share:                                           |       |                                       |       |   |   |   |   |
| Basic                                                                   |       | $                                          | 0.63       |   | $ | 0.46 |   | $ | 0.39 |   |
| Diluted                                                                 |       | $                                          | 0.62       |   | $ | 0.45 |   | $ | 0.37 |   |

 

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 was 2.8million, 416,000 and 2.9 million for the years ended December 31, 2006,2005 and 2004, respectively.

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**12. DefinedContribution Plans**

Prior to 2006, the Companyhad various savings plans (the “Savings Plans”) that qualified as definedcontribution plans under Section 401(k) of the Internal Revenue Code.In 2006, the Savings Plans were consolidated into one savings plan (the “MasterSavings Plan”), which also qualifies as a defined contribution plan underSection 401(k) of the Internal Revenue Code. Under the Master SavingsPlan, participating employees may defer a percentage of their eligible pre-taxearnings up to the Internal Revenue Service’s annual contribution limit. Allfull-time employees of the Company are eligible to participate in the MasterSavings Plan. The Master Savings Plan does not permit investment of participantcontributions in the Company’s common stock. Company matching contributions tothe Master Savings Plan is discretionary. Company contributions to the MasterSavings Plan amounted to $445,000, $395,000 and $376,000 for the years endedDecember 31, 2006, 2005 and 2004, respectively.

**13. 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 yearsended December 31, 2006 and 2005, the Company recorded $455,000 and$222,000, respectively, in facilities expense associated with this operatinglease agreement. As of December 31, 2006 and 2005, the Company had an outstandingamount due to this unaffiliated entity of $1,000 and $8,000, respectively,which is reflected in accounts payableand accrued expenses.

**14. Commitmentsand Contingencies**

**Leases**

Futureminimum lease payments as of December 31, 2006 under noncancellableoperating leases, and related sublease income, with initial lease terms inexcess of one year, for the next five years and thereafter are as follows (inthousands):

| **Year Ending December 31:** | ** ** | ** ** | ** ** | **Operating  Lease  Commitments** | ** ** | **Operating  Sublease  Income** | ** ** |
|---------------------------------------------|------------|------------|------------|-----------------------------------|------------|---------------------------------|------------|
| 2007                                        |       |       | $          | 5,712                             |       |                            |       | $ | (702 | ) |   |
| 2008                                        |       |       | 5,090      |                              |       |                            | (576       | ) |   |
| 2009                                        |       |       | 3,816      |                              |       |                            | (283       | ) |   |
| 2010                                        |       |       | 2,074      |                              |       |                            | (267       | ) |   |
| 2011                                        |       |       | 512        |                              |       |                            | —     |   |   |
| Thereafter                                  |       |       | 112        |                              |       |                            | —     |   |   |
| Total minimum  lease payments               |       |       | $          | 17,316                            |       |                            |       | $ | (1,828 | ) |   |

 

Operating leases consist primarily of facility leases.Certain of the Company’s operating leases include escalation clauses thatperiodically adjust rental expense to reflect changes in price indices. TheCompany records rent expense on a straight-line basis over the lease term.

Total rent expense under operating leases, net ofsublease income, was $5.0 million, $3.8 million and $2.9 millionfor the years ended December 31, 2006, 2005 and 2004, respectively.

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As of December 31,2006, the Company had the following purchase obligations (in thousands):

| ** **            | ** ** | **Payments due by period** | ** ** |
|-----------------------|------------|-------------------------------------------|------------|
| ** **            | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1 to less  than  3 years** | ** ** | **3 to less  than  5 years** | ** ** | **More than  5 years** | ** ** |
| Purchase  obligations |       | $                                         | 1,416      |   |   | $ | 1,165 |   |   |   | $ | 251 |   |   |   | $ | — |   |   |   | $ | — |   |   |
|                       |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Purchase obligations include agreements to purchasegoods or services that are enforceable, legally binding and specify allsignificant terms. Purchase obligations exclude agreements that are cancelablewithout 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.Certificates of deposit of $500,000 and $605,000 maintained by the Company inconnection with certain of these standby letters of credit are included in cashand cash equivalents as of December 31, 2006 and 2005, respectively.Commitments under standby letters of credit as of December 31, 2006 arescheduled to expire as follows (in thousands):

| ** **                 | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1 to less than 3 years** | ** ** | **3 to less than 5 years** | ** ** | **More than  5 years** | ** ** |
|----------------------------|------------|-----------|------------|---------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------------|------------|
| Standby letters  of credit |       | $         | 585        |                            |       | —                     |       |                       |       | —                           |       |   |   | $ | 585 |   |   |   | — |   |   |
|                            |            |           |            |                                 |            |                            |            |                            |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

**Other Commitments**

In the ordinary course of business, the Company mayprovide indemnifications 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 the Company’s breach ofsuch agreements, services to be provided by the Company, or from intellectualproperty infringement claims made by third-parties. In addition, the Companyhas entered into indemnification agreements with its directors and certain ofits officers and employees that will require the Company, among other things,to indemnify them against certain liabilities that may arise by reason of theirstatus or service as directors, officers or employees. The Company has alsoagreed to indemnify certain former officers, directors and employees ofacquired companies in connection with the acquisition of such companies. TheCompany maintains director and officer insurance, which may cover certainliabilities arising from its obligation to indemnify its directors and certainof its officers and employees, and former officers, directors and employees ofacquired companies, 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**

From time to time, theCompany may become subject to legal proceedings, claims and litigationarising in the ordinary course of business. In addition, the Companymay receive letters alleging infringement of patent or other intellectualproperty rights. The Company is not currently a party to any material legalproceedings, nor is the Company aware of any pending or threatened litigationthat would have a material adverse effect on the Company’s business, operatingresults, cash flows or financial condition should such litigation be resolvedunfavorably.

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**15. Restructuringand Lease 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 toterminate the lease. As a result, the Company reversed the remainingrestructuring allowance of $588,000 and recorded a corresponding benefit whichis reflected in**restructuring benefit, net in theconsolidated statement of operations 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 would continue to incur for theremaining lease terms of the vacated premises, less estimated sublease income.The total lease exit charge associated with vacating these leased premises wasrecorded 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, 2006, 2005 and 2004 (in thousands):

| ** **                         | ** ** | **Lease  Exit  Costs** | ** ** |
|------------------------------------|------------|------------------------|------------|
| 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                     |       |
| Cash payments,  net                |       | (32                    | )          |
| Accrual at  December 31, 2006 |       | $                      | —     |   |

 

**16. Segmentsand Geographic Information**

TheCompany derives its revenue from four business segments. These businesssegments are presented on a worldwide basis and include: Media, AffiliateMarketing, Comparison Shopping, and Technology. In the fourth quarter of 2006,the Company changed its internal reporting structure which resulted in changesin the Company’s reportable segments to: a) present segment information on aworldwide product view (whereas prior to the fourth quarter of 2006 all of theCompany’s operations in Europe, including Affiliate Marketing, ComparisonShopping and Technology, were recorded in the Media segment); b) presentseparately the operating results of the Company’s Comparison Shopping segment;and c) include the Company’s Search123 product (which was previously includedin the Media segment) with the Affiliate Marketing segment in order toconsolidate the Company’s SEM and search syndication product offerings in onesegment. In accordance with SFAS 131, all prior period segment information hasbeen revised to conform to the new segment presentation. The following table providesrevenue, segment income from operations and total assets for each of theCompany’s four business 

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segments. Segment income from operations, as shownbelow, excludes the effects of: stock-based compensation expense; amortizationof intangible assets; restructuring benefit, net; and corporate expenses.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, legal, tax, and Sarbanes-Oxley compliance; insurance; and, othercorporate expenses. 

| ** **            | ** ** | **Revenue**             | ** ** | **Segment Income from  Operations** | ** ** | **Total Assets** | ** ** |
|-----------------------|------------|-------------------------|------------|-----------------------------------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2006**                | ** ** | **2005**                                      | ** ** | **2004**              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **            | ** ** | **(in thousands)** | ** ** |
| Media                 |       | $                       | 382,973    |                                          | $          | 164,835               |       | $ | 64,143 |   | $ | 94,193 |   | $ | 38,310 |   | $ | 9,603 |   | $ | 504,051 |   | $ | 509,694 |   |
| Affiliate Marketing   |       | 112,150                 |       | 95,791                                        |       | 73,945                |       | 57,906 |   | 44,961 |   | 29,393 |   | 217,676 |   | 156,189 |   |
| Comparison Shopping   |       | 26,217                  |       | 17,295                                        |       | 5,695                 |       | 3,076 |   | 2,034 |   | 1,643 |   | 42,163 |   | 34,713 |   |
| Technology            |       | 25,714                  |       | 27,015                                        |       | 25,462                |       | 7,622 |   | 9,303 |   | 7,542 |   | 29,376 |   | 20,265 |   |
| Inter-segment revenue |       | (1,438                  | )          | (929                                          | )          | (67                   | )          | — |   | — |   | — |   | — |   | — |   |
| Total                 |       | $                       | 545,616    |                                          | $          | 304,007               |       | $ | 169,178 |   | $ | 162,797 |   | $ | 94,608 |   | $ | 48,181 |   | $ | 793,266 |   | $ | 720,861 |   |

 

Areconciliation of segment income from operations to consolidated income fromoperations is as follows for each period (in thousands): 

| ** **                           | ** ** | **Segment Income from Operations** | ** ** |
|--------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Segment income  from operations      |       | $                                                 | 162,797    |   | $ | 94,608 |   | $ | 48,181 |   |
| Corporate  expenses                  |       | (26,932                                           | )          | (16,103 | ) | (8,824 | ) |
| Stock-based  compensation expense    |       | (11,940                                           | )          | (2,022 | ) | (739 | ) |
| Amortization of  intangible assets   |       | (21,801                                           | )          | (12,179 | ) | (4,111 | ) |
| Restructuring  benefit, net          |       | —                                            |       | 73 |   | 1,003 |   |
| Consolidated income from  operations |       | $                                                 | 102,124    |   | $ | 64,377 |   | $ | 35,510 |   |

 

Depreciation and amortization expense included in thedetermination of segment income from operations as presented above for theMedia, Affiliate Marketing, Comparison Shopping, and Technology segments was$3.2 million, $2.8 million, $756,000, and $1.9 million, respectively, for theyear ended December 31, 2006; $1.6 million, $2.8 million, $286,000, and$1.8 million, respectively, for the year ended December 31, 2005; and,$660,000, $3.6 million, $58,000, and $1.2 million, respectively, for the yearended December 31, 2004. Depreciation and amortization expense included incorporate expenses in the determination of consolidated income from operationswas $622,000, $640,000 and $675,000 for the years ended December 31, 2006,2005 and 2004, respectively.

The Company’s operations are domiciled in the UnitedStates with operations in Europe through wholly-owned subsidiaries. Prior to March 26,2004, the Company had operations in Japan through its majority-ownedsubsidiary, ValueClick Japan. The Company sold its equity interest of 59% inValueClick Japan on March 26, 2004 and the operating results of ValueClickJapan are included in the Company’s operating results through March 31,2004. The results of operations of ValueClick Japan for the period from March 26,2004 through March 31, 2004 were not significant. Revenue is attributed toindividual countries based upon the country in which the Company’s customer islocated. Geographic long-lived assets exclude deferred tax assets and otherassets as referred to in the Company’s consolidated balance sheets.

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TheCompany’s geographic information was as follows (in thousands):

| ** **                   | ** ** | **Year Ended  December 31, 2006** | ** ** | ** **                       | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **Revenue**                                      | ** ** | **Income from  Operations** | ** ** | **Long-lived  Assets at  December 31,  2006** | ** ** |
| United States                |       | $                                                | 486,773    |                             |       | $ | 95,980 |   |   |   | $ | 342,313 |   |   |
| Europe                       |       | 69,740                                           |       |                             | 6,144      |   |   |   | 46,135 |   |   |
| Inter-regional  eliminations |       | (10,897                                          | )          |                             | —     |   |   |   | — |   |   |
| Total                        |       | $                                                | 545,616    |                             |       | $ | 102,124 |   |   |   | $ | 388,448 |   |   |

 

| ** **                   | ** ** | **Year Ended  December 31, 2005** | ** ** | ** **                       | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **Revenue**                                      | ** ** | **Income from  Operations** | ** ** | **Long-lived  Assets at  December 31,  2005** | ** ** |
| United States                |       | $                                                | 263,385    |                             |       | $ | 59,463 |   |   |   | $ | 365,761 |   |   |
| Europe                       |       | 48,673                                           |       |                             | 4,914      |   |   |   | 27,208 |   |   |
| Inter-regional  eliminations |       | (8,051                                           | )          |                             | —     |   |   |   | — |   |   |
| 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 |   |   |
| Inter-regional  eliminations |       | (6,367                                           | )          |                                     | —     |   |   |   | — |   |   |
| Total                        |       | $                                                | 169,178    |                                     |       | $ | 35,510 |   |   |   | $ | 86,443 |   |   |

 

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**SCHEDULE II**

**VALUECLICK, INC.**

**VALUATIONAND QUALIFYING ACCOUNTS(in thousands)**

| ** **                                              | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions  Charged To  Expense/  Against  Revenue** | ** ** | **Other  Adjustments(2)** | ** ** | **Deductions** | ** ** | **Balance at  End of Period** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------------|------------|---------------------------|------------|----------------|------------|----------------------------------------------|------------|
| Allowance for doubtful  accounts and sales credits (1): |       |                                           |       |                                                       |       |                      |       |           |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Year ended December 31, 2006                       |       |                                           | $          | 4,692                                                      |       |                      |       | $              | 4,818      |                                         |       |   | $ | — |   |   |   | $ | (5,386 | ) |   |   | $ | 4,124 |   |   |
| Year ended December 31, 2005                       |       |                                           | $          | 2,973                                                      |       |                      |       | $              | 3,283      |                                         |       |   | $ | 1,031 |   |   |   | $ | (2,595 | ) |   |   | $ | 4,692 |   |   |
| Year ended  December 31, 2004                      |       |                                           | $          | 2,060                                                      |       |                      |       | $              | 1,308      |                                         |       |   | $ | 183 |   |   |   | $ | (578 | ) |   |   | $ | 2,973 |   |   |

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(1)          Items relating to theallowance for doubtful accounts are charged to expense. Items relating to salescredits are charged against revenue.

(2)          Other adjustmentsrepresent increases in the allowance for doubtful accounts and sales creditsfrom acquisitions.

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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 1stday of March, 2007.
|        | VALUECLICK,  INC. |
|--------|-------------------|
|   | By:               | /s/ JAMES  R. ZARLEY |
|   |              | James R. Zarley |
|   | * *          | *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 all capacities,to sign any and all amendments to this annual report on Form 10-K, and tofile 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 and                |       | March 1, 2007  |
| James  R. Zarley             |          | Chief Executive Officer  (Principal Executive Officer) |       |                |
| /s/ SCOTT  H. RAY       |          | Chief Financial  Officer                               |       | March 1,  2007 |
| Scott  H. Ray                |          | (Principal Financial and  Accounting Officer)          |       |                |
| /s/ DAVID  S. BUZBY     |          | Director                                               |       | March 1,  2007 |
| David  S. Buzby              |          |                                                   |       |                |
| /s/ MARTIN  T. HART     |          | Director                                               |       | March 1,  2007 |
| Martin  T. Hart              |          |                                                   |       |                |
| /s/ JEFFREY  F. RAYPORT |          | Director                                               |       | March 1,  2007 |
| Jeffrey  F. Rayport          |          |                                                   |       |                |
| /s/ TOM  A. VADNAIS     |          | Director                                               |       | March 1,  2007 |
| Tom A. Vadnais               |          |                                                   |       |                |

 

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