**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**
| **(Mark One)**                                 |       |                                                                                                    |
|------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| **x**                                          | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
| **For the  Year Ended December 31, 2004** |
| **or**                                         |
| o                                              | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                |            |                                                                                                         |  |  |

 

**Forthe transition period from                            to                             **

**Commissionfile number 000-30135**

**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)  |                                  |

 

**4353 Park Terrace Drive,Westlake Village, California 91361**

(Address of principalexecutive offices, including zip code)

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

**Securities registeredpursuant to Section 12(b) of the Act: None**

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

**Common Stock, $0.001 parvalue**

**Series APreferred Stock Purchase Rights**(Title of each class)

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes x No o

Indicate by a check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K. o

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

As of June 30, 2004, which was the last businessday of the registrant’s most recently completed second fiscal quarter, theapproximate aggregate market value of voting stock held by non-affiliates ofthe registrant was $933.7 million (based upon the closing price for sharesof the Registrant’s Common Stock as reported by The National Market System ofthe National Association of Securities Dealers Automated Quotation System as ofthat date). As of February 28, 2005, there were approximately 82,194,253shares of Common Stock outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the Proxy Statement for the 2005 Annual Meeting of the Stockholders (the “ProxyStatement”), to be filed within 120 days of the end of the fiscal year ended December 31,2004, are incorporated by reference in Parts I and III hereof. Except withrespect to the information specifically incorporated by reference in this Form 10-K,the Proxy Statement is not deemed to be filed as part hereof.

 

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**VALUECLICK, INC.FORM 10-K ANNUAL REPORTTABLE OF CONTENTS**
|               | ** ** | ** **                                                                                                             | ** ** | **Page** | ** ** |
|---------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| PART I   |       | 1                                                                                                                      |       |
| ITEM 1.       |       | BUSINESS                                                                                                               |       | 1        |       |
| ITEM 2.       |       | PROPERTIES                                                                                                             |       | 25       |       |
| ITEM 3.       |       | LEGAL PROCEEDINGS                                                                                                      |       | 26       |       |
| ITEM  4.      |       | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                   |       | 27       |       |
| PART II  |       | 28                                                                                                                     |       |
| ITEM  5.      |       | MARKET  FOR THE REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER  PURCHASES OF EQUITY SECURITIES |       | 28       |       |
| ITEM 6.       |       | SELECTED FINANCIAL DATA                                                                                                |       | 28       |       |
| ITEM  7.      |       | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                            |       | 33       |       |
| ITEM  7A.     |       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                            |       | 46       |       |
| ITEM  8.      |       | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                                           |       | 48       |       |
| ITEM  9.      |       | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                  |       | 48       |       |
| ITEM 9A.      |       | CONTROLS AND  PROCEDURES                                                                                               |       | 48       |       |
| ITEM 9B.      |       | OTHER INFORMATION                                                                                                      |       | 52       |       |
| PART III |       | 53                                                                                                                     |       |
| ITEM  10.     |       | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                                    |       | 53       |       |
| ITEM 11.      |       | EXECUTIVE COMPENSATION                                                                                                 |       | 53       |       |
| ITEM  12.     |       | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS                       |       | 53       |       |
| ITEM  13.     |       | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                                                        |       | 53       |       |
| ITEM  14.     |       | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                                                                |       | 53       |       |
| PART IV  |       | 54                                                                                                                     |       |
| ITEM  15.     |       | EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES                                                                            |       | 54       |       |
|          |       | 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, including information incorporated herein byreference, contains “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934. These statements relate to expectations concerning matters thatare not historical facts. Words such as “projects,” “believes,” “anticipates,” “will,”“estimate,” “plans,” “expects,” “intends,” and similar words and expressionsare intended to identify forward-looking statements. Although we believe thatsuch forward-looking statements are reasonable, we cannot assure you that suchexpectations will prove to be correct. Important language regarding factorswhich could cause actual results to differ materially from such expectationsare disclosed in this Report, including without limitation under the caption “RiskFactors” beginning on page 12 of this Report and in the other documents wefile, from time to time, with the Securities and Exchange Commission, includingour annual report on Form 10-K, quarterly reports on Form 10-Qand current reports on Form 8-K. All forward-looking statementsattributable to ValueClick, Inc. are expressly qualified in their entiretyby such language. We do not undertake to update publicly any forward-lookingstatements for any reason, even if new information becomes available or otherevents occur in the future.*

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**PART I.**

**ITEM 1. BUSINESS**

**OVERVIEW**

We offer a suite of products and services that enablemarketers to advertise and sell their products through all major onlinemarketing channels—display/Web advertising, search marketing, email marketing,and affiliate marketing. Additionally, we provide software that assistsadvertising agencies and other companies with information management regardingtheir financial, workflow and offline media planning and buying processes. Thebroad range of products and services that we provide enables our customers toaddress all aspects of the marketing process, from strategic planning throughexecution, including results measurement and campaign refinements. By combiningour media, affiliate marketing and technology offerings with our experience inboth online and offline marketing, we help our customers around the worldoptimize their marketing campaigns both on the Internet and through offlinemedia.

Our customers are predominantly advertisers and directmarketers, as well as the agencies that service these groups. Our valueproposition to these groups is our ability to provide distinctive expertise,flexible product customization, superior service, and a diligent focus on theperformance of their marketing investments. This approach has enabled us tobuild relationships with over 4,500 advertisers and agencies, assisting them intheir use of the Internet to create awareness, attract visitors, generatequalified leads, and drive sales, and to do so with both customer acquisition andretention programs.

Another key component in our value proposition is thebase of relationships we have developed with quality website publishers. Tofulfill our clients’ marketing programs, we rely on our relationships withwebsites of all sizes—from many of the largest portals on the Web, toheavily-trafficked and well-known content and shopping sites, to high-qualityniche content properties. Our relationships with these partners span fromrepresentation of most of their advertising space, to monetization of theirunsold advertising inventory, to regular spot buys of media and email forspecific client needs. Our ability to offer these partners a wide variety ofways to generate revenue has enabled us to now reach approximately70 million unique Internet users in the U.S. each month and approximately 120 millionworldwide. ValueClick believes that the effectiveness of our advertisingsolutions is dependent on the quality of the partner relationships, andtherefore we have established stringent quality standards that includerejection on the basis of inappropriate content, illegal activity andfraudulent clicking activity, among other criteria. We enforce these qualitystandards using a combination of manual and automated auditing processes thatcontinually monitor and review both website content and adherence to advertisercampaign specifications.

We derive our revenue fromthree business segments, based on the types of products and services provided.These business segments are Media, Affiliate Marketing and Technology, whichare described in more detail below. For information regarding the revenue,gross profit and total assets of these segments, see Item 7 and Note 15 to the December 31,2004 consolidated financial statements included herein.

**MEDIA**

ValueClick’s Media segmentprovides a comprehensive suite of online media services and tailored programsthat help marketers create awareness, attract visitors and generate leads andsales through the Internet. Our Media segment has grown both organically andthrough the acquisition of complementary businesses such as Search123.com,completed in May 2003, Hi-Speed Media, completed in December 2003,and Pricerunner AB, completed in August 2004. Our strategic expansion andsubsequent integration within the Media segment has increased our presence ininteractive marketing with powerful offerings that are offered to advertiserand agency clients in the following product categories:

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*Display/WebAdvertising*

Through partnerships with online publishers that spanmore than 4,500 online media properties in the U.S. and more than 14,000worldwide, we provide advertisers and agencies with access to one of thelargest and most reputable online advertising networks. With a single buy,advertisers can reach their target online audience using a variety of onlinedisplay ad units and any of 17 standard channels of online content.

We offer our marketing clients a variety of display adunits that can be delivered onto the Web pages of our online advertisingnetwork and tracked to evaluate success against the goals of the program. 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. Within these placements, we alsooffer our clients the ability to execute a wide variety of rich mediaapplications, providing even greater visual and auditory impact.

We began as a performance-based marketing network andwe continue to offer flexible pricing arrangements designed around maximizingour clients’ return on investment. Our Web advertising placements are offeredon both cost-per-thousand impression (CPM) pricing, whereby our clients paybased on the number of times the target audience is exposed to theadvertisement, and cost-per-click (CPC) pricing, whereby payment is triggeredonly when an interested individual visits the client’s website.

The benefits that ourclients enjoy in Web advertising include: our flexible pricing models; theability to reach new and larger audience segments through our website publisherpartners; the ability to have a single source for media negotiation; and theability to improve campaigns in a variety of ways while the campaign is stillrunning, by optimizing at site, placement and creative levels, based on bothresponse and conversion experience.

*E-commerce*

We sell a limited numberof consumer products directly to end-user customers through a small number ofCompany owned e-commerce websites.

*Email Marketing*

Our email marketing services allow marketers to targetqualified prospective customers on a large scale with opt-in email lists from aselect group of email list partners who meet our stringent criteria for dataintegrity, as well as who comply with all aspects of federal email legislation.Through ValueClick Media’s relationships with quality business and consumeropt-in email list owners and managers, email Marketing clients can targetaudiences within specific selection criteria.

Through our acquisition ofHi-Speed Media, we now possess a database of approximately 40 millionopt-in email profiles that comply with recently enacted U.S. federal emaillegislation. Through this business, we provide marketers with the ability toadvertise their products and services to the members of this email database.

*Lead GenerationMarketing*

Our Lead Generation Marketing services enablemarketers to develop their own proprietary permission-based lists of leads forre-marketing. Creating lists of consumers who have expressed interest in aspecific company or offer gives marketers the ability to generate immediatesales while building ongoing relationships with prospective customers.

ValueClick’s proprietary UltraLeads product is anemail marketing solution whereby we develop customized and permissioneddatabases of individuals who have voluntarily expressed interest in learningmore about a specific client’s product or service. Using a technique calledco-registration, we place opt-in 

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offers on registration areasof publisher partners’ websites, providing the visitors to those websites theability to get more information, or to receive special offers from a specificadvertiser. If consumers voluntarily opt-in to a given offer, they firstreceive a verification message to ensure their permission, followed by therequested information via an email from us to the address they provided.UltraLeads is priced on a cost-per-lead (CPL) basis, whereby clients only payus and we only pay our publisher partners when Internet users voluntarilyopt-in to a given offer.

An additional emailmarketing offering is our onResponse product. This offering is priced on acost-per-action (CPA) basis, whereby clients only pay us and we only pay ourpublisher partners when Internet users perform specific actions, such ascompleting requests for more information, website registrations, product samplerequests, trial subscriptions, etc. These marketing messages are delivered byour publisher partners via solo email messages and e-newsletters to their baseof registered visitors. When one of the recipients of these messages responds,they are directed toward the client’s website to complete the desired action.

*Online ComparisonShopping*

Our online comparisonshopping service enables consumers to research and compare products from amongthousands of online and offline merchants through our Pricerunner destinationwebsites. We gather product and merchant data and organize it into acomprehensive catalog on our destination websites, along with relevant consumerand professional reviews. Our service is free for consumers and merchantsprimarily pay us on a cost-per-lead (CPL) basis when consumers click through tomerchant websites from listings on our service.

*Search Marketing*

Search Marketing allows marketers to find prospectivecustomers who are actively engaged in researching and buying products andservices online. ValueClick Media’s Search offerings are pay-per-click searchengines, in which marketers bid for placement within search results and payonly when targeted leads are delivered to their site. ValueClick Searchconsists of two offerings:

Search123 is ValueClick Search’s self-service paidsearch network that generates its traffic primarily through syndicationrelationships with other search engines, web portals and content sites.

Simpli is ValueClick Search’s premium paid searchnetwork. Simpli sources traffic through Simpli.com and sites where Simplitypically enables the entire search experience. Simpli’s meta-enginearchitecture queries leading paid and algorithmic search engines and presentshighly relevant search results across image, audio, video and news; and localyellow pages and white pages search. Simpli also offers intelligent “areyou looking for?” technology that allows users to refine their searches.

ValueClick Media Searchofferings act as an affordable complement to other pay-per-click searchengines, enabling marketers to realize additional qualified sales leads fromsearch results at a competitive price. Search123 has a network of hundreds ofonline publisher partner websites, which collectively generate hundreds ofmillions of searches per month.

*Web PublisherRelationships*

Our automated onlineapplication process is supported by a team of network development and customerservice professionals across all ValueClick properties. Their responsibilitiesinclude screening prospective Web publishers, monitoring network quality,maintaining relationships, consulting with publishers on additional revenueopportunities, and the trafficking and optimization of client advertisingcampaigns.

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**AFFILIATE MARKETING**

Affiliate marketing is a technique whereby onlineproperties agree to display advertising messages in a variety of locations andconfigurations in return for compensation based on every lead developed orbased on a share of any revenue that is generated when their website visitorsrespond to the advertisement by purchasing products or services from theadvertiser. We provide comprehensive marketing systems that enable onlinemarketers to use this technique to attract, convert and retain customers easilyand cost effectively.

ValueClick AffiliateMarketing segment products and services, outlined below, are offered throughour wholly-owned subsidiaries Be Free, Inc., acquired in May 2002,and Commission Junction, acquired in December 2003. In 2004, Be Free andCommission Junction were integrated and we market our affiliate marketingofferings under the Commission Junction brand name.

*Affiliate Marketing*

Our affiliate marketing business includes technologyand services that enable advertisers to manage, track and analyze a variety ofonline marketing programs. Specifically, our affiliate marketing servicesenable our advertiser clients to: build relationships with affiliate partners;manage the offers they make available to their affiliate partners; track theonline traffic, leads and sales that these offers drive to the advertiser’swebsite; analyze the effectiveness of the offers and affiliate partners; and,we have programs which facilitate payments to affiliates on our customers’behalf.

We offer affiliate marketing services that address theneeds of advertisers that seek to build and manage a private-labeled network ofthird-party online publishers, as well as advertisers that wish to conduct anaffiliate marketing program through our existing network of third-party onlineaffiliate publishers. Our affiliate marketing services are offered on a hostedbasis to enable marketers to execute their own affiliate marketing programswithout the expense of building and maintaining their own in-house technicalinfrastructure and resources.

Affiliate Marketing revenues are driven by acombination 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 the transaction-related revenuestreams, we also receive service fees from clients who elect to utilize ourOutsourced Program Management service and Commission Junction Vantageofferings. With these services, we assume full responsibility for all aspectsof managing the advertiser’s program including planning, publisher recruitment,review and management, and program administration.

The benefits of ouraffiliate marketing offering include professional services, apay-for-performance model, the option of owning affiliate partner relationships,comprehensive technology platforms, and extensive expertise.

**TECHNOLOGY**

Our Technology segmentprovides marketers, agencies, website publishers, and other firms with thetools they need to manage both their business operations and marketing programseffectively. The technology products and services outlined below are offeredthrough our wholly-owned subsidiaries Mediaplex, Inc. and AdWare Systems, Inc.(now referred to as “Mediaplex Systems”), both acquired in October 2001.

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*Mediaplex—OnlineAdserving and Email Technology Tools*

Our Mediaplex subsidiary offers technologyinfrastructure tools and services that enable advertisers, advertising agenciesand online publishers to implement and manage their own online displayadvertising (adserving) and email campaigns. Our Mediaplex products are basedon our proprietary MOJO® technology platform, which has the ability toautomatically configure messages in response to real-time information from amarketer’s enterprise data system and to provide ongoing campaign optimization.Mediaplex’s products are priced primarily on a cost-per-thousand impression(CPM) or email delivered basis.

Mediaplex’s solutions spanthree primary categories—Third-Party Adserving, Publisher Ad Management andEmail Campaign Management.

*Mediaplex—Third-PartyAdserving*

Our third-party adserving product, MOJO® Adserver,allows users to configure Web advertising campaigns, serve those campaignsaccording to time and site placements—commonly known in the industry astrafficking—and report results from such campaigns through to conversion. MOJO®Adserver operates on the same platform as MOJO® Mail (see Mediaplex—EmailCampaign Management below), is Web-based and is available as either afull-service or Application Service Provider (“ASP”) offering.

The benefits of ourthird-party adserving technology and services include an intuitive interface,advanced targeting options, response and conversion tracking, near real-timereporting, a choice of full-service or ASP offerings, automated creative andplacement optimization, the ability to handle rich media, and back-end datafeeds for quantitative analysis.

*Mediaplex—PublisherAd Management*

MOJO® Publisher is an ad management technologysolution for websites and networks and has powered the ValueClick Media networksince 1999. With MOJO® Publisher, websites and networks can quickly implement,manage, sell, and traffic advertising inventory on their properties, ensuringmaximum revenue from those properties.

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

*Mediaplex—EmailCampaign Management*

Either alone or in combination with ValueClick Media’sEmail Marketing solutions described above, our email campaign managementproduct, MOJO® Mail, allows users to configure, traffic and report results forpermission-based prospect and customer email campaigns. In addition to basicemail campaign execution, MOJO® Mail affords a user the ability to populateemail messages with dynamic content that is updated in real-time when therecipient opens the email. The product’s Web-based interfaces, MOJO® Works(delivery configuration) and MOJO® Reports (tracking results), provide a singlepoint of access for email messaging campaigns across all platforms, includingonline advertising and wireless devices. The system, available in bothfull-service and ASP modes, provides the ability to target customer andprospect audience segments with tailored offers and creative message versions,and to track through to conversion activity in near real-time.

The benefits of our email campaignmanagement technology include an intuitive interface, systematic listmanagement and segmentation, advanced targeting options, unsubscribe and bouncemanagement, near real-time reporting, response and conversion tracking,back-end data feeds for quantitative analysis, a 

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choiceof full-service or ASP offerings, the ability to handle rich media programs,and integration with our email marketing solutions above.

*MediaplexSystems—Enterprise Management Solutions*

Our Mediaplex Systems subsidiary is an ASP thatdelivers high-quality, Web-based information management systems to advertisingagencies, marketing communications companies, public relations agencies, andother large corporate advertisers. The solutions that Mediaplex Systemsprovides span three primary categories—Agency Management, Media Management andContent Management, as outlined below. Mediaplex Systems revenue is generatedprimarily from monthly service fees paid by customers over the contractualservice period.

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

*Agency Management*

Our agency managementsystems consist of the following:

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

·       AdVault FINANCIALS: Arobust multi-company, multi-office financial system that provides for themanaging of accounts receivable, accounts payable, general ledger, budgeting,and cost accounting functions.

*Media Management*

Our mediamanagement systems enable media planners in corporate marketing departments andadvertising agencies to plan, execute, track, analyze, and bill out media buysfor network broadcast, spot broadcast, national cable, local cable,syndication, newspaper, magazine, and outdoor media channels. Media plannersuse these systems to record the available advertising opportunities and theircorresponding cost and choose the configuration that best meets their campaignneeds. They can then generate a media plan that consists of the mediaplacements they have selected. Different systems are available for each type ofmedia buying:

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

·       AdVaultNETWORK is a tool for making, tracking and analyzing network, national broadcastcable and syndication media buys. The system also enables efficient invoicingand payment capabilities for the commercial schedule.

·       AdVault PRINT is a toolproviding all of the functionality needed to estimate, contract for, buy, bill,and pay for ads scheduled in newspapers, magazines and trade publications. Inaddition, Ad Vault PRINT can handle outdoor media buys such as billboards.

 

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*Content Management*

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

**INTERNATIONALOPERATIONS**

We currently have international operations in theUnited Kingdom, Germany, France, and Sweden. All operations are wholly-ownedsubsidiaries. Prior to March 26, 2004, we had operations in Japan throughour majority owned subsidiary, ValueClick Japan. We completed the sale of ourapproximately 59% equity interest in ValueClick Japan, Inc. to livedoorCo., Ltd., a Japanese Internet and technology product and services company, on March 26,2004 for approximately $24 million in cash, excluding transaction fees.

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 115 as of December 31,2004.

**TECHNOLOGY PLATFORMS**

Our proprietary applications are constructed fromestablished, readily available technologies. These technologies are craftedinto applications whose main objective is to out-perform offerings of ourcompetitors within the same business segment. Some of the basic components ourproducts are built on come from leading software providers such as Oracle, IBM,Sun, Dell, EMC, and Cisco while some components are constructed from leadingOpen Source software projects such as Apache Web Server, FreeBSD and Perl. Bystriking the proper balance between using commercially available software andOpen Source software, we direct our technology expenditures toward developingdistinguishing application functionality while minimizing third-partytechnology supplier costs.

We build in high performance, availability andreliability into our product offerings. Within the particular business segment,each offering out-performs industry-wide acceptable performance measurements.We safeguard against the potential for service interruptions at our third-partytechnology vendors by engineering failsafe controls into our critical components.ValueClick delivers its hosted solutions primarily from three co-locationcenters, geographically disbursed within the United States. ValueClickapplications are monitored 24 hours a day, 365 days a year byspecialized monitoring systems that aggregate alarms to a human staffed networkoperations center. If a problem occurs, appropriate engineers are notified andcorrective action is taken.

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

**SALES,MARKETING AND CUSTOMER SERVICE**

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

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**Customers**

We sell our products and services to a variety ofadvertisers and advertising agencies primarily through our internal sales team.We make extensive use of telemarketing and e-marketing strategies. Each of ouraccount executives assists the advertisers he or she services, typicallyadvertising, direct marketing and e-commerce companies, with all aspects ofmedia planning and design of their advertising campaigns and their relatedtechnology needs. These services and products include advertisement purchasingand placement, assessment of results and optimization of performance andrelated technology platforms.

We derive our revenue from three business segmentsbased on the types of products and services provided. These business segmentsare Media, Affiliate Marketing and Technology.

For additional informationregarding our business segments and international operations, see Note 15to our consolidated financial statements contained in this Report.

**Competition**

We face intense competition in the Internetadvertising market. We expect that this competition will continue to intensifyin the future as a result of industry consolidation and the continuingmaturation of the industry. We compete with a diverse and large pool ofadvertising, media and Internet companies.

Our ability tocompete depends upon several factors, including the following:

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

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

·       ourcustomer service and support efforts;

·       oursales and marketing efforts;

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

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

Additional competitivefactors include each competitor’s: reputation, knowledge of the advertisingmarket, financial controls, geographical coverage, relationships with clients,technological capability, and quality and breadth of services.

**Seasonality and Cyclicality**

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

**INTELLECTUAL PROPERTY RIGHTS**

We currently rely on a combination of copyright,trademark and trade secret laws and restrictions on disclosure to protect ourintellectual property rights. Our success depends on the protection of theproprietary aspects of our technology as well as our ability to operate withoutinfringing on the proprietary rights of others. We also enter into proprietaryinformation and confidentiality agreements with our 

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employees, consultants andcommercial partners and control access to, and distribution of our softwaredocumentation and other proprietary information. We have registered thetrademark “ValueClick” in the United States and the European Union. Wecurrently have four pending U.S. patent applications. 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 receive will be challenged or invalidated. Althoughpatents are only one component of the protection of intellectual propertyrights, if our patent applications are denied, it may result in increasedcompetition and the development of products substantially similar to our own.In addition, it is difficult to monitor unauthorized use of technology,particularly in foreign countries where the laws may not protect ourproprietary rights as fully as in the United States, and our competitors mayindependently develop technology similar to those of our own. We will continueto assess appropriate occasions for seeking patent and other intellectualproperty protections for those aspects of our technology that we believeconstitute innovations providing significant competitive advantages.

In December 2002, we purchased a license from24/7 Real Media for the ‘368’ patent under a Patent License Agreement. Inconnection with the Patent License Agreement, 24/7 Real Media also agreed toterminate their lawsuit against us for patent infringement. The terms of thePatent License and Settlement Agreements are confidential.

In November 2002, inconnection with our Stock Repurchase Program, we repurchased 7,878,562 sharesof our common stock held by DoubleClick. In the related repurchase agreement,both parties agreed not to sue or threaten to sue each other or any of theircustomers for infringement of outstanding patents for a three-year periodbeginning in November 2002.

**CORPORATEHISTORY AND RECENT ACQUISITIONS**

We commenced operations as ValueClick, LLC, aCalifornia limited liability company, on May 1, 1998. Prior to theformation of ValueClick, LLC, the ValueClick Internet advertising businessbegan in July 1997 as a line of business within Web-Ignite Corporation, acompany wholly-owned by the founding member of ValueClick, LLC. Thereorganization and formation of ValueClick, LLC was effected by the transfer ofthe Internet advertising business of Web-Ignite to ValueClick, LLC. On December 31,1998, ValueClick, LLC reorganized as ValueClick, Inc., a Delawarecorporation. On March 30, 2000, we completed our initial public offeringof common stock. Our common stock is publicly traded and is reported on the NASDAQNational Market under the symbol “VCLK.”

*Pricerunner AB.  *On August 6,2004, we completed the acquisition of Pricerunner AB (“Pricerunner”), a leadingprovider of online comparison shopping services in Europe.

We accounted for the acquisition under the purchasemethod. Accordingly, the results of Pricerunner’s operations are included inthe Company’s consolidated financial statements from the beginning of theaccounting period nearest to the date of acquisition. Under the terms of theagreement, ValueClick acquired all of the outstanding capital stock of Pricerunnerfor an aggregate purchase price of approximately $30.1 million, includingcash of $26.9 million and approximately 263,000 shares of ValueClick commonstock valued at approximately $2.0 million (based on the average ValueClickcommon stock price at the public announcement date and the five trading daysbefore and after that date), and transaction costs of the acquisition ofapproximately $1.2 million. The stock portion of the consideration isapproximately 6.5% of the total purchase price. The Company also agreed toprovide additional cash and stock consideration totaling up to $6.0 million,contingent upon Pricerunner exceeding certain performance milestones related tothe Pricerunner fiscal year ending April 30, 2005. Such additional consideration,if earned, would be most likely distributed in the third quarter ending September 30,2005 and will be reflected as an increase in goodwill.

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*Hi-Speed Media, Inc.  *OnDecember 17, 2003, we completed the acquisition of Hi-Speed Media, Inc.,a California corporation (“Hi-Speed Media”), pursuant to an Agreement and Planof Merger, dated as of December 7, 2003, by and among ValueClick, Inc.,HS Acquisition Corp., a wholly-owned subsidiary of ValueClick, Hi-Speed Media,the shareholders of Hi-Speed Media, and Farshad Fardad, in his capacity asShareholder Agent. Hi-Speed Media provides email marketing and e-commerceservices. We accounted for the acquisition under the purchase method.Accordingly, the results of Hi-Speed Media’s operations are included in theCompany’s consolidated financial statements from the beginning of theaccounting period nearest to the date of acquisition. Under the terms of theagreement, ValueClick acquired all of the outstanding capital stock of Hi-SpeedMedia for an aggregate purchase price of approximately $10.5 million,including cash of $9.0 million and transaction costs of $1.1 million. TheCompany also agreed to provide additional cash consideration of up to$1.0 million per quarter, contingent upon the achievement of certainrevenue and operating income milestones over the eight quarters beginning January 1,2004. Contingent cash consideration earned for the year ended December 31,2004 totaled approximately $2.3 million, and was reflected as an increase ingoodwill. In connection with the transaction, Hi-Speed Media’s outstandingemployee stock options were converted into options to purchase approximately81,000 shares of ValueClick common stock valued at approximately $0.4 millionusing the Black-Scholes option pricing model.

*Commission Junction, Inc.  *OnDecember 7, 2003, we completed the acquisition of Commission Junction, Inc.,a Delaware corporation (“Commission Junction”), pursuant to an Agreement andPlan of Merger and Reorganization, dated as of October 9, 2003, by andamong ValueClick, NCJ Acquisition Corp., a wholly-owned subsidiary ofValueClick, Commission Junction and Idealab Holdings LLC, a Delaware limitedliability company, in its capacity as Stockholder Agent. Pursuant to the termsof the merger agreement, Commission Junction was merged with and into NCJAcquisition and became a wholly-owned subsidiary of ValueClick. CommissionJunction is an affiliate marketing business, which provides technology andservices that enable advertisers to manage, track and analyze a variety ofonline marketing programs. We accounted for the acquisition under the purchasemethod. Accordingly, the results of Commission Junction’s operations areincluded in our consolidated financial statements from the beginning of theaccounting period nearest to the date of acquisition. Pursuant to the terms ofthe agreement, ValueClick acquired all of the outstanding capital stock ofCommission Junction for approximately 3.0 million shares of ValueClickcommon stock, valued at approximately $29.5 million, and approximately$26.1 million in cash and transaction costs of $0.4 million. Additionally,outstanding options to acquire common stock of Commission Junction wereconverted into an aggregate of approximately 1.2 million options to acquireValueClick common stock with an estimated aggregate fair value of approximately$6.1 million.

*Search123.com Inc.  *OnMay 30, 2003, we completed the acquisition of Search123.com Inc. (“Search123”).Under the terms of the merger agreement, a wholly-owned subsidiary ofValueClick was merged with and into Search123, with Search123 surviving as awholly-owned subsidiary of ValueClick. Search123 is a search marketing companythat allows marketers to find prospective customers who are actively engaged inresearching and buying products and services online. We accounted for theacquisition under the purchase method. Accordingly, the results of Search123’soperations are included in our consolidated financial statements from thebeginning of the accounting period nearest to the date of acquisition. Theaggregate consideration, constituting the purchase price of approximately $4.9 million,included a cash payment of $3.2 million, the assumption of a net workingcapital deficit of $1.5 million and transaction costs of approximately$200,000.

*Be Free, Inc.  *OnMay 23, 2002, we completed the acquisition of Be Free, Inc. Under theterms of the merger agreement, a wholly-owned subsidiary of ValueClick wasmerged with and into Be Free and Be Free survived as a wholly-owned subsidiaryof ValueClick. Under the terms of the merger agreement, Be Free stockholdersreceived 0.65882 shares of ValueClick common stock for each share of Be Freecommon 

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stock. The Companyissued a total of approximately 43.4 million shares of its common stock,valued at approximately $122.3 million, for all of the outstanding capitalstock of Be Free. In addition, the Company issued options to purchaseapproximately 4.2 million additional shares of ValueClick common stock inexchange for outstanding options to acquire Be Free common stock. We accountedfor the acquisition under the purchase method. Accordingly, the results of BeFree’s operations are included in our consolidated financial statements fromthe beginning of the accounting period nearest to the date of the acquisition.The aggregate consideration constituting the purchase price of approximately$129.3 million, includes the issuance of 43.4 million shares of commonstock (based on the average common stock price for the public announcementdate, the day before and after that date), the issuance of options and warrantsto purchase an aggregate of 4.2 million shares of common stock valued atapproximately $5.0 million using the Black-Scholes option pricing modeland transaction costs of approximately $2.0 million, which include legalfees, accounting fees, and fees for other related professional services. Theacquisition of Be Free expanded our online and offline marketing andadvertising technology capabilities.

**PRIVACY**

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

Moreover, if our clients have databases of their customers,we can use this data on behalf of those clients, again pursuant to theirprivacy policies. The premise is that both the site providing the ad space andthe advertiser (1) have a relationship with the customer, or opt-in, (2) havean opportunity to share their privacy policies with their customers, and (3) providean opportunity to opt-out.

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

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

We use “cookies,” among other techniques, to measureand report non-personalized information to advertisers, such as the number ofpeople who see their ads or emails and the number of times people see theadvertisement. A cookie is a small file that is stored in a Web-user’s harddrive. Cookies cannot read information from the user’s hard drive; rather theyallow sites and advertisers to track advertising effectiveness and to ensurethat viewers do not receive the same ads repeatedly. Cookies, by themselves,cannot be used to identify any user if the user does not provide any personallyidentifiable information. They can be used to allow personalization featuressuch 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 users.

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**EMPLOYEES**

As of December 31,2004, we had 505 employees in the U.S. and 115 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 of this 10-K Reportfor information about Executive Officers of the Registrant.

**WEBSITEACCESS TO OUR PERIODIC SEC REPORTS**

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

Materials we file with theSEC may be read and copied at the SEC’s Public Reference Room at 450 FifthStreet, N.W., 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 AND BUSINESS CONDUCT**

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

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

**RISK FACTORS**

*You shouldcarefully consider the following risks before you decide to buy shares of our commonstock. The risks and uncertainties described below are not the only ones facingus. Additional risks and uncertainties, including those risks set forth in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” below,may also adversely impact and impair our business. If any of the followingrisks actually occur, our business, results of operations or financialcondition would likely suffer. In such case, the trading price of our commonstock could decline, and you may lose all or part of the money you paid to buyour stock.*

*This Report contains forward-looking statements basedon the current expectations, assumptions, estimates, and projections about usand our industry. These forward-looking statements involve risks anduncertainties. Our actual results could differ materially from those discussedin these forward-looking statements as a result of certain factors, as morefully described in this section and elsewhere in this Report. We*

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*do not undertake to update publicly anyforward-looking statements for any reason, even if new information becomesavailable or other events occur in the future.*

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

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

If we finance futureacquisitions by using equity securities, this would dilute our existingstockholders. Any amortization of intangible assets, or other charges resultingfrom the costs of these acquisitions, could have an adverse effect on theresults of our operations. In addition, we may pay more for an acquisition thanthe acquired products, services, technology or business are ultimately worth.

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

As we continue to increasethe scope of our operations, we will need an effective planning and managementprocess to implement our business plan successfully in the rapidly evolvingInternet advertising market. Our business, results of operations and financialcondition will be substantially harmed if we are unable to manage our expandingoperations effectively. We plan to continue to expand our sales and marketing,customer support and technology organizations. Past growth has placed, and anyfuture growth will continue to place, a significant strain on our managementsystems and resources. We will likely need to continue to improve our financialand managerial controls and our reporting systems and procedures. In addition,we will need to expand, train and manage our work force. Our failure to manageour growth effectively could increase our expenses and divert management’s timeand attention.

**WERECENTLY ACHIEVED PROFITABILITY AND MIGHT NOT REMAIN PROFITABLE.**

Although we achieved profitability in 2003 and 2004,events could arise that prevent us from achieving net income in future periods.

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

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

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

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

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

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

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

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

·       adaptto changes in the competitive landscape.

If we are unsuccessful in addressing these risks and uncertainties, ourbusiness, results of operations and financial condition could be materially andadversely affected.

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

Our Media segmentaccounted for 55.2% of our revenue for the year ended December 31, 2004 bydelivering advertisements that generate impressions, click-throughs and otheractions to our advertisers’ websites. This business model may not continue tobe effective in the future for a number of reasons, including the following:click rates have always been low and may decline as the number of banneradvertisements on the Web increases; Internet users can install “filter”software programs which allow them to prevent advertisements from appearing ontheir computer screens or email boxes; Internet advertisements are, by theirnature, limited in content relative to other media; direct marketing companiesmay be reluctant or slow to adopt online advertising that replaces, limits orcompetes with their existing direct marketing efforts; and direct marketingcompanies may prefer other forms of Internet advertising we do not offer,including certain forms of search engine placements. If the number of directmarketing companies who purchase online advertising from us does not continueto grow, we may experience difficulty in attracting publishers, and our revenuecould decline.

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

Traditionally, most of our revenue has been derivedfrom our Media segment. Although we intend to grow our Affiliate Marketing andTechnology segments, we expect that our Media segment will continue to generatea substantial amount of our revenue in the future. Our Media segment includesproducts and services that are based on a cost-per-click (“CPC”),cost-per-action (“CPA”), cost-per-lead (“CPL”) or cost-per-thousand impressions(“CPM”) pricing model. Our ability to generate significant revenue fromadvertisers will depend, in part, on our ability to demonstrate theeffectiveness of our various pricing models to advertisers and to Webpublishers; and on our ability to attract and retain advertisers and Webpublishers by differentiating our technology and services from those of ourcompetitors. One component of our strategy is to enhance advertisers’ abilityto measure their return on investment and track the performance andeffectiveness of their advertising campaigns. To date, not all advertisers havetaken 

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advantage of the mostsophisticated tools we offer for tracking Internet users’ activities after theyhave reached advertisers’ websites. We will not be able to assure you that ourstrategy will succeed.

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

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

Our success depends in part on our ability toeffectively manage our existing advertising space. The Web publishers and listowners that list their unsold advertising space with us are not bound bylong-term contracts that ensure us a consistent supply of advertising space,which we refer to as inventory. In addition, websites can change the amount ofinventory they make available to us at any time. If a Web publisher or emaillist owner decides not to make advertising space from its websites, newslettersor lists available to us, we may not be able to replace this advertising spacewith advertising space from other websites or list owners that have comparabletraffic patterns and user demographics quickly enough to fulfill ouradvertisers’ requests. This would result in lost revenue. We expect that ourcustomers’ requirements will become more sophisticated as the Web matures as anadvertising medium. If we fail to manage our existing advertising spaceeffectively to meet our customers’ changing requirements, our revenue coulddecline. Our growth depends on our ability to expand our advertising inventory.To attract new customers, we must maintain a consistent supply of attractiveadvertising space. We intend to expand our advertising inventory by selectivelyadding to our network new Web publishers and list owners that offer attractivedemographics, innovative and quality content and growing Web user traffic andemail volume. Our ability to attract new Web publishers and list owners to ournetwork and to retain Web publishers and list owners currently in our networkwill depend on various factors, some of which are beyond our control. Thesefactors include our ability to introduce new and innovative product lines andservices, our ability to efficiently manage our existing advertising inventory,our pricing policies, and the cost-efficiency to Web publishers and list ownersof outsourcing their advertising sales. In addition, the number of competingintermediaries that purchase advertising inventory from Web publishers and listowners continues to increase. We will not be able to assure you that the sizeof our inventory will increase or even remain constant in the future.

Our pay-per-click searchservice is dependent upon a limited number of sources to direct Internet usersto our search service. Our sources for users conducting searches are members ofour affiliate network, including portals, browsers, or other affiliates and ourown website. Revenues are generated when users conducting searches are directedto advertisers through a paid search link in our search results. The moretraffic our sources direct to our advertisers through our search technology,the more revenue we will generate. Unfavorable changes in our relationship withthese sources or loss of these relationships would adversely affect our revenueand results of operations.

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

We may be subject to legalactions alleging intellectual property infringement (including patentinfringement), unfair competition or similar claims against us. Companies mayapply for or be awarded 

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patentsor have other intellectual property rights covering aspects of our technologyor business. One of the primary competitors of our Search123 subsidiary,Overture Services, Inc., purports to be the owner of U.S. Patent No. 6,269,361,which was issued on July 31, 2001 and is entitled “System and method forinfluencing a position on a search result list generated by a computer networksearch engine.” Overture has aggressively pursued its alleged patent rights byfiling lawsuits against other pay-per-click search engine companies such asFindWhat.com and Google. FindWhat.com and Google have asserted counter-claimsagainst Overture including, but not limited to, invalidity, unenforceabilityand non-infringement.  We are currentlyindemnifying Barnesandnoble.com, Inc. in its patent infringementlitigation with BTG International, Inc. (“BTG”). This case could prove tobe very expensive to us and, if successful for BTG, hinder our ability todeliver our affiliate marketing products and services.

**IFTHE TECHNOLOGY THAT WE CURRENTLY USE TO TARGET THE DELIVERY OF ONLINEADVERTISEMENTS AND TO PREVENT FRAUD ON OUR NETWORK IS RESTRICTED OR BECOMES SUBJECTTO REGULATION, OUR EXPENSES COULD INCREASE AND WE COULD LOSE CUSTOMERS ORADVERTISING INVENTORY.**

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

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

We earn advertisingrevenue and make payments to Web publishers based on the number of impressions,clicks and actions from advertisements delivered on our network of websites andemail lists. Advertisers’ and Web publishers’ willingness to use our servicesand join our network will depend on the extent to which they perceive ourmeasurements of impressions, clicks or actions to be accurate and reliable.Advertisers and Web publishers often maintain their own technologies andmethodologies for counting impressions, clicks or actions, and from time totime we have had to resolve differences between our measurements and theirs.Any significant dispute over the proper measurement of clicks or other userresponses to advertisements could cause us to lose customers or advertisinginventory.

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

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

The market for Internet advertising and relatedservices is intensely competitive. We expect this competition to continue toincrease because there are no significant barriers to entry. Increasedcompetition may result in price reductions for advertising space, reducedmargins and loss of our market share. Our principal competitors include othercompanies that provide advertisers with Internet advertising solutions, such asCPM, CPC, CPL or CPA, and companies that offer pay-per-click search services.We directly compete with a number of competitors in the CPC market segment,such as Advertising.com. We compete in the performance-based marketing segmentwith CPL and CPA performance-based companies such as Direct Response andLinkshare, and we compete with other Internet advertising networks that focuson the traditional CPM model, including 24/7 Real Media. We also compete withpay-per-click search companies such as Overture, recently acquired by Yahoo,Google and FindWhat. In addition, we now compete in the online comparisonshopping market with focused comparison shopping websites such as Shopping.com,Kelkoo (which was recently acquired by Yahoo), NexTag, and Pricegrabber, andwith search engines and portals such as Yahoo, Google and MSN, and with onlineretailers such as Amazon.com and Ebay.****Large websiteswith brand recognition, such as Yahoo, AOL and MSN, have direct sales personneland substantial proprietary inventory that provide significant competitiveadvantages compared to our networks and have significant impact on pricing foronline advertising. These companies have longer operating histories, greatername recognition and have greater financial and marketing resources than wehave.

Competition foradvertising placements among current and future suppliers of Internetnavigational and informational services, high-traffic websites and Internetservice providers, or ISPs, as well as competition with other media foradvertising placements, could result in significant price competition,declining margins and/or reductions in advertising revenue. In addition, as wecontinue to 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 competitors mayhave advantages in expertise, brand recognition and other areas. If existing orfuture competitors develop or offer services that provide significantperformance, price, creative or other advantages over those offered by us, ourbusiness, results of operations and financial condition would be negativelyaffected. We will also compete with traditional advertising media, such asdirect mail, television, radio, cable, and print, for a share of advertisers’total advertising budgets. Many current and potential competitors enjoycompetitive advantages over us, such as longer operating histories, greatername recognition, larger customer bases, greater access to advertising space onhigh-traffic websites, and significantly greater financial, technical andmarketing resources. As a result, we may not be able to compete successfully.If we fail to compete successfully, we could lose customers or advertisinginventory and our revenue could decline.

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**OURREVENUE GROWTH 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 be inhibitedfor a number of reasons, such as: inadequate network infrastructure; securityconcerns; 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 and ourperformance and reliability may decline. In addition, websites have experiencedinterruptions in their service as a result of outages and other delaysoccurring throughout the Internet network infrastructure, and as a result ofsabotage, such as electronic attacks designed to interrupt service on manywebsites. The Internet could lose its viability as a commercial medium due todelays in the development or adoption of new technology required to accommodateincreased levels of Internet activity. If use of the Internet does not continueto grow, or if the Internet infrastructure does not effectively support ourgrowth, our revenue could be materially and adversely affected.

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

Because many of ourcustomers’ advertisements encourage online purchasing, our long-term successmay depend in part on the growth and market acceptance of e-commerce. Our businesswill be adversely affected if the market for e-commerce does not continue togrow or grows slower than now expected. A number of factors outside of ourcontrol could hinder the future growth of e-commerce, including the following:

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

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

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

·       financialinstability of e-commerce customers.

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

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

The successful integration of the companies we haveacquired will depend in part on the retention of personnel critical to ourcombined business and operations due to, for example, unique technical skillsor management expertise. We may be unable to retain existing management,technical, sales, and customer support personnel that are critical to thesuccess of the integrated company, resulting in disruption of operations, lossof key information, expertise or know-how and unanticipated additionalrecruitment and training costs and otherwise diminishing anticipated benefitsof these acquisitions.

Our future success issubstantially dependent on the continued service of our key senior management.Our employment agreements with our key personnel are short-term and on anat-will basis. We do not have key-person insurance on any of our employees. Theloss of the services of any member of our management team, or of any other keyemployees, could divert management’s time and attention, increase our expensesand adversely affect our ability to conduct our business efficiently. Ourfuture success also 

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dependson our continuing ability to attract, retain and motivate highly skilledemployees. We may be unable to retain our key employees or attract, assimilateor retain other highly qualified employees in the future. We have experienceddifficulty from time to time in attracting the personnel necessary to supportthe growth of our business, and may experience similar difficulties in thefuture.

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

Provisions of Delaware lawcould make it more difficult for a third-party to acquire us, even if doing sowould be beneficial to our stockholders. Section 203 of the DelawareGeneral Corporation Law may make the acquisition of the Company and the removalof incumbent officers and directors more difficult by prohibiting stockholdersholding 15% or more of our outstanding voting stock from acquiring the Companywithout the board of directors’ consent for at least three years from the datethey first hold 15% or more of the voting stock. In addition, our StockholderRights Plan has significant anti-takeover effects by causing substantialdilution to a person or group that attempts to acquire us on terms not approvedby our board of directors.

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

Our success depends on thecontinuing and uninterrupted performance of our systems. Sustained or repeatedsystem failures that interrupt our ability to provide services to customers,including failures affecting our ability to deliver advertisements quickly andaccurately and to process users’ responses to advertisements, would reducesignificantly the attractiveness of our solutions to advertisers and Webpublishers. Our business, results of operations and financial condition couldbe materially and adversely affected by any damage or failure that interruptsor delays our operations. Our computer systems are vulnerable to damage from avariety of sources, including telecommunications failures, power outages,malicious human acts, and natural disasters. We lease server space in ElSegundo and Sunnyvale, California, Louisville, Kentucky and Stockholm, Sweden.Therefore, any of the above factors affecting the Los Angeles, Sunnyvale orLouisville areas would substantially harm our business. Moreover, despitenetwork security measures, our servers are potentially vulnerable to physicalor electronic break-ins, computer viruses and similar disruptive problems inpart because we cannot control the maintenance and operation of our third-partydata centers. Despite the precautions taken, unanticipated problems affectingour systems could cause interruptions in the delivery of our solutions in thefuture. Our data storage centers incorporate redundant systems, consisting ofadditional servers, but our primary system does not switch over to our back-upsystem automatically. Our insurance policies may not adequately compensate usfor any losses that may occur due to any failures in our systems.

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

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

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advertisementsappear. Internet users have occasionally experienced difficulties connecting tothe Web due to failures of their ISPs’ systems. Any disruption in Internetaccess provided by ISPs or failures by ISPs to handle the higher volumes oftraffic expected in the future could materially and adversely affect ourrevenue.

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

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

·       fluctuationsin demand for our advertising solutions;

·       fluctuationsin click, lead and action rates;

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

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

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

·       seasonalpatterns in Internet advertisers’ spending;

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

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

·       costsrelated to acquisitions of technology or businesses.

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 current or prospectiveadvertisers’ spending priorities, or may increase the time it takes us to closesales with advertisers, and could materially and adversely affect our business,results of operations and financial condition.

**IF WEDO NOT SUCCESSFULLY DEVELOP OUR INTERNATIONAL STRATEGY, OUR REVENUE AND CASHFLOWS AND THE GROWTH OF OUR BUSINESS COULD BE HARMED.**

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

Our internationalexpansion will subject us to additional foreign currency exchange risks andwill require management’s attention and resources. We expect to pursueexpansion through a number of international alliances and to rely extensivelyon these business partners initially to conduct operations, establish localnetworks, register websites as affiliates and coordinate sales and marketingefforts. Our success in these markets will depend on the success of ourbusiness partners and their willingness to 

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dedicatesufficient resources to the relationships. We cannot assure you that we will besuccessful in our efforts overseas. International operations are subject toother inherent risks, including:

·       theimpact of recessions in economies outside the United States;

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

·       exportrestrictions, including export controls relating to encryption technologies;

·       reducedprotection for intellectual property rights in some countries;

·       potentiallyadverse tax consequences;

·       difficultiesand costs of staffing and managing foreign operations;

·       politicaland economic instability;

·       tariffsand other trade barriers; and

·       seasonalreductions in business activity.

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

**WE MAY BELIABLE FOR CONTENT DISPLAYED ON OUR NETWORKS OF PUBLISHERS WHICH COULD INCREASEOUR EXPENSES.**

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

**IF WEFAIL TO ESTABLISH, MAINTAIN AND EXPAND OUR TECHNOLOGY BUSINESS AND MARKETINGALLIANCES AND PARTNERSHIPS, OUR ABILITY TO GROW COULD BE LIMITED, WE MAY NOTACHIEVE DESIRED REVENUE AND OUR STOCK PRICE MAY DECLINE.**

In order to grow our technology business, we mustgenerate, retain and strengthen successful business and marketing allianceswith advertising agencies.

We depend, and expect tocontinue to depend, on our business and marketing alliances, which arecompanies with which we have written or oral agreements to work together toprovide services to our clients and to refer business from their clients andcustomers to us. If companies with which we have business and marketingalliances do not refer their clients and customers to us to perform theironline campaign and message management, our revenue and results of operationswould be severely harmed.

**WEWILL BE DEPENDENT UPON TECHNOLOGIES, INCLUDING OUR MOJO, MEDIAPLEX SYSTEMS,COMMISSION JUNCTION, HI-SPEED MEDIA, SEARCH123, AND PRICERUNNER TECHNOLOGIES,FOR OUR FUTURE REVENUE, AND IF THESE TECHNOLOGIES DO NOT GENERATE REVENUE, OURBUSINESS MAY FAIL.**

Our future revenue islikely to be dependent on the acceptance by clients of the use of ourtechnologies, which we believe to be the cornerstone of our technologybusiness. If these technologies do not perform as anticipated or otherwise donot attract clients to use our services, our operations will suffer. Inaddition, we may incur significant expenses in the future developing ourexisting and purchased technologies. If our revenue generated from the use ofour technologies does not cover these development costs, our results of operationsand financial condition would suffer.

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

Our business will beharmed if our technologies suffer from design or performance defects and, as aresult, we could become subject to significant product liability claims.Technology as complex as our technology may contain design and/or performancedefects which are not detectable even after extensive internal testing. Such defectsmay become apparent only after widespread commercial use. Our contracts withour clients currently do not contain provisions to completely limit ourexposure to liabilities resulting from product liability claims. Although wehave not experienced any product liability claims to date, we cannot assure youthat we will not do so in the future. A product liability claim brought againstus, which is not adequately covered by our insurance, could materially harm ourbusiness.

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

If the sales andimplementation cycle of our technology products and services are delayed, ourrevenue will likewise be delayed. Our sales and implementation cycles arelengthy, causing us to recognize revenue long after our initial contact with aclient. During our sales effort, we spend significant time educatingprospective clients on the use and benefit of our message management services.As a result, the sales cycle for our products and services is long, rangingfrom a few weeks to several months to over one year for our larger clients. Thesales cycle for our message management services and media managementapplications is likely to be longer than the sales cycle for competitorsbecause we believe that clients may require more extensive approval processesrelated to integrating internal business information with their advertisingcampaigns. In addition, in order for a client to implement our services, theclient must commit a significant amount of resources over an extended period oftime. Furthermore, even after a client purchases our services, theimplementation cycle is subject to delays. These delays may be caused byfactors within our control, such as possible technology defects, as well asthose outside our control, such as clients’ budgetary constraints, internalacceptance reviews, functionality enhancements, lack of appropriate customerstaff to implement our applications, and the complexity of clients’ advertisingneeds. Also, failure to deliver service or application features consistent withdelivery commitments could result in a delay or cancellation of a clientagreement.

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

Our success depends in large part on our proprietarytechnologies, including tracking management software, our affiliate marketingtechnologies and our MOJO platform. In addition, we believe that our trademarksare key to identifying and differentiating our services from those of ourcompetitors. We may be required to spend significant resources to monitor andpolice our intellectual property rights. If we fail to successfully enforce ourintellectual property rights, the value of our services could be diminished andour competitive position may 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 technology without authorization ordevelop similar technology independently which may infringe upon ourproprietary rights. We may not be able to detect infringement and may losecompetitive position in the market before we do so. In addition, competitorsmay design around our technology or develop competing technologies.Intellectual property protection may also be unavailable or limited in someforeign countries.

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

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

The Internet advertisingmarket is characterized by rapidly changing technologies, evolving industrystandards, frequent new product and service introductions, and changingcustomer demands. The introduction of new products and services embodying newtechnologies and the emergence of new industry standards and practices canrender existing products and services obsolete and unmarketable or requireunanticipated technology investments. Our success will depend on our ability toadapt to rapidly changing technologies, to enhance existing solutions and todevelop and introduce a variety of new solutions to address our customers’changing demands. For example, advertisers are increasingly requiring Internetadvertising networks to have the ability to deliver advertisements utilizingnew formats that surpass stationary images and incorporate rich media, such asvideo and audio, interactivity, and more precise consumer targeting techniques.Our system does not support some types of advertising formats, such as certainvideo and audio formats, and many of the websites in our network have notimplemented systems to allow rich media advertisements. In addition, anincrease in the 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 from third-parties. We intend tocontinue to acquire technology necessary for us to conduct our business fromthird-parties. We cannot assure you that, in the future, these technologies willbe 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 significant market acceptance. Ifwe fail to keep pace with technological developments and the introduction ofnew industry and technology standards on a cost-effective basis, our expensescould increase, and we could lose customers or advertising inventory.

**CHANGESIN GOVERNMENT REGULATION AND INDUSTRY STANDARDS COULD DECREASE DEMAND FOR OURSERVICES 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 adverselyaffect the demand for our advertising solutions or otherwise harm our business,results of operations and financial condition. The United States Congress hasenacted Internet legislation regarding children’s privacy, copyrights, sendingof unsolicited commercial email (e.g., the Federal CAN-Spam Act of 2003),Spyware (e.g., H.R. 29, the “Spy Act”), and taxation. Other laws andregulations have been adopted and may be adopted in the future, and may addressissues such as user privacy, Spyware, pricing, intellectual property ownershipand infringement, copyright, trademark, trade secret, export of encryptiontechnology, acceptable content, taxation, and quality of products and services.This legislation could hinder growth in the use of the Web generally anddecrease the acceptance of the Web as a communications, commercial andadvertising medium.

Due to the global natureof the Web, it is possible that, although our transmissions originate inCalifornia, Kentucky and Sweden, the governments of other states or foreigncountries might attempt to 

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regulateour transmissions or levy sales or other taxes relating to our activities. Inaddition, the growth and development of the market for Internet commerce mayprompt calls for more stringent consumer protection laws, both in the UnitedStates and abroad, that may impose additional burdens on companies conductingbusiness over the Internet. The laws governing the Internet remain largelyunsettled, even in areas where there has been some legislative action. It maytake years to determine how existing laws, including those governingintellectual property, privacy, libel and taxation, apply to the Internet andInternet advertising. Our business, results of operations and financialcondition could be materially and adversely affected by the adoption ormodification of laws or regulations relating to the Internet, or theapplication of existing laws to the Internet or Internet-based advertising.

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

Recent growing 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. Any failureby us to comply with applicable foreign, federal and state laws and regulatoryrequirements of regulatory authorities may result in, among other things,indemnification liability to our clients and the advertising agencies we workwith, administrative enforcement actions and fines, class action lawsuits,cease and desist orders, and civil and criminal liability. Recently, classaction lawsuits have been filed alleging violations of privacy laws by ISPs.The European Union’s directive addressing data privacy limits our ability tocollect and use information regarding Internet users. These restrictions maylimit our ability to target advertising in most European countries. Our failureto comply with these or other federal, state or foreign laws could result inliability 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 us adversely.Governments, trade associations and industry self-regulatory groups may enactmore burdensome laws, regulations and guidelines, including consumer privacylaws, affecting our clients and us. Since many of the proposed laws orregulations are just being developed, and a consensus on privacy and data usagehas not been reached, we cannot yet determine the impact these regulations mayhave on our business. However, if the gathering of profiling information wereto be curtailed, Internet advertising would be less effective, which wouldreduce demand for Internet advertising and harm our business.

Our customers are alsosubject to various federal and state regulations concerning the collection anduse of information regarding individuals. These laws include the Children’sOnline Privacy Protection Act, the Federal Drivers Privacy Protection Act of1994, the privacy provisions of the Gramm-Leach-Bliley Act, the CAN-SPAM Act of2003, H.R. 29 the Spy Act of 2005, as well as other laws that govern thecollection and use of consumer credit information. We cannot assure you thatour clients are currently in compliance, or will remain in compliance, withthese laws and their own privacy policies. We may be held liable if our clientsuse our technology in a manner that is not in compliance with these laws ortheir own stated privacy standards.

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

Our common stock has been publicly traded only 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 stock may materiallydecline, regardless of our operating performance. In 

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thepast, following periods of volatility in the market price of a particularcompany’s securities, securities class action litigation has often been broughtagainst that company. We may become involved in this type of litigation in thefuture. Litigation of this type is often expensive and diverts management’sattention and resources.

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

We have historically usedstock options as a key component of our total employee compensation program inorder to align employees’ interests with the interests of our stockholders,encourage employee retention, and provide competitive compensation packages.Volatility or lack of positive performance in our stock price may adverselyaffect our ability to retain key employees, all of whom have been granted stockoptions, or attract additional highly-qualified personnel. Many of ouroutstanding employee stock options have exercise prices in excess of ourcurrent stock price. To the extent these circumstances continue or recur, ourability to retain present employees may be adversely affected. In addition, theFinancial Accounting Standards Board (“FASB”) has finalized changes toGenerally Accepted Accounting Principles (“GAAP”) that will require an expenseto be recorded for employee stock option grants and other equity incentivesbeginning July 1, 2005. Moreover, applicable stock exchange listingstandards relating to obtaining stockholder approval of equity compensationplans could make it more difficult or expensive for us to grant options toemployees in the future. As a result, in addition to recording additionalcompensation expense, 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 2. PROPERTIES**

We lease a number of properties in both domestic andforeign locations.

Our principal corporate offices are located inWestlake Village, California, where we lease a property with approximately14,300 square feet of space. This facility is also used by our Media segment’soperations. Other leased facilities used in our Media segment operationsinclude separate 4,000 square-foot and 2,900 square-foot facilities in Tarzana,California, a 3,200 square-foot facility in Sherman Oaks, California, and a7,000 square-foot facility in New York, New York, as well as a 10,600 square-footfacility in San Francisco, shared with our Technology segment. In December 2004,we signed a lease to relocate our corporate offices to a new 35,000 square-footfacility in Westlake Village, California. We anticipate that relocation will becompleted by March 31, 2005.

Leased facilities used by our Affiliate Marketingsegment include an approximate 12,500 square-foot facility in Marlborough,Massachusetts, a 12,200 square-foot facility in Pittsburgh, Pennsylvania, andan approximate 17,700 square-foot facility in Santa Barbara, California. In December 2004,we signed a lease to relocate our west coast affiliate marketing offices to anew 28,000 square-foot facility in Santa Barbara, California. We anticipatethat relocation will be completed by March 31, 2005.

Our Technology segment occupies an approximate 10,600square-foot facility in San Francisco, California, and 7,000 square-footfacility in New York, New York, both shared by our Mediaplex operations and ourMedia Segment, and an approximate 20,800 square-feet of office space for ourMediaplex Systems enterprise solutions organization in Louisville, Kentucky.

We also lease small officespace and facilities in Agoura Hills, California; London, England; Paris,France; Munich, Germany; and Stockholm, Sweden. In addition, we use third-partyco-location facilities that house our Web servers in Sunnyvale, California; ElSegundo, California; Louisville, Kentucky; and Stockholm, Sweden. Our existingoffice space is adequate for our current operations. For additional 

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informationregarding our obligations under leases, see note 13 to our consolidatedfinancial statements included in this Report.

**ITEM 3. LEGAL PROCEEDINGS**

***Lorenc v. Be Free, Inc. et al.***

On September 27,2000, Joseph Lorenc, a former employee of Be Free, Inc. filed a lawsuitagainst Be Free and two officers of Be Free, Steven Joseph and GordonHoffstein, in the United States District Court, District of Massachusetts. Thecomplaint alleged, among other things, breach of contract. Lorenc sought, amongother things, compensatory damages, punitive damages and attorney’s fees to thegreatest extent allowed by law. The case was pending before the state court inMassachusetts. The case was set for trial in May of 2004. On May 3,2004, the day of trial, Lorenc agreed to dismiss his case against the Companywith prejudice, in exchange for the Company’s agreement not to pursue a claimagainst Lorenc for its attorney’s fees expended in defending Lorenc’s action. Thecase is now concluded.

***Chahal v. ValueClick, Inc. et al.***

This case was filed on September 5,2003 and brought against ValueClick and Company executives Sam Paisley, JimZarley and Scott Barlow, by Gurbaksh Chahal and Tajinder Chahal for, amongother things, fraud. The Chahals are former employees of the Company’s ClickAgents Inc. subsidiary and the case arises out of the Company’s repurchaseof the Chahals’ ValueClick stock. The case was pending before the Los AngelesCounty Superior Court. The Chahals sought, among other things, general, specialand punitive damages according to proof as well as the imposition of aconstructive trust. On July 19, 2004, the Company reached a settlementwith the Chahals, which was not material to the Company’s financial statements.Terms of the settlement agreement are confidential.

***BTG International Inc. v. Barnesandnoble.com***

On September 28, 2004, the Company received aletter from Barnesandnoble.com (“B&N”) requesting that the Company fullyindemnify B&N for the costs and expenses associated with a lawsuit forpatent infringement filed by BTG International, Inc. (“BTG”) againstB&N and other defendants. The case is pending before the United StatesDistrict Court, District of Delaware. The complaint alleges that through theuse of certain online advertising technologies, B&N infringes two patentsobtained by BTG purporting to cover methods and apparatuses for “AttachingNavigational History Information to Universal Resource Locator Links on a WorldWide Web Page” (U.S. Patent No. 5,712,979) and for “Tracking theNavigational Path of a User on the World Wide Web” (U.S. Patent No. 5,717,860)and seeks injunctive relief, monetary damages in an amount no less than areasonable royalty, treble damages for alleged willful infringement,prejudgment interest, costs, and attorneys’ fees. B&N’s request forindemnification stems from standard mutual indemnification language included ina services agreement between B&N and ValueClick’s wholly-owned subsidiary,Be Free, Inc. B&N alleges that is has been named in the patentinfringement suit as a result of B&N’s use of Be Free’stechnology. The Company has agreed to indemnify B&N and is providinglegal counsel while fully reserving its legal rights. Moreover, we dispute theallegations of wrongdoing in the complaint and intend to defend ourselves andB&N vigorously in this matter. We believe that a contingent loss in thismatter is reasonably possible but the probability of inaccuracy of any estimateof such loss is more than slight, and thus cannot be made.

From time to time, we maybecome subject to additional legal proceedings, claims, and litigation arisingin the ordinary course of business. In addition, we may receive lettersalleging infringement of patent or other intellectual property rights. Otherthan the matters discussed above, we are not a party to any other materiallegal proceedings, nor are we aware of any other pending or threatenedlitigation that 

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wouldhave a material adverse effect on our business, operating results, cash flowsor financial condition should such litigation be resolved unfavorably.

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

No matters were submitted to a vote of securitiesholders during the quarter ended December 31, 2004.

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**PART II.**

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

**Market Information**

Our common stock has traded on The NASDAQ NationalMarket under the symbol “VCLK” since our initial public offering on March 30,2000. The following table sets forth, for the periods indicated, the high andlow sales prices per share of our common stock as reported on the NASDAQNational Market. On December 31, 2004, the last sale price of our commonstock reported by the NASDAQ National Market was $13.33 per share.
| ** **                                    | ** ** | **Price Range of  Common Stock** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                    | ** ** | **High**                                        | ** ** | **Low** | ** ** |
| **Fiscal Year Ended  December 31, 2004** |       |                                            |       |   |   |
| Fourth Quarter                                |       | $                                               | 13.93      |   | $ | 9.02 |   |
| Third Quarter                                 |       | 11.94                                           |       | 6.48 |   |
| Second Quarter                                |       | 12.48                                           |       | 9.47 |   |
| First Quarter                                 |       | 11.94                                           |       | 9.24 |   |
|                                               |            |                                                 |            |  |  |  |  |

 
| ** **                                    | ** ** | **Price Range of  Common Stock** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                    | ** ** | **High**                                        | ** ** | **Low** | ** ** |
| **Fiscal Year Ended  December 31, 2003** |       |                                            |       |   |   |
| Fourth Quarter                                |       | $                                               | 10.75      |   | $ | 7.35 |   |
| Third Quarter                                 |       | 9.96                                            |       | 6.10 |   |
| Second Quarter                                |       | 6.38                                            |       | 3.18 |   |
| First Quarter                                 |       | 3.21                                            |       | 2.65 |   |
|                                               |            |                                                 |            |  |  |  |  |

 
| ** **                                    | ** ** | **Price Range of  Common Stock** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                    | ** ** | **High**                                        | ** ** | **Low** | ** ** |
| **Fiscal Year Ended  December 31, 2002** |       |                                            |       |   |   |
| Fourth Quarter                                |       | $                                               | 2.87       |   | $ | 2.00 |   |
| Third Quarter                                 |       | 3.10                                            |       | 2.11 |   |
| Second Quarter                                |       | 3.24                                            |       | 2.55 |   |
| First Quarter                                 |       | 3.11                                            |       | 2.35 |   |
|                                               |            |                                                 |            |  |  |  |  |

 

**Holders**

As of December 31,2004, there were 892 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 intendto retain future earnings, if any, for use in the operation and expansion ofour business and do not anticipate paying cash dividends in the foreseeablefuture.

**ITEM 6. SELECTED FINANCIAL DATA**

The selected consolidatedfinancial data set forth below with respect to our consolidated statement ofoperations for each of the years ended December 31, 2004, 2003 and 2002and with respect to our consolidated balance sheet as of December 31, 2004and 2003 have been derived from the audited financial 

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statementsof ValueClick which are included elsewhere herein. The consolidated statementof operations data for the years ended December 31, 2001 and 2000 and theconsolidated balance sheet data as of December 31, 2002, 2001 and 2000have been derived from our audited consolidated financial statements notincluded herein. The selected consolidated financial data set forth below isqualified in our entirety by, and should be read in conjunction with, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andthe consolidated financial statements and the notes to those statements both includedelsewhere herein and not included herein.

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**CONSOLIDATEDSTATEMENT OF OPERATIONS DATA**
| ** **                                                                                                      | ** ** | **For the Years ended December 31,**      | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2004**                                                           | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                                                      | ** ** | **(In thousands, except per share data)** | ** ** |
| **Consolidated  Statement of Operations Data(3):**                                                              |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenue                                                                                                         |       | $                                                                  | 169,178    |   | $ | 92,516 |   | $ | 62,554 |   | $ | 44,873 |   | $ | 64,332 |   |
| Cost of revenue                                                                                                 |       | 50,762                                                             |       | 32,024 |   | 21,733 |   | 20,370 |   | 31,930 |   |
| Gross profit                                                                                                    |       | 118,416                                                            |       | 60,492 |   | 40,821 |   | 24,503 |   | 32,402 |   |
| Operating  expenses:                                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Sales and marketing(1)                                                                                          |       | 36,000                                                             |       | 21,162 |   | 17,001 |   | 11,976 |   | 11,436 |   |
| General and administrative(1)                                                                                   |       | 27,168                                                             |       | 19,699 |   | 17,784 |   | 13,301 |   | 12,896 |   |
| Technology(1)                                                                                                   |       | 15,891                                                             |       | 10,504 |   | 10,459 |   | 5,313 |   | 4,846 |   |
| Stock-based compensation                                                                                        |       | 739                                                                |       | 352 |   | 1,527 |   | 2,699 |   | 5,058 |   |
| Amortization of intangible assets and acquired  software                                                        |       | 4,111                                                              |       | 1,570 |   | 533 |   | 1,875 |   | 1,069 |   |
| Merger-related costs                                                                                            |       | —                                                             |       | — |   | 17 |   | 1,787 |   | 353 |   |
| Restructuring charges (reversals)                                                                               |       | (1,003                                                             | )          | — |   | 2,320 |   | 515 |   | — |   |
| Total operating expenses                                                                                        |       | 82,906                                                             |       | 53,287 |   | 49,641 |   | 37,466 |   | 35,658 |   |
| Income (loss) from operations                                                                                   |       | 35,510                                                             |       | 7,205 |   | (8,820 | ) | (12,963 | ) | (3,256 | ) |
| Interest income                                                                                                 |       | 3,665                                                              |       | 3,364 |   | 5,909 |   | 5,051 |   | 4,120 |   |
| Gain (loss) on sale of marketable securities                                                                    |       | —                                                             |       | — |   | 134 |   | 701 |   | (9,006 | ) |
| Impairment write-down of marketable securities                                                                  |       | —                                                             |       | — |   | — |   | — |   | (60,233 | ) |
| Gain from consolidated subsidiary stock issuance                                                                |       | —                                                             |       | — |   | — |   | — |   | 13,656 |   |
| Gain on sale of consolidated subsidiary stock                                                                   |       | —                                                             |       | — |   | — |   | — |   | 2,344 |   |
| Gain on sale of equity interest in Japan subsidiary                                                             |       | 8,007                                                              |       | — |   | — |   | — |   | — |   |
| Other income (expense)                                                                                          |       | 63                                                                 |       | — |   | 32 |   | (5 | ) | — |   |
| Income (loss) before income taxes, minority interest  and cumulative effect of a change in accounting principle |       | 47,245                                                             |       | 10,569 |   | (2,745 | ) | (7,216 | ) | (52,375 | ) |
| Income tax expense (benefit)                                                                                    |       | (40,512                                                            | )          | 830 |   | 163 |   | 34 |   | 2,539 |   |
| Income (loss) before minority interest and cumulative  effect of a change in accounting principle               |       | 87,757                                                             |       | 9,739 |   | (2,908 | ) | (7,250 | ) | (54,914 | ) |
| Minority share of loss (income) in consolidated  subsidiary                                                     |       | 130                                                                |       | 84 |   | (15 | ) | 32 |   | (419 | ) |
| Income (loss) before cumulative effect of a change in  accounting principle                                     |       | 87,887                                                             |       | 9,823 |   | (2,923 | ) | (7,218 | ) | (55,333 | ) |
| Cumulative effect of a change in accounting principle(2)                                                        |       | —                                                             |       | — |   | (7,649 | ) | — |   | — |   |
| Net income (loss)                                                                                               |       | $                                                                  | 87,887     |   | $ | 9,823 |   | $ | (10,572 | ) | $ | (7,218 | ) | $ | (55,333 | ) |
| Basic net income (loss) per common share:                                                                       |       | $                                                                  | 1.10       |   | $ | 0.13 |   | $ | (0.14 | ) | $ | (0.20 | ) | $ | (1.72 | ) |
| Shares used to calculate basic net income (loss) per  common share                                              |       | 80,063                                                             |       | 74,300 |   | 73,744 |   | 37,058 |   | 32,151 |   |
| Diluted net income (loss) per common share:                                                                     |       | $                                                                  | 1.05       |   | $ | 0.13 |   | $ | (0.14 | ) | $ | (0.20 | ) | $ | (1.72 | ) |
| Shares used to calculate diluted net income (loss)  per common share                                            |       | 84,038                                                             |       | 78,436 |   | 73,744 |   | 37,058 |   | 32,151 |   |

----

(1)          Excludesstock-based compensation for the following periods (in thousands):
| ** **                  | ** ** | **For the Years ended December 31,** | ** ** |
|-----------------------------|------------|---------------------------------------------------------------|------------|
| ** **                  | ** ** | **2004**                                                      | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Sales and  marketing        |       | $                                                             | 369        |   | $ | 113 |   | $ | 488 |   | $ | 864 |   | $ | 1,610 |   |
| General and  administrative |       | 245                                                           |       | 181 |   | 779 |   | 1,376 |   | 2,718 |   |
| Technology                  |       | 125                                                           |       | 58 |   | 260 |   | 459 |   | 730 |   |
|                        |       | $                                                             | 739        |   | $ | 352 |   | $ | 1,527 |   | $ | 2,699 |   | $ | 5,058 |   |

 

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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” (“SFASNo. 142”). In accordance with the transitional guidance of SFAS No. 142,we completed our impairment assessment in the second quarter of 2002 from theadoption of this standard and determined that goodwill of $7.6 millionrelated to the Bach Systems and ValueClick Japan acquisitions was impaired at January 1,2002 and reflected a cumulative effect of a change in accounting principle forthe goodwill impairment.

(3)          Theamounts included in the Consolidated Statement of Operations Data for the yearspresented reflect acquisitions and a disposition as follows:
| **Acquisitions**                | ** ** | ** **         | ** ** | **Date** |
|---------------------------------|------------|--------------------|------------|----------|
| Pricerunner AB                  |       | August 2004   |
| Commission  Junction, Inc. |       | December 2003 |
| Hi-Speed  Media, Inc.      |       | December 2003 |
| Search123.com, Inc.        |       | May 2003      |
| Be Free, Inc.              |       | May 2002      |
| Mediaplex, Inc.            |       | October 2001  |
| Z Media, Inc.              |       | December 2000 |
| ClickAgents.com, Inc.      |       | November 2000 |
| Bach Systems, Inc.         |       | November 2000 |

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

 

**ConsolidatedBalance Sheet Data:**
| ** **                                        | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                        | ** ** | **2004**                              | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                        | ** ** | **(In thousands)**               | ** ** |
| Cash, cash  equivalents and marketable securities |       | $                                     | 242,583    |   | $ | 220,120 |   | $ | 232,978 |   | $ | 163,355 |   | $ | 127,450 |   |
| Working capital                                   |       | 241,639                               |       | 213,809 |   | 234,229 |   | 161,928 |   | 129,036 |   |
| Total assets                                      |       | 430,426                               |       | 323,099 |   | 263,850 |   | 190,626 |   | 154,050 |   |
| Total stockholders’  equity                  |       | 384,905                               |       | 274,207 |   | 231,981 |   | 165,507 |   | 127,493 |   |
|                                                   |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Quarterly Results**

Thefollowing table sets forth some of our selected financial information for oureight most recent fiscal quarters in dollar terms. In the opinion of ourmanagement, this unaudited financial information has been prepared on the samebasis as the audited financial information, and includes all adjustments,consisting only of normal recurring adjustments, necessary to present thisinformation fairly when read in conjunction with our financial statements andthe related notes contained elsewhere herein. These operating results are notnecessarily indicative of results of any future period.
| ** **                                                  | ** ** | **For the Three-Month Period Ended**           | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **Dec. 31,  2004**                                            | ** ** | **Sept. 30,  2004** | ** ** | **Jun. 30,  2004** | ** ** | **Mar. 31,  2004** | ** ** | **Dec. 31,  2003** | ** ** | **Sept. 30,  2003** | ** ** | **Jun. 30,  2003** | ** ** | **Mar. 31,  2003** | ** ** |
| ** **                                                  | ** ** | **(In thousands, except per share data)** | ** ** |
| Revenue                                                     |       | $                                                                  | 54,371     |   | $ | 43,492 |   | $ | 34,606 |   | $ | 36,709 |   | $ | 30,273 |   | $ | 22,694 |   | $ | 20,086 |   | $ | 19,463 |   |
| Cost of revenue                                             |       | 15,011                                                             |       | 13,206 |   | 11,416 |   | 11,129 |   | 10,044 |   | 8,532 |   | 6,947 |   | 6,501 |   |
| Gross profit                                                |       | 39,360                                                             |       | 30,286 |   | 23,190 |   | 25,580 |   | 20,229 |   | 14,162 |   | 13,139 |   | 12,962 |   |
| Operating expenses:                                         |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales and marketing(1)                                      |       | 11,597                                                             |       | 9,760 |   | 7,198 |   | 7,445 |   | 6,251 |   | 5,002 |   | 4,931 |   | 4,978 |   |
| General and administrative(1)                               |       | 7,624                                                              |       | 6,962 |   | 5,931 |   | 6,651 |   | 5,841 |   | 4,772 |   | 4,634 |   | 4,452 |   |
| Technology(1)                                               |       | 3,984                                                              |       | 3,663 |   | 4,168 |   | 4,076 |   | 2,925 |   | 2,510 |   | 2,497 |   | 2,572 |   |
| Stock-based compensation                                    |       | 203                                                                |       | 124 |   | 174 |   | 238 |   | 86 |   | 72 |   | 97 |   | 97 |   |
| Amortization of intangible assets and acquired  software    |       | 1,276                                                              |       | 1,107 |   | 864 |   | 864 |   | 515 |   | 401 |   | 342 |   | 312 |   |
| Restructuring reversals                                     |       | —                                                             |       | — |   | (1,003 | ) | — |   | — |   | — |   | — |   | — |   |
| Total operating expenses                                    |       | 24,684                                                             |       | 21,616 |   | 17,332 |   | 19,274 |   | 15,618 |   | 12,757 |   | 12,501 |   | 12,411 |   |
| Income from operations                                      |       | 14,676                                                             |       | 8,670 |   | 5,858 |   | 6,306 |   | 4,611 |   | 1,405 |   | 638 |   | 551 |   |
| Interest and other income, net                              |       | 1,188                                                              |       | 1,001 |   | 843 |   | 696 |   | 675 |   | 716 |   | 934 |   | 1,039 |   |
| Gain on sale of equity interest in Japan subsidiary         |       | —                                                             |       | — |   | — |   | 8,007 |   | — |   | — |   | — |   | — |   |
| Income before income taxes and minority interest            |       | 15,864                                                             |       | 9,671 |   | 6,701 |   | 15,009 |   | 5,286 |   | 2,121 |   | 1,572 |   | 1,590 |   |
| Income tax   expense (benefit)                         |       | (45,443                                                            | )          | 2,053 |   | 1,187 |   | 1,691 |   | 16 |   | 196 |   | 233 |   | 385 |   |
| Income before minority interest                             |       | 61,307                                                             |       | 7,618 |   | 5,514 |   | 13,318 |   | 5,270 |   | 1,925 |   | 1,339 |   | 1,205 |   |
| Minority share of loss (income) in consolidated  subsidiary |       | —                                                             |       | — |   | — |   | 130 |   | 76 |   | 82 |   | (55 | ) | (19 | ) |
| Net income                                                  |       | $                                                                  | 61,307     |   | $ | 7,618 |   | $ | 5,514 |   | $ | 13,448 |   | $ | 5,346 |   | $ | 2,007 |   | $ | 1,284 |   | $ | 1,186 |   |
| Basic net income per common share                           |       | $                                                                  | 0.75       |   | $ | 0.09 |   | $ | 0.07 |   | $ | 0.17 |   | $ | 0.07 |   | $ | 0.03 |   | $ | 0.02 |   | $ | 0.02 |   |
| Diluted net income  per common share                   |       | $                                                                  | 0.73       |   | $ | 0.09 |   | $ | 0.07 |   | $ | 0.16 |   | $ | 0.07 |   | $ | 0.03 |   | $ | 0.02 |   | $ | 0.02 |   |

----

(1)          Excludesstock-based compensation for the following periods (in thousands):
| ** **                  | ** ** | **For the Three-Month Period Ended** | ** ** |
|-----------------------------|------------|----------------------------------------------------------|------------|
| ** **                  | ** ** | **Dec. 31,  2004**                                  | ** ** | **Sept. 30,  2004** | ** ** | **Jun. 30,  2004** | ** ** | **Mar. 31,  2004** | ** ** | **Dec. 31,  2003** | ** ** | **Sept. 30,  2003** | ** ** | **Jun. 30,  2003** | ** ** | **Mar. 31,  2003** | ** ** |
| Sales and marketing         |       |                                                     | $          | 101 |   |   |   | $ | 62 |   |   |   | $ | 87 |   |   |   | $ | 119 |   |   |   | $ | 28 |   |   |   | $ | 23 |   |   |   | $ | 31 |   |   |   | $ | 31 |   |   |
| General and  administrative |       |                                                     | 67         |   |   |   | 41 |   |   |   | 58 |   |   |   | 79 |   |   |   | 44 |   |   |   | 37 |   |   |   | 50 |   |   |   | 50 |   |   |
| Technology                  |       |                                                     | 35         |   |   |   | 21 |   |   |   | 29 |   |   |   | 40 |   |   |   | 14 |   |   |   | 12 |   |   |   | 16 |   |   |   | 16 |   |   |
|                        |       |                                                     | $          | 203 |   |   |   | $ | 124 |   |   |   | 174 |   |   |   | $ | 238 |   |   |   | $ | 86 |   |   |   | $ | 72 |   |   |   | $ | 97 |   |   |   | $ | 97 |   |   |

 

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**ITEM7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

The following discussionof our financial condition and results of operations should be read inconjunction with our consolidated financial statements and the related notesthereto included elsewhere in this Report on Form 10-K beginning on page F-1.The following discussion contains forward-looking statements that involve risksand uncertainties including anticipated financial performance, businessprospects, anticipated capital expenditures and other similar matters, whichreflect management’s best judgment based on factors currently known. Actualresults could differ materially from those discussed herein. Factors that couldcause or contribute to the differences are discussed in “Business—Risk Factors”and elsewhere in this Report.

**Overview**

We offer a suite of products and services that enablemarketers to advertise and sell their products through all major onlinemarketing channels—display/Web advertising, search marketing, email marketing,and affiliate marketing. Additionally, we provide software that assistsadvertising agencies and other companies with information management regardingtheir financial, workflow, and offline media planning and buying processes. Thebroad range of products and services that we provide enables our customers toaddress all aspects of the marketing process, from strategic planning throughexecution, including results measurement and campaign refinements. By combiningour media, affiliate marketing and technology offerings with our experience inboth online and offline marketing, we help our customers around the worldoptimize their marketing campaigns both on the Internet and through offlinemedia.

In prior periods, we operated in two reportableoperating segments: Media and Technology. With the acquisition of CommissionJunction, Inc. (“Commission Junction”) in December 2003, wereassessed our reportable operating segments and determined that we now have anadditional reportable operating segment, Affiliate Marketing, which combinesthe operations of Be Free, Inc. (“Be Free”) and Commission Junction. Forprior periods, Be Free was included in the Technology operating segment.Accordingly, our prior period operating segment information has beenreclassified to conform to 2004 and 2003 presentation.

We derive our revenue from three business segmentsbased on the types of products and services provided. These business segmentsare Media, Affiliate Marketing and Technology.

*MEDIA*—OurMedia segment provides a comprehensive suite of online media services andtailored programs that help marketers create awareness, attract visitors andgenerate leads and sales through the Internet. Our Media segment has grown bothorganically and through the acquisition of complementary firms such asSearch123.com, completed in May 2003, Hi-Speed Media, completed in December 2003,and Pricerunner, completed in August 2004.

We offer advertisers and agencies a range of onlinemedia solutions in the categories of display/Web advertising, email marketing,lead generation marketing, and search marketing that are described in detail inItem 1 of this document. To accomplish this, we have partnered with thousandsof online publishers to provide advertisers and agencies with access to one ofthe largest and most reputable online advertising networks and we have employedrigorous network quality control and advanced proprietary targeting technology.With the addition of Pricerunner, the Company expanded its suite ofperformance-based online marketing solutions into the category of comparisonshopping, a commerce-oriented form of search.

Our Media services are sold on a variety of pricingmodels, including cost-per-thousand-impression (CPM), cost-per-click (CPC),cost-per-lead (CPL), and cost-per-action (CPA).

*AFFILIATEMARKETING*—Our Affiliate Marketing segment operatesthrough our wholly-owned subsidiaries Be Free, acquired in May 2002, andCommission Junction, acquired in December 2003.

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Our affiliate marketingbusiness includes technology and services that enable advertisers to manage,track and analyze a variety of online marketing programs. Specifically, ouraffiliate marketing services enable our advertiser clients to: build relationshipswith affiliate partners; manage the offers they make available to theiraffiliate partners; track the online traffic, leads and sales that these offersdrive to the advertiser’s website; analyze the effectiveness of the offers andaffiliate partners; and track the commissions due to their affiliates.

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

*TECHNOLOGY*—OurTechnology segment operates through our wholly-owned subsidiaries Mediaplex, Inc.(Mediaplex) and AdWare Systems, Inc. (now referred to as Mediaplex Systems),which were acquired in 2001.

Our Mediaplex subsidiaryoffers technology infrastructure tools and services that enable advertisers,advertising agencies and online publishers to implement and manage their ownonline display advertising and email campaigns. Mediaplex’s products are basedon its proprietary MOJO® technology platform, which has the ability toautomatically configure messages in response to real-time information from amarketer’s enterprise data system and to provide ongoing campaign optimization.Mediaplex’s revenues are primarily derived from software access and use chargespaid by our software clients. These fees vary based on the client’s use of thetechnology.

Mediaplex Systems is anapplications service provider (“ASP”) delivering high-quality informationmanagement systems to advertising agencies, marketing communications companies,and public relations agencies. Mediaplex Systems’s revenue is generatedprimarily from monthly service fees paid by customers over the contracted serviceperiods.

Revenue,gross profit and total assets by segment are listed in the following table (inthousands). Media segment revenue includes sales of certain affiliate marketingservices of approximately $8,337,000 and $1,206,000, and technology services ofapproximately $4,976,000 and $3,069,000, made by Media operations outside theUnited States, for the years ended 2004 and 2003, respectively.
| ** **                          | ** ** | **Revenue** | ** ** | **Gross Profit** | ** ** | **Total Assets** | ** ** |
|-------------------------------------|------------|-------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2004**    | ** ** | **2003**              | ** ** | **2002**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Media                               |       | $           | 93,317     |                  | $          | 45,761                |       | $ | 30,252 |   | $ | 49,970 |   | $ | 23,212 |   | $ | 15,824 |   | $ | 297,380 |   | $ | 214,574 |   | $ | 129,895 |   |
| Affiliate Marketing                 |       | 59,995      |       | 24,302                |       | 11,848                |       | 50,767 |   | 18,829 |   | 9,076 |   | 116,284 |   | 95,160 |   | 76,938 |   |
| Technology                          |       | 22,233      |       | 23,559                |       | 20,934                |       | 17,263 |   | 18,451 |   | 15,921 |   | 16,762 |   | 13,365 |   | 57,017 |   |
| Intercompany eliminations and other |       | (6,367      | )          | (1,106                | )          | (480                  | )          | 416 |   | — |   | — |   | — |   | — |   | — |   |
| Total                               |       | $           | 169,178    |                  | $          | 92,516                |       | $ | 62,554 |   | $ | 118,416 |   | $ | 60,492 |   | $ | 40,821 |   | $ | 430,426 |   | $ | 323,099 |   | $ | 263,850 |   |

 

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

*Revenue.  *Consolidatednet revenue for the year ended December 31, 2004 was $169.2 million,representing a 82.9% increase over the prior year.

Media segment revenueincreased 103.9% to $93.3 million for the year ended December 31, 2004compared to $45.8 million for 2003. The increase of $47.5 million in Mediasegment revenue was largely attributable to the inclusion of a full year ofSearch123 operations, acquired in May 2003, a full year of Hi-Speed Mediaoperations, acquired in December 2003, and five months of Pricerunneroperations, acquired in August 2004, in the 2004 period. Such Mediaacquisitions accounted for $29.2 million or 61.5% of the 

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$47.5million increase in 2004 Media revenue over 2003. The remaining increase of$18.3 million was a result of strong performance by our U.S. and European mediateams and the general improvement of the online media market in the U.S. andEurope, offset by a decrease in 2004 revenue from 2003 of $5.7 millionresulting from the sale of our Japan subsidiary in March 2004.

Affiliate Marketingsegment revenue increased to $60.0 million in 2004 compared to $24.3 million in2003. This increase of $35.7 million, or 146.9%, was primarily attributable tothe inclusion of a full year of Commission Junction operations, acquired in December 2003,representing $32.4 million of the 2004 increase over 2003. The remaining $3.3million of the Affiliate Marketing 2004 revenue increase over 2003 representscore growth by our U.S. Affiliate Marketing team existing prior to theCommission Junction acquisition, offset by the merger of our AffiliateMarketing brands in 2004 and the resulting customer platform changes.

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

There is no guarantee thatwe will close additional acquisitions in future periods or that any potentialfuture acquisitions will provide the same revenue impact as historicacquisitions.

*Cost ofRevenue.  *Cost of revenue for the Media segment consistsprimarily of amounts that we pay to website publishers on ValueClick’sconsolidated networks. We pay these publishers on either a CPC, CPA, CPL or CPMbasis. Cost of revenue for the Media, Affiliate Marketing and Technologysegments also includes labor costs, depreciation on revenue-producingtechnologies and Internet access costs. Consolidated cost of revenue was $50.8million for the year ended December 31, 2004 compared to $32.0 million in2003, an increase of $18.8 million, or 58.5%. The consolidated gross profitmargin improved to 70.0% for the year ended December 31, 2004 compared to65.4% for 2003 resulting primarily from a greater mix of higher-marginAffiliate Marketing segment revenue in 2004.

Cost of revenue for theMedia segment increased $20.8 million to $43.3 million for the year ended December 31,2004 compared to $22.5 million in 2003. The increase in cost of revenue isprimarily related to the corresponding increase in Media segment revenue. Mediasegment gross margins at 53.5% for 2004 compared to 50.7% in 2003 reflects agreater mix of higher-margin online comparison shopping revenue in 2004. 2005Media segment gross margins could move higher if online comparison shoppingrevenue becomes a greater percentage of total Media segment revenue.

Cost of revenue for theAffiliate Marketing segment increased by $3.7 million to $9.2 million for theyear ended December 31, 2004, compared to $5.5 million in 2003. AffiliateMarketing cost of revenue decreased as a percentage of revenue to 15.4% in 2004from 22.5% in 2003. This decrease, as well as the corresponding increase ingross margin to 84.6% in 2004 from 77.5% in 2003 was primarily associated withthe operating leverage of our affiliate marketing infrastructure, supportingsignificantly higher revenue levels.

Technology segment cost ofrevenue of $5.0 million in 2004 remained comparable to 2003 cost of revenue of$5.1 million.

*Sales and Marketing.  *Salesand marketing expense consist primarily of compensation of sales and marketing,network development and related support teams, sales commissions, travel,advertising, trade shows and marketing materials. Sales and marketing expensesfor the year ended December 31, 2004 were $36.0 million compared to$21.2 million for 2003, an increase of $14.8 million or 70.1%. Theincrease in sales and marketing expenses was due primarily to the inclusion ofsales and marketing expense for Search123, Commission Junction and Hi-SpeedMedia for a full year and the addition of Pricerunner for five months,accounting for approximately $14.2 million of the increase. The remainingincrease of 

35

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$0.6 million is dueto increased sales staff in the U.S and Europe and increased commissionsrelated to higher revenue, offset by the sale of ValueClick Japan in March 2004.Our sales and marketing costs as a percentage of revenue decreased to 21.3% forthe year ended December 31, 2004 from 22.9% for 2003 due primarily toincreased productivity of our sales teams.

*Generaland Administrative.  *General and administrative expenseconsists primarily of facilities costs, executive and administrativecompensation, depreciation, and professional service fees. General andadministrative expense increased to $27.2 million for the year ended December 31,2004 from $19.7 million in 2003, an increase of $7.5 million or37.9%. General and administrative expenses increased primarily due to theinclusion of a full year of expense for Search123, Commission Junction andHi-Speed Media and five months for Pricerunner, accounting for an approximate$8.6 million increase, as well as an increase in fees for external professionaladvisors and employee costs associated with Sarbanes-Oxley compliance efforts,offset by the sale of ValueClick Japan in March 2004.

*Technology.  *Technologycosts include expenses associated with the maintenance of our technologyplatforms, including the salaries and related expenses for our softwareengineering department, as well as costs for contracted services and supplies. Withthe exception of certain internal use software qualifying for capitalization,all product technology costs have been expensed as incurred. Technology costswere $15.9 million for the year ended December 31, 2004 compared to$10.5 million for 2003, an increase of $5.4 million, or 51.3%. The increase isdue to the inclusion of a full year of expense for Search123, CommissionJunction and Hi-Speed Media and five months of technology expense forPricerunner, totaling $5.8 million, offset by the sale of ValueClick Japan in March 2004.

*Stock-BasedCompensation.  *Stock-based compensation included in theaccompanying consolidated statements of operations reflects the amortization ofthe difference between the deemed fair value of our common stock for financialaccounting purposes and the exercise price of options on the date the optionswere granted. Stock-based compensation expense for the year ended December 31,2004 amounted to $739,000, which relates primarily to the amortization ofdeferred compensation recorded in prior periods for stock options assumed inbusiness combinations. The increase in stock-based compensation from $352,000for the year ended December 31, 2003 relates to a full year ofamortization of deferred compensation recorded in 2004 for stock optionsassumed in the Hi-Speed Media and Commission Junction acquisitions in December 2003.

We anticipate lowerstock-based compensation expense during the first two quarters of 2005 based onour amortization method that charges to expense a higher portion of theexisting deferred stock-based compensation in the earlier years of the optionvesting period. However, the adoption of the SFAS 123R fair value method couldincrease overall stock-based compensation beginning with the third quarter of2005. The magnitude of the impact to stock-based compensation on future periodsas a result of the adoption of SFAS 123R cannot be predicted at this timeas it is dependent upon, among other factors, the fair value and number ofshare-based payments granted in the future.

*Amortizationof Intangible Assets.  *Amortization of intangible assetsfor the year ended December 31, 2004 was $4.1 million compared to$1.6 million in 2003. This expense primarily represents the amortization ofintangible assets acquired through business combinations and purchased intellectualproperty. The increase in 2004 compared to 2003 was due to the additionalintangible assets purchased in the 2004 Pricerunner acquisition and a full yearof amortization of the intangible assets purchased in the Hi-Speed Media,Commission Junction and Search123 acquisitions.

*RestructuringReserve Reversal.  *In the second quarter of 2002 and inthe fourth quarter of 2001, the Company recorded restructuring charges of $2.3million and $0.5 million, respectively. These restructuring charges were theresult of certain personnel redundancies and consolidation of certain leasedfacilities, for which the Company was committed to pay through 2010. TheCompany relocated back to a previously 

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vacated leasedfacility in November 2004 and, accordingly, in the second quarter of 2004,reversed $1.0 million of the related restructuring charge originallyestablished.

*InterestIncome.  *Interest income principally consists ofinterest earned on our cash and cash equivalents and marketable debt securitiesand is net of interest paid on capital lease obligations. Interest income was$3.7 million for the year ended December 31, 2004 compared to$3.4 million for 2003. The increase of $0.3 million is primarilyattributable to the effects of increasing average investment yields from 2003as a result of interest rate increases during 2004.

*Gain onSale of Equity Interest in Japan Subsidiary.  *Gain onsale of equity interest in Japan subsidiary for the year ended December 31,2004 was $8,007,000, which represents the pre-tax gain recognized from the saleof our equity interest of approximately 59% in ValueClick Japan, Inc. on March 26,2004, net of related transaction expenses.

*Income Tax Expense (Benefit).  *Inthe fourth quarter of 2004, we determined that a substantial portion of ourdeferred tax asset valuation allowance was no longer required. Thisdetermination was based on an evaluation of positive and negative factorsincluding, but not limited to: our history of achieving operating objectives;the achievement of net income beginning in the first quarter of 2003 and eachsubsequent quarter; our established customer relationships; and futureprojections of pre-tax income. Based upon the Company’s assessment of allavailable evidence, we concluded that, primarily with the exception of netoperating loss and capital loss carryforwards expected to expire prior to beingutilized and certain foreign net operating loss carryforwards, it is morelikely than not that the remaining deferred tax assets will be realized.  We recognized an income tax benefit of $40.5million in 2004, including $47.8 million related to the reversal of a portionof the deferred tax asset valuation allowance recorded at December 31, 2003,partially offset by a net provision for current and deferred Federal and stateincome taxes of $7.3 million. Additionally, the tax associated with the gain from the sale of ourequity interest in ValueClick Japan of approximately $8.0 million has beenfully offset by the utilization of capital loss carryforwards generated by theCompany in prior years that carried a full valuation allowance. The Company’seffective tax rate for future periods is expected to increase based on thereversal of the valuation allowance during 2004.

*MinorityShare of Loss of ValueClick Japan.  *For the year ended December 31,2004, the minority share of the loss generated by ValueClick Japan was $130,000compared to $84,000 for the year ended December 31, 2003. We accounted forour interest in ValueClick Japan on a consolidated basis for financialreporting purposes, resulting in a minority interest in the net incomegenerated or losses incurred by ValueClick Japan. On March 26, 2004, theCompany completed the sale of its equity interest in ValueClick Japan.

**RESULTSOF OPERATIONS—Fiscal Years Ended December 31, 2003 and 2002**

*Revenue.  *Consolidated net revenue from ourMedia, Affiliate Marketing and Technology segments, excluding intercompanytransactions, accounted for $45.8 million, $24.3 million, and$22.4 million, respectively, resulting in consolidated net revenue for theyear ended December 31, 2003 of $92.5 million compared to$62.6 million for 2002, an increase of $29.9 million, or 47.9%. The2003 revenue increase over 2002 is due to the inclusion of a full year ofrevenue from our Be Free operations acquired in May 2002 and the additionof the Search123 operations in May 2003 and Commission Junction operationsin December 2003, totaling $14.7 million, in addition to core growth inall three of our operating segments resulting from the general improvement ofthe online advertising industry segment.

*Cost ofRevenue.  *Cost of revenue was $32.0 million for theyear ended December 31, 2003 compared to $21.7 million for 2002, anincrease of $10.3 million, or 47.4%. The overall increase in cost ofrevenue was associated with the corresponding increase in revenue for 2004 over2003. Gross profit margins of 65.4% for the year ended December 31, 2003remained comparable to 2002 gross profit margins of 65.3%. 

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The consistencyreflected higher margins from a greater mix of higher margin AffiliateMarketing and Technology segment revenue, offset by a decline in margins fromour Japan operations.

*Salesand Marketing.  *Sales and marketing expenses for theyear ended December 31, 2003 were $21.2 million compared to$17.0 million for 2002, an increase of $4.2 million, or 24.5%. Theincrease in sales and marketing expenses was due primarily to the inclusion ofsales and marketing expenses for Be Free for a full year and the addition ofSearch123 and Commission Junction for seven months and one month, respectively.Our sales and marketing costs as a percentage of revenue decreased to 22.9% forthe year ended December 31, 2003 from 27.2% for 2002 due primarily to theimproved productivity of our sales teams.

*Generaland Administrative.  *General and administrative expensesincreased to $19.7 million for the year ended December 31, 2003 from$17.8 million in 2002, an increase of $1.9 million, or 10.8%. Ourgeneral and administrative costs as a percentage of revenue decreased to 21.3%for the year ended December 31, 2003 from 28.4% for 2002. General andadministrative cost increases due to the inclusion of Be Free for a full yearand the addition of Search123 and Commission Junction for seven months and onemonth, respectively, were offset partially by ongoing cost reductionactivities. The decrease in general and administrative expenses as a percent ofrevenue resulted from improved operating leverage and the ongoing costreduction efforts.

*Technology.  *Technologycosts were $10.5 million for the both years ended December 31, 2003and 2002. Technology cost increases resulting from the inclusion of Be Free fora full year and the addition of Search123 and Commission Junction for sevenmonths and one month, respectively, were offset by continuing efforts to reducethe number of our co-location facilities and consolidate technology teams.

*Stock-BasedCompensation.  *Stock-based compensation expense for theyear ended December 31, 2003 amounted to $352,000, which relates primarilyto the amortization of existing deferred compensation recorded in prior periodsfor stock options and restricted shares. The decrease in stock-basedcompensation from $1.5 million for the year ended December 31, 2002relates to our amortization method that charges to expense a higher portion ofthe deferred stock-based compensation in the earlier years of the optionvesting period.

*Amortizationof Intangible Assets.  *Amortization of intangible assetsfor the year ended December 31, 2003 was $1.6 million compared to$0.5 million in 2002. This expense primarily represents the amortization ofintangible assets acquired through business combinations and purchased intellectualproperty. The increase in 2003 compared to 2002 was due to the additionalintangible assets purchased in the 2003 Commission Junction and Search123acquisitions.

*Restructuringcharge.  *In the second quarter of 2002 we recordedrestructuring charges of $2.3 million. These restructuring charges werethe result of certain personnel redundancies as a result of our acquisitions ofBe Free and Mediaplex and primarily represent a provision for consolidatingcertain leased facilities, which will be paid out through 2010.

*InterestIncome.  *Interest income was $3.4 million for theyear ended December 31, 2003 compared to $5.9 million for 2002. Thedecrease in interest income is attributable to a lower cash balance over theperiod primarily due to the purchase of ValueClick common stock under the stockrepurchase program and the effects of decreasing average investment yieldssince 2001.

*Incometax expense (benefit).  *For the year ended December 31,2003, our provision for federal, state and foreign income taxes amounted to$830,000, compared to $163,000 for 2002. The effective income tax rate reflectedcertain non-deductible expenses, including the stock-based compensationcharges. Additionally, income tax benefits from the available net operatinglosses were not fully reflected in the provision as the realization of thesebenefits was not deemed more likely than not based upon both positive andnegative evidence available at December 31, 2003.

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*MinorityShare of Income/Loss of ValueClick Japan.  *For the yearended December 31, 2003, minority share of loss of ValueClick Japan was$84,000 compared to minority share of income of $15,000 for the year ended December 31,2002. We accounted for our interest in ValueClick Japan on a consolidated basisfor financial reporting purposes, resulting in a minority interest in the netincome or losses incurred by ValueClick Japan.

*CumulativeEffect of a Change in Accounting Principle.  *On January 1,2002, we adopted the accounting standards set forth in SFAS No. 142, “Goodwilland other Intangible Assets.” Although the application of this standard did notchange our evaluation of our other identifiable intangible assets, the initialapplication of this statement resulted in an impairment of goodwill of$7.6 million to write down goodwill related to the Bach Systems andValueClick Japan acquisitions. The amount of the impairment was estimated basedon a valuation process that considered both the estimated present value offuture cash flows and the application of market value-to-revenue multiples forcomparable publicly-traded companies to the projected and historical revenue ofBach Systems and ValueClick Japan. The impairment amount was reported as acumulative effect of a change in accounting principle during the first quarterof 2002.

**Liquidity andCapital Resources**

Since our inception, wehave financed our operations through working capital generated from operations,equity financing and corporate development activities. At December 31,2004, our combined cash and cash equivalents and marketable securities balancestotaled $242.6 million. Net cash provided by operating activities totaled$46.6 million for the year ended December 31, 2004 compared to$15.9 million in 2003 and $1.7 million in 2002. The increase in 2004 wasdue primarily to increased income from operations, adjusted for non-cash items,including the net benefit from deferred taxes of $52.3 million, the gain onsale of our equity interest in the Company’s Japan subsidiary of approximately$8.0 million, depreciation and amortization of approximately $10.3 million,provision for doubtful accounts receivable and inventory write-downs of $1.5million, and tax benefits from stock option exercises of $11.0 million. Theincrease from 2002 to 2003 is attributable primarily to increased income fromoperations.

The net cash used ininvesting activities for the year ended December 31, 2004 of $66.1 millionwas primarily the result of cash used of $25.4 million in the acquisition ofPricerunner, net purchases of marketable securities of $35.7 million and $6.0million of equipment purchases, offset by net proceeds from the sale of theCompany’s equity interest in ValueClick Japan of $2.4 million. For the yearended December 31, 2003, net cash used in investing activities of$0.5 million resulted primarily from the use of $18.5 million foracquisitions and $3.2 million for equipment purchases, offset by the net reductionof marketable securities of $22.0 million, which was used to fundacquisitions and purchases of ValueClick common stock pursuant to the StockRepurchase Program. For the year ended December 31, 2002, net cashprovided by investing activities totaled $49.8 million, resultingprimarily from the net sale of marketable securities, which was used primarilyto fund purchases of ValueClick common stock pursuant to the Stock RepurchaseProgram.

Net cash provided byfinancing activities for the year ended December 31, 2004 of $8.7 millionwas primarily attributable to proceeds received from the exercises of commonstock options of $11.0 million, partially offset by the repurchase of $2.2million of the Company’s common stock. For the year ended December 31,2003, net cash used in financing activities of $8.8 million resulted fromthe use of $9.2 million for market purchases of ValueClick common stockpursuant to the Stock Repurchase Program and the repayment of $1.8 millionon notes payable and capital leases, offset by net proceeds received from theexercise of stock options of $2.2 million. For the year ended December 31,2002, net cash used in financing activities totaled $53.8 million,resulting from the use of $56.2 million for market purchases of ValueClickcommon stock pursuant to the Stock Repurchase Program and the repayment of$0.8 million on notes payable and capital leases, offset by proceedsreceived from the exercise of stock options of $3.3 million.

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*Stock Repurchase Program*

In September 2001,the board of directors authorized a $10 million Stock Repurchase Programto purchase outstanding shares of ValueClick common stock from time to time atprevailing market prices in the open market or through unsolicited negotiatedtransactions depending on market conditions. The Stock Repurchase Program wasincreased by the board of directors to $30 million in February 2002,to $50 million in July 2002, to $75 million in November 2002,and to $95 million in August 2004. Under the program, the purchasesare funded from available working capital, and the repurchased shares will beretired, held in treasury or used for ongoing stock issuances such as issuancesunder employee stock plans. There is no guarantee as to the exact number ofshares that will be repurchased by us and we may discontinue purchases at anytime that management determines additional purchases are not warranted. As of December 31,2004, and since the initiation of the Stock Repurchase Program, we hadrepurchased a total of approximately 26.6 million shares of our commonstock for approximately $73.6 million, $70.2 million of which waspurchased pursuant to the Stock Repurchase Program. As December 31, 2004,up to $24.8 million of the Company’s capital may be used to purchaseshares of the Company’s outstanding common stock under the Stock RepurchaseProgram.

*Commitments and Contingencies*

Contractualobligations at December 31, 2004 are as follows (in thousands):
| ** **                          | ** ** | **Payments due by period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| Lease obligations:                  |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital leases, including  interest |       | $                                         | 424        |   |   | $ | 253 |   |   |   | $ | 171 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Operating leases(1)                 |       | 17,329                                    |       |   | 4,109 |   |   |   | 6,962 |   |   |   | 5,075 |   |   |   | 1,183 |   |   |
| Purchase obligations(2)             |       | 1,094                                     |       |   | 1,073 |   |   |   | 17 |   |   |   | 4 |   |   |   | — |   |   |
| Total contractual obligations       |       | $                                         | 18,847     |   |   | $ | 5,435 |   |   |   | $ | 7,150 |   |   |   | $ | 5,079 |   |   |   | $ | 1,183 |   |   |

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(1)          Theoperating lease obligations shown in the table have not been reduced by minimumnon-cancelable sublease rentals aggregating $1.0 million. The Company remainssecondarily liable under these leases in the event that the sublessee defaultsunder the sublease terms. The Company does not believe that material paymentswill be required as a result of the secondary liability provisions of theprimary lease agreements.

(2)          Purchaseobligations include agreements to purchase goods or services that areenforceable, legally binding and specify all significant terms, including fixedor minimum quantities to be purchased; fixed, minimum or variable priceprovisions; and the approximate timing of the transaction. Purchase obligationsexclude agreements that are cancelable without penalty.

Othercommercial commitments as of December 31, 2004 are as follows (inthousands):
| ** **                | ** ** | **Other Commercial Commitments** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|
| ** **                | ** ** | **Total**                                  | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| Standby letters of credit |       | $                                          | 566        |   |   | — |   |   |   | $ | 66 |   |   |   | — |   |   |   | $ | 500 |   |   |
|                           |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The standby letters ofcredit are maintained pursuant to the Company’s lease agreements.**The standby letters of credit remain in effect at declininglevels through the terms of the leases. Certificates of deposit of $566,000 inconnection with these standby letters of credit are included in cash as of December 31,2004.

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

It is not possible to determine the maximum potentialamount under these indemnification agreements due to the limited history ofprior indemnification claims and the unique facts and circumstances involved ineach particular agreement. Such indemnification agreements may not be subjectto maximum loss clauses. See Item 3 for further information regarding acontingent obligation relating to an indemnification agreement.

We have no other off-balance sheet obligations or guarantees.

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

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

·       themarket acceptance of our products and services;

·       thelevels of promotion and advertising that will be required to launch our new productsand achieve and maintain a competitive position in the marketplace;

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

·       capitalimprovements to new and existing facilities;

·       technologicaladvances;

·       ourcompetitors’ response to our products and services;

·  our Stock Repurchase Program

·       ourpursuit of strategic transactions; and

·       our relationships withcustomers.

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**CriticalAccounting Policies and Estimates**

Management’s discussion and analysis of financialcondition and results of operations is based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenue and expenses, and relateddisclosure of contingent assets and liabilities. On an ongoing basis, weevaluate our estimates, including those related to revenue recognition,allowance for doubtful accounts, investments, income taxes, impairment ofgoodwill and other intangible assets and contingencies and litigation. We baseour estimates on historical experience and on various other assumptions thatare believed to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates.

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

·  ***Revenue Recognition Policy.  ***Werecognize revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104,“Revenue Recognition in Financial Statements.” Under SAB No. 104, werecognize revenue when the following criteria have been met: persuasiveevidence of an arrangement exists, the fees are fixed and determinable, nosignificant Company obligations remain, and collection of the relatedreceivable is reasonably assured. To date, our agreements have not required aguaranteed minimum number of click-throughs or actions.

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

Our Affiliate Marketingand Technology segment revenue is generated primarily from fixed fees forcampaign management services, application management services and professionalservices. Campaign management services revenue and professional servicesrevenue is recognized when the related services are performed, provided nosignificant obligations remain, collection of the resulting receivable isreasonably assured and fees are fixed and determinable. Application managementservices revenue consists of monthly recurring fees for hosting services and isrecognized as the services are performed, provided no significant obligationsremain, collection of the resulting receivable is reasonably assured and feesare fixed and determinable. Application management services provide customersrights to access software applications, hardware for the application access andcustomer service. Our customers do not have the right to take possession of thesoftware at any time during or after the hosting agreement. Accordingly, asprescribed by EITF Issue No. 00-3, “Application of AICPA Statementof Position 97-2 to Arrangements That Include the Right to Use SoftwareStored on Another Entity’s Hardware,” our revenue recognition for AffiliateMarketing and Technology segments is outside the scope of Statement of Position(“SOP”) No. 97-2, “Software Revenue Recognition.” Additionally,consistent with the provisions of EITF Issue No. 99-19, “ReportingRevenue Gross as a Principal versus Net as an Agent,” the Company recognizesrevenue as an agent in affiliate marketing transactions. Accordingly, servicefee revenue is recognized on a net basis as any publisher expenses are theresponsibility of the Company’s advertising customer. Contracts for applicationmanagement services that exceed 

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designated minimum monthlyor quarterly volume usage are recognized as revenue in the month or quarter inwhich minimum volume is exceeded.

Our affiliate marketingcustomers have return policies that allow their consumers to return previouslypurchased product under certain circumstances. Based upon the terms of ouragreements with our affiliate marketing customers, when one of their consumersreturns a product, we are required to refund the transaction fees that weearned related to the original consumer purchase. We also experience directsales returns related to our e-commerce customers based upon the terms of ourtransactions with these customers. For revenue transactions subject to a rightof return, we are required to record a provision for sales returns, which isrecorded as a reduction to our revenue, based upon an estimate of the amount offuture returns. In determining our estimate for future returns, we rely uponhistorical returns data relative to historical sales volumes and known factsand circumstances that may not be reflected in the historical returnsinformation. Historically, actual returns have not significantly differed fromour estimates. However, factors including changes in the economic and industryenvironment may result in future actual returns experience that is differentthan our estimates.

During the year ended December 31,2004, we recorded a provision for sales returns of approximately $4.0 millionas a reduction to our revenue. The provision for sales returns in periods priorto 2004 was not significant, as the majority of the sales returns recorded in2004 relate to the business operations of entities acquired in December 2003(Hi-Speed Media and Commission Junction). We expect the actual amount of salesreturns in whole dollar terms to increase in the future in conjunction with ouranticipated increase in affiliate marketing 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, 2004 allowance for salesreturns of less than $100,000 and a corresponding decrease to revenue for theyear then ended.

·  ***Allowance for Doubtful Accounts.  ***Weestimate our allowance for doubtful accounts using two methods. The amountscalculated from each of these methods are analyzed to determine the totalamount reserved. First, we evaluate specific accounts where informationindicates the customers may have an inability to meet financial obligations,such as due to bankruptcy, and receivable amounts outstanding for an extendedperiod beyond contractual terms. In these cases, we use assumptions andjudgment, based on the best available facts and circumstances, to record aspecific reserve for those customers against amounts due to reduce thereceivable to the amount expected to be collected. These specific reserves arere-evaluated and adjusted as additional information is received. Second, areserve is established for all customers based on a range of percentagesapplied to receivables aging categories. These percentages are based onhistorical collection and write-off experience. Historically, actual write-offsof doubtful accounts have not significantly differed from our estimates. However,factors including higher than expected default rates may result in futurewrite-offs greater than our estimates.

As of December 31,2004, we recorded an allowance for doubtful accounts of $3.0 million, whichrepresents a reserve percentage of 8.5% of our gross accounts receivablebalance of $35.0 million. If our assumptions and estimates regarding theultimate collectibility of our outstanding accounts receivable balances changedto warrant a 100 basis point increase in the ending reserve percentage, theresult would be an increase in the December 31, 2004 allowance fordoubtful accounts of approximately $350,000 and a corresponding decrease in ouroperating income for the year then ended.

·  ***Investments.  ***We record an impairmentcharge when we believe an asset has experienced a decline in value that isother than temporary. Future adverse changes in market conditions or 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. When it is determined that another-than-temporary impairment has occurred, the investment is written down tomarket value at the end of the period in which it is determined that an other-than-temporarydecline has occurred.

As of December 31,2004, we have net unrealized losses of $1.2 million on a marketable securitiesportfolio with a total fair value of $214.3 million. Our marketable securitiesportfolio consists of high-grade municipal, corporate and government agenciesobligations. Management has determined that the unrealized losses as of December 31,2004 do not represent an other-than-temporary decline in value, primarily dueto both our assessment that there are no specific adverse conditions affectingthe investments or the related investees’ credit ratings or ability to satisfytheir obligations in full, and our ability to hold any individual investmentthrough a downturn in market value which may be caused by short-term interestrate movements. If our assessment regarding these factors were to change, wemay be required to record an impairment charge equal to the difference betweenthe fair value of the securities and the amortized cost of the securities. Asof December 31, 2004, if the determination was made that the currentdecline in market value of certain investments was other than temporary, therelated impairment charge could be as much as $1.2 million. Further, futureadverse conditions impacting our marketable securities portfolio, such asadverse changes in the financial condition or credit ratings of bond issuers,or adverse changes in the overall economic environment, may result in futureimpairment charges greater than this amount.

·***Accounting for Income Taxes*.  **Weuse the asset and liability method of accounting for income taxes. Under thismethod, income tax expense is recognized for the amount of taxes payable orrefundable for the current year and for deferred tax liabilities and assets forthe future tax consequences of events that have been recognized in an entity’sfinancial statements or tax returns. Management must make assumptions,judgments and estimates to determine our current provision for income taxes andalso our deferred tax assets and liabilities and any valuation allowance to berecorded against a deferred tax asset. Our judgments, assumptions and estimatesrelative to the current provision for income taxes take into account currenttax laws, our interpretation of current tax laws and possible outcomes ofcurrent and future audits conducted by foreign and domestic tax authorities.Changes in tax laws or our interpretation of tax laws and the resolution ofcurrent and future tax audits could significantly impact the amounts providedfor income taxes in our consolidated financial statements.

As of December 31, 2003,based upon both positive and negative evidence available at that time, we haddetermined it was more likely than not that certain of our deferred tax assetswere not realizable. Accordingly, we fully reserved certain of our deferred taxassets. In the fourth quarter of 2004, based on factors including, but notlimited to: our history of achieving operating objectives; the achievement ofnet income beginning in the first quarter of 2003 and each subsequent quarter;our established customer relationships; and future projections of pre-taxincome, we have determined that it is more likely than not that we will be ableto realize a substantial portion of our deferred tax assets. At December 31,2004, we have net deferred tax assets of $64.2 million. Should we determinethat we will not be able to realize all or part of our net deferred tax assetsin the 

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future, an adjustment tothe net deferred tax assets would reduce income in the period suchdetermination was made.

·  ***Impairment of Goodwill andIntangible Assets*.  **Our long-lived assets include goodwilland other intangible assets with net balances of $50.9 million and $25.6million, respectively, as of December 31, 2004. Goodwill and other indefinite-livedintangible assets are tested for impairment at the reporting unit level on anannual basis as of December 31st or between annual testswhenever facts and circumstances indicate that goodwill might be impaired. Asof December 31, 2004, our reporting units consisted of the AffiliateMarketing and Technology operating segments, in addition to three components ofthe Media operating segment: the U.S. domestic media business (excludingHi-Speed Media); the Europe media business; and Hi-Speed Media. Application ofthe goodwill impairment test requires certain estimates and assumptions,including the identification of reporting units, assigning assets andliabilities to reporting units, and determining the fair value of eachreporting unit. We have determined the fair value of each reporting unitutilizing a valuation technique based on earnings multiples of recentacquisitions and similar publicly-traded companies in the online advertisingservices sector. Significant judgments required to estimate the fair value ofreporting units include the selection and application of appropriate earningsmultiples. Changes in these estimates and assumptions could materially affectthe determination of fair value for each reporting unit which could triggergoodwill impairment. See Note 5 in the consolidated financial statementsfor additional information. Based on our goodwill impairment testing for theyear ended December 31, 2004, there would have to be a significantunfavorable change to our estimates and assumptions used in such calculationsfor an impairment to exist.

We amortize otherintangible assets over their estimated economic useful lives. We must record animpairment charge on these assets when we determine that their carrying valuemay not be recoverable. Events and circumstances considered in determiningwhether the carrying value may not be recoverable include: significant changesin performance relative to expected operating results; significant changes inthe use of the assets; significant negative industry or economic trends; asignificant decline in the Company’s stock price for a sustained period oftime; and changes in the Company’s business strategy. In determining ifimpairment exists, we estimate the undiscounted cash flows to be generated fromthe use and ultimate disposition of these assets. If impairment is indicatedbased on a comparison of the assets’ carrying values and the undiscounted cashflows, the impairment loss is measured as the amount by which the carryingamount of the assets exceeds the fair market value of the assets. Our estimatesof future cash flows attributable to our other intangible assets requiresignificant judgments and assumptions, including anticipated industry andeconomic conditions. Different assumptions and judgments could materiallyaffect the calculation of the fair value of the other intangible assets whichcould trigger impairment. There were no indicators of impairment of our otherintangible assets as of December 31, 2004.

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

**RecentlyIssued Accounting Standards**

In March 2004, the FASB ratified the measurementand recognition guidance and certain disclosure requirements for impairedsecurities as described in Emerging Issues Task Force (“EITF”) Issue No. 03-1,“The Meaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments.” In September 2004, the FASB issued a proposed Staff Position(“FSP”) EITF Issue No. 03-1-a, “Implementation Guidance forthe Application of Paragraph 16 of EITF 03-1.” The proposed FSP willprovide measurement and recognition guidance with respect to debt securitiesthat are impaired solely due 

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to interest rates and/orsector spreads. The FSP has delayed the effective date until such time that thefinal standard is issued. The requirements of EITF Issue No. 03-1 did nothave a material impact on the disclosure requirements for us. We do not believethat the measurement and recognition guidance will have a material impact onour financial position or results of operations.

In December 2004, the FASB issued SFAS No. 123(revised 2004), “Share-Based Payment,”or SFAS 123R, which is a revision of SFAS 123, “Accounting for Stock-Based Compensation,”**or SFAS 123. SFAS 123Rrequires all share-based payments to employees, including grants of employeestock options, to be recognized in the financial statements based on theirgrant date fair values and does not allow the previously permitted pro-formadisclosure as an alternative to financial statement recognition. SFAS 123Rsupersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,”or APB 25, and related interpretations and amends SFAS No. 95, “Statement of Cash Flows,”**or SFAS 95. SFAS 123R iseffective for us beginning in the third quarter of fiscal 2005. SFAS 123Rallows for either prospective recognition of compensation expense orretroactive recognition, which may date back to the original issuance ofSFAS 123 or only to interim periods in the year of adoption. We arecurrently evaluating these transition methods.

The adoption of the SFAS 123R fair value method isexpected to have a significant impact on our reported results of operations,although it will have no impact on our overall financial position. The impactof adoption of SFAS 123R cannot be predicted at this time because thatwill depend on the fair value and number of share-based payments granted in thefuture. However, had we adopted SFAS 123R in prior periods, the magnitudeof the impact of that standard would have approximated the impact ofSFAS 123 assuming the application of the Black-Scholes model as describedin the disclosure of pro-forma net income (loss) and pro-forma netincome (loss) per share in Note 1 of our Notes to Consolidated FinancialStatements. SFAS 123R also requires the benefits of tax deductions inexcess of recognized compensation cost to be reported as a financing cash flow,rather than as an operating cash flow as required under current literature.This requirement will reduce net operating cash flows and increase netfinancing cash flows in periods after adoption, if such tax deductions exceedthe recognized compensation expense.

In October 2004, theAmerican Jobs Creation Act of 2004 (the “Jobs Act”) was signed into law. Amongits various provisions, the Jobs Act creates a temporary incentive for U.S.corporations to repatriate accumulated income earned abroad by providing an 85%dividends received deduction for certain qualifying dividends. In December 2004,the FASB issued FSP 109-2, “Accountingand Disclosure Guidance for the Foreign Earnings Repatriation Provision withinthe American Jobs Creation Act of 2004.” FSP 109-2 allowscompanies additional time beyond the financial reporting period in which theJobs Act was enacted to evaluate the effect of the Jobs Act on a company’s planfor reinvestment or repatriation of unremitted foreign earnings for thepurposes of applying SFAS No. 109, “Accountingfor Income Taxes.” As of December 31, 2004, management has no plansto repatriate foreign earnings in the foreseeable future.

**Inflation**

Inflation was not amaterial factor in either revenue or operating expenses during the past threefiscal years ended December 31, 2004, 2003 and 2002.

**ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

**INTEREST RATE RISK**

The primary objective of our investment activities isto preserve capital while at the same time maximizing yields withoutsignificantly increasing risk. We are exposed to the impact of interest ratechanges and changes in the market values of our investments. Our interestincome is sensitive to changes in the general level of U.S. interest rates. Inthis regard, changes in U.S. interest rates affect the interest 

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earned on our cashequivalents and marketable debt securities. Our exposure to market rate riskfor changes in interest rates relates primarily to our investment portfolio. Wehave not used derivative financial instruments in our investment portfolio. Weinvest a portion of our excess cash in debt instruments of high-qualitycorporate issuers and, by policy, limit the amount of credit exposure to anyone issuer. We protect and preserve our invested funds by limiting default,market and reinvestment risk. Investments in both fixed rate and floating rateinterest earning instruments carry a degree of interest rate risk. Fixed ratesecurities may have their fair market value adversely impacted due to a rise ininterest rates, while floating rate securities may produce less income thanexpected if interest rates fall. Due in part to these factors, our futureinvestment income may fall short of expectations due to changes in interestrates, or we may suffer losses in principal if forced to sell securities, whichhave declined in market value due to changes in interest rates.

Marketable securities asof December 31, 2004 consist primarily of marketable debt securities inhigh-grade corporate and government securities with maturities of less than twoyears. Management’s internal investment policy requires a weighted-average timeto maturity of the investment portfolio to be no greater than 365 days andallows for auction-rate-securities to be weighted based on the auction resetdate. As of December 31, 2004, our investment in marketable securities hada weighted-average time to maturity of approximately 274 days. We classifyall of our investments as available-for-sale. Available-for-sale securities arecarried at fair value, with unrealized gains and losses, net of tax, reportedin a separate component of stockholders’ equity. As of December 31, 2004,unrealized losses in our investments in marketable securities aggregated $1.2million.

During the year ended December 31,2004, our investments in marketable securities yielded an effective interestrate of 1.78%. If interest rates were to decrease 1%, the result would be anannual decrease in our interest income related to our cash and cash equivalentsand marketable securities of approximately $2.1 million. However, due tothe uncertainty of the actions that would be taken and their possible effects,this analysis assumes no such action. Further, this analysis does not considerthe effect of the change in the level of overall economic activity that couldexist in such an environment.

**FOREIGN CURRENCYRISK**

We transact business invarious foreign countries and are thus subject to exposure from adversemovements in foreign currency exchange rates. This exposure is primarilyrelated to revenue and operating expenses for ValueClick and PricerunnerEurope, which denominate their transactions in primarily in U.K. pounds. Theeffect of foreign exchange rate fluctuations for the year ended December 31,2004 was not material to the consolidated results of operations. If there werean adverse change of 10% in overall foreign currency exchange rates over anentire year, the result of translations would be a reduction of revenue ofapproximately $3.1 million, a reduction of income before income taxes of$0.4 million and a reduction of net assets, excluding intercompany balances, of$1.7 million. Historically, we have not hedged our exposure to exchange ratefluctuations. Accordingly, we may experience economic loss and a negativeimpact on earnings, cash flows or equity as a result of foreign currencyexchange rate fluctuations. We assess the need to utilize financial instrumentsto hedge currency exposures on an ongoing basis. As of December 31, 2004,we had $11.7 million in cash and cash equivalents denominated in foreigncurrencies, primarily the U.K. pound.

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 foreignexchange rate volatility. Accordingly, our future results could be materiallyand adversely affected by changes in these or other factors.

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**ITEM8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

ValueClick, Inc.financial statements, schedules and supplementary data, as listed under Item15, appear in a separate section of this Report beginning on page F-1.

**ITEM9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE**

None.

**ITEM 9A. CONTROLS AND PROCEDURES**

**(a)   DisclosureControls and Procedures**

The Company maintains disclosure controls andprocedures that are designed to ensure that 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, andthat such information is accumulated and communicated to management, includingthe Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”),as appropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives.

In connection with thepreparation of this Annual Report on Form 10-K, as of December 31, 2004, anevaluation was performed under the supervision and with the participation ofthe Company’s management, including the CEO and CFO, of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures(as defined in Rule 13a-15(e) under the Exchange Act).  Our CEO and CFO have concluded that, for thereasons set forth below, our disclosure controls and procedures were notadequate to ensure that the information required to be disclosed by us inreports or submitted under the Exchange Act is recorded, processed, summarized,and reported within the time periods specified in the rules and forms of theSEC.

**(b)   Management’sReport on Internal Control over Financial Reporting**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting as defined inRules 13a-15(f) and 15d-15(f) under the Exchange Act.  Our internal control over financial reportingis designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.  Our internal control over financial reportingincludes those policies and procedures that:

(i)    pertain tothe maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of our assets;

(ii)   providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that our receipts and expenditures are being madeonly in accordance with authorizations of our management and directors; and

(iii) providereasonable assurance regarding prevention or timely detection of anyunauthorized acquisition, use or disposition of our assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk 

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that internal controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

Our management has assessed the effectiveness of ourinternal control over financial reporting as of December 31, 2004.  In making this assessment, management usedthe criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (“COSO”) in Internal Control-Integrated Framework.  Our independent registered public accountingfirm, Deloitte & Touche LLP, has issued an audit report on ourassessment of our internal control over financial reporting, which is includedherein.

In conducting management’s evaluation of theeffectiveness of the Company’s internal control over financial reporting,management has excluded the acquisition of Pricerunner AB completed onAugust 6, 2004. The financial statements of Pricerunner AB reflect 1.9% oftotal assets as of December 31, 2004 and 3.4% of total revenues for theyear then ended. Refer to Note 3 to the consolidated financial statements forfurther discussion of this acquisition and its impact on the Company’sconsolidated financial statements.

As a result of its evaluation, our management hasconcluded that a control deficiency in its internal control over financialreporting as of December 31, 2004 constitutes a “material weakness” within themeaning of the Public Company Accounting Oversight Board Auditing Standard No.2.   A material weakness is defined as asignificant deficiency, or combination of significant deficiencies, thatresults in a more than remote likelihood that a material misstatement of theannual or interim financial statements will not be prevented or detected.  Because management has identified a materialweakness, management has concluded that the Company’s internal control overfinancial reporting was ineffective as of December 31, 2004.

The material weakness identified relates to an errorresulting from a deficiency in the operation of controls for evaluating anddocumenting the assessment of valuation allowances recorded against netdeferred tax assets.  The error, whichresulted in the reversal of the Company’s valuation allowance against asubstantial portion of the net deferred tax assets of $67.4 million, wasidentified in the Company’s income tax provision calculation.

The Company has taken steps to remediate the controldeficiency identified in our accounting for income taxes, includingre-evaluating our income tax calculation methodologies and adjusting thecalculation of our deferred tax balances. Further, the Company has filled a newly-created Director of Taxationposition to enhance the Company’s internal income tax expertise.  This new individual’s employment will beginduring the quarter ended June 30, 2005. Management has discussed these issues and remediation efforts in detailwith our Audit Committee.  Our CEO andour CFO believe that these remediation measures, when implemented, will addressthis material weakness and will also allow us to conclude that our disclosurecontrols and procedures and our internal controls over financial reporting areeffective at a reasonable level of assurance at future filing dates.

The Company filed a Form12b-25 with the SEC to extend the due date of our Form 10-K by 15 days due todelays experienced in completing management’s assessment of the effectivenessof the Company’s internal control over financial reporting and completing thepreparation of the Company’s financial statements for the year ended December31, 2004.

**(c)   Changesin Internal Control over Financial Reporting**

We have conducted a thorough review and evaluation ofour internal control over financial reporting as part of the Company’scompliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.  We have dedicated substantial resources tothe review of our control processes and procedures.  Based on the results of this review, we haveinitiated revisions and enhancements to improve our internal control overfinancial reporting.  As disclosed above,management identified an internal control deficiency 

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indicative of a materialweakness in our internal control over financial reporting.  In order to remediate this material weakness,management has implemented the following measures:

·  re-evaluated our income tax calculationmethodologies and adjusted the calculation of our net deferred tax balances;and

·  filled a newly-created Director of Taxationposition to enhance the Company’s internal income tax expertise.

Management believesthat these measures will be effective in remediating this materialweakness.  Other than these remediationmeasures with regard to the material weakness, there have been no changes inour internal control over financial reporting that occurred during the quarterended December 31, 2004 that have materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

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

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over FinancialReporting, that ValueClick, Inc. and its consolidated subsidiaries (the “Company”)did not maintain effective internal control over financial reporting as of December 31,2004, because of the effect of the material weakness identified in management’sassessment based on criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. As described in Management’s Reporton Internal Control Over Financial Reporting, management excluded from theirassessment the internal control over financial reporting at Pricerunner AB,which was acquired on August 6, 2004 and whose financial statementsreflect total assets and revenues constituting 1.9% and 3.4%, respectively, ofthe related consolidated financial statement amounts as of and for the yearended December 31, 2004. Accordingly, our audit did not include theinternal control over financial reporting at Pricerunner AB. The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express an opinionon management’s assessment and an opinion on the effectiveness of the Company’sinternal control over financial reporting based on our audit.

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

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial 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 (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

A material weakness is a significant deficiency, orcombination of significant deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financial 

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statements will not beprevented or detected. The following material weakness has been identified andincluded in management’s assessment: a deficiency in the operation of controlsfor evaluating and documenting the assessment of valuation allowances recordedagainst deferred income tax assets resulted in an error in the Company’s incometax provision calculation. This error of $67.4 million resulted in the reversalof a substantial portion of the Company’s valuation allowance against deferredincome tax assets. This deficiency results in a more than remote likelihoodthat a material misstatement to the Company’s income tax provision and relateddeferred tax asset accounts in the annual or interim financial statements willnot be prevented or detected. This material weakness was considered indetermining the nature, timing, and extent of audit tests applied in our auditof the consolidated financial statements and financial statement schedule as ofand for the year ended December 31, 2004, of the Company and this reportdoes not affect our report on such financial statements and financial statementschedule.

In our opinion, management’s assessment that theCompany did not maintain effective internal control over financial reporting asof December 31, 2004, is fairly stated, in all material respects, based onthe criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. Also in our opinion, because of theeffect of the material weakness described above on the achievement of theobjectives of the control criteria, the Company has not maintained effectiveinternal control over financial reporting as of December 31, 2004, basedon the criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements and financial statementschedule as of and for the year ended December 31, 2004, of the Companyand our report dated March 31, 2005 expressed an unqualified opinion onthose financial statements and financial statement schedule.

*DELOITTE &TOUCHE LLP*

Los Angeles, CaliforniaMarch 31, 2005

**ITEM 9B. OTHERINFORMATION**

None.

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**PART III.**

**ITEM10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

The information requiredby this Item is incorporated by reference from our definitive proxy statementfor the 2005 Annual Meeting of Stockholders to be held June 6, 2005.

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

**ITEM 11. EXECUTIVECOMPENSATION**

The information requiredby this Item is incorporated by reference from our definitive proxy statementfor the 2005 Annual Meeting of Stockholders to be held June 6, 2005.

**ITEM12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS**

**EquityCompensation Plan Information**

Thefollowing table provides aggregated information with respect to ourcompensation plans under which equity securities of ValueClick are authorizedfor issuance as of December 31, 2004:
| **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** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders        |       |       | 5,986,492  |                                                                                                                                             |       |                                                                                                           | $          | 6.03                                                                                                                                    |       |   |   | 6,169,877 |   |   |
| Equity  compensation plans not approved by security holders(2) |       |       | 1,389,245  |                                                                                                                                             |       |                                                                                                           | $          | 14.32                                                                                                                                   |       |   |   | — |   |   |
| Total                                                          |       |       | 7,375,737  |                                                                                                                                             |       |                                                                                                           | $          | 7.59                                                                                                                                    |       |   |   | 6,169,877 |   |   |

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(1)          Foradditional information with respect to the outstanding option pricingcategories as of December 31, 2004, refer to Note 10 to the December 31,2004 Consolidated Financial Statements included in the F-pages.

(2)          Theequity compensation plans not approved by security holders represent stockoption plans assumed in business combinations. Such plans for Mediaplex and BeFree were indirectly approved in the related stockholder approvals of therespective mergers. The material features of these assumed stock option plansare described in Note 10 to the December 31, 2004 consolidatedfinancial statements included in the F-pages.

The remaining informationrequired by this Item is incorporated by reference from our definitive proxystatement for the 2005 Annual Meeting of Stockholders to be held June 6,2005.

**ITEM13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

None.

**ITEM14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

The information requiredby this Item is incorporated by reference from our definitive proxy statementfor the 2005 Annual Meeting of Stockholders to be held June 6, 2005.

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**PART IV.**

**ITEM15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

(a)           Documents filed as partof this Report:

1.                *FinancialStatements.**  *Thefollowing financial statements of ValueClick, Inc. are included in aseparate section of this Annual Report on Form 10-K commencing on the pages referencedbelow: 
|                                                                                                                 | ** ** | **Page** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| ValueClick, Inc.  Consolidated Financial Statements                                                        |       |     |       |
| Report of Independent Auditors                                                                                  |       | F-2      |       |
| Consolidated Balance Sheets at December 31,  2004 and 2003                                                 |       | F-4      |       |
| Consolidated Statements of Operations for the years  ended December 31, 2004, 2003 and 2002           |       | F-5      |       |
| Consolidated Statements of Stockholders’ Equity for  the years ended December 31, 2004, 2003 and 2002 |       | F-6      |       |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2004, 2003 and 2002           |       | F-7      |       |
| 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 on the pages referencedbelow. All other schedules have been omitted because they are not applicable,not required, or the information is included in the financial statements ornotes thereto.
| Schedule II—Valuation and  Qualifying Accounts |   | F-35 |   |
|-----------------------------------------------------|--------|------|--------|

 

3.                *Exhibits.**  *The following exhibits are filed aspart of, or are incorporated by reference in, this Report:
| Exhibit Number | ** ** | **Description of Document**                                                                                                                               |
|----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1            |       | Agreement and Plan of  Merger, dated as of August 6, 2004, by and among ValueClick and Pricerunner  AB                                               |
| 2.2            |       | Stock Purchase  Agreement, dated January 29, 2004, by and among ValueClick and livedoor Co.,  Ltd (formerly Edge Co., Ltd), a Japanese Corporation.       |
| 2.3(1)         |       | Agreement and Plan of  Merger, dated as of October 9, 2003, by and among ValueClick, NCJ  Acquisition Corporation and Commission Junction, Inc. |
| 2.4(2)         |       | Agreement and Plan of  Merger, dated as of May 30, 2003, by and among ValueClick, Search123.com  Acquisition Corporation and Search123          |
| 2.5(3)         |       | Agreement and Plan of  Merger, dated as of March 20, 2002, by and among ValueClick, Bravo  Acquisition I Corporation and Be Free, Inc.     |
| 2.6(4)         |       | Agreement and Plan of  Merger, dated as of July 1, 2001, by and among ValueClick, Mars  Acquisition Corporation and Mediaplex, Inc.        |
| 3.1.1(5)       |       | Amended and Restated  Certificate of Incorporation of ValueClick                                                                                          |
| 3.1.2(5)       |       | Certificate of Amendment  to Amended and Restated Certificate of Incorporation of ValueClick                                                              |

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| 3.2(5)          |   | 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(5)          |   | Specimen stock  certificate for the ValueClick common stock                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.3(11)         |   | 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(5)         |   | Deed of Assignment,  dated January 1, 1999 by and between Web-Ignite Corporation and  ValueClick                                                                                                                                                                                                                                                                                                                                          |
| 10.3(5)         |   | Trademark Assignment,  dated as of May 1, 1998 from Web-Ignite Corporation to ValueClick                                                                                                                                                                                                                                                                                                                                                  |
| 10.4(5)         |   | Exchange Agreement,  dated December 31, 1998, by and between ValueClick and ValueClick, LLC                                                                                                                                                                                                                                                                                                                                          |
| 10.5(5)         |   | Bill of Sale and  Assignment and Assumption of Liabilities, dated December 31, 1998                                                                                                                                                                                                                                                                                                                                                       |
| 10.6(5)         |   | 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(5)         |   | Stock Purchase  Agreement, dated August 6, 1999, by and between Jonathan Hendricksen and  Timothy Williams and ValueClick                                                                                                                                                                                                                                                                                                                 |
| 10.8(5)         |   | Share Purchase  Agreement, dated December 31, 1999, by and between ValueClick and Todd  Treusdell                                                                                                                                                                                                                                                                                                                                         |
| 10.9(5)         |   | Share Purchase  Agreement, dated December 31, 1999, by and between ValueClick and  James R. Zarley                                                                                                                                                                                                                                                                                                                                   |
| 10.10(5)        |   | Share Purchase  Agreement, dated December 31, 1999, by and between ValueClick and Brian  Coryat                                                                                                                                                                                                                                                                                                                                           |
| 10.11(5)        |   | License Agreement, dated  August 17, 1999, between ValueClick and ValueClick Europe, Limited                                                                                                                                                                                                                                                                                                                                              |
| 10.12(6)†  |   | 1999 Stock Option Plan,  as amended, and form of option agreement                                                                                                                                                                                                                                                                                                                                                                              |
| 10.13(7)†  |   | 2002 Stock Incentive  Plan and form of option agreement                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.14(8)†  |   | Key Employee Agreement  between ValueClick and James R. Zarley dated January 1, 2002                                                                                                                                                                                                                                                                                                                                                 |
| 10.15(9)†  |   | Key Employee Agreement  between ValueClick and Samuel J. Paisley dated January 1, 2002                                                                                                                                                                                                                                                                                                                                                    |
| 10.16(10)† |   | Key Employee Agreement  between ValueClick and Peter Wolfert dated January 1, 2002                                                                                                                                                                                                                                                                                                                                                        |
| 10.18(5)        |   | Intercompany License  Agreement dated December 19, 1999, between ValueClick and ValueClick  Japan, Inc.                                                                                                                                                                                                                                                                                                                              |
| 10.19(5)        |   | Stock Purchase  Agreement, dated January 20, 2000, between Jonathan Hendriksen and  Timothy Williams and ValueClick                                                                                                                                                                                                                                                                                                                       |
| 16.1(12)        |   | Letter from  PricewaterhouseCoopers LLP to the Securities and Exchange Commission dated  July 2, 2004                                                                                                                                                                                                                                                                                                                                     |

55

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| 21.1 |   | Subsidiaries of  ValueClick                                                                                                                                                   |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 23.1 |   | Consent of  Deloitte & Touche LLP                                                                                                                                    |
| 23.2 |   | Consent of  PricewaterhouseCoopers LLP                                                                                                                                        |
| 31.1 |   | Certification of CEO  Pursuant to Securities Exchange Act Rules 13a-15(e) and 15d-15(e),  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-15(e) and 15d-15(e),  as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 |   | Certification of CEO  Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                     |
| 32.2 |   | Certification of  CFO Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                     |

----

†                     Indicatesa management contract or compensatory arrangement.

(1)          Incorporated byreference to Exhibit 2.1 to the Current Report on Form 8-K/Afiled by ValueClick on February 23, 2004.

(2)          Incorporated byreference to Exhibit 2.1 to the Current Report on Form 8-Kfiled by ValueClick on June 11, 2003.

(3)          Incorporated byreference to Exhibit 2.1 to the Current Report on Form 8-Kfiled by ValueClick on March 11, 2002.

(4)          Incorporated byreference from Registration Statement on Form S-4 (File No. 333-655620),as amended, originally filed by ValueClick with the Securities and ExchangeCommission on July 20, 2001.

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

(6)          Incorporated byreference from Registration Statement on Form S-8 (File No. 333-61278)originally filed with the Securities and Exchange Commission on April 19,2001).

(7)          Incorporated byreference from Registration Statement on Form S-8 (File No. 333-89396)originally filed with the Securities and Exchange Commission on May 30,2002).

(8)          Incorporated byreference to Exhibit 10.14 to the Annual Report on Form 10-Kfiled by ValueClick on March 28, 2003.

(9)          Incorporated byreference to Exhibit 10.15 to the Annual Report on Form 10-Kfiled by ValueClick on March 28, 2003.

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

(11)   Incorporated by reference to Exhibit 4to the Current Report on Form 8-K filed by ValueClick on June 14,2002.

(12)   Incorporated by reference to Exhibit 16.1to the Current Report on Form 8-K filed by ValueClick on July 2,2004.

56

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**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**
|                                                                                                                  | ** ** | **Page** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| ValueClick, Inc.  Consolidated Financial Statements                                                         |       |     |       |
| Reports  of Independent Registered Public Accounting Firms                                                       |       | F-2      |       |
| Consolidated Balance Sheets  at December 31, 2004 and 2003                                                  |       | F-4      |       |
| Consolidated  Statements of Operations for the years ended December 31, 2004, 2003 and  2002                |       | F-5      |       |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31,  2004, 2003 and 2002 |       | F-6      |       |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2004, 2003 and  2002                |       | F-7      |       |
| Notes  to Consolidated Financial Statements                                                                      |       | F-9      |       |
| Schedule  II—Valuation and Qualifying Accounts                                                              |       | F-35     |       |

 

F-1

----

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

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

We have audited the accompanying consolidated balancesheet of ValueClick, Inc. and itsconsolidated subsidiaries (the “Company”) as of December 31, 2004, andthe related consolidated statements of operations, stockholders’ equity, andcash flows for the year then ended.  Our audit also included theaccompanying financial statement schedule II for the year ended December 31,2004.  These financial statements and financial statement schedule are theresponsibility of the Company’s management.  Our responsibility is toexpress an opinion on these financial statements and financial statementschedule based on our audit. 

We conducted our audit in accordance with thestandards of 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 material misstatement.An audit includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion. 

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

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2004, based on the criteriaestablished in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission and our report dated March 31, 2005 expressed anunqualified opinion on management’s assessment of the effectiveness of theCompany’s internal control over financial reporting and an adverse opinion onthe effectiveness of the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Los Angeles,CaliforniaMarch 31, 2005

F-2

----

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofValueClick, Inc.

In our opinion, the accompanying consolidated balancesheet and the related consolidated statements of operations, stockholders’equity and cash flows present fairly, in all material respects, the financialposition of ValueClick, Inc. and its subsidiaries (the “Company”) at December 31,2003, and the results of their operations and their cash flows for each of thetwo years in the period ended December 31, 2003, in conformity withaccounting principles generally accepted in the United States of America. Inaddition, in our opinion, the financial statement schedule appearing on pageF-35 for each of the two years in the period ended December 31, 2003presents fairly, in all material respects, the information set forth thereinwhen read in conjunction with the related consolidated financial statements.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 standardsof Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

As described inNote 1 to the consolidated financial statements, effective January 1,2002, the Company adopted Statement of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets.”

/s/ PRICEWATERHOUSECOOPERS LLP

Los Angeles, CaliforniaFebruary 19, 2004

F-3

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**VALUECLICK, INC.CONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                                                | ** ** | **As of December 31,**                 | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                                                                                                | ** ** | **2004**                                              | ** ** | **2003** | ** ** |
| ** **                                                                                                                                                                | ** ** | **(in thousands,  except share data)** | ** ** |
| **Assets**                                                                                                                                                                |       |                                                  |       |   |   |
| Current assets:                                                                                                                                                           |       |                                                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                 |       | $                                                     | 28,295     |   | $ | 36,642 |   |
| Marketable securities, at fair value                                                                                                                                      |       | 214,288                                               |       | 183,478 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $2,973 and $2,060 as of December 31, 2004 and 2003,  respectively                                    |       | 32,036                                                |       | 21,942 |   |
| Inventories                                                                                                                                                               |       | 435                                                   |       | 53 |   |
| Prepaid expenses and other current assets                                                                                                                                 |       | 2,163                                                 |       | 1,715 |   |
| Income taxes receivable                                                                                                                                                   |       | —                                                |       | 440 |   |
| Deferred tax assets                                                                                                                                                       |       | 5,411                                                 |       | 1,446 |   |
| Total current assets                                                                                                                                                      |       | 282,628                                               |       | 245,716 |   |
| Property and  equipment, net                                                                                                                                              |       | 8,571                                                 |       | 10,559 |   |
| Goodwill                                                                                                                                                                  |       | 50,884                                                |       | 49,375 |   |
| Intangible  assets, net                                                                                                                                                   |       | 25,648                                                |       | 15,974 |   |
| Deferred tax  assets                                                                                                                                                      |       | 61,630                                                |       | — |   |
| Other assets                                                                                                                                                              |       | 1,065                                                 |       | 1,475 |   |
| Total assets                                                                                                                                                              |       | $                                                     | 430,426    |   | $ | 323,099 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                            |       |                                                  |       |   |   |
| Current liabilities:                                                                                                                                                      |       |                                                  |       |   |   |
| Accounts payable and accrued expenses                                                                                                                                     |       | $                                                     | 38,288     |   | $ | 29,567 |   |
| Income taxes payable                                                                                                                                                      |       | 964                                                   |       | 811 |   |
| Deferred revenue                                                                                                                                                          |       | 1,498                                                 |       | 1,264 |   |
| Capital lease obligations                                                                                                                                                 |       | 239                                                   |       | 265 |   |
| Total current liabilities                                                                                                                                                 |       | 40,989                                                |       | 31,907 |   |
| Capital lease  obligations, less current portion                                                                                                                          |       | 169                                                   |       | 187 |   |
| Deferred tax  liabilities                                                                                                                                                 |       | 2,865                                                 |       | 1,996 |   |
| Other non-current  liabilities                                                                                                                                            |       | 1,498                                                 |       | 3,493 |   |
| Total liabilities                                                                                                                                                         |       | 45,521                                                |       | 37,583 |   |
| Minority interest  in consolidated subsidiary                                                                                                                             |       | —                                                |       | 11,309 |   |
| Stockholders’ equity:                                                                                                                                                |       |                                                  |       |   |   |
| Convertible preferred stock, $0.001 par value;  20,000,000 shares authorized; no shares issued or outstanding at  December 31, 2004 and 2003                         |       | —                                                |       | — |   |
| Common stock, $0.001 par value; 500,000,000 shares  authorized; 82,032,522 and 77,953,774 shares issued and outstanding at  December 31, 2004 and 2003, respectively |       | 82                                                    |       | 78 |   |
| Additional paid-in capital                                                                                                                                                |       | 361,141                                               |       | 339,597 |   |
| Deferred stock compensation                                                                                                                                               |       | (221                                                  | )          | (1,163 | ) |
| Accumulated other comprehensive income                                                                                                                                    |       | 399                                                   |       | 78 |   |
| Retained earnings (accumulated deficit)                                                                                                                                   |       | 23,504                                                |       | (64,383 | ) |
| Total stockholders’ equity                                                                                                                                           |       | 384,905                                               |       | 274,207 |   |
| Total liabilities  and stockholders’ equity                                                                                                                          |       | $                                                     | 430,426    |   | $ | 323,099 |   |

 

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

F-4

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**VALUECLICK, INC.CONSOLIDATED STATEMENTS OFOPERATIONS**
| ** **                                                                                                                   | ** ** | **For the Year Ended December 31,**       | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2004**                                                           | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                                   | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenue                                                                                                                      |       | $                                                                  | 169,178    |   | $ | 92,516 |   | $ | 62,554 |   |
| Cost of revenue                                                                                                              |       | 50,762                                                             |       | 32,024 |   | 21,733 |   |
| Gross profit                                                                                                                 |       | 118,416                                                            |       | 60,492 |   | 40,821 |   |
| Operating expenses:                                                                                                          |       |                                                               |       |   |   |   |   |
| Sales and marketing (excludes stock-based  compensation of $369, $113 and $488 for 2004, 2003 and 2002, respectively)        |       | 36,000                                                             |       | 21,162 |   | 17,001 |   |
| General and administrative (excludes stock-based  compensation of $245, $181 and $779 for 2004, 2003 and 2002, respectively) |       | 27,168                                                             |       | 19,699 |   | 17,784 |   |
| Technology (excludes stock-based compensation of  $125, $58 and $260 for 2004, 2003 and 2002, respectively)                  |       | 15,891                                                             |       | 10,504 |   | 10,459 |   |
| Stock-based compensation                                                                                                     |       | 739                                                                |       | 352 |   | 1,527 |   |
| Amortization of intangible assets and acquired  software                                                                     |       | 4,111                                                              |       | 1,570 |   | 533 |   |
| Merger-related costs                                                                                                         |       | —                                                             |       | — |   | 17 |   |
| Restructuring charges (reversals)                                                                                            |       | (1,003                                                             | )          | — |   | 2,320 |   |
| Total operating expenses                                                                                                     |       | 82,906                                                             |       | 53,287 |   | 49,641 |   |
| Income (loss) from operations                                                                                                |       | 35,510                                                             |       | 7,205 |   | (8,820 | ) |
| Gain on sale of  equity interest in Japan subsidiary                                                                         |       | 8,007                                                              |       | — |   | — |   |
| Interest income                                                                                                              |       | 3,665                                                              |       | 3,364 |   | 5,909 |   |
| Gain on sale of equity  securities                                                                                           |       | —                                                             |       | — |   | 134 |   |
| Other income                                                                                                                 |       | 63                                                                 |       | — |   | 32 |   |
| Income (loss) before income taxes, minority interest  and cumulative effect of a change in accounting principle              |       | 47,245                                                             |       | 10,569 |   | (2,745 | ) |
| Income tax expense  (benefit)                                                                                                |       | (40,512                                                            | )          | 830 |   | 163 |   |
| Income (loss)  before minority interest and cumulative effect of a change in accounting  principle                           |       | 87,757                                                             |       | 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                                             |       | 87,887                                                             |       | 9,823 |   | (2,923 | ) |
| Cumulative effect  of a change in accounting principle                                                                       |       | —                                                             |       | — |   | (7,649 | ) |
| Net income (loss)                                                                                                            |       | $                                                                  | 87,887     |   | $ | 9,823 |   | $ | (10,572 | ) |
| Basic net income (loss) per common share:                                                                                    |       |                                                               |       |   |   |   |   |
| Basic income (loss) per common share before  cumulative effect of a change in accounting principle                           |       | $                                                                  | 1.10       |   | $ | 0.13 |   | $ | (0.04 | ) |
| Cumulative effect of a change in accounting principle  per common share                                                 |       | —                                                             |       | — |   | (0.10 | ) |
| Basic net income (loss) per common share                                                                                     |       | $                                                                  | 1.10       |   | $ | 0.13 |   | $ | (0.14 | ) |
| Diluted net income (loss) per common share:                                                                                  |       |                                                               |       |   |   |   |   |
| Diluted income (loss) per common share before  cumulative effect of a change in accounting principle                         |       | $                                                                  | 1.05       |   | $ | 0.13 |   | $ | (0.04 | ) |
| Cumulative effect of a change in accounting principle  per common share                                                 |       | —                                                             |       | — |   | (0.10 | ) |
| Diluted net income (loss) per common share                                                                                   |       | $                                                                  | 1.05       |   | $ | 0.13 |   | $ | (0.14 | ) |
| Shares used to calculate basic net income (loss) per  common share                                                           |       | 80,063                                                             |       | 74,300 |   | 73,744 |   |
| Shares used to calculate  diluted net income (loss) per common share                                                         |       | 84,038                                                             |       | 78,436 |   | 73,744 |   |

 

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

F-5

----

**VALUECLICK, INC.CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY(in thousands, except share data)**
| ** ** | ** ** | **Preferred Stock**                                  | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Treasury** | ** ** | **Deferred Stock  Compensation** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Retained  Earnings  (Accumulated** | ** ** | **Total  Stockholders’** | ** ** |
|------------|------------|-----------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|---------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|-------------------------------|------------|
| ** ** | ** ** | **Shares**                                                | ** ** | **Amount**            | ** ** | **Shares**              | ** ** | **Amount**   | ** ** | **Capital**                           | ** ** | **Stock**                             | ** ** | **Loss**                             | ** ** | **Income (Loss)**        | ** ** | **Deficit)** | ** ** | **Equity** | ** ** |
| ** ** | ** ** | **(in thousands, except share data)** | ** ** |
|            |            |                                                           |            |                       |            |                         |            |              |            |                                       |            |                                       |            |                                      |            |                               |            |  |  |  |  |
| Balance at December 31, 2001                                                                                     |   |   | — |   |   |   | — |   |   | 52,698,617  |   |   | $      | 53     |   |   |    | $      | 238,522 |    |   | $      | (2,959 | )      |   | $      | (1,453 | )      |   |   | $       | (5,022 | )      |   |    | $      | (63,634 | )      |   |   | $       | 165,507 |   |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|-------------|--------|--------|--------|--------|--------|--------|---------|--------|---------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|---------|--------|--------|--------|---------|--------|---------|--------|--------|--------|---------|---------|--------|--------|
| Stock issued in the Be Free purchase business  combination                                                            |   |   | — |   |   |   | — |   |   | 43,361,717  |   |   | 43     |   |   |   | 127,252 |   |    | —  |   |   | — |   |   |   | — |   |   |   | —  |   |   |   | 127,295 |   |    |
| Stock issued in the Bach Systems purchase business  combination                                                       |   |   | — |   |   |   | — |   |   | 259,375     |   |   | 1      |   |   |   | 633     |   |    | —  |   |   | — |   |   |   | — |   |   |   | —  |   |   |   | 634     |   |    |
| Purchase of treasury shares                                                                                           |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | —  |   |    | (56,250 | )      |   | — |   |   |   | — |   |   |   | —  |   |   |   | (56,250 | )      |    |
| Conversion of acquired company’s purchased stock to  treasury stock                                              |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | —  |   |    | (1,674  | )      |   | — |   |   |   | — |   |   |   | —  |   |   |   | (1,674  | )      |    |
| Deferred stock compensation                                                                                           |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | 547     |   |    | —  |   |   | (547   | )      |   |   | — |   |   |   | —  |   |   |   | —  |   |    |
| Amortization of stock-based compensation                                                                              |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | —  |   |    | —  |   |   | 1,527  |   |   |   | — |   |   |   | —  |   |   |   | 1,527   |   |    |
| Exercise of common stock options                                                                                      |   |   | — |   |   |   | — |   |   | 2,798,766   |   |   | 2      |   |   |   | 3,259   |   |    | —  |   |   | — |   |   |   | — |   |   |   | —  |   |   |   | 3,261   |   |    |
| Tax benefit from the exercise of stock options                                                                        |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | 225     |   |    | —  |   |   | — |   |   |   | — |   |   |   | —  |   |   |   | 225     |   |    |
| Comprehensive loss:                                                                                                   |   |   |   |   |   |   |   |   |   |        |   |   |   |   |   |   |    |   |    |    |   |   |   |   |   |   |   |   |   |   |    |   |   |   |    |   |    |
| Net loss                                                                                                              |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | —  |   |    | —  |   |   | — |   |   |   | — |   |   |   | (10,572 | )      |   |   | (10,572 | )      |    |
| Change in market value of marketable securities, net  of tax                                                     |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | —  |   |    | —  |   |   | — |   |   |   | (430   | )      |   |   | —  |   |   |   | (430    | )      |    |
| Foreign currency translation                                                                                          |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | —  |   |    | —  |   |   | — |   |   |   | 2,458  |   |   |   | —  |   |   |   | 2,458   |   |    |
| Total comprehensive loss                                                                                              |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | —  |   |    | —  |   |   | — |   |   |   | 2,028  |   |   |   | (10,572 | )      |   |   | (8,544  | )      |    |
| Balance at December 31, 2002                                                                                     |   |   | — |   |   |   | — |   |   | 99,118,475  |   |   | 99     |   |   |   | 370,438 |   |    | (60,883 | )      |   | (473   | )      |   |   | (2,994 | )      |   |   | (74,206 | )      |   |   | 231,981 |   |    |
| Amortization of stock-based compensation                                                                              |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | —  |   |    | —  |   |   | 352    |   |   |   | — |   |   |   | —  |   |   |   | 352     |   |    |
| Exercise of common stock options                                                                                      |   |   | — |   |   |   | — |   |   | 2,085,969   |   |   | 2      |   |   |   | 2,186   |   |    | —  |   |   | — |   |   |   | — |   |   |   | —  |   |   |   | 2,188   |   |    |
| Deferred stock compensation                                                                                           |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | 1,042   |   |    | —  |   |   | (1,042 | )      |   |   | — |   |   |   | —  |   |   |   | —  |   |    |
| Issuance of shares in purchase transaction—Commission  Junction                                             |   |   | — |   |   |   | — |   |   | 3,018,586   |   |   | 3      |   |   |   | 29,428  |   |    | —  |   |   | — |   |   |   | — |   |   |   | —  |   |   |   | 29,431  |   |    |
| Assumed options in the Commission Junction and  Hi-Speed Media business combinations                                  |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | 6,521   |   |    | —  |   |   | — |   |   |   | — |   |   |   | —  |   |   |   | 6,521   |   |    |
| Purchase of treasury stock                                                                                            |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | —  |   |    | (9,161  | )      |   | — |   |   |   | — |   |   |   | —  |   |   |   | (9,161  | )      |    |
| Retirement of treasury stock                                                                                          |   |   | — |   |   |   | — |   |   | (26,269,256 | )      |   | (26    | )      |   |   | (70,018 | )      |    | 70,044  |   |   | — |   |   |   | — |   |   |   | —  |   |   |   | —  |   |    |
| Comprehensive income:                                                                                                 |   |   |   |   |   |   |   |   |   |        |   |   |   |   |   |   |    |   |    |    |   |   |   |   |   |   |   |   |   |   |    |   |   |   |    |   |    |
| Net income                                                                                                            |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | —  |   |    | —  |   |   | — |   |   |   | — |   |   |   | 9,823   |   |   |   | 9,823   |   |    |
| Change in market value of marketable securities, net  of tax                                                     |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | —  |   |    | —  |   |   | — |   |   |   | 87     |   |   |   | —  |   |   |   | 87      |   |    |
| Foreign currency translation                                                                                          |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | —  |   |    | —  |   |   | — |   |   |   | 2,985  |   |   |   | —  |   |   |   | 2,985   |   |    |
| Total comprehensive income                                                                                            |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | —  |   |    | —  |   |   | — |   |   |   | 3,072  |   |   |   | 9,823   |   |   |   | 12,895  |   |    |
| Balance at December 31, 2003                                                                                     |   |   | — |   |   |   | — |   |   | 77,953,774  |   |   | 78     |   |   |   | 339,597 |   |    | —  |   |   | (1,163 | )      |   |   | 78     |   |   |   | (64,383 | )      |   |   | 274,207 |   |    |
| Amortization of stock-based compensation                                                                              |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | —  |   |    | —  |   |   | 739    |   |   |   | — |   |   |   | —  |   |   |   | 739     |   |    |
| Deferred stock compensation adjustment for forfeited  stock   options                                                 |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | (203    | )      |    | —  |   |   | 203    |   |   |   | — |   |   |   | —  |   |   |   | —  |   |    |
| Exercise of common stock options                                                                                      |   |   | — |   |   |   | — |   |   | 4,119,089   |   |   | 4      |   |   |   | 10,963  |   |    | —  |   |   | — |   |   |   | — |   |   |   | —  |   |   |   | 10,967  |   |    |
| Issuance of shares in purchase  transaction—Pricerunner                                                          |   |   | — |   |   |   | — |   |   | 263,467     |   |   | — |   |   |   | 1,967   |   |    | —  |   |   | — |   |   |   | — |   |   |   | —  |   |   |   | 1,967   |   |    |
| Purchase and retirement of treasury stock                                                                             |   |   | — |   |   |   | — |   |   | (303,808    | )      |   | — |   |   |   | (2,206  | )      |    | —  |   |   | — |   |   |   | — |   |   |   | —  |   |   |   | (2,206  | )      |    |
| Tax benefit from the exercise of stock options                                                                        |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | 11,023  |   |    | —  |   |   | — |   |   |   | — |   |   |   | —  |   |   |   | 11,023  |   |    |
| Comprehensive income:                                                                                                 |   |   |   |   |   |   |   |   |   |        |   |   |   |   |   |   |    |   |    |    |   |   |   |   |   |   |   |   |   |   |    |   |   |   |    |   |    |
| Net income                                                                                                            |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | —  |   |    | —  |   |   | — |   |   |   | — |   |   |   | 87,887  |   |   |   | 87,887  |   |    |
| 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                                                                                            |   |   | — |   |   |   | — |   |   | —      |   |   | — |   |   |   | —  |   |    | —  |   |   | — |   |   |   | 321    |   |   |   | 87,887  |   |   |   | 88,208  |   |    |
| Balance at  December 31, 2004                                                                                    |   |   | — |   |   |   | — |   |   | 82,032,522  |   |   | $      | 82     |   |   |    | $      | 361,141 |    |   | — |   |   | $      | (221   | )      |   |   | $      | 399     |   |   |   | $       | 23,504 |    |   |   | $      | 384,905 |    |   |

 

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

F-6

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**VALUECLICK, INC.CONSOLIDATED STATEMENTS OFCASH FLOWS**
| ** **                                                                                | ** ** | **For the Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                                                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                | ** ** | **(in thousands)**                                      | ** ** |
| Cash flows from operating  activities:                                                    |       |                                                         |       |   |   |   |   |
| Net income (loss)                                                                         |       | $                                                            | 87,887     |   | $ | 9,823 |   | $ | (10,572 | ) |
| Adjustments to reconcile  net income (loss) to net cash provided by operating activities: |       |                                                         |       |   |   |   |   |
| Depreciation and amortization                                                             |       | 10,299                                                       |       | 7,531 |   | 5,325 |   |
| Cumulative effect of change in accounting principle                                       |       | —                                                       |       | — |   | 7,649 |   |
| Restructuring charge (reversal)                                                           |       | (1,003                                                       | )          | — |   | 2,320 |   |
| Provision for doubtful accounts receivable                                                |       | 1,308                                                        |       | 1,213 |   | 1,409 |   |
| Inventory write-down                                                                      |       | 199                                                          |       | — |   | — |   |
| Stock-based compensation                                                                  |       | 739                                                          |       | 352 |   | 1,527 |   |
| Tax benefit from stock option exercises                                                   |       | 11,023                                                       |       | — |   | — |   |
| Gain on sale of marketable equity securities                                              |       | —                                                       |       | — |   | (134 | ) |
| Minority interest in ValueClick Japan                                                     |       | (130                                                         | )          | (84 | ) | 17 |   |
| Gain on sale of equity interest in Japan                                                  |       | (8,007                                                       | )          |   |   |   |   |
| Gain on the ValueClick Japan stock issuance                                               |       | —                                                       |       | — |   | 10 |   |
| Provision for (benefit from) deferred taxes                                               |       | (52,326                                                      | )          | (112 | ) | (186 | ) |
| Changes in  operating assets and liabilities, net of effects of acquisitions:             |       |                                                         |       |   |   |   |   |
| Accounts receivable                                                                       |       | (9,510                                                       | )          | (8,106 | ) | (3,019 | ) |
| Prepaid expenses, inventory and other assets                                              |       | (866                                                         | )          | 567 |   | 2,055 |   |
| Accounts payable and accrued liabilities                                                  |       | 6,783                                                        |       | 4,657 |   | (4,512 | ) |
| Income taxes receivable/payable                                                           |       | 489                                                          |       | 449 |   | 812 |   |
| Deferred revenue                                                                          |       | 235                                                          |       | 523 |   | (917 | ) |
| Other non-current liabilities                                                             |       | (561                                                         | )          | (885 | ) | (49 | ) |
| Net cash provided by operating activities                                                 |       | 46,559                                                       |       | 15,928 |   | 1,735 |   |
| Cash flows from investing  activities:                                                    |       |                                                         |       |   |   |   |   |
| Proceeds from the maturity and sale of marketable  debt securities                        |       | 131,730                                                      |       | 25,792 |   | 66,183 |   |
| Purchases of marketable debt securities                                                   |       | (167,464                                                     | )          | (3,758 | ) | (11,120 | ) |
| Purchases of equity securities                                                            |       | —                                                       |       | — |   | (1,645 | ) |
| Acquisition of businesses, net of cash acquired                                           |       | (25,394                                                      | )          | (18,513 | ) | (212 | ) |
| Purchases of property and equipment                                                       |       | (6,009                                                       | )          | (3,241 | ) | (2,344 | ) |
| Sale of equity interest in Japan subsidiary, net                                          |       | 2,351                                                        |       | — |   | — |   |
| Purchases of intangible assets                                                            |       | (1,313                                                       | )          | (811 | ) | (1,067 | ) |
| Net cash provided by (used in) investing activities                                       |       | (66,099                                                      | )          | (531 | ) | 49,765 |   |
| Cash flows from financing  activities:                                                    |       |                                                         |       |   |   |   |   |
| Purchase of treasury shares                                                               |       | (2,206                                                       | )          | (9,161 | ) | (56,248 | ) |
| Repayment of notes payable and capital leases                                             |       | (44                                                          | )          | (1,833 | ) | (796 | ) |
| Proceeds from exercises of stock options and warrants                                     |       | 10,967                                                       |       | 2,188 |   | 3,261 |   |
| Net cash provided by (used in) financing activities                                       |       | 8,717                                                        |       | (8,806 | ) | (53,783 | ) |
| Effect of currency translations                                                           |       | 2,476                                                        |       | 2,985 |   | 2,458 |   |
| Net increase (decrease) in cash and cash equivalents                                      |       | (8,347                                                       | )          | 9,576 |   | 175 |   |
| Cash and cash equivalents, beginning of period                                            |       | 36,642                                                       |       | 27,066 |   | 26,891 |   |
| Cash and cash  equivalents, end of period                                                 |       | $                                                            | 28,295     |   | $ | 36,642 |   | $ | 27,066 |   |

 

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

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**VALUECLICK, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                                     | ** ** | **For the Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                                                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**                                      | ** ** |
| Supplemental disclosures  of cash flow information:                            |       |                                                         |       |   |   |   |   |
| Cash paid for interest                                                         |       | $                                                            | 26         |   | $ | 52 |   | $ | 109 |   |
| Cash paid for income taxes                                                     |       | $                                                            | 634        |   | $ | 511 |   | $ | 670 |   |
| Non-cash investing and  financing activities:                                  |       |                                                         |       |   |   |   |   |
| Issuance of common stock in business combinations                              |       | $                                                            | 1,967      |   | $ | 29,431 |   | $ | 127,929 |   |
| Purchase of Patent license through payables                                    |       | $                                                            | —     |   | $ | — |   | $ | 788 |   |
| Conversion of acquired company’s purchased stock to  treasury stock  |       | $                                                            | —     |   | $ | — |   | $ | 1,674 |   |
| Effect of Acquisitions  and Disposition:                                       |       |                                                         |       |   |   |   |   |
| Marketable securities                                                          |       | $                                                            | 3,716      |   | $ | — |   | $ | (124,948 | ) |
| Accounts receivable, net                                                       |       | $                                                            | (935       | ) | $ | (1,310 | ) | $ | (3,103 | ) |
| Prepaid expenses and other current assets                                      |       | $                                                            | (135       | ) | $ | (535 | ) | $ | (1,650 | ) |
| Property and equipment                                                         |       | $                                                            | 1,269      |   | $ | (2,789 | ) | $ | (5,272 | ) |
| Goodwill                                                                       |       | $                                                            | (13,832    | ) | $ | (49,375 | ) | $ | — |   |
| Intangible assets                                                              |       | $                                                            | (13,808    | ) | $ | (14,703 | ) | $ | (1,013 | ) |
| Other assets                                                                   |       | $                                                            | (625       | ) | $ | (47 | ) | $ | (1,222 | ) |
| Accounts payable and accrued expenses                                          |       | $                                                            | 662        |   | $ | 12,015 |   | $ | 3,373 |   |
| Deferred revenue                                                               |       | $                                                            | (505       | ) | $ | 2 |   | $ | 1,563 |   |
| Income taxes payable                                                           |       | $                                                            | 100        |   | $ | 281 |   | $ | — |   |
| Notes payable                                                                  |       | $                                                            | —     |   | $ | — |   | $ | 1,426 |   |
| Other non-current liabilities                                                  |       | $                                                            | —     |   | $ | — |   | $ | 1,377 |   |
| Deferred tax liabilities, net                                                  |       | $                                                            | 2,813      |   | $ | 1,996 |   | $ | — |   |
| Minority interest in consolidated subsidiary                                   |       | $                                                            | (11,179    | ) | $ | — |   | $ | — |   |
| Additional paid-in capital                                                     |       | $                                                            | 1,967      |   | $ | 36,994 |   | $ | 129,257 |   |
| Deferred stock-based  compensation                                             |       | $                                                            | —     |   | $ | (1,042 | ) | $ | — |   |

 

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

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

**1.Organization and Summary of Significant Accounting Policies**

**Organizationand Basis of Presentation**

ValueClick, Inc., and its subsidiaries (“ValueClick”or “the Company”) offer a suite of products and services that enable marketersto advertise and sell their products through all major online marketingchannels—display/Web advertising, search marketing, email marketing, andaffiliate marketing. Additionally, the Company provides software that assistsadvertising agencies and other companies with information management regardingtheir financial, workflow and offline media planning and buying processes. Thebroad range of products and services that the Company provides enables itscustomers to address all aspects of the marketing process, from strategicplanning through execution, including results measurement and campaignrefinements. By combining the Company’s media, affiliate marketing andtechnology offerings with its experience in both online and offline marketing,the Company helps its customers optimize their marketing campaigns both on theInternet and through offline media.

In periods prior to December 2003, the Companyoperated in two reportable operating segments: Media and Technology. With theacquisition of Commission Junction, Inc. (“Commission Junction”) in December 2003,management reassessed the Company’s reportable operating segments anddetermined that the Company now has an additional reportable operating segment,Affiliate Marketing, which combines the operations of Be Free, Inc. (“BeFree”) and Commission Junction. For prior periods, Be Free was included in theTechnology operating segment. Accordingly, prior period operating segmentinformation has been reclassified to conform to 2003 and 2004 presentation.

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

*MEDIA*—ValueClick’sMedia segment provides a comprehensive suite of online media services andtailored programs that help marketers create awareness, attract visitors andgenerate leads and sales through the Internet. The Company’s Media segment hasgrown both organically and through the acquisition of complementary businessessuch as Search123.com, completed in May 2003, Hi-Speed Media, completed inDecember 2003, and Pricerunner AB, completed in August 2004.

The Company offers advertisers and agencies a range ofonline media solutions in the categories of display/Web advertising, searchmarketing, email marketing, and lead generation marketing. The Company hasaggregated thousands of online publishers to provide advertisers and agencieswith access to one of the largest online advertising networks. The Company alsosells a limited number of consumer products directly to end-user customersthrough a small number of Company-owned e-commerce websites. With the additionof Pricerunner AB, the Company expanded its suite of performance-based onlinemarketing solutions into the area of online comparison shopping.

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

*AFFILIATEMARKETING*—ValueClick’s Affiliate Marketing segmentoperates through its wholly-owned subsidiaries Be Free, acquired on May 23,2002, and Commission Junction, acquired on December 7, 2003. In 2004, BeFree and Commission Junction were integrated and the Company markets itsaffiliate marketing offerings under the Commission Junction brand name.

The Company’s Affiliate Marketing segment offerstechnology and services that enable advertisers to manage, track and analyze avariety of online marketing programs. Specifically, the Company’s affiliate 

F-9

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marketing services enableits advertiser clients to: build relationships with affiliate partners; managethe offers they make available to their affiliate partners; track the onlinetraffic, leads and sales that these offers drive to the advertiser’s website;analyze the effectiveness of the offers and affiliate partners; and, track thecommissions due to their affiliates.

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

*TECHNOLOGY*—ValueClick’sTechnology segment operates through its wholly-owned subsidiaries Mediaplex, Inc.(“Mediaplex”) and AdWare Systems, Inc. (now referred to as “MediaplexSystems”), which were acquired on October 19, 2001.

Mediaplex offers technology infrastructure tools andservices that enable advertisers, advertising agencies and online publishers toimplement and manage their own online display advertising (adserving) and emailcampaigns. Mediaplex’s products are based on its proprietary MOJO® technologyplatform, which has the ability to automatically configure messages in responseto real-time information from a marketer’s enterprise data system and toprovide ongoing campaign optimization. Revenues are primarily derived fromsoftware access and use charges paid by its software clients. Mediaplex’sproducts are priced primarily on a CPM or email delivered basis.

Mediaplex Systems is anapplications service provider (“ASP”) delivering high-quality, Web-based informationmanagement systems to advertising agencies, marketing communications companies,public relations agencies, and other large corporate advertisers. The solutionsthat Mediaplex Systems provides span three primary categories—Agency Management,Media Management and Content Management. Mediaplex Systems’s revenue isgenerated primarily from monthly service fees paid by customers over theservice period.

**Principles of Consolidation**

The consolidated financial statements include theaccounts of the Company, its majority-owned subsidiary and its wholly-ownedsubsidiaries. The Company’s majority-owned subsidiary, ValueClick Japan, Inc.,wassold on March 26, 2004 to livedoor Co., Ltd., as described in Note 4. Theoperating results of ValueClick Japan are included in the Company’s operatingresults through the date of disposition. All material intercompany transactionsand balances have been eliminated in consolidation.

The consolidated financialstatements include the accounts of the Company and its subsidiaries from thebeginning of the accounting period nearest to the date of acquisition,acquisition date of majority voting control or formation.

**Useof Estimates and Critical Accounting Policies**

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.

The most significant areasthat require management judgment are revenue recognition including salesreturns, allowance for doubtful accounts receivable, deferred income taxes,impairment of long-lived assets 

F-10

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andgoodwill, and contingencies and litigation. The accounting policies for theseareas are discussed in this or other footnotes to these consolidated financialstatements.

**Cash and Cash Equivalents**

The Company considers allshort-term highly liquid investments with an original maturity at the date ofpurchase of three months or less to be cash equivalents. At December 31,2004, cash equivalents consisted of money market accounts and certificates ofdeposit. At December 31, 2003, cash equivalents consisted of money marketaccounts, certificates of deposit and commercial paper. Included in cash as of December 31,2004 are $566,000 of certificates of deposit used to collateralize standby letters of credit in connection with theCompany’s facility leases as described in Note 13.

**Marketable Securities**

Marketable securities areclassified as available-for-sale and accordingly are recorded at fair value,based on quoted market rates, with unrealized gains and losses reflected as aseparate component of stockholders’ equity, net of tax, until realized or untila determination is made that an other-than-temporary decline in market valuehas occurred. Factors considered by management in assessing whether another-than-temporary impairment has occurred include: the nature of theinvestment(s); 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 both the ability and intent to hold the investment. When it isdetermined that an other-than-temporary impairment has occurred, the investmentis written down to the market value at the end of the period in which it isdetermined that an other-than-temporary decline has occurred. The cost ofsecurities sold is based upon the specific identification method.

**AccountsReceivable and Allowance for Doubtful Accounts**

Trade receivables are stated at gross invoice amountless other allowances and provision for uncollectible accounts.

The Company estimates itsallowance for doubtful accounts using two methods. The amounts calculated fromeach of these methods are analyzed to determine the total amount reserved. First,the Company evaluates specific accounts where information indicates thecustomers may have an inability to meet financial obligations, such asbankruptcy proceedings and receivable amounts outstanding for an extendedperiod beyond contractual terms. In these cases, the Company uses its judgment,based on the best available facts, to record a specific reserve for thosecustomers against amounts due to reduce the receivable to the amount expectedto be collected. These specific reserves are reevaluated and adjusted asadditional information is received. Second, a reserve is determined for allcustomers based on a range of loss percentages applied to receivables aging categories.These percentages are based on historical collection and write-off experience.If circumstances change, for example the occurrence of higher-than-expecteddefaults, estimates of the recoverability of receivable amounts due could bereduced.

**Inventories**

Inventories are stated atthe lower of cost or market value determined using the First-In-First-Out (“FIFO”)method. The Company reduces its inventory value for estimated obsolete andslow-moving inventory in an amount equal to the difference between the cost ofinventory and the net realizable value based upon assumptions about futuredemand and market conditions. If actual market conditions are less favorablethan those projected by management, additional inventory write-downs may berequired. As of December 31, 2004, the Company held $524,000 of finishedgoods inventories, as well as $109,000 of raw material inventories which arelocated at the Company’s outsourced packager. As of December 31, 2003, 

F-11

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inventorybalances represented only finished goods located at the Company’s own facility.As of December 31, 2004 and 2003, inventory balances of $633,000 and$53,000 were reduced by inventory write-downs of $198,000 and $0, respectively.

**Property and Equipment**

Property and equipment arestated at cost less accumulated depreciation and amortization. Depreciationexpense on property and equipment is calculated using the straight-line methodover the estimated useful lives of the assets ranging from 3 to 5 years.Leasehold improvements are amortized on a straight-line basis over 5 years, orthe term of the lease, whichever is shorter.

**Goodwill**

The Company tests goodwillfor impairment in accordance with the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 142, “Goodwill and Other IntangibleAssets,” adopted on January 1, 2002 (see Note 5). Accordingly,goodwill is tested at least annually at the reporting unit level or wheneverevents or circumstances indicate that goodwill might be impaired. The Companyhas determined its reporting units based on the guidance in SFAS No. 142and Emerging Issues Task Force (“EITF”) Issue D-101, “Clarification ofReporting Unit Guidance in Paragraph 30 of FASB Statement No. 142.” As of December 31,2004, the Company’s reporting units consisted of the Affiliate Marketing andTechnology operating segments, in addition to three components of the Mediaoperating segment: the U.S. Domestic media business (excluding Hi-Speed Media,acquired in December 2003), the Europe media business and Hi-Speed Media.The Company has elected to test for goodwill impairment annually as of December 31.The Company determined that there was no impairment of goodwill as of December 31,2004 and 2003.

**Long-lived Assets**

Management evaluates therecoverability of the Company’s identifiable intangible assets and otherlong-lived assets in accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-lived Assets,” which generally requires theassessment of these assets for recoverability when events or circumstancesindicate a potential impairment exists. Events and circumstances considered bythe Company in determining whether the carrying value may not be recoverableinclude: significant changes in performance relative to expected historical orprojected future operating results; significant changes in the use of theassets; significant negative industry or economic trends; a significant declinein the Company’s stock price for a sustained period of time; and changes in theCompany’s business strategy. In determining if an impairment exists, theCompany estimates the undiscounted cash flows to be generated from the use andultimate disposition 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.

**Revenue Recognition**

The Company recognizes revenue in accordance withStaff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition inFinancial Statements.” Under SAB No. 104, the Company recognizes revenuewhen the following criteria have been met: persuasive evidence of anarrangement exists, the fees are fixed and determinable, no significant Companyobligations remain and collection of the related receivable is reasonablyassured.

The Company’s Media segment revenue is principallyderived from the delivery of advertising impressions, click-throughs, actions,as specifically defined, from click-throughs and customer leads delivered fromthird-party websites, online newsletters and email lists, comprising theValueClick Consolidated Network (the “Network”). Revenue is recognized in theperiod that the advertising 

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impressions,click-throughs or actions occur, when lead-based information is delivered, or,for the Media segment’s e-commerce business, when consumer products areshipped, provided that no significant Company obligations remain, collection ofthe resulting receivable is reasonably assured and prices are fixed anddeterminable. Additionally, consistent with the provisions of EITF Issue No. 99-19,“Reporting Revenue Gross as a Principal versus Net as an Agent,” the Companyrecognizes revenue as a principal in media transactions. Accordingly, revenueis recognized on a gross basis and corresponding publisher expenses arerecorded as a component of cost of revenue. To date, the Company’s agreementshave not required a guaranteed minimum number of click-throughs or actions.

The Company becomes obligated to make payments tothird-party websites, online newsletters and email lists, which have contractedwith the Company to be part of the Network, in the period the advertisingimpressions, click-throughs, actions or lead-based information are delivered.Such expenses are classified as cost of revenue in the corresponding period inwhich the revenue is recognized in the accompanying consolidated statements ofoperations.

Revenue for the Company’s Affiliate Marketing andTechnology segments is generated primarily from fees for campaign managementservices and from application management services and professional services.Campaign management services revenue is recognized when the related servicesare performed, provided that no significant Company obligations remain,collection of the resulting receivable is reasonably assured and fees are fixedand determinable. Application management services revenue consists of monthlyrecurring fees for hosting services and is recognized as the services areperformed, provided that no significant Company obligations remain, collectionof the resulting receivable is reasonably assured and fees are fixed anddeterminable. The Company’s application management services provide customersrights to access software applications, hardware for the application access andcustomer service. The Company’s customers do not have the right to takepossession of the software at any time during the hosting agreement or at itstermination. Accordingly, as prescribed by EITF Issue No. 00-3, “Applicationof AICPA Statement of Position 97-2 to Arrangements That Include the Right toUse Software Stored on Another Entity’s Hardware,” the Company’s revenuerecognition for Affiliate Marketing and Technology segments is outside thescope of Statement of Position (“SOP”) No. 97-2, “Software RevenueRecognition.” Contracts for application management services that exceeddesignated minimum monthly, quarterly or annual volume usage are recognized asrevenue by the Company in the month, quarter or year in which minimum volume isexceeded. Additionally, consistent with the provisions of EITF Issue No. 99-19,“Reporting Revenue Gross as a Principal versus Net as an Agent,” the Companyrecognizes revenue as an agent in affiliate marketing transactions.Accordingly, service fee revenue is recognized on a net basis as any publisherexpenses are the responsibility of the Company’s advertising customer.

Deferred revenue consists of fees received or billedin advance of the delivery or completion of the delivery of services andimplementation and start-up fees, which the Company recognizes over theestimated customer lives. This revenue is recognized when the services areprovided and no significant Company obligations remain or when cash is receivedfor previously performed services. To date, the Company has not had any bartertransactions.

The Company estimatesprovisions for returns which are recorded as a reduction to revenues. Theprovision for returns reflects an estimate for actual returns from consumers ofthe Company’s affiliate marketing customers and product returns from the Company’se-commerce customers. In determining the estimate for returns, the Companyrelies upon historical data, contract information and other factors. Theestimated provision for returns can vary from actual results. More or lessproduct may be returned from consumers of the Company’s affiliate marketingcustomers and from the Company’s e-commerce customers as compared to whatwas estimated. These factors and unanticipated changes in the economic andindustry environment could make the return estimates differ from actualreturns, thus materially impacting the Company’s financial position and resultsof operations**.**

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**Cost of Revenue**

Cost of revenue consistsof payments to third-party websites, online newsletters and email lists, in theCompany’s Network, labor costs, telecommunication costs and depreciation ofequipment related to the Company’s ad-delivery and affiliate marketinginfrastructure.  Additionally, cost ofrevenue of the Company’s Media Segment e-commerce business includes shipping andhandling costs.

**Sales and Marketing**

Sales and marketing expenses include salaries, salescommissions, employee benefits, travel, and related expenses for the Company’ssales force, and advertising costs.

Advertising costs areexpensed as incurred and totaled approximately $4,937,000, $272,000 and$129,000 for the years ended December 31, 2004, 2003 and 2002,respectively. The increase of $4,665,000 in 2004 was primarily due toadvertising fees associated with the Company’s expansion into its e-commerce business.

**General and Administrative**

General and administrativeexpenses include facility costs, professional service fees, salaries andbenefits, and related expenses for the Company’s executive, finance, legal,human resources and other administrative personnel, and other general overheadcosts.

**Technology**

Technology costs includeexpenses associated with the maintenance of the Company’s technology platforms,including the salaries and related expenses for the Company’s softwareengineering department, as well as costs for contracted services and supplies. Withthe exception of certain internal use software qualifying for capitalization,all technology costs have been expensed as incurred. The Company follows theguidance of Statement of Position No. 98-1, “Accounting for the Costs ofComputer Software Developed or Obtained for Internal Use.” As of December 31,2004, capitalized software development costs of $1,558,000 were fullyamortized, compared to capitalized software development costs of $473,000 as ofDecember 31, 2003, net of related accumulated amortization of $1,085,000.Capitalized software development costs were amortized for periods up to18 months.

**Stock-based Compensation**

Certain options have been granted or assumed withexercise prices below the market value of the underlying common stock on thegrant date or assumption date in business combinations. At December 31,2004, the Company has eight stock-based employee compensation plans which aredescribed more fully in Note 10. The Company accounts for its employeestock option plans in accordance with the provisions of Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”and the related interpretations of FASB Interpretation (“FIN”) No. 44, “Accountingfor Certain Transactions involving Stock Compensation.” Accordingly,compensation expense related to employee stock options is recorded only if, onthe date of the grant, the fair value of the underlying stock exceeds theexercise price.

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Thefollowing table illustrates the effect on stock-based compensation, net income(loss) and net income (loss) per share if the Company had applied the fairvalue recognition provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation,” using the Black-Scholes option pricing model, to stock-basedemployee compensation (in thousands, except per share data).
| ** **                                                                                              | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                              | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Stock-based  compensation:                                                                              |       |                                       |       |   |   |   |   |
| As reported                                                                                             |       | $                                          | 739        |   | $ | 352 |   | $ | 1,527 |   |
| Additional stock-based compensation expense  determined under the fair value method, net of tax benefit |       | 827                                        |       | 5,298 |   | 2,172 |   |
| Pro-forma                                                                                               |       | $                                          | 1,566      |   | $ | 5,650 |   | $ | 3,699 |   |
| Net income (loss):                                                                                      |       |                                       |       |   |   |   |   |
| As reported                                                                                             |       | $87,887                                    |       | $ | 9,823 |   | $ | (10,572 | ) |
| Additional stock-based compensation expense  determined under the fair value method, net of tax benefit |       | (827                                       | )          | (5,298 | ) | (2,172 | ) |
| Pro-forma                                                                                               |       | $87,060                                    |       | $ | 4,525 |   | $ | (12,744 | ) |
| Net income (loss) per  share—basic:                                                                |       |                                       |       |   |   |   |   |
| As reported                                                                                             |       | $                                          | 1.10       |   | $ | 0.13 |   | $ | (0.14 | ) |
| Per share effect of additional stock-based  compensation expense determined under the fair value method |       | $                                          | (0.01      | ) | $ | (0.07 | ) | $ | (0.03 | ) |
| Pro-forma                                                                                               |       | $                                          | 1.09       |   | $ | 0.06 |   | $ | (0.17 | ) |
| Net income (loss) per  share—diluted:                                                              |       |                                       |       |   |   |   |   |
| As reported                                                                                             |       | $                                          | 1.05       |   | $ | 0.13 |   | $ | (0.14 | ) |
| Per share effect of additional stock-based  compensation expense determined under the fair value method |       | $                                          | (0.01      | ) | $ | (0.07 | ) | $ | (0.03 | ) |
| Pro-forma                                                                                               |       | $                                          | 1.04       |   | $ | 0.06 |   | $ | (0.17 | ) |

 

**Foreign CurrencyTranslation**

The Company’s foreign subsidiaries measure theirassets, liabilities and operations in their respective functional currencies.The Company translates its subsidiaries’ financial statements into U.S. dollarsfor purposes of consolidation.

Assets and liabilities of the Company’s foreignsubsidiaries are translated at the period-end exchange rate while revenue andexpenses, gains and losses are translated at the average rates in effect forthe period. The effects of these translation adjustments are reported in aseparate component of stockholders’ equity as a comprehensive income.

Transaction gains andlosses are included in general and administrative expense in the statement ofoperations and were not significant for the years ended December 31, 2004,2003 and 2002.

**Concentrationof Credit 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 local currency with major financial institutions in the UnitedStates and Europe; at most times, such United States balances with any onefinancial institution may be in excess of FDIC insurance limits and certainbalances in Europe may not be insured. Marketable securities are held in localcurrency with three major United States financial institutions and are notinsured.

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Credit is extended tocustomers based on an evaluation of their financial condition and other factors.The Company generally does not require collateral or other security to supportaccounts receivable. The Company performs ongoing credit evaluations of itscustomers and maintains an allowance for potential bad debts. To date, suchlosses have been within management’s expectations. At December 31, 2004and 2003, no customer comprised more than 10% of accounts receivable. For theyears ended December 31, 2004 and 2003, no customer comprised more than10% of total revenue. For the year ended December 31, 2002, one customeraccounted for 14.5% of total revenue.

**Fair Value of Financial Instruments**

The Company’s financialinstruments, including cash and cash equivalents, accounts receivable, accountspayable, and accrued expenses, are carried at historical basis. At December 31,2004 and 2003, the fair values of these instruments approximated their financialstatement carrying amounts 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**

ValueClick uses the assetand liability method of accounting for income taxes. Under this method,deferred tax assets and liabilities are recognized for the future taxconsequences attributable to the differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases and to operating loss and tax credit carryforwards. Deferred tax assetsand liabilities are measured using enacted tax rates expected to apply totaxable income in the years in which those temporary differences are expectedto be recovered or settled. The effect on deferred tax assets and liabilitiesof a change in tax rates is recognized in results of operations in the periodthat includes the enactment date. A valuation allowance is provided to reducethe deferred tax assets reported if, based on the weight of the availableevidence, it is more likely than not some portion or all of the deferred taxassets will not be realized.

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

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

**Comprehensive Income (Loss)**

The Company has adopted the provisions of SFAS No. 130,“Reporting Comprehensive Income.” SFAS No. 130 establishes standards forreporting comprehensive income and its components in financial statements.Comprehensive income, as defined, includes all changes in equity (net assets)during a period from non-owner sources. The elements of comprehensive income,other than net income (loss), relate to foreign currency translationadjustments and unrealized gains/losses on marketable securities for the yearsended December 31, 2004, 2003 and 2002. As of December 31, 2004 theaccumulated balance of the foreign currency translation adjustment andunrealized losses on marketable securities were $1.6 million and $1.2 million,respectively.

As of December 31,2004, the Company has $1,179,000 in net unrealized losses on marketablesecurities and has reported such losses, net of tax, in comprehensive income.Additionally, the Company has fully valued the related deferred tax asset.

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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,” to identify its reportable businesssegments. 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. See Note 15 herein forfurther information regarding the Company’s business segments.

**RecentlyIssued Accounting Standards**

In March 2004, the Financial Accounting StandardsBoard (“FASB”) ratified the measurement and recognition guidance and certaindisclosure requirements for impaired securities as described in EITF Issue No. 03-1,“The Meaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments.” In September 2004, the FASB issued a proposed Staff Position(“FSP”) EITF Issue No. 03-1-a, “Implementation Guidance for theApplication of Paragraph 16 of EITF 03-1.” The proposed FSP will provide measurementand recognition guidance with respect to debt securities that are impairedsolely due to interest rates and/or sector spreads. The FSP has delayed theeffective date until such time that the final standard is issued. Therequirements of EITF Issue No. 03-1 did not have a material impact on thedisclosure requirements for the Company. The Company does not believe that themeasurement and recognition guidance will have a material impact on its financialposition or results of operations.

In December 2004, the FASB issued SFAS No. 123(revised 2004), “Share-Based Payment,”or SFAS No. 123R, which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.”SFAS No. 123R requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the financial statementsbased on their grant date fair values and does not allow the previouslypermitted pro forma disclosure as an alternative to financial statementrecognition. SFAS No. 123R supersedes Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued toEmployees,” and related interpretations, and amends SFAS No. 95,“Statement of Cash Flows.”SFAS No. 123R is effective for the Company beginning in the thirdquarter of fiscal 2005. SFAS No. 123R allows for either prospectiverecognition of compensation expense or retroactive recognition, which may dateback to the original issuance of SFAS No. 123 or only to interim periodsin the year of adoption. The Company is currently evaluating these transitionmethods.

The adoption of the SFAS No. 123R fair valuemethod will have a significant impact on the Company’s reported results ofoperations, although it will have no impact on the Company’s overall financialposition. The impact of adoption of SFAS No. 123R cannot be predicted atthis time because it will depend on the fair value and number of share-basedpayments granted in the future. However, had the Company adopted SFAS No. 123Rin prior periods, the magnitude of the impact of that standard would haveapproximated the impact of SFAS No. 123 assuming the application of theBlack-Scholes model as described above in the disclosure of pro forma netincome (loss) and pro forma net income (loss) per share in Note 1.SFAS No. 123R also requires the benefits of tax deductions in excess ofrecognized compensation cost to be reported as a financing cash flow, ratherthan as an operating cash flow as required under current literature. Thisrequirement will reduce net operating cash flows and increase net financingcash flows in periods after adoption if such tax deductions exceed therecognized compensation expense.

In October 2004, theAmerican Jobs Creation Act of 2004 (the “Jobs Act”) was signed into law. Amongits various provisions, the Jobs Act creates a temporary incentive for UScorporations to repatriate 

F-17

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accumulatedincome earned abroad by providing an 85% dividends received deduction forcertain qualifying dividends. In December 2004, the FASB issued FSP 109-2,“Accounting and Disclosure Guidancefor the Foreign Earnings Repatriation Provision within the American JobsCreation Act of 2004.” FSP 109-2 allows companies additional time beyondthe financial reporting period in which the Jobs Act was enacted to evaluatethe effect of the Jobs Act on a company’s plan for reinvestment or repatriationof unremitted foreign earnings for the purposes of applying SFAS No. 109, “Accounting for Income Taxes.” As of December 31,2004, management has no plans to repatriate foreign earnings in the foreseeablefuture.

**2. Marketable Securities**

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

 

Marketablesecurities consisted of the following as of December 31, 2003 (inthousands):
| ** **                   | ** ** | **Amortized  Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
|------------------------------|------------|---------------------|------------|-----------------------|------------|------------------------|------------|--------------------------------|------------|
| Municipal  obligations       |       | $                   | 25,935     |                  |       | $                      | 2          |                           |       |   | $ | (32 | ) |   | $ | 25,905 |   |
| U.S. agencies  obligations   |       | 46,450              |       |                  | 46         |                   |       |                           | (17        | ) |   | 46,479 |   |
| Corporate  obligations       |       | 92,475              |       |                  | 177        |                   |       |                           | (94        | ) |   | 92,558 |   |
| Other debt  obligations      |       | 18,536              |       |                  | —     |                   |       |                           | —     |   |   | 18,536 |   |
| Total marketable  securities |       | $                   | 183,396    |                  |       | $                      | 225        |                           |       |   | $ | (143 | ) |   | $ | 183,478 |   |

 

Market values were determined for each individualsecurity in the investment portfolio. The unrealized losses related to theseinvestments are primarily due to changes in interest rates and are consideredto be temporary in nature. As of December 31, 2004 and 2003, there were nomaterial unrealized losses with a holding period greater than one year. See Note 1for the Company’s policy on recording other-than-temporary declines in theCompany’s marketable debt securities portfolio.

The following table summarizes the amortized cost andestimated fair value of marketable debt securities classified by the remainingmaturity of the security as of December 31, 2004 (in thousands): 
| ** **                            | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair  Value** | ** ** |
|---------------------------------------|------------|---------------------|------------|----------------------------|------------|
| Due within one  year                  |       | $                   | 94,537     |                       | $          | 94,073 |   |
| Due after one  year through two years |       | 84,191              |       | 83,476                     |       |
| Due after two  years                  |       | 36,739              |       | 36,739                     |       |
| Total                                 |       | $                   | 215,467    |                       | $          | 214,288 |   |

 

Sales ofavailable-for-sale marketable securities resulted in the Company realizinggross gains of approximately $28,000, $111,000 and $174,000, and gross lossesof approximately $30,000, $21,000 and $8,000 in 2004, 2003 and 2002,respectively. Realized gains and losses from sales of marketable debt securitiesare included in interest income. The Company recognizes realized gains andlosses upon sale of marketable securities using the specific identificationmethod.

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**3.Recent Business Combinations and Investments**

***Purchases***

*Pricerunner AB.  *On August 6,2004, the Company completed the acquisition of Pricerunner AB (“Pricerunner”),a leading provider of online comparison shopping services in Europe. With theaddition of Pricerunner, the Company was able to expand its suite ofperformance-based online marketing solutions into the area of comparisonshopping. Together with the Company’s current services, the acquisition isexpected to increase the Company’s competitive position in Europe and theUnited States. These factors contributed to a purchase price in excess of thefair value of Pricerunner’s net tangible and intangible assets acquired, and asa result, the Company has recorded goodwill in connection with thistransaction.

The Company accounted for the acquisition under thepurchase method. Accordingly, the results of Pricerunner’s operations areincluded in the Company’s consolidated financial statements from the beginningof the accounting period nearest to the date of acquisition. Under the terms ofthe agreement, ValueClick acquired all of the outstanding capital stock ofPricerunner for an aggregate purchase price of approximately $30.1 million,including cash of $26.9 million and approximately 263,000 shares of ValueClickcommon stock valued at approximately $2.0 million (based on the averageValueClick common stock price at the public announcement date and the fivetrading days before and after that date), and transaction costs of theacquisition of approximately $1.2 million. The stock portion of theconsideration is approximately 6.5% of the total purchase price. The Companyalso agreed to provide additional cash and stock consideration totaling up to$6.0 million, contingent upon Pricerunner exceeding certain performancemilestones related to the Pricerunner fiscal year ending April 30, 2005.Such additional consideration, if earned, would be most likely distributed inthe quarter ending September 30, 2005 and will be reflected as an increasein goodwill.

Theallocation of the purchase price to the assets acquired and liabilities assumedbased on the estimated fair values was as follows (in thousands):
| Cash acquired                                             |   | $      | 2,710  |   |
|-----------------------------------------------------------|--------|--------|--------|--------|
| Other tangible assets  acquired                           |   | 4,085  |   |
| Amortizable intangible assets:                            |   |   |   |
| Customer, affiliate and  advertiser related relationships |   | 7,900  |   |
| Developed technology                                      |   | 500    |   |
| Other identifiable  intangible assets                     |   | 200    |   |
| Unamortizable trade name  intangible asset                |   | 5,100  |   |
| Goodwill                                                  |   | 14,679 |   |
| Total assets acquired                                     |   | 35,174 |   |
| Liabilities assumed                                       |   | (5,054 | )      |
| Total                                                     |   | $      | 30,120 |   |

 

Theacquired intangible assets with finite-lives are being amortized on astraight-line basis over the following weighted-average useful lives (inyears):
| ** **                                                | ** ** | **Weighted-Average  Useful Life** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------|------------|
| Customer,  affiliate and advertiser related relationships |       |                                   | 7          |   |   |
| Developed  technology                                     |       |                                   | 4          |   |   |
| Other                                                     |       |                                   | 1          |   |   |
| Total                                                     |       |                                   | 7          |   |   |

 

***Hi-Speed Media, Inc.  ***OnDecember 17, 2003, the Company completed its acquisition of Hi-Speed Media, Inc.,a California corporation (“Hi-Speed Media”), pursuant to an Agreement and Planof Merger, 

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dated as of December 7,2003, by and among ValueClick, Inc., HS Acquisition Corp., a wholly-ownedsubsidiary of ValueClick, Hi-Speed Media, the shareholders of Hi-Speed Media,and Farshad Fardad, in his capacity as Shareholder Agent. Hi-Speed Mediaprovides email marketing and e-commerce services.

ValueClick accounted for the acquisition under thepurchase method. Accordingly, the results of Hi-Speed Media’s operations areincluded in the Company’s consolidated financial statements from the beginningof the accounting period closest to the acquisition date. Under the terms ofthe agreement, ValueClick acquired all of the outstanding capital stock ofHi-Speed Media for an aggregate purchase price of approximately$10.5 million, including cash of $9.0 million and transaction costs of$1.1 million. The Company also agreed to provide additional cash considerationof up to $1.0 million per quarter, contingent upon the achievement ofcertain revenue and operating income milestones over the eight quartersbeginning January 1, 2004. Contingent cash consideration earned for theyear ended December 31, 2004 totaled approximately $2.3 million, and wasreflected as an increase in goodwill. In connection with the transaction,Hi-Speed Media’s outstanding employee stock options were converted into optionsto purchase approximately 81,000 shares of ValueClick common stock valued at$0.4 million using the Black-Scholes option pricing model. Identifiableintangible assets and goodwill of approximately $3.8 million and$10.2 million, respectively, have been recorded related to thisacquisition.

***Commission Junction, Inc.  ***OnDecember 7, 2003, the Company completed its acquisition of CommissionJunction, Inc., a Delaware corporation (“Commission Junction”), pursuantto an Agreement and Plan of Merger and Reorganization, dated as of October 9,2003, by and among ValueClick, NCJ Acquisition Corp., a wholly-owned subsidiaryof ValueClick, Commission Junction and Idealab Holdings LLC, a Delaware limitedliability company, in its capacity as Stockholder Agent. Pursuant to the termsof the merger agreement, Commission Junction was merged with and into NCJAcquisition and became a wholly-owned subsidiary of ValueClick. CommissionJunction is an affiliate marketing business, which provides technology andservices that enable advertisers to manage, track and analyze a variety ofonline marketing programs.

ValueClick accounted for the acquisition under thepurchase method. Accordingly, the results of Commission Junction’s operationsare included in the Company’s consolidated financial statements from thebeginning of the accounting period closest to the acquisition date. Pursuant tothe terms of the agreement, ValueClick acquired all of the outstanding capitalstock of Commission Junction for approximately 3.0 million shares ofValueClick common stock valued at approximately $29.5 million,approximately $26.1 million in cash and transaction costs of$0.4 million. Additionally, outstanding options to acquire common stock ofCommission Junction were converted into an aggregate of 1.2 million optionsto acquire ValueClick common stock valued at approximately $6.1 millionusing the Black-Scholes option pricing model. Identifiable intangible assetsand goodwill of approximately $9.7 million and $35.5 million,respectively, have been recorded related to this acquisition.

***Search123.com Inc.  ***OnMay 30, 2003, the Company completed its acquisition ofSearch123.com Inc. (“Search123”). Under the terms of the merger agreement,a wholly-owned subsidiary of ValueClick was merged with and into Search123,with Search123 surviving as a wholly-owned subsidiary of ValueClick. Search123is a search marketing company that allows marketers to find prospectivecustomers who are actively engaged in researching and buying products andservices online.

ValueClick accounted for the acquisition under thepurchase method. Accordingly, the results of Search123’s operations areincluded in the Company’s consolidated financial statements from the beginningof the accounting period closest to the acquisition date. The aggregate consideration,constituting the purchase price of approximately $4.9 million, included acash payment of $3.2 million, the assumption of a net working capitaldeficit of $1.5 million and transaction costs of approximately $200,000.Identifiable intangible assets and goodwill of approximately $1.4 millionand $3.7 million, respectively, have been recorded related to thisacquisition.

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***Be Free, Inc.  ***OnMay 23, 2002, the Company completed its acquisition of Be Free, Inc.Under the terms of the merger agreement, a wholly-owned subsidiary of theCompany was merged with and into Be Free and Be Free survived as a wholly-ownedsubsidiary of the Company. Be Free is an affiliate marketing business, whichprovides technology and services that enable advertisers to manage, track andanalyze a variety of online marketing programs.

Under the terms of the merger agreement, Be Freestockholders received 0.65882 shares of the Company common stock for each shareof Be Free common stock. The Company issued a total of approximately43.4 million shares of its common stock for all of the outstanding stockof Be Free. In addition, the Company issued options to purchase approximately4.2 million additional shares of ValueClick common stock in exchange foroutstanding options to acquired Be Free common stock.

The Company accounted for the acquisition under thepurchase method. Accordingly, the results of Be Free’s operations are includedin the Company’s consolidated financial statements from the beginning of theaccounting period closest to the acquisition date. The aggregate considerationconstituting the purchase price of approximately $129.3 million, includes theissuance of 43.4 million shares of common stock valued at approximately$122.3 million (based on the average common stock price for the publicannouncement date, the day before and after that date), the issuance of optionsand warrants to purchase an aggregate of 4.2 million shares of common stockvalued at $5.0 million using the Black-Scholes option pricing model andtransaction costs of approximately $2.0 million, which include legal fees,accounting fees, and fees for other related professional services.

Thehistorical operating results of Pricerunner, Hi-Speed Media, CommissionJunction, and Search123 prior to the respective acquisition dates have not beenincluded in the Company’s historical operating results. Pro forma data(unaudited) for the years ended December 31, 2004 and 2003 as if theseacquisitions had been effective as of January 1, 2003, and excluding theresults of the Company’s investment in ValueClick Japan (see Note 4) as if thesale had been effective January 1, 2003, is as follows (in thousands,except per share data):
| ** **                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Revenue                              |       | $        | 171,932    |     | $          | 120,803 |   |
| Net income                           |       | $        | 79,772     |     | $          | 9,145 |   |
| Basic net income  per common share   |       | $        | 1.00       |     | $          | 0.12 |   |
| Diluted net income per  common share |       | $        | 0.95       |     | $          | 0.12 |   |

 

**4.**Sale of ValueClick Japan

On March 26, 2004,the Company completed the sale of its approximate 59% equity interest inValueClick Japan, Inc. to livedoor Co., Ltd., a Japanese Internet andtechnology product and services company. The Company received approximately $24million in cash, excluding transaction fees. In addition, the Company willcontinue to provide services to ValueClick Japan, including licensing oftechnology and technical support under a cancelable support agreement, forspecified fees. This transaction resulted in a gain on sale of approximately$8.0 million. The current taxable amounts associated with the gain from thesale of ValueClick Japan have been fully offset by the utilization of capitalloss carryforwards generated by the Company in prior years. The deferred taxassets associated with the capital loss carryforwards were previously fullyreserved as, prior to the consummation of the sale of ValueClick Japan, therealization of such deferred tax assets was not deemed more likely than not. Accordingly,the utilization of the deferred tax assets and the release of the relatedvaluation allowance resulted in a reduction of book income tax expense of $3.2million in 2004. The sale did not qualify as a discontinued operation given thesignificance of the Company’s technology services agreement on ValueClick Japan’scontinuing operations, and as such, the operating results of ValueClick Japanare included in the Company’s operating results through the date of disposition.

F-21

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**5. Goodwill and Intangible Assets**

On January 1, 2002, the Company adopted theaccounting standards set forth in SFAS No. 142, “Goodwill and OtherIntangible Assets.” SFAS No. 142 changed the methodology for assessinggoodwill impairments and ceased the continued amortization of goodwill.Although the application of this standard did not change management’sevaluation of the Company’s other identifiable intangible assets, the initialapplication of this statement resulted in an impairment of goodwill of $7.6 millionto write down goodwill related to the Bach Systems and ValueClick Japanacquisitions in 2002. The amount of the impairment was estimated based on avaluation process that combined estimating the present value of the future cashflows of Bach Systems and ValueClick Japan with obtaining the marketvalue-to-revenue multiples of comparable publicly traded companies and applyingthese multiples to the projected and historical revenue of Bach Systems andValueClick Japan and was reported as a cumulative effect of a change inaccounting principle during the first quarter of 2002.

TheCompany tests goodwill for impairment annually as of December 31 at thereporting unit level using a fair value approach, in accordance with theprovisions of SFAS No. 142. The Company has determined its reporting unitsbased on the guidance in SFAS No. 142 and EITF D-101. As of December 31,2004, the Company’s reporting units consisted of the Affiliate Marketing andTechnology operating segments, in addition to three components of the Mediaoperating segment: the U.S. domestic media business (excluding Hi-Speed Media,acquired in December 2003), the Europe media business and Hi-Speed Media. Asrequired by SFAS No. 142, the Company has assigned goodwill to itsreportable segments. Below is assigned goodwill by reportable segment andreporting unit as of December 31, 2004 and 2003 (in thousands):
| ** **                                   | ** ** | **2004 ** | ** ** | **2003** | ** ** |
|----------------------------------------------|------------|----------------|------------|----------|------------|
| **Reportable Segments and  Reporting Units** |       |           |       |     |       |
| Affiliate  Marketing                         |       | $              | 23,452     |     | $          | 37,511 |   |
| Technology                                   |       | —         |       | —   |       |
| Media:                                       |       |           |       |     |       |
| U.S. domestic media business                 |       | 2,570          |       | 3,947    |       |
| Europe media business                        |       | 14,625         |       | —   |       |
| Hi-Speed Media                               |       | 10,237         |       | 7,917    |       |
| Total goodwill                               |       | $              | 50,884     |     | $          | 49,375 |   |

 

For the year ended December 31, 2004, theincrease in goodwill was primarily due to $14.6 million of goodwill resultingfrom the acquisition of Pricerunner, purchase price additions of $2.3 millionfor Hi-Speed Media as a result of working capital adjustments and contingentcash consideration earned for the year ended December 31, 2004, and apurchase price reduction of $711,000 for Commission Junction, due toadjustments of net assets acquired excluding the net operating losscarryforwards discussed herein. The Company also realized the tax benefit ofacquired net operating loss carryforwards of $99,000 and $1,269,000 forSearch123 and Commission Junction, respectively, in 2004, which resulted in adecrease in goodwill. In 2004, the Company recorded a reduction in goodwill of$1.2 million and $12.1 million for Search123 and Commission Junction,respectively, in connection with a release of a deferred tax valuationallowance as more fully described in Note 8. In 2003, $4.0 million,$37.5 million and $7.9 million were added to the goodwill related to thepurchases of Search123, Commission Junction and Hi-Speed Media, respectively.Total goodwill as of December 31, 2004 and 2003 of $50.9 million and $49.4million, respectively, are not tax deductible.

F-22

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TheCompany’s acquired intangible assets with finite-lives are being amortized on astraight-line basis over the following weighted-average useful lives (inyears):
| ** **                                        | ** ** | **Weighted-Average  Useful Life** | ** ** |
|---------------------------------------------------|------------|----------------------------------------|------------|
| Customer,  affiliate and advertiser relationships |       |                                   | 6          |   |   |
| Trademark and  domain name                        |       |                                   | 4          |   |   |
| Developed  technology                             |       |                                   | 4          |   |   |
| Other                                             |       |                                   | 3          |   |   |
| Total                                             |       |                                   | 6          |   |   |

 

Thegross carrying amounts and accumulated amortization of the Company’s otheracquired intangible assets were as follows at December 31 (in thousands): 
| ** **                                       | ** ** | **Gross  Balance** | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|-------------------------------|------------|-------------------------------|------------|
| December 31, 2004:                          |       |               |       |                          |       |                          |       |   |   |   |   |
| Customer, affiliate and advertiser relationships |       | $                  | 21,021     |                          |       | $                             | (3,265     | ) |   |   | $ | 17,756 |   |   |
| Trademark, trade name and domain name            |       | 5,684              |       |                          | (276       | )                             |       |   | 5,408 |   |   |
| Developed technology                             |       | 5,085              |       |                          | (2,805     | )                             |       |   | 2,280 |   |   |
| Other                                            |       | 454                |       |                          | (250       | )                             |       |   | 204 |   |   |
| Total intangible  assets                         |       | $                  | 32,244     |                          |       | $                             | (6,596     | ) |   |   | $ | 25,648 |   |   |
| December 31,  2003:                         |       |               |       |                          |       |                          |       |   |   |   |   |
| Customer, affiliate and advertiser relationships |       | $                  | 13,032     |                          |       | $                             | (260       | ) |   |   | $ | 12,772 |   |   |
| Trademark, trade name and domain name            |       | 595                |       |                          | (128       | )                             |       |   | 467 |   |   |
| Developed technology                             |       | 4,585              |       |                          | (2,005     | )                             |       |   | 2,580 |   |   |
| Other                                            |       | 247                |       |                          | (92        | )                             |       |   | 155 |   |   |
| Total intangible assets                          |       | $                  | 18,459     |                          |       | $                             | (2,485     | ) |   |   | $ | 15,974 |   |   |

 

Intangible assets created as a result of acquisitionsduring 2004 and 2003 include: customer, affiliate and advertiser relationships;acquired technology; trademark and trade names; and other intangibles that arebeing amortized using the straight-line method over the periods benefited,ranging from 1 to 7 years. As of December 31, 2004, the Company hadan indefinite-lived intangible asset, a trade name, with a gross carryingamount of $5.1 million. There was no indefinite-lived intangible asset atDecember 31, 2003.

In2004, $13.7 million of intangible assets acquired related to the purchase ofPricerunner, of which $5.1 million related to an indefinite-lived trade nameintangible. In 2003, $1.2 million, $9.7 million and $3.8 millionwere added to the intangible asset balances, respectively, related to thepurchases of Search123, Commission Junction and Hi-Speed Media. Amortizationexpense for finite-lived intangible assets was $4.1 million, $1.6 million and$0.5 million for the years ended December 31, 2004, 2003 and 2002,respectively. Estimated intangible asset amortization expense remaining for thenext five years ending December 31 is as follows (in thousands):
| 2005       |   | $      | 4,819  |   |
|------------|--------|--------|--------|--------|
| 2006       |   | $      | 4,527  |   |
| 2007       |   | $      | 3,405  |   |
| 2008       |   | $      | 2,870  |   |
| 2009       |   | $      | 2,198  |   |
| Thereafter |   | $2,729 |   |

 

F-23

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**6. Property and Equipment**

Propertyand equipment consisted of the following as of December 31, 2004 and 2003(in thousands):
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Computer  equipment and purchased software       |       | $                     | 24,778     |   | $ | 22,321 |   |
| Furniture and  equipment                         |       | 2,863                 |       | 3,124 |   |
| Vehicles                                         |       | 41                    |       | 35 |   |
| Leasehold  improvements                          |       | 731                   |       | 558 |   |
|                                             |       | 28,413                |       | 26,038 |   |
| Less: accumulated  depreciation and amortization |       | (19,842               | )          | (15,479 | ) |
|                                             |       | $                     | 8,571      |   | $ | 10,559 |   |

 

Total depreciation expenseincluding the amortization of leasehold improvements for the years ended December 31,2004, 2003 and 2002 was approximately $6,245,000, $5,961,000 and $4,792,000,respectively.

**7.Accounts Payable and Accrued Expenses**

Accountspayable and accrued expenses consisted of the following as of December 31,2004 and 2003 (in thousands):
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Accounts payable                          |       | $                     | 8,115      |   | $ | 3,154 |   |
| Accrued payments  to third-party websites |       | 13,879                |       | 11,286 |   |
| Advertiser  Deposits                      |       | 4,906                 |       | 2,518 |   |
| Other accrued  liabilities                |       | 11,388                |       | 12,609 |   |
|                                      |       | $                     | 38,288     |   | $ | 29,567 |   |

 

**8. Income Taxes**

Thecomponents of income (loss) before income taxes, minority interests andcumulative effect of a change in accounting principle are as follows (inthousands):
| ** **                                                                                                        | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| United States                                                                                                     |       | $                                          | 43,968     |   | $ | 11,204 |   | $ | (1,030 | ) |
| Foreign                                                                                                           |       | 3,277                                      |       | (635 | ) | (1,715 | ) |
| Income (loss) before  income taxes, minority interests and cumulative effect of a change in  accounting principle |       | $                                          | 47,245     |   | $ | 10,569 |   | $ | (2,745 | ) |

 

F-24

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Theprovision for income taxes for the years ended December 31, 2004, 2003 and2002 is comprised of the following (in thousands):
| ** **                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current:                      |       |                                       |       |   |   |   |   |
| Federal                       |       | $                                          | 228        |   | $ | 566 |   | $ | (413 | ) |
| State                         |       | 636                                        |       | 321 |   | 406 |   |
| Foreign                       |       | (73                                        | )          | 55 |   | 131 |   |
|                          |       | 791                                        |       | 942 |   | 124 |   |
| Deferred:                     |       |                                       |       |   |   |   |   |
| Federal                       |       | (43,289                                    | )          | (30 | ) | (144 | ) |
| State                         |       | (9,527                                     | )          | — |   | (42 | ) |
| Foreign                       |       | 490                                        |       | (82 | ) | — |   |
|                          |       | (52,326                                    | )          | (112 | ) | (186 | ) |
| Equity:                       |       | 11,023                                     |       | — |   | 225 |   |
| Income tax expense  (benefit) |       | $                                          | (40,512    | ) | $ | 830 |   | $ | 163 |   |

 

Thecomponents of the deferred tax assets at December 31, 2004 and 2003 are asfollows (in thousands):
| ** **                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Deferred tax  assets:                               |       |                  |       |   |   |
| Net operating loss                                  |       | $                     | 66,784     |   | $ | 65,932 |   |
| Capital loss carryforward                           |       | 19,348                |       | 26,438 |   |
| Depreciation and amortization                       |       | 7,239                 |       | 7,891 |   |
| Other                                               |       | 4,034                 |       | 4,594 |   |
| Gross deferred tax assets                           |       | 97,405                |       | 104,855 |   |
| Valuation allowance                                 |       | (24,762               | )          | (93,907 | ) |
| Net deferred tax assets                             |       | 72,643                |       | 10,948 |   |
| Deferred tax  liabilities:                          |       |                  |       |   |   |
| Capital gains on issuance of ValueClick Japan Stock |       | —                |       | 5,454 |   |
| Acquired intangible assets                          |       | 8,467                 |       | 5,876 |   |
| Other                                               |       | —                |       | 168 |   |
| Total deferred tax liabilities                      |       | 8,467                 |       | 11,498 |   |
| Net deferred tax assets                             |       | $                     | 64,176     |   | $ | (550 | ) |
| Current portion  of net deferred tax assets         |       | $                     | 5,411      |   | $ | 1,446 |   |
| Long-term portion  of net deferred tax assets       |       | $                     | 58,765     |   | $ | (1,996 | ) |
| Net deferred tax assets                             |       | $                     | 64,176     |   | $ | (550 | ) |

 

Consistent with prior periods, in evaluating the needfor a valuation allowance at December 31, 2004, the Company evaluated bothpositive and negative evidence in accordance with the requirements of SFASNo. 109, “Accounting for Income Taxes.” In prior periods, the Companyconcluded that, with the exception of short-term net deferred tax assettemporary differences that will reverse within one year, it was not more likelythan not that the remaining deferred tax assets would be realized.  However, as of December 31, 2004, based on factors including, but notlimited to: the Company’s history of achieving operatingobjectives; the achievement of net income beginning in the first quarter of2003 and each subsequent quarter; our established customer relationships; andfuture projections of pre-tax income,the Company determined, primarily with the exception of net operating loss andcapital loss carryforward 

F-25

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expectedto expire prior to being utilized and certain foreign net operating losscarryforwards, that it is more likely than not that a substantial portion ofour deferred tax assets will be realized. Accordingly, the Company has reversed $67.4 million of thepreviously recorded valuation allowance. Approximately $13.3 million of the valuation allowance reversal wasrecorded as a decrease in goodwill as certain of the associated deferred taxassets related to acquired entities.  Thevaluation allowance decreased by $69.1 million during the year endedDecember 31, 2004 and increased by $10.5 million during the yearended December 31, 2003.

The decrease in gross deferred tax assets during 2004is primarily attributable to the utilization of capital loss carryforwardsagainst the gain on sale of ValueClick Japan. At December 31, 2004, theCompany had net operating loss carryforwards for federal and state purposes of$168.7 million and $125 million, respectively, and had capital losscarryforwards for federal and state purposes of $48.4 million. The federaland state net operating loss carryforwards begin to expire in 2011 and 2004,respectively, and the capital loss carryforwards expire in 2005 and 2006.

The income tax benefit of disqualifying dispositionsof employee incentive stock options exercised during 2004 in the amount of $11.0million was recorded in additional paid in capital and did not therefore resultin a benefit on the statements of operations.

Theoverall effective tax rate differs from the statutory Federal tax rate for theyears ended December 31, 2004, 2003 and 2002 as follows:
| ** **                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Tax provision  (benefit) based on the federal statutory rate               |       | 34.0                                       | %          | 34.0 | % | (34.0 | )% |
| State income  taxes, net of federal benefit                                |       | 4.4                                        |       | 3.0 |   | 6.6 |   |
| Stock-based  compensation                                                  |       | 0.4                                        |       | 2.2 |   | — |   |
| Non-deductible  amortization / impairment                                  |       | —                                     |       | — |   | 1.0 |   |
| Effects of  foreign income                                                 |       | (0.4                                       | )          | (0.3 | ) | — |   |
| Federal effect of  state rate change                                       |       | —                                     |       | — |   | 2.5 |   |
| Adjustment to  valuation allowance, net of purchase accounting adjustments |       | (121.1                                     | )          | (34.0 | ) | 28.8 |   |
| Other, net                                                                 |       | (3.1                                       | )          | 2.9 |   | 1.0 |   |
|                                                                       |       | (85.8                                      | )%         | 7.8 | % | 5.9 | % |

 

The Company files aconsolidated federal income tax return as well as separate state and foreignstatutory jurisdictional returns. As of December 31, 2004, management has noplans to repatriate foreign earnings in the foreseeable future.

**9. Capitalization**

**Treasury Stock**

In September 2001,the board of directors authorized a $10 million Stock Repurchase Programto purchase outstanding shares of ValueClick common stock from time to time atprevailing market prices in the open market or through unsolicited negotiatedtransactions depending on market conditions. The Stock Repurchase Program wasincreased by the board of directors to $30 million in February 2002,to $50 million in July 2002, to $75 million in November 2002,and to $95 million in August 2004. Under the program, the purchasesare funded from available working capital, and the repurchased shares will beretired, held in treasury or used for ongoing stock issuances such as issuancesunder employee stock plans. There is no guarantee as to the exact number ofshares that will be repurchased by the Company and the Company may discontinuepurchases at any time that management determines additional purchases are notwarranted. For the year ended December 31, 2004, 2003 and 2002, theCompany repurchased 303,808, 

F-26

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3,438,183and 20,900,363 shares of its common stock under the Stock Repurchase Program,respectively. As of December 31, 2004, and since the initiation of theStock Repurchase Program, the Company had repurchased a total of approximately26.6 million shares of its common stock for approximately$73.6 million, $70.2 million of which was purchased pursuant to theStock Repurchase Program. As of December 31, 2004, up to$24.8 million of the Company’s capital may be used to purchase shares ofthe Company’s outstanding common stock under the Stock Repurchase Program.

**Stockholder Rights Plan**

On June 4, 2002, theboard of directors of ValueClick, Inc. declared a dividend of onepreferred share purchase right for each outstanding share of the Company’scommon stock. The dividend was payable on June 14, 2002 to thestockholders of record at the close of business on that date. Each rightentitles the registered holder to purchase from the Company one unit consistingof one-thousandth of a share of Series A junior participating preferredstock of the Company at a price of $25.00 per unit. The description and termsof the rights are set forth in a rights agreement, dated as of June 4,2002, by and between the Company and Mellon Investor Services LLC, a New JerseyLimited Liability Company, as Rights Agent.

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

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

The Series A junior participating preferred stockpurchasable upon exercise of the rights will not be redeemable. Each share of Series Ajunior participating preferred stock will be entitled to a dividend of 1,000times the dividend declared per share of common stock. In the event ofliquidation, the holders of the shares of Series A junior participating preferredstock will be entitled to a payment of 1,000 times the payment made per shareof common stock. Each share of Series A junior participating preferred stockwill have 1,000 votes, voting together with the common stock. Finally, in theevent of any merger, consolidation or other transaction in which shares ofcommon stock are exchanged, each share of Series A junior participating preferredstock will be entitled to receive 1,000 times the amount received per share ofcommon stock. These rights are protected by customary 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. Stock Options**

**2002 Stock Option Plan**

On May 23, 2002, the Board of Directors adoptedand the stockholders approved the 2002 Stock Incentive Plan (the “2002 StockPlan”) replacing the provisions of the 1999 Stock Option Plan. A total of 

F-27

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10,000,000 shares ofcommon stock have been reserved for issuance under the 2002 Stock Plan, ofwhich 5,018,434 shares were available for future grant at December 31,2004.

The 2002 Stock Planprovides for the granting of non-statutory and incentive stock options toemployees, officers, directors, and consultants of the Company. Options grantedto new employees generally begin vesting on the new employee’s date of employment,and vest over a four-year period, with one-fourth vesting on the firstanniversary date and the remainder vesting pro rata monthly over the remainingthree years and generally expire ten years from the date of grant. Optionsgranted to existing employees typically vest on a monthly pro rata basis over afour-year period and also generally expire ten years from the date of grant.

**1999 Stock Option Plan**

On May 13, 1999, theBoard of Directors adopted and the stockholders approved the 1999 Stock OptionPlan (the “1999 Stock Plan”). A total of 5,000,000 shares of common stock havebeen reserved for issuance under the 1999 Stock Plan, of which 1,151,443 shareswere available for grant under the provisions of the 2002 Stock Plan at December 31,2004.

**Assumed Stock Option Plans**

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

 

F-28

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Thefollowing table summarizes activity under all of the stock option plans for theyears ended December 31, 2004, 2003 and 2002:
| ** **                                                | ** ** | **Number of  Shares** | ** ** | **Exercise Price  Per Share** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
|-----------------------------------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|-------------------------------------------|------------|
| Options  outstanding at December 31, 2001            |       | 6,308,624                  |       | $0.07 to $247.99                        |       |                                      | $          | 5.65 |   |   |
| Granted                                                   |       | 4,030,100                  |       | 2.30 to 2.90                            |       |                                      | 2.46       |   |   |
| Assumed from Be Free                                      |       | 4,164,875                  |       | 0.23 to 68.59                           |       |                                      | 6.27       |   |   |
| Exercised                                                 |       | (2,798,766                 | )          | 0.07 to 2.85                            |       |                                      | 1.17       |   |   |
| Forfeited/expired                                         |       | (1,601,545                 | )          | 0.07 to 190.86                          |       |                                      | 9.87       |   |   |
| Options  outstanding at December 31, 2002            |       | 10,103,288                 |       | 0.07 to 247.99                          |       |                                      | 5.23       |   |   |
| Granted                                                   |       | 2,512,501                  |       | 2.83 to 9.20                            |       |                                      | 7.27       |   |   |
| Assumed from Commission Junction and  Hi-Speed Media |       | 1,298,403                  |       | 1.99 to 8.62                            |       |                                      | 3.47       |   |   |
| Exercised                                                 |       | (2,085,969                 | )          | 0.23 to 7.90                            |       |                                      | 1.05       |   |   |
| Forfeited/expired                                         |       | (780,797                   | )          | 0.07 to 79.02                           |       |                                      | 5.31       |   |   |
| Options  outstanding at December 31, 2003            |       | 11,047,426                 |       | 0.07 to 247.99                          |       |                                      | 6.15       |   |   |
| Granted                                                   |       | 1,507,689                  |       | 7.16 to 11.70                           |       |                                      | 9.28       |   |   |
| Exercised                                                 |       | (4,119,089                 | )          | 0.07 to 11.00                           |       |                                      | 2.67       |   |   |
| Forfeited/expired                                         |       | (1,060,289                 | )          | 0.07 to 190.86                          |       |                                      | 14.07      |   |   |
| Options outstanding at  December 31, 2004            |       | 7,375,737                  |       | 0.23 to 247.99                          |       |                                      | 7.59       |   |   |

 

Options acquired in business combinations during theyears ended December 31, 2004, 2003 and 2002, net of cancellations,resulted in a total deferred compensation amount of approximately $0,$1,042,000 and $547,000, respectively, which was included in deferred stock-basedcompensation in stockholders’ equity. Deferred stock-based compensation expenseis being amortized using the accelerated expense attribution method, inaccordance with FIN No. 28, “Accounting for Stock Appreciation Rights andOther Variable Stock Option Award Plans,” over the vesting period of eachrespective option, generally four years. During the years ended December 31,2004, 2003 and 2002, such compensation expense included in stock-basedcompensation in the statement of operations amounted to approximately $739,000,$352,000 and $1,527,000, respectively.

Additionalinformation with respect to the outstanding options as of December 31,2004 is as follows:
| ** **                 | ** ** | **Options Outstanding**                                                | ** ** | **Options Exercisable**              | ** ** |
|----------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Number of  Shares** | ** ** | **Weighted-Average  Remaining Contractual  Life (In Years)** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Number of  Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
| 230,779                    |       |                                                                        | 5.16       |                                      |       |   | $ | 1.45 |   |   | 214,431 |   |   | $ | 1.40 |   |   |
| 198,928                    |       |                                                                        | 7.83       |                                      |       |   | 2.30 |   |   | 77,760 |   |   | 2.30 |   |   |
| 1,367,901                  |       |                                                                        | 7.55       |                                      |       |   | 2.45 |   |   | 486,713 |   |   | 2.45 |   |   |
| 974,911                    |       |                                                                        | 5.21       |                                      |       |   | 2.65 |   |   | 675,566 |   |   | 2.70 |   |   |
| 835,283                    |       |                                                                        | 7.73       |                                      |       |   | 3.57 |   |   | 633,702 |   |   | 3.58 |   |   |
| 2,211,826                  |       |                                                                        | 8.68       |                                      |       |   | 7.90 |   |   | 610,025 |   |   | 7.72 |   |   |
| 1,290,317                  |       |                                                                        | 8.38       |                                      |       |   | 10.23 |   |   | 302,592 |   |   | 10.38 |   |   |
| 265,792                    |       |                                                                        | 5.36       |                                      |       |   | 58.84 |   |   | 265,785 |   |   | 58.84 |   |   |
| 7,375,737                  |       |                                                                        | 7.60       |                                      |       |   | 7.59 |   |   | 3,266,574 |   |   | 8.96 |   |   |

 

F-29

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The options exercisableand the weighted-average exercise price per share at December 31, 2003 and2002 were 6,034,989 at $6.96 and 5,641,804 at $6.26, respectively.

During the years endedDecember 31, 2004, 2003 and 2002, the exercise price for all optionsgranted under the 2002 and 1999 Stock Plans equaled the market price at thedates of grants. The weighted-average fair value of options granted in theyears ended December 31, 2004, 2003 and 2002, were $3.30, $2.18 and $0.91,respectively. No options were assumed in 2004. The weighted-average estimatedfair value of stock options assumed during the years ended December 31,2003 and 2002 were $6.47 and $1.33 per share, respectively.

TheCompany calculated the fair value of each option grant on the date of grantusing the Black-Scholes option-pricing model as prescribed by SFAS No. 123using the following assumptions:
| ** **                 | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2004**                               | ** ** | **2003** | ** ** | **2002** | ** ** |
| Risk-free  interest rates  |       |                                   | 2          | % |   |   | 2 | % |   |   | 3 | % |   |
| Expected lives  (in years) |       |                                   | 2          |   |   |   | 3 |   |   |   | 4 |   |   |
| Dividend yield             |       |                                   | 0          | % |   |   | 0 | % |   |   | 0 | % |   |
| Expected volatility        |       |                                   | 60         | % |   |   | 57 | % |   |   | 45 | % |   |

 

**11. Net Income(Loss) Per Share**

Thefollowing table sets forth the computation of basic and diluted net income(loss) per share for the periods indicated (in thousands, except per sharedata):
| ** **                                                             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                             | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Numerator:                                                             |       |                                       |       |   |   |   |   |
| Net income (loss)                                                      |       | $                                          | 87,887     |   | $ | 9,823 |   | $ | (10,572 | ) |
| Denominator:                                                           |       |                                       |       |   |   |   |   |
| Denominator for basic calculation—Weighted-average  common shares |       | 80,063                                     |       | 74,300 |   | 73,744 |   |
| Weighted-average effect of dilutive securities—stock  options     |       | 3,975                                      |       | 4,136 |   | — |   |
| Denominator for diluted calculation                                    |       | 84,038                                     |       | 78,436 |   | 73,744 |   |
| Net income (loss) per  basic share:                                    |       |                                       |       |   |   |   |   |
| Income before cumulative effect of accounting change                   |       | $                                          | 1.10       |   | $ | 0.13 |   | $ | (0.04 | ) |
| Cumulative effect of a change in accounting  principle                 |       | —                                     |       | — |   | (0.10 | ) |
| Net income (loss) per basic share                                      |       | $                                          | 1.10       |   | $ | 0.13 |   | $ | (0.14 | ) |
| Net income (loss) per  diluted share:                                  |       |                                       |       |   |   |   |   |
| Income before cumulative effect of a change in  accounting principle   |       | $                                          | 1.05       |   | $ | 0.13 |   | $ | (0.04 | ) |
| Cumulative effect of a change in accounting  principle                 |       | —                                     |       | — |   | (0.10 | ) |
| Net income (loss)  per diluted share                                   |       | $                                          | 1.05       |   | $ | 0.13 |   | $ | (0.14 | ) |

 

The diluted per sharecomputations exclude common stock options which were anti-dilutive. The numbersof shares excluded from the diluted net loss per common share computation were 2,860,012,1,658,423 and 2,457,729 for the year ended December 31, 2004, 2003 and 2002respectively.

**12. DefinedContribution Plan**

The Company has a SavingsPlan (the “Savings Plan”) that qualifies as a defined contribution plan underSection 401(k) of the Internal Revenue Code. Under the Savings Plan,participating employees may defer a percentage (not to exceed 20%) of theireligible pre-tax earnings up to the Internal Revenue 

F-30

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Service’sannual contribution limit. All full-time employees on the payroll of theCompany are eligible to participate in the Savings Plan. The Savings Plan doesnot invest participant contributions in the Company’s common stock. Companymatching contributions to the Savings Plan are discretionary. Companycontributions to the Savings Plan amounted to $376,000, $152,000 and $75,000for the years ended December 31, 2004, 2003 and 2002, respectively.

**13.Commitments and Contingencies**

**Leases**

Futureminimum lease payments under noncancellable operating and capital leases andrelated sublease income, with initial or remaining lease terms in excess of oneyear as of December 31, 2004 are as follows (in thousands):
| **Year Ending December 31:** | ** ** | ** ** | ** ** | **Operating  Lease  Commitments** | ** ** | **Operating  Sublease  Income** | ** ** | **Capital  Leases** | ** ** |
|---------------------------------------------|------------|------------|------------|-----------------------------------|------------|---------------------------------|------------|---------------------|------------|
| 2005                                        |       |       | $          | 4,109                             |       |                            |       | $                   | (251       | ) |   | $ | 253 |   |
| 2006                                        |       |       | 3,646      |                              |       |                            | (251       | )                   |       | 171 |   |
| 2007                                        |       |       | 3,316      |                              |       |                            | (289       | )                   |       | — |   |
| 2008                                        |       |       | 2,807      |                              |       |                            | (252       | )                   |       | — |   |
| 2009                                        |       |       | 2,268      |                              |       |                            | —     |                |       | — |   |
| Thereafter                                  |       |       | 1,183      |                              |       |                            | —     |                |       | — |   |
| Total minimum lease payments                |       |       | $          | 17,329                            |       |                            |       | $                   | (1,043     | ) |   | $ | 424 |   |
| Less amount representing interest           |       |       |       |                              |       |                            |       |                |       | (16 | ) |
| Present value of minimum lease payments     |       |       |       |                              |       |                            |       |                |       | 408 |   |
| Less current portion                        |       |       |       |                              |       |                            |       |                |       | (239 | ) |
|                                        |       |       |       |                              |       |                            |       |                |       | $ | 169 |   |

 

Capital leases consist ofequipment leases that totaled $708,000 and $806,000 as of December 31,2004 and 2003, respectively. Accumulated amortization for the year ended December 31,2004 and 2003 amounted to $312,000 and $368,000, respectively. The amortizationof assets recorded under capital leases is included within depreciation andamortization expense in the accompanying statements of operations for each ofthe years in the three-year period ended December 31, 2004.

Certain of the Company’soperating leases include escalation clauses that adjust rental expense toreflect changes in price indices, as well as renewal options. In addition tominimum rental payments, certain of the Company’s leases require additionalpayments to reimburse the lessors for operating expenses such as real estatetaxes, maintenance and utilities.

Total rent expense underoperating leases, net of sublease income, was $2.9 million, $2.6 millionand $2.2 million, for the years ended December 31, 2004, 2003 and2002, respectively.

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 $566,000 in connection with these standby letters ofcredit are included in cash as of December 31, 2004. Commitments understandby letters of credit as of December 31, 2004 are scheduled tomature/expire as follows (in thousands):
| ** **                 | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|----------------------------|------------|-----------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| Standby letters  of credit |       | $         | 566        |                            |       | —             |       |               |       | $                                | 66         |   |   |   | — |   |   |   | $ | 500 |   |   |
|                            |            |           |            |                                 |            |                    |            |                    |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |

 

F-31

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**Other Commitments**

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

It is not possible todetermine the maximum potential amount under these indemnification agreementsdue to the limited history of prior indemnification claims and the unique factsand circumstances involved in each particular agreement. Such indemnificationagreements may not be subject to maximum loss clauses.

**Legal Action**

***Lorenc v. Be Free, Inc.et al.***

On September 27,2000, Joseph Lorenc, a former employee of Be Free, Inc. filed a lawsuitagainst Be Free and two officers of Be Free, Steven Joseph and GordonHoffstein, in the United States District Court, District of Massachusetts. Thecomplaint alleged, among other things, breach of contract. Lorenc sought, amongother things, compensatory damages, punitive damages and attorney’s fees to thegreatest extent allowed by law. The case was pending before the state court inMassachusetts. The case was set for trial in May of 2004. On May 3,2004, the day of trial, Lorenc agreed to dismiss his case against the Companywith prejudice, in exchange for the Company’s agreement not to pursue a claimagainst Lorenc for its attorney’s fees expended in defending Lorenc’s action. Thecase is now concluded.

***Chahal v.ValueClick, Inc. et al.***

This case was filed on September 5,2003 and brought against ValueClick and Company executives Sam Paisley, JimZarley and Scott Barlow, by Gurbaksh Chahal and Tajinder Chahal for, amongother things, fraud. The Chahals are former employees of the Company’s ClickAgents Inc. subsidiary and the case arises out of the Company’s repurchaseof the Chahals’ ValueClick stock. The case was pending before the Los AngelesCounty Superior Court. The Chahals sought, among other things, general, specialand punitive damages according to proof as well as the imposition of aconstructive trust. On July 19, 2004, the Company reached a settlementwith the Chahals, which was not material to the Company’s financial statements.Terms of the settlement agreement are confidential.

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

On September 28,2004, the Company received a letter from Barnesandnoble.com (“B&N”)requesting that the Company fully indemnify B&N for the costs and expensesassociated with a lawsuit for patent infringement filed by BTG International, Inc.(“BTG”) against B&N and other defendants. The case is pending before theUnited States District Court, District of Delaware. The complaint alleges thatthrough the use of certain online advertising technologies, B&N infringestwo patents obtained by BTG purporting to cover methods and apparatuses for “AttachingNavigational History Information to Universal Resource Locator Links on a WorldWide Web Page” (U.S. Patent No. 5,712,979) and for “Tracking theNavigational Path of a User on the World Wide Web” (U.S. Patent No. 5,717,860)and seeks injunctive relief, monetary damages in an amount no less than areasonable royalty, treble damages for 

F-32

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allegedwillful infringement, prejudgment interest, costs, and attorneys’ fees. B&N’srequest for indemnification stems from standard mutual indemnification languageincluded in a services agreement between B&N and ValueClick’s wholly-ownedsubsidiary, Be Free, Inc. B&N alleges that is has been named in thepatent infringement suit as a result of B&N’s use of Be Free’stechnology. The Company has agreed to indemnify B&N and is providinglegal counsel while fully reserving its legal rights. Moreover, we dispute theallegations of wrongdoing in the complaint and intend to defend ourselves andB&N vigorously in this matter. We believe that a contingent loss in thismatter is reasonably possible but the probability of inaccuracy of any estimateof such loss is more than slight, and thus cannot be made.

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

**14. RestructuringCharges**

In thesecond quarter of 2002 and in the fourth quarter of 2001, the Company recordedrestructuring charges of $2.3 million and $515,000, respectively. Theserestructuring charges were the result of certain personnel redundancies andconsolidation of certain leased facilities, for which the Company was committedto pay through 2010. The Company relocated back to a previously vacated leasedfacility in November 2004. When this relocation decision became knownduring the second quarter of 2004, the Company reversed $1,003,000 of therelated restructuring charge originally established. As of December 31,2004, $1,245,000 of the restructuring charges has been paid. The followingtable reflects activity in the restructuring accrual during the years ended December 31,2004 and 2003 (in thousands):
| ** **                         | ** ** | **Lease  Exit  Costs** | ** ** |
|------------------------------------|------------|------------------------|------------|
| Accrual at  December 31, 2002 |       | $                      | 2,352      |   |
| Cash payments                      |       | (438                   | )          |
| Accrual at  December 31, 2003 |       | 1,914                  |       |
| Cash payments                      |       | (323                   | )          |
| Restructuring reserve  reversal    |       | (1,003                 | )          |
| Accrual at December 31, 2004  |       | $                      | 588        |   |

 

The restructuring accrualof $588,000 as of December 31, 2004 is included in current accruedexpenses on the Company’s consolidated balance sheet.

**15.Segments and Geographic Information**

ValueClick derives its revenue from three businesssegments based on the types of products and services provided. These businesssegments are Media, Affiliate Marketing and Technology. Management relies on aninternal management reporting process that provides revenue and gross profitfor making financial decisions and allocating resources.

As discussed in Note 1, inyears prior to 2003, the Company operated in two reportable operating segments:Media and Technology. With the acquisition of Commission Junction in December 2003,the reportable operating segments were reassessed and as a result a thirdreportable operating segment was established, the Affiliate Marketing segmentwhich combines the operations of Commission Junction and Be Free, previously includedin the Technology segment. Accordingly, the prior year results of Be Free havebeen reclassified out of the Technology segment and included in the AffiliateMarketing segment to conform to the 2004 and 2003 presentation.

F-33

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Media Segment revenueincludes sales of certain affiliate marketing products and services of $8,337,000and $1,206,000, and technology products and services of $4,976,000 and$3,069,000, provided by Media operations outside the United States, for theyears ended 2004 and 2003, respectively.

Revenue, gross profit, totalassets, and capital expenditures, by segment, are as follows (in thousands):
| ** **                           | ** ** | **Revenue** | ** ** | **Gross Profit** | ** ** | **Total Assets** | ** ** |
|--------------------------------------|------------|-------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2004**    | ** ** | **2003**              | ** ** | **2002**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Media                                |       | $           | 93,317     |                  | $          | 45,761                |       | $ | 30,252 |   | $ | 49,970 |   | $ | 23,212 |   | $ | 15,824 |   | $ | 297,380 |   | $ | 214,574 |   | $ | 129,895 |   |
| Affiliate  Marketing                 |       | 59,995      |       | 24,302                |       | 11,848                |       | 50,767 |   | 18,829 |   | 9,076 |   | 116,284 |   | 95,160 |   | 76,938 |   |
| Technology                           |       | 22,233      |       | 23,559                |       | 20,934                |       | 17,263 |   | 18,451 |   | 15,921 |   | 16,762 |   | 13,365 |   | 57,017 |   |
| Intercompany  eliminations and other |       | (6,367      | )          | (1,106                | )          | (480                  | )          | 416 |   | — |   | — |   | — |   | — |   | — |   |
| Total                                |       | $           | 169,178    |                  | $          | 92,516                |       | $ | 62,554 |   | $ | 118,416 |   | $ | 60,492 |   | $ | 40,821 |   | $ | 430,426 |   | $ | 323,099 |   | $ | 263,850 |   |

 
| ** **           | ** ** | **Capital Expenditures** | ** ** |
|----------------------|------------|-------------------------------|------------|
| ** **           | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2002** | ** ** |
| Media                |       | $                             | 2,608      |   | $ | 1,859 |   | $ | 1,024 |   |
| Affiliate  Marketing |       | 860                           |       | 250 |   | 571 |   |
| Technology           |       | 2,541                         |       | 1,132 |   | 749 |   |
| Total                |       | $                             | 6,009      |   | $ | 3,241 |   | $ | 2,344 |   |

 

The Company’s operationsare domiciled in the United States with operations in Europe through itswholly-owned subsidiaries, ValueClick Europe, ValueClick France, ValueClickGermany, and Pricerunner AB. Prior to March 26, 2004, the Company hadoperations in Japan through its majority-owned subsidiary, ValueClick Japan.The Company sold its equity interest of approximately 59% in ValueClick Japanon March 26, 2004. The operating results of ValueClick Japan are includedin the Company’s operating results through the date of disposition.

TheCompany’s geographic information is as follows (in thousands):
| ** **                           | ** ** | **Year Ended  December 31, 2004** | ** ** | **Long-lived**                           | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **Revenue**                                      | ** ** | **Income  (Loss) from  Operations** | ** ** | **Assets at  December 31,  2004** | ** ** |
| United States                        |       | $                                                | 142,370    |                                     |       | $ | 31,715 |   |   |   | $56,548 |   |   |
| Japan                                |       | 1,806                                            |       |                                     | (525       | ) |   |   | — |   |   |
| Europe                               |       | 31,369                                           |       |                                     | 3,904      |   |   |   | 28,555 |   |   |
| Intercompany eliminations  and other |       | (6,367                                           | )          |                                     | 416        |   |   |   | — |   |   |
| Total                                |       | $                                                | 169,178    |                                     |       | $ | 35,510 |   |   |   | $ | 85,103 |   |   |
|                                      |            |                                                  |            |                                          |            |  |  |  |  |  |  |  |  |  |

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

 
| ** **                           | ** ** | **Year Ended  December 31, 2002** | ** ** | **Long-lived  Assets at** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **Revenue**                                      | ** ** | **Loss from  Operations** | ** ** | **December 31,  2002** | ** ** |
| United States                        |       | $                                                | 48,528     |                           |       | $ | (6,811 | ) |   |   | $ | 10,997 |   |   |
| Japan                                |       | 7,476                                            |       |                           | (230       | ) |   |   | 851 |   |   |
| Europe                               |       | 7,030                                            |       |                           | (1,779     | ) |   |   | 208 |   |   |
| Intercompany eliminations  and other |       | (480                                             | )          |                           | —     |   |   |   | — |   |   |
| Total                                |       | $                                                | 62,554     |                           |       | $ | (8,820 | ) |   |   | $ | 12,056 |   |   |

 

F-34

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**SCHEDULE II**

**VALUECLICK, INC.**

**VALUATIONAND QUALIFYING ACCOUNTS(in Thousands)**
| ** **                         | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions  Charged To  Expenses** | ** ** | **Other  Adjustments(1)** | ** ** | **Deductions** | ** ** | **Balance at End  of Period** | ** ** |
|------------------------------------|------------|------------------------------------------------|------------|------------------------------------------|------------|---------------------------|------------|----------------|------------|----------------------------------------------|------------|
| Allowance for doubtful  accounts:  |       |                                           |       |                                     |       |                      |       |           |       |                                         |       |   |   |   |   |   |   |   |   |   |   |
| Year ended December 31, 2004  |       |                                           | $          | 2,060                                    |       |                      |       | $              | 1,308      |                                         |       |   | $ | 183 |   |   |   | $ | (578 | ) |   |   | $ | 2,973 |   |   |
| Year ended December 31, 2003  |       |                                           | $          | 1,892                                    |       |                      |       | $              | 1,213      |                                         |       |   | $ | 206 |   |   |   | $ | (1,251 | ) |   |   | $ | 2,060 |   |   |
| Year ended  December 31, 2002 |       |                                           | $          | 1,546                                    |       |                      |       | $              | 1,409      |                                         |       |   | $ | 573 |   |   |   | $ | (1,636 | ) |   |   | $ | 1,892 |   |   |

----

(1)          Other adjustmentsrepresent increases in allowance accounts from acquisitions.

F-35

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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 31st dayof March, 2005.
|        | VALUECLICK, INC. |
|--------|------------------|
|   | By:              | /s/ JAMES ZARLEY |
|   |             | James Zarley |
|   |             | *President and Chief Executive  Officer* |

 

**POWER OF ATTORNEY**

KNOW ALL MEN BY THESE PRESENTS, the undersigned herebyconstitute and appoint each of James R. Zarley and Samuel J. Paisley their trueand lawful attorney-in-fact and agent, with full power of substitution andresubstitution, for them and in their name, place and stead, in any and allcapacities, to sign any and all amendments to this Report, and to file thesame, with exhibits thereto, and other documents in connection therewith, withthe Securities and Exchange Commission, granting unto said attorney-in-fact andagent, full power and authority to do and perform each and every act and thingrequisite or necessary to be done in connection therewith, as fully to allintents and purposes as they might or could do in person, hereby ratifying andconfirming all that said attorney-in-fact and agent, or his respectivesubstitute or substitutes, may lawfully do or cause to be done by virtuehereof.

Pursuantto the requirements of the Securities Exchange Act of 1934, this Report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated:
|                             | **Signature** | ** **                                                            | ** ** | ** **           | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|-----------------------------|---------------|-----------------------------------------------------------------------|------------|----------------------|-----------|------------|------------|------------|----------|------------|
| /s/ JAMES R. ZARLEY    |          | Chairman of the  Board of Directors,                                  |       | March 31,  2005 |
| James R. Zarley             |          | Chief Executive Officer  and President  (Principal Executive Officer) |       |                 |
| /s/ SAMUEL J. PAISLEY  |          | Chief Financial  Officer                                              |       | March 31,  2005 |
| Samuel J. Paisley           |          | (Principal  Financial Officer)                                        |       |                 |
| /s/ DAVID S. BUZBY     |          | Director                                                              |       | March 31,  2005 |
| David S. Buzby              |          |                                                                  |       |                 |
| /s/ MARTIN T. HART     |          | Director                                                              |       | March 31,  2005 |
| Martin T. Hart              |          |                                                                  |       |                 |
| /s/ TOM A. VADNAIS     |          | Director                                                              |       | March 31,  2005 |
| Tom A. Vadnais              |          |                                                                  |       |                 |
| /s/ JEFFREY F. RAYPORT |          | Director                                                              |       | March 31,  2005 |
| Jeffrey F.  Rayport         |          |                                                                  |       |                 |

 

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