##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarter ended March 31, 2003



Commission File No. 0-21935



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Modem Media, Inc.

(Exact name of registrant as specified in its charter)



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|DELAWARE                                                       |  | 06-1464807                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



230
East Avenue

Norwalk, CT 06855

(203) 299-7000

(Address of principal executive offices and zip
code)



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



There were 25,950,322 shares of the Registrants Common Stock, $0.001 par value, issued and outstanding as of April 30, 2003.



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##### Table of Contents



TABLE OF CONTENTS



|                                                            |  |                                                                                          |  | Page
|----------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | ----
|SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS |  | 2                                                                                       
|                                                           
|PART I. FINANCIAL INFORMATION                               |  |                                                                                         
|                                                           
|Item 1.                                                     |  | Financial Statements (unaudited)                                                         |  |     
|                                                            |  | Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002                   |  | 3   
|                                                            |  | Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002 |  | 4   
|                                                            |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002 |  | 5   
|                                                            |  | Notes to Consolidated Financial Statements                                               |  | 6   
|                                                           
|Item 2.                                                     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations    |  | 12  
|                                                           
|Item 3.                                                     |  | Quantitative and Qualitative Disclosures About Market Risk                               |  | 17  
|                                                           
|Item 4.                                                     |  | Controls and Procedures                                                                  |  | 18  
|                                                           
|PART II. OTHER INFORMATION                                  |  |                                                                                         
|                                                           
|Item 1.                                                     |  | Legal Proceedings                                                                        |  | 19  
|Item 5.                                                     |  | Other Information                                                                        |  | 20  
|Item 6.                                                     |  | Exhibits and Reports on Form 8-K                                                         |  | 20  
|                                                            |  | Signatures                                                                               |  | 21  



1



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##### Table of Contents

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS



This document includes forward-looking statements within the meaning of Section 21E(i)(1) of the Securities and Exchange Act of 1934, as amended. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause our actual results to be materially different from any future results expressed or implied by these statements. Such factors include, among other things, the following:



| |  |  | our history of operating losses,
| | - |  | --------------------------------



| |  |  | the scope and timing of new assignments and client initiatives,
| | - |  | ---------------------------------------------------------------



| |  |  | the allocation of resources to new business development,
| | - |  | --------------------------------------------------------



| |  |  | spending levels and budget constraints of our clients,
| | - |  | ------------------------------------------------------



| |  |  | our dependence on a limited number of clients,
| | - |  | ----------------------------------------------



| |  |  | variability of our operating results,
| | - |  | -------------------------------------



| |  |  | our ability to accurately estimate costs in fixed-fee engagements,
| | - |  | ------------------------------------------------------------------



| |  |  | our ability to attract and retain qualified professionals,
| | - |  | ----------------------------------------------------------



| |  |  | the ability of CentrPort to meet its obligations under its real estate lease, of which we are guarantor,
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | our ability to sub-lease our unoccupied office space,
| | - |  | -----------------------------------------------------



| |  |  | the ability of our sub-tenants to continue to meet their obligations under our sub-lease agreements for our New York City and part of our San Francisco office space,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our need and ability to manage the level of our staff and capacity in the future,
| | - |  | ---------------------------------------------------------------------------------



| |  |  | the potential future impairment of our goodwill,
| | - |  | ------------------------------------------------



| |  |  | our dependence on key management staff,
| | - |  | ---------------------------------------



| |  |  | exclusivity arrangements with clients that may limit our ability to provide services to others,
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | pricing pressure for our services,
| | - |  | ----------------------------------



| |  |  | our ability to integrate acquired companies, if any,
| | - |  | ----------------------------------------------------



| |  |  | the timing and amount of our capital expenditures,
| | - |  | --------------------------------------------------



| |  |  | utilization and recoverability of our deferred tax assets,
| | - |  | ----------------------------------------------------------



| |  |  | the timing of collections from our clients,
| | - |  | -------------------------------------------



| |  |  | our ability to manage future growth,
| | - |  | ------------------------------------



| |  |  | our ability to respond to rapid technological change,
| | - |  | -----------------------------------------------------



| |  |  | our dependence on the future growth of the internet,
| | - |  | ----------------------------------------------------



| |  |  | the long-term effects of the global recession,
| | - |  | ----------------------------------------------



| |  |  | changes in government regulation, including regulation of privacy issues and
| | - |  | ----------------------------------------------------------------------------



| |  |  | the effect of terrorist activities and military actions.
| | - |  | --------------------------------------------------------



In light of these and other uncertainties, the forward-looking statements included in this document should not be regarded as a
representation by us that our plans and objectives would be achieved.



2



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##### Table of Contents



PART I. FINANCIAL INFORMATION



|ITEM 1. |  | FINANCIAL STATEMENTS
|------- |  | --------------------



MODEM MEDIA, INC.



CONSOLIDATED BALANCE SHEETS



(In thousands, except share and per share amounts)

(unaudited)



|                                                                                                            |  | March 31, 2003 |         |   | December 31, 2002 |  
|----------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ----------------- | -
|ASSETS                                                                                                      |  |                |         |   |                   |  
|Current assets:                                                                                             |  |                |         |   |                   |  
|Cash and cash equivalents                                                                                   |  | $              | 44,881  |   |                   | $
|Accounts receivable, net of bad debt reserve of $224 and $281,
respectively                                 |  |                | 11,404  |   |                   |  
|Unbilled revenues                                                                                           |  |                | 2,379   |   |                   |  
|Deferred income taxes                                                                                       |  |                | 5,298   |   |                   |  
|Prepaid expenses and other current assets                                                                   |  |                | 1,128   |   |                   |  
|                                                                                                            |  |                |         |   |                   |  
|Total current assets                                                                                        |  |                | 65,090  |   |                   |  
|Noncurrent assets:                                                                                          |  |                |         |   |                   |  
|Property and equipment, net                                                                                 |  |                | 7,845   |   |                   |  
|Goodwill, net                                                                                               |  |                | 43,156  |   |                   |  
|Deferred income taxes                                                                                       |  |                | 14,792  |   |                   |  
|Other assets                                                                                                |  |                | 3,352   |   |                   |  
|                                                                                                            |  |                |         |   |                   |  
|Total noncurrent assets                                                                                     |  |                | 69,145  |   |                   |  
|                                                                                                            |  |                |         |   |                   |  
|Total assets                                                                                                |  | $              | 134,235 |   |                   | $
|                                                                                                            |  |                |         |   |                   |  
|LIABILITIES AND STOCKHOLDERS'
EQUITY                                                                        |  |                |         |   |                   |  
|Current liabilities:                                                                                        |  |                |         |   |                   |  
|Accounts payable                                                                                            |  | $              | 1,177   |   |                   | $
|Pre-billed media                                                                                            |  |                | 10,297  |   |                   |  
|Deferred revenues                                                                                           |  |                | 2,385   |   |                   |  
|Accrued restructuring                                                                                       |  |                | 2,967   |   |                   |  
|Accrued expenses and other current liabilities                                                              |  |                | 6,616   |   |                   |  
|                                                                                                            |  |                |         |   |                   |  
|Total current liabilities                                                                                   |  |                | 23,442  |   |                   |  
|Noncurrent liabilities:                                                                                     |  |                |         |   |                   |  
|Accrued restructuring                                                                                       |  |                | 15,655  |   |                   |  
|Other liabilities                                                                                           |  |                | 1,066   |   |                   |  
|Stockholders' equity:                                                                                       |  |                |         |   |                   |  
|Common stock, $.001 par value145,000,000 shares authorized, 26,214,844 and
26,188,475 issued, respectively |  |                | 26      |   |                   |  
|Preferred stock, $.001 par value5,000,000 shares authorized, none issued and
outstanding                   |  |                |        |   |                   |  
|Paid-in capital                                                                                             |  |                | 192,202 |   |                   |  
|Deferred compensation                                                                                       |  |                | (373    | ) |                   |  
|Accumulated deficit                                                                                         |  |                | (96,219 | ) |                   |  
|Treasury stock, 261,322 and 219,422 shares of common stock, respectively, at
cost                           |  |                | (1,345  | ) |                   |  
|Accumulated other comprehensive loss                                                                        |  |                | (219    | ) |                   |  
|                                                                                                            |  |                |         |   |                   |  
|Total stockholders' equity                                                                                  |  |                | 94,072  |   |                   |  
|                                                                                                            |  |                |         |   |                   |  
|Total liabilities and stockholders' equity                                                                  |  | $              | 134,235 |   |                   | $
|                                                                                                            |  |                |         |   |                   |  



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



3



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##### Table of Contents



MODEM MEDIA,
INC.



CONSOLIDATED STATEMENTS OF OPERATIONS



(In thousands, except per share amounts)

(Unaudited)



|                                                      |  | Three Months Ended March 31, |       
|----------------------------------------------------- |  | ---------------------------- | ------
|                                                      |  | 2003                         |       
|                                                      |  |                              |       
|Revenues                                              |  | $                            | 14,465
|Cost of revenues                                      |  |                              | 7,748 
|                                                      |  |                              |       
|Gross profit                                          |  |                              | 6,717 
|Operating expenses:                                   |  |                              |       
|Selling, general and administrative                   |  |                              | 4,848 
|Restructuring and other charges, net                  |  |                              |      
|Depreciation and amortization                         |  |                              | 931   
|                                                      |  |                              |       
|Total operating expenses                              |  |                              | 5,779 
|                                                      |  |                              |       
|Operating income                                      |  |                              | 938   
|Gain on sale of CentrPort stock                       |  |                              |      
|Interest income                                       |  |                              | 155   
|Other expense, net                                    |  |                              | (173  
|                                                      |  |                              |       
|Income from continuing operations before income taxes |  |                              | 920   
|Provision for income taxes                            |  |                              | 319   
|                                                      |  |                              |       
|Income from continuing operations                     |  |                              | 601   
|Loss from discontinued operations                     |  |                              |      
|                                                      |  |                              |       
|Income before cumulative effect of accounting change  |  |                              | 601   
|Cumulative effect of accounting change                |  |                              |      
|                                                      |  |                              |       
|Net income (loss)                                     |  | $                            | 601   
|                                                      |  |                              |       
|Basic and diluted per share data:                     |  |                              |       
|Income from continuing operations                     |  | $                            | 0.02  
|Loss from discontinued operations                     |  |                              |      
|                                                      |  |                              |       
|Income before cumulative effect of accounting change  |  |                              | 0.02  
|Cumulative effect of accounting change                |  |                              |      
|                                                      |  |                              |       
|Net income (loss)                                     |  | $                            | 0.02  
|                                                      |  |                              |       
|Weighted-average number of common shares outstanding: |  |                              |       
|Basic                                                 |  |                              | 25,967
|                                                      |  |                              |       
|Diluted                                               |  |                              | 26,107
|                                                      |  |                              |       



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



4



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MODEM MEDIA,
INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS



(In thousands)

(unaudited)



|                                                                                   |  | Three Months Ended March 31, |       
|---------------------------------------------------------------------------------- |  | ---------------------------- | ------
|                                                                                   |  | 2003                         |       
|                                                                                   |  |                              |       
|Cash flows from operating activities:                                              |  |                              |       
|Net income                                                                         |  | $                            | 601   
|Adjustments to reconcile net income to net cash used in operating
activities:      |  |                              |       
|Cumulative effect of accounting change                                             |  |                              |      
|Depreciation and amortization                                                      |  |                              | 931   
|Non-cash income taxes                                                              |  |                              | 224   
|Gain from the sale of CentrPort stock                                              |  |                              |      
|Amortization of deferred compensation                                              |  |                              | 53    
|Other, net                                                                         |  |                              | (4    
|Changes in assets and liabilities:                                                 |  |                              |       
|Accounts receivable                                                                |  |                              | 546   
|Unbilled revenues                                                                  |  |                              | (1,469
|Prepaid expenses and other assets                                                  |  |                              | 422   
|Accounts payable, accrued expenses and other liabilities                           |  |                              | (3,695
|Pre-billed media                                                                   |  |                              | (1,772
|Deferred revenues                                                                  |  |                              | 50    
|Accrued restructuring charges                                                      |  |                              | (632  
|                                                                                   |  |                              |       
|Net cash used in operating activities                                              |  |                              | (4,745
|Cash flows from investing activities:                                              |  |                              |       
|Purchases of property and equipment                                                |  |                              | (98   
|Proceeds from property and equipment disposals                                     |  |                              | 4     
|Collection of note receivable                                                      |  |                              | 578   
|                                                                                   |  |                              |       
|Net cash provided by (used in) investing activities                                |  |                              | 484   
|Cash flows from financing activities:                                              |  |                              |       
|Purchases of treasury stock                                                        |  |                              | (94   
|Payments of notes payable and capital lease obligations                            |  |                              | (122  
|Exercises of stock options, including purchases under employee stock purchase
plan |  |                              | 54    
|                                                                                   |  |                              |       
|Net cash used in financing activities                                              |  |                              | (162  
|                                                                                   |  |                              |       
|Effect of exchange rates on cash and cash equivalents                              |  |                              | (8    
|Net decrease in cash and cash equivalents                                          |  |                              | (4,431
|Cash and cash equivalents, beginning of the period                                 |  |                              | 49,312
|                                                                                   |  |                              |       
|Cash and cash equivalents, end of the period                                       |  | $                            | 44,881
|                                                                                   |  |                              |       



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



5



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MODEM MEDIA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1. Basis of Presentation and Summary of Significant Accounting Policies



Nature of OperationsModem Media, Inc. (the Company) is an interactive marketing strategy and services firm. The
Company is a marketing partner to some of the worlds leading companies and uses digital marketing and technologies to help its clients realize greater value from their most vital assettheir customers. The Company leverages its experience
in marketing and business strategy, database marketing, creative design and technology development to address the unique business objectives, challenges and opportunities of each of its client companies. Headquartered in Norwalk, Connecticut, the
Company maintains offices in San Francisco, London and São Paulo.



Basis of PresentationThe accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information
and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are
adequate to make the information presented not misleading. The consolidated balance sheet as of March 31, 2003, the consolidated statements of operations for the three months ended March 31, 2003 and 2002, and the consolidated statements of cash
flows for the three months ended March 31, 2003 and 2002 are unaudited. The consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair
presentation of the Companys financial position and results of operations. The operating results for the three months ended March 31, 2003 and 2002 are not necessarily indicative of the results to be expected for any other interim period or
any future year. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2002.



Discontinued OperationsIn the third
quarter of 2002, the operations of the Companys offices in Toronto, Munich and Hong Kong ceased. In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, as adopted by the Company on January 1, 2002, the results of these operations have been reclassified and are separately presented for all reporting periods as discontinued operations.



Principles of ConsolidationThe accompanying
consolidated financial statements include all of the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated in consolidation.



Use of EstimatesThe preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.



ReclassificationsCertain reclassifications have been made in the prior period consolidated financial statements to conform to
the current period presentation.



Revenue
Recognition and BillingThe Company recognizes revenues as services are rendered in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements(SAB No. 101). A majority of its
revenues are derived from fixed-bid and retainer-based assignments. Unbilled revenues represent labor costs incurred and estimated earnings in excess of billings and production and other client-reimbursable out-of-pocket costs incurred in excess of
billings. Amounts billed to clients in excess of revenues recognized to date are classified as deferred revenues. The Companys clients hire it on a fixed-bid, retainer or time-and-materials basis. The Company reassesses its estimated costs on
fixed-bid engagements periodically and, as needed, for specific engagements. Losses are accrued to the extent that costs incurred and anticipated costs to complete engagements exceed total anticipated billings. Provisions for losses on uncompleted
fixed-bid contracts, if any, are recognized in the period in which such losses are determined.



In accordance with Emerging Issue Task Force (EITF) Issue No. 01-14, Income Statement Characterization of Reimbursements Received for Out-Of-Pocket Expenses Incurred (EITF
01-14), the Company must report reimbursable pass-through expenses as a component of revenues and cost of revenues. The Companys adoption of EITF 01-14 results in increased revenues and increased cost of revenues. The Company had
revenues and related cost of revenues attributable to such expenses of $1.0 million and $0.7 million for the three months ended March 31, 2003, and 2002, respectively.



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MODEM MEDIA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Business Concentrations and Credit RiskThe Companys services have been provided primarily to a limited number of clients located worldwide in a variety of industries. The Company had revenues from two clients
representing 26.3% and 21.9% of revenues for the three months ended March 31, 2003. The Company had revenues from five clients representing 16.2%, 15.8% 11.2%, 10.5% and 10.4% of revenues for the three months ended March 31, 2002. The Company
generally does not require its clients to provide collateral. Additionally, the Company is subject to a concentration of credit risk with respect to its accounts receivable. The Company had four clients accounting for 22.3%, 22.1%, 14.7% and 11.8%
of total gross accounts receivable as of March 31, 2003. The Company had four clients accounting for 17.5%, 15.7%, 13.3% and 12.4% of total gross accounts receivable as of March 31, 2002.



Income TaxesThe Company accounts for income taxes under the liability method in accordance with
SFAS No. 109, Accounting for Income Taxes. In accordance with such standard, the provision for income taxes includes deferred income taxes resulting from items reported in different periods for income tax and financial statement purposes.
Deferred income tax assets and liabilities represent the expected future tax consequences of the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effects of changes
in tax rates on deferred income tax assets and liabilities are recognized in the period that includes the enactment date.



Stock-Based CompensationThe Company follows the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 encourages, but does not require, companies to record compensation expense for stock-based employee compensation plans at fair value. The Company has elected to continue to account for stock-based compensation to
employees using the intrinsic value method presented in Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees and related interpretations. Accordingly, the compensation cost of stock options is
measured as the excess, if any, of the quoted market price of the Companys stock at the date of grant over the exercise price and is charged to operations either when earned or over the vesting period. Income tax benefits attributable to stock
options exercised are credited to paid-in capital.



If compensation expense for stock options awarded under the Companys plans had been determined in accordance with SFAS No. 123, the Companys pro forma net loss and pro forma net loss per share would have been as follows:



|                                                                       |  | Three Months Ended March 31,          |     
|---------------------------------------------------------------------- |  | ------------------------------------- | ----
|                                                                       |  | 2003                                  |     
|                                                                       |  |                                       |     
|                                                                       |  | (in thousands, except per share data) |     
|Net income (loss) as reported                                          |  | $                                     | 601 
|Stockbased compensation recorded, net of tax                          |  |                                       | 32  
|                                                                       |  |                                       |     
|Sub total                                                              |  |                                       | 633 
|Stock-based compensation expense determined under SFAS 123, net of tax |  |                                       | 715 
|                                                                       |  |                                       |     
|Pro forma net loss                                                     |  | $                                     | (82 
|                                                                       |  |                                       |     
|Net income (loss) per share:                                           |  |                                       |     
|Basic and diluted income (loss) per share, as reported                 |  | $                                     | 0.02
|                                                                       |  |                                       |     
|Basic and diluted loss per share, pro forma                            |  | $                                     |    
|                                                                       |  |                                       |     



The
effects of applying SFAS No. 123 in the pro forma net loss disclosures above are not likely to be representative of the effects on pro forma disclosures of future years.



7



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##### Table of Contents

MODEM MEDIA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





During the
first quarter of 2003, the Company issued approximately 244,000 options to purchase its common stock to certain management employees at an exercise price of $0.58 per share. The Company recorded deferred compensation expense of approximately $0.4
million relating to these options which represents the difference between the exercise price and the fair market value of the Companys common stock on the date of grant. This balance will be amortized on a straight-line basis over the vesting
period, which ends on December 31, 2004. The Company has amortized approximately $0.1 million of the deferred compensation expense during the three months ended March 31, 2003.



Cash and Cash EquivalentsThe Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents. Although cash balances are maintained in high quality financial institutions, the balances at times exceed insurable amounts.



Property and EquipmentProperty and equipment are
stated at cost and are depreciated principally using the straight-line method over their estimated useful lives of three to five years for computers and software, and five to seven years for furniture and other. Purchased software and third-party
costs incurred to develop software for internal use are capitalized and amortized principally over three years. Leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining lease term.



GoodwillGoodwill represents acquisition costs in
excess of the fair value of net assets acquired. In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.SFAS No. 141 requires that all business combinations initiated
after June 30, 2001 be accounted for using the purchase method of accounting. Under SFAS No. 142, goodwill is no longer amortized but is reviewed for impairment annually, as well as when a triggering event indicates impairment may have occurred.
This statement eliminated goodwill amortization upon adoption and required an initial assessment for goodwill impairment within six months of adoption and at least annually thereafter. The Company adopted this pronouncement on January 1, 2002. The
goodwill test for impairment consists of a two-step process that begins with an estimation of the fair value of the reporting unit. The first step of the process is a screen for potential impairment and the second step measures the amount of
impairment, if any. SFAS No. 142 required an entity to complete the first step of the transitional goodwill impairment test within six months of adopting the statement. The Company performed the required transitional fair value impairment test on
its goodwill as of January 1, 2002. As a result of completing this test, the Company determined that the goodwill associated with its Munich operation was fully impaired as of January 1, 2002. Accordingly, the Company recorded a goodwill impairment
charge of $3.4 million as a cumulative effect of an accounting change retroactive to January 1, 2002. There was no income tax benefit associated with this charge because the Company believes it is more likely than not that future taxable income in
Germany will not be sufficient to realize the related income tax benefit.



Net Income (Loss) Per ShareIn accordance with SFAS No. 128, Earnings Per Share, basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during each
period. Diluted net income (loss) per share gives effect to all potentially dilutive securities that were outstanding during each period. At March 31, 2003 and 2002, outstanding options of approximately 5.4 million and 4.4 million, respectively to
purchase shares of common stock were not included in the computation of diluted net income (loss) per share because to do so would have an antidilutive effect for the periods presented. The following table details the reconciliation from basic
earnings per share to diluted earnings per share for continuing operations:



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##### Table of Contents

MODEM MEDIA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





|                                                                                     |  | Three Months Ended March 31,           
|------------------------------------------------------------------------------------ |  | ---------------------------------------
|                                                                                     |  | 2003                                   
|                                                                                     |  | (in thousands, except per shareamounts)
|Numerator for basic and diluted earnings per shareincome from continuing
operations |  |                                        
|                                                                                     |  |                                        
|Weighted average common shares outstandingbasic                                     |  |                                        
|Assumed conversion of dilutive securities Employee stock options                     |  |                                        
|                                                                                     |  |                                        
|Weighted average common shares outstandingdiluted                                   |  |                                        
|                                                                                     |  |                                        
|Basic and diluted earnings per share for income from continuing
operations           |  | $                                      
|                                                                                     |  |                                        



Fair
Value of Financial InstrumentsThe carrying values of the Companys assets and liabilities approximate fair value because of the short maturities of these financial instruments.



Foreign Currency TranslationThe Companys
financial statements were prepared in accordance with the requirements of SFAS No. 52, Foreign Currency Translation. Under this method, net foreign currency transaction gains and losses are included in the accompanying consolidated statements
of operations.



Comprehensive
IncomeThe Company reflects its comprehensive income such as unrealized gains and losses on the Companys foreign currency translation adjustments and available-for-sale securities as a separate component of stockholders equity
as required by SFAS No. 130, Reporting Comprehensive Income. The Company has not recorded the tax effects related to the currency translation adjustments because such adjustments relate to indefinite investments in international subsidiaries.
Comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments. Comprehensive income was $0.7 million for the three months ended March 31, 2003 compared to comprehensive loss of $1.8 million for the three
months ended March 31, 2002.



Recently issued
accounting pronouncementsIn March 2003, the EITF published issue No.00-21 Accounting for Revenue Arrangements with Multiple Deliverables (EITF 00-21). This issue addresses certain aspects of the accounting by a
vendor for arrangements under which it performs multiple revenue-generating activities and how to determine whether such an arrangement involving multiple deliverables contains more than one unit of accounting for purposes of revenue recognition.
The guidance in this issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003, accordingly, the Company will adopt EITF 00-21 on July 1, 2003. The Company is currently evaluating what impact, if any,
EITF 00-21 will have on its Consolidated Financial Statements.



NOTE 2. Discontinued Operations and Restatement of Prior Period Financial Results



In the third quarter of 2002, the operations of the Companys offices in Toronto, Munich and Hong Kong ceased. In accordance with
SFAS No. 144, the results of these operations have been reclassified and are separately presented for all reporting periods as discontinued operations. Revenue for discontinued operations for the three months ended March 31, 2002 were $1.2 million.



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MODEM MEDIA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





In
connection with the reclassification of the results of these operations, the Company also noted certain errors within accrued liabilities associated with its continuing operations that were generated in prior periods. Therefore, the Company has
restated its historical results to adjust for these items. The impact of these adjustments served to decrease selling, general and administrative expenses and the loss from continuing operations before income taxes by approximately $0.1 million in
the first quarter of 2002. The correction for these items had no impact on the timing or amount of the Companys revenue or cash flow. The impact of the restatement on the net loss for three months ended March 31, 2002 is as follows:



|                                     |  | Three Months EndedMarch 31, 2002         |       
|------------------------------------ |  | ---------------------------------------- | ------
|                                     |  | (in thousands, except per share amounts) |       
|                                     |  | As Previously Reported                   |       
|Net loss                             |  | $                                        | (1,852
|Basic and diluted net loss per share |  |                                          | (0.07 



NOTE 3. Restructuring
and Other Charges, Net



Continuing
Operations



The Company initiated a
series of restructuring actions in 2002 to align capacity with both revenue and the demand from its clients. These actions were completed in the third and fourth quarters of 2002 and included staff reductions and a reduction in office space in the
Companys U.S. and London offices.



Discontinued Operations



Due to the decline in client demand, the Company decided in the second quarter of 2002 to close its offices in Toronto, Munich and Hong Kong, ceasing operations in the third quarter of 2002.



The accruals established by the Company in respect to both
continuing and discontinued operations, and activities related thereto, are summarized as follows:



|                      |  | Balances at December 31, 2002 |        | Cash Uses |   |      | Other |  |   | Balances at March 31, 2003
|--------------------- |  | ----------------------------- | ------ | --------- | - | ---- | ----- |  | - | --------------------------
|                      |  | (In thousands)               
|Facilities            |  | $                             | 19,105 |           | $ | (714 | )     |  | $ | (57                       
|Severance             |  |                               | 57     |           |   | (24  | )     |  |   |                          
|Other                 |  |                               | 93     |           |   | (26  | )     |  |   | 188                       
|                      |  |                               |        |           |   |      |       |  |   |                           
|Total                 |  | $                             | 19,255 |           | $ | (764 | )     |  | $ | 131                       
|                      |  |                               |        |           |   |      |       |  |   |                           
|Less: current portion |  |                               |        |           |   |      |       |  |   |                           
|                      |  |                               |        |           |   |      |       |  |   |                           
|Long-term portion     |  |                               |        |           |   |      |       |  |   |                           
|                      |  |                               |        |           |   |      |       |  |   |                           



Included
in other within the facilities category is $0.1 million of interest expense. In addition, in the first quarter of 2003 the Company reclassed $0.2 million from facilities to other to better reflect the remaining
restructure accrual.



NOTE 4. CentrPort Transactions



In conjunction with the CentrPort
Transactions, described in detail in Note 3 to the Companys 2002 Consolidated Financial Statements, the Company designated CentrPort as a preferred vendor and committed to resell at least $5.0 million



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MODEM MEDIA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



of CentrPorts products and services during 2001 pursuant to a value added reseller agreement (CentrPort Commitment). Based
primarily on the uncertain nature of the Companys ability to meet this CentrPort Commitment, the Company deferred its gain of $4.1 million on the CentrPort Preferred Stock Sale. The original agreement provided that, if the CentrPort Commitment
was not met, the Company was to remit the value of the shortfall to CentrPort in either CentrPort common stock from the Companys holdings pursuant to a contractual per share fixed value, or in cash, at the Companys election. As of
December 31, 2001, the Company had sold $2.7 million in CentrPort products and services applicable to the CentrPort Commitment. As a result, the Company recognized $1.7 million in the fourth quarter of 2001 of the $4.1 million deferred gain that was
recorded as of December 31, 2000. The remaining balance of the deferred gain on the Companys balance sheet was equal to $2.3 million as of December 31, 2001. In February 2002, the Company, CentrPort and the CentrPort Investors were party to
agreements which amended various conditions and commitments including the extinguishment of the Companys CentrPort Commitment to sell further CentrPort products and services, the extinguishment of the Companys obligation to pay the value
of the shortfall in either cash or CentrPort common stock and the extension of the Companys $2.5 million note receivable due from the CentrPort Investors to it until December 31, 2002, which was subsequently satisfied. Accordingly, the Company
recognized the remaining deferred gain of $2.3 million in the first quarter of 2002.



The Company is guarantor for CentrPorts obligations under its lease for office space at 450 Post Road East, Westport, Connecticut for 16,900 square feet, which expires on June 30, 2010, subject
to renewal. As of March 31, 2003, the aggregate remaining base rent and estimated operating expenses due under this lease was $6.1 million, subject to adjustment in accordance with the terms of the lease. This balance reduces by approximately $0.8
million per year through June 30, 2010. The lease provides that once 50% of the original lease term has expired, which will occur in July 2005, this guaranty may be replaced with an irrevocable letter of credit in favor of the landlord in an amount
not to exceed the remaining base rent. Upon expiration of 50% of the lease term, CentrPort is required to obtain such a letter of credit. Additionally, CentrPort has agreed to cooperate with the Company to secure the Companys release from its
guaranty prior to that time, if possible. In the event that CentrPort were to default on its lease obligation, the Company would be liable for the aggregate remaining base rent and operating expenses at the time of default by CentrPort. In the event
of a default, the Company would take all appropriate action to be reimbursed for this liability. As of March 31, 2003, no provision has been recorded for this potential liability.



NOTE 5. Legal Proceedings



Beginning in August 2001, a number of substantially identical class action complaints alleging violations of the federal securities laws
were filed in the United States District Court for the Southern District of New York naming as defendants Modem Media, Inc., certain of its officers (G.M. OConnell, Chairman, Steven Roberts, former Chief Financial Officer, and, in certain
actions, Robert C. Allen II, board member, a Managing Director and former President) and certain named underwriters of its initial public offering (FleetBoston Robertson Stephens, Inc., BankBoston Robertson Stephens, Inc., Bear Stearns & Co.,
Inc., Nationsbanc Montgomery Securities and Banc of America Securities LLC). The complaints have since been consolidated into a single action and a consolidated amended complaint was filed on April 24, 2002. The amended complaint alleges, among
other things, that the underwriters of the Companys initial public offering violated the securities laws by failing to disclose certain alleged compensation arrangements (such as undisclosed commissions or stock stabilization practices) in the
offerings registration statement and by engaging in manipulative practices to artificially inflate the price of Modem Media stock in the after-market subsequent to the IPO. The Company and the officers are named in the amended complaint
pursuant to Section 11 of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 on the basis of an alleged failure to disclose the underwriters alleged compensation arrangements and manipulative
practices. The complaint seeks unspecified damages. Similar complaints have been filed against over 300 other issuers that have had initial public offerings since 1998 and all such actions have been included in a single coordinated proceeding.



In October 2002, the actions against the
individual defendants were dismissed without prejudice. In July 2002, the Company and the other issuers in the consolidated cases filed motions to dismiss the amended complaint for failure to state a claim, which was denied as to us on February 19,
2003. The Company intends to defend these actions vigorously. However, due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the litigation. Any unfavorable outcome of this litigation could
have an adverse impact on the Companys business, financial condition and results of operations.



In August 2001, the Companys subsidiary, Modem Media Canada, Inc. (Modem Media Canada), brought suit against City Core
Properties, Ltd. (Landlord) in Ontario Supreme Court for breach of an office lease on the basis that the Landlord did not complete the building into which Modem Media Canada was to move (the Space). Modem Media Canada



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MODEM MEDIA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



is claiming approximately $1.2 million in damages. The Landlord has counter-sued the Company, Modem Media Canada and certain of its officers
and directors for breach of lease and is seeking damages in the amount of approximately $16.0 million. The Space was repossessed by a mortgage holder and has been sold to an unrelated third party. The Company believes that it has meritorious
defenses to the counter-claim and it intends to defend this action vigorously. The Company believes that the resolution of these matters will not have a material adverse effect on its business, financial condition and results of operations.



From time to time, the Company becomes involved
in various routine legal proceedings in the ordinary course of its business. Other than as noted above, the Company believes that the outcome of pending legal proceedings and unasserted claims in the aggregate will not have a material adverse effect
on its business, financial condition and results of operations.



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



Overview



Founded in 1987, Modem Media is an interactive marketing strategy and services firm. We are a marketing
partner to some of the worlds leading companies including Delta Air Lines, General Motors, Michelin, IBM, Sprint, Kraft and Kodak. We define interactive marketing as the use of any interactive channel to reach and serve any target customer
with the intention of generating measurable value, both to that customer and to the marketer. These channels include web sites and other internet applications, wireless applications, electronic mail, online marketing, advertising,
promotions and other emerging communication channels. We use interactive marketing to help our clients realize greater value from their most vital assettheir customers. We approach this goal through the following business basics:



| |  |  | We add profitable new customers for our clients, through brand awareness, demand generation, lead generation and customer acquisition initiatives,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We increase our clients sales from current customers, through loyalty, retention, cross-sell and up-sell initiatives and through digital services and
experiences that expand the breadth, depth and lifetime value of customer relationships, and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We improve our clients marketing productivity, by migrating high cost sales, service and communication activities online and optimizing the cost and
impact of activities that already are executed online.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





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We provide
marketing and business strategy, marketing programs, creative design and technology development to address the unique business objectives, challenges and opportunities of each of our client companies. We tailor solutions across integrated service
offerings that include the following:



Marketing Insights,
Strategy and Planning



We help our
clients discover and mine untapped opportunities to create revenue, reduce costs and capture the full value potential of their customers. This work begins and ends with our clients customers by understanding their needs and preferences,
assessing their value to the clients business, prioritizing customer segments and defining pragmatic strategies to realize value potential. Our planning teams guide clients on topics as wide-ranging as digital branding, technology architecture
and planning and media partnership strategy.



Marketing
Platform Design and Development



We
design and build marketing platforms that enable our clients to create, manage and grow profitable relationships with their customers. These platforms include web sites and wireless applications, intranets and extranets that support our
clients needs in communications, commerce and customer care. Our marketing platform teams bring expertise in both the creative and technical aspects of digital platform design including user interface and experience design, information
architecture, application development, content management, personalization systems and marketing automation tools.



Marketing Program Design and Execution



We conceive, create and distribute the marketing programs that turn our clients prospects into customers. We test, track and
optimize digital experiences to achieve each clients marketing goals most effectively and efficiently. This work entails the development of innovative marketing ideas and data analysis. Our marketing program teams bring expertise in creative
design and execution, marketing plan development, media services, as well as database marketing, management and analysis.



Headquartered in Norwalk, Connecticut, we also maintain offices in San Francisco, London and São Paulo.



Application of Critical Accounting Policies and Estimates



The preparation of financial statements in conformity with
generally accepted accounting principles requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenue and expenses during a reporting period. Actual results can differ from those estimates and it is possible that the differences could be material.



We believe the following accounting policies are critical to
the understanding of the more significant judgments and estimates used in the preparation of our consolidated financial statements:



| |  |  | revenue recognition,
| | - |  | --------------------



| |  |  | allowance for doubtful accounts,
| | - |  | --------------------------------



| |  |  | accounting for restructuring liabilities,
| | - |  | -----------------------------------------



| |  |  | accounting for income taxes,
| | - |  | ----------------------------



| |  |  | valuation of long-lived assets, investments and goodwill, and
| | - |  | -------------------------------------------------------------



| |  |  | lease guarantees.
| | - |  | -----------------



Revenue Recognition



We recognize revenues as services are rendered in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements(SAB No. 101). A majority of our revenues are derived from fixed-bid and retainer-based assignments. Unbilled revenues represent labor costs incurred and estimated earnings in excess of billings and



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production and other client-reimbursable out-of-pocket costs incurred in excess of billings. Amounts billed to clients in excess of revenues
recognized to date are classified as deferred revenues. Our clients hire us on a fixed-bid, retainer or time-and-materials basis. We reassess our estimated costs on fixed-bid engagements periodically and, as needed for specific engagements, losses
are accrued to the extent that costs incurred and anticipated costs to complete engagements exceed total anticipated billings. Provisions for losses on uncompleted fixed-bid contracts, if any, are recognized in the period in which such losses are
determined. Out-of-pocket and other pass-through expenses are recognized as revenue in the period incurred.



Allowance for Doubtful Accounts



We assess the required amount of allowance for doubtful accounts based on past experience and the review of the aging and analysis of
specific accounts.



Accounting for
Restructuring Liabilities



Restructuring
charges include the costs associated with our restructuring actions taken in the periods presented. Charges were recorded at the time the decision was made and plans were approved to restructure operations. The charges consisted of actual and
estimated costs that were incremental to our ongoing operations and were incurred to close offices, reduce excess office facilities and equipment, and terminate employees. Due to the continuing high level of available office space and lack of demand
in the San Francisco, Norwalk and London real estate markets, we determined that expected lease terms are significantly less favorable than the original assumptions and will not improve in the foreseeable future. The liability is equal to the future
minimum lease payments under contractual obligations offset by estimated future sublease payments. In determining these estimates, we evaluated our potential to sublease our excess space and our ability to renegotiate various leases at more
favorable terms and in some instances obtain relief through relocation of office space. These sublease estimates, which were made in connection with our real estate advisers, are based on current and projected conditions in the real estate and
economic markets in which we have excess office space. If actual market conditions are more or less favorable than those we have projected, we may be required to adjust existing accrued restructuring expenses associated with this excess office space
(see Note 3 of Notes to Consolidated Financial Statements).



Accounting for Income Taxes



We follow the provisions of SFAS No. 109, Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate an income tax provision for each of the
jurisdictions in which we operate. This process involves estimating the actual current tax provision or benefit together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We then assess the likelihood that deferred tax assets will be recovered from future taxable income and, to the extent it is
determined that recovery is not likely, a valuation allowance is established. Significant management judgment is required in determining the provision or benefit for income taxes and the amount of valuation allowance that would be required.
Historically, we have not taken benefits for losses generated by most of our foreign entities and accordingly have recorded a valuation allowance against their deferred tax assets. In the event that actual results differ from these estimates or we
adjust these estimates in future periods, we may need to establish an additional valuation allowance that could materially impact our financial condition and results of operations.



At March 31, 2003, we had a valuation allowance of $1.3 million associated with $21.4 million of gross
deferred tax assets. The net deferred tax asset of $20.1 million represents net operating loss carry forwards and deductible temporary differences, which are more likely than not to be utilized in the future. We considered all of the available
evidence in evaluating the recoverability of our deferred tax assets; however, a change in circumstances, including expectations as to our projected future taxable income, may have a material impact on the recoverability of deferred tax assets and
on future operating results.



Valuation of
Long-lived Assets, Investments and Goodwill



We have a significant amount of long-lived assets, including fixed assets, goodwill and investments. We periodically evaluate the realizability of all of our long-lived assets. Future events could cause us to conclude that an
impairment exists and that the asset values associated with a given operation have become impaired. Any resulting impairment loss could have a material impact on our financial condition and results of operations.



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We performed
our annual goodwill impairment test during the fourth quarter of 2002 and determined that it was not impaired. We will continue to perform a goodwill impairment test annually, as well as when a triggering event indicates impairment may have
occurred. If our projections of future cash flows are lower than the current estimates, we may be required to recognize an impairment charge up to the carrying value of the goodwill of $43.2 million.



Lease Guarantee



We are the guarantor for CentrPorts obligations under
their lease for office space at 450 Post Road East, Westport, Connecticut, for 16,900 square feet, which expires on June 30, 2010, subject to renewal. As of March 31, 2003, the aggregate remaining base rent and estimated operating expenses due under
this lease $6.1 million, subject to adjustment in accordance with the terms of the lease. This balance reduces by approximately $0.8 million per year through June 30, 2010. The lease provides that once 50% of the original lease term has expired,
which will occur in July 2005, this guaranty may be replaced with an irrevocable letter of credit in favor of the landlord in an amount not to exceed the remaining base rent. Upon expiration of 50% of the lease term, CentrPort is required to obtain
such a letter of credit. Additionally, CentrPort has agreed to cooperate with us to secure our release from our guaranty prior to that time, if possible. In the event that CentrPort were to default on its lease obligation, we would be liable for the
aggregate remaining base rent and operating expenses at the time of default by CentrPort. In the event of a default, we would take all appropriate action to be reimbursed for this liability. As of March 31, 2003, no provision had been recorded for
this potential liability.



Historical Results of Operations



Clients hire us on a fixed-fee, retainer or
time-and-materials basis. A majority of our revenues are derived from fixed-fee engagements. We recognize revenues as services are rendered in accordance with SAB No. 101. We reassess our estimated costs on fixed-fee engagements periodically and, as
needed for specific engagements, losses are accrued to the extent that costs incurred and anticipated costs to complete engagements exceed anticipated billings. Provisions for losses on uncompleted fixed-fee contracts, if any, are recognized in the
period in which such losses are determined.



Our
results of operations and our business depend on our relationships with a limited number of large clients with which we generally do not have long-term contracts. Our clients generally have the right to terminate their relationships with us without
penalty and with relatively short or no notice. Once an engagement is completed, we cannot be assured that a client will engage us for further services. As a result, a client that generates substantial revenue for us in one period may not be a
substantial source of revenue in a subsequent period. The termination of our business relationships with any of our significant clients, or a material reduction in the use of our services by any of our significant clients, could adversely affect our
future financial performance.



Our ten largest
clients accounted for 86.1% and 89.4% of consolidated revenues for the three months ended March 31, 2003 and 2002, respectively. Two clients individually accounted for 26.3% and 21.9% of our revenues in the first quarter of 2003. Five clients
accounted for 16.2%, 15.8%, 11.2%, 10.5%, 10.4% of our revenues in the first quarter of 2002. We expect a relatively high level of client concentration to continue which may not necessarily involve the same clients from period to period.



Cost of revenues consists of salaries, employee
benefits and incentive compensation for our professional services staff, costs for temporary staff that we use to provide professional services and certain other direct costs. Selling, general and administrative expenses consist of salaries,
employee benefits and incentive compensation of new business development, sales and marketing, administrative and other non-billable employees, certain other marketing costs, office rent, utilities, professional and consulting fees, travel,
telephone and other related expenses.



Three Months Ended
March 31, 2003 Compared to Three Months Ended March 31, 2002



Revenues. Revenues decreased $4.3 million, or 23.1%, to $14.5 million for the three months ended March 31, 2003 from $18.8 million for the three months ended March 31, 2002. This decline in revenues was primarily
attributable to a decrease in total billed hours partially offset by an increase in the average revenue per hour for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002. The decrease in billed hours was
primarily due to the decrease in demand for our services attributable to the continued general decline in the global economy which has resulted in reduced marketing spending from some of our significant clients. Revenues and related cost of revenues
attributable to reimbursable pass-through expenses were $1.0 million and $0.7 million for the three months ended March 31, 2003 and 2002, respectively.



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Cost of
Revenues and Gross Profit. Cost of revenues decreased $2.2 million, or 22.0%, to $7.7 million for the three months ended March 31, 2003 from $9.9 million for the three months ended March 31, 2002. This decrease in cost of revenues was primarily
due to company-wide reductions in capacity due to a decrease in revenues. Gross profit margin decreased to 46.4% of revenues for the three months ended March 31, 2003 from 47.2% for the three months ended March 31, 2002 due to lower utilization
(defined as billed hours divided by local capacity hours) for the three months ended March 31, 2003.



Selling, General and Administrative. Selling, general and administrative expenses decreased $0.9 million, or 15.3%, to $4.8 million
for the three months ended March 31, 2003 from $5.7 million for the three months ended March 31, 2002. Selling, general and administrative expenses represented 33.5% of revenues for the three months ended March 31, 2003 as compared to 30.4% for the
three months ended March 31, 2002. The dollar decreases in selling, general and administrative expenses were primarily the result of expense reduction actions representing reduced headcount and infrastructure costs during 2002.



Restructuring and Other Charges, Net.There were no
restructuring and other charges for the three months ended March 31, 2003. Restructuring and other charges of $0.6 million for the three months ended March 31, 2002 represent costs incurred in connection with the reduction of capacity across
multiple offices.



Depreciation and
Amortization. Depreciation and amortization decreased $0.4 million, or 27.5%, to $0.9 million for the three months ended March 31, 2003 from $1.3 million for the three months ended March 31, 2002. Depreciation and amortization represented 6.4%
of revenues for the three months ended March 31, 2003 and 6.8% for the three months ended March 31, 2002. The decrease in depreciation and amortization was primarily attributable to the restructuring actions taken, which included the write-off of
certain property and equipment in 2002.



Interest Income. Interest income remained essentially flat at $0.2 million for the three months ended March 31, 2003 and 2002, respectively.



Other Expense, Net. Other expense, net increased $0.05 million, or 40.7%, to $0.2 million for the
three months ended March 31, 2003 from $0.1 million for the three months ended March 31, 2002. Other expense increased primarily as a result of an increase in interest expense related to the accrual for the present value of the future costs of our
excess office space in San Francisco, Norwalk and London.



Income from Continuing Operations before Income Taxes. Our income before income taxes was $0.9 million for the three months ended March 31, 2003, as compared to income of $3.7 million for the three months ended March 31, 2002.
This decrease in income before income taxes of $2.7 million was primarily due to the absence of the gain on the sale of CentrPort stock recognized in the first quarter of 2002 and the decrease in revenues for the three months ended March 31, 2003 as
compared to the same period in 2002, partially offset by expense reduction actions as discussed above.



Income Taxes. The provision for income taxes for the three months ended March 31, 2003 was $0.3 million compared to a provision for
income taxes of $1.2 million for the three months ended March 31, 2002. The effective income tax rate was 34.7% for the three months ended March 31, 2003 compared to an effective income tax rate of 33.9% for the three months ended March 31, 2002. We
provide for income taxes in the jurisdictions in which we pay income taxes at the statutory rates in effect in each jurisdiction, adjusted for differences in providing for income taxes between financial reporting and income tax purposes. The
effective tax rate varies among periods due to the impact of state taxes, non-deductible items and changes in the valuation allowances recorded against losses generated by certain foreign entities.



Income from Continuing Operations. Our income was $0.6
million, or $0.02 per common share, for the three months ended March 31, 2003, as compared to income of $2.4 million, or $0.09 per common share, for the three months ended March 31, 2002. This net decrease of $1.8 million was primarily due to the
absence of the gain on the sale of CentrPort stock recognized in the first quarter of 2002 and the decrease in revenues for the three months ended March 31, 2003 as compared to the same period in 2002, partially offset by expense reduction actions
as discussed above.



Cumulative Effect of
Accounting Change. In accordance with SFAS No. 142, we performed the required transitional impairment test on our goodwill as of January 1, 2002. As a result of completing this test, we determined that the goodwill associated with our Munich
operation was fully impaired as of January 1, 2002. Accordingly, we recorded a goodwill impairment charge of $3.4 million as a cumulative effect of an accounting change retroactive to January 1, 2002. There was no income tax benefit associated with
this charge as we believe it is more likely than not that future taxable income in Munich, Germany will not be sufficient to realize the related income tax benefit.



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Liquidity and Capital
Resources



We historically have financed our
operations primarily from funds generated from operations. Net cash used in operating activities was $4.7 million and $1.0 million for the three months ended March 31, 2003 and 2002, respectively.



Net cash provided by (used in) investing activities was $0.5
million and $(0.05) million for the three months ended March 31, 2003 and 2002, respectively. In the first quarter of 2003 and 2002, we invested $0.1 million and $0.05 million in capital expenditures, respectively. In addition, during the first
quarter of 2003 we collected $0.6 million from notes receivable.



Net cash used in financing activities was $0.2 million and $0.3 million for the three months ended March 31, 2003, and 2002, respectively. Our primary use of cash from financing activities during the three months ended March 31, 2003
and 2002 were repayments of debt and capital lease obligations of $0.1 million and $0.7 million, respectively, and the purchase of treasury stock for $0.1 million and $0.02 million, respectively. Offsetting these items for the three months ended
March 31, 2003 and 2002 were proceeds from the exercise of employee stock options, including purchases under the employee stock purchase plan of $0.05 million, and $0.4 million, respectively.



We believe that our cash on hand and short-term investments
together with funds available from operations will be sufficient to meet our capital needs for at least the next twelve months.



We are the guarantor for CentrPorts obligations under their lease for office space at 450 Post Road East, Westport, Connecticut, for
16,900 square feet, which expires on June 30, 2010, subject to renewal. As of March 31, 2003, the aggregate remaining base rent and estimated operating expenses due under this lease was $6.1 million, subject to adjustment in accordance with the
terms of the lease. This balance reduces by approximately $0.8 million per year through June 30, 2010. The lease provides that once 50% of the original lease term has expired, which will occur in July 2005, this guaranty may be replaced with an
irrevocable letter of credit in favor of the landlord in an amount not to exceed the remaining base rent. Upon expiration of 50% of the lease term, CentrPort is required to obtain such a letter of credit. Additionally, CentrPort has agreed to
cooperate with us to secure our release from our guaranty prior to that time, if possible. In the event that CentrPort were to default on its lease obligation, we would be liable for the aggregate remaining base rent and operating expenses at the
time of default by CentrPort. In the event of a default, we would take all appropriate action to be reimbursed for this liability.



In October 2002, we established a program to repurchase over an eighteen month period up to $5.0 million of our common stock. The timing
and amount of purchases will be dependent upon a number of factors including the price and availability of our common stock, general market conditions and other uses of funds. The program may be discontinued at any time. During the first quarter of
2003, we repurchased 41,900 shares of common stock at an average price of $2.21 per share for a total cost of $0.1 million under this program. In aggregate we have purchased 54,590 shares of common stock at an average price of $2.25 per share for a
total cost of $0.1 million as of March 31, 2003.



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



Our consolidated financial statements are denominated in U.S. dollars. For the three months ended March 31,
2003, we derived 15.1% of our revenues from operations outside of the U.S. We face foreign currency risks primarily as a result of the revenues that we receive from services delivered through our foreign subsidiaries. These subsidiaries incur most
of their expenses in the local currency. Accordingly, our foreign subsidiaries use the local currency as their functional currency. We are also exposed to foreign exchange rate fluctuations with respect to the British Pound and Brazilian Real as the
financial results of foreign subsidiaries are translated into U.S. dollars for consolidation. As exchange rates vary, these results when translated may vary from expectations and adversely impact net income (loss) and operating performance. The
effect of foreign exchange rate fluctuation for the three months ended March 31, 2003 was not material. Currently, we do not hedge foreign currency transactions into U.S. dollars because we believe that, over time, the cost of a hedging program will
outweigh any benefit of greater predictability in our U.S. dollar-denominated results. However, we would from time to time reconsider the issue of whether a foreign currency-hedging program would be beneficial to our operations.



We are exposed to interest rate risk primarily through our
investments in cash equivalents and short-term investments. Our investment policy calls for investment in short-term, low risk instruments. We have limited our exposure to interest rate risk by investing in securities with maturities of one year or
less.



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



Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended). Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that material information required to be disclosed by us in the reports that we file and
submits under the Exchange Act is recorded, processed, summarized and reported as and when required, and are effective in ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and our
Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.



In addition, our Chief Executive Officer and Chief Financial Officer have reviewed our internal controls, and have determined that there have been no significant changes in our internal controls or in
other factors that could significantly affect those controls subsequent to the date of their last evaluation, including no corrective actions with regard to significant deficiencies and material weaknesses.



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PART II. OTHER INFORMATION



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



Beginning in August 2001, a number of substantially identical class action complaints alleging violations of the federal securities laws
were filed in the United States District Court for the Southern District of New York naming as defendants Modem Media, Inc., certain of our officers (G.M. OConnell, Chairman, Steven Roberts, former Chief Financial Officer, and, in certain
actions, Robert C. Allen II, board member, a Managing Director and former President) and certain named underwriters of our initial public offering (FleetBoston Robertson Stephens, Inc., BankBoston Robertson Stephens, Inc., Bear Stearns & Co.,
Inc., Nationsbanc Montgomery Securities and Banc of America Securities LLC). The complaints have since been consolidated into a single action and a consolidated amended complaint was filed on April 24, 2002. The amended complaint alleges, among
other things, that the underwriters of our initial public offering violated the securities laws by failing to disclose certain alleged compensation arrangements (such as undisclosed commissions or stock stabilization practices) in the
offerings registration statement and by engaging in manipulative practices to artificially inflate the price of Modem Media stock in the after-market subsequent to the IPO. We and the officers are named in the amended complaint pursuant to
Section 11 of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 on the basis of an alleged failure to disclose the underwriters alleged compensation arrangements and manipulative practices. The
complaint seeks unspecified damages. Similar complaints have been filed against over 300 other issuers that have had initial public offerings since 1998 and all such actions have been included in a single coordinated proceeding.



In October 2002, the actions against the individual defendants
were dismissed without prejudice. In July 2002, we and the other issuers in the consolidated cases filed motions to dismiss the amended complaint for failure to state a claim, which was denied to us on February 19, 2003. We intend to defend these
actions vigorously. However, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation. Any unfavorable outcome of this litigation could have an adverse impact on our business, financial
condition and results of operations.



In August
2001, our subsidiary, Modem Media Canada, Inc. (Modem Media Canada), brought suit against City Core Properties, Ltd. (Landlord) in Ontario Supreme Court for breach of an office lease on the basis that the Landlord did not
complete the building into which Modem Media Canada was to move (the Space). Modem Media Canada is claiming approximately $1.2 million in damages. The Landlord has counter-sued us, Modem Media Canada and certain of our officers and
directors for breach of lease and is seeking damages in the amount of approximately $16.0 million. The Space was repossessed by a mortgage holder and has been sold to an unrelated third party. We believe that we have meritorious defenses to the
counter-claim and we intend to defend this action vigorously. We believe that the resolution of these matters will not have a material adverse effect on our business, financial condition and results of operations.



From time to time, we become involved in various routine legal
proceedings in the ordinary course of our business. Other than as noted above, we believe that the outcome of pending legal proceedings and unasserted claims in the aggregate will not have a material adverse effect on our business, financial
condition and results of operations.



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|ITEM 5. |  | OTHER INFORMATION
|------- |  | -----------------



In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, in the first quarter of 2003, our Audit Committee approved
additional engagements of PricewaterhouseCoopers LLP our independent auditors to perform the following non-audit services: (1) acting as liquidator of Modem Media (Hong Kong), Ltd., (2) providing seminars, continuing educations and publications, (3)
providing certain domestic and foreign tax advice and (4) assisting with U.S. tax filing.



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



(a) Exhibits



None.



(b) Reports on Form 8-K



We filed a Form 8-K, dated January 28, 2003, reporting in Item 7, that we attached a press release as an Exhibit 99.1 announcing our
expected revenue from continued operations in the fourth quarter 2002 and full year revenue for 2002. In addition, in the same Form 8-K, reporting in Item 9, we furnished pursuant to Regulation FD that we recorded a restructuring charge in the
fourth quarter 2002 related to excess office space in Norwalk, San Francisco and London.



We filed a Form 8-K, dated March 5, 2003, reporting in Item 7 and Item 9, that we issued a press release reporting our results of operations for the fourth quarter and fiscal year ended December 31,
2002.



We filed a Form 8-K/A, dated March 6,
2003, reporting in Item 5 and Item 7, that we issued a replacement of our March 4, 2003 press release, with corrections, that was attached as an exhibit to Form 8-K dated March 5, 2003.



We filed a Form 8-K, dated March 10, 2003, reporting in Item 5 that Mr. G.M. OConnell, the Chairman of
the Board of Directors, amended and extended his sales plan under Rule 10b5-1(c)(3).



We filed a Form 8-K, dated May 2, 2003, reporting in Item 9 and Item 12, that we issued a press release reporting our results of operations for the first quarter ended March 31, 2003 and guidance as to
future results of operations.



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SIGNATURES



Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|Date:  May 14, 2003 |  |  |  | MODEM MEDIA,
INC.
|------------------- |  |  |  | -----------------
|                   
|                    |  |  |  |                  
|                    |  |  |  |                  
|                   
|                    |  |  |  |                  
|                    |  |  |  |                  



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Modem
Media, Inc. 302 Certification







I, Marc Particelli certify that:



|1.    I |  | have reviewed this quarterly report on Form 10-Q for Modem Media, Inc.;
|------- |  | -----------------------------------------------------------------------



2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;



3.    Based on my knowledge, the financial statements, and
other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;



4.    The registrants other certifying
officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a  14 and 15d  14) for the registrant and we have:



| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(Evaluation Date); and
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



5.    The
registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):



| | a. |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



6.    The registrants
other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.







Date: May 14, 2003



Signature:

/s/    MARC
PARTICELLIName: Marc ParticelliTitle: Chief Executive Officer






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I, Frank Connolly certify
that:



1.    I have reviewed this quarterly
report on Form 10-Q for Modem Media, Inc.;



2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this quarterly report;



3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;



4.    The registrants other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a  14 and 15d  14) for the registrant and we have:



| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(Evaluation Date); and
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



5.    The
registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):



| | a. |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



6.    The registrants
other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.







Date: May 14, 2003





Signature:

/s/    FRANK
CONNOLLYName:    Frank ConnollyTitle:      Chief Financial Officer




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