SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2004

Commission File No. 0-21935



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Modem Media, Inc.

(Exact name of registrant as specified in its charter)



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

230 East AvenueNorwalk, CT 06855(203) 299-7000(Address of principal executive offices and zip code)



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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 o

There were 27,200,831 shares of the Registrants Common Stock, $0.001 par value, issued and outstanding as of April 30, 2004.






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TABLE OF CONTENTS



|                                                            |  |                                                                                          | Page
|----------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- | ----
|SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS AND RISK FACTORS | 
|                                                            |  |                                                                                          |     
|PART I. FINANCIAL INFORMATION                               | 
|                                                            |  |                                                                                          |     
|Item 1.                                                     |  | Financial Statements (unaudited)                                                         | 3   
|                                                            |  |                                                                                          |     
|                                                            |  | Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003                   | 3   
|                                                            |  |                                                                                          |     
|                                                            |  | Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 | 4   
|                                                            |  |                                                                                          |     
|                                                            |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 | 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                               | 18  
|                                                            |  |                                                                                          |     
|Item 4.                                                     |  | Controls and Procedures                                                                  | 18  
|                                                            |  |                                                                                          |     
|PART II. OTHER INFORMATION                                  | 
|                                                            |  |                                                                                          |     
|Item 1.                                                     |  | Legal Proceedings                                                                        | 19  
|                                                            |  |                                                                                          |     
|Item 2.                                                     |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities         | 20  
|                                                            |  |                                                                                          |     
|Item 4.                                                     |  | Submission of Matters to a Vote of Security Holders                                      | 20  
|                                                            |  |                                                                                          |     
|Item 5.                                                     |  | Other Information                                                                        | 20  
|                                                            |  |                                                                                          |     
|Item 6.                                                     |  | Exhibits and Reports on Form 8-K                                                         | 20  
|                                                            |  |                                                                                          |     
|                                                            |  | Signatures                                                                               | 22  

1

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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 dependence on a limited number of clients, including the credit risk posed by any of our clients and the potential bankruptcy of any of our clients,
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | spending levels and budget constraints of our clients for interactive marketing services,
| | - | -----------------------------------------------------------------------------------------

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

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

| |  | the need to implement any additional cost reduction programs if demand for our services were to decline,
| | - | --------------------------------------------------------------------------------------------------------

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

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

| |  | the timing of and costs associated with ceasing operations in Brazil,
| | - | ---------------------------------------------------------------------

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

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

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

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

| |  | our ability to manage third party vendors for the benefit of our clients,
| | - | -------------------------------------------------------------------------

| |  | the potential disruption of information systems due to unanticipated problems or failures,
| | - | ------------------------------------------------------------------------------------------

| |  | our ability to maintain our reputation and expand name recognition to remain competitive,
| | - | -----------------------------------------------------------------------------------------

| |  | the potential liability to our clients for damages,
| | - | ---------------------------------------------------

| |  | the impact of our involvement in litigation, including class action lawsuits,
| | - | -----------------------------------------------------------------------------

| |  | our ability to use intellectual property in the future,
| | - | -------------------------------------------------------

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

| |  | significant competition within the industry and low barriers to entry,
| | - | ----------------------------------------------------------------------

| |  | our dependence on the future growth and development of the internet and the market for our services,
| | - | ----------------------------------------------------------------------------------------------------

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

| |  | customer concerns about privacy and data usage on the Internet and other interactive channels,
| | - | ----------------------------------------------------------------------------------------------

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

| |  | the volatility of the price of our stock,
| | - | -----------------------------------------

| |  | the potential dilution of earnings per share from the exercise of outstanding stock options, and
| | - | ------------------------------------------------------------------------------------------------

| |  | the difficulty of acquisition by a third party due to anti-takeover provisions.
| | - | -------------------------------------------------------------------------------

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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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MODEM MEDIA, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)(unaudited)



|                                                                                                            |  | March 31,2004 |         | December31,2003 |  
|----------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | --------------- | -
|ASSETS                                                                                                      |  |               |         |                 |  
|Current assets:                                                                                             |  |               |         |                 |  
|Cash and cash equivalents                                                                                   |  | $             | 36,549  |                 | $
|Marketable securities                                                                                       |  |               | 20,416  |                 |  
|Accounts receivable, net of bad debt reserve of $157 and $162, respectively                                 |  |               | 10,760  |                 |  
|Unbilled revenues                                                                                           |  |               | 2,871   |                 |  
|Deferred income taxes                                                                                       |  |               | 3,634   |                 |  
|Prepaid expenses and other current assets                                                                   |  |               | 1,715   |                 |  
|                                                                                                            |  |               |         |                 |  
|Total current assets                                                                                        |  |               | 75,945  |                 |  
|Noncurrent assets:                                                                                          |  |               |         |                 |  
|Property and equipment, net                                                                                 |  |               | 6,901   |                 |  
|Goodwill                                                                                                    |  |               | 43,156  |                 |  
|Deferred income taxes                                                                                       |  |               | 12,603  |                 |  
|Other assets                                                                                                |  |               | 1,408   |                 |  
|                                                                                                            |  |               |         |                 |  
|Total noncurrent assets                                                                                     |  |               | 64,068  |                 |  
|                                                                                                            |  |               |         |                 |  
|Total assets                                                                                                |  | $             | 140,013 |                 | $
|                                                                                                            |  |               |         |                 |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                        |  |               |         |                 |  
|Current liabilities:                                                                                        |  |               |         |                 |  
|Accounts payable                                                                                            |  | $             | 1,217   |                 | $
|Pre-billed media                                                                                            |  |               | 11,476  |                 |  
|Deferred revenues                                                                                           |  |               | 2,689   |                 |  
|Accrued restructuring                                                                                       |  |               | 3,122   |                 |  
|Accrued expenses and other current liabilities                                                              |  |               | 4,683   |                 |  
|                                                                                                            |  |               |         |                 |  
|Total current liabilities                                                                                   |  |               | 23,187  |                 |  
|Noncurrent liabilities:                                                                                     |  |               |         |                 |  
|Accrued restructuring                                                                                       |  |               | 12,330  |                 |  
|Other liabilities                                                                                           |  |               | 1,060   |                 |  
|Stockholders equity:                                                                                       |  |               |         |                 |  
|Common stock, $.001 par value145,000,000 shares authorized, 27,203,295 and 26,705,359 issued, respectively |  |               | 27      |                 |  
|Preferred stock, $.001 par value5,000,000 shares authorized, none issued and outstanding                   |  |               |        |                 |  
|Paid-in capital                                                                                             |  |               | 196,858 |                 |  
|Deferred compensation                                                                                       |  |               | (336    | )               |  
|Accumulated deficit                                                                                         |  |               | (91,088 | )               |  
|Treasury stock, 324,902 and 264,522 shares of common stock, respectively, at cost                           |  |               | (1,701  | )               |  
|Accumulated other comprehensive loss                                                                        |  |               | (324    | )               |  
|                                                                                                            |  |               |         |                 |  
|Total stockholders equity                                                                                  |  |               | 103,436 |                 |  
|                                                                                                            |  |               |         |                 |  
|Total liabilities and stockholders equity                                                                  |  | $             | 140,013 |                 | $
|                                                                                                            |  |               |         |                 |  

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

3

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MODEM MEDIA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)(unaudited)



|                                                      |  | ThreeMonthsEndedMarch 31, |       
|----------------------------------------------------- |  | ------------------------- | ------
|                                                      |  | 2004                      |       
|                                                      |  |                           |       
|Revenues                                              |  | $                         | 15,294
|Cost of revenues                                      |  |                           | 8,181 
|                                                      |  |                           |       
|Gross profit                                          |  |                           | 7,113 
|Operating expenses:                                   |  |                           |       
|Selling, general and administrative                   |  |                           | 5,415 
|Depreciation and amortization                         |  |                           | 538   
|                                                      |  |                           |       
|Total operating expenses                              |  |                           | 5,953 
|                                                      |  |                           |       
|Operating income                                      |  |                           | 1,160 
|Interest income                                       |  |                           | 159   
|Other expense, net                                    |  |                           | (156  
|                                                      |  |                           |       
|Income before income taxes                            |  |                           | 1,163 
|Provision for income taxes                            |  |                           | 425   
|                                                      |  |                           |       
|Net income                                            |  | $                         | 738   
|                                                      |  |                           |       
|Basic and diluted per share data:                     |  |                           |       
|Net income                                            |  | $                         | 0.03  
|                                                      |  |                           |       
|Weighted-average number of common shares outstanding: |  |                           |       
|Basic                                                 |  |                           | 26,585
|                                                      |  |                           |       
|Diluted                                               |  |                           | 28,197
|                                                      |  |                           |       

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)



|                                                                                  |  | ThreeMonthsEndedMarch 31, |        
|--------------------------------------------------------------------------------- |  | ------------------------- | -------
|                                                                                  |  | 2004                      |        
|Cash flows from operating activities:                                             |  |                           |        
|Net income                                                                        |  | $                         | 738    
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |        
|Depreciation and amortization                                                     |  |                           | 538    
|Non-cash income taxes                                                             |  |                           | (172   
|Amortization of deferred compensation                                             |  |                           | 99     
|Other, net                                                                        |  |                           |       
|Changes in assets and liabilities:                                                |  |                           |        
|Accounts receivable                                                               |  |                           | 4,567  
|Unbilled revenues                                                                 |  |                           | (2,018 
|Prepaid expenses and other assets                                                 |  |                           | (390   
|Tax benefit from exercise of stock options                                        |  |                           | 416    
|Accounts payable, accrued expenses and other liabilities                          |  |                           | (1,827 
|Pre-billed media                                                                  |  |                           | (1,032 
|Deferred revenues                                                                 |  |                           | (2,135 
|Accrued restructuring                                                             |  |                           | (731   
|                                                                                  |  |                           |        
|Net cash used in operating activities                                             |  |                           | (1,947 
|                                                                                  |  |                           |        
|Cash flows from investing activities:                                             |  |                           |        
|Purchases of property and equipment, net of disposals                             |  |                           | (132   
|Purchases of marketable securities                                                |  |                           | (20,416
|Restricted cash                                                                   |  |                           | 1,333  
|Collection of notes receivable                                                    |  |                           | 22     
|                                                                                  |  |                           |        
|Net cash (used in) provided by investing activities                               |  |                           | (19,193
|                                                                                  |  |                           |        
|Cash flows from financing activities:                                             |  |                           |        
|Purchases of treasury stock                                                       |  |                           | (350   
|Payments of notes payable and capital lease obligations                           |  |                           | (50    
|Exercises of stock options and purchases under employee stock purchase plan       |  |                           | 1,897  
|                                                                                  |  |                           |        
|Net cash provided by (used in) financing activities                               |  |                           | 1,497  
|                                                                                  |  |                           |        
|Effect of exchange rates on cash and cash equivalents                             |  |                           | 97     
|Net decrease in cash and cash equivalents                                         |  |                           | (19,546
|Cash and cash equivalents, beginning of the period                                |  |                           | 56,095 
|                                                                                  |  |                           |        
|Cash and cash equivalents, end of the period                                      |  | $                         | 36,549 
|                                                                                  |  |                           |        

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

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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 their 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 and London.

Basis of PresentationThe accompanying unaudited 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 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, 2004 and 2003 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, 2003.

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. 104,Revenue Recognition(SAB No. 104). For the three months ended March 31, 2004 and 2003, approximately 90% of its fee-based revenues were derived from fixed-fee 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. Clients hire the Company on a fixed-fee, retainer or time-and-materials basis. The Company reassesses its estimated costs on fixed-fee engagements periodically and, as needed, for specific
engagements. Losses, which have not been material, are accrued to the extent that costs incurred and anticipated costs to complete engagements exceed total anticipated billings. Provisions for losses on uncompleted fixed-fee contracts, if any, are recognized in the period in which such losses are determined. The cost of online media and email campaigns purchased by the Company for its clients is not included in revenue because the Company acts as an agent on behalf of its clients.

In accordance with Emerging Issues Task Force (EITF) Issue No. 01-14,Income Statement Characterization of Reimbursements Received for Out-Of-Pocket Expenses Incurred(EITF 01-14), the Company reports reimbursable pass-through expenses as a component of revenues and cost of revenues. This component of revenue was less than 3% of total revenues for all periods presented.

Business
  Concentrations and Credit RiskThe Company had
  revenues from Delta Air Lines, IBM, General Motors and Hewlett Packard representing
  21%, 13%, 13% and 10% of revenues, respectively, for the three months ended
  March 31, 2004. The Company had revenues from Delta Air Lines and General Motors
  representing 26% and 22% of revenues, respectively, for the three months ended
  March 31, 2003. 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 24%, 13%, 12% and 11% of total gross accounts receivable as of March 31,
  2004. The Company had four clients accounting for 32%, 26%, 16% and 16% of total
  gross accounts receivable as of December 31, 2003. Delta Air Lines, which represented
  24% of the total gross accounts receivable as of March 31, 2004, has stated
  in its periodic report on Form 10-Q filed with the SEC on May 10, 2004, that
  if it cannot achieve a competitive cost structure, regain sustained profitability
  and access the capital markets on acceptable terms, it will need to pursue alternative
  courses of action intended to make Delta Air Lines viable for the long-term,
  including the possibility of seeking to restructure its costs under Chapter
  11 of the U.S. Bankruptcy Code. The Company continues to monitor this situation
  and has taken steps to minimize the financial risk to the Company in case of
  the further deterioration of the financial condition of Delta and the filing
  of bankruptcy under Chapter 11.

Income TaxesThe Company accounts for income taxes under the liability method in accordance with Statement of Financial Accounting Standards (SFAS) 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

6

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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 Employeesand 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 were to have been determined in accordance with SFAS No. 123, the Companys pro forma net income (loss) and pro forma net income (loss) per share would have been as follows:



|                                                                       |  | Three Months EndedMarch 31,          |     
|---------------------------------------------------------------------- |  | ------------------------------------ | ----
|                                                                       |  | 2004                                 |     
|                                                                       |  | (in thousands, exceptper share data) |     
|Net income as reported                                                 |  | $                                    | 738 
|Stockbased compensation recorded, net of tax                          |  |                                      | 58  
|                                                                       |  |                                      |     
|Sub total                                                              |  |                                      | 796 
|Stock-based compensation expense determined under SFAS 123, net of tax |  |                                      | 771 
|                                                                       |  |                                      |     
|Pro forma net income (loss)                                            |  | $                                    | 25  
|                                                                       |  |                                      |     
|Net income (loss) per share:                                           |  |                                      |     
|Basic and diluted income per share, as reported                        |  | $                                    | 0.03
|                                                                       |  |                                      |     
|Basic and diluted income (loss) per share, pro forma                   |  | $                                    | 0.00
|                                                                       |  |                                      |     

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

During the first quarter of 2004, as a partial payment of bonuses under the Companys management incentive plan, the Company issued approximately 29,000 shares of restricted stock and 3,500 stock options to purchase its common stock to certain management employees at $8.00 per share, the fair market value of the Companys common stock on the date of grant, and a weighted average exercise price of $2.53 per stock option, respectively. The Company recorded deferred compensation expense of approximately $0.2 million relating to the restricted stock, which represents the difference between the cost of the stock to the employee and the fair market value of the Companys common stock on the date of grant. In addition, the Company recorded deferred compensation expense of $0.02 million relating to the stock 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. These amounts will be amortized on a straight-line basis over the vesting period, which ends on December 31, 2005. The Company has amortized approximately $0.03 million of deferred compensation during the three months ended March 31, 2004 related to the restricted stock and stock options.

On January 1, 2004, the Company modified the terms of an outstanding stock option award for a key executive who became a consultant with the Company. The fair value of unvested outstanding stock options were remeasured on March 31, 2004 and will be remeasured at each balance sheet date until the stock options vest on December 31, 2004. The Company will recognize compensation expense for the fair value of the unvested stock options over the remaining vesting period. For the quarter ended March 31, 2004, $0.03 million was recorded as compensation expense.

During the first quarter of 2003, as a partial payment of bonuses under the Companys management incentive plan, the Company issued approximately 244,000 stock 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 stock 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 $0.05 million and $0.1 million of deferred compensation during the three months ended March 31, 2004 and 2003, respectively, related to these options.

In connection with the transfer to True North Communications, Inc. (True North) of the non-strategic digital interactive marketing operations by the Company in 1998, True North agreed to satisfy options to purchase up to an aggregate of 281,010 shares of the Companys common stock held by employees of such operations, as well as options to purchase an aggregate of 298,022 shares

7

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of the Companys Common stock held by former employees of the Poppe Tyson Strategic Interactive Marketing Operations under the 1997 Plan (the Option Agreement). As of March 31, 2004, options to purchase up to 40,964 shares of common stock to be satisfied by True North, through the Interpublic Group of Companies (IPG), which completed its acquisition of True North in June 2001, remained outstanding. Upon the exercise of such options, the exercise price will be paid to IPG and IPG will surrender an equivalent number of shares of common stock to the Company. During the first quarter of 2004, 60,380 shares related to the exercise of such options at a cost of $0.35 million were included in treasury stock on the consolidated balance sheets.

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.

Marketable SecuritiesThe Company classifies its investments in marketable securities as available-for-sale. Accordingly, these investments are carried at fair value, with unrealized gains and losses reported as a separate component of stockholders equity. The Company recognized gains and losses when these securities are sold using the specific identification method. The Company has not recognized any material gains or losses from the sale of its investments in marketable securities.

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 three 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. Under SFAS No. 142,Goodwill and Other Intangible Assets, goodwill is not amortized but is reviewed for impairment annually, as well as when a triggering event indicates impairment may have occurred. 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. The Company performed its annual goodwill impairment test during the fourth quarter of 2003 and determined that no additional impairment had occurred. The Company will continue to perform a goodwill impairment test annually, as well as when a triggering event indicating
impairment may have occurred.

Net Income Per ShareIn accordance with SFAS No. 128,Earnings Per Share, basic net income per share is computed using the weighted-average number of common shares outstanding during each period. Diluted net income per share gives effect to all potentially dilutive securities that were outstanding during each period. For the three months ended March 31, 2004 and 2003, outstanding options to purchase shares of common stock of approximately 0.3 million and 5.4 million, respectively, were not included in the computation of diluted net income per share because to do so would have an antidilutive effect for the periods presented. The following table details the computation of basic and diluted earnings per share for net income:



|                                                   |  | Three Months EndedMarch 31,             |       
|-------------------------------------------------- |  | --------------------------------------- | ------
|                                                   |  | 2004                                    |       
|                                                   |  | (in thousands, exceptper share amounts) |       
|Net income                                         |  | $                                       | 738   
|                                                   |  |                                         |       
|Weighted average common shares outstandingbasic   |  |                                         | 26,585
|Assumed conversion of dilutive securities          |  |                                         | 1,612 
|                                                   |  |                                         |       
|Weighted average common shares outstandingdiluted |  |                                         | 28,197
|                                                   |  |                                         |       
|Basic and diluted earnings per share               |  | $                                       | 0.03  
|                                                   |  |                                         |       

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 consists of net income and foreign currency translation adjustments. Comprehensive income was $0.7 million and $0.7 million for the three months ended March 31, 2004 and 2003, respectively.

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Recently Issued Accounting Pronouncements

In December 2003, the FASB issued Interpretation No. 46R,Consolidation of Variable Interest Entities(FIN 46R). FIN 46R replaces the same titled FIN 46 that was issued in January 2003. FIN 46R requires the consolidation of a variable interest entity by a company that bears the majority of the risk of loss from the variable entitys activities, is entitled to receive a majority of the variable interest entitys residual returns or both. The provisions of this interpretation are effective for the Company beginning the first quarter of fiscal 2004. The adoption of this interpretation did not have a material effect on the Companys consolidated financial statements or disclosures.

NOTE 2. CentrPort Investment and Lease Guarantee

The Company and certain employees formed CentrPort LLC in November 1999 to focus on developing intelligent marketing platforms to build and enhance customer relationships across multiple communication channels. In December 2000, CentrPort LLC, which was originally organized as a Delaware limited liability company, was reorganized as CentrPort, Inc. (CentrPort), a Delaware corporation. Immediately after this reorganization, the Company sold a portion of its ownership in CentrPort, which was formerly our majority-owned subsidiary. A consortium of third party investors (the CentrPort Investors) purchased 8,332,000 shares of preferred stock of CentrPort from the Company (CentrPort Preferred Stock Sale) in exchange for $2.5 million in cash and a $2.5 million note receivable originally due in December 2001, subject to certain conditions. In addition, the Company received a
warrant to purchase 391,604 shares of CentrPort common stock from CentrPort (CentrPort Warrant).

Concurrent with the CentrPort Preferred Stock Sale, the CentrPort Investors agreed to invest up to $22.0 million directly into CentrPort. At the closing of the transaction, $16.5 million was paid by the CentrPort Investors to CentrPort in exchange for 36,660,800 shares of newly issued CentrPort preferred stock. Subject to CentrPorts securing certain revenue commitments by April 1, 2001, an additional payment of $5.5 million (Contingent Payment) would be due from the CentrPort Investors to CentrPort in December 2001. CentrPort did not secure these certain commitments and as such the Contingent Payment was not made by the CentrPort Investors to CentrPort.

In addition, concurrent with the CentrPort Preferred Stock Sale, the Company purchased 1,842,657 shares of CentrPort common stock from certain minority CentrPort stockholders in exchange for approximately $1.9 million of its common stock, or 315,858 shares (the Founders Stock Transaction). In connection with the Founders Stock Transaction, the Company recorded a charge to equity of approximately $1.4 million based on the excess of the value paid for the founders stock and its estimated fair value on the date the Company acquired the stock.

The CentrPort Preferred Stock Sale, the CentrPort Warrant, the investment by the CentrPort Investors directly into CentrPort and the Founders Stock Transaction are hereinafter collectively referred to as the CentrPort Transactions. As a result of the CentrPort Transactions, the Companys ownership in CentrPort preferred and common stock, combined, was reduced from 59.0% to 15.2%, which was later reduced as discussed below. Through the date of the CentrPort Transactions, the Company consolidated CentrPort and recognized 100% of the losses incurred by CentrPort in consideration that the Company was CentrPorts sole funding source. Such losses aggregated approximately $5.7 million. Subsequent to the CentrPort Transactions, the Company has accounted for its investment in CentrPort under the cost method.

In conjunction with the CentrPort Transactions, the Company designated CentrPort as a preferred vendor and committed to resell at least $5.0 million 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.

In addition, as a result of a valuation the Company received from an independent firm regarding the Companys investment in CentrPort as of December 31, 2001, the Company concluded that its investment in CentrPort was impaired. Accordingly, the Company reduced its investment in CentrPort from $3.7 million, reflected at December 31, 2000, to $0.5 million by recording a $3.2 million charge in the fourth quarter of 2001. In October 2002, CentrPort closed on a second series of equity financing whereby

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CentrPort issued new equity to some of the CentrPort Investors in exchange for cash (the Secondary Financing). The Company did not participate in the Secondary Financing. As a result of the Secondary Financing, the Companys ownership interest in CentrPorts common and preferred stock was reduced from 15% to 9%.

Based on the Companys review, during the fourth quarter of 2003, of the financial results of CentrPort for the latter part of 2003 as well as projections for 2004, the Company determined that its investment in CentrPort was fully impaired at December 31, 2003. Accordingly, the Company recorded a $0.5 million impairment charge relating to this investment in the fourth quarter of 2003. The Company also concluded that it is not likely that the Company will be able to recognize any benefit from the deferred tax asset related to this investment. As a result, the Company recorded a $0.8 million tax provision in the fourth quarter of 2003 to provide a valuation allowance against this deferred tax asset.

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, 2004, the aggregate remaining base rent and estimated operating expenses due under this lease was $5.3 million, subject to adjustment in accordance with the terms of the lease. This balance will be reduced 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. In addition, upon expiration of 50% of the lease term, CentrPort is required to obtain such a letter of credit. Furthermore, CentrPort has agreed to cooperate with the Company
to secure its 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.

The Company has considered the need to record a provision for this potential liability. Although the Company believes it is reasonably possible that an accrual of a loss contingency for the CentrPort lease guarantee in the future may be warranted, due to the significance of the uncertainties surrounding this matter, the criteria to accrue a loss contingency under SFAS No. 5,Accounting for Loss Contingencies, which states that a loss contingency should be accrued when the loss contingency is probable and such amount is reasonably estimable, has not been met. For example, if CentrPort were sold, a portion of the proceeds could be used to satisfy all or some of this lease obligation which affects the amount and timing of any potential future liability. Other factors that add to the uncertainty of estimating any potential future loss contingency include
CentrPorts ability to obtain additional financing and the level of acceptance of their products and services by their current and potential clients. Accordingly, as of March 31, 2004, no provision has been recorded for this potential liability.

NOTE 3. Accrued Restructuring

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 atDecember 31,2003 |        | Charges(Credits) |   | Cash Uses |  | Other |      | Balances atMarch 31,2004 |  
|--------------------- |  | --------------------------- | ------ | ---------------- | - | --------- |  | ----- | ---- | ------------------------ | -
|                      |  | (In thousands)              |       
|Facilities            |  | $                           | 15,821 |                  | $ |          |  | $     | (784 | )                        | $
|Other exit costs      |  |                             | 326    |                  |   |          |  |       | (41  | )                        |  
|                      |  |                             |        |                  |   |           |  |       |      |                          |  
|Total                 |  | $                           | 16,147 |                  | $ |          |  | $     | (825 | )                        | $
|                      |  |                             |        |                  |   |           |  |       |      |                          |  
|Less: current portion |  |                             |        |                  |   |           |  |       |      |                          |  
|                      |  |                             |        |                  |   |           |  |       |      |                          |  
|Long-term portion     |  |                             |        |                  |   |           |  |       |      |                          |  
|                      |  |                             |        |                  |   |           |  |       |      |                          |  

For the three months ended March 31, 2004, included in other within the facilities category is $0.1 million in interest expense.

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NOTE 4. 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 Underwriters). 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 Modem Media defendants 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.

On June 30, 2003, a committee of our Board of Directors conditionally approved a proposed partial settlement with the plaintiffs in this matter. The settlement would provide, among other things, a release of Modem Media, Inc. and of the individual defendants for the conduct alleged in the action to be wrongful in the amended complaint. The Company would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, not assert, or release certain potential claims it may have against its Underwriters. Any direct financial impact of the proposed settlement is expected to be borne by the Companys insurers. The committee agreed to approve the settlement subject to a number of conditions, including the participation of a substantial number of other issuer defendants in the proposed settlement, the consent of the Companys insurers to the settlement, and the
completion of acceptable final settlement documentation. Furthermore, the settlement is subject to a hearing on fairness and approval by the court overseeing the IPO Litigation. The settlement is partial because the Underwriters are not party to the settlement. The Company understands that a majority of the other issuer defendants in the consolidated actions have also conditionally approved the proposed settlement.

If the settlement is not finalized, the Company will continue to defend these actions vigorously. However, due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the litigation if the litigation is not settled. 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 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 is currently in discovery for this litigation. The Company believes that there is no basis for the counterclaims, it has meritorious defenses to the counterclaims and the Company intends to
defend this action vigorously. Based on this belief, 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.

NOTE 5. Subsequent Events

Due to adverse market conditions and lower revenues in the Companys São Paolo, Brazil office, its estimates of future operating performance and cash flows in Brazil have declined substantially. As a result, in the second quarter of 2004, the operations of the Companys office in São Paolo are expected to cease. In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the results of these operations will be reclassified and separately presented in the Companys consolidated financial statements as discontinued operations beginning in the second quarter of 2004. A restructuring charge, net of tax, of approximately $0.6 million related to those activities is expected to be recorded in the second quarter of 2004 and would be included within operating loss from discontinued operations.

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

Overview

Founded in 1987, Modem Media is a leading interactive marketing strategy and services firm. We have established and maintained long-standing relationships with many of the worlds leading Fortune 500 companies including Delta Air Lines, General Motors, IBM, Michelin, Sprint, and Kraft. We offer our clients a comprehensive range of interactive marketing services that includes strategic consulting and research, website design, interactive advertising and promotions, email marketing, search marketing and data collection and analysis. Our services encompass all interactive channels including websites, Internet applications, wireless applications, email and other emerging communication channels to achieve our clients marketing objectives. We have been able to compete successfully and maintain deep client relationships due to our proven ability to deliver creative, innovative solutions that produce
meaningful results for our clients driven by our singular focus on the interactive marketing services sector. We help our clients realize greater value from their most vital asset  their customers  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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We were one of the first companies to provide interactive marketing services, and over the past 17 years have distinguished ourselves through numerous industry innovations and have been consistently recognized for our creative and effective solutions. We pioneered the use of Internet advertising, email direct marketing and online market research. We have won over 100 awards, most recently highlighted by AD:Techs Best Interactive Brand Campaign award for our 2003 campaign for Delta Air Lines and Media Magazines Best of the Internet award for our 2003 advertising campaign for Heineken and Harrisdirect.

Services

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 understanding of the needs and preferences of our clients customers, 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 websites 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, online advertising and promotions 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.

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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 and goodwill, and
| | - | ------------------------------------------------

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

Revenue Recognition

We recognize revenues as services are rendered in accordance with SEC Staff Accounting Bulletin No. 104,Revenue Recognition(SAB No. 104). For the three months ended March 31, 2004 and 2003, approximately 90% of our fee-based revenues were derived from fixed-fee 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. Our clients hire us on a fixed-fee, retainer or time-and-materials basis. 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 total anticipated billings. Provisions for losses on uncompleted fixed-fee contracts, if any, are recognized in the period in which such losses are determined. The cost of online media and email campaigns we purchased for our clients is not included in revenue because we act as an agent on behalf of our clients. 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, including the financial condition of our clients and the cyclical nature of the industries in which they operate.

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. The liability for the excess office facilities is equal to the present value of the future minimum lease payments, including applicable operating expenses, under contractual obligations offset by the present value of estimated future sublease payments from our existing subtenants. If our assumptions about future events are more or less favorable that those we have projected, we may be required to adjust existing accrued restructuring liabilities associated with this excess office space
(see Note 3 of Notes to Consolidated Financial Statements). The principal future events that we have considered in determining estimated costs associated with the excess space relate to operating cost escalation assumptions, an upcoming market rent review in our London office, the ability of our sub-tenants to continue to meet their obligations and our expected inability to further sublet our excess office space.

We continue to pursue potential sublease opportunities for all of our excess office space. Should we be able to sublease any of our excess office space, we would reverse the appropriate portion of the existing restructuring accrual related to the respective facility at such time.

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Accounting for Income Taxes

We follow the provisions of Statement of Financial Accounting Standards (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. As of March 31, 2004, we have recorded a valuation allowance against all of the foreign 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, 2004 deferred tax assets were $16.2 million, net of a $1.9 million valuation allowance. The net deferred tax assets of $16.2 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 and Goodwill

We have a significant amount of long-lived assets, including fixed assets and goodwill. We periodically evaluate the realizability of all of our long-lived assets. Future events could cause us to conclude that 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.

We performed our annual goodwill impairment test during the fourth quarter of 2003 and determined that the goodwill 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 the fair value of the U.S. reporting unit should decline significantly, we may be required to recognize an impairment charge up to the carrying value of the goodwill of $43.2 million. As of October 1, 2003, the estimated fair value of our U.S. reporting unit was significantly in excess of the carrying value of the U.S. reporting unit.

CentrPort Inc. Transaction, Investment and Lease Guarantee

We and certain employees formed CentrPort LLC in November 1999 to focus on developing intelligent marketing platforms to build and enhance customer relationships across multiple communication channels. In December 2000, CentrPort LLC, which was originally organized as a Delaware limited liability company, was reorganized as CentrPort, Inc. (CentrPort), a Delaware corporation. Immediately after this reorganization, we sold a portion of our ownership in CentrPort, which was formerly our majority-owned subsidiary. A consortium of third party investors (the CentrPort Investors) purchased 8,332,000 shares of preferred stock of CentrPort from us (CentrPort Preferred Stock Sale) in exchange for $2.5 million in cash and a $2.5 million note receivable originally due in December 2001, subject to certain conditions. In addition, we received a warrant to purchase 391,604 shares of
CentrPort common stock from CentrPort (CentrPort Warrant).

Concurrent with the CentrPort Preferred Stock Sale, the CentrPort Investors agreed to invest up to $22.0 million directly into CentrPort. At the closing of the transaction, $16.5 million was paid by the CentrPort Investors to CentrPort in exchange for 36,660,800 shares of newly issued CentrPort preferred stock. Subject to CentrPorts securing certain revenue commitments by April 1, 2001, an additional payment of $5.5 million (Contingent Payment) would be due from the CentrPort Investors to CentrPort in December 2001. CentrPort did not secure these certain commitments and as such the Contingent Payment was not made by the CentrPort Investors to CentrPort.

In addition, concurrent with the CentrPort Preferred Stock Sale, we purchased 1,842,657 shares of CentrPort common stock from certain minority CentrPort stockholders in exchange for approximately $1.9 million of our common stock, or 315,858 shares (the Founders Stock Transaction). In connection with the Founders Stock Transaction, we recorded a charge to equity of approximately $1.4 million based on the excess of the value paid for the founders stock and its estimated fair value on the date we acquired the stock.

The CentrPort Preferred Stock Sale, the CentrPort Warrant, the investment by the CentrPort Investors directly into CentrPort and the Founders Stock Transaction are hereinafter collectively referred to as the CentrPort Transactions. As a result of the CentrPort Transactions, our ownership in CentrPort preferred and common stock, combined, was reduced from 59.0% to 15.2%,

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which was later reduced as discussed below. Through the date of the CentrPort Transactions, we consolidated CentrPort and recognized 100% of the losses incurred by CentrPort in consideration that we were CentrPorts sole funding source. Such losses aggregated approximately $5.7 million. Subsequent to the CentrPort Transactions we have accounted for our investment in CentrPort under the cost method.

In conjunction with the CentrPort Transactions, we designated CentrPort as a preferred vendor and committed to resell at least $5.0 million of CentrPorts products and services during 2001 pursuant to a value added reseller agreement (CentrPort Commitment). Based primarily on the uncertain nature of our ability to meet this CentrPort Commitment, we deferred our gain of $4.1 million on the CentrPort Preferred Stock Sale. The original agreement provided that, if the CentrPort Commitment was not met, we were to remit the value of the shortfall to CentrPort in either CentrPort common stock from our holdings pursuant to a contractual per share fixed value, or in cash, at our election. As of December 31, 2001, we had sold $2.7 million in CentrPort products and services applicable to the CentrPort Commitment. As a result, we 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 our balance sheet was equal to $2.3 million as of December 31, 2001. In February 2002, we, CentrPort and the CentrPort Investors were party to agreements which amended various conditions and commitments including the extinguishment of our CentrPort Commitment to sell further CentrPort products and services, the extinguishment of our obligation to pay the value of the shortfall in either cash or CentrPort common stock and the extension of our $2.5 million note receivable due from the CentrPort Investors to us until December 31, 2002, which was subsequently satisfied. Accordingly, we recognized the remaining deferred gain of $2.3 million in the first quarter of 2002.

In addition, as a result of a valuation we received from an independent firm regarding our investment in CentrPort as of December 31, 2001, we concluded that our investment in CentrPort was impaired. Accordingly we reduced our investment in CentrPort from $3.7 million, reflected at December 31, 2000, to $0.5 million by recording a $3.2 million charge in the fourth quarter of 2001. In October 2002, CentrPort closed on a second series of equity financing whereby CentrPort issued new equity to some of the CentrPort Investors in exchange for cash (the Secondary Financing). We did not participate in the Secondary Financing. As a result of the Secondary Financing, our ownership interest in CentrPorts common and preferred stock was reduced from 15% to 9%.

Based on our review, during the fourth quarter of 2003, of the financial results of CentrPort for the latter part of 2003 as well as projections for 2004, we determined that our investment in CentrPort was fully impaired as of December 31, 2003. Accordingly, we recorded a $0.5 million impairment charge relating to this investment in the fourth quarter of 2003. We also concluded that it is not likely that we will be able to recognize any benefit from the deferred tax asset related to this investment. As a result, we recorded a $0.8 million tax provision in the fourth quarter of 2003 to provide a valuation allowance against this deferred tax asset.

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, 2004, the aggregate remaining base rent and operating expenses due under this lease was $5.3 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. In addition, upon expiration of 50% of the lease term, CentrPort is required to obtain such a letter of credit. Furthermore, 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.

We have considered the need to record a provision for this potential liability. Although we believe it is reasonably possible that an accrual of a loss contingency for the CentrPort lease guarantee in the future may be warranted, due to the significance of the uncertainties surrounding this matter, we believe the criteria to accrue a loss contingency under SFAS No. 5,Accounting for Loss Contingencies, which states that a loss contingency should be accrued when the loss contingency is probable and such amount is reasonably estimable, has not been met. For example, if CentrPort were sold, a portion of the proceeds could be used to satisfy all or some of this lease obligation which affects the amount and timing of any potential future liability. Other factors that add to the uncertainty of estimating any potential future loss contingency include CentrPorts
ability to obtain additional financing and the level of acceptance of their products and services by their current and potential clients. Accordingly, as of March 31, 2004, no provision has been recorded for this potential liability.

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Discontinued Operations

Due to adverse market conditions and lower revenues in the Companys Sao Paolo office, our estimates of future operating performance and cash flows in Brazil have declined substantially. As a result, in the second quarter of 2004, the operations of the Companys office in São Paolo is expected to cease. In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, the results of these operations will be reclassified and separately presented as discontinued operations beginning in the second quarter of 2004. A restructuring charge, net of tax, of approximately $0.6 million related to those activities is expected to be recorded in the second quarter of 2004 and would be included within operating loss from discontinued operations.

Historical Results of Operations

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 88% and 86% of consolidated revenues for the three months ended March 31, 2004 and 2003, respectively. Delta Air Lines, IBM, General Motors and Hewlett Packard accounted for 21%, 13%, 13% and 10% of our revenues, respectively, in the three months ended March 31, 2004. Delta Air Lines and General Motors accounted for 26% and 22% of our revenues, respectively, in the three months ended March 31, 2003. We expect a relatively high level of client concentration to continue which may not necessarily involve the same clients from period to period.

Delta
  Air Lines, which represented 24% of the total gross accounts receivable as of
  March 31, 2004, has stated in its periodic report on Form 10-Q filed with the
  SEC on May 10, 2004, that if it cannot achieve a competitive cost structure,
  regain sustained profitability and access the capital markets on acceptable
  terms, it will need to pursue alternative courses of action intended to make
  Delta Air Lines viable for the long-term, including the possibility of seeking
  to restructure its costs under Chapter 11 of the U.S. Bankruptcy Code. We continue
  to monitor this situation and have taken steps to minimize the financial risk
  to us in case of the further deterioration of the financial condition of Delta
  and the filing of bankruptcy under Chapter 11.

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 sales and marketing, new business development, administrative
  and other non-billed employees, certain other marketing costs, office rent,
  utilities, professional and consulting fees, travel, telephone and other related
  expenses.

Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003

Revenues.
   Revenues increased $0.8 million, or 6%, to $15.3 million for the three
  months ended March 31, 2004 from $14.5 million for the three months ended March
  31, 2003. This increase in revenues was primarily attributable to an increase
  in overall average fee per billed hour, partially offset by a reduction in total
  billed hours. Average fee per billed hour increased from $164 during the first
  quarter of 2003 to $186 during the same period in 2004. Total billed hours declined
  from 82,000 billed hours during the three months ended March 31, 2003 to 79,000
  billed hours during the same period in 2004, which was principally due to the
  completion of a large engagement in the Brazil office which did not reoccur
  in 2004. By location, billed hours decreased by 7,000 to 6,000 in Brazil and
  by 1,000 to 57,000 in the U.S., offset by an increase in billed hours of 5,000
  to 16,000 in London. The beneficial effect of foreign exchange rate fluctuation
  on revenues was $0.4 million during the first quarter of 2004 compared with
  2003, due to the strengthening of the British Pound compared to the U.S. Dollar.
  Revenues from our operations in Brazil were $0.1 million and $0.2 million for
  the three months ended March 31, 2004 and 2003, respectively.

Cost
  of Revenues.Cost of revenues increased $0.5 million,
  or 6%, to $8.2 million for the three months ended March 31, 2004 from $7.7 million
  for the three months ended March 31, 2003. This increase in cost of revenues
  was primarily due to additional employee compensation and related expenses mainly
  due to an increase in full time equivalent employees (FTEs), in
  which the average number of FTEs increased by 10 from 236 average FTEs during
  the first quarter of 2003 to 246 average FTEs during the first quarter of 2004.
  Cost of revenues from our operations in Brazil were $0.1 million and $0.2 million
  for the three months ended March 31, 2004 and 2003, respectively.

Gross Profit.Gross profit margin increased to 47% of revenues for the three months ended March 31, 2004, from 46% for the three months ended March 31, 2003. This increase was primarily due to an increase in the average fee per billed hour of $22 from $164 during the first quarter of 2003 to $186 during the first quarter of 2004, mostly offset by lower utilization (billed hours divided by total capacity hours of billable employees) of 70% for the three months ended March 31, 2004 compared with 76% for the same period in 2003.

Selling, General and Administrative.  Selling, general and administrative expenses increased $0.6 million, or 12%, to $5.4 million for the three months ended March 31, 2004 from $4.8 million for the three months ended March 31, 2003. The increase in selling, general and administrative expenses were primarily due to an increase in employee compensation and related expenses,

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facilities related expenses, and an increase in professional fees related to a Sarbanes-Oxley project. Selling, general and administrative expenses from our operations in Brazil were $0.1 million for each of the three months ended March 31, 2004 and 2003.

Depreciation and Amortization.Depreciation and amortization decreased $0.4 million, or 42%, to $0.5 million for the three months ended March 31, 2004 from $0.9 million for the three months ended March 31, 2003. The decrease in depreciation and amortization was attributable to certain assets becoming fully depreciated during 2003.

Interest Income.Interest income remained flat at $0.2 million for the three months ended March 31, 2004 compared with the three months ended March 31, 2003. This was primarily attributable to higher average cash balances for most of the first quarter of 2004 as compared to the same period in 2003 offset by a decrease in average interest rates and an investment of cash in marketable securities during March 2004.

Provision for Income Taxes.  The provision for income taxes for the three months ended March 31, 2004 was $0.4 million compared to $0.3 million for the three months ended March 31, 2003. The effective income tax rate was 37% for the three months ended March 31, 2004 compared to an effective income tax benefit rate of 35% for the three months ended March 31, 2003. 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 rates differ from the federal statutory rates due to the impact of state taxes, non-deductible items and changes in the valuation allowances recorded against losses generated by certain foreign entities.

Liquidity and Capital Resources

We historically have financed our operations primarily from funds generated from operations. Net cash used in operating activities was $1.9 million and $4.7 million for the three months ended March 31, 2004 and 2003, respectively.

Net
  cash (used in) provided by investing activities was $(19.2) million for the
  three months ended March 31, 2004 compared to $0.5 million for the three months
  ended March 31, 2003. During the first three months of 2004, we invested $0.1
  million in capital expenditures and purchased $20.4 million of marketable securities.
  In addition, during the first three months of 2004 we collected $0.02 million
  of notes receivable and obtained $1.3 million in restricted cash related to
  a letter of credit for our San Francisco office space. As of December 31, 2003,
  this restricted cash was included in Prepaid expenses and other current
  assets on the consolidated balance sheet. We anticipate spending approximately
  $2 million on capital expenditures during the year ended December 31, 2004.

Net cash provided by (used in) financing activities was $1.5 million for the three months ended March 31, 2004 compared to $(0.2) million for the three months ended March 31, 2003. Our primary source of cash from financing activities for the three months ended March 31, 2004 and 2003 were proceeds from the exercise of employee stock options and purchases under the employee stock purchase plan of $1.9 million and $0.1 million, respectively. Offsetting these items for the three months ended March 31, 2004 and 2003 were repayments of debt and capital lease obligations of $0.05 million and $0.1 million, respectively, and the purchase of treasury stock for $0.4 million and $0.1 million, respectively.

In 2004, cash flow from financing activities may fluctuate based on possible purchases of our common stock as a result of the exercise of stock options.

We believe that our cash on hand and short-term investments together with funds generated 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 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, 2004, the aggregate remaining base rent and estimated operating expenses due under this lease was $5.3 million, subject to adjustment in accordance with the terms of the lease. This balance will be reduced 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.

We have considered the need to record a provision for this potential liability. Although we believe it is reasonably possible that an accrual of a loss contingency for the CentrPort lease guarantee in the future may be warranted, due to the significance of the uncertainties surrounding this matter, we believe the criteria to accrue a loss contingency under SFAS No. 5,Accounting for Loss Contingencies, which states that a loss contingency should be accrued when the loss contingency is probable and such amount is

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reasonable estimable, has not been met. For example, if CentrPort were sold, a portion of the proceeds could be used to satisfy all or some of this lease obligation which affects the amount and timing of any potential future liability. Other factors that add to the uncertainty of estimating any potential future loss contingency include CentrPorts ability to obtain additional financing and the level of acceptance of their products and services by their current and potential clients. Accordingly, as of March 31, 2004, no provision has been recorded for this potential 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 expired in April 2004. In aggregate we have purchased 57,790 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, 2004.

Recently Issued Accounting Pronouncements

In December 2003, the FASB issued Interpretation No. 46R,Consolidation of Variable Interest Entities(FIN 46R). FIN 46R replaces the same titled FIN 46 that was issued in January 2003. FIN 46R requires the consolidation of a variable interest entity by a company that bears the majority of the risk of loss from the variable entitys activities, is entitled to receive a majority of the variable interest entitys residual returns or both. The provisions of this interpretation are effective for us beginning the first quarter of fiscal 2004. The adoption of this interpretation did not have a material effect on our consolidated financial statements or disclosures.

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, 2004 and 2003, we derived 20% and 15%, respectively, 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 beneficial effect of foreign exchange
rate fluctuation on revenues was $0.4 million during the first quarter of 2004 compared with 2003, due to the strengthening of the British Pound compared to the U.S. Dollar. 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 will 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 marketable securities. Our investment policy calls for investment in low risk instruments and we have limited our exposure to interest rate risk by investing in securities with maturities of two years or less and our weighted average maturity will be no more than one year.

ITEM 4. CONTROLS AND PROCEDURES

We conducted 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-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. 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 submit under the Exchange Act 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.

During the quarter ended March 31, 2004, there has not occurred any change in our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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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 Underwriters). 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. The Modem Media defendants 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.

On June 30, 2003, a committee of our Board of Directors conditionally approved a proposed partial settlement with the plaintiffs in this matter. The settlement would provide, among other things, a release of Modem Media, Inc. and of the individual defendants for the conduct alleged in the action to be wrongful in the amended complaint. We would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, not assert, or release certain potential claims we may have against our underwriters. Any direct financial impact of the proposed settlement is expected to be borne by our insurers. The committee agreed to approve the settlement subject to a number of conditions, including the participation of a substantial number of other issuer defendants in the proposed settlement, the consent of our insurers to the settlement, and the completion of acceptable final
settlement documentation. Furthermore, the settlement is subject to a hearing on fairness and approval by the Court overseeing the IPO Litigations. The settlement is partial because the Underwriters are not party to the settlement. We understand that a majority of the other issuer defendants in the consolidated actions have also conditionally approved the proposed settlement.

If the settlement is not finalized, we will continue to defend these actions vigorously. However, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation if the litigation is not settled. 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 are currently in discovery for this litigation. We believe that there is no basis for the counterclaims, we have meritorious defenses to the counterclaims and we intend to defend this action vigorously. Based on this
belief, 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 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

The following table is a summary of all repurchases made by the Company of its common stock during the three months ended March 31, 2004, prior purchases made in prior periods and purchases which may be made pursuant to outstanding plans as of March 31, 2004:



|Period   |  | TotalNumberofSharesPurchased |     |  | AveragePricePaidperShare |      |     | NumberofSharesPurchasedasPartofPubliclyAnnouncedPlansorPrograms(1) |        | Maximum
        Number (or ApproximateDollar Value) of Shares (or Units)that May Yet Be Purchased Underthe Plans or Programs |                                           
|-------- |  | ---------------------------- | --- |  | ------------------------ | ---- | --- | ------------------------------------------------------------------ | ------ | ---------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------
|January  |  | 20,000                       | (2) |  | $                        | 5.79 | (2) |                                                                    | 57,790 |                                                                                                                              | 65,510(3)
              and $4,867,330(1) 
|February |  | 22,000                       | (2) |  |                          | 5.79 | (2) |                                                                    | 57,790 |                                                                                                                              | 40,964(3)(4) 
         and $4,867,330(1)  
|March    |  |                             |     |  |                          | N/A  |     |                                                                    | 57,790 |                                                                                                                              | 40,964(3)
               and $4,867,330(1)
|         |  |                              |     |  |                          |      |     |                                                                    |        |                                                                                                                              |                                           
|Total    |  | 42,000                       | (2) |  | $                        | 5.79 | (2) |                                                                    | 57,790 |                                                                                                                              | 40,964(3)
               and $4,867,330(1)

| | (1) | In October 2002, we established a program, which expired in April 2004, to repurchase $5.0 million of our common stock. The timing and amount of the Companys purchases were dependent on a number of factors including the price and availability of our common stock, general market conditions and other uses of funds. These shares were repurchased between November 2002 and April 2003. There were no repurchases during the first quarter of 2004.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | These shares represent the exercise of options under the Option Agreement with True North. The exercise price has been paid to IPG and IPG surrendered an equivalent number of shares of common stock to the Company.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The number of shares that are subject to option exercises under the Option Agreement, pursuant to which the exercise price would be paid to IPG and IPG would surrender an equivalent number of shares to the Company.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Due to the termination of employment of certain option holders, options to purchase 2,546 shares were cancelled.
| | --- | ----------------------------------------------------------------------------------------------------------------

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, during the first quarter of 2004, our Audit Committee has approved additional or re-affirmed engagements of PricewaterhouseCoopers LLP, our independent auditors, to perform the following:

| | (a) | non-audit services: evaluate our design of our internal controls that are required by section 404 of the Sarbanes-Oxley Act; and tax services in Europe regarding tax filings and specific tax advice; and
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | audit related services: provide continuing education services; audit our 401(K) employee benefit plan for the year ended December 31, 2003.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

| | (a) | Exhibits
| | --- | --------



|Exhibit No. | Description                                                                                                                                                                                                                                                 
|----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |                                                                                                                                                                                                                                                             
|31.1        | Certification of Marc C. Particelli, President and Chief Executive Officer of Modem Media, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                    
|            |                                                                                                                                                                                                                                                             
|31.2        | Certification of Frank J. Connolly, Jr., Chief Financial Officer of Modem Media, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                              
|            |                                                                                                                                                                                                                                                             
|32          | Certification of Marc C. Particelli, President and Chief Executive Officer and Frank J. Connolly, Jr., Chief Financial Officer of Modem Media, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|            |                                                                                                                                                                                                                                                             

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| | (b) | Reports on Form
        8-K
| | --- | ---------------------------

The
  Company filed a Form 8-K, dated February 26, 2004, reporting in Item 5, that
  it announced the appointment of Scott Sorokin as Managing Director of its San
  Francisco office.

The Company filed a Form 8-K, dated March 5, 2004, reporting in Item 7 that it attached a press release as an Exhibit 99.1. In the same Form 8-K, reporting in Item 9, pursuant to Regulation FD, the Company attached a press release as an Exhibit 99.1 reporting that the Company furnished results of operations for the fourth quarter 2003 and fiscal year-ended December 31, 2003 and guidance for the first quarter of 2004. In addition, in the same Form 8-K, reporting in Item 12, the Company furnished the results of operations for the fourth quarter of 2003 and fiscal year-ended December 31, 2003.

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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 11, 2004 |  | MODEMMEDIA,INC.
|------------------ |  | ---------------
|                   |  | By             
|                   |  |                
|                   |  |                





| |  |    |                                                                        
| |  | -- | -----------------------------------------------------------------------
| |  | By | /s/ BRIANJ.DICK                                                        
| |  |    |                                                                        
| |  |    | Brian J. Dick Vice President, Controller (Principal Accounting Officer)



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