10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2004
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from           to

Commission file number: 000-23709

DoubleClick Inc.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Delaware	13-3870996
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)	(I.R.S. EMPLOYER IDENTIFICATION NUMBER)

111 Eighth Avenue, 10th Floor

New York, New York 10011

(212) 683-0001

(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER,

INCLUDING AREA CODE OF REGISTRANT’S PRINCIPAL EXECUTIVE OFFICES)

     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 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 þ          No o

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

      As of August 6, 2004 there were 126,732,248 outstanding shares of the registrant’s Common Stock.

DOUBLECLICK INC.

INDEX TO FORM 10-Q

PART I:  FINANCIAL INFORMATION
Item 1:	Financial Statements (unaudited)
	Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003	2
	Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003	3
	Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003	4
	Notes to Consolidated Financial Statements	5
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3:	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4:	Controls and Procedures	47
PART II:  OTHER INFORMATION
Item 1:	Legal Proceedings	47
Item 2:	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	48
Item 4:	Submission of Matters to a Vote of Security Holders	48
Item 6:	Exhibits and Reports on Form 8-K	49
AGREEMENT AND PLAN OF MERGER
MASTER LICENSE AGREEMENT
CERTIFICATION
CERTIFICATION
CERTIFICATION
CERTIFICATION

1

PART 1:     FINANCIAL INFORMATION

Item 1: Financial Statements (Unaudited)

DOUBLECLICK INC.

CONSOLIDATED BALANCE SHEETS

		June 30,			December 31,
		2004			2003
		(Unaudited, in thousands,
		except share amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	77,522		$	183,484
Investments in marketable securities			183,839			151,898
Restricted cash			3,728			16,328
Accounts receivable, net of allowances of $7,780 and $7,519, respectively			66,160			51,491
Prepaid expenses and other current assets			19,234			17,473
	Total current assets		350,483			420,674
Investment in marketable securities			264,822			312,434
Restricted cash			11,668			11,668
Property and equipment, net			76,933			75,786
Goodwill			68,293			18,658
Intangible assets, net			33,111			10,847
Investment in affiliates			15,135			13,422
Other assets			13,615			14,408
	Total assets	$	834,060		$	877,897
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	4,897		$	4,164
Accrued expenses and other current liabilities			60,453			62,741
Current portion of capital lease obligations and loans payable			3,416			411
Deferred revenue			9,762			8,188
	Total current liabilities		78,528			75,504
Convertible subordinated notes — Zero Coupon, due 2023			135,000			135,000
Other long term liabilities			26,503			27,046
STOCKHOLDERS’ EQUITY:
Preferred stock, par value $0.001; 5,000,000 shares authorized, none outstanding			—			—
Common stock, par value $0.001; 400,000,000 shares authorized, 140,209,258 and 139,329,875 shares issued, respectively			140			139
Treasury stock, 8,442,325 and 1,846,170 shares, respectively			(70,385	)		(10,396	)
Additional paid-in capital			1,292,525			1,287,775
Accumulated deficit			(637,949	)		(649,523	)
Other accumulated comprehensive income			9,698			12,352
	Total stockholders’ equity		594,029			640,347
	Total liabilities and stockholders’ equity	$	834,060		$	877,897

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

2

DOUBLECLICK INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

			Three Months Ended						Six Months Ended
			June 30,						June 30,
			2004			2003			2004			2003
			(Unaudited, in thousands, except per share amounts)
Revenue			$	69,153		$	63,556		$	137,200		$	123,610
Cost of revenue				21,829			22,448			44,394			44,395
	Gross profit			47,324			41,108			92,806			79,215
Operating expenses:
	Sales and marketing			23,505			20,852			49,155			40,508
	General and administrative			8,860			8,360			16,934			17,226
	Product development			10,993			8,528			19,484			16,573
	Amortization of intangibles			1,188			1,240			1,825			3,319
	Restructuring credits, net			—			(6,871	)		—			(6,871	)
		Total operating expenses		44,546			32,109			87,398			70,755
Income from operations				2,778			8,999			5,408			8,460
Other income (expense)
	Equity in losses of affiliates			(384	)		(1,048	)		(570	)		(2,313	)
	Gain on distribution from affiliate			—			—			2,400			—
	Loss on early extinguishment of debt			—			(4,406	)		—			(4,406	)
	Interest and other, net			2,317			2,589			5,791			5,632
		Total other income (expense)		1,933			(2,865	)		7,621			(1,087	)
Income before income taxes				4,711			6,134			13,029			7,373
Provision for income taxes				(830	)		(303	)		(1,455	)		(636	)
Net income			$	3,881		$	5,831		$	11,574		$	6,737
Basic net income per share			$	0.03		$	0.04		$	0.09		$	0.05
Weighted average shares used in basic net income per share				134,824			136,922			135,961			136,679
Diluted net income per share			$	0.03		$	0.04		$	0.08		$	0.05
Weighted average shares used in diluted net income per share				137,636			140,434			139,360			139,597

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

3

DOUBLECLICK INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

				Six Months Ended June 30,
				2004			2003
				(Unaudited, in thousands)
OPERATING ACTIVITIES
	Net income			$	11,574		$	6,737
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and leasehold amortization			13,797			20,353
		Amortization of intangible assets			3,609			4,980
		Equity in losses of affiliates			570			2,313
		Gain on distribution from affiliate			(2,400	)		—
		Loss on early extinguishment of debt			—			4,406
		Other non-cash items			1,397			1,202
		Provisions for bad debts and advertiser discounts			5,958			3,258
		Changes in operating assets and liabilities, net of the effect of acquisitions:
			Accounts receivable		(3,186	)		(71	)
			Prepaid expenses and other assets		317			3,892
			Accounts payable		732			(3,677	)
			Lease termination and related payments		(7,625	)		(14,400	)
			Accrued expenses and other liabilities		(16,191	)		(28,829	)
			Deferred revenue		(928	)		4,184
		Net cash provided by operating activities			7,624			4,348
INVESTING ACTIVITIES
	Purchases of investments in marketable securities				(95,084	)		(236,195	)
	Maturities of investments in marketable securities				106,592			335,139
	Restricted cash				12,600			(30,811	)
	Purchases of property and equipment				(12,123	)		(11,227	)
	Proceeds from distribution from affiliate				2,400			—
	Investment in Abacus Deutschland				(471	)		—
	Acquisition of businesses, net of cash acquired				(72,002	)		(2,757	)
	Proceeds from sale of investment in affiliates				—			656
	Proceeds from sale of intangible asset, net				—			900
		Net cash (used in) provided by investing activities			(58,088	)		55,705
FINANCING ACTIVITIES
	Proceeds from the issuance of common stock and the exercise of stock options, net				3,354			2,266
	Proceeds from issuance of convertible subordinated notes, net				—			131,963
	Purchases of treasury stock				(58,423	)		—
	Payments under capital lease obligations and notes payable				(285	)		(3,681	)
		Net cash (used in) provided by financing activities			(55,354	)		130,548
Effect of exchange rate changes on cash					(144	)		2,693
Net (decrease) increase in cash and cash equivalents					(105,962	)		193,294
Cash and cash equivalents at beginning of period				$	183,484		$	123,671
Cash and cash equivalents at end of period				$	77,522		$	316,965

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

4

DOUBLECLICK INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2004

(Unaudited)

Note 1 — Description of Business and Significant Accounting Policies

Description of Business

      DoubleClick is a leading provider of technology and data products used by direct marketers, Web publishers and advertisers to plan, execute and analyze their marketing programs. Combining technology and data expertise, DoubleClick’s solutions help its customers to optimize their advertising and marketing campaigns online and through direct mail. DoubleClick offers a broad array of technology and data products and services to its customers to allow them to address a full range of the marketing processes, from pre-campaign planning and testing, to execution, measurement and campaign refinements.

      DoubleClick derives its revenues from two business segments: TechSolutions and Data. DoubleClick TechSolutions includes its Ad Management and Marketing Automation divisions. DoubleClick’s Ad Management division primarily consists of the DART for Publishers Service, the DART for Advertisers Service and the DART Enterprise ad serving software product. DoubleClick’s Marketing Automation division consists of email products based on DoubleClick’s DARTmail Service as well as campaign management and analytics products and services. As a result of its acquisition of SmartPath, Inc. (“SmartPath”), a marketing resource management software company, in March 2004, DoubleClick offers marketing planning and operational management solutions as part of its Marketing Automation suite of products and services. With the acquisition of Performics Inc. (“Performics”) in June 2004, DoubleClick created a third division within TechSolutions that offers search engine marketing and affiliate marketing solutions.

      DoubleClick Data includes its Abacus and Data Management divisions. Abacus utilizes the information contributed to the proprietary Abacus database by Abacus Alliance members to make direct marketing more effective for Abacus Alliance members and other clients. Data Management was formed as a result of DoubleClick’s acquisition of Computer Strategy Coordinators, Inc. (“CSC”), which was completed in June 2003. Data Management offers direct marketers solutions for building and managing customer marketing databases, tools to plan, execute and measure multi-channel marketing campaigns, as well as list processing and data hygiene products and services.

Basis of Presentation

      The accompanying consolidated financial statements include the accounts of DoubleClick, its wholly owned subsidiaries, and subsidiaries over which it exercises a controlling financial interest. All significant intercompany transactions and balances have been eliminated. Investments in entities in which DoubleClick does not have a controlling financial interest, but over which it has significant influence are accounted for using the equity method. Investments in which DoubleClick does not have the ability to exercise significant influence are accounted for using the cost method.

      The accompanying interim consolidated financial statements have been prepared in accordance with the rules and regulations of Securities and Exchange Commission. The accompanying interim consolidated financial statements are unaudited, but in the opinion of management, contain all the normal, recurring adjustments considered necessary to present fairly the financial position, the results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles applicable to interim periods. Results of operations are not necessarily indicative of the results expected for the full fiscal year or for any future period.

      The Consolidated Balance Sheet at December 31, 2003 has been derived from, but does not include all the disclosures contained in, the audited Consolidated Financial Statements for the year ended December 31, 2003. The accompanying Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements of DoubleClick for the year ended December 31, 2003.

5

DOUBLECLICK INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

June 30, 2004

(Unaudited)

Cash and Cash Equivalents, Investments in Marketable Securities and Restricted Cash

      Cash and cash equivalents represent cash and highly liquid investments with a remaining contractual maturity at the date of purchase of three months or less.

      Marketable securities consist of government and corporate debt securities and are classified as current or non-current assets depending on their dates of maturity. As of June 30, 2004, all marketable securities included in non-current assets have maturities greater than one year.

      DoubleClick 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. DoubleClick recognizes gains and losses when these securities are sold using the specific identification method. DoubleClick has not recognized any material gains or losses from the sale of its investments in marketable securities.

      Restricted cash primarily represents amounts placed in escrow relating to funds used to cover office lease security deposits and DoubleClick’s automated clearinghouse payment function.

Property and Equipment

      Property and equipment is recorded at cost and depreciated using the straight-line method over the shorter of the estimated life of the asset or the lease term. As required by SOP 98-1, “Accounting for Costs of Computer Software Developed or Obtained for Internal Use”, DoubleClick capitalizes certain computer software developed or obtained for internal use. Capitalized software is depreciated using the straight-line method over the estimated life of the software, generally three to five years.

Goodwill and Intangible Assets

      DoubleClick records as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired. SFAS No. 142, “Goodwill and Other Intangible Assets,” prescribes a two-step process for impairment testing of goodwill, which is performed annually, as well as when an event triggering impairment may have occurred. The first step tests for impairment, while the second step, if necessary, measures the impairment. DoubleClick has elected to perform its annual analysis during the fourth quarter of each fiscal year as of October 1st. No indicators of impairment were identified during the first half of 2004.

      Intangible assets include patents, trademarks, customer relationships, purchased technology and a covenant not to compete. Such intangible assets are amortized on a straight-line basis over their estimated useful lives, which are generally two to five years.

Impairment of Long-Lived Assets

      DoubleClick assesses the recoverability of long-lived assets, including intangible assets, held and used whenever events or changes in circumstances indicate that future cash flows, undiscounted and without interest charges, expected to be generated by an asset’s disposition or use may not be sufficient to support its carrying amount. If such undiscounted cash flows are not sufficient to support the recorded value of assets, an impairment loss is recognized to reduce the carrying value of long-lived assets to their estimated fair value.

Revenue Recognition

      DoubleClick’s revenues are presented net of a provision for advertiser credits, which is estimated and established in the period in which services are provided. These credits are generally issued in the event that solutions do not meet contractual specifications. Actual results could differ from these estimates.

6

DOUBLECLICK INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

June 30, 2004

(Unaudited)

      TechSolutions. Revenues include fees earned from the use of DoubleClick’s Ad Management and Marketing Automation products and services. Revenues derived from DoubleClick’s hosted, or Web-based, applications, including the DART for Publishers Service, the DART for Advertisers Service, and DARTmail, are recognized in the period the advertising impressions or emails are delivered, provided collection of the resulting receivable is reasonably assured. DART Service activation fees are deferred and recognized ratably over the expected term of the customer relationship.

      For DoubleClick’s licensed ad serving, campaign management and marketing resource management software solutions, revenues are recognized when product installation is complete, which generally occurs when customers begin utilizing the product, there is pervasive evidence of an arrangement, collection is reasonably assured, the fee is fixed or determinable and vendor-specific objective evidence exists to allocate the total fees to all elements of the arrangement. A portion of the initial ad serving software license fee is attributed to the customer’s right to receive, at no additional charge, software upgrades released during the subsequent twelve months. Revenues attributable to software upgrades are deferred and recognized ratably over the period covered by the software license agreement, which is generally one year.

      Revenues from consulting services are recognized as the services are performed and customer-support revenues are deferred and recognized ratably over the period covered by the customer support agreement, which is generally one year.

      Data. Abacus provides services to its clients that result in a deliverable product in the form of consumer and business prospect lists. Revenues are recognized when the product is shipped to the client, provided collection of the resulting receivable is reasonably assured. Data Management provides list processing, database development and database management services. List processing and database development revenues are recognized in the period that the product is completed and delivered, provided that collection is reasonably assured. Database management revenues are recognized as the services are provided.

Product Development

      Product development expenses consist primarily of compensation and related benefits, consulting fees and other operating expenses associated with product development departments. The product development departments perform research and development, enhance and maintain existing products and provide quality assurance. Software development costs are required to be capitalized when a product’s technological feasibility has been established by completion of a working model of the product and ending when a product is available for general release to customers. To date, completion of a working model of DoubleClick’s products and general release have substantially coincided. As a result, DoubleClick has not capitalized any software development costs.

Issuance of Stock by Affiliates

      Changes in DoubleClick’s interest in its affiliates arising as the result of their issuance of common stock are recorded as gains and losses in the Consolidated Statement of Operations, except for any transactions that must be recorded directly to equity in accordance with the provisions of SAB No. 51, “Accounting for Sales of Stock of a Subsidiary.”

Income Taxes

      DoubleClick uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax

7

DOUBLECLICK INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

June 30, 2004

(Unaudited)

bases and to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if, based on the weight of the available evidence, it is not more likely than not that some portion or all of the deferred tax assets will be realized.

Foreign Currency

      The functional currencies of DoubleClick’s foreign subsidiaries are their respective local currencies. The financial statements maintained in local currencies are translated to United States dollars using period-end rates of exchange for assets and liabilities and average rates during the period for revenues, cost of revenues and expenses. Translation gains and losses are accumulated as a separate component of stockholders’ equity. Net gains and losses from foreign currency transactions are included in the Consolidated Statements of Operations and were not significant during the periods presented.

Equity-based Compensation

      DoubleClick accounts for its employee stock option plans under the intrinsic value method, in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Under APB No. 25, generally no compensation expense is recorded when the terms of the award are fixed and the exercise price of the employee stock option equals or exceeds the fair value of the underlying stock on the date of the grant. DoubleClick has adopted the disclosure-only requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, (“SFAS 123”), which allows entities to continue to apply the provisions of APB No. 25 for transactions with employees and provide pro forma net income and pro forma earnings per share disclosures for employee stock grants made as if the fair value based method of accounting in SFAS No. 123 had been applied to these transactions.

      In December 2002, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” which amends SFAS No. 123, “Accounting for Stock-Based Compensation.”

      Had DoubleClick determined compensation expense of employee stock options based on the estimated fair value of the stock options at the grant date, consistent with the guidelines of SFAS No. 123, DoubleClick’s net income would have decreased to the pro forma amounts indicated below:

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2004			2003			2004			2003
		(In thousands, except per share amounts)
Net income (loss)
	As reported	$	3,881		$	5,831		$	11,574		$	6,737
	Pro forma per SFAS 123	$	(2,778	)	$	(21,361	)	$	(2,375	)	$	(44,602	)
Basic net income (loss) per share
	As reported	$	0.03		$	0.04		$	0.09		$	0.05
	Pro forma per SFAS 123	$	(0.02	)	$	(0.16	)	$	(0.02	)	$	(0.33	)
Diluted net income (loss) per share
	As reported	$	0.03		$	0.04		$	0.08		$	0.05
	Pro forma per SFAS 123	$	(0.02	)	$	(0.16	)	$	(0.02	)	$	(0.33	)

8

DOUBLECLICK INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

June 30, 2004

(Unaudited)

      The per share weighted average fair value of options granted for the three and six months ended June 30, 2004 was $5.63 and $5.83, respectively, and the per share weighted average fair value of options granted for the three and six months ended June 30, 2003 was $4.04 and $3.98, respectively, on the grant date with the following weighted average assumptions:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Expected dividend yield		0%		0%		0%		0%
Risk-free interest rate		3.29%		2.53%		3.23%		2.74%
Expected life		4.5  years		4.5  years		4.5  years		4.5  years
Volatility		65%		55%		65%		58%

      The pro forma impact of options on net income (loss) for the three and six months ended June 30, 2004 and 2003 is not representative of the effects on net income (loss) for future years, as future years will include the effects of additional years of stock option grants.

Basic and Diluted Net Income Per Share

      Basic net income per share excludes the effect of potentially dilutive securities and is computed by dividing the net income available to common shareholders by the weighted-average number of common shares outstanding for the reporting period. Diluted net income per share adjusts this calculation to reflect the impact of outstanding convertible securities and stock options to the extent that their inclusion would have a dilutive effect on net income per share for the reporting period.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
	(In thousands, except per share amounts)
Net income	$	3,881	$	5,831	$	11,574	$	6,737
Weighted average basic common shares outstanding		134,824		136,922		135,961		136,679
Effect of dilutive securities: stock options		2,812		3,512		3,399		2,918
Weighted average diluted common shares outstanding		137,636		140,434		139,360		139,597
Net income per common share — basic	$	0.03	$	0.04	$	0.09	$	0.05
Net income per common share — diluted	$	0.03	$	0.04	$	0.08	$	0.05

      At June 30, 2004 and 2003, outstanding options of approximately 9.9 million and 13.0 million, respectively, to purchase shares of common stock were not included in the computation of diluted net income per share because to do so would have had an antidilutive effect for the periods presented. Similarly, the computation of diluted net income per share at June 30, 2004 excludes the effect of 10.3 million shares of common stock issuable upon conversion of the Zero Coupon Convertible Subordinated Notes due 2023. In addition, at June 30, 2003, the effect of 14.0 million shares issuable upon conversion of the 4.75% Convertible Subordinated Notes due 2006 was excluded since their inclusion would also have had an antidilutive effect.

Use of Estimates

      The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and

9

DOUBLECLICK INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

June 30, 2004

(Unaudited)

liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

New Accounting Pronouncements

      In January 2003, FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities that either (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) are owned by equity investors who lack an essential characteristic of a controlling financial interest. FIN 46 applies immediately to variable interest entities created after January 31, 2003. With regard to variable interest entities already in existence prior to February 1, 2003, the implementation of FIN 46 has been delayed and currently applies to the first fiscal year or interim period beginning after December 15, 2003. FIN 46 requires disclosure of variable interest entities in financial statements issued after January 31, 2003, if it is reasonably possible that as of the transition date (1) an entity will be the primary beneficiary of an existing variable interest entity that will require consolidation, or (2) an entity will hold a significant variable interest in, or have significant involvement with, an existing variable interest entity. In December 2003, the FASB issued Interpretation No. 46R (“FIN 46R”), a revision to FIN 46. FIN 46R clarifies some of the provisions of FIN 46 and exempts certain entities from its requirements. FIN 46R is effective at the end of the first interim period ending after December 15, 2003. DoubleClick does not have any entities as of June 30, 2004 that required disclosure or new consolidation as a result of adopting the provisions of FIN 46 and FIN 46R.

Note 2 — Business Transactions

Acquisitions

2004

Performics Inc.

      On June 22, 2004, DoubleClick completed its acquisition of Performics, a privately-held search engine marketing and affiliate marketing company based in Chicago, Illinois for approximately $58.2 million in cash. Pursuant to the acquisition agreements, Performics has the right to receive up to an additional $7.0 million based on the attainment of certain 2004 revenue objectives. Performics’ search engine marketing solutions are designed to help clients automate their paid placement, paid inclusion, and comparison shopping listings across multiple search providers and publishers. Performics also provides the infrastructure for affiliate marketing, through which marketers manage, track, and report on their offers across multiple affiliate sites. This acquisition allows DoubleClick to offer performance based marketing products and services.

10

DOUBLECLICK INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

June 30, 2004

(Unaudited)

      The purchase price has been preliminarily allocated to the assets acquired and the liabilities assumed according to their fair value at the date of acquisition as follows (in millions):

Current assets	$	24.9
Property and equipment		1.4
Other intangible assets		18.7
Goodwill		35.0
Total assets acquired		80.0
Total liabilities assumed		(21.8	)
Net assets acquired	$	58.2

      On the basis of estimated fair values, approximately $11.8 million of the purchase price has been preliminarily allocated to purchased technology and $6.9 million to customer relationships. The purchased technology and the customer relationships are being amortized on a straight-line basis over three years based on each intangibles estimated useful life.

      The results of Performics’ operations will be included in DoubleClick’s Consolidated Statement of Operations beginning in the third quarter of 2004. DoubleClick has reflected this acquisition on its Consolidated Balance Sheet as of June 30, 2004.

SmartPath, Inc.

      On March 19, 2004, DoubleClick completed its acquisition of SmartPath, a privately-held marketing resource management, or MRM, software company based in Raleigh, North Carolina for approximately $24.1 million in cash. The SmartPath MRM solution adds marketing planning and operational management solutions to DoubleClick’s existing offerings in channel execution and data/analytics and optimization. In addition, SmartPath provides DoubleClick with an expanded platform to enter traditional marketing channels such as print and television.

      The purchase price has been allocated to the assets acquired and the liabilities assumed according to their fair value at the date of acquisition as follows (in millions):

Current assets	$	3.2
Property and equipment		0.1
Other intangible assets		7.1
Goodwill		15.7
Total assets acquired		26.1
Total liabilities assumed		(2.0	)
Net assets acquired	$	24.1

      On the basis of estimated fair values, approximately $3.3 million of the purchase price has been allocated to purchased technology, $1.4 million to customer relationships and $2.4 million to a covenant not to compete. The purchased technology and the customer relationships are being amortized on a straight-line basis over three years based on each intangibles estimated useful life. The covenant not to compete is being amortized on a straight-line basis over 15 months.

11

DOUBLECLICK INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

June 30, 2004

(Unaudited)

      The results of SmartPath’s operations were included in DoubleClick’s Consolidated Statement of Operations beginning in the second quarter of 2004.

2003

Computer Strategy Coordinators, Inc.

      On June 30, 2003, DoubleClick completed its acquisition of CSC, a data management company based in Schaumburg, Illinois. This acquisition enabled DoubleClick to strengthen the link between its email, campaign management and Web site analytics technology businesses with its data businesses, to create a comprehensive and bundled solution. In the transaction, DoubleClick acquired all of the outstanding shares of CSC in exchange for approximately $2.8 million in cash and the assumption of certain indebtedness.

      The purchase price has been allocated to the assets acquired and the liabilities assumed according to their fair value at the date of acquisition as follows (in millions):

Current assets	$	2.2
Property and equipment		0.5
Other intangible assets		6.8
Total assets acquired		9.5
Total liabilities assumed		(6.7	)
Net assets acquired	$	2.8

      On the basis of estimated fair values, approximately $5.6 million of the purchase price has been allocated to customer relationships and $1.2 million to purchased technology. These intangibles are being amortized on a straight-line basis over three years based on each intangible’s estimated useful life.

      The results of operations of CSC were included in DoubleClick’s Consolidated Statement of Operations beginning in the third quarter of 2003.

      The following unaudited pro forma results of operations have been prepared assuming that the acquisitions of Performics, SmartPath and CSC, consummated during 2004 and 2003, occurred at the beginning of the respective periods presented. This pro forma financial information should not be considered indicative of the actual results that would have been achieved had the acquisitions been completed on the dates indicated and does not purport to indicate results of operations as of any future date or any future period.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
	(In thousands, except				(In thousands, except per
	per share data)				share data)
Revenues	$	73,919	$	70,747	$	147,357	$	139,108
Net income	$	3,718	$	4,009	$	7,594	$	3,487
Net income per basic share	$	0.03	$	0.03	$	0.06	$	0.03
Net income per diluted share	$	0.03	$	0.03	$	0.05	$	0.02

12

DOUBLECLICK INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

June 30, 2004

(Unaudited)

Note 3 — Investment in Affiliates

      DoubleClick’s investments in affiliates at June 30, 2004 and December 31, 2003 consisted of the following:

	June 30,		December 31,
	2004		2003
	(In thousands)
AdLINK Internet Media AG	$	9,395	$	7,578
DoubleClick Japan		5,663		5,844
Abacus Deutschland		77		—
MaxWorldwide, Inc.		—		—
	$	15,135	$	13,422

      In connection with DoubleClick’s sale of its European Media business to AdLINK Internet Media AG (“AdLINK”) in January 2002, DoubleClick acquired an option to acquire an additional 21% of AdLINK common shares from United Internet AG, AdLINK’s largest shareholder. This option was only exercisable if AdLINK had achieved EBITDA positive results for two out of three consecutive fiscal quarters before December 31, 2003. AdLINK did not achieve EBITDA positive results during these periods, therefore the option expired unexercised.

      DoubleClick’s investment in AdLINK represents an investment in a publicly traded company, the shares of which are accounted for as available-for-sale marketable securities. Accordingly, this investment is carried at fair value with changes in fair value being reported as a component of other comprehensive income. At June 30, 2004 and December 31, 2003, DoubleClick’s cost basis in this investment was approximately $1.9 million.

      As of June 30, 2004 and December 31, 2003, DoubleClick’s investments in MaxWorldwide, Inc. (“MaxWorldwide”) and DoubleClick Japan represent investments in publicly traded companies which are accounted under the equity method of accounting. At June 30, 2004 and December 31, 2003, the fair value of these investments was as follows:

	June 30,		December 31,
	2004		2003
	(In thousands)
MaxWorldwide, Inc.	$	1,968	$	3,840
DoubleClick Japan	$	19,340	$	12,981

      In January 2004, DoubleClick commenced operations of Abacus Deutschland, a joint venture with AZ Direct GmbH, a subsidiary of Bertelsmann AG, a global media company. DoubleClick has a 50% interest in the joint venture which required an initial investment of approximately $0.5 million and is expected to require additional investments of up to $1.0 million during 2004. As of June 30, 2004 DoubleClick recognized losses of approximately $0.4 million. Abacus Deutschland is based in Düsseldorf, Germany and offers German catalog companies modeling tools designed to improve their direct marketing initiatives.

      In the first quarter of 2004, DoubleClick recognized a gain of $2.4 million relating to a distribution from MaxWorldwide in connection with its plan of liquidation and dissolution. DoubleClick still maintains a 19.8% interest in MaxWorldwide and may receive additional distributions in future periods based on the finalization of its plan of liquidation and dissolution.

13

DOUBLECLICK INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

June 30, 2004

(Unaudited)

Note 4 — Goodwill

      The changes in the carrying amount of goodwill for the six months ended June 30, 2004 are as follows (in thousands):

Balance at December 31, 2003	$	18,658
Recognition of Canadian deferred tax assets		(903	)
Acquisition of SmartPath		15,719
Acquisition of Performics		35,053
Tax adjustment related to the acquisition of MessageMedia		(234	)
Balance at June 30, 2004	$	68,293

      Goodwill at June 30, 2004 and December 31, 2003 relates solely to DoubleClick’s TechSolutions segment.

Note 5 — Intangible Assets

      Intangible assets consist of the following:

				June 30, 2004
		Weighted									December 31,
		Average		Gross							2003
		Amortization		Carrying		Accumulated
		Period		Amount		Amortization			Net		Net
				(In thousands)
Intangible assets:
	Patents and trademarks		33 months	$	2,084	$	(2,084	)	$	—	$	—
	Customer relationships		33 months		35,618		(22,598	)		13,020		6,105
	Purchased technology and other		39 months		27,131		(8,960	)		18,171		4,742
	Covenant not to compete		15 months		2,400		(480	)		1,920		—
			36 months	$	67,233	$	(34,122	)	$	33,111	$	10,847

      Amortization expense was $2.1 million and $3.6 million for the three and six months ended June 30, 2004, respectively, and $2.0 million and $5.0 million for the three and six months ended June 30, 2003, respectively. For the three and six months ended June 30, 2004, $0.9 million and $1.8 million of amortization expense relating to purchased technology has been included as a component of cost of revenue in the Consolidated Statements of Operations. For the three and six months ended June 30, 2003, $0.8 million and $1.7 million of amortization expense relating to purchased technology has been included as a component of cost of revenue in the Consolidated Statements of Operations.

      Based on the balance of intangible assets at June 30, 2004, the annual amortization expense for each of the succeeding three fiscal years is estimated to be $12.6 million, $9.7 million and $3.9 million in 2005, 2006 and 2007, respectively. Amortization expense for the remaining balance of fiscal 2004 is estimated to be $6.9 million.

Note 6 — Convertible Subordinated Debt — Zero Coupon

      On June 23, 2003, DoubleClick issued $135.0 million aggregate principal amount of Zero Coupon Convertible Subordinated Notes due 2023 (the “Zero Coupon Notes”) in a private offering. The Zero

14

DOUBLECLICK INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

June 30, 2004

(Unaudited)

Coupon Notes do not bear interest and have a zero yield to maturity. The Zero Coupon Notes are convertible under certain circumstances into DoubleClick common stock at a conversion price of approximately $13.12 per share, which would result in an aggregate of approximately 10.3 million shares, subject to adjustment upon the occurrence of specified events. Each $1,000 principal amount of the Zero Coupon Notes will initially be convertible into 76.2311 shares of DoubleClick common stock prior to July 15, 2023 if the sale price of DoubleClick’s common stock issuable upon conversion of the Zero Coupon Notes reaches a specified threshold for a defined period of time, if specified corporate transactions have occurred or if DoubleClick calls the Zero Coupon Notes for redemption. The specified thresholds for conversion prior to the maturity date are (a) during any calendar quarter, the last reported sale price of DoubleClick’s common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the previous calendar quarter is greater than or equal to 120% of the applicable conversion price on that 30th trading day and (b) subject to certain exceptions, during the five business day period following any five consecutive trading day period, the trading price per $1,000 principal amount of Zero Coupon Notes for each of the five consecutive trading days is less than 98% of the product of the last reported sale price of DoubleClick’s common stock and the conversion rate (initially 76.2311) on each such day. As of June 30, 2004, these thresholds had not been met.

      The Zero Coupon Notes are DoubleClick’s general unsecured obligations and are subordinated in right of payment to all of its existing and future senior debt. DoubleClick may not redeem the Zero Coupon Notes prior to July 15, 2008. DoubleClick may be required to repurchase any or all of the Zero Coupon Notes upon a change of control or a termination of trading. DoubleClick may redeem for cash some or all of the Zero Coupon Notes at any time on or after July 15, 2008. Holders of the Zero Coupon Notes also have the right to require DoubleClick to purchase some or all of their notes for cash on July 15, 2008, July 15, 2013 and July 15, 2018, at a price equal to 100% of the principal amount of the Zero Coupon Notes being redeemed plus accrued and unpaid liquidated damages, if any.

      DoubleClick received net proceeds of approximately $131.5 million and incurred issuance costs of approximately $3.5 million. The issuance costs are amortized from the date of issuance through July 15, 2008 and are included as a component of other assets on the Consolidated Balance Sheet.

      The Zero Coupon Notes contain an embedded derivative, the fair value of which as of June 30, 2004 has been determined to be immaterial to our consolidated financial position. For financial accounting purposes, the ability of the holder to convert upon the satisfaction of a trading price condition constitutes an embedded derivative. Any significant changes in its value will be reflected in our future income statements, in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

Note 7 — Restructuring

      During the first half of 2004, no restructuring charges or credits were recorded. Cash paid during the six months ended June 30, 2004 with respect to previously accrued restructuring charges was approximately $9.6 million. In the first quarter of 2004, $7.6 million was paid for the final lease termination payment relating to DoubleClick’s former New York headquarters. The remaining $2.0 million of cash paid in the first half of 2004 related to payments for lease and other exit costs at excess and idle facilities in New York and for DoubleClick’s other facilities, primarily London, England and Louisville, Colorado.

      The restructuring accrual as of June 30, 2004 of approximately $23.6 million consists primarily of DoubleClick’s facilities in Louisville, Colorado and London, England. The restructuring accrual associated with these facilities represents the excess of future lease commitments over estimated sublease income, if any. These accruals were based on an analysis performed with the assistance of a real estate firm and are based on

15

DOUBLECLICK INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

June 30, 2004

(Unaudited)

the current real estate market conditions in the local markets where these facilities are located. Should market conditions or other circumstances change, this information may be updated and restructuring charges or credits may be required.

      As of June 30, 2004, approximately $3.6 million and $20.0 million remained accrued as a component in accrued expenses and other current liabilities and other long-term liabilities on the Consolidated Balance Sheet, respectively, and relates wholly to future lease costs.

      The following table sets forth a summary of the costs and related charges for DoubleClick’s restructuring charges and the balance of the restructuring reserves established (in thousands):

Balance at December 31, 2003		$	32,977
	Cash expenditures		(9,636	)
	Effect of foreign currency translation		260
Balance at June 30, 2004		$	23,601

Note 8 — Contingencies

      In April 2002, a consolidated amended class action complaint alleging violation of the federal securities laws in connection with DoubleClick’s follow-on offerings was filed in the United States District Court for the Southern District of New York naming as defendants DoubleClick, some of its officers and directors and certain underwriters of DoubleClick’s follow-on offerings. Approximately 300 other issuers and their underwriters have had similar suits filed against them, all of which are included in a single coordinated proceeding in the Southern District of New York. In October 2002, the action was dismissed against the named officers and directors without prejudice. However, claims against DoubleClick remain. In July 2002, DoubleClick and the other issuers in the consolidated cases filed motions to dismiss the amended complaint for failure to state a claim, which was denied as to DoubleClick in February 2003.

      In June 2003, DoubleClick’s Board of Directors conditionally approved a proposed partial settlement with the plaintiffs in this matter. In June 2004, an agreement of settlement was submitted to the Court for preliminary approval. The settlement would provide, among other things, a release of DoubleClick and of the individual defendants for the conduct alleged in the action to be wrongful in the amended complaint. DoubleClick 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. The Board 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 DoubleClick’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 litigations. If this settlement is not finalized, DoubleClick intends to dispute these allegations and defend this lawsuit vigorously.

      DoubleClick is defending two class action lawsuits, one filed in Allegheny County, Pennsylvania and the other in San Joaquin County, California, alleging, among other things, deceptive business practices, fraud, misrepresentation, invasion of privacy and right of association relating to allegedly deceptive content of online advertisement that plaintiffs assert we delivered to consumers. The actions seek, among other things, injunctive relief, compensatory and punitive damages and attorneys’ fees and costs. In April 2004, the court in the California action entered an order dismissing several claims against DoubleClick with leave to amend. DoubleClick believes these claims are without merit and intends to defend these actions vigorously.

16

DOUBLECLICK INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

June 30, 2004

(Unaudited)

      As previously reported, in October 2003, DoubleClick received a grand jury subpoena from the United States Attorney’s Office for the Southern District of New York (“U.S. Attorney’s Office”) seeking documents regarding certain vendors that provided services to DoubleClick, including interior construction and facilities management, during the period from 1999 through 2001. The services provided by these vendors are unrelated to the products and services provided by DoubleClick to its customers. In March 2004, the U.S. Attorney’s Office issued a press release announcing an Indictment against nineteen individuals, including a former DoubleClick employee, for racketeering and other federal crimes. The Indictment alleges a scheme to defraud DoubleClick through extortion of one of its vendors and through kickbacks to the DoubleClick former employee named in the Indictment. The press release states that these kickback payments “were made without knowledge of [the former employee’s] superiors at DoubleClick and were in direct violation of the written policies and procedures of DoubleClick.”

      DoubleClick is continuing to fully cooperate with the U.S. Attorney’s Office. In addition, following receipt of the grand jury subpoena, DoubleClick conducted an internal investigation and has implemented remedial measures to improve its selection, use and oversight of its vendors. DoubleClick does not believe that any overpayments by DoubleClick relating to the vendor named in the Indictment or the other vendors listed in the grand jury subpoena are material with respect to its financial statements for the periods in question or its current financial condition.

Note 9 — Segment Reporting

      DoubleClick is organized into two segments: TechSolutions and Data. In December 2003, DoubleClick changed its measure of segment profit or loss from gross profit to operating income (loss). As a result, DoubleClick has adjusted its prior period segment disclosures to conform to this new measurement. Adjustments to reconcile segment reporting to consolidated results are included in “corporate.” Corporate represents the results of operations of DoubleClick’s unallocated corporate overhead and restructuring credits that are non-segment specific. The accounting policies of DoubleClick’s segments are the same as those described in the summary of significant accounting policies.

      Revenue and operating income (loss) by segment are as follows (in thousands):

	For the Three Months Ended									For the Three Months Ended
	June 30, 2004									June 30, 2003
	TechSolutions		Data		Corporate			Total		TechSolutions		Data		Corporate			Total
Revenue from external customers	$	46,365	$	22,788	$	—		$	69,153	$	43,469	$	20,087	$	—		$	63,556
Depreciation and amortization	$	5,629	$	2,208	$	612		$	8,449	$	9,451	$	1,640	$	1,104		$	12,195
Restructuring credits, net	$	—	$	—	$	—		$	—	$	—	$	—	$	6,871		$	6,871
Operating income/(loss)	$	9,543	$	2,366	$	(9,131	)	$	2,778	$	4,041	$	5,858	$	(900	)	$	8,999
Total other income/(loss)								$	1,933								$	(2,865	)
Income before income taxes								$	4,711								$	6,134

17

DOUBLECLICK INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

June 30, 2004

(Unaudited)

	For the Six Months Ended									For the Six Months Ended
	June 30, 2004									June 30, 2003
	TechSolutions		Data		Corporate			Total		TechSolutions		Data		Corporate			Total
Revenue from external customers	$	91,662	$	45,538	$	—		$	137,200	$	84,997	$	38,613	$	—		$	123,610
Depreciation and amortization	$	11,807	$	4,372	$	1,227		$	17,406	$	19,883	$	3,354	$	2,096		$	25,333
Restructuring credits, net	$	—	$	—	$	—		$	—	$	—	$	—	$	6,871		$	6,871
Operating Income/(loss)	$	18,039	$	4,899	$	(17,530	)	$	5,408	$	6,879	$	10,324	$	(8,743	)	$	8,460
Total other income/(loss)								$	7,621								$	(1,087	)
Income before income taxes								$	13,029								$	7,373

Note 10 — Comprehensive Income (Loss)

      Comprehensive income (loss) consists of net income, unrealized gains and losses on marketable securities and foreign currency translation adjustments. Comprehensive loss was $6.1 million for the three months ended June 30, 2004. Comprehensive income was $8.9 million for the six months ended June 30, 2004. Comprehensive income was $10.3 million and $9.1 million for the three and six months ended June 30, 2003.

18

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements

      This report contains forward-looking statements relating to future events and our future performance within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Stockholders are cautioned that such statements involve risks and uncertainties. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate and management’s beliefs and assumptions. Any statements contained herein, including without limitation, statements to the effect that we or our management “believes”, “expects”, “anticipates”, “plans” or similar expressions that are not statements of historical fact should be considered forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Our actual results and timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Risk Factors” and elsewhere in this report and in our other public filings with the Securities and Exchange Commission. It is routine for internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations are made as of the date of this Quarterly Report on Form 10-Q and may change prior to the end of each quarter or the year. While we may elect to update forward-looking statements at some point in the future, we may not update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

Overview

      We provide technology and data products and services that direct marketers, Web publishers and advertisers use to optimize their marketing programs and efficiently reach their customers. We derive revenues from two business segments: DoubleClick TechSolutions, which we refer to as our TechSolutions segment and DoubleClick Data, which we refer to as our Data segment.

      DoubleClick TechSolutions. TechSolutions includes products and services from our Ad Management and our Marketing Automation divisions. Our Ad Management products and services primarily consist of our DART for Publishers Service, DART Enterprise ad serving product and DART for Advertisers Service. Our Marketing Automation products and services consist of our email products based on our DARTmail Service, Ensemble, our campaign management software tool, and SiteAdvance, our Web site analytics solution. As a result of our acquisition of SmartPath, Inc., a marketing resource management, or MRM, software company in March 2004, we offer marketing planning and operational management solutions as part of our Marketing Automation suite of products and services. With the acquisition of Performics Inc. in June 2004, DoubleClick created a third division within TechSolutions which offers search engine marketing and affiliate marketing solutions. We generate our TechSolutions revenue primarily from the delivery of advertising impressions and emails as well as the sale and the installation of our licensed software products.

      DoubleClick Data. Data, which consists of our Abacus and Data Management divisions, provides products and services primarily to direct marketers. Abacus maintains the Abacus Alliance database in the United States, which is a proprietary database of consumer transactions used for target marketing purposes, and maintains alliances in the United Kingdom, Australia, Japan and through a joint venture, in Germany. In the United States, we also offer a Business-to-Business Alliance. As a result of our acquisition of Computer Strategy Coordinators, Inc., a data management company, in June 2003 we offer direct marketers solutions for building and managing customer marketing databases and other related products and services as part of our Data Management division. We generate our Data revenue primarily from the sale of consumer and business prospect lists, list processing, database development and database management services.

19

Critical Accounting Policies

      Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions, which management believes to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. Variances in the estimates or assumptions used could yield materially different accounting results. Described below are the areas where we believe that the estimates, judgments or assumptions that we have made, if different, would have yielded the most significant differences in our financial statements.

Restructuring Estimates

      Our restructuring reserves as of June 30, 2004 were approximately $23.6 million, and consisted primarily of reserves for our facilities in Louisville, Colorado and London, England. The restructuring accrual associated with our facilities represents the excess of future lease commitments over estimated sublease income, if any. These accruals were based on an analysis performed with the assistance of a real estate firm and are based on the current real estate market conditions in the local markets where these facilities are located. The most material estimate is associated with our facility in London where the office space is currently sublet for only a portion of the remaining lease term. The total remaining obligation for this facility is approximately $44.4 million. Our London reserve is based on our estimate of future sublease income relative to the total remaining obligation and was determined based on the weighted probability of various future sublease scenarios. These scenarios resulted in a weighted average sublease rate where for each $1.00 change in this assumption, additional restructuring charges or credits of approximately $0.2 million would be required. If market conditions or other circumstances change, this information may be updated and additional charges or credits may be required.

Advertiser Credits and Bad Debt

      We record reductions to revenue for the estimated future credits issuable to our customers in the event that solutions do not meet contractual specifications. We follow this method because we believe reasonably dependable estimates of such credits can be made based on historical experience. If the actual amounts of customer credits differ from our estimates, revisions to the associated allowance may be required. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required in subsequent periods.

Valuation of Investments and Goodwill

      We invest in companies, technologies and intangible assets in areas within our strategic focus, some of which have highly volatile fair values and uncertain profit potentials. We evaluate our investments for impairment on a periodic basis and reduce the carrying values of such assets to their estimated fair value when we believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of strategic investments could indicate an inability to recover the carrying value of the investments, thereby possibly requiring impairment charges in the future.

      We evaluate our goodwill for impairment annually, as well as when an event triggering impairment may have occurred. We have elected to perform our annual impairment analysis during the fourth quarter of each fiscal year as of October 1st. In accordance with Statements of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, we utilize a two-step process for impairment testing of goodwill. The first step tests for impairment, while the second step, if necessary, measures the impairment.

      When it is determined that the carrying value of goodwill may be impaired or investments may not be recoverable, management measures impairment based on projected discounted cash flows, recent transactions

20

involving similar businesses and price/revenue multiples at which they were bought and sold, price/revenue multiples of competitors and the closing market price for investments that are publicly traded.

      As of June 30, 2004, we held investments in equity instruments of public companies received as a result of certain business transactions, including shares in DoubleClick Japan, AdLINK Internet Media AG and MaxWorldwide, Inc. Such investments, which are in the Internet industry, are subject to significant fluctuations in fair market value due to the volatility of the stock market. The following sets forth the cost basis and fair market value of these investments, which are included in investment in affiliates on the Consolidated Balance Sheets.

	As of June 30, 2004
			Fair Market
	Cost Basis		Value
	(In thousands)
DoubleClick Japan	$	5,663	$	19,340
AdLINK Internet Media AG	$	1,855	$	9,395
MaxWorldwide, Inc.	$	—	$	1,968

      Some of these investments have suffered a decrease in value in the past. We will continue to evaluate our investments in affiliates for impairment due to declines in market value considered to be other than temporary. This evaluation includes, in addition to persistent, declining stock prices, general economic and company-specific assessments. In the event of a determination that a further decline in market value is other than temporary, a charge to earnings will be recorded for all or a portion of the unrealized loss and a new cost basis in the investment will be established.

Deferred Tax Assets

      Pursuant to SFAS 109, we record a valuation allowance to the extent realization of our deferred tax assets is not more likely than not. As of June 30, 2004 and December 31, 2003, we maintained a valuation allowance against those net deferred tax assets that we believe, after considering all the available objective evidence, both positive and negative, historical and prospective, with greater weight given to historical evidence, are not more likely than not expected to be realized. If we determine that we would be able to realize additional or all of our deferred tax assets, an adjustment to the net deferred tax asset would increase income and/or adjust additional paid-in capital and/or goodwill in the period such determination was made.

Property and Equipment

      Property and equipment is stated at cost and depreciated using the straight-line method over the shorter of the estimated life of the asset or the lease term. We periodically review the useful lives of our assets to confirm that such useful life determination is appropriate. If we determine that the estimated useful life of our assets needs to be adjusted to reflect depreciation expense over the remaining time that the assets are expected to remain in service, future income or losses will be impacted in the subsequent periods after such a determination is made.

Recent Accounting Pronouncements

      In January 2003, FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”, known as FIN 46. This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities that either (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) are owned by equity investors who lack an essential characteristic of a controlling financial interest. FIN 46 applies immediately to variable interest entities created after January 31, 2003. With regard to variable interest entities already in existence prior to February 1, 2003, the implementation of FIN 46 has been delayed and currently applies to the first fiscal year or interim period beginning after December 15, 2003. FIN 46 requires disclosure of variable interest entities in financial statements issued after January 31, 2003, if it is reasonably possible that as of the transition date (1) an entity will be the primary

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beneficiary of an existing variable interest entity that will require consolidation, or (2) an entity will hold a significant variable interest in, or have significant involvement with, an existing variable interest entity. In December 2003, the FASB issued Interpretation No. 46R, known as FIN 46R, a revision to FIN 46. FIN 46R clarifies some of the provisions of FIN 46 and exempts certain entities from its requirements. FIN 46R is effective at the end of the first interim period ending after December 15, 2003. We do not have any entities as of June 30, 2004 that required disclosure or new consolidation as a result of adopting the provisions of FIN 46 and FIN 46R.

Business Transactions

Acquisitions

2004

Performics Inc.

      On June 22, 2004, we completed our acquisition of Performics Inc., a privately-held search engine marketing and affiliate marketing company based in Chicago, Illinois for approximately $58.2 million in cash. Pursuant to the merger agreement, Performics has the right to receive up to an additional $7.0 million based on the attainment of certain 2004 revenue objectives. Performics’ search engine marketing solutions are designed to help clients automate their paid placement, paid inclusion, and comparison shopping listings across multiple search providers and publishers. Performics also provides the infrastructure for affiliate marketing, through which marketers manage, track, and report on their offers across multiple affiliate sites.

SmartPath, Inc.

      On March 19, 2004, we completed our acquisition of SmartPath, Inc, a privately held marketing resource management, or MRM, software company for approximately $24.1 million in cash.

2003

Computer Strategy Coordinators, Inc.

      On June 30, 2003, we completed our acquisition of Computer Strategy Coordinators, Inc., or CSC, a data management company. In the transaction, we acquired all of the outstanding shares of CSC in exchange for approximately $2.8 million in cash and the assumption of certain indebtedness.

Results of Operations

Three months ended June 30, 2004 compared to three months ended June 30, 2003

      Revenue for the three months ended June 30, 2004 was $69.2 million, an increase of $5.6 million or 8.8% compared to the prior year period. This increase was due to the acquisitions of CSC in June 2003 and SmartPath in March 2004 as well as organic growth from within our Marketing Automation division. These increases were offset by year-over year declines in both our Ad Management and Abacus divisions. Gross profit increased $6.2 million during the quarter to $47.3 million over the prior year period while gross margins improved by 370 basis points to 68.4%. These increases were driven by our TechSolutions segment. Operating income was $2.8 million compared to $9.0 million in the prior year period. Operating income declined due to an increase in operating expenses of $12.4 million partially offset by the improvement in gross profit of $6.2 million. The increase in operating expenses was the result of the assumption of headcount associated with the CSC and SmartPath acquisitions and the hiring of additional employees in our TechSolutions division. These personnel-related increases primarily occurred in our sales and marketing and product development departments. In addition, second quarter 2003 operating expenses benefited from the inclusion of a $6.9 million net restructuring credit associated with the settlement of excess real estate commitments. Net income was $3.9 million, or $0.03 per diluted share, for the second quarter of 2004 as compared to $5.8 million, or $0.04 per diluted share, in the prior year period. Net income for the second

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quarter of 2003 included a $4.4 million loss in connection with the redemption of our 4.75% Convertible Subordinated Notes.

Six months ended June 30, 2004 compared to six months ended June 30, 2003

      Revenue for the six months ending June 30, 2004 was $137.2 million, an increase of $13.6 million or 11.0% compared to the prior year period. This increase was primarily due to the acquisitions of CSC in June 2003 and SmartPath in March 2004 as well as organic growth from within our Marketing Automation division. Gross profit increased $13.6 million during the quarter to $92.8 million over the prior year period while gross margins improved by 360 basis points to 67.6%. These increases were driven by our TechSolutions segment. Operating income was $5.4 million for the first half of 2004 compared to $8.5 million in the prior year period. Operating income declined due to an increase in operating expenses of $16.6 million partially offset by the improvement in gross profit of $13.6 million. The increase in operating expenses was primarily due to the assumption of headcount as a result of our acquisitions of CSC and SmartPath and the hiring of additional employees in our TechSolutions division. These personnel-related increases primarily occurred in our sales and marketing and product development departments. In addition, operating expenses in 2003 benefited from the inclusion of a $6.9 million net restructuring credit associated with the settlement of excess real estate commitments. The increases in operating expenses were offset by reductions in amortization of intangible assets as certain assets reached the end of their useful lives and a $1.5 million reserve reversal recorded in the first quarter of 2004 relating to a prior acquisition. Net income was $11.6 million, or $0.08 per diluted share, for the first half of 2004 as compared to net income of $6.7 million, or $0.05 per diluted share, in the prior year period. Net income for the six months ended June 30, 2004 benefited from a distribution from MaxWorldwide of approximately $2.4 million in connection with its plan of liquidation and dissolution. Net income for the six months ended June 30, 2003 included a $4.4 million loss in connection with the redemption of our 4.75% Convertible Subordinated Notes.

      We expect revenue to increase throughout the remainder of 2004 as compared to the prior year period primarily as a result of our acquisitions of Performics and SmartPath. Operating income is expected to increase as well due to continued efficiency gains within our TechSolutions business partially offset by integration costs and the amortization of intangibles associated with our acquisitions of SmartPath and Performics.

      Revenues, gross profit and operating income (loss) by segment are as follows (in thousands):

	For the Three Months									For the Six Months
	Ended June 30,				2004 vs. 2003					Ended June 30,				2004 vs. 2003
Revenue:	2004		2003		Change		%			2004		2003		Change		%
TechSolutions	$	46,365	$	43,469	$	2,896		6.7	%	$	91,662	$	84,997	$	6,665		7.8	%
Data		22,788		20,087		2,701		13.4	%		45,538		38,613		6,925		17.9	%
Total	$	69,153	$	63,556	$	5,597		8.8	%	$	137,200	$	123,610	$	13,590		11.0	%

	For the Three Months										For the Six Months
	Ended June 30,				2004 vs. 2003						Ended June 30,				2004 vs. 2003
Gross Profit:	2004		2003		Change			%			2004		2003		Change		%
TechSolutions	$	33,833	$	26,906	$	6,927			25.7	%	$	65,732	$	52,349	$	13,383		25.6	%
Data		13,491		14,202		(711	)		(5.0	)%		27,074		26,866		208		0.8	%
Total	$	47,324	$	41,108	$	6,216			15.1	%	$	92,806	$	79,215	$	13,591		17.2	%

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	For the Three Months												For the Six Months
	Ended June 30,						2004 vs. 2003						Ended June 30,						2004 vs. 2003
Operating Income/(Loss):	2004			2003			Change			%			2004			2003			Change			%
TechSolutions	$	9,543		$	4,041		$	5,502			136.2	%	$	18,039		$	6,879		$	11,160			162.2	%
Data		2,366			5,858			(3,492	)		(59.6	)%		4,899			10,324			(5,425	)		(52.5	)%
Corporate(1)		(9,131	)		(900	)		(8,231	)		NMF			(17,530	)		(8,743	)		(8,787	)		NMF
Total	$	2,778		$	8,999		$	(6,221	)		(69.1	)%	$	5,408		$	8,460		$	(3,052	)		(36.1	)%

(1)  Adjustments to reconcile segment reporting to consolidated results are included in “Corporate.”

DoubleClick TechSolutions

      TechSolutions revenue is derived from the sales of our Ad Management and Marketing Automation products and services. Our Ad Management products and services primarily consist of the DART for Publishers Service, the DART Enterprise ad serving software product and the DART for Advertisers Service. Our Marketing Automation products and services consist of our email products based on our DARTmail Service, our Ensemble campaign management software tool, our SiteAdvance Web site analytics solution and MRM, our marketing resource management software. TechSolutions cost of revenue includes costs associated with the delivery of advertisements and emails, including Internet access costs, depreciation of the ad and email delivery systems, the amortization of purchased technology and facility- and personnel-related costs incurred to operate and support our Ad Management and Marketing Automation products and services.

Three months ended June 30, 2004 compared to three months ended June 30, 2003

      TechSolutions revenue increased by 6.7% to $46.4 million for the three months ended June 30, 2004 from $43.5 million for the three months ended June 30, 2003. The increase in TechSolutions revenue was attributable to growth in Marketing Automation, which offset the decline in Ad Management. Ad Management revenue decreased by approximately $0.8 million or 2.3% to $31.8 million in the second quarter of 2004 compared to the same period of 2003. For the three months ended June 30, 2004, the increase in volumes for our DART for Advertisers Service outpaced the decline in effective price for this product. However, the increase in revenue from our DART for Advertisers Service was outweighed by the declines in revenue from DART for Publishers Service where volume increases did not outpace pricing declines. The decline in effective prices continued to be due to sustained competitive pressure. Marketing Automation revenue increased 33.5% to $14.6 million in the second quarter of 2004 compared to $10.9 million in the prior year period. This increase was attributable to the organic growth in all of our Marketing Automation products as well as to the acquisition of SmartPath, a marketing resource management company.

      TechSolutions gross profit was $33.8 million or 73.0% of revenue for the three months ended June 30, 2004 compared to $26.9 million or 61.9% of revenue for the three months ended June 30, 2003. Gross profits increased $6.9 million primarily due to the increase in Marketing Automation revenues and decreases in depreciation and utilities expense of approximately $2.8 million in aggregate. The decrease in depreciation and utilities costs was due to the relocation of our data center from New York to Colorado which was completed in June 2003. In addition, depreciation expense also benefited from the continued efficient use of our existing hardware.

      TechSolutions operating income was $9.5 million for the three months ended June 30, 2004, an increase of $5.5 million compared to the prior year period. This improvement was a result of the increase in gross profit partially offset by an increase in operating expenses of approximately $1.4 million. Operating expenses included an increase in personnel-related costs of approximately $1.7 million resulting from the assumption of headcount as the result of our acquisition of SmartPath and the hiring of additional employees in our sales and marketing and product development departments. In addition, bad debt expense increased by approximately $0.6 million and professional fees increased by approximately $0.7 million. These costs were offset by a decline in depreciation expense of $1.1 million relating to our former New York headquarters. In addition, amortization expense decreased by $0.5 million as a result of certain assets reaching the end of their

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amortizable lives partially offset by the addition of acquired intangibles associated with our acquisition of SmartPath.

Six months ended June 30, 2004 compared to six months ended June 30, 2003

      TechSolutions revenue increased by 7.8% to $91.7 million for the six months ended June 30, 2004 from $85.0 million for the six months ended June 30, 2003. The increase in TechSolutions revenue was attributable to growth in both our Marketing Automation and Ad Management divisions. Ad Management revenue increased by approximately $1.4 million or 2.2% to $65.1 million in the first half of 2004 compared to the same period of 2003. For the six months ended June 30, 2004, the increase in volumes for our DART for Advertisers Service outpaced the decline in effective price for this product. However, the increase in revenue from our DART for Advertisers Service was outweighed by the declines in revenue from our DART for Publishers Service where volume increases did not outpace pricing declines. The decline in effective prices continued to be due to sustained competitive pressure. Marketing Automation revenue increased 24.4% to $26.5 million in the first half of 2004 compared to $21.3 million in the prior year period. This increase was primarily due to new customer acquisitions and from the acquisition of SmartPath in March of 2004.

      TechSolutions gross profit was $65.7 million or 71.7% of revenue for the six months ended June 30, 2004 compared to $52.3 million or 61.6% of revenue for the six months ended June 30, 2003. Gross profits increased $13.4 million primarily due to the increase in revenues and decreases in depreciation and utilities expense of approximately $4.4 million in aggregate. The decrease in depreciation and utilities costs was due to the relocation of our data center from New York to Colorado which was completed in June 2003. In addition, depreciation expense also benefited from the continued efficient use of our existing hardware.

      TechSolutions operating income was $18.0 million for the six months ended June 30, 2004, an increase of $11.2 million compared to the prior year period. This improvement was a result of the increase in gross profit partially offset by an increase in operating expenses of approximately $2.2 million. Operating expenses included an increase in personnel-related costs of approximately $3.7 million resulting from the assumption of headcount as the result of our acquisition of SmartPath and the hiring of additional employees in our sales and marketing and product development departments. In addition, bad debt expense increased by approximately $1.8 million and professional fees increased by approximately $1.2 million. The change in personnel-related costs was net of a $1.5 million reserve reversal recorded in the first quarter of 2004 relating to a prior acquisition. These costs were offset by a decline in depreciation expense of $2.3 million relating to our former New York headquarters. In addition, amortization expense decreased by $2.3 million as a result of certain assets reaching the end of their amortizable lives partially offset by the addition of acquired intangibles associated with our acquisition of SmartPath.

      In 2004, we plan to continue to invest additional resources in our TechSolutions sales and marketing and product development departments to help achieve future revenue growth. As a part of this strategy, we anticipate increasing our investments in our Ad Management businesses during the remainder of 2004. We anticipate TechSolutions revenue and operating income will increase as compared to the year ago periods even with these additional investments described above partially offset by integration costs and amortization of intangibles related to our acquisitions of SmartPath and Performics.

DoubleClick Data

      DoubleClick Data revenue has historically been derived primarily from our Abacus division, which provides products and services, such as acquisition solutions, retention solutions and list optimization, to direct marketers in the Abacus Alliances. As a result of our acquisition of CSC in June 2003, we offer direct marketers solutions for building and managing customer marketing databases and other related products and services as part of the our Data Management division. Data cost of revenue includes expenses associated with maintaining and updating the Abacus databases, facility- and personnel-related expenses to operate and support our production equipment, the amortization of purchased intangible assets and subscriptions to third party providers of lifestyle and demographic data that is used to supplement our transactions based databases.

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Three months ended June 30, 2004 compared to three months ended June 30, 2003

      Data revenue increased 13.4% to $22.8 million for the three months ended June 30, 2004 compared to $20.1 million for the three months ended June 30, 2003. The increase in revenue is attributable to the acquisition of CSC, which more than offset the decline in Abacus revenue. Abacus revenues decreased 2.4% to $19.6 million in the second quarter of 2004 compared to $20.1 million in second quarter of 2003. The remaining $3.2 million of Data revenue was associated with our Data Management division, in which we began recognizing revenue in the third quarter of 2003. The year-over-year decrease in Abacus revenues were driven primarily from continued softness in the U.S. Business-to-Consumer catalogue market, which led to fewer mailings from large Abacus customers. These declines were partially offset by growth in our U.S. Business-to-Business and International Alliances.

      Gross profit decreased $0.7 million to $13.5 million, or 59.2%, of revenues in the second quarter of 2004 compared to $14.2 million or 70.7% of revenues in the prior year period. The decrease in gross profit was primarily associated with the decline in Abacus Business-to-Customer revenues partially offset by revenue growth in our International Alliances. Gross margins were impacted by the decline in Abacus revenue as well as from the inclusion of CSC, a lower margin business.

      Data operating income decreased to $2.4 million for the second quarter of 2004 from $5.9 million in the prior year period. This change was due to an increase in operating expenses of $2.8 million and the decline in gross profit of $0.7 million. Operating expenses included an increase in personnel-related costs of approximately $2.3 million resulting from the assumption of headcount as the result of our acquisition of CSC. In addition, amortization expense included as a component of operating expenses increased by approximately $0.5 million. These expenses are associated with intangible assets acquired in connection with the CSC acquisition.

Six months ended June 30, 2004 compared to six months ended June 30, 2003

      Data revenue increased 17.9% to $45.5 million for the six months ended June 30, 2004 compared to $38.6 million for the six months ended June 30, 2003. The increase in revenue was attributable to the acquisition of CSC and organic growth from our Abacus business. Abacus revenues increased 3.5% to $40.0 million in the first half of 2004 compared to $38.6 million in first half of 2003. The remaining $5.5 million of Data revenue was associated with our Data Management division, in which we began recognizing revenue in the third quarter of 2003. The year-over-year increase in Abacus revenues was driven from continued growth in our U.S. Business-to-Business and International Alliances while revenues associated with our U.S. Business-to-Consumer Alliance were flat.

      Gross profit increased slightly by $0.2 million to $27.1 million or 59.5% of revenues in the first half of 2004 compared to $26.9 million, or 69.6%, of revenues in the prior year period. The increase in gross profit was primarily due to revenue growth in our International Alliances. Gross margins also were impacted by the inclusion of CSC, a lower margin business.

      Data operating income decreased to $4.9 million for the first half of 2004 from $10.3 million in the prior year period. This change was due to an increase in operating expenses of $5.6 million partially offset by the slight increase in gross profit of $0.2 million. Operating expenses included an increase in personnel-related costs of approximately $4.7 million primarily resulting from the assumption of headcount as the result of our acquisition of CSC. In addition, amortization expense included as a component of operating expenses increased by approximately $0.9 million. These expenses are associated with intangible assets acquired in connection with the CSC acquisition.

      For the remainder of 2004, we anticipate that Data revenue will increase compared to the prior year periods due to anticipated growth from Data Management and our U.S. Business-to-Business and International Alliances. Operating income is expected to be comparable to prior year periods as we plan to continue to invest in new Data Management products and our International Alliances.

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Operating Expenses

      Operating costs and expenses were as follows (in thousands):

	For the Three Months								For the Six Months
	Ended June 30,				2004 vs. 2003				Ended June 30,				2004 vs. 2003
Operating Expenses:	2004		2003		Change		%		2004		2003		Change			%
Sales and marketing	$	23,505	$	20,852	$	2,653		12.7%	$	49,155	$	40,508	$	8,647			21.3	%
General and administrative	$	8,860	$	8,360	$	500		6.0%	$	16,934	$	17,226	$	(292	)		(1.7	)%
Product development	$	10,993	$	8,528	$	2,465		28.9%	$	19,484	$	16,573	$	2,911			17.6	%

Sales and Marketing

      Sales and marketing expenses consist primarily of compensation and related benefits, sales commissions, general marketing costs, advertising, bad debt expense and other operating expenses associated with our sales and marketing departments. Sales and marketing expenses increased by $2.7 million in the second quarter of 2004 compared to the same period of 2003 and increased as a percentage of revenue to 34.0% from 32.8%. The increase was primarily attributable to increases in personnel-related costs of $2.3 million, bad debt expense of $0.6 million offset by decreases in depreciation, rent and utilities costs of approximately $0.6 million. Personnel-related costs increased due to the assumption of headcount as a result of our acquisitions of CSC and SmartPath and the hiring of additional employees in our TechSolutions division. As a result, average sales and marketing headcount increased 15% in the second quarter of 2004 compared to 2003. The increase in bad debt expense was consistent with our year-over-year increase in revenues. Additionally, the decrease in depreciation, rent and utilities costs was due to the termination of the lease for our former New York headquarters.

      Sales and marketing expenses increased by $8.6 million in the first half of 2004 compared to the same period of 2003 and increased as a percentage of revenue to 35.8% from 32.8%. The increase was primarily attributable to increases in personnel-related costs of $7.1 million, bad debt expense of $1.5 million and marketing expenses of $0.7 million offset by decreases in depreciation, rent and utilities costs of approximately $1.2 million. Personnel-related costs increased due to the assumption of headcount as a result of our acquisitions of CSC and SmartPath and the hiring of additional employees in our TechSolutions division. The change in personnel-related costs was net of a $1.5 million reserve reversal recorded in the first quarter of 2004 relating to a prior acquisition. The increase in bad debt expense was consistent with our year-over-year increase in revenues. Marketing expenses increased in the first half of 2004 due to our worldwide Insight conferences held in the first quarter of 2004. Additionally, the decrease in depreciation, rent and utilities costs was due to the termination of the lease for our former New York headquarters.

      For the remainder of 2004, we expect the absolute dollar amount of sales and marketing expenses to increase as compared to the prior year period due to additional personnel-related expenses primarily as a result of our acquisition of Performics and additional investments expected to be made in our Ad Management business. However, we expect these expenses to decline as a percentage of revenues due to anticipated increases in revenues.

General and Administrative

      General and administrative expenses consist primarily of compensation and related benefits, professional services and other operating expenses associated with our executive, finance, human resources, legal, facilities and administrative departments. General and administrative expenses increased slightly by $0.5 million to 12.8% of revenue in the second quarter of 2004 compared to 13.2% of revenue in the same period of 2003. The increases were primarily a result of approximately $1.3 million in professional and outside service fees relating to strategic initiatives and the requirements of the Sarbanes-Oxley Act. Additionally, personnel-related costs increased by $0.4 million due to the rise in average general and administrative headcount of approximately 15% in the second quarter of 2004 compared to the same period of 2003. Cost savings initiatives during the year resulted in reductions of $0.4 million in computer-related office expenses and decreases in depreciation,

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rent and utilities costs of approximately $0.7 million. The decrease in depreciation, rent and utilities costs was due to the termination of the lease for our former New York headquarters.

      General and administrative expenses decreased slightly by $0.3 million to 12.3% of revenue in the first half of 2004 compared to 13.9% of revenue in the same period of 2003. Cost savings initiatives during the year resulted in reductions of $0.8 million in computer-related office expenses and decreases in depreciation and utility costs of approximately $1.1 million. The decrease in depreciation and utilities was due to the termination of the lease for our former New York headquarters. These decreases were partially offset by increases in personnel-related costs of $1.1 million due to the increase in average general and administrative headcount of approximately 12% in the first half of 2004 compared to the same period of 2003. In addition, professional and outside service fees increased by approximately $0.5 million relating to strategic initiatives and the requirements of the Sarbanes-Oxley Act.

      For the remainder of 2004, we expect general and administrative expenses to decline in absolute dollars and as a percentage of revenues due to anticipated higher revenues as compared to the prior year period.

Product Development

      Product development expenses consist primarily of compensation and related benefits, consulting fees and other operating expenses associated with the product development departments. The product development departments perform research and development, enhance and maintain existing products and provide quality assurance. Product development expenses increased by $2.5 million to 15.9% of revenue in the second quarter of 2004 compared to 13.4% of revenue in the same period of 2003. The increase was primarily due to increases in personnel-related costs of $2.2 million which was attributable to additional headcount assumed from our acquisitions of CSC and SmartPath and the impact of hiring additional employees in our TechSolutions division. As a result, the increase in average product development headcount was approximately 33% in the second quarter of 2004 compared to the same period of 2003. In addition, professional fees increased by approximately $0.6 million relating to consulting fees for new product initiatives. These increases were partially offset by decreases of $0.5 million in depreciation and utilities from the termination of the lease for our former New York headquarters.

      Product development expenses increased by $2.9 million to 14.2% of revenue in the first half of 2004 compared to 13.4% of revenue in the same period of 2003. The increase was primarily due to increases in personnel-related costs of $2.6 million which was attributable to additional headcount assumed from our acquisitions of CSC and SmartPath and the impact of hiring additional employees in our TechSolutions division. As a result, the increase in average product development headcount of approximately 25% in the first half of 2004 compared to the same period of 2003. In addition, professional fees increased by approximately $1.0 million relating to consulting fees for new product initiatives. These increases were partially offset by decreases of $1.0 million in depreciation and utilities from the termination of the lease for our former New York headquarters.

      For the remainder of 2004, we expect product and development expenses to continue to increase in absolute dollars and as a percentage of revenue as compared to the prior year period primarily due to the assumption of headcount as a result of our acquisition of Performics and additional investments expected to be made in our Ad Management business.

Amortization of Intangibles

      Amortization of intangible assets consists primarily of the amortization of customer relationships. Amortization expense was $1.2 million for the three months ended June 30, 2004 and 2003. Amortization expense remained flat for the second quarter of 2004 compared to the second quarter of 2003 primarily due to acquired intangibles assets with respect to CSC and SmartPath offset by certain intangible assets becoming fully amortized during the year.

      Amortization expense was $1.8 million and $3.3 millions for the six months ended June 30, 2004 and 2003, respectively. The decrease of $1.5 million in the first half of 2004 compared to the same period of 2003 was primarily the result of certain intangible assets becoming fully amortized during the year.

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      We expect amortization of intangible assets to increase during the remainder of 2004 due to the acquisition of Performics in June 2004, offset slightly by other intangible assets becoming fully amortized during the year.

Non-Operating Expenses and Income Taxes

Equity in Losses of Affiliates

      Equity in losses of affiliates was $0.4 million and $1.0 million for the three months ended June 30, 2004 and 2003, respectively. In the second quarter of 2004, we recognized equity losses of approximately $0.3 million from our equity investment in Abacus Deutschland and approximately $0.1 million from our equity investment in DoubleClick Japan. In the second quarter of 2003, we recognized equity losses of $0.9 million relating to our equity investment in MaxWorldwide and $0.1 million from our equity investment in DoubleClick Japan.

      Equity in losses of affiliates was $0.6 million and $2.3 million for the six months ended June 30, 2004 and 2003, respectively. In the first half of 2004, we recognized equity losses of approximately $0.4 million from our equity investment in Abacus Deutschland and approximately $0.2 million from our investment in DoubleClick Japan. In the first half of 2003, we recognized equity losses of $1.9 million relating to our equity investment in MaxWorldwide and $0.4 million from our equity investment in DoubleClick Japan.

Gain on Distribution from Affiliate

      In the first quarter of 2004, we recognized a gain of $2.4 million relating to a distribution from MaxWorldwide in connection with its plan of liquidation and dissolution. We still maintain a 19.8% interest in MaxWorldwide and may receive additional distributions in future periods based on the finalization of its plan of liquidation and dissolution.

      We did not recognize any gains from affiliate distributions in the six months ended June 30, 2003.

Interest and Other, Net

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2004			2003			2004			2003
Interest Income	$	2,758		$	4,084		$	5,756		$	9,105
Interest Expense		(346	)		(2,166	)		(697	)		(4,273	)
Other		(95	)		671			732			800
	$	2,317		$	2,589		$	5,791		$	5,632

      Interest and other, net was $2.3 million and $2.6 million for the three months ended June 30, 2004, and 2003, respectively. In the second quarter of 2004, interest income decreased by $1.3 million due to a decrease of average total cash, which includes cash and cash equivalents, investments in marketable securities and restricted cash, of $225.7 million compared to the prior year period and a decrease in the average interest rates. Interest expense decreased due to the redemption of our 4.75% Convertible Subordinated Notes due 2006 in July 2003.

      Interest and other, net was $5.8 million and $5.6 million for the six months ended June 30, 2004, and 2003, respectively. For the six months ended June 30, 2004, interest income decreased by $3.3 million due to a decrease of average total cash, which includes cash and cash equivalents, investments in marketable securities and restricted cash, of $175.1 million compared to the prior year period and a decrease in the average interest rates. Interest expense decreased due to the redemption of our 4.75% Convertible Subordinated Notes due 2006 in July 2003.

      Interest and other, net may fluctuate in future periods in correlation with the cash, investment and debt balances we maintain and as a result of changes in the market interest rates.

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Provision for Income Taxes

      The provision for income taxes recorded for the three months ended June 30, 2004 of $0.8 million consists principally of income taxes of $0.7 million on the earnings of certain of our foreign subsidiaries and federal alternative minimum taxes of $0.1 million. The provision for income taxes recorded for the three months ended June 30, 2003 of $0.3 million consists principally of income taxes of $0.6 million on the earnings of some of our foreign subsidiaries offset by a $0.3 million benefit related to a reduction of federal alternative minimum tax and state taxes recorded in the period ended March 31, 2003 and resolution of certain prior year state tax matters. Except for certain foreign jurisdictions, the provision for income taxes for the three months ended June 30, 2004 and 2003 does not reflect tax benefits attributable to our net operating loss and other tax carryforwards due to limitations and uncertainty surrounding our prospective realization of such benefits.

      The provision for income taxes recorded for the six months ended June 30, 2004 of $1.5 million consists principally of income taxes of $1.1 million on the earnings of certain of our foreign subsidiaries, federal alternative minimum taxes of $0.3 million and state and local taxes of $0.1 million. The provision for income taxes recorded for the six months ended June 30, 2003 of $0.6 million consists principally of income taxes of $1.1 million on the earnings of some of our foreign subsidiaries offset by a $0.5 million benefit related to a reduction of federal alternative minimum tax and state taxes recorded in the period ended June 30, 2003 and resolution of certain prior year state tax matters. Except for certain foreign jurisdictions, the provision for income taxes for the six months ended June 30, 2004 and 2003 does not reflect tax benefits attributable to our net operating loss and other tax carryforwards due to limitations and uncertainty surrounding our prospective realization of such benefits.

Liquidity and Capital Resources

	For the Six Months
	Ended June 30,
	2004			2003
	(In thousands)
Net cash provided by operating activities	$	7,624		$	4,348
Net cash (used in) provided by investing activities	$	(58,088	)	$	55,705
Net cash (used in) provided by financing activities	$	(55,354	)	$	130,548

Operating Activities

      For the six months ended June 30, 2004, cash provided by operating activities was $7.6 million, an increase of $3.3 million compared to the same period of 2003. The increase is primarily a result of the decrease in accrued expenses and the timing of lease termination payments. Accrued expenses decreased to $16.2 million in the six months ended June 30, 2004 compared to $28.8 million in the same period of the prior year. The decreases in payments associated with accrued expenses were primarily a result of additional restructuring activities in 2003 compared to same period in 2004. Lease termination payments were $7.6 million in the first half of 2004 compared to $14.4 million in the prior year period. These payments were slightly offset by a decrease in net income adjusted for non-cash items and improvements in prepaid expenses and deferred revenue.

      For the remainder of 2004, we expect to generate positive cash flow from operating activities due to the completion of restructuring payments for our former New York headquarters and the anticipated increase in revenues and net income.

Investing Activities

      For the six months ended June 30, 2004, cash used in investing activities was $58.1 million, a decline of $113.8 compared to the same period of 2003. The decline is primarily due to the net cash used in the acquisitions of Performics and SmartPath of $72.0 million and the decrease in the net proceeds from purchases and maturities of investments in marketable securities of $87.4 million. These cash flows were partially offset by positive movements in restricted cash totaling $43.4 million.

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      For the remainder of 2004, cash flow from investing activities may fluctuate based upon the net proceeds from purchases and maturities of investments in marketable securities, purchases of equipment and possible acquisitions compared to the prior year period.

Financing Activities

      For the six months ended June 30, 2004, cash used in financing activities was $55.3 million, a decline of $185.9 compared to the same period of 2003. The decline is due to the proceeds from the issuance of the Zero Coupon Convertible Subordinated Notes due 2023 of $132.0 million received in June 2003 and $58.4 million in cash used in the purchase of 6.8 million shares of our common stock during the first half of this year. These cash flows were offset by reductions in payments under capital leases of $3.4 million.

      For the remainder of 2004, cash flow from financing activities may fluctuate based on possible purchases of our common stock as compared to the prior year period.

Related Party Transactions

      We maintain a 15% interest in AdLINK. This interest was acquired in January 2002 as a result of the sale of our European Media business. We currently maintain one seat on AdLINK’s supervisory board. We recognized revenue of approximately $0.9 million and $1.3 million during the six months ended June 30, 2004 and 2003, respectively, relating to services provided to AdLINK.

      In addition, we hold a 19.8% interest in MaxWorldwide. This interest was acquired in July 2002 as a result of the sale of our North American Media business. We recognized revenue of approximately $1.4 million during the six months ended June 30, 2003, relating to services provided to MaxWorldwide. In 2004, we did not provide any services to MaxWorldwide as a result of the sale of its MaxOnline division and its plan of liquidation and dissolution.

      Additionally, we maintain a minority interest in DoubleClick Japan. On December 26, 2002, we sold 45,049 shares of common stock in DoubleClick Japan and reduced our ownership interest to 15.6%. As a result of this transaction, we account for our remaining 31,271 shares in DoubleClick Japan under the equity method of accounting. We also have retained one seat on DoubleClick Japan’s board of directors. DoubleClick Japan continues to sell our suite of DART technology products as part of a long-term technology reseller agreement. Revenue recognized through services provided to DoubleClick Japan was approximately $1.7 million and $1.6 million for the six months ended June 30, 2004 and 2003, respectively.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

          Interest Rate Risk

      The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and marketable securities in a variety of government and corporate debt obligations and money market funds. As of June 30, 2004, our investments in marketable securities had a weighted average time to maturity of 394 days.

      The following table presents the amounts of our financial instruments that are subject to interest rate risk by expected maturity and average interest rates as of June 30, 2004:

	Time to Maturity
	One Year			One to Two			Two to Five			Five and
	or Less			Years			Years			Thereafter		Fair Value
	(In thousands)
Assets:
Cash and cash equivalents	$	77,522		$	—		$	—		$	—	$	77,522
Average interest rate		1.85	%
Fixed-rate investments in marketable securities	$	183,839		$	264,822		$	—		$	—	$	448,661
Average interest rate		1.83	%		1.90	%
Liabilities:
Loans payable	$	3,289		$	—		$	—		$	—	$	3,289
Average interest rate		4.47	%
Convertible subordinated notes	$	—		$	—		$	135,000		$	—	$	122,006
Average interest rate								0.00	%

      As of June 30, 2004, the current portion of restricted cash was $3.7 million and the average interest rate associated with this cash was 0.13% and the non-current portion of restricted cash was $11.7 million with an average interest rate of 0.58%. Restricted cash primarily represents amounts placed in escrow relating to funds to cover office lease security deposits and our automated clearinghouse payment function.

      We may redeem for cash some or all of the Zero Coupon Convertible Subordinated Notes due 2023, at any time on or after July 15, 2008. Holders of the Zero Coupon Convertible Subordinated Notes due 2023 also have the right to require us to purchase some or all of their notes for cash on July 15, 2008, July 15, 2013 and July 15, 2018, at a price equal to 100% of the principal amount of the Zero Coupon Convertible Subordinated Notes due 2023 being redeemed plus accrued and unpaid liquidated damages, if any.

      The Zero Coupon Convertible Subordinated Notes due 2023 contain an embedded derivative, the value of which as of June 30, 2004 has been determined to be immaterial to our consolidated financial position. For financial accounting purposes, the ability of the holder to convert upon the satisfaction of a trading price condition constitutes an embedded derivative. Any changes in its value will be reflected in our future income statements, in accordance with Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.” As of June 30, 2004, we did not hold any other derivative financial instruments.

Foreign Currency Risk

      We transact business in various foreign countries and are thus subject to exposure from adverse movements in foreign currency exchange rates. This exposure is primarily related to revenue and operating expenses denominated in European and Asian currencies, as well as cash balances held in currencies other than our functional currency and the functional currency of our subsidiaries. For the three and six months ended June 30, 2004, our international revenues were approximately $13.9 million and $28.0 million, respectively. The revenues included beneficial foreign currency movements of approximately $2.1 million and

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$4.2 million for the three and six months ended June 30, 2004, respectively, primarily due to the strength of the Euro compared to the U.S. dollar. The effect of foreign exchange rate fluctuations on operations resulted in gains of $0.5 million for the six months ended June 30, 2004. This was principally as a result of the weakening of the U.S. dollar and its impact upon our U.S. dollar denominated deposits held by our international subsidiaries.

      To date we have not used financial instruments to hedge operating activities denominated in foreign currencies. We assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis. As of June 30, 2004, we had $45.4 million in cash and cash equivalents denominated in foreign currencies.

      Our international business is subject to risks typical of an international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility. Accordingly, our future results could be materially and adversely affected by changes in these or other factors.

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RISK FACTORS

      The following important factors, among others, could cause our actual operating results to differ materially from those indicated or suggested by forward-looking statements made in this Form 10-Q or presented elsewhere by management from time to time.

RISKS RELATING TO OUR COMPANY AND OUR BUSINESS

We have a limited operating history and our future financial results may fluctuate, which may cause our stock price to decline.

      We have a limited operating history. An investor in our common stock must consider the risks and difficulties frequently encountered by companies in new and rapidly evolving industries, including companies that provide marketing technology and data products and services. Our risks include the ability to:

•  achieve anticipated revenue growth rates;

•  manage our operations;

•  compete effectively in the marketplace;

•  develop and introduce new products and services;

•  continue to develop, upgrade and integrate our products and services;

•  attract, retain and motivate qualified personnel;

•  maintain our current, and develop new, relationships with direct marketers, Web publishers, advertisers and advertising agencies; and

•  anticipate and adapt to changing industry conditions.

      We also depend on the use of the Internet and direct mail for advertising and marketing and as communications media, the demand for advertising and marketing services in general, and on general economic and industry conditions. We cannot assure you that our business strategy will be successful or that we will successfully address these risks. If we are unsuccessful in addressing these risks, our revenues may decline or may not grow in accordance with our business model and may fall short of expectations of market analysts and investors, which could negatively affect the price of our stock.

We have a history of losses and may have losses at times in the future.

      With the exception of fiscal year 2003, we have incurred net losses each year since inception, including net losses of $117.9 million and $265.8 million for the years ended December 31, 2002 and 2001, respectively. As of June 30, 2004 our accumulated deficit was $637.9 million. With the exception of the fiscal year ended December 31, 2003, we have not achieved profitability on an annual basis and may incur operating losses at times in the future. We expect to continue to incur significant operating and capital expenditures, which may include obligations for facilities that currently constitute excess or idle facilities. Periodically, we evaluate the expenses likely to be incurred for these facilities, and where appropriate, have taken restructuring charges with respect to these expenses. We cannot assure you that there will not be additional restructuring charges recognized with respect to our excess or idle facilities, in particular with respect to our facility in London, England where the office space is currently sublet for only a portion of the remaining lease term. As a result of our expenditures, we will need to generate significant revenue to maintain profitability. Even if we do continue to achieve profitability, we cannot assure you that we can sustain or increase profitability on a quarterly or annual basis in the future. If revenue does not meet our expectations, or if operating expenses exceed what we anticipate or cannot be reduced accordingly, our business, results of operations and financial condition will be materially and adversely affected.

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A decrease in expenditures by direct marketers and advertisers or a downturn in the economy could cause our revenues to decline significantly in any given period.

      We derive, and expect to continue to derive for the foreseeable future, a large portion of our revenue from products and services we provide to direct marketers, Web publishers, advertisers and advertising agencies. Expenditures by direct marketers and advertisers tend to be cyclical, reflecting overall economic conditions as well as budgeting and buying patterns. Specifically, the market for online advertising has been characterized in the last few years by lower prices for advertisements and the reduction, renegotiation or cancellation of advertising contracts. As a result, advertising spending across traditional media, as well as the Internet, decreased over the past few years. In addition, at times in the past, we have experienced an increased risk of uncollectible receivables from customers and the reduction of marketing and advertising budgets, especially for online advertising. We cannot assure you that expenditures by direct marketers and advertisers will not decline in any given period.

      The number of ad impressions delivered by DoubleClick TechSolutions has, at times in the past, declined and may in the future decline or fail to grow, which would adversely affect our revenues. In addition, the prices that DoubleClick TechSolutions can charge for its services has declined in recent years, and if these declines continue, it may adversely affect our revenues. A decline in the economic prospects of direct marketers or the economy in general would also adversely impact the revenue outlook for our marketing automation business. DoubleClick Data, which provides products and services to direct marketers, may face similar pressures. Some direct marketers may respond to economic downturns by reducing the number of catalogs mailed, thereby possibly reducing the demand for DoubleClick Data’s services. If direct marketing activities fail to grow or decline, our revenues could be adversely affected.

      We cannot assure you that reductions in marketing spending will not occur or that marketing spending will not be diverted to more traditional media or other online marketing products and services. However, even if economic conditions improve, we cannot assure you that marketing budgets and advertising spending in general or with respect to our offerings in particular will increase, or not decrease, from current levels. A decline in the economic prospects of marketers or the economy in general could alter current or prospective marketers’ spending priorities or increase the time it takes to close a sale with a customer. As a result, our revenues from marketing and advertising services may not increase or may decline significantly in any given period.

Disruption of our services due to unanticipated problems or failures could harm our business.

      Some of our TechSolutions and Data technologies reside in our data centers in multiple locations in the United States and abroad. Continued and uninterrupted performance of our technology is critical to our success. Customers may become dissatisfied by any system failure that interrupts our ability to provide our services to them, including failures affecting our ability to deliver advertisements without significant delay to the viewer or our ability to deliver a customer’s online marketing campaign. Sustained or repeated system failures would reduce the attractiveness of our products and services to our customers and could result in contract terminations, fee rebates or credits, or damages resulting from claims or litigation, thereby reducing revenue. Slower response time or system failures may also result from straining the capacity of our technology due to an increase in the volume of advertising or emails delivered through our servers. To the extent that we do not effectively address any capacity constraints or system failures, our business, results of operations and financial condition could be materially and adversely affected.

      Our operations are dependent on our ability to protect our computer systems against damage from natural disasters, fire, power loss, water damage, telecommunications failures, vandalism, unauthorized access to, or attacks on, our systems, and other malicious acts, and similar unexpected adverse events. In addition, interruptions in our products or services could result from the failure of our telecommunications providers to provide the necessary data communications capacity in the time frame we require. Unanticipated problems affecting our systems have from time to time in the past caused, and in the future could cause, interruptions in the delivery of our products and services. Our business, results of operations and financial condition could be materially and adversely affected by any damage or failure that interrupts, delays or destroys our operations.

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Some of our data centers are located at facilities provided by third parties and if these parties are unable to adequately protect our data centers, our business, results of operations and financial conditions could be materially and adversely affected.

We do not have multi-year agreements with most of our customers and may be unable to retain customers, attract new customers or replace departing customers with customers that can provide comparable revenues.

      Many of our contracts with our customers are short-term. We cannot assure you that our customers will continue to use our products and services or that we will be able to replace, in a timely or effective manner, departing customers with new customers that generate comparable revenues. Further, we cannot assure you that our customers will continue to generate consistent amounts of revenues over time. Our failure to develop and sustain long-term relationships with our customers would materially and adversely affect our results of operations.

Industry shifts, continuing evolution of our products and services and other changes may strain our managerial, operational, financial and information system resources.

      In recent years, we have had to respond to significant changes in our industry. As a result, we have experienced industry shifts, continuing evolution of product and service offerings and other changes that have increased the complexity of our business and placed considerable demands on our managerial, operational and financial resources. We continue to increase and change the scope of our product and service offerings both domestically and internationally and to deploy our resources in accordance with changing business conditions and opportunities. We have also grown through geographic expansion and as a result have dispersed offices and operation centers that make it more challenging to manage, operate and monitor our business and operations. To continue to successfully implement our business plan in our changing industry requires effective planning and management processes. We expect that we will need to continue to improve our financial and managerial controls and information and reporting systems and procedures and will need to continue to train and manage our workforce. Our inability to effectively respond to these challenges could materially and adversely affect our business, financial condition and results of operations.

We may not be able to generate profits from many of our products and services.

      A significant part of our business model involves generating revenue by providing marketing technology and data products and services to direct marketers, Web publishers, advertisers and advertising agencies. The long term profit potential for our business model has not yet been proven. The profitability of our business model is subject to external and internal factors. Any single factor or combination of factors could limit the profit potential, long-term and short-term, of our business model. Like other businesses in the marketing and advertising sectors, our revenue outlook is sensitive to downturns in the economy, including declines in advertising and marketing budgets. The profit potential of our business model is also subject to the acceptance of our products and services by direct marketers, Web publishers, advertisers and advertising agencies. Intensive marketing and sales efforts may be necessary to educate prospective customers regarding the uses and benefits of, and to generate demand for, our products and services. Enterprises may be reluctant or slow to adopt a new approach that may replace existing techniques, or may feel that our offerings fall short of their needs. If these outcomes occur, it could have an adverse effect on the profit potential of our business model.

Misappropriation of confidential information could cause us to lose customers or incur liability.

      We currently retain highly confidential information on behalf of our customers in secure database servers. Although we observe security measures throughout our operations, we cannot assure you that we will be able to prevent unauthorized individuals from gaining access to these database servers. Any unauthorized access to our servers, or abuse by our employees, could result in the theft of confidential customer information. If confidential information is compromised, we could lose customers or become subject to liability or litigation and our reputation could be harmed, any of which could materially and adversely affect our business and results of operations.

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Direct marketing, online advertising and related products and services are competitive markets and we may not be able to compete successfully.

      The market for marketing technology and data products and services is very competitive. We expect this competition to continue because there are low barriers to entry for several of our businesses. Also, industry consolidation may lead to stronger, better capitalized entities against which we must compete. We expect that we will encounter additional competition from new sources as we expand our product and service offerings.

      We believe that our ability to compete depends on many factors both within and beyond our control, including the following:

•  the features, performance, price and reliability of products and services offered either by us or our competitors;

•  the launch timing and market success of products and services developed either by us or our competitors;

•  our ability to adapt, integrate and scale our products and services, and to develop and introduce new products and services that respond to market needs;

•  our ability to adapt to evolving technology and industry standards;

•  our customer service and support efforts;

•  our sales and marketing efforts; and

•  the relative impact of general economic and industry conditions on either us or our competitors.

      Some of our existing and potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than do we. These factors could allow them to compete more effectively than we can, including devoting greater resources to the development, promotion and sale of their products and services, engaging in more extensive research and development, undertaking more far-reaching marketing campaigns, adopting more aggressive pricing policies and making more attractive offers to existing and potential employees, strategic partners, direct marketers, Web publishers and advertisers. We cannot assure you that our competitors will not develop products or services that are equal or superior to our products and services or that achieve greater acceptance than our products and services. In addition, current and potential competitors have or may merge or have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products or services to address the needs of our prospective direct marketer, Web publisher, advertising and advertising agency customers. As a result, it is possible that new competitors may emerge and rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross profits and loss of market share. We cannot assure you that we will be able to compete successfully or that competitive pressures will not materially and adversely affect our business, results of operations or financial condition.

Our quarterly operating results are subject to significant fluctuations and you should not rely on them as an indication of future operating performance.

      Our revenue and results of operations may fluctuate significantly in the future as a result of a variety of factors, many of which are beyond our control. These factors include:

•  direct marketer, Web publisher and advertiser demand for our products and services;

•  downward pricing pressures from current and potential customers for our products and services;

•  Internet user traffic levels;

•  number and size of ad units per page on our customers’ Web sites;

•  the introduction of new products or services by us or our competitors;

•  variations in the levels of capital, operating expenditures and other costs relating to our operations;

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•  the size and timing of significant pre-tax charges, including for goodwill impairment and the write-down of assets and restructuring charges and credits, such as those relating to idle or excess facilities and severance;

•  costs related to any acquisitions or dispositions of technologies or businesses;

•  general seasonal and cyclical fluctuations; and

•  general economic and industry conditions.

We may not be able to manage our operational spending properly which could adversely impact our business, results of operations and financial condition.

      We may not be able to adjust spending quickly enough to offset any unexpected revenue shortfall. Our expenses include upgrading and enhancing our ad management and email delivery technology, expanding our product and service offerings, marketing and supporting our products and services and supporting our sales and marketing operations. If we have a shortfall in revenue in relation to our expenses, or if our expenses exceed revenue, then our business, results of operations and financial condition could be materially and adversely affected.

Seasonal trends may cause our operating results to fluctuate.

      Our business is subject to seasonal fluctuations. Advertisers generally place fewer advertisements during the first and third calendar quarters of each year, which directly affects our DoubleClick TechSolutions business. Further, Internet user traffic typically drops during the summer months, which reduces the amount of online advertising. The direct marketing industry generally uses our data services more in the third calendar quarter based on plans for holiday season mailings, which directly affects our DoubleClick Data business. The email technology business may experience seasonal patterns similar to the traditional direct marketing industry, which typically generates lower revenues earlier in the calendar year and higher revenues later in the year. In addition, the demand for performance based marketing services has, in the past, peaked during the fourth quarter holiday season. As a result, we believe that period-to-period comparisons of our results of operations may not be indicators of future performance.

We may not be able to continue to grow through acquisitions of or investments in other companies.

      Our business has continued to expand rapidly in part as a result of acquisitions or investments in other companies, including the recent acquisitions of SmartPath and Performics. We have recorded goodwill in connection with a number of our acquired businesses, including MessageMedia, FloNetwork, SmartPath and Performics. We have in the past recognized impairment charges with respect to the goodwill of some acquired businesses as a result of significantly lower-than-expected revenues generated with respect to acquired businesses and considerably reduced estimates of future performance. If market conditions require, we may in the future record additional impairments in the value of our acquired businesses.

      We may continue to acquire or make investments in other complementary businesses, products, services or technologies as a means to grow our business. From time to time we have had discussions with other companies regarding our acquiring, or investing in, their businesses, products, services or technologies. We cannot assure you that we will be able to identify other suitable acquisition or investment candidates. Even if we do identify suitable candidates, we cannot assure you that we will be able to make other acquisitions or investments on commercially acceptable terms, if at all. Even if we agree to buy a company, technology or other assets, we cannot assure you that we will be successful in consummating the purchase. If we are unable to continue to expand through acquisitions, our revenue may decline or fail to grow.

      We are also minority investors in a few technology companies, including AdLINK, MaxWorldwide and DoubleClick Japan. Our investments have decreased in value in the past, and may decrease in the future, as a result of market volatility, and periodically, we have recorded charges to earnings for all or a portion of the unrealized loss due to declines in market value considered to be other than temporary. The market value of these investments may decline in future periods due to the continued volatility in the stock market in general

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or the market prices of securities of technology companies in particular and we may be required to record further charges to earnings as a result. Further, we cannot assure you that we will be able to sell these securities at or above our cost basis.

We may not manage the integration of acquired companies successfully or achieve desired results.

      As a part of our business strategy, we have in the past entered into, and could in the future enter into, a number of business combinations and acquisitions. Acquisitions are accompanied by a number of risks, including:

•  the difficulty of assimilating the operations and personnel of the acquired companies;

•  the potential disruption of the ongoing businesses and distraction of our management and the management of acquired companies;

•  the difficulty of incorporating acquired technology and rights into our products and services;

•  unanticipated expenses related to technology and other integration;

•  difficulties in disposing of the excess or idle facilities of an acquired company or business;

•  difficulties in maintaining uniform standards, controls, procedures and policies;

•  the impairment of relationships with employees and customers as a result of the integration of new management personnel;

•  the inability to develop new products and services that combine our knowledge and resources and our acquired businesses or the failure for a demand to develop for the combined companies’ new products and services;

•  potential failure to achieve additional sales and enhance our customer base through cross-marketing of the combined company’s products to new and existing customers;

•  potential litigation resulting from our business combinations or acquisition activities; and

•  potential unknown liabilities associated with the acquired businesses.

      We may not succeed in addressing these risks or other problems encountered in connection with these business combinations and acquisitions. If so, these risks and problems could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. Furthermore, we may incur debt or issue equity securities to pay for any future acquisitions. The issuance of equity securities could be dilutive to our existing stockholders.

We depend on third-party Internet, telecommunications and technology providers, over whom we have no control, to provide our products and services.

      We depend heavily on several third-party providers of Internet and related telecommunication services, including hosting and co-location facilities, as well as providers of technology solutions, including software developed by third party vendors, in delivering our products and services. These companies may not continue to provide services or software to us without disruptions in service, at the current cost or at all. Our Abacus division depends on data modeling software licensed from SAS Institute Inc. We do not maintain a long term agreement with this vendor and rely, in large measure, upon our relationship with them.

      If the products and services provided by these third-party vendors are disrupted or not properly supported, our ability to provide our products and services would be adversely impacted. While we believe our business relationships with our key vendors are good, a material adverse impact on our business would occur if a supply or license agreement with a key vendor is materially revised, is not renewed or is terminated, or the supply of products or services were insufficient or interrupted. The costs associated with any transition to a new service provider could be substantial, require us to reengineer our computer systems and telecommunications

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infrastructure to accommodate a new service provider and disrupt the services we provide to our customers. This process could be both expensive and time consuming and could damage our relationships with customers.

      In addition, failure of our Internet and related telecommunications providers to provide the data communications capacity in the time frame we require could cause interruptions in the services we provide. Unanticipated problems affecting our computer and telecommunications systems in the future could cause interruptions in the delivery of our services, causing a loss of revenue and potential loss of customers.

We are dependent on key personnel and on the retention and recruiting of key personnel for our future success.

      Our future success depends to a significant extent on the continued service of our key technical, sales and senior management personnel. We do not have employment agreements with these executives and do not maintain key person life insurance on any of these executives. The loss of the services of one or more of our key employees could significantly delay or prevent the achievement of our product development and other business objectives and could harm our business. Our future success also depends on our continuing ability to attract, retain and motivate highly skilled employees for key positions. There is competition for qualified employees in our industry. We may not be able to retain our key employees or attract, assimilate or retain other highly qualified employees in the future.

      We have from time to time in the past experienced, and we expect to continue to experience from time to time in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications for certain positions.

We may be unable to introduce new or enhanced products and services that meet our customers’ requirements.

      Our future success depends in part upon our ability to enhance and integrate our existing products and to introduce new, competitively priced products and solutions with features that meet evolving customer requirements, all in a timely and cost-effective manner. A number of factors, including the following, could have a negative impact on the success of our products and services:

•  delays or difficulties in product acquisition, integration or development;

•  our competitors’ introduction of new products ahead of our new products, or their introduction of superior or cheaper products;

•  our customers’ development of in-house solutions that could eliminate the need for our products and services; and

•  our failure to anticipate changes in customers’ requirements.

      If we are unable to introduce new and enhanced products and services effectively, our revenues may decline or may not grow in accordance with our business model.

If we fail to adequately protect our intellectual property, we could lose our intellectual property rights or be liable for damages to third parties.

      Our success and ability to effectively compete are substantially dependent on the protection of our proprietary technologies, patents, trademarks, service marks, copyrights and trade secrets, which we protect through a combination of patent, trademark, copyright, trade secret, unfair competition and contract law. We cannot assure you that any of our intellectual property rights will be viable or of value in the future.

      In September 1999, the U.S. Patent and Trademark Office issued to us a patent that covers our DART ad serving and ad management technology. We are currently seeking reissue of this patent, which would limit the scope of the existing patent, and this reissue proceeding is pending before the U.S. Patent and Trademark Office. The patent examiner has raised some objections to our reissue application. Although we are contesting these objections, we cannot assure you that this patent will be reissued. We own other patents, and have patent

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applications pending for some of our other technology. We cannot assure you that the patent applications that we have filed in the United States and internationally will be issued or that patents issued or acquired by us now or in the future will be valid and enforceable or provide us with any meaningful protection.

      We also have rights in the trademarks and service marks that we use to market our products and services. These marks include DOUBLECLICK®, DART®, DARTMAIL®, ABACUS^SM, DOUBLECLICK ENSEMBLE^SM, SITEADVANCE®, MEDIAVISOR^SM, CHANNELVIEW® and MOTIF^SM. We have applied to register some of our trademarks and service marks in the United States and internationally. We cannot assure you that any of these current or future applications will be approved. Even if these marks are registered, these marks may be invalidated or successfully challenged by others. If our trademarks or service marks are not registered because third parties own these marks, our use of these marks will be restricted unless we are able to enter into arrangements with these parties, which may not be available on commercially reasonable terms, if at all.

      We also enter into confidentiality, assignments of proprietary rights and license agreements, as appropriate, with our employees, consultants and business and technology partners, and generally control access to and distribution of our technologies, documentation and other proprietary information. Despite these efforts, we cannot be certain that the steps we take to prevent unauthorized use of our intellectual property rights are sufficient to prevent misappropriation of our products and services or technologies, particularly in foreign countries where laws or law enforcement practices may not protect our intellectual property rights as fully as in the United States. In addition, we cannot assure you that we will be able to adequately enforce the contractual arrangements that we have entered into to protect our proprietary technologies and intellectual property. If we lose our intellectual property rights, this could have a material and adverse impact on our business, financial condition and results of operations.

If we face a claim of intellectual property infringement, we may be liable for damages and be required to make changes to our technology or business.

      Infringement claims may be asserted against us, which could adversely affect our reputation and the value of our intellectual property rights. From time to time we have been, and we expect to continue to be, subject to claims or notices in the ordinary course of our business, including assertions of alleged infringement of the patents, trademarks and other intellectual property rights of third parties by us or our customers. We do not conduct exhaustive patent searches to determine whether our technology infringes patents held by others. In addition, the protection of proprietary rights in Internet-related industries is inherently uncertain due to the rapidly evolving technological environment. As such, there may be numerous patent applications pending, many of which are confidential during a large part of their prosecution, that provide for technologies similar to ours.

      Third party infringement claims and any resultant litigation against us or our technology partners or providers, should it occur, could subject us to significant liability for damages, restrict us from using our or their technology or operating our business generally, or require changes to be made to our technology. Even if we prevail, litigation is time consuming and expensive to defend and would result in the diversion of management’s time and attention. Claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims unless we are able to enter into royalty, licensing or other similar agreements with the third parties asserting these claims.

      Such agreements, if required, may not be available on terms acceptable to us, or at all. If we are unable to enter into these types of agreements, we would be required to either cease using the subject product or change the technology underlying the applicable product. If a successful claim of infringement is brought against us and we fail to develop non-infringing technology as an alternative or to license the infringed or similar technology on a timely basis, it could materially adversely affect our business, financial condition and results of operations.

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Our business may be materially adversely affected by lawsuits related to privacy, data protection and our business practices.

      We have been a defendant in several lawsuits and governmental inquiries by the Federal Trade Commission and the attorneys general of several states alleging, among other things, that we unlawfully obtain and use Internet users’ personal information and that our use of ad serving “cookies” violates various laws. Cookies are small pieces of data that are recorded on the computers of Internet users. Although the last of these particular matters was resolved in 2002, we may in the future be subject to additional claims or regulatory inquiries with respect to our business practices. Class action litigation and regulatory inquiries of these types are often expensive and time consuming and their outcome may be uncertain.

      Any additional claims or regulatory inquiries, whether successful or not, could require us to devote significant amounts of monetary or human resources to defend ourselves and could harm our reputation. We may need to spend significant amounts on our legal defense, senior management may be required to divert their attention from other portions of our business, new product launches may be deferred or canceled as a result of any proceedings, and we may be required to make changes to our present and planned products or services, any of which could materially and adversely affect our business, financial condition and results of operations. If, as a result of any proceedings, a judgment is rendered or a decree is entered against us, it may materially and adversely affect our business, financial condition and results of operations and harm our reputation.

Activities of our clients could damage our reputation or give rise to legal claims against us.

      Our clients’ promotion of their products and services may not comply with federal, state and local laws, including but not limited to laws and regulations relating to the Internet. Failure of our customers to comply with federal, state or local laws or our policies could damage our reputation and adversely affect our business, results of operations or financial condition. We cannot predict whether our role in facilitating our customers’ marketing activities would expose us to liability under these laws. Any claims made against us could be costly and time-consuming to defend. If we are exposed to this kind of liability, we could be required to pay substantial fines or penalties, redesign our business methods, discontinue some of our services or otherwise expend resources to avoid liability.

      We also may be held liable to third parties for the content in the advertising and emails we deliver on behalf of our customers. We may be held liable to third parties for content in the advertising we serve if the music, artwork, text or other content involved violates the copyright, trademark or other intellectual property rights of such third parties or if the content is defamatory, deceptive or otherwise violates applicable laws or regulations. Any claims or counterclaims could be time consuming, result in costly litigation or divert management’s attention.

Our business may suffer if we are unable to effectively manage our international operations.

      We have operations in a number of countries and have limited experience in developing localized versions of our products and services and in marketing, selling and distributing our products and services internationally. We sell our technology products and services through our directly and indirectly owned subsidiaries primarily located in Australia, Canada, China, France, Germany, Spain, Ireland, the United Kingdom and Hong Kong. In Japan, we sell our technology products and services through DoubleClick Japan, of which we own approximately 15%. In addition, we develop and provide support for some of our technology products and services in Canada, Europe and Asia. We also operate the DoubleClick Data business in the United Kingdom, Australia and Japan and, through a joint venture, in Germany.

      Our international operations are subject to other inherent risks, including:

•  the high cost of maintaining international operations;

•  uncertain demand for our products and services;

•  the impact of recessions in economies outside the United States;

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•  changes in regulatory requirements;

•  more restrictive data protection regulation, which may vary by country;

•  reduced protection for intellectual property rights in some countries;

•  potentially adverse tax consequences;

•  difficulties and costs of staffing and managing foreign operations;

•  cultural differences in the conduct of business;

•  political and economic instability;

•  fluctuations in currency exchange rates; and

•  seasonal fluctuations in Internet usage and marketing and advertising spending.

      These risks may have a material and adverse impact on the business, results of operations and financial condition of our operations in a particular country and could result in a decision by us to reduce or discontinue operations in that country. The combined impact of these risks in each country may also materially and adversely affect our business, results of operations and financial condition as a whole.

Many of our customers continue to experience business conditions that could adversely affect our business.

      Some of our customers have experienced, and may continue to experience, difficulty raising capital and supporting their current operations and implementing their business plans, or may be anticipating such difficulties and, therefore, may elect to scale back the resources they devote to marketing in general and our offerings in particular. These customers may not be able to discharge their payment and other obligations to us. The non-payment or late payment of amounts due to us from our customers could negatively impact our financial condition. If the current business environment for our customers worsens, our business, results of operations and financial condition could be materially adversely affected.

Anti-takeover provisions in our charter, by-laws and Delaware law may make it difficult for a third party to acquire us.

      Some of the provisions of our amended and restated certificate of incorporation, our amended and restated by-laws and Delaware law could, together or separately:

•  discourage potential acquisition proposals;

•  delay or prevent a change in control; or

•  impede the ability of our stockholders to change the composition of our board of directors in any one year.

      As a result, it could be more difficult for third parties to acquire us, even if doing so might be beneficial to our stockholders. Difficulty in acquiring us could, in turn, limit the price that investors might be willing to pay for shares of our common stock.

Our stock price may experience price and volume fluctuations, and this volatility could result in us becoming subject to securities or other litigation, which is expensive and could result in a diversion of resources.

      The market price of our common stock has fluctuated in the past and is likely to continue to be highly volatile and subject to wide fluctuations. In addition, the stock market has experienced significant price and volume fluctuations. Investors may be unable to resell their shares of our common stock at or above their purchase price.

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      Additionally, in the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. Many companies in our industry have been subject to this type of litigation in the past. We may also become involved in this type of litigation. Litigation is often expensive and diverts management’s attention and resources, which could materially and adversely affect our business, financial condition and results of operations.

Future sales of our common stock may affect the market price of our common stock.

      As of June 30, 2004, we had 131,766,933 shares of common stock outstanding, excluding 17,970,632 shares subject to options outstanding as of such date under our stock option plans that are exercisable at prices ranging from $0.01 to $1,134.80 per share. We cannot predict the effect, if any, that future sales of common stock or the availability of shares of common stock for future sale will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of common stock, including shares issued upon the exercise of stock options, or the perception that such sales could occur, may materially reduce the market value for our common stock.

Risks Related to Our Industry

Direct marketers and advertisers may be reluctant to devote a portion of their budgets to marketing technology and data products and services or online advertising.

      Companies doing business on the Internet, including us, must compete with traditional advertising media, including television, radio, cable and print, for a share of advertisers’ total marketing budgets. Potential customers may be reluctant to devote a significant portion of their marketing budget to online advertising or marketing technology and data products and services if they perceive the Internet or direct marketing to be a limited or ineffective marketing medium. Any shift in marketing budgets away from marketing technology and data products or services or online advertising spending, or our offerings in particular, could materially and adversely affect our business, results of operations or financial condition. In addition, online advertising could lose its appeal to those direct marketers and advertisers using the Internet as a result of its ad performance relative to other media.

If the delivery of Internet advertising on the Web, or the delivery of our email messages, is limited or blocked, demand for our products and services may decline.

      Our business may be adversely affected by the adoption by computer users of technologies that harm the performance of our products and services. For example, computer users may use software designed to filter or prevent the delivery of emails or Internet advertising, including pop-up and pop-under advertisements, or Internet browsers set to block the use of cookies or prevent or impair the operation of other online tracking technologies. We cannot assure you that the number of computer users who employ these or other similar technologies will not increase, thereby diminishing the efficacy of our products and services. In the event that one or more of these technologies became more widely adopted by computer users, demand for our products and services would decline.

      We also depend on our ability to deliver emails over the Internet through Internet service providers and private networks. Internet service providers are able to block messages from reaching their users and we do not have agreements with any Internet service providers to deliver emails to their customers. As a result, we could experience temporary or permanent blockages of our delivery of emails to their customers, which would limit the effectiveness of email marketing. Some Internet service providers also use proprietary technologies to handle and deliver email. If Internet service providers or private networks materially limit or block the delivery of our emails, or if our technology fails to be compatible with their email technologies, then our business, results of operations or financial condition could be materially and adversely affected. In addition, the effectiveness of email marketing may decrease as a result of increased consumer resistance to email marketing in general.

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New laws and regulations or changing interpretations of existing laws and regulations could harm our business.

      Governments in the U.S. and other countries have adopted laws and regulations affecting important aspects of our business, Internet commerce, such as Internet communications, electronic contracting, privacy and data protection, taxation, advertising and direct marketing.

      Many countries, including the countries of the European Union, have implemented more stringent data protection regulations than those in the U.S. Our current policies and procedures may not meet these more restrictive standards. The cost of such compliance could be material, and we may not be able to comply with the applicable regulations in a timely or cost-effective manner.

      In addition, the U.S. and many foreign countries have adopted laws that restrict the transmission of unsolicited commercial email. U.S. law requires senders of commercial electronic mail messages to, among other things, identify their messages as advertisements or solicitations and provide recipients a mechanism to decline (opt out) future commercial email from the sender. The Federal Trade Commission is authorized to regulate commercial email and may impose additional measures such as labeling requirements or a national “Do Not E-Mail” registry. Other countries, including the countries of the European Union, either have or may in the future require senders to obtain recipients’ direct affirmative consent before sending commercial email messages. Although our email delivery is consent-based, we may be subjected to increased liabilities and may be required to change our current email practices in ways that make email communications less effective or more costly.

      Some countries, including the countries of the European Union, require that Internet users be allowed to refuse to accept cookies or other online tracking technologies. In addition, new technologies may make it easier or less inconvenient for Internet users to reject cookies or other online tracking technologies. If a high percentage of Internet users refuse to accept cookies or other online tracking technologies, or if future laws require express consent for the use of cookies or otherwise restrict our use of related Internet technologies, Internet advertising and direct marketing may become more costly and less effective, and the demand for our services may decrease.

      Meanwhile, many areas of the law affecting the Internet remain unsettled, and it can be difficult to determine whether and how existing laws, such as those governing data protection, privacy, intellectual property, financial services, content standards, libel, data security and taxation, may be applied to Internet-based businesses. Our business could be negatively impacted by new applications or interpretations of existing laws and regulations to direct marketing, the Internet or our other lines of business.

      Future laws and regulations could also have a material adverse effect on our business. In particular, new consumer protection requirements could impose significant, unanticipated compliance costs and could make it inefficient or infeasible to operate certain parts of our business. Governments in the U.S. and other countries are considering new limitations on the collection, use and disclosure of personal information for marketing purposes. The U.S. Congress and several U.S. states are presently considering legislation that, if enacted into law, could impose substantial restrictions, including consumer notice and consent requirements, on our use of ad serving cookies and other online tracking technologies. Any legislation enacted or regulation issued could dampen the growth and acceptance of our industry in general and of our offerings in particular and could have a material adverse effect on our business, financial condition and results of operations. We are unable to predict whether any particular proposal will pass, or the nature of the limitations that may be imposed.

      Any changes in applicable legal requirements may cause us to change or discontinue an existing offering, business or business model; cancel a proposed offering or new business; or incur significant expenses or liability that materially and adversely affect our business, financial condition and results of operations.

      We are a member of the Network Advertising Initiative, including its Email Service Provider Coalition, the Privacy Alliance, and the Direct Marketing Association, all industry self-regulatory organizations. These organizations or similar organizations might adopt additional, more burdensome guidelines, compliance with which could materially and adversely affect our business, financial condition and results of operations.

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Our business may suffer if the Web experiences unexpected interruptions or delays that may be caused by system failures.

      Our success depends, in large part, upon the maintenance of the Web infrastructure, such as a reliable network backbone with the necessary speed, data capacity and security and timely development of enabling products. We cannot assure you that the Web infrastructure will effectively support the demands placed on it as the Web continues to experience increased numbers of users, frequency of use or increased bandwidth requirements of users. Furthermore, the Web has experienced unexpected interruptions and delays caused by system failures and computer viruses. These interruptions and delays could impact user traffic and the direct marketers, Web publishers and advertisers using our products and services. In addition, a lack of security over the Internet may cause Internet usage to decline and could adversely impact our business, financial condition and results of operations.

The lack of appropriate advertising measurement standards or tools may cause us to lose customers or prevent us from charging a sufficient amount for our products and services.

      Because online marketing technology and data products and services remain relatively new disciplines, there are currently no generally accepted methods or tools for measuring the efficacy of online marketing and advertising as there are for advertising in television, radio, cable and print. Many traditional advertisers may be reluctant to spend sizable portions of their budget on online marketing and advertising until there exist widely accepted methods and tools that measure the efficacy of their campaigns.

      We could lose customers or fail to gain customers if our products and services do not utilize the measuring methods and tools that may become generally accepted. Further, new measurement standards and tools could require us to change our business and the means used to charge our customers, which could result in a loss of customer revenues and adversely impact our business, financial condition and results of operation.

Our Data business segment is dependent on the success of the direct marketing industry for our future success.

      The future success of DoubleClick Data is dependent in large part on the continued demand for our services from the direct marketing industry, including the catalog industry, as well as the continued willingness of catalog operators to contribute their data to us. Most of our Abacus customers are large consumer merchandise catalog operators in the United States, with a number of operators in the United Kingdom. A significant downturn in the direct marketing industry generally, including the catalog industry, or withdrawal or diminished use of our services by a substantial number of catalog operators from the Abacus Alliances, would have a material adverse effect on our business, financial condition and results of operations. If email marketing or electronic commerce, including the purchase of merchandise and the exchange of information via the Internet or other media, increases significantly in the future, companies that now rely on catalogs or other direct marketing avenues to market their products may reallocate resources toward these new direct marketing channels and away from catalog-related marketing or other direct marketing avenues, which could adversely affect demand for some DoubleClick Data services. In addition, the effectiveness of direct mail as a marketing tool may decrease as a result of consumer saturation and increased consumer resistance to direct mail in general.

Increases in postal rates and paper prices could harm our Data business segment.

      The direct marketing activities of our Abacus Alliance customers are adversely affected by postal rate increases, especially increases that are imposed without sufficient advance notice to allow adjustments to be made to marketing budgets. Higher postal rates may result in fewer mailings of direct marketing materials, with a corresponding decline in the need for some of the direct marketing services offered by us. Increased postal rates can also lead to pressure from our customers to reduce our prices for our services in order to offset any postal rate increase. Higher paper prices may also cause catalog companies to conduct fewer or smaller mailings which could cause a corresponding decline in the need for our products and services. Our customers may aggressively seek price reductions for our products and services to offset any increased materials cost.

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Item 4. Controls and Procedures.

      DoubleClick’s management, with the participation of DoubleClick’s chief executive officer and chief financial officer, evaluated the effectiveness of DoubleClick’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2004. Based on this evaluation, DoubleClick’s chief executive officer and chief financial officer concluded that, as of June 30, 2004, DoubleClick’s disclosure controls and procedures were (1) designed to ensure that material information relating to DoubleClick, including its consolidated subsidiaries, is made known to DoubleClick’s chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by DoubleClick in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

      No change in DoubleClick’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, DoubleClick’s internal control over financial reporting.

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

      In April 2002, a consolidated amended class action complaint alleging violations of the federal securities laws in connection with our follow-on offerings was filed in the United States District Court for the Southern District of New York naming us, some of our officers and directors and certain underwriters of our follow-on offerings as defendants. We and some of our officers and directors are named in the suit pursuant to Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 on the basis of the alleged failure to disclose the underwriters’ alleged compensation and manipulative practices. This action seeks, among other things, unspecified damages and costs, including attorneys’ fees. Approximately 300 other issuers and their underwriters have had similar suits filed against them, all of which are included in a single coordinated proceeding in the Southern District of New York. In October 2002, the action was dismissed against our officers and directors without prejudice. However, claims against us remain. In July 2002, we and the other issuers in the consolidated cases filed motions to dismiss the amended complaint for failure to state a claim, which was denied as to us in February 2003.

      In June 2003, our Board of Directors conditionally approved a proposed partial settlement with the plaintiffs in this matter. In June 2004, an agreement of settlement was submitted to the court for preliminary approval. The settlement would provide, among other things, a release of us 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. Our Board of Directors 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. We believe these claims are without merit and, if the settlement is not finalized, we intend to defend these actions vigorously. However, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation. An unfavorable outcome in litigation could materially and adversely affect our business, financial condition and results of operations.

      We are defending two class action lawsuits, one filed in Allegheny County, Pennsylvania and the other in San Joaquin County, California, alleging, among other things, deceptive business practices, fraud, misrepresentation, invasion of privacy and right of association relating to allegedly deceptive content of online advertisements that plaintiffs assert we delivered to consumers. The actions seek, among other things,

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injunctive relief, compensatory and punitive damages and attorneys’ fees and costs. In April 2004, the court in the California action entered an order dismissing several claims against us with leave to amend. We believe these claims are without merit and intend to defend these actions vigorously. However, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of these litigations. An unfavorable outcome in litigation could materially and adversely affect our business, financial condition and results of operations.

      As previously reported, in October 2003, we received a grand jury subpoena from the United States Attorney’s Office for the Southern District of New York (“U.S. Attorney’s Office”) seeking documents regarding certain vendors that provided services to us, including interior construction and facilities management, during the period from 1999 through 2001. The services provided by these vendors are unrelated to the products and services provided by us to our customers. In March 2004, the U.S. Attorney’s Office issued a press release announcing an Indictment against nineteen individuals, including one of our former employees, for racketeering and other federal crimes. The Indictment alleges a scheme to defraud us through extortion of one of our vendors and through kickbacks to our former employee named in the Indictment. The press release states that these kickback payments “were made without knowledge of [the former employee’s] superiors at DoubleClick and were in direct violation of the written policies and procedures of DoubleClick.”

      We are continuing to fully cooperate with the U.S. Attorney’s Office. In addition, following receipt of the grand jury subpoena, we conducted an internal investigation and have implemented remedial measures to improve our selection, use and oversight of our vendors. We do not believe that any overpayments made by us relating to the vendor named in the Indictment or the other vendors listed in the grand jury subpoena are material with respect to our financial statements for the periods in question or our current financial condition.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

      The following provides information with respect to our purchases of our common stock during the second quarter of 2004 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act:

					Total Number of Shares		Approximate Dollar
	Total Number of				Repurchased as Part of		Value that May Yet Be
	Shares		Average Price		Publicly Announced		Purchased under the
	Repurchased		Per Share		Program		Program(1)
April 1 through April 30, 2004		700,000	$	9.30		2,761,755	$	71.6 million
May 1 through May 31, 2004		1,689,900	$	8.20		4,451,655	$	57.8 million
June 1 through June 30, 2004		2,310,000	$	8.36		6,761,655	$	38.7 million

(1)  In November 2003, the Board of Directors approved a $100 million stock repurchase program (the “Program”). We did not purchase any other shares of our common stock outside of the Program during the quarterly period ended June 30, 2004. As part of our Program, we may, from time to time, enter into a purchase plan with a broker in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The Rule 10b5-1 plan would authorize the broker to effect repurchases under the Program during times when we ordinarily would not be in the market because of our self-imposed trading “blackout periods,” provided that the terms and conditions in the plan are met.

Item 4. Submission of Matters to a Vote of Security Holders

      We held our 2004 Annual Meeting of Stockholders on June 7, 2004. At that meeting, our stockholders (1) approved the election of Thomas S. Murphy, Mark E. Nunnelly and Kevin J. O’Connor as Class I directors whose term expires in 2007 and (2) approved the audit committee’s selection of PricewaterhouseCoopers LLP as our independent auditors for the fiscal year ending December 31, 2004. In addition to the directors listed above who were elected at our 2004 Annual Meeting of Stockholders, the terms of the following directors continued after our 2004 Annual Meeting: Kevin P. Ryan, Dwight A. Merriman, David N. Strohm, W. Grant Gregory and Don Peppers.

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      There were 116,357,763 votes cast for and 6,231,879 votes withheld in connection with the election of Thomas S. Murphy as a director. There were 117,626,057 votes cast for and 4,963,585 votes withheld in connection with the election of Mark E. Nunnelly as a director. There were 111,900,562 votes cast for and 10,689,080 votes withheld in connection with the election of Kevin J. O’Connor as a director.

      There were 120,595,023 votes cast for, 1,960,366 votes cast against and 34,253 abstentions in connection with the audit committee’s selection of PricewaterhouseCoopers LLP as independent auditors.

Item 6. Exhibits and Reports on Form 8-K

      (a) Exhibits

Number		Description
	10.1*	Agreement and Plan of Merger, dated May 13, 2004, by and among DoubleClick Inc., Sherlock Subsidiary, Inc., Performics Inc. and James Crouthamel.
	10.2*	Master License Agreement between DoubleClick Inc. (as successor to Abacus Direct Corporation) and SAS Institute Inc.
	31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1*	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2*	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*  filed herewith

      (b) Reports on Form 8-K

      On April 15, 2004, we furnished a Current Report on Form 8-K under Item 12, containing a copy of our earnings release for the quarter ended March 31, 2004 (including financial statements).

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SIGNATURE

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

DOUBLECLICK INC.

By:  /s/ CORY A. DOUGLAS

Cory A. Douglas

Vice President, Finance and Corporate Controller

(Chief Accounting Officer and

Duly Authorized Officer)

Date: August 9, 2004

50

EXHIBIT INDEX

Number			Description
	10	.1*	Agreement and Plan of Merger, dated May 13, 2004, by and among DoubleClick Inc., Sherlock Subsidiary, Inc., Performics Inc. and James Crouthamel.
	10	.2*	Master License Agreement between DoubleClick Inc. (as successor to Abacus Direct Corporation) and SAS Institute Inc.
	31	.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31	.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32	.1*	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.2*	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

EX-10.1

EXHIBIT 10.1

EXECUTION COPY

AGREEMENT AND PLAN OF MERGER

BY AND AMONG

DOUBLECLICK INC.

SHERLOCK SUBSIDIARY, INC.,

PERFORMICS INC.,

AND

JAMES CROUTHAMEL

May 13, 2004

TABLE OF CONTENTS

		Page
ARTICLE I THE MERGER			1
1.1	The Merger		1
1.2	The Closing		1
1.3	Actions at the Closing		1
1.4	Additional Action		2
1.5	Conversion of Shares		2
1.6	Dissenting Shares		4
1.7	Options and Warrants		5
1.8	Payment for Company Shares		6
1.9	Earnout Payment		7
1.10	Escrow		12
1.11	Articles of Incorporation; By-laws; Officers		12
1.12	No Further Rights		13
1.13	Closing of Transfer Books		13
1.14	Taxes		13
1.15	Shareholder Releases		13
1.16	Appointment of Shareholder Representative		14
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL SHAREHOLDER			16
2.1	Organization, Qualification and Corporate Power		16
2.2	Capitalization		16
2.3	Authorization of Transaction		18
2.4	Noncontravention		18
2.5	Subsidiaries		18
2.6	Financial Statements		19
2.7	Absence of Certain Changes		19
2.8	Undisclosed Liabilities		19
2.9	Tax Matters		20
2.10	Assets		23
2.11	No Owned Real Property		23
2.12	Real Property Leases		23
2.13	Intellectual Property		24
2.14	Contracts		28
2.15	Accounts Receivable; Indebtedness		30
2.16	Powers of Attorney		30
2.17	Insurance		30
2.18	Litigation		31
2.19	Warranties		31
2.20	Employees		31

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		Page
2.21	Employee Benefits		33
2.22	Environmental Matters		36
2.23	Legal Compliance		36
2.24	Customers and Suppliers		36
2.25	Permits		37
2.26	Certain Business Relationships With Affiliates		37
2.27	Brokers’ Fees		37
2.28	Books and Records		37
2.29	Principal Shareholder Representation		38
2.30	Disclosure		38
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE BUYER AND THE TRANSITORY SUBSIDIARY			38
3.1	Organization and Corporate Power		38
3.2	Authorization of Transaction		38
3.3	Noncontravention		39
3.4	Brokers’ Fees		39
ARTICLE IV COVENANTS			39
4.1	Closing Efforts		39
4.2	Governmental and Third-Party Notices and Consents		39
4.3	Shareholder Approval		40
4.4	Operation of Business		41
4.5	Access to Information		43
4.6	Notice of Breaches		43
4.7	Exclusivity		43
4.8	Expenses		44
4.9	FIRPTA		44
4.10	Employee Benefits		44
4.11	2004 Bonus Program; 2004 Sales Commission Plan		45
4.12	401(k) Plan		45
4.13	Indemnification		45
ARTICLE V CONDITIONS TO CONSUMMATION OF MERGER			45
5.1	Conditions to Each Party’s Obligations		45
5.2	Conditions to Obligations of the Buyer and the Transitory Subsidiary		45
5.3	Conditions to Obligations of the Company		47
ARTICLE VI INDEMNIFICATION			48
6.1	Indemnification by the Company Securityholders		48
6.2	Indemnification by the Buyer		48
6.3	Indemnification Claims		49
6.4	Survival of Representations and Warranties		52

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		Page
6.5	Limitations		53
6.6	Treatment of Indemnity Payments		53
ARTICLE VII TERMINATION			54
7.1	Termination of Agreement		54
7.2	Effect of Termination		55
ARTICLE VIII DEFINITIONS			55
ARTICLE IX MISCELLANEOUS			67
9.1	Press Releases and Announcements		67
9.2	No Third Party Beneficiaries		67
9.3	Entire Agreement		67
9.4	Succession and Assignment		67
9.5	Counterparts and Facsimile Signature		67
9.6	Headings		67
9.7	Notices		67
9.8	Governing Law		68
9.9	Amendments and Waivers		68
9.10	Severability		69
9.11	Limitation on Remedies		69
9.12	Submission to Jurisdiction		69
9.13	Construction		70

EXHIBITS AND SCHEDULES

Exhibit A-1 -Opinion of Counsel to the Company

Exhibit A-2 - Opinion of Special Counsel to the Company

Exhibit B - Escrow Agreement

Exhibit C - Disbursing Agent Agreement

Exhibit D - DoubleClick Employee Standard Terms Agreement and Offer Letter

Exhibit E - Form of Non-Competition Agreement

Disclosure Schedule

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AGREEMENT AND PLAN OF MERGER

     Agreement entered into as of May 13, 2004 by and among DoubleClick Inc., a Delaware corporation (the “Buyer”), Sherlock Subsidiary, Inc., an Illinois corporation and a wholly-owned subsidiary of the Buyer (the “Transitory Subsidiary”), Performics Inc., an Illinois corporation (the “Company”) and James Crouthamel (the “Principal Shareholder”).

     This Agreement contemplates a merger of the Transitory Subsidiary into the Company. In such merger, the holders of Company Shares will receive cash in exchange for their capital stock of the Company, and the holders of Options and Warrants will receive cash in exchange for their Options and Warrants.

     Now, therefore, in consideration of the representations, warranties and covenants herein contained, the Parties agree as follows.

ARTICLE I
THE MERGER

     1.1 The Merger. Upon and subject to the terms and conditions of this Agreement, the Transitory Subsidiary shall merge with and into the Company at the Effective Time. From and after the Effective Time, the separate corporate existence of the Transitory Subsidiary shall cease, and the Company shall continue as the Surviving Corporation. At the Effective Time, the Merger shall have the effects set forth in this Agreement and in Section 11.50 of the Illinois Business Corporation Act of 1983 (the “IBCA”). Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all property, rights, privileges, powers and franchises of the Company and the Transitory Subsidiary shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and the Transitory Subsidiary shall become the debts, liabilities and duties of the Surviving Corporation.

     1.2 The Closing. The Closing shall take place at the offices of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109, or at such other place as the Parties may mutually agree in writing, commencing at 9:00 a.m. local time on the Closing Date.

     1.3 Actions at the Closing. At the Closing:

          (a) the Company shall deliver to the Buyer and the Transitory Subsidiary the various certificates, instruments and documents referred to in Section 5.2;

          (b) the Buyer and the Transitory Subsidiary shall deliver to the Company the various certificates, instruments and documents referred to in Section 5.3;

          (c) the Surviving Corporation and the Transitory Subsidiary shall submit the Articles of Merger to the Secretary of State of the State of Illinois;

          (d) the Buyer and the Disbursing Agent shall execute and deliver the Disbursing Agent Agreement;

          (e) the Buyer, the Shareholder Representative and the Escrow Agent shall execute and deliver the Escrow Agreement;

          (f) the Buyer shall deposit with the Disbursing Agent an amount equal to the sum of (A) the aggregate amount required to pay each Company Shareholder 90% (rounded up to the nearest $.01) of the Initial Payment, (B) 90% of the aggregate Initial Option Payment (less any applicable federal and state withholding taxes), to be paid in accordance with Section 1.7, and (C) 90% of the aggregate Initial Warrant Payment, to be paid in accordance with Section 1.7;

          (g) the Buyer or the Transitory Subsidiary shall deposit the balance of the Initial Payment, Initial Option Payment and Initial Warrant Payment not deposited pursuant to clause (f) above with the Escrow Agent in accordance with Section 1.10; and

          (h) the Company shall pay or cause to be paid the Company Closing Transaction Expenses.

     1.4 Additional Action. The Surviving Corporation may, at any time after the Effective Time, take any action, including executing and delivering any document, in the name and on behalf of either the Company or the Transitory Subsidiary, in order to consummate the transactions contemplated by this Agreement, including, without limitation, filing the report on Form BCA 14.35 with the Illinois Secretary of State within 60 days of the Closing Date and filing a certified copy of the Articles of Merger with the Cook County Recorder within 15 days of the mailing thereof by the Secretary of State of the State of Illinois or as soon thereafter as is reasonably practicable.

     1.5 Conversion of Shares. At the Effective Time, by virtue of the Merger and without any action on the part of any Party or the holder of any of the following securities:

          (a) Each Common Share issued and outstanding immediately prior to the Effective Time (other than Dissenting Shares and Common Shares held in the Company’s treasury) shall be converted into and represent the right to receive (A) subject to the provisions of Section 1.10, the Per Common Share Price in cash, without any interest thereon, and (B) a share of any Earnout Payment in proportion to the payment of the Initial Merger Consideration for such Common Share to the aggregate Initial Merger Consideration, Initial Option Consideration and Initial Warrant Consideration.

          (b) Each Preferred Share not otherwise converting into Common Shares issued and outstanding immediately prior to the Effective Time (other than Dissenting Shares and Preferred Shares held in the Company’s treasury) shall be converted into and represent (A) subject to the provisions of Section 1.10, the right to receive in cash without any interest thereon the sum of (i) the Preferred Share Liquidation Preference payable on such Preferred Share, plus (ii) the Per Common Share Price multiplied by the number of Common Shares into which such Preferred Share is then convertible (provided that no Preferred Share shall represent the right to receive in excess of five (5) times the Preferred Share Liquidation Preference payable with respect to such Preferred Share) and (B) the right to receive a share of any Earnout Payment in proportion to the payment of the Initial Merger Consideration for such Preferred Share to the

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aggregate Initial Merger Consideration, Initial Option Consideration and Initial Warrant Consideration.

          (c) The “Per Common Share Price” shall be an amount determined by dividing (i) the Primary Merger Consideration plus the sum of (A) the Aggregate Option Exercise Price and (B) the Aggregate Warrant Exercise Price, minus the sum of the aggregate Preferred Share Liquidation Preference payable pursuant to Section 1.5(b) above with respect to Preferred Shares; by (ii) the sum of (W) the number of Common Shares outstanding immediately prior to the Effective Time (including any Common Shares issuable upon conversion of Preferred Shares which will be converted at the Effective Time), (X) the number of Common Shares into which the Preferred Shares outstanding immediately prior to the Effective Time (and not converted at the Effective Time) is then convertible, (Y) the number of Common Shares underlying Options outstanding immediately prior to the Effective Time and (Z) the number of Common Shares underlying Warrants outstanding immediately prior to the Effective Time.

          (d) Each Company Share held in the Company’s treasury immediately prior to the Effective Time shall be cancelled and retired without payment of any consideration therefor.

          (e) Each share of common stock, $0.01 par value per share, of the Transitory Subsidiary issued and outstanding immediately prior to the Effective Time shall be converted into and thereafter evidence one share of common stock, $0.01 par value per share, of the Surviving Corporation.

          (f) As soon as practicable after the Closing, but in no event later than ninety (90) days after the Effective Time, the Buyer shall review the books and records of the Company. Within that period, the Buyer shall (i) calculate the Tangible Net Book Value of the Company as of the Closing Date, (ii) prepare the statement (the “TNBV Adjustment Statement”) setting forth a detailed calculation of the Tangible Net Book Value as compared to the estimated Tangible Net Book Value set forth in the certificate prepared by the Chief Financial Officer of the Company as of the Closing Date and the application of the results of such comparison to the determination of the Initial Merger Consideration, the Initial Option Consideration and the Initial Warrant Consideration, and (iii) within three business days after completion of the TNBV Adjustment Statement, deliver the TNBV Adjustment Statement to the Shareholder Representative and the Escrow Agent. The Buyer agrees that it will prepare the TNBV Adjustment Statement in the manner specified on Schedule 1.5 of this Agreement. The Shareholder Representative then shall have thirty (30) days from receipt of the TNBV Adjustment Statement to give the Buyer written notice of his objection to any item or calculation contained in the TNBV Adjustment Statement. If the Shareholder Representative concurs with the TNBV Adjustment Statement or otherwise does not give the Buyer written notice of this objection to the TNBV Adjustment Statement within such thirty (30) day period, such TNBV Adjustment Statement shall be deemed final and conclusive with respect to the determination of the Tangible Net Book Value and the Initial Merger Consideration, Initial Option Consideration and Initial Warrant Consideration and shall be binding on the Parties for such purpose. If, however, the Shareholder Representative objects to any items or calculations contained in the TNBV Adjustment Statement, the parties shall meet and shall attempt in good faith to resolve such objections. If the parties are unable to resolve the Shareholder Representative’s objections within thirty (30) days following such objection, such objections and the Buyer’s response

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thereto will be reviewed by the Independent Accountant, who shall resolve all such objections, make any necessary revisions to the TNBV Adjustment Statement, and deliver the TNBV Adjustment Statement (as so revised, if applicable) to the Buyer and the Shareholder Representative within fifteen (15) days after receiving written instructions to resolve such objections. The TNBV Adjustment Statement as finalized by the Independent Accountant shall be deemed final and conclusive with respect to the Tangible Net Book Value and the Initial Merger Consideration, the Initial Option Consideration and the Initial Warrant Consideration, and shall be binding on the Parties for such purposes. The Independent Accountant, Buyer and Shareholder Representative will enter into such engagement letters as required by the Independent Accountant to perform under this Section 1.5(f). The fees and expenses of the Independent Accountant in resolving all such objections shall be borne by (i) the Buyer in an amount equal to the proportion that the Independent Accountant finds that the Buyer is responsible for payment to the Company Securityholders bears to the total amount at issue in all such objections, and (ii) the Company Securityholders in an amount equal to the proportion that the Independent Accountant finds that such holders are not entitled to payment by the Buyer bears to the total amount at issue in all such objections. For example, if the aggregate amount at issue in all the TNBV Adjustment Statement objections is $100 and the Independent Accountant finds that the Buyer is responsible to pay $60 of the $100 and the Company Securityholders are not entitled to payment of $40 of the $100, then the Buyer shall be responsible for sixty percent of the fees and expenses of the Independent Accountant and such holders shall be responsible for forty percent of such fees and expenses. The amount of the fees and expenses of the Independent Accountant to be paid by the Company Securityholders will be satisfied by offset from the Escrow.

          (g) If, after giving effect to the adjustment provided for in Section 1.5(f), the Initial Payment, the Initial Option Payment and the Initial Warrant Payment exceed the Initial Merger Consideration, the Initial Option Consideration and the Initial Warrant Consideration, respectively, the Buyer and the Shareholder Representative, within seven days after final determination of the Initial Merger Consideration, Initial Option Consideration and Initial Warrant Consideration, shall deliver a written notice to the Escrow Agent instructing the Escrow Agent to disburse to the Buyer from the Escrow Fund otherwise payable to Company Securityholders such holder’s applicable pro rata portion of such overpayment. If, after giving effect to the adjustment provided for in Section 1.5(f), the Initial Payment, the Initial Option Payment and the Initial Warrant Payment is less than the Initial Merger Consideration, the Initial Option Consideration and the Initial Warrant Consideration, respectively, then the Buyer, within seven days after final determination of the Initial Merger Consideration, Initial Option Consideration and Initial Warrant Consideration shall cause to be delivered to the Disbursing Agent on behalf of each Company Securityholder 90% of such underpayment and shall deposit with the Escrow Agent the remaining 10% of such underpayment. Notwithstanding the foregoing provisions of this Section 1.5, in no event shall the aggregate Initial Merger Consideration, Initial Option Consideration and Initial Warrant Consideration exceed $60,000,000.

     1.6 Dissenting Shares.

          (a) Dissenting Shares shall not be converted into or represent the right to receive the Initial Merger Consideration and a proportionate share of any Earnout Payment but

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shall be converted into the right to receive such consideration as may be determined to be due for such Dissenting Shares pursuant to Sections 11.65 and 11.70 of the IBCA (unless the Company Shareholder holding such Dissenting Shares shall have forfeited his, her or its right to payment under the IBCA or properly withdrawn his, her or its demand for payment). If, after the Effective Time, such Company Shareholder has so forfeited or withdrawn his, her or its demand to obtain payment for such Company Shareholder’s Dissenting Shares pursuant to the provisions of the IBCA, then, (i) as of the occurrence of such event, such holder’s Dissenting Shares shall cease to be Dissenting Shares and shall be converted into and represent the right to receive the Initial Merger Consideration payable in respect of such Company Shares pursuant to Section 1.5 and a proportionate share of any Earnout Payment, and (ii) promptly following the occurrence of such event, the Buyer or the Surviving Corporation shall deliver to such Company Shareholder a payment representing 90% of the Initial Merger Consideration to which such holder is entitled pursuant to Section 1.5 and shall pay to the Escrow Agent the remaining 10% of the Initial Merger Consideration to which such holder is entitled pursuant to Section 1.5.

          (b) The Company shall give the Buyer (i) prompt notice of any written demands for payment of any Company Shares pursuant to Section 11.70 of the IBCA, withdrawals of such demands, and any other instruments that relate to such demands received by the Company and (ii) the opportunity to direct all negotiations and proceedings with respect to any such demands. The Company shall not, except with the prior written consent of the Buyer, make any payment with respect to any demands for payment for Dissenting Shares or offer to settle or settle any such demands.

     1.7 Options and Warrants.

          (a) Prior to the Effective Time, the Company shall take all necessary and appropriate actions to provide for the termination of each outstanding Option effective as of the Effective Time, in exchange for (A) subject to the provisions of Section 1.10, the payment of the Option Consideration (reduced by any applicable federal and state withholding taxes) and (B) the right to receive a share of any Earnout Payment in proportion to the payment of the Initial Option Consideration for such Option to the aggregate Initial Merger Consideration, Initial Option Consideration and Initial Warrant Consideration.

          (b) Prior to the Effective Time, the Company shall enter into an agreement, in a form reasonably satisfactory to the Buyer, with each holder of an outstanding Warrant providing for a termination of such Warrant effective as of the Effective Time in exchange for (A) subject to the provisions of Section 1.10, payment of the Warrant Consideration and (B) the right to receive a share of any Earnout Payment in proportion to the payment of the Initial Warrant Consideration for such Warrant to the aggregate Initial Merger Consideration, Initial Option Consideration and Initial Warrant Consideration.

          (c) The Company shall terminate all Company Stock Plans immediately prior to the Effective Time.

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     1.8 Payment for Company Shares.

          (a) Prior to the Effective Time, the Buyer shall appoint the Disbursing Agent to effect the payments required to be made to the Company Shareholders. As soon as practicable, but in any event not later than three business days after the Effective Time, the Buyer shall cause the Disbursing Agent to send a notice and a transmittal form to each record holder of a certificate evidencing Common Shares or Preferred Shares, as the case may be (each a “Share Certificate”), advising such holder of the effectiveness of the Merger and the procedure with which such holder must comply for surrendering to the Disbursing Agent such Share Certificate in exchange for the Initial Merger Consideration and the right to receive a share of any Earnout Payment in proportion to the payment of the Initial Merger Consideration for such Company Share to the aggregate Initial Merger Consideration, Initial Option Consideration and Initial Warrant Consideration.

          (b) Each holder of a Share Certificate, upon proper surrender thereof to the Disbursing Agent in accordance with the instructions in such notice, shall receive in exchange therefor (subject to any taxes required to be withheld) 90% of the Initial Merger Consideration. The Disbursing Agent shall deliver the Initial Merger Consideration, the Initial Option Consideration and the Initial Warrant Consideration to the Company Securityholders by cashiers check or wire transfer in immediately available funds to the address or pursuant to the account information, as applicable, provided to the Disbursing Agent. Until properly surrendered, each such Share Certificate shall be deemed for all purposes to evidence only the right to receive the consideration to be paid pursuant to this Article I. Holders of Share Certificates shall not be entitled to payment of the Initial Merger Consideration and a share of any Earnout Payment in proportion to the payment of the Initial Merger Consideration for such Company Share to the aggregate Initial Merger Consideration, Initial Option Consideration and Initial Warrant Consideration to which they would otherwise be entitled until such Share Certificates are properly surrendered. No interest shall be paid or accrued on the cash payable upon the surrender of a Share Certificate.

          (c) If the Initial Merger Consideration to be paid pursuant to this Article I (or any portion thereof) is to be delivered to a person other than the person in whose name the Share Certificate surrendered in exchange therefor is registered, it shall be a condition to the payment of such consideration that (i) the Share Certificate so surrendered shall be transferable, and shall be properly assigned, endorsed or accompanied by appropriate stock powers or any other required evidence of transfer and (ii) the person requesting such transfer shall pay to the Disbursing Agent (or show evidence reasonably satisfactory to the Disbursing Agent of payment of) any transfer or other taxes payable by reason of the foregoing or establish to the satisfaction of the Disbursing Agent that such taxes have been paid or are not required to be paid. Notwithstanding the foregoing, neither the Buyer nor the Disbursing Agent shall be liable to a holder of Company Shares for any consideration payable pursuant to this Article I delivered to a public official pursuant to applicable abandoned property, escheat or similar laws.

          (d) In the event any Share Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Share Certificate to be lost, stolen or destroyed, the Buyer or the Surviving Corporation shall issue in exchange for such lost, stolen or destroyed Share Certificate the Initial Merger Consideration and a share of any

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Earnout Payment in proportion to the payment of the Initial Merger Consideration for such Company Share to the aggregate Initial Merger Consideration, Initial Option Consideration and Initial Warrant Consideration payable in exchange therefor pursuant to this Article I.

          (e) The Buyer may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Share Certificate to indemnify the Buyer against any claims that may be made against the Buyer or Surviving Corporation with respect to the Share Certificate alleged to have been lost, stolen or destroyed.

          (f) Within five business days after the Effective Time, the Buyer shall cause the Disbursing Agent to send to each holder of an outstanding Option or Warrant the Initial Option Consideration or Initial Warrant Consideration, respectively, relating thereto.

     1.9 Earnout Payment. Subject to the provisions of this Section 1.9, Company Securityholders shall be entitled to additional, contingent consideration (the “Earnout Payment”) as follows.

          (a) Within 75 days after December 31, 2004, the Buyer will determine the 2004 Company Revenue (as defined below) and calculate the amount of the Earnout Payment as follows:

       (i) if the 2004 Company Revenue is less than or equal to $20,500,000, the amount of the Earnout Payment shall be $0;

       (ii) if the 2004 Company Revenue is greater than $20,500,000 and less than or equal to $22,500,000, the amount of the Earnout Payment shall be equal to the product of (A) $2, multiplied by (B) the difference between the 2004 Company Revenue and $20,500,000;

       (iii) if the 2004 Company Revenue is greater than $22,500,000 and less than or equal to $23,500,000, the amount of the Earnout Payment shall be equal to the sum of (A) $4,000,000 and (B) the difference between the 2004 Company Revenue and $22,500,000; and

       (iv) if the 2004 Company Revenue is greater than $23,500,000, the amount of the Earnout Payment shall be equal to $5,000,000.

 In no event shall the amount of the Earnout Payment be greater than $5,000,000.

          (b) Within five business days following the Buyer’s determination of the Earnout Payment, the Buyer will deliver to the Shareholder Representative (A) a statement that includes each element of the calculation of the Earnout Payment; and (B) a certificate of the Buyer’s Chief Financial Officer certifying on behalf of the Buyer that the calculation of the Earnout Payment (or the calculation that no Earnout Payment pursuant to this Section 1.9 is due) was made in accordance with the terms of this Section 1.9 (such statement and certificate being referred to as the “Earnout Certificate”). The Shareholder Representative and his professional advisors will be given prompt access to the books and records of the Surviving Corporation that the Shareholder Representative and his advisors reasonably request in order to confirm the

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calculations and information contained in or accompanying the Earnout Certificate. All information obtained by the Shareholder Representative shall be deemed to be Confidential Information of the Buyer subject to the restrictions of the Nondisclosure Agreement, and shall not be disclosed or made use of by the Shareholder Representative other than for the limited purposes of enforcing, and to the extent necessary to enforce, the Company Securityholders’ rights under this Agreement.

          (c) Manner of Computation. For purposes of this Agreement, “2004 Company Revenue” shall mean the gross revenue recognized by the Company, the Surviving Corporation, Buyer or any of their respective Affiliates (without duplication and net of transactions between and among the Buyer and Affiliates of the Buyer, other than as expressly set forth in this Section 1.9) during 2004, as determined in accordance with GAAP, from the sale, license, use, service, maintenance, distribution, provision of or training with respect to the Company’s (and, following the Effective Time, the Surviving Corporation’s) search management and affiliate marketing products and services (including any enhancements thereof or improvements thereto either before or after the Closing Date); provided, however, that for purposes of calculating the 2004 Company Revenue:

       (i) such calculations shall be determined in a manner consistent with (x) GAAP applied on a basis consistent with the Company’s past practices and (y) the revenue recognition policies of the Company, in each case as employed prior to the date of this Agreement;

       (ii) the effect of any change in GAAP during fiscal year 2004 shall be disregarded; and

       (iii) 2004 Company Revenue shall specifically include:

(A)

100% of the revenues attributable to the sale, license, use, service, maintenance, distribution, provision of or training with respect to the Company’s (and following the Effective Time, the Surviving Corporation’s) full-service search management and affiliate marketing products and services (including any enhancements thereof or improvements thereto either before or after the Closing Date) offered by the Company, the Surviving Corporation, the Buyer or any of their respective Affiliates; and

(B)

100% of the revenues attributable to the sale, license, use, service, maintenance, distribution, provision of or training with respect to the Company’s (and following the Effective Time, the Surviving Corporation’s) search management and affiliate marketing products and services (including any enhancements thereof or improvements thereto either before or after the Closing Date) in an application service provider environment offered by the Company, the Surviving Corporation, the Buyer or any of their respective

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Affiliates (in each case, where the customer, licensee or other purchaser or user of such products or services was directly referred by the Buyer); provided, however, that the minimum amount to be included in 2004 Company Revenues with respect to the activities described in this subsection (B) (regardless of whether such amounts are recognized as revenue under GAAP as set forth in Section 1.9(c)(i) or otherwise) shall be equal to $0.01 per click-through that is tracked through the Company’s proprietary technology platform (to the extent that such click-through would otherwise be invoiced or invoiceable to a customer if the search management and/or affiliate marketing products and services described in this subsection (B) were not incorporated into other products, services or components).

Ambiguities in the categorization of revenues shall be resolved in favor of categorizing revenue pursuant to subsection (A) of this Section 1.9(c)(iii).

(d) Dispute Resolution.

       (i) The amount of any Earnout Payment (or the calculation and statement that no Earnout Payment is due under this Section 1.9) set forth in the Earnout Certificate shall be binding on the Company Securityholders, unless the Shareholder Representative presents to the Buyer within 20 days after receipt of such Earnout Certificate (the “Earnout Objection Deadline”) written notice of disagreement specifying in reasonable detail the nature and extent of the disagreement and the Shareholder Representative’s calculation of the Earnout Payment amount (including a statement with each element of the Shareholder Representative’s calculation thereof) (the “Earnout Objection Certificate”). The Buyer and the Shareholder Representative shall attempt in good faith during the 30 days immediately following the Buyer’s timely receipt of the Earnout Objection Certificate to resolve any disagreement with respect to such Earnout Payment (the “Earnout Dispute Resolution Period”).

       (ii) If, at the end of the Earnout Dispute Resolution Period, Buyer and the Shareholder Representative have not resolved all disagreements with respect to the calculation of the Earnout Payment, Buyer and the Shareholder Representative will refer the items of disagreement for determination to the Independent Accountant, and the parties will be reasonably available and work diligently to facilitate the Independent Accountant rendering a determination within the 20-day period immediately following the referral to the Independent Accountant. A determination by the Independent Accountant with respect to any item of disagreement submitted to it will be binding on Buyer and the Company Securityholders. The Independent Accountant, Buyer and Shareholder Representative will enter into such engagement letters as required by the Independent Accountant to perform under this Section 1.9(d)(ii). One half of the fees and disbursements of the Independent Accountant under this Section 1.9(d)(ii) will be borne by the Buyer and the other 50% will deducted from the Earnout Payment or the Escrow, if any (and borne by the Shareholder Representative if there is no Earnout Payment or

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remaining Escrow), unless it is determined that either, but not both, the Earnout Certificate or the Earnout Objection Certificate, in each case as amended or modified during the Earnout Dispute Resolution Period, miscalculated the actual Earnout Payment, as determined by the Independent Accountant, by $50,000 or more, in which case such fees and disbursements will be (A) borne exclusively by the Buyer if the Earnout Certificate so miscalculated the Earnout Payment or (B) exclusively deducted from the Earnout Payment or the Escrow, if any (and borne by the Shareholder Representative if there is no Earnout Payment or remaining Escrow) if the Earnout Objection Certificate so miscalculated the Earnout Payment. For the avoidance of doubt, in the event that both the Earnout Certificate and the Earnout Objection Certificate, in each case as amended or modified during the Earnout Dispute Resolution Period, miscalculated the actual Earnout Payment, Earnout Payment, as determined by the Independent Accountant, by $50,000 or more, one half of the fees and disbursements will be borne by the Buyer and the other 50% will deducted from the Earnout Payment or the Escrow, if any (and borne by the Shareholder Representative if there is no Earnout Payment or remaining Escrow).

          (e) Payment of Earnout Payment. The Earnout Payment, if any, less any reimbursed amounts paid from the Earnout Payment to the Shareholder Representative under Section 1.9(d)(ii), shall be paid to the Company Securityholders pro rata based on such Company Securityholder’s portion of the aggregate Initial Merger Consideration, Initial Option Consideration and Initial Warrant Consideration. If any Earnout Payment is payable under this Section 1.9, promptly following the expiration of the Earnout Objection Deadline, if no objection to the Earnout Certificate is made, or immediately upon final resolution of any dispute relating to the Earnout Certificate or Earnout Payment pursuant to subsection (d) of this Section 1.9, the Buyer shall pay the Earnout Payment, less any amounts required to be reimbursed to the Shareholder Representative under Section 1.9(d)(ii), to the Disbursing Agent on behalf of and for the account of the Company Securityholders, and the Disbursing Agent shall deliver the Earnout Payment to the Company Securityholders by cashiers check or wire transfer in immediately available funds to the address or pursuant to the account information, as applicable, provided to the Disbursing Agent by the Shareholder Representative.

          (f) Earnout Payment Acceleration Events. In the event that one or more Earnout Acceleration Events, as defined below, shall occur, then the maximum, then-remaining payment possible under this Section 1.9 shall be immediately due and payable, in the manner described in Section 1.9(e), without demand, notice or declaration of any kind. For purposes of this Section 1.9(f), each of the following shall constitute an “Earnout Acceleration Event:”

       (i) without the prior written consent of the Shareholder Representative, the relocation of the Surviving Corporation’s employees or material operations outside of Chicago, Illinois;

       (ii) the occurrence of a Surviving Corporation Change of Control;

       (iii) a material breach of one or more of the Buyer’s obligations set forth in Section 1.9(g) (other than clause (iv) thereof), provided that such breach is not cured within 20 days following the delivery by the Shareholder Representative to the Buyer of written notice of such breach;

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       (iv) the occurrence of a Buyer Change of Control that has the effect of materially adversely affecting 2004 Company Revenues; or

       (v) the disposal by the Buyer of a material portion of the business conducted by the Buyer that has the effect of materially adversely affecting 2004 Company Revenues.

          (g) Conduct of Business by the Buyer. Between the Closing Date and December 31, 2004, the Buyer agrees to:

       (i) permit and authorize the Surviving Corporation (A) to incur its 2004 budgeted expenses as are set forth in the Operating Plan set forth on Schedule 1.9 (the “Operating Plan”) (and not to distribute proceeds to itself or its Affiliates from the Surviving Corporation to the extent necessary for the Surviving Corporation to incur such budgeted expenses) and (B) to operate in accordance with the Operating Plan; provided, however, that:

(A)	the Buyer shall be permitted to cause or require the Surviving Corporation to incur costs and expenses that are not set forth in the Operating Plan, including, but not limited to, overhead costs and expenses and the costs and expenses associated with the addition of employees or other efforts to effect the integration of the business and operations of the Surviving Corporation with the Buyer or one or more of its Affiliates, which costs and expenses shall not be considered as part of or within the Operating Plan, and the Buyer must provide the additional funding for any such required costs and expenses;
(B)	notwithstanding the employee headcount specifications set forth in the Operating Plan, the Surviving Corporation shall be entitled to hire an aggregate of four (4) employees, in addition to the maximum number specified in the Operating Plan, within the search program manager and client services personnel job classifications;
(C)	James Crouthamel and Stuart Frankel shall have the right to make non-material modifications to the Operating Plan; and
(D)	James Crouthamel and Stuart Frankel or their successors, if then employed by the Surviving Corporation, shall be authorized and permitted to manage and direct the Surviving Corporation’s sales, marketing, operations, product engineering and administrative functions; provided, however, that such individuals shall comply with the

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Buyer’s standard written policies and procedures, including with respect to employee hiring and termination matters.

       (ii) maintain or cause to be maintained separate or otherwise identifiable (e.g., in the case of a shared general ledger) books and records for (x) the Surviving Corporation and (y) the revenues or amounts allocated to or specifically included in the 2004 Company Revenue, in a manner reasonably necessary to determine 2004 Company Revenue in accordance with Section 1.9(c);

       (iii) provide funding to the Surviving Corporation to the extent necessary to enable the Surviving Corporation to pay the budgeted expenses for the fiscal year ending December 31, 2004 as set forth in the Operating Plan;

       (iv) consider in good faith reasonable requests relating to changes to or modifications of the budgeted expenses set forth in the Operating Plan, provided that the Buyer shall not consider the cost of the Earnout Payment that may result from such changes or modifications of the budgeted expenses; and

       (v) in the event that a Buyer Change of Control occurs prior to the payment of the Earnout Payment, if any, make appropriate provision or cause appropriate provision to be made so that the 2004 Company Revenue can be calculated and the Earnout Payment, if any, shall be calculated and paid.

     1.10 Escrow.

          (a) On the Closing Date, the Buyer or the Transitory Subsidiary shall deposit with the Escrow Agent an amount equal to 10% (rounded to the nearest $.01) of the aggregate Initial Payment, Initial Option Payment and Initial Warrant Payment, for the purpose of securing the obligations of the Company Securityholders set forth in this Agreement. The Escrow Fund shall be held by the Escrow Agent under the Escrow Agreement pursuant to the terms thereof.

          (b) The adoption of this Agreement and the approval of the Merger by the shareholders of the Company shall constitute approval of the Escrow Agreement and of all of the arrangements relating thereto, including the placement of the Escrow Fund in escrow and the appointment of the Shareholder Representative.

     1.11 Articles of Incorporation; By-laws; Officers.

          (a) The Articles of Incorporation of the Surviving Corporation immediately following the Effective Time shall be the same as the Articles of Incorporation of the Transitory Subsidiary immediately prior to the Effective Time, except that (i) the name of the corporation set forth therein shall be changed to the name of the Company and (ii) the identity of the incorporator shall be deleted.

          (b) The By-laws of the Surviving Corporation immediately following the Effective Time shall be the same as the By-laws of the Transitory Subsidiary immediately prior to the Effective Time, except that the name of the corporation set forth therein shall be changed to the name of the Company.

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     1.12 No Further Rights. From and after the Effective Time, no Company Shares shall be deemed to be outstanding, and holders of certificates formerly representing Company Shares shall cease to have any rights with respect thereto except as provided herein or by law.

     1.13 Closing of Transfer Books. At the Closing, the stock transfer books of the Company shall be closed and no transfer of Company Shares shall thereafter be made. If, after the Closing, certificates formerly representing Company Shares are presented to the Buyer or the Surviving Corporation, they shall be cancelled and exchanged for (A) the Initial Merger Consideration in accordance with Section 1.5, subject to Section 1.10 and to applicable law in the case of Dissenting Shares and (B) the right to receive a share of any Earnout Payment in proportion to the payment of the Initial Merger Consideration for such Company Share to the aggregate Initial Merger Consideration, Initial Option Consideration and Initial Warrant Consideration.

     1.14 Taxes. Notwithstanding any other provision in this Agreement, the Buyer, the Company, the Transitory Subsidiary, the Disbursing Agent and the Escrow Agent shall have the right to deduct and withhold Taxes from any payments to be made hereunder (including any payments to be made under the Escrow Agreement) if such withholding is required by law and to collect any necessary Tax forms, including Form W-9 or the appropriate series of Form W-8, as applicable, or any similar information, from the Company Securityholders and any other recipients of payments hereunder. To the extent that amounts are so withheld, such withheld amounts shall be treated for all purposes of this Agreement as having been delivered and paid to the Company Securityholder or other recipient of payments in respect of which such deduction and withholding was made.

     1.15 Shareholder Releases.

          (a) Effective as of the Closing, the Principal Shareholder agrees not to sue and fully releases and discharges the Company and its shareholders, directors, officers, assigns and successors, past and present (collectively, “Releasees”), with respect to and from any and all claims, issuances of Company’s stock, notes or other securities, any demands, rights, liens, contracts, covenants, proceedings, causes of action, obligations, debts, and losses of whatever kind or nature in law, equity or otherwise, whether now known or unknown, and whether or not concealed or hidden, all of which the Principal Shareholder now owns or holds or has at any time owned or held against Releasees connected with or relating to any matter occurring on or prior to the Closing Date. Nothing in this Section 1.15 will be deemed to constitute a release by the Principal Shareholder of any right of the Principal Shareholder under this Agreement or under any agreement entered into in connection with this Agreement, or any right to receive compensation or benefits under employee benefit plans attributable to the periods prior to the Closing Date.

          (b) Except as set forth in the last sentence of Section 1.15(a) above, it is the intention of the Principal Shareholder that such release be effective as a bar to each and every claim, demand and cause of action hereinabove specified. In furtherance of this intention the Principal Shareholder hereby expressly waives, effective as of the Closing, any and all rights and benefits conferred upon him by the provisions of applicable law, rule and regulation, including Section 1542 of the California Civil Code and expressly consents that this release will be given

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full force and effect according to each and all of its express terms and provisions, including as well, those related to unknown and unsuspected claims, demands and causes of action, if any, as those relating to any other claims, demands and causes of action hereinabove specified, but only to the extent such section is applicable to releases such as this. Section 1542 provides:

“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”

     1.16 Appointment of Shareholder Representative.

          (a) Prior to the Effective Time, the Company shall take all actions reasonably necessary to cause the Company Shareholders to elect the Principal Shareholder as Shareholder Representative to act as the Company Shareholders’ representative and agent for all purposes under this Agreement. Upon election of the Shareholder Representative, the Shareholder Representative will be authorized to execute on behalf of each Company Securityholder any and all documents and agreements referred to herein upon the Closing. By way of example only, and without limitation, the Shareholder Representative shall have the authority in his discretion to (i) execute on behalf of each Company Securityholder, as fully as if the Company Securityholders were acting on their own behalf, any and all documents and agreements referred to herein, including executing this Agreement and the Escrow Agreement as the Company Securityholders’ representative, (ii) give and receive notices or instructions permitted or required under this Agreement or the Escrow Agreement on behalf of the Company Securityholders, (iii) authorize the release of the amounts held in the Escrow Fund to pay any Claimed Amount, (iv) to undertake any actions with respect to the resolution of a Dispute or any disagreement with respect to the amount of any Earnout Payment, including partaking in any dispute resolution process, or (v) refrain from taking any action that the Shareholder Representative is otherwise authorized hereunder to take.

          (b) The Shareholder Representative may resign at any time upon giving ten (10) day’s written notice to Buyer and the Company Securityholders. Each Company Securityholder agrees, should the Shareholder Representative resign or be unable to serve, the Company Securityholders having received a majority of the Initial Merger Consideration, the Initial Option Consideration and the Initial Warrant Consideration shall appoint a single substitute agent to take on the responsibilities of such Shareholder Representative under the provisions specified herein, whose appointment shall be effective on the date of the prior Shareholder Representative’s resignation or incapacity.

          (c) Except for gross negligence or willful misconduct, the Shareholder Representative shall not be liable to any person or entity for any act, omission, loss, consequential damages, lost profits, damage or expense arising from the performance of his duties hereunder. The Shareholder Representative shall only have the duties expressly stated in this Agreement and shall have no other duty, express or implied. The Shareholder Representative may engage attorneys, accountants and other professionals and experts. The Shareholder Representative may in good faith rely conclusively upon information, reports, statements and opinions prepared or presented by such professionals, and any action taken by the

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Shareholder Representative based on such reliance shall be deemed conclusively to have been taken in good faith and in the exercise of reasonable judgment. The Shareholder Representative is not responsible for determining and verifying the authority of any person acting or purporting to act on behalf of any party to this Agreement or the agreements contemplated herein. The Company Securityholders shall indemnify, defend and hold the Shareholder Representative harmless from and against any and all loss, damage, tax, liability and expense incurred without gross negligence or willful misconduct on the part of the Shareholder Representative and arising out of or in connection with the acceptance or administration of his duties hereunder including the legal costs and expenses of defending himself against any claim or liability in connection with his performance hereunder (collectively, “Shareholder Representative Damages”) on a pro rata basis proportionate to the Initial Merger Consideration, the Initial Option Consideration and the Initial Warrant Consideration received. In no event shall the Buyer, the Company or the Surviving Corporation have any liability to any Company Securityholder for any act or omission of the Shareholder Representative, including without limitation, negligence and willful misconduct.

          (d) The Shareholder Representative will serve without compensation. Following the termination of the Escrow Period and the resolution and payout of all pending claims made by Indemnified Parties for Damages, the Shareholder Representative shall have the right to recover (i) any Shareholder Representative Damages; and (ii) any expenses incurred or anticipated to be incurred without gross negligence or willful misconduct on the part of the Shareholder Representative and arising out of or in connection with the acceptance or administration of the Shareholder Representative duties hereunder, including the reasonable fees and expenses of any legal counsel, accountants and other professionals and experts retained by the Shareholder Representative (“Shareholder Representative Expenses”), in each case (with respect to both Shareholder Representative Damages and Shareholder Representative Expenses) from the remaining portion of the Escrow Fund prior to any distribution of the Escrow Fund to the Company Securityholders. Prior to any such distribution, the Shareholder Representative shall deliver to the Escrow Agent a certificate setting forth the Shareholder Representative Damages and Shareholder Representative Expenses actually incurred. The Shareholder Representative shall also have the right to recover any Shareholder Representative Damages or Shareholder Representative Expenses from the Secondary Escrow Fund, as such term is defined in the Disbursing Agent Agreement.

          (e) In the event that the Escrow Fund and the Secondary Escrow Fund are insufficient to reimburse the Shareholder Representative Expenses and Shareholder Representative Damages, all Shareholder Representative Expenses and Shareholder Representative Damages shall be paid or reimbursed by the Company Securityholders on a pro rata basis proportionate to the Initial Merger Consideration, the Initial Option Consideration and the Initial Warrant Consideration received.

          (f) Any notice, direction or communication received by the Buyer, Transitory Subsidiary or the Surviving Corporation from the Shareholder Representative, or delivered to the Shareholder Representative by Buyer, Transitory Subsidiary or the Surviving Corporation, shall be binding upon the Company Securityholders, and each of them. The Shareholder Representative shall act in all matters on behalf of the Company Securityholders and Buyer and Transitory Subsidiary and, after the Effective Time, the Surviving Corporation shall be entitled

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to rely on the actions of the Shareholder Representative hereunder as the actions of the Company Securityholders. Buyer, Transitory Subsidiary and the Surviving Corporation may deliver notices and communications to the Company Securityholders hereunder through the Shareholder Representative at the address set forth in this Agreement for notices, and such delivery shall be deemed to have been made to any or all of the Company Securityholders. None of Buyer, Transitory Subsidiary nor the Surviving Company shall pay any costs or expenses incurred by the Shareholder Representative in carrying out his obligations hereunder. Each of Buyer, Transitory Subsidiary and the Surviving Corporation consents to the appointment of the Shareholder Representative to act as described hereunder.

ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
PRINCIPAL SHAREHOLDER

     The Company (and the Principal Shareholder with respect only to Section 2.29) represents and warrants to the Buyer that, except as set forth in the Disclosure Schedule, the statements contained in this Article II are true and correct as of the date of this Agreement and will be true and correct as of the Closing, except to the extent such representations and warranties are specifically made as of a particular date (in which case such representations and warranties will be true and correct as of such date). The disclosures in any section or subsection of the Disclosure Schedule shall qualify other sections and subsections in this Article II only to the extent it is clear from a reading of the disclosure that such disclosure is applicable to such other sections and subsections. For purposes of this Article II, the phrase “to the knowledge of the Company” or any phrase of similar import shall be deemed to refer to the actual knowledge of the executive officers of the Company, as well as any other knowledge which such executive officers would have possessed after reasonable inquiry.

     2.1 Organization, Qualification and Corporate Power. The Company is a corporation duly organized, validly existing and in corporate and tax good standing under the laws of the State of Illinois. The Company is duly qualified to conduct business and is in corporate and tax good standing under the laws of each jurisdiction listed in Section 2.1 of the Disclosure Schedule, which jurisdictions constitute the only jurisdictions in which the nature of the Company’s businesses or the ownership or leasing of its properties requires such qualification. The Company has all requisite corporate power and authority to carry on the businesses in which it is engaged and to own and use the properties owned and used by it. The Company has furnished to the Buyer complete and accurate copies of its Articles of Incorporation and by-laws. The Company is not in default under or in violation of any provision of its Articles of Incorporation or by-laws. Section 2.1 of the Disclosure Schedule sets forth a list of all officers and directors of the Company.

     2.2 Capitalization.

          (a) The authorized capital stock of the Company consists of (i) 20,267,550 Common Shares, of which, as of the date of this Agreement, 5,079,684 shares were issued and outstanding, and (ii) 8,729,550 Preferred Shares, of which (A) 1,230,000 shares have been designated as Series A Preferred Stock, of which, as of the date of this Agreement, 1,220,000

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shares were issued and outstanding, (B) 3,760,000 shares have been designated as Series B Preferred Stock, of which, as of the date of this Agreement, 3,578,280 shares were issued and outstanding and (C) 3,739,550 shares have been designated as Series C Preferred Stock, of which, as of the date of this Agreement, 1,631,797 shares were issued and outstanding.

          (b) Section 2.2 of the Disclosure Schedule sets forth a complete and accurate list, as of the date of the Agreement, of the holders of capital stock of the Company, showing the number of shares of capital stock, and the class or series of such shares, held by each shareholder and (for shares other than Common Stock) the number of Common Shares (if any) into which such shares are convertible. Section 2.2 of the Disclosure Schedule also indicates all outstanding Common Shares that constitute restricted stock or that are otherwise subject to a repurchase or redemption right, indicating the name of the applicable shareholder, the vesting schedule (including any acceleration provisions with respect thereto), and the repurchase price payable by the Company. All of the issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. All of the issued and outstanding shares of capital stock of the Company have been offered, issued and sold by the Company in compliance with all applicable federal and state securities laws.

          (c) Section 2.2 of the Disclosure Schedule sets forth a complete and accurate list, as of the date of this Agreement of: (i) all Company Stock Plans, indicating for each Company Stock Plan the number of Common Shares issued to date under such Plan, the number of Common Shares subject to outstanding options under such Plan and the number of Common Shares reserved for future issuance under such Plan; (ii) all holders of outstanding Options, indicating with respect to each Option the Company Stock Plan under which it was granted, the number of Common Shares subject to such Option, the exercise price, the date of grant, and the vesting (including any acceleration provisions with respect thereto); and (iii) all holders of outstanding Warrants, indicating with respect to each Warrant the agreement or other document under which it was granted, the number of shares of capital stock, and the class or series of such shares, subject to such Warrant, the exercise price, the date of issuance and the expiration date thereof. The Company has provided to the Buyer complete and accurate copies of all Company Stock Plans, forms of all stock option agreements evidencing Options and all Warrants. All of the shares of capital stock of the Company subject to Options and Warrants will be, upon issuance pursuant to the exercise of such instruments, duly authorized, validly issued, fully paid and nonassessable.

          (d) Except as set forth in this Section 2.2 or in Section 2.2 of the Disclosure Schedule, (i) no subscription, warrant, option, convertible security or other right (contingent or otherwise) to purchase or acquire any shares of capital stock of the Company is authorized or outstanding, (ii) the Company has no obligation (contingent or otherwise) to issue any subscription, warrant, option, convertible security or other such right, or to issue or distribute to holders of any shares of its capital stock any evidences of indebtedness or assets of the Company, (iii) the Company has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any shares of its capital stock or any interest therein or to pay any dividend or to make any other distribution in respect thereof, and (iv) there are no outstanding or authorized stock appreciation, phantom stock or similar rights with respect to the Company.

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          (e) Except as set forth in Section 2.2(e) of the Disclosure Schedule, there is no agreement, written or oral, between the Company and any holder of its securities, or, to the Company’s knowledge, among any holders of its securities, relating to the sale or transfer (including agreements relating to rights of first refusal, co-sale rights or “drag-along” rights), registration under the Securities Act, or voting, of the capital stock of the Company.

     2.3 Authorization of Transaction. The Company has all requisite power, capacity and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution and delivery by the Company of this Agreement and, subject to obtaining the Requisite Shareholder Approval, the consummation by the Company of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of the Company. Without limiting the generality of the foregoing, the Board of Directors of the Company, at a meeting duly noticed (or for which notice was duly waived) and held, by the unanimous vote of all directors (i) determined that the Merger is fair and in the best interests of the Company and its shareholders, (ii) adopted this Agreement in accordance with the provisions of the IBCA, and (iii) directed that this Agreement and the Merger be submitted to the shareholders of the Company for their adoption and approval and resolved to recommend that the shareholders of the Company vote in favor of the adoption and approval of this Agreement and the approval of the Merger. This Agreement has been duly and validly executed and delivered by the Company and the Principal Shareholder and constitutes a valid and binding obligation of the Company and the Principal Shareholder, enforceable against the Company and the Principal Shareholder in accordance with its terms except that such enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to creditors’ rights generally, and that such enforceability is subject to general principles of equity.

     2.4 Noncontravention. Subject to compliance with the applicable requirements of the Hart-Scott-Rodino Act, obtaining the Requisite Shareholder Approval and the filing of the Articles of Merger as required by the IBCA, neither the execution and delivery by the Company of this Agreement, nor the consummation by the Company of the transactions contemplated hereby, will (a) conflict with or violate any provision of the Articles of Incorporation or By-laws of the Company or the articles of organization or operating agreement or other organizational document of the Subsidiary, (b) require on the part of the Company or the Subsidiary any notice to or filing with, or any permit, authorization, consent or approval of, any Governmental Entity, (c) conflict with, result in a breach of, constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration of obligations under, create in any party the right to terminate, modify or cancel, or require any notice, consent or waiver under, any contract, agreement or instrument to which the Company or the Subsidiary is a party or by which the Company or the Subsidiary is bound or to which any of their respective assets is subject, (d) result in the imposition of any Security Interest upon any assets of the Company or the Subsidiary or (e) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Company or the Subsidiary or any of their respective properties or assets.

     2.5 Subsidiaries.

          (a) The Company’s only subsidiary is Epitelo LLC, an Illinois limited liability company (the “Subsidiary”) for which Articles of Dissolution were filed with the Secretary of State for the State of Illinois on May 7, 2004 (the “LLC Dissolution Articles”). The Subsidiary

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has no assets or liabilities and has conducted no business since the date of its formation. Immediately prior to the filing of the LLC Dissolution Articles, the Subsidiary had been duly organized and was validly existing under the laws of the jurisdiction of its organization. Immediately prior to the filing of the LLC Dissolution Articles, the Subsidiary had all requisite power and authority to carry on the businesses in which it was engaged and to own and use the properties owned and used by it. The Company has delivered to the Buyer complete and accurate copies of the articles of organization, operating agreement and other organizational documents of the Subsidiary and the LLC Dissolution Articles. Immediately prior to the filing of the LLC Dissolution Articles, the Subsidiary was not in default under or in violation of any provision of its articles of organization, operating agreement or other organizational documents. All of the membership interests of the Subsidiary are held of record and owned beneficially by the Company and are held or owned free and clear of any restrictions on transfer (other than restrictions under the Securities Act and state securities laws), claims, Security Interests, options, warrants, rights, contracts, calls, commitments, equities and demands. There are no outstanding or authorized options, warrants, rights, agreements or commitments to which the Company or the Subsidiary is a party or which are binding on any of them providing for the issuance, disposition or acquisition of any membership interests of the Subsidiary. There are no outstanding stock appreciation, phantom stock or similar rights with respect to the Subsidiary. There are no voting trusts, proxies or other agreements or understandings with respect to the voting of any membership interests of the Subsidiary.

          (b) Except for the Subsidiary, the Company does not control directly or indirectly or have any direct or indirect equity participation or similar interest in any corporation, partnership, limited liability company, joint venture, trust or other business association or entity.

     2.6 Financial Statements. The Company has provided to the Buyer the Financial Statements, copies of which are attached as Section 2.6 to the Disclosure Schedule. The Financial Statements have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, fairly present the consolidated financial condition, results of operations and cash flows of the Company and the Subsidiary as of the respective dates thereof and for the periods referred to therein and are consistent with the books and records of the Company and the Subsidiary; provided, however, that the Financial Statements referred to in clause (b) of the definition of such term are subject to normal recurring year-end adjustments (which will not be material) and do not include footnotes. Except as set forth in Section 2.6 of the Disclosure Schedule, there are no material differences from the information included in the footnotes to the audited Financial Statements that would be disclosed in footnotes to the unaudited Financial Statements if such footnotes had been prepared.

     2.7 Absence of Certain Changes. Since the Most Recent Balance Sheet Date, (a) there has occurred no event or development which, individually or in the aggregate, has had, or could reasonably be expected to have in the future, a Company Material Adverse Effect, and (b) neither the Company nor the Subsidiary has taken any of the actions set forth in paragraphs (a) through (n) of Section 4.4.

     2.8 Undisclosed Liabilities. Neither the Company nor the Subsidiary has any liability (whether known or unknown, whether absolute or contingent, whether liquidated or unliquidated and whether due or to become due), except for (a) liabilities shown on the Most Recent Balance

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Sheet, (b) immaterial liabilities which have arisen since the Most Recent Balance Sheet Date in the Ordinary Course of Business and (c) immaterial contractual and other liabilities incurred in the Ordinary Course of Business which are not required by GAAP to be reflected on a balance sheet.

     2.9 Tax Matters. With respect to the representations and warranties set forth in this Section 2.9, the Parties agree that the disclosure set forth on Section 2.9 to the Disclosure Schedule is for informational purposes only and is not an exception or modification in any way to the representations contained in this Section 2.9 for purposes of the indemnification provisions of Article VI and that it is the intent of the Parties that the Company Securityholders shall indemnify the Buyer (net of refunds received by the Buyer or the Surviving Corporation on account of Taxes paid by the Company prior to the Effective Time and not reflected on the Most Recent Balance Sheet) to the full extent permitted under Article VI as would have been required if such disclosure on Section 2.9 of the Disclosure Schedule had not been made.

          (a) Each of the Company and the Subsidiary has filed on a timely basis all Tax Returns that it was required to file, and all such Tax Returns were complete and accurate in all material respects. Each of the Company and the Subsidiary has paid on a timely basis all Taxes, whether or not shown on any Tax Return, that were due and payable. All Taxes that the Company or the Subsidiary is or was required by law to withhold or collect have been duly withheld or collected and, to the extent required, have been properly paid on a timely basis to the proper Governmental Entity. The Company and the Subsidiary have complied with all information reporting and back-up withholding requirements including maintenance of the required records with respect thereto, in connection with amounts paid to any employee, independent contractor, creditor or other third party.

          (b) The unpaid Taxes of the Company and the Subsidiary for tax periods through the Most Recent Balance Sheet Date do not exceed the accruals and reserves for Taxes (excluding accruals and reserves for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the Most Recent Balance Sheet. All Taxes attributable to the period from and after the Most Recent Balance Sheet Date and continuing through the Closing Date are, or will be, attributable to the conduct by the Company and the Subsidiary of their operations in the Ordinary Course of Business.

          (c) Neither the Company nor the Subsidiary is or has ever been a member of any group of corporations with which it has filed (or been required to file) consolidated, combined, or unitary Tax Returns, other than a group of which the Company was the common parent. Neither the Company nor the Subsidiary has any actual or potential liability under Treasury Regulation Section 1.1502-6 (or any comparable or similar provision of federal, state, local, or foreign law), as a transferee or successor, by contract, or otherwise for any Taxes of any person (including without limitation any affiliated, combined, or unitary group of corporations or other entities that included the Company during a prior Taxable period, other than a group of which the Company was the common parent. Neither the Company nor the Subsidiary is a party to, bound by, or obligated under any Tax allocation, Tax sharing, Tax indemnity or similar agreement.

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          (d) The Company has delivered or made available to the Buyer (i) complete and correct copies of all Tax Returns of the Company and the Subsidiary relating to Taxes for all Taxable periods for which the applicable statute of limitations has not yet expired and (ii) complete and correct copies of all private letter rulings, revenue agent reports, information document requests, notices of proposed deficiencies, deficiency notices, protests, petitions, closing agreements, settlement agreements, pending ruling requests and any similar documents submitted by, received by or agreed to by or on behalf of the Company or the Subsidiary relating to Taxes for all Taxable periods for which the applicable statute of limitations has not yet expired. The income Tax Returns of the Company and the Subsidiary have been audited by the Internal Revenue Service or other applicable Governmental Entity or are closed by the applicable statute of limitations for all periods through and including the Taxable period or periods specified in Section 2.9(d) of the Disclosure Schedule. No examination or audit of any Tax Return of the Company or the Subsidiary by any Governmental Entity is currently in progress or, to the knowledge of the Company, threatened or contemplated, and the Company does not know of any basis upon which a Tax deficiency or assessment could reasonably be expected to be asserted against the Company or the Subsidiary. Neither the Company nor the Subsidiary has been informed by any jurisdiction that the jurisdiction believes that the Company or the Subsidiary was required to file any Tax Return that was not filed.

          (e) Neither the Company nor the Subsidiary has (i) waived any statute of limitations with respect to Taxes or agreed to extend the period for assessment or collection of any Taxes, (ii) requested any extension of time within which to file any Tax Return, which Tax Return has not yet been filed, or (iii) executed or filed any power of attorney relating to Taxes with any Governmental Entity.

          (f) Neither the Company nor the Subsidiary has engaged in a transaction that is the same as or substantially similar to one of the types of transactions set forth in Treas. Reg. § 1.6011-4(b). Each of the Company and the Subsidiary has disclosed on its federal income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal income Tax within the meaning of Section 6662 of the Code.

          (g) There are no Security Interests or other encumbrances with respect to Taxes upon any of the assets or properties of the Company or the Subsidiary, other than with respect to Taxes not yet due and payable.

          (h) Neither the Company nor the Subsidiary has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(l)(A)(ii) of the Code.

          (i) Neither the Company nor the Subsidiary has made any payments, is obligated to make any payments, or is a party to any agreement, contract, arrangement, or plan that could obligate it to make any payments, that are or could be, separately or in the aggregate, “excess parachute payments” within the meaning of Section 280G of the Code (without regard to Sections 280G(b)(4) and 280G(b)(5) thereof) with respect to the Merger.

          (j) No Company Shareholder holds Company Shares that are non-transferable and subject to a substantial risk of forfeiture within the meaning of Section 83 of the Code with

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respect to which a valid election under Section 83(b) of the Code has not been made, and no payment to any Company Shareholder of any portion of the consideration payable pursuant to this Agreement will result in compensation or other income to such Company Shareholder with respect to which the Buyer, the Company or the Subsidiary would be required to deduct or withhold any Taxes.

          (k) None of the assets of the Company or the Subsidiary (i) is property that is required to be treated as being owned by any other person pursuant to the provisions of former Section 168(f)(8) of the Internal Revenue Code of 1954, (ii) is “tax-exempt use property” within the meaning of Section 168(h) of the Code, (iii) directly or indirectly secures any debt the interest on which is tax exempt under Section 103(a) of the Code, or (iv) is subject to a lease under Section 7701(h) of the Code or under any predecessor section.

          (l) Neither the Company nor the Subsidiary will be required to include any item of income in, or exclude any item of deduction from, Taxable income for any Taxable period (or portion thereof) ending after the Closing Date as a result of any (i) change in method of accounting for a Taxable period ending on or prior to the Closing Date (or as a result of the transactions contemplated by this Agreement) under Section 481 of the Code (or any corresponding or similar provision of federal, state, local or foreign Tax law); (ii) “closing agreement” as described in Section 7121 of the Code (or any corresponding or similar provision of state, local or foreign Tax law) executed on or prior to the Closing Date; (iii) deferred intercompany gain or any excess loss account described in Treasury Regulations under Section 1502 of the Code (or any corresponding or similar provision of state, local or foreign Tax law); (iv) installment sale or open transaction disposition made on or prior to the Closing Date; or (v) prepaid amount received on or prior to the Closing Date. The Company and the Subsidiary currently utilize the accrual method of accounting for income Tax purposes and such method of accounting has not changed in the past five (5) years.

          (m) Neither the Company nor the Subsidiary has participated in or cooperated with an international boycott within the meaning of Section 999 of the Code.

          (n) There is no limitation on the utilization by the Company and the Subsidiary of their respective net operating losses, built-in losses, Tax credits, or similar items under Sections 382, 383, or 384 of the Code or comparable provisions of foreign, state or local law (other than any such limitation arising as a result of the consummation of the transactions contemplated by this Agreement).

          (o) Neither the Company nor the Subsidiary has distributed to its shareholders or security holders stock or securities of a controlled corporation, nor have stock or securities of the Company or the Subsidiary been distributed, in a transaction to which Section 355 or Section 361 of the Code applies.

          (p) Section 2.9(p) of the Disclosure Schedule sets forth each jurisdiction (other than United States federal) in which the Company or the Subsidiary files, or is required to file or has been required to file a Tax Return or is or has been liable for Taxes on a “nexus” basis and each jurisdiction that has sent notices or communications of any kind requesting information relating to the nexus with such jurisdiction of the Company or the Subsidiary.

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          (q) Neither the Company nor the Subsidiary is a “consenting corporation” within the meaning of Section 341(f) of the Code, and none of the assets of the Company or the Subsidiary are subject to an election under Section 341(f) of the Code.

          (r) To the Company’s knowledge, there is no basis for the assertion of any claim relating or attributable to Taxes, which, if adversely determined, would result in any Security Interest on the assets of the Company or the Subsidiary or would reasonably be expected to have a material adverse effect on the Company.

          (s) Neither the Company nor the Subsidiary owns any interest in any entity that is characterized as a partnership for federal income Tax purposes.

     2.10 Assets.

          (a) The Company is the true and lawful owner of, and has good title to, all of the assets (tangible or intangible) purported to be owned by the Company or the Subsidiary, free and clear of all Security Interests. The Company owns or leases all tangible assets sufficient for the conduct of its businesses as presently conducted and as presently proposed to be conducted. Each such tangible asset is free from material defects, has been maintained in accordance with normal industry practice, is in good operating condition and repair (subject to normal wear and tear) and is suitable for the purposes for which it presently is used.

          (b) Section 2.10(b) of the Disclosure Schedule lists, as of April 30, 2004, individually (i) all fixed assets (within the meaning of GAAP) of the Company or the Subsidiary, indicating the cost, accumulated book depreciation (if any) and the net book value of each such fixed asset as of the Most Recent Balance Sheet Date, and (ii) all other assets of a tangible nature (other than inventories) of the Company or the Subsidiary whose book value exceed $50,000.

          (c) Each item of equipment, motor vehicle and other asset that the Company or the Subsidiary has possession of pursuant to a lease agreement or other contractual arrangement is in such condition that, upon its return to its lessor or owner under the applicable lease or contract, the obligations of the Company or the Subsidiary to such lessor or owner will have been discharged in full.

     2.11 No Owned Real Property. Neither the Company nor the Subsidiary owns, or has ever owned, any real property.

     2.12 Real Property Leases. Section 2.12 of the Disclosure Schedule lists all Leases and lists the term of such Lease, any extension and expansion options, and the rent payable thereunder. The Company has delivered to the Buyer complete and accurate copies of the Leases. With respect to each Lease:

          (a) such Lease is legal, valid, binding, enforceable and in full force and effect;

          (b) such Lease will continue to be legal, valid, binding, enforceable and in full force and effect immediately following the Closing in accordance with the terms thereof as in effect immediately prior to the Closing;

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          (c) neither the Company nor the Subsidiary nor, to the knowledge of the Company, any other party, is in breach or violation of, or default under, any such Lease, and no event has occurred, is pending or, to the knowledge of the Company, is threatened, which, after the giving of notice, with lapse of time, or otherwise, would constitute a breach or default by the Company or the Subsidiary or, to the knowledge of the Company, any other party under such Lease;

          (d) there are no disputes, oral agreements or forbearance programs in effect as to such Lease;

          (e) neither the Company nor the Subsidiary has assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in the leasehold or subleasehold;

          (f) to the knowledge of the Company, all facilities leased or subleased thereunder are supplied with utilities and other services adequate for the operation of said facilities;

          (g) the Company is not aware of any Security Interest, easement, covenant or other restriction applicable to the real property subject to such lease which would reasonably be expected to materially impair the current uses or the occupancy by the Company or the Subsidiary of the property subject thereto; and

          (h) other than the rental payment amounts set forth in Section 2.12 of the Disclosure Schedule, to the knowledge of the Company and the Subsidiary, no other amounts are owed or reasonably likely to be owed by the Company or the Subsidiary with respect to any real property subject to a Lease.

     2.13 Intellectual Property.

          (a) Section 2.13(a) of the Disclosure Schedule contains, for all of the following included in Company Owned Intellectual Property, a true and complete list of the issued Patents and applications therefor, material unregistered Trademarks and registered Trademarks and applications for registration thereof, and registered Copyrights and applications for registration thereof. The Company Owned Intellectual Property listed in Section 2.13(a) of the Disclosure Schedule is in good standing.

          (b) Section 2.13(b) of the Disclosure Schedule contains a true and complete list of all License Agreements (other than standard form employee agreements that contain assignments of invention provisions, assignments of Intellectual Property that have already been consummated, licenses to or for Software or Customer Deliverables commercially available and that are subject to “shrink-wrap” or “click-through” license agreements or licenses for “off the shelf” Software used internally by the Company). The shrink-wrap or click-thru license agreements used by the Company are all materially the same as the forms listed under the heading “Shrink Wrap Form Agreements” under Section 2.13(b) of the Disclosure Schedule. To the knowledge of Company, the Company Used Intellectual Property is in good standing.

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          (c) Except as set forth in Schedule 2.13(c), each of the Company and the Subsidiary owns all Company Owned Intellectual Property and has the right to use all Company Used Intellectual Property free and clear of all Security Interests. Each item of Company Owned Intellectual Property will be owned and each item of Company Used Intellectual Property which is material to the conduct of the business of the Company or its Subsidiary will be available for use by the Buyer immediately following the Closing on substantially identical terms and conditions as it was immediately prior to the Closing. The Company or the Subsidiary has exercised reasonable measures consistent with standards in its industry in the United States to protect the Company Owned Intellectual Property, and to maintain in confidence all Trade Secrets, that it owns or uses. No other person or entity has any rights to any of the Company Owned Intellectual Property (except pursuant to the License Agreements), and, to the knowledge of the Company, no other person or entity is infringing, violating or misappropriating any of the Company Owned Intellectual Property.

          (d) The reproduction, manufacturing, distribution, licensing, sublicensing, sale, or use of the Customer Deliverables, use of the Internal Systems, performance of any of its services by it and the conduct of its business do not infringe on any Intellectual Property rights of any person or entity in the United States and, to the knowledge of the Company, anywhere else in the world. Except as set forth in Section 2.13(d) of the Disclosure Schedule, to the knowledge of the Company no claims have been made or threatened by any third party challenging (i) the validity or ownership by the Company of any of the Company Owned Intellectual Property; or, (ii) the use by the Company of any Company Used Intellectual Property. Neither the Company nor the Subsidiary has brought or threatened a claim against any person or entity alleging infringement of rights relating to the Company Owned Intellectual Property or Company Used Intellectual Property. To the knowledge of the Company, all registered, granted or issued Patents, Trademarks and Copyrights held by the Company are valid and enforceable in accordance with applicable laws, rules and regulations.

          (e) Except as set forth in the License Agreements disclosed in Section 2.13(b) of the Disclosure Schedule or in any other agreements disclosed in the Disclosure Schedule, neither the Company nor the Subsidiary has agreed to indemnify any person or entity against any infringement, violation or misappropriation of any Intellectual Property rights (other than pursuant to licenses to or for Software or Customer Deliverables commercially available that are subject to “shrink-wrap” or “click-through” license agreements).

          (f) With respect to the system documentation relating to the Software included as part of the Company Owned Intellectual Property that is material to the conduct of the business of the Company and all source code of the Software, the Company has: (i) used commercially reasonable efforts to maintain such materials in confidence and (ii) limited disclosure only to those employees, consultants, contractors, or other third-parties who have a “need to know” the contents thereof in connection with the performance of their duties to the Company and who have executed nondisclosure agreements referred to in Section 2.13(f) of the Company Disclosure Schedule or other written agreements that contain restrictions on such parties’ disclosure that is at least as restrictive as the agreements referred to in Section 2.13(f) of the Disclosure Schedule.

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          (g) Except as set forth in Section 2.13(g) of the Company Disclosure Schedule, all of the Company Owned Intellectual Property has been developed by employees of the Company or the Subsidiary within the course and scope of their employment, or has been acquired from third parties in the normal course, or was developed by third parties or independent contractors, in each case (employees, third parties, contractors etc.) who, was party to a “work-for-hire” arrangement or other agreement with the Company or the Subsidiary in accordance with applicable law that has accorded the Company or the Subsidiary full, effective, exclusive and original ownership of all tangible and intangible property thereby arising and, otherwise, have assigned in writing to the Company or the Subsidiary, all of his, her or its right, title and interest in and to such Intellectual Property, if any.

          (h) The execution and delivery of this Agreement and the consummation of the Merger will not cause the diminution, termination or forfeiture of any Company Owned Intellectual Property or, to the knowledge of the Company and the Subsidiary, the Company Used Intellectual Property.

          (i) The Software included in the Company Owned Intellectual Property and, to the knowledge of the Company, in the Company Used Intellectual Property, is free from material defects or programming errors and conforms in all material respects to its written documentation and specifications. To the knowledge of the Company, all the Software included within the Company Owned Intellectual Property and Company Used Intellectual Property does not, and will not when delivered to Buyer, contain any computer code that (i) is knowingly and intentionally designed to disrupt, disable, harm, or otherwise impede in any manner, including aesthetical disruptions or distortions, the operation of the Software or any hardware, or (ii) would knowingly and intentionally disable or impair in any way the operation of any of the Software or hardware based on the elapsing of a period of time, the exceeding of an authorized number of users or copies, or the advancement to a particular date or other numeral (sometimes referred to as “time bombs,” “time locks,” or “drop dead” devices).

          (j) The Company and the Subsidiary have implemented reasonable steps and practices for the physical and electronic protection of their and their customers’ information assets from unauthorized disclosure, use or modification. The Company has informed the Buyer of (i) each material breach of security of the databases of the Company and the Subsidiary of which the Company is aware, (ii) the reasonably known or anticipated consequences, and (iii) the steps the Company or the Subsidiary has taken to remedy such breach.

          (k) Except as set forth in Section 2.13(k) of the Disclosure Schedule, neither the Company nor the Subsidiary has an existing or future obligation to pay any royalties or other payments to third parties in respect of any Customer Deliverables, Internal Systems, Company Owned Intellectual Property or Company Used Intellectual Property. All royalties or other payments set forth in Section 2.13(k) of the Disclosure Schedule that have accrued prior to the date of this Agreement have been paid in full.

          (l) Section 2.13(l) of the Disclosure Schedule contains a true and complete list of the registrations that the Company and the Subsidiary have obtained anywhere in the world in relation to the processing of data. To the knowledge of the Company, the Company and the Subsidiary have made all such registrations which they are required to have made and is in

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good standing with respect to such registrations with all fees due as of the date of this Agreement duly made. Except as set forth in Section 2.13(l) of the Disclosure Schedule, neither the Company nor the Subsidiary has collected or maintains any personal information about persons outside the United States.

       (m) Schedule 2.13(m) of the Disclosure Schedule lists Open Source Materials that the Company or the Subsidiary has used or uses in any way and describes the manner in which such Open Source Materials have been used, including, without limitation, whether and how the Open Source Materials have been modified and/or distributed by the Company or the Subsidiary. The inaccuracy of the foregoing representation with respect to the Open Source Materials that the Company has used shall not be deemed a breach or violation of this Agreement, unless such inaccuracy would have a Material Adverse Effect on Buyer. Except as set forth on Schedule 2.13(m), neither the Company nor the Subsidiary has (i) incorporated Open Source Materials into, or combined Open Source Materials with, Software developed or distributed by the Company or the Subsidiary; or (ii) distributed Open Source Materials in conjunction with any other Software developed or distributed by the Company or the Subsidiary. The use, modification and/or distribution of the Open Source Materials by the Company in the manner they have been used, modified or distributed by Company prior to the date of this Agreement, has not, under the terms of the licenses under which such Open Source Materials were received by the Company granted, or purported to grant, to any third party, any rights to or immunities under Intellectual Property or required, as a condition of such use, modification and/or distribution that other Software incorporated into, derived from or distributed with such Open Source Materials be (a) disclosed or distributed in source code form, (b) be licensed for the purpose of making derivative works, or (c) be redistributable at no charge). Without limiting the foregoing, (i) none of the Customer Deliverables or Internal Systems have been distributed within the meaning of such term in the GNU General Public License or the Artistic License and (ii) none of the portions of the Open Source Materials that are licensed to the Company under the Artistic License have been modified within the meaning of such term in the Artistic License, except with respect to modifications expressly disclosed in Section 2.13(m) of the Disclosure Schedule.

       (n) Except as set forth in section 2.13(n) of the Disclosure Schedule, the Company Owned Intellectual Property is not subject to any source code escrow or similar agreement.

       (o) The Company and the Subsidiary currently comply with, and each has at all times complied with, all legal and regulatory requirements of any federal, state, local or foreign government, or any Governmental Entity, relating to data protection, data use, personal information and privacy, except with respect to registrations relating to processing of data, for which clause (l) above is the applicable representation of the Company. The inaccuracy of the foregoing representation shall not be deemed a breach or violation of the Agreement, unless such inaccuracy would have a Material Adverse Effect on Buyer. Neither the Company nor the Subsidiary has received any notice or communication from any Governmental Entity alleging noncompliance with any applicable law, rule or regulation relating thereto.

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     2.14 Contracts.

          (a) Section 2.14 of the Disclosure Schedule lists the following agreements (written or oral) to which the Company or the Subsidiary is a party as of the date of this Agreement:

       (i) any agreement (or group of related agreements) for the lease of personal property from or to third parties providing for lease payments in excess of $25,000 per annum or having a remaining term longer than one year;

       (ii) any agreement for capital expenditures in excess of $25,000 in the aggregate;

       (iii) any agreement (or group of related agreements) (A) for the purchase or sale of products or for the furnishing or receipt of services which calls for performance over a period of more than one year, (B) with vendors to the Company that resulted in payments by the Company of over $50,000 in the last full fiscal year or that are reasonably expected to result in payments by the Company of over $50,000 in the current full fiscal year (each, a “Vendor Agreement”), (C) with the customers or clients of the Company that resulted in revenue to the Company of over $50,000 in the last full fiscal year or that are reasonably expected to result in revenue to the Company of over $50,000 in the current full fiscal year (each, a “Client Agreements”), (D) with the distribution partners of the Company that resulted in amounts remitted to a distribution partner by the Company of over $100,000 in the last full fiscal year or that are reasonably expected to result in amounts remitted to a distribution partner by the Company of over $100,000 in the current fiscal year (each, a “Partner Agreement”), or (E) in which the Company or the Subsidiary has granted “most favored nation” pricing provisions or marketing or distribution rights relating to any products or territory or has agreed to purchase a minimum quantity of goods or services or has agreed to purchase goods or services exclusively from a certain party;

       (iv) any agreements with a third party under which the Company or the Subsidiary is subject to (i) an obligation to provide dedicated personnel or resources to a customer under any circumstances, (ii) an obligation to meet minimum performance or service levels or (iii) liability or indemnity obligations that are not limited (other than intellectual property infringement indemnifications, breach of confidentiality indemnifications or indemnifications for the Company’s breach of the agreement contained in customer agreements entered into in the Ordinary Course of Business);

       (v) any agreements with a third party providing for the receipt or expenditure of $50,000 or more that provides such third party with the right to terminate the agreement for convenience (with or without penalty) or upon a change of control;

       (vi) any agreement pursuant to which the Company or the Subsidiary has granted or may be obligated to grant in the future, a source code license or option or other right to use or acquire source code, including any agreements which provide for source code escrow arrangements,

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       (vii) any reseller agreement or referral agreement;

       (viii) any vendor or supplier agreement providing for the receipt or expenditure of $50,000 or more;

       (ix) any agreement concerning the establishment or operation of a partnership, joint venture or limited liability company;

       (x) any agreement (or group of related agreements) under which it has created, incurred, assumed or guaranteed (or may create, incur, assume or guarantee) indebtedness (including capitalized lease obligations) in excess of $50,000 or under which it has imposed (or may impose) a Security Interest on any of its assets, tangible or intangible;

       (xi) any agreement for the disposition of any significant portion of the assets or business of the Company or the Subsidiary (other than sales of products in the Ordinary Course of Business) or any agreement for the acquisition of the assets or business of any other entity (other than purchases of inventory or components in the Ordinary Course of Business);

       (xii) any agreement concerning noncompetition or, on the part of the Company, nonsolicitation of employees;

       (xiii) any employment or consulting agreement or arrangement or other agreement or arrangement that provides for severance payments after the Most Recent Balance Sheet Date;

       (xiv) any agreement (other than employment and similar agreements) involving any current or former officer, director or shareholder of the Company or an Affiliate thereof;

       (xv) any agreement under which the consequences of a default or termination would reasonably be expected to have a Company Material Adverse Effect;

       (xvi) any agreement which contains any provisions requiring the Company or the Subsidiary to indemnify any other party (excluding indemnities contained in agreements for the purchase, sale or license of products entered into in the Ordinary Course of Business); and

       (xvii) any other agreement (or group of related agreements) (A) involving more than $50,000, (B) or not entered into in the Ordinary Course of Business or (C) that is otherwise material to the Company or the Subsidiary.

          (b) The Company has delivered to the Buyer a complete and accurate copy of each agreement listed in Section 2.13 or Section 2.14 of the Disclosure Schedule, or with respect to each such unwritten agreement, the Company has provided a detailed description of the terms of such unwritten agreement. With respect to each agreement so listed: (i) the agreement is legal, valid, binding and enforceable and in full force and effect; (ii) except for agreements

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disclosed on Section 2.4 of the Disclosure Schedule to the extent the required consent or waiver has not been obtained or the required notice has not been given and other than agreements terminated prior to Closing in accordance with the terms thereof, the agreement will continue to be legal, valid, binding and enforceable and in full force and effect immediately following the Closing in accordance with the terms thereof as in effect immediately prior to the Closing; and (iii) neither the Company nor the Subsidiary nor, to the knowledge of the Company, any other party, is in breach or violation of, or default under, any such agreement, and no event has occurred, is pending or, to the knowledge of the Company, is threatened, which, after the giving of notice, with lapse of time, or otherwise, would constitute a breach or default by the Company or the Subsidiary or, to the knowledge of the Company, any other party under such agreement.

     2.15 Accounts Receivable; Indebtedness.

          (a) All accounts receivable of the Company and the Subsidiary reflected on the Most Recent Balance Sheet (other than those paid since such date) are valid receivables subject to no setoffs or counterclaims and are current and collectible (with respect to each receivable in excess of $25,000 within 90 days after the date on which it first became due and payable), net of the applicable reserve for bad debts on the Most Recent Balance Sheet. A complete and accurate list of the accounts receivable reflected on the Most Recent Balance Sheet, showing the aging thereof, is included in Section 2.15 of the Disclosure Schedule. All accounts receivable of the Company and the Subsidiary that have arisen since the Most Recent Balance Sheet Date are valid receivables subject to no setoffs or counterclaims and are collectible (with respect to each receivable in excess of $25,000 within 90 days after the date on which it first became due and payable), net of a reserve for bad debts in an amount proportionate to the reserve shown on the Most Recent Balance Sheet. Neither the Company nor the Subsidiary has received any written notice from an account debtor stating that any account receivable is subject to any contest, claim or setoff by such account debtor.

          (b) Section 2.15(b) of the Disclosure Schedule sets forth all of the long term and short term indebtedness of the Company and the Subsidiary, including the party to whom the debt is owed, the principal amount and interest rate thereof and accrued interest thereon and the due date(s) for payment thereof (provided that the amount set forth on Section 2.15 of the Disclosure Schedule with respect to the Company’s equipment line of credit shall be as of April 30, 2004). Except as set forth on Section 2.15(b) of the Disclosure Schedule, there is no other indebtedness of the Company.

     2.16 Powers of Attorney. There are no outstanding powers of attorney executed on behalf of the Company or the Subsidiary.

     2.17 Insurance. Section 2.17 of the Disclosure Schedule lists each insurance policy (including fire, theft/crime, casualty, comprehensive general liability, workers compensation, business interruption, environmental, errors and omissions, directors and officers fiduciary liability, employment practices liability, product liability and automobile insurance policies and bond and surety arrangements) to which the Company or the Subsidiary is a party, specifying the type of coverage, the amount of coverage, the premium, the insurer and the expiration date of each such policy and all claims made under each such policy. All such policies: (a) are in full force and effect; (b) are sufficient for compliance by the Company with all requirements of

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applicable law and of all material agreements to which the Company is a party; (c) are valid and outstanding policies enforceable against the insurer; (d) insure against risks of companies similarly situated and by companies engaged in similar businesses or owning similar assets; and (e) provide that they remain in full force and effect immediately prior to the Closing and all premiums due thereon have been paid. There is no material claim pending under any such policy as to which coverage has been questioned, denied or disputed by the underwriter of such policy. All premiums due and payable under all such policies have been paid, neither the Company nor the Subsidiary may be liable for retroactive premiums or similar payments, and the Company and the Subsidiary are otherwise in compliance in all material respects with the terms of such policies. Neither the Company nor the Subsidiary has been denied insurance coverage at any time during the past five years and no policies have been cancelled or have been refused to be renewed by the insurer in the past five years. The Company has no knowledge of any threatened termination of, or premium increase with respect to, any such policy. Each such policy will continue to be enforceable and in full force and effect immediately following the Closing in accordance with the terms thereof as in effect immediately prior to the Closing. Neither the Company nor the Subsidiary has failed to timely give any notice required or failed to satisfy any subjectivities under such insurance policies or binders of insurance.

     2.18 Litigation. There is no Legal Proceeding pending or, to the knowledge of the Company, threatened against the Company or the Subsidiary. There are no judgments, orders or decrees outstanding against the Company or the Subsidiary. There is no judgment, decree or order against the Company or the Subsidiary or, to the knowledge of the Company, any of their respective directors or officers (in their capacities as such), that could reasonably be expected to prevent, enjoin, or materially alter or delay any of the transactions contemplated by this Agreement, or that could reasonably be expected to have a Company Material Adverse Effect. Section 2.18 of the Disclosure Schedule lists all Legal Proceedings that the Company or the Subsidiary has pending against other parties.

     2.19 Warranties. No product or service manufactured, sold, leased, licensed or delivered by the Company or the Subsidiary is subject to any guaranty, warranty, right of return, right of credit or other indemnity other than (i) the applicable standard terms and conditions of sale or lease of the Company or the Subsidiary, which are set forth in Section 2.19 of the Disclosure Schedule and (ii) manufacturers’ warranties for which neither the Company nor the Subsidiary has any liability. Section 2.19 of the Disclosure Schedule sets forth the aggregate expenses incurred by the Company and the Subsidiary in fulfilling their obligations under their guaranty, warranty, right of return and indemnity provisions during each of the fiscal years and the interim period covered by the Financial Statements; and the Company does not know of any reason why such expenses should significantly increase as a percentage of sales in the future.

     2.20 Employees.

          (a) The Company has previously provided to the Buyer a list of all employees of the Company and the Subsidiary as of the date of such list, along with the date of hire, position and the annual rate of compensation (including salary, bonus and commissions) of each such person. Each current or past employee of the Company or the Subsidiary, including each EmPower Employee, has entered into a confidentiality and assignment of inventions agreement with the Company or the Subsidiary, a copy or form of which has previously been delivered or

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made available to the Buyer. Section 2.20(a) of the Disclosure Schedule contains a list, as of the date of this Agreement, of all employees of the Company or the Subsidiary who are a party to a non-competition agreement with the Company or the Subsidiary; the form of such agreement has previously been delivered or made available to the Buyer. All of the agreements referenced in the two preceding sentences will continue to be legal, valid, binding and enforceable and in full force and effect immediately following the Closing in accordance with the terms thereof as in effect immediately prior to the Closing. Section 2.20 of the Disclosure Schedule contains a list of all employees of the Company or the Subsidiary who are not citizens of the United States. To the knowledge of the Company, no key employee or group of employees has any plans to terminate employment with the Company or the Subsidiary.

          (b) To the knowledge of the Company, no employees of the Company or the Subsidiary or consultants employed or engaged by the Company or the Subsidiary are in violation of any term of any employment or consulting contract, non-disclosure agreement, non-competition agreement, or any restrictive covenant to a former employer or other person relating to the right of any such employee or consultant to be employed or engaged by the Company or the Subsidiary because of the nature of the business conducted or presently proposed to be conducted by the Company or the Subsidiary or to the use of trade secrets or proprietary information of others.

          (c) Section 2.20(c) of the Disclosure Schedule contains (i) a list of all sales personnel of the Company and the Subsidiary as of the date of this Agreement, (ii) a description of all plans, policies, agreements, arrangements or understandings of the Company and the Subsidiary relating to sales commissions and similar payments and (iii) a list of all estimated sales commission or payment obligations of the Company and the Subsidiary.

          (d) Section 2.20(d) of the Disclosure Schedule contains a list of all severance plans, agreements, programs and policies of Company and the Subsidiary with or relating to their respective employees, directors or consultants and with respect to the EmPower Employees, to the extent there remains any liability under such arrangements with respect to such EmPower Employees. The consummation of the transactions contemplated by this Agreement will not individually or in conjunction with termination of employment (i) entitle any current or former employee or EmPower Employee or other service provider of the Company or the Subsidiary to severance benefits or any other payment, compensation or benefit (including forgiveness of indebtedness) or (ii) accelerate the time of payment or vesting, or increase the amount of compensation or benefit due any such employee, EmPower Employee or service provider.

          (e) Except as set forth in Section 2.20(e) of the Disclosure Schedule, each employee whose employment with the Company or the Subsidiary has been terminated, including each EmPower Employee, has signed the Company’s standard separation agreement substantially in the form set forth in Section 2.18(e) of the Disclosure Schedule.

          (f) The Company, the Subsidiary and EmPower HR have withheld all amounts required by applicable law or by agreement to be withheld from the wages, salaries, and other payments to employees and EmPower Employees with respect to the time such EmPower Employees were jointly employed by the Company and EmPower HR; and are not liable for any arrears of wages or any Taxes or any penalty for failure to comply with any of the foregoing.

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Neither the Company nor the Subsidiary is liable for any payment to any trust or other fund or to any Governmental Entity, with respect to unemployment compensation benefits, social security or other benefits or obligations for employees (other than routine payments to be made in the Ordinary Course of Business). There are no pending claims against the Company or the Subsidiary under any workers compensation plan or policy or for long term disability. There are no controversies pending or, to the knowledge of the Company, threatened, between the Company or the Subsidiary and any of its employees, which controversies have or could reasonably be expected to result in an action, suit, proceeding, claim, arbitration or investigation before any Governmental Entity.

          (g) The Company and the Subsidiary are in compliance in all material respects with all currently applicable laws and regulations respecting employment, discrimination in employment, terms and conditions of employment, wages, hours, payment over overtime and occupational safety and health and employment practices, and is not engaged in any unfair labor practice and has no material liability under such laws and regulations.

          (h) Neither the Company nor the Subsidiary is a party to or bound by any collective bargaining agreement, nor has any of them experienced in the past two (2) years, any group strikes, material grievances, claims of unfair labor practices or other collective bargaining disputes. The Company has no knowledge of any organizational effort made or threatened, either currently or within the past two years, by or on behalf of any labor union with respect to employees of the Company or the Subsidiary, including the EmPower Employees.

     2.21 Employee Benefits.

          (a) Section 2.21(a) of the Disclosure Schedule contains a complete and accurate list of all Company Plans. Complete and accurate copies of (i) all Company Plans which have been reduced to writing, (ii) written summaries of all unwritten Company Plans, (iii) all related trust agreements, insurance contracts and current summary plan descriptions, (iv) the last two annual reports filed on IRS Form 5500, 5500C or 5500R and (for all funded plans) all plan financial statements for the last two plan years for each Company Plan, (v) the most recent financial statements for each Company Plan that is funded, (vi) all employee handbooks in use within the last two years and (vii) the last two reports regarding the satisfaction of the nondiscrimination requirements of Sections 125, 129, 410(b), 401(k) and 401(m) of the Code, have been delivered to the Buyer.

          (b) Each Company Plan has been administered in all material respects in accordance with its terms and each of the Company, the Subsidiary and the ERISA Affiliates has in all material respects met its obligations with respect to each Company Plan and has made all required contributions thereto. The Company, the Subsidiary, each ERISA Affiliate and each Company Plan are in compliance in all material respects with the currently applicable provisions of ERISA and the Code and the regulations thereunder. All filings and reports as to each Company Plan required to have been submitted to the Internal Revenue Service or to the United States Department of Labor have been duly and timely submitted. No Company Plan, other than the Company Stock Plans, has assets that include securities issued by the Company or any ERISA Affiliate. No investment vehicle in which assets used to fund any Company Plan are

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invested which is liquidated or changed will result in any sales charge, surrender fee or similar expenses.

          (c) There are no Legal Proceedings (except claims for benefits payable in the normal operation of the Company Plans and proceedings with respect to qualified domestic relations orders) against or involving any Company Plan or asserting any rights or claims to benefits under any Company Plan that could give rise to any material liability. To the knowledge of the Company, no Company Plan is the subject of or has received notice that it is the subject of examination by a Governmental Entity. The Company has not been a participant in or taken action to correct a Company Plan under a government sponsored amnesty, voluntary compliance or similar program whether or not a filing with a Governmental Entity was required as part of such process.

          (d) All the Company Plans that are intended to be qualified under Section 401(a) of the Code (“Qualified Plans”) have received, from the Internal Revenue Service, a determination letter with respect to the adoption of such Company Plan by the Company or the Subsidiary or ERISA Affiliate, as to such status, and following receipt of such determination such Company Plans have not been amended, except to the extent required by applicable laws, and nothing has occurred that is reasonably likely to result in disqualification of such Company Plans. Each Company Plan which is required to satisfy Section 125, 129, 401(k)(3) or Section 401(m)(2) of the Code has been tested for compliance with, and satisfies the requirements of Section 125, 129, 401(k)(3) and Section 401(m)(2) of the Code for each plan year ending prior to the Closing Date.

          (e) Neither the Company, the Subsidiary, nor any ERISA Affiliate has ever maintained an Employee Benefit Plan subject to Section 412 of the Code or Title IV of ERISA.

          (f) At no time has the Company, the Subsidiary or any ERISA Affiliate been obligated to contribute to any “multiemployer plan” (as defined in Section 4001(a)(3) of ERISA).

          (g) There are no unfunded obligations under any Company Plan providing benefits after termination of employment to any employee of the Company or the Subsidiary (or to any beneficiary of any such employee), including but not limited to retiree health coverage and deferred compensation, but excluding severance, change in control payments, continuation of health coverage required to be continued under Section 4980B of the Code or other applicable law and insurance conversion privileges under state law. The assets of each Qualified Plan which is funded are reported at their fair market value on the books and records of such Company Plan. With respect to the Company Plans, there are no benefit obligations for which contributions have not been made or properly accrued and there are no benefit obligations which have not been accounted for in accordance with GAAP, on the financial statements of the Company.

          (h) No act or omission has occurred and no condition exists with respect to any Company Plan that would subject the Company, the Subsidiary or any ERISA Affiliate to (i) fines, penalties, taxes or liabilities of any kind imposed under ERISA or the Code which are

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material in the aggregate or (ii) any contractual indemnification or contribution obligation protecting any fiduciary, insurer or service provider with respect to any Company Plan.

          (i) No Company Plan is funded by, associated with or related to a “voluntary employee’s beneficiary association” within the meaning of Section 501(c)(9) of the Code.

          (j) Each Company Plan, other than the Company Stock Plans, is amendable and terminable unilaterally by the Company at any time without liability or expense to the Company or such Company Plan as a result thereof (other than for benefits accrued through the date of termination or amendment and reasonable administrative expenses related thereto or provisions requiring notice of 30 days or less) and no Company Plan, plan documentation or agreement, summary plan description or other written communication distributed generally to employees by its terms prohibits the Company from amending or terminating any such Company Plan.

          (k) Section 2.21(k) of the Disclosure Schedule discloses each: (i) agreement with any shareholder, director, executive officer or other employee of the Company or the Subsidiary (A) the benefits of which are contingent, or the terms of which are altered, upon the occurrence of a transaction involving the Company or the Subsidiary of the nature of any of the transactions contemplated by this Agreement, (B) providing any term of employment or compensation guarantee or (C) providing severance benefits after the termination of employment of such director, executive officer or employee; (ii) agreement, plan or arrangement under which any person has or may receive payments from the Company or the Subsidiary that may be subject to the tax imposed by Section 4999 of the Code or included in the determination of such person’s “parachute payment” or could be, separately or in the aggregate, included in determining an “excess parachute payment” under Section 280G of the Code (without regard to Sections 280G(b)(4) and 280G(b)(5) thereof); and (iii) agreement or plan binding the Company or the Subsidiary, including any stock option plan, stock appreciation right plan, restricted stock plan, stock purchase plan, severance benefit plan or Company Plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement.

          (l) Section 2.21(l) of the Disclosure Schedule sets forth the policy of the Company and the Subsidiary with respect to accrued vacation, accrued sick time and earned time off and the amount of such liabilities as of March 31, 2004.

          (m) Each Company Plan subject to Law outside the United States is in material compliance, and the books and records thereof are maintained in material compliance, with all applicable laws, rules and regulations of the jurisdiction to which such Company Plan is subject (“Foreign Plan”). The fair market value of the assets of each funded Foreign Plan, the liability of each insurer for any Foreign Plan funded with insurance or the book reserve established for any Foreign Plan, together with any accrued contributions, is sufficient to procure or provide for the accrued benefit obligations as of the Closing, with respect to all current and former participants in such plan according to the actuarial assumptions and valuations most recently used to determine employer contributions to such Foreign Plan and no transaction contemplated by this Agreement shall cause such assets or insurance obligations to be less than such benefit

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obligations. Section 2.21(m) of the Disclosure Schedule lists each country in which any of the Company or the Subsidiary has operations and the number of employees in each such country. Each Foreign Plan required to be registered has been registered and has been maintained in good standing with applicable Governmental Entities.

          (n) Each individual who has received compensation for the performance of services from any source on behalf of the Company or the Subsidiary has been properly classified as an employee or the employee of an agency or an independent contractor in accordance with applicable law.

          (o) The Company has delivered to the Buyer a complete and accurate copy of the 2004 Company Bonus Program. Section 2.21(o) of the Disclosure Schedule contains a complete and accurate list of (i) the maximum aggregate amount payable under the 2004 Company Bonus Program for the full 2004 calendar year and (ii) a list of all eligible participants as of the date hereof and the maximum amount payable for the full 2004 calendar year to each such participant under the 2004 Company Bonus Program.

     2.22 Environmental Matters.

          (a) Each of the Company and the Subsidiary has complied with all applicable Environmental Laws. There is no pending or, to the knowledge of the Company, threatened civil or criminal litigation, written notice of violation, formal administrative proceeding, or investigation, inquiry or information request by any Governmental Entity, relating to any Environmental Law involving the Company or the Subsidiary.

          (b) Neither the Company nor the Subsidiary has any liabilities or obligations arising from the release of any Materials of Environmental Concern into the environment.

          (c) Neither the Company nor the Subsidiary is a party to or bound by any court order, administrative order, consent order or other agreement between the Company and any Governmental Entity entered into in connection with any legal obligation or liability arising under any Environmental Law.

          (d) The Company is not aware of any material environmental liability of any solid or hazardous waste transporter or treatment, storage or disposal facility that has been used by the Company or the Subsidiary.

     2.23 Legal Compliance. Each of the Company and the Subsidiary is currently conducting, and have at all times conducted, their respective businesses in material compliance with each applicable law (including rules and regulations thereunder) of any federal, state, local or foreign government, or any Governmental Entity. Neither the Company nor the Subsidiary has received any notice or communication from any Governmental Entity alleging noncompliance with any applicable law, rule or regulation.

     2.24 Customers and Suppliers. The Company has provided the Buyer with a list of (a) each customer during the last full fiscal year or the interim period through the Most Recent Balance Sheet Date and the amount of revenues accounted for by such customer during each such period and (b) each supplier that is the supplier of any significant product or service to the

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Company or the Subsidiary. Since January 1, 2004, no party to a Vendor Agreement, Client Agreement or Partner Agreement has cancelled or otherwise terminated, or made any threat to the Company or the Subsidiary to cancel or otherwise terminate such Vendor Agreement, Client Agreement or Partner Agreement, as the case may be, or its relationship with the Company. Neither Company nor the Subsidiary has knowledge of any facts or circumstances relating to any such vendor, customer, client or distribution partner which the Company or the Subsidiary believes could reasonably be expected to negatively impact the business or operations of Company or the Subsidiary. No unfilled customer order or commitment obligating the Company or the Subsidiary to process, manufacture or deliver products or perform services will result in a loss to the Company or the Subsidiary upon completion of performance. No purchase order or commitment of the Company or the Subsidiary is in excess of normal requirements, nor are prices provided therein in excess of current market prices for the products or services to be provided thereunder. For purposes hereof, the loss of one or more customers of the Company solely as a result of the public announcement or disclosure of the Merger shall not constitute a breach of this Section 2.24.

     2.25 Permits. Section 2.25 of the Disclosure Schedule sets forth a list of all Permits issued to or held by the Company or the Subsidiary. Such listed Permits are the only material Permits that are required for the Company and the Subsidiary to conduct their respective businesses as presently conducted or as proposed by the Company to be conducted. Each such Permit is in full force and effect; the Company or the Subsidiary is in compliance with the terms of each such Permit; and, to the knowledge of the Company, no suspension or cancellation of such Permit is pending or threatened and there is no basis for believing that such Permit will not be renewable upon expiration. Each such Permit will continue in full force and effect immediately following the Closing.

     2.26 Certain Business Relationships With Affiliates. No Affiliate of the Company or of the Subsidiary (a) owns any property or right, tangible or intangible, which is used in the business of the Company or the Subsidiary, (b) to the knowledge of the Company has any claim or cause of action against the Company or the Subsidiary, or (c) owes any money to, or is owed any money by, the Company or the Subsidiary. Section 2.26 of the Disclosure Schedule describes any transactions or relationships between the Company or the Subsidiary and any Affiliate thereof which occurred or have existed since the beginning of the time period covered by the Financial Statements.

     2.27 Brokers’ Fees. Neither the Company nor the Subsidiary has any liability or obligation to pay any fees or commissions to any broker, financial advisor, finder or agent with respect to the transactions contemplated by this Agreement.

     2.28 Books and Records. The minute books and other similar records of the Company and the Subsidiary contain complete and accurate records of all actions taken at any meetings of the Company’s or the Subsidiary’s shareholders, members, Board of Directors, managing members or any committee thereof and of all written consents and informal actions executed in lieu of the holding of any such meeting. The books and records of the Company and the Subsidiary accurately reflect in all material respects the assets, liabilities, business, financial condition and results of operations of the Company or the Subsidiary and have been maintained in accordance with good business and bookkeeping practices. Section 2.28 of the Disclosure

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Schedule contains a list of all bank accounts and safe deposit boxes of the Company and the Subsidiary and the names of persons having signature authority with respect thereto or access thereto.

     2.29 Principal Shareholder Representation. The Principal Shareholder has good and marketable title, free and clear of any and all liens or Security Interests, to all of the shares of capital stock of the Company owned by him, and he has the full right, power and authority to deliver the certificates representing such shares to the Buyer or the Disbursing Agent pursuant to the Merger.

     2.30 Disclosure. No representation or warranty by the Company contained in this Agreement, and no statement contained in the Disclosure Schedule or any other document, certificate or other instrument delivered or to be delivered by or on behalf of the Company pursuant to this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary, in light of the circumstances under which it was made, in order to make the statements herein or therein not misleading.

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE BUYER
AND THE TRANSITORY SUBSIDIARY

     Each of the Buyer and the Transitory Subsidiary represents and warrants to the Company that the statements contained in this Article III are true and correct as of the date of this Agreement and will be true and correct as of the Closing as though made as of the Closing.

     3.1 Organization and Corporate Power. Each of the Buyer and the Transitory Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. The Buyer has all requisite corporate power and authority to carry on the businesses in which it is engaged and to own and use the properties owned and used by it.

     3.2 Authorization of Transaction. Each of the Buyer and the Transitory Subsidiary has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder. The Buyer has all requisite power and authority to execute and deliver the Escrow Agreement and the Employee Agreements. The execution and delivery by the Buyer and the Transitory Subsidiary of this Agreement and (in the case of the Buyer) the Escrow Agreement and the Employee Agreements and the consummation by the Buyer and the Transitory Subsidiary of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of the Buyer and Transitory Subsidiary, respectively. This Agreement has been duly and validly executed and delivered by the Buyer and the Transitory Subsidiary and constitutes a valid and binding obligation of the Buyer and the Transitory Subsidiary, enforceable against them in accordance with its terms except that such enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to creditors’ rights generally, and that such enforceability is subject to general principles of equity. Upon execution and delivery by the Buyer, the Escrow Agreement and the Employee Agreements will each constitute a valid and binding obligation of the Buyer, enforceable against the Buyer in accordance with their respective terms except that

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such enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting or relating to creditors’ rights generally, and that such enforceability is subject to general principles of equity.

     3.3 Noncontravention. Subject to compliance with the applicable requirements of the Hart-Scott-Rodino Act and the filing of the Articles of Merger as required by the IBCA, neither the execution and delivery by the Buyer or the Transitory Subsidiary of this Agreement or (in the case of the Buyer) the Escrow Agreement and the Employee Agreements, nor the consummation by the Buyer or the Transitory Subsidiary of the transactions contemplated hereby or thereby, will (a) conflict with or violate any provision of the charter or By-laws of the Buyer or the Transitory Subsidiary, (b) require on the part of the Buyer or the Transitory Subsidiary any filing with, or permit, authorization, consent or approval of, any Governmental Entity, (c) conflict with, result in breach of, constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration of obligations under, create in any party any right to terminate, modify or cancel, or require any notice, consent or waiver under, any contract or instrument to which the Buyer or the Transitory Subsidiary is a party or by which either is bound or to which any of their assets are subject, except for (i) any conflict, breach, default, acceleration, termination, modification or cancellation which would not adversely affect the consummation of the transactions contemplated hereby or the ability of the Buyer to fulfill its obligations hereunder or (ii) any notice, consent or waiver the absence of which would not adversely affect the consummation of the transactions contemplated hereby or the ability of the Buyer to fulfill its obligations hereunder, or (d) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Buyer or the Transitory Subsidiary or any of their properties or assets.

     3.4 Brokers’ Fees. Except for the Buyer’s engagement of and agreement with Gridley & Company LLC, neither the Buyer nor any of its officers, directors, employees, shareholders or affiliates has employed or made any agreement with any broker, financial advisor, finder or agent which will result in the obligation of the Company to pay any finder’s fee, brokerage fees or commission or similar payment in connection with the transactions contemplated by this Agreement.

ARTICLE IV
COVENANTS

     4.1 Closing Efforts. Each of the Parties shall use its Reasonable Best Efforts to take all actions and to do all things necessary, proper or advisable to consummate the transactions contemplated by this Agreement, including using its Reasonable Best Efforts to ensure that (i) its representations and warranties remain true and correct in all material respects through the Closing Date and (ii) the conditions to the obligations of the other Parties to consummate the Merger are satisfied.

     4.2 Governmental and Third-Party Notices and Consents.

          (a) Each Party shall use its Reasonable Best Efforts to obtain, at its expense, all waivers, permits, consents, approvals or other authorizations from Governmental Entities, and to effect all registrations, filings and notices with or to Governmental Entities, as may be required for such Party to consummate the transactions contemplated by this Agreement and to

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otherwise comply with all applicable laws and regulations in connection with the consummation of the transactions contemplated by this Agreement. Without limiting the generality of the foregoing, each of the Parties shall promptly file any Notification and Report Forms and related material that it may be required to file with the Federal Trade Commission and the Antitrust Division of the United States Department of Justice under the Hart-Scott-Rodino Act, shall use its Reasonable Best Efforts to obtain an early termination of the applicable waiting period, and shall make any further filings or information submissions pursuant thereto that may be necessary, proper or advisable; provided, however, that notwithstanding anything to the contrary in this Agreement, the Buyer shall not be obligated to sell or dispose of or hold separately (through a trust or otherwise) any assets or businesses of the Buyer or its Affiliates.

          (b) The Company shall use its Reasonable Best Efforts to obtain, at its expense, the waivers, consents or approvals from third parties that are listed in Section 4.2 of the Disclosure Schedule, and to give all notices to third parties that are listed in Section 4.2 of the Disclosure Schedule.

     4.3 Shareholder Approval.

          (a) The Company shall use its Reasonable Best Efforts to obtain, as promptly as practicable, the Requisite Shareholder Approval pursuant to a written informal action of shareholders in accordance with the applicable requirements of the IBCA (the “Shareholder Action”). In connection with obtaining the Shareholder Action, the Company shall, within one business day following the date of this Agreement, provide to the Buyer for its review and approval a copy of the Disclosure Statement, which shall comply in all material respects with the provisions of the IBCA and Federal and state securities law, if applicable, and shall include (A) a summary of the Merger and this Agreement (which summary shall include a summary of the terms relating to the indemnification obligations of the Company Securityholders, the escrow arrangements and the authority of the Shareholder Representative, and a statement that the adoption of this Agreement by the shareholders of the Company shall constitute approval of such terms) and (B) a statement that procedures to dissent are available for holders of the Company Shares pursuant to Section 11.70 of the IBCA, and (C) a copy of such Section 11.70. The Buyer agrees to cooperate with the Company in the preparation of the Disclosure Statement. The Company agrees not to distribute the Disclosure Statement until the Buyer has had a reasonable opportunity to review and comment on the Disclosure Statement and the Disclosure Statement has been approved by the Buyer (which approval may not be unreasonably withheld, conditioned or delayed). Within one business day of the date that the Buyer notifies the Company of its approval of the Disclosure Statement, the Company shall send by United States First Class mail the Disclosure Statement to its shareholders. In addition to delivering the Disclosure Statement prior to execution and effectiveness of the Shareholder Action, the Company shall also send, pursuant to Section 7.10 of the IBCA, a written notice to all shareholders of the Company that did not execute the Shareholder Action adopting this Agreement and approving the Merger informing them that this Agreement and the Merger were adopted and approved by the shareholders of the Company and that procedures to dissent are available for their Company Shares pursuant to Section 11.70 of the IBCA (which notice shall include a copy of such Section 11.70). The Company shall promptly inform the Buyer of the date on which such notice was sent.

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          (b) The Company shall use its Reasonable Best Efforts to ensure that the Disclosure Statement does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading (provided that the Company shall not be responsible for the accuracy or completeness of any information concerning the Buyer or the Transitory Subsidiary furnished by the Buyer in writing for inclusion in the Disclosure Statement).

          (c) The Buyer shall use its Reasonable Best Efforts to ensure that any information relating to the Buyer furnished in writing by the Buyer to the Company for inclusion in the Disclosure Statement does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.

     4.4 Operation of Business. Except as contemplated by this Agreement, during the period from the date of this Agreement to the Closing, the Company shall (and shall cause the Subsidiary to) conduct its operations in the Ordinary Course of Business and in compliance with all applicable laws and regulations and, to the extent consistent therewith, use its Reasonable Best Efforts to preserve intact its current business organization, keep its physical assets in good working condition, keep available the services of its current officers and employees (provided that, with respect to non-officer employees, the Company shall retain the right to discharge employees consistent with past practice), and preserve its relationships with customers, suppliers and others having business dealings with it to the end that its goodwill and ongoing business shall not be impaired in any material respect. Without limiting the generality of the foregoing, prior to the Closing, the Company shall not (and shall cause the Subsidiary not to), without the written consent of the Buyer:

          (a) issue or sell any stock or other securities of the Company or the Subsidiary or any options, warrants or rights to acquire any such stock or other securities (except pursuant to the conversion of Preferred Shares or the exercise of Options or Warrants outstanding on the date hereof), or amend any of the terms of (including the vesting of) any Options, Warrants or restricted stock agreements, or repurchase or redeem any stock or other securities of the Company (provided that the Company may repurchase unvested securities at the original purchase price thereof from former employees, officers, directors, consultants or other persons who performed services for the Company or the Subsidiary in connection with the cessation of such employment or service);

          (b) split, combine or reclassify any shares of its capital stock; or declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock;

          (c) other than up to $200,000 of additional indebtedness under the Company’s equipment line of credit in effect as of the date of this Agreement, create, incur or assume any indebtedness (including obligations in respect of capital leases); assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations of any other person or entity; or make any loans, advances or capital contributions to, or investments in, any other person or entity other than advances to employees for reasonable business expenses consistent with past practice;

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          (d) enter into, adopt or amend, except as required by law, any Employee Benefit Plan or any employment or severance agreement or arrangement of the type described in Section 2.21(k) or increase in any manner the compensation or fringe benefits of, or modify the employment terms of, its directors, officers or employees, generally or individually (other than pursuant to scheduled employee reviews under the Company’s normal employee review cycle in the Ordinary Course of Business), or pay any bonus or other benefit to its directors, officers or employees (except for existing payment obligations listed in Section 2.21 of the Disclosure Schedule) or hire any new officers or, other than in the Ordinary Course of Business in accordance with the Operating Plan, employees;

          (e) acquire, sell, lease, license or dispose of any assets or property (including any shares or other equity interests in or securities of the Subsidiary or any corporation, partnership, association or other business organization or division thereof), other than purchases, licenses and sales of assets or property in the Ordinary Course of Business;

          (f) mortgage or pledge any of its property or assets or subject any such property or assets to any Security Interest;

          (g) discharge or satisfy any Security Interest or pay any obligation or liability other than in the Ordinary Course of Business;

          (h) amend its Articles of Incorporation, by-laws or other organizational documents;

          (i) change its accounting methods, principles or practices, except insofar as may be required by a generally applicable change in GAAP, or make any new elections, or changes to any current elections, with respect to Taxes;

          (j) enter into, amend, terminate, take or omit to take any action that would constitute a violation of or default under, or waive any rights under, any contract or agreement of a nature required to be listed (A) in Section 2.12 or Section 2.13 of the Disclosure Schedule or (B) in Section 2.14 of the Disclosure Schedule, except, in the case of Section 2.14 only, in the Ordinary Course of Business with prior notice to the Buyer;

          (k) make or commit to make any capital expenditure in excess of $25,000 in the aggregate;

          (l) other than Legal Proceeding for breach of this Agreement, institute or settle any Legal Proceeding or enter into any waiver, release, assignment or compromise relating to any Legal Proceeding;

          (m) reduce any insurance coverage from that in existence as of the date of this Agreement;

          (n) take any action or fail to take any action permitted by this Agreement with the knowledge that such action or failure to take action would result in (i) any of the representations and warranties of the Company set forth in this Agreement becoming untrue or (ii) any of the conditions to the Merger set forth in Article V not being satisfied; or

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          (o) agree in writing or otherwise to take any of the foregoing actions.

     4.5 Access to Information.

          (a) The Company shall (and shall cause the Subsidiary to) permit representatives of the Buyer to have full access (at all reasonable times, and in a manner so as not to interfere with the normal business operations of the Company and the Subsidiary) to all premises, properties, financial, tax and accounting records (including the work papers of the Company’s independent accountants), contracts, other records and documents, and personnel, of or pertaining to the Company and the Subsidiary.

          (b) Within 15 days after the end of each month ending prior to the Closing, beginning with April 30, 2004, the Company shall furnish to the Buyer an unaudited income statement for such month and a balance sheet as of the end of such month, prepared on a basis consistent with the Financial Statements. Such financial statements shall present fairly the financial condition and results of operations of the Company and the Subsidiary on a consolidated basis as of the dates thereof and for the periods covered thereby, and shall be consistent with the books and records of the Company and the Subsidiary.

     4.6 Notice of Breaches.

          (a) From the date of this Agreement until the Closing, the Company shall promptly deliver to the Buyer supplemental information concerning events or circumstances occurring subsequent to the date hereof which would render any representation, warranty or statement in this Agreement or the Disclosure Schedule inaccurate or incomplete at any time after the date of this Agreement until the Closing. No such supplemental information shall be deemed to avoid or cure any misrepresentation or breach of warranty or constitute an amendment of any representation, warranty or statement in this Agreement or the Disclosure Schedule.

          (b) From the date of this Agreement until the Closing, the Buyer shall promptly deliver to the Company supplemental information concerning events or circumstances occurring subsequent to the date hereof which would render any representation or warranty in this Agreement inaccurate or incomplete at any time after the date of this Agreement until the Closing. No such supplemental information shall be deemed to avoid or cure any misrepresentation or breach of warranty or constitute an amendment of any representation or warranty in this Agreement.

     4.7 Exclusivity.

          (a) Neither the Company nor the Principal Shareholder shall, and the Company shall require each of its officers, directors, employees, representatives and agents not to, directly or indirectly, (i) initiate, solicit, encourage or otherwise facilitate any inquiry, proposal, offer or discussion with any party (other than the Buyer) concerning any merger, reorganization, consolidation, recapitalization, business combination, liquidation, dissolution, share exchange, sale of stock, sale of material assets or similar business transaction involving the Company (a “Takeover Proposal”), the Subsidiary or any division of the Company, (ii) furnish any non-public information concerning the business, properties or assets of the Company, the Subsidiary or any division of the Company to any party (other than the Buyer or its

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representatives), except in the Ordinary Course of Business with respect to immaterial assets or (iii) engage in discussions or negotiations with any party (other than the Buyer) concerning any such transaction; provided, however, that nothing contained in this Agreement shall prohibit the Company’s Board of Directors from recommending a Takeover Proposal received without violation of this Section 4.7 to the shareholders of the Company, if the Company’s Board of Directors (A) concludes that such a proposal or offer would constitute a Superior Proposal and (B) determines in good faith, after consultation with outside counsel, that the failure to take such action would result in breach by the Company’s Board of Directors of its fiduciary duties to the Company’s shareholders.

          (b) The Company and the Principal Shareholder shall immediately notify any party with which discussions or negotiations of the nature described in paragraph (a) above were pending that the Company is terminating such discussions or negotiations. If the Company or the Principal Shareholder receives any inquiry, proposal or offer of the nature described in paragraph (a) above, the Company or the Principal Shareholder, as applicable, shall, within one business day after such receipt, notify the Buyer of such inquiry, proposal or offer, including the identity of the other party and the terms of such inquiry, proposal or offer.

     4.8 Expenses. Except as set forth in Article VI and the Escrow Agreement, each of the Parties shall bear its own costs and expenses (including legal, financial advisor and accounting fees and expenses and including any bonus payments to any employee for his or her participation in the successful negotiation of this Agreement and/or the consummation of the transactions contemplated hereby) incurred in connection with this Agreement and the transactions contemplated hereby.

     4.9 FIRPTA. Prior to the Closing, (i) the Company shall deliver to the Buyer and to the Internal Revenue Service notices that the Company Shares are not “U.S. real property interests” in accordance with Treasury Regulations under Sections 897 and 1445 of the Code, or (ii) each of the Company Shareholders shall deliver to the Buyer certifications that they are not foreign persons in accordance with the Treasury Regulations under Section 1445 of the Code. If the Buyer does not receive either the notices or the certifications described above on or before the Closing Date, the Buyer, the Transitory Subsidiary, or the Disbursing Agent shall be permitted to withhold from the payments to be made pursuant to this Agreement any required withholding tax under Section 1445 of the Code.

     4.10 Employee Benefits. As soon as practicable after the Closing Date, the Buyer shall provide the employees of the Company who are employed by the Buyer or one of its subsidiaries in the United States after the Closing Date with types and levels of benefits comparable to those provided to similarly situated employees of the Buyer. Except as set forth on Schedule 4.10 and subject to the preceding sentence, for purposes of determining eligibility to participate, vesting and entitlement to benefits where length of service is relevant under any Employee Benefit Plans (other than a defined benefit plan) of the Buyer in effect as of the Closing, the Buyer shall use its Reasonable Best Efforts to provide that such employees shall receive service credit under such Employee Benefit Plans (other than a defined benefit plan) for the employee’s period of service with the Company and the Subsidiary prior to the Closing Date.

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     4.11 2004 Bonus Program; 2004 Sales Commission Plan. The Buyer shall keep in effect the Company’s 2004 Bonus Program and the Company’s 2004 Sales Commission Plan for employees of the Company on the Closing Date and for employees of the Surviving Corporation after the Closing Date with respect to 2004 results. Any awards under the 2004 Bonus Program or the 2004 Sales Commission Plan shall be made in accordance therewith and consistent with past policies and practices.

     4.12 401(k) Plan. As soon as practicable following the Closing Date, all employees of the Company who were eligible to participate in the Company’s 401(k) plan prior to the Closing Date shall be eligible to participate in a 401(k) plan maintained by the Buyer.

     4.13 Indemnification. The Articles of Incorporation and Bylaws of the Surviving Corporation will contain provisions with respect to exculpation and indemnification that are at least as favorable to the directors and officers of the Company immediately prior to the Effective Time as those contained in the Articles of Incorporation and Bylaws of the Company as in effect on the date hereof, which provisions will not be amended, repealed or otherwise modified for a period of six years from the Effective Time in any manner that would adversely affect the rights thereunder of individuals who, immediately prior to the Effective Time, were directors or officer of the Company, unless such modification is required by law. In the event of a Surviving Corporation Change of Control, the liquidation or dissolution of the Surviving Corporation, or a diminution of the financial ability of the Surviving Corporation to indemnify such officers and directors compared to the financial ability of the Surviving Corporation to do so immediately after Closing, then the Buyer agrees that it will, during such six year period, indemnify such officers and directors to the extent provided by the Surviving Corporation pursuant to the first sentence of this Section 4.13.

ARTICLE V
CONDITIONS TO CONSUMMATION OF MERGER

     5.1 Conditions to Each Party’s Obligations. The respective obligations of each Party to consummate the Merger are subject to the satisfaction of the condition that this Agreement and the Merger shall have received the Requisite Shareholder Approval.

     5.2 Conditions to Obligations of the Buyer and the Transitory Subsidiary. The obligation of each of the Buyer and the Transitory Subsidiary to consummate the Merger is subject to the satisfaction (or waiver by the Buyer) of the following additional conditions:

          (a) the number of Dissenting Shares shall not exceed 1% of the number of outstanding Common Shares as of the Effective Time, and no Preferred Shares shall be Dissenting Shares;

          (b) the Company and the Subsidiary shall have obtained at their own expense (and shall have provided copies thereof to the Buyer) all of the waivers, permits, consents, approvals or other authorizations, and effected all of the registrations, filings and notices, referred to in Section 4.2 which are required on the part of the Company or the Subsidiary;

          (c) the representations and warranties of the Company set forth in the first sentence of Section 2.1 and in Section 2.3 and any representations and warranties of the

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Company set forth in this Agreement that are qualified as to materiality shall be true and correct in all respects, and all other representations and warranties of the Company set forth in this Agreement shall be true and correct in all material respects, in each case as of the date of this Agreement and as of the Closing as though made as of the Closing, except to the extent such representations and warranties are specifically made as of a specified date other than the date of this Agreement or to the extent the representations and warranties set forth in Section 2.2(a), the first sentence of Section 2.2(c), the first sentence of Section 2.14(a), the third sentence of Section 2.20(a) and Section 2.20(c) are specifically made only as of the date of this Agreement (in which case such representations and warranties shall be true and correct as of such date);

          (d) the Company shall have performed or complied with in all material respects its agreements and covenants required to be performed or complied with under this Agreement as of or prior to the Closing;

          (e) no Legal Proceeding shall be pending or threatened wherein an unfavorable judgment, order, decree, stipulation or injunction would (i) prevent consummation of the transactions contemplated by this Agreement, (ii) cause the transactions contemplated by this Agreement to be rescinded following consummation or (iii) have, individually or in the aggregate, a Company Material Adverse Effect, and no such judgment, order, decree, stipulation or injunction shall be in effect;

          (f) the Company shall have delivered to the Buyer and the Transitory Subsidiary the Company Certificate;

          (g) all applicable waiting periods (and any extensions thereof) under the Hart-Scott-Rodino Act shall have expired or otherwise been terminated;

          (h) the Buyer shall have received the resignations, effective as of the Closing, of each director and officer of the Company and the Subsidiary (other than any such resignations which the Buyer designates, by written notice to the Company, as unnecessary with respect to such position);

          (i) the Buyer shall have received evidence in the form reasonably satisfactory to the Buyer of the termination of each outstanding Option and each outstanding Warrant pursuant to the terms of Section 1.7;

          (j) the Buyer shall have received from counsel to the Company opinions in substantially the form attached hereto as Exhibit A-1 and Exhibit A-2, each addressed to the Buyer and dated as of the Closing Date;

          (k) the Buyer shall have received from each individual listed on Section 5.2(k) of the Disclosure Schedule an executed copy of the Buyer’s Employee Standard Terms agreement in substantially the form attached hereto as Exhibit D (together with the Buyer offer letters for at will employment, the “Employee Agreements”);

          (l) the non-competition agreement between the Buyer and James Crouthamel in the form attached hereto as Exhibit E and executed on the date hereof shall have become effective;

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          (m) the Company shall have terminated its 401(k) Plan;

          (n) the Buyer shall have received a certificate of the Chief Financial Officer of the Company, in a form acceptable to the Buyer, setting forth the estimated Net Tangible Book Value and the estimated Company Closing Transaction Expenses; and

          (o) the Buyer shall have received certificates of good standing of the Company and the Subsidiary in their jurisdiction of organization and the various foreign jurisdictions in which they are qualified, certified charter documents, certificates as to the incumbency of officers and certificates as to the adoption of authorizing resolutions.

     5.3 Conditions to Obligations of the Company. The obligation of the Company to consummate the Merger is subject to the satisfaction of the following additional conditions:

          (a) the representations and warranties of the Buyer and the Transitory Subsidiary set forth in the first sentence of Section 3.1 and in Section 3.2 and any representations and warranties of the Buyer and the Transitory Subsidiary set forth in this Agreement that are qualified as to materiality shall be true and correct in all respects, and all other representations and warranties of the Buyer and the Transitory Subsidiary set forth in this Agreement shall be true and correct in all material respects, in each case as of the date of this Agreement and as of the Closing as though made as of the Closing, except to the extent such representations and warranties are specifically made as of a date other than the date of this Agreement (in which case such representations and warranties shall be true and correct as of such date);

          (b) each of the Buyer and the Transitory Subsidiary shall have performed or complied with in all material respects its agreements and covenants required to be performed or complied with under this Agreement as of or prior to the Closing;

          (c) no Legal Proceeding shall be pending or threatened wherein an unfavorable judgment, order, decree, stipulation or injunction would (i) prevent consummation of the transactions contemplated by this Agreement or (ii) cause the transactions contemplated by this Agreement to be rescinded following consummation, and no such judgment, order, decree, stipulation or injunction shall be in effect;

          (d) the Buyer shall have delivered to the Company the Buyer Certificate;

          (e) all applicable waiting periods (and any extensions thereof) under the Hart-Scott-Rodino Act shall have expired or otherwise been terminated; and

          (f) the Company shall have received certificates of good standing of the Buyer and the Transitory Subsidiary in their jurisdiction of organization, certified charter documents, certificates as to the incumbency of officers and certificates as to the adoption of authorizing resolutions.

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ARTICLE VI
INDEMNIFICATION

     6.1 Indemnification by the Company Securityholders. Subject to the limitations of Section 6.5, the Company Securityholders shall indemnify the Buyer in respect of, and hold it harmless against, any and all Damages incurred or suffered by the Surviving Corporation or the Buyer or any Affiliate thereof resulting from or relating to:

          (a) any inaccuracy, misrepresentation or breach, as of the date of this Agreement or as of the Closing Date, of any representation or warranty of the Company or the Principal Shareholder contained in this Agreement or any other agreement or instrument expressly required to be furnished by the Company to the Buyer pursuant to this Agreement;

          (b) any failure to perform any covenant or agreement of the Company contained in this Agreement or any agreement or instrument expressly required to be furnished by the Company to the Buyer pursuant to this Agreement;

          (c) any failure of any Company Shareholder to have good, valid and marketable title to the issued and outstanding Company Shares registered in the name of such Company Shareholder, free and clear of all Security Interests;

          (d) any Company Transaction Expenses that are not Company Closing Transaction Expenses;

          (e) any claim by a Company Shareholder or former shareholder of the Company, or any other person or entity, seeking to assert, or based upon: (i) ownership or rights to ownership of any shares of stock of the Company; (ii) any rights of a shareholder (other than the right to receive the Merger Consideration pursuant to this Agreement or dissenters’ rights under the applicable provisions of the IBCA), including any option, preemptive rights or rights to notice or to vote; (iii) any rights under the Articles of Incorporation or By-laws of the Company; or (iv) any claim that his, her or its shares were wrongfully repurchased by the Company.

     6.2 Indemnification by the Buyer. The Buyer shall indemnify the Company Securityholders in respect of, and hold them harmless against, any and all Damages incurred or suffered by the Company Securityholders resulting from or relating to:

          (a) Any inaccuracy, misrepresentation or breach, as of the date of this Agreement or as of the Closing Date, of any representation or warranty of the Buyer or the Transitory Subsidiary contained in this Agreement or any other agreement or instrument expressly required to be furnished by the Buyer or the Transitory Subsidiary to the Company pursuant to this Agreement; or

          (b) any failure to perform any covenant or agreement of the Buyer or the Transitory Subsidiary contained in this Agreement or any agreement or instrument expressly required to be furnished by the Buyer or the Transitory Subsidiary to the Company pursuant to this Agreement.

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     6.3 Indemnification Claims.

          (a) An Indemnified Party shall give written notification to the Indemnifying Party of the commencement of any Third Party Action. Such notification shall be given within 20 days after receipt by the Indemnified Party of notice of such Third Party Action, and shall describe in reasonable detail (to the extent known by the Indemnified Party) the facts constituting the basis for such Third Party Action and the amount of the claimed damages; provided, however, that no delay or failure on the part of the Indemnified Party in so notifying the Indemnifying Party shall relieve the Indemnifying Party of any liability or obligation hereunder except to the extent of any damage or liability caused by or arising out of such failure. Within 20 days after delivery of such notification, the Indemnifying Party may, upon written notice thereof to the Indemnified Party, assume control of the defense of such Third Party Action with counsel reasonably satisfactory to the Indemnified Party; provided that (i) the Indemnifying Party may only assume control of such defense if (A) it acknowledges in writing to the Indemnified Party that any damages, fines, costs or other liabilities that may be assessed against the Indemnified Party in connection with such Third Party Action constitute Damages for which the Indemnified Party shall be indemnified pursuant to this Article VI and (B) the ad damnum is less than or equal to the amount of Damages for which the Indemnifying Party is otherwise liable under this Article VI, and (ii) the Indemnifying Party may not assume control of the defense of a Third Party Action involving criminal liability or in which equitable relief is sought against the Indemnified Party. If the Indemnifying Party does not, or is not permitted under the terms hereof to, so assume control of the defense of a Third Party Action, the Indemnified Party shall control such defense. The Non-controlling Party may participate in such defense at its own expense. The Controlling Party shall keep the Non-controlling Party advised of the status of such Third Party Action and the defense thereof and shall consider in good faith recommendations made by the Non-controlling Party with respect thereto. The Non-controlling Party shall furnish the Controlling Party with such information as it may have with respect to such Third Party Action (including copies of any summons, complaint or other pleading which may have been served on such party and any written claim, demand, invoice, billing or other document evidencing or asserting the same) and shall otherwise cooperate with and assist the Controlling Party in the defense of such Third Party Action. The fees and expenses of counsel to the Indemnified Party with respect to a Third Party Action shall be considered Damages for purposes of this Agreement if (i) the Indemnified Party controls the defense of such Third Party Action pursuant to the terms of this Section 6.3(a) or (ii) the Indemnifying Party assumes control of such defense and the Indemnified Party reasonably concludes that the Indemnifying Party and the Indemnified Party have conflicting interests or different defenses available with respect to such Third Party Action. The Indemnifying Party shall not agree to any settlement of, or the entry of any judgment arising from, any Third Party Action without the prior written consent of the Indemnified Party, which shall not be unreasonably withheld, conditioned or delayed. The Indemnified Party shall not agree to any settlement of, or the entry of any judgment arising from, any such Third Party Action without the prior written consent of the Indemnifying Party, which shall not be unreasonably withheld, conditioned or delayed.

          (b) In order to seek indemnification under this Article VI, an Indemnified Party shall deliver a Claim Notice to the Indemnifying Party. If the Indemnified Party is the Buyer, the Surviving Corporation or an Affiliate of the Buyer and is seeking to enforce such claim pursuant to the Escrow Agreement, the Indemnifying Party shall deliver a copy of the

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Claim Notice to the Escrow Agent and the Shareholder Representative. No payment for any Damages shall be made until the monetary amount of such Damages has been determined or agreed.

          (c) Within 20 days after delivery of a Claim Notice, the Indemnifying Party shall deliver to the Indemnified Party a Response, in which the Indemnifying Party shall: (i) agree that the Indemnified Party is entitled to receive all of the Claimed Amount (in which case the Response shall be accompanied by a payment by the Indemnifying Party to the Indemnified Party of the Claimed Amount, by check or by wire transfer; provided, however, that if the Indemnified Party is the Buyer, the Surviving Corporation or an Affiliate of the Buyer, the Indemnifying Party and the Indemnified Party shall deliver to the Escrow Agent, within three days following the delivery of the Response, a written notice executed by both parties instructing the Escrow Agent to disburse the Claimed Amount to the Buyer), (ii) agree that the Indemnified Party is entitled to receive the Agreed Amount (in which case the Response shall be accompanied by a payment by the Indemnifying Party to the Indemnified Party of the Agreed Amount, by check or by wire transfer; provided that if the Indemnified Party is the Buyer, the Surviving Corporation or an Affiliate of the Buyer, the Indemnifying Party and the Indemnified Party shall deliver to the Escrow Agent, within three days following the delivery of the Response, a written notice executed by both parties instructing the Escrow Agent to disburse the Agreed Amount to the Buyer) or (iii) dispute that the Indemnified Party is entitled to receive any of the Claimed Amount.

          (d) During the 30-day period following the delivery of a Response that reflects a Dispute, the Indemnifying Party and the Indemnified Party shall use good faith efforts to resolve the Dispute. If the Dispute is not resolved within such 30-day period, the Indemnifying Party and the Indemnified Party shall discuss in good faith the submission of the Dispute to binding arbitration, and if the Indemnifying Party and the Indemnified Party agree in writing to submit the Dispute to such arbitration, then the provisions of Section 6.3(e) shall become effective with respect to such Dispute. The provisions of this Section 6.3(d) shall not obligate the Indemnifying Party and the Indemnified Party to submit to arbitration or any other alternative dispute resolution procedure with respect to any Dispute, and in the absence of an agreement by the Indemnifying Party and the Indemnified Party to arbitrate a Dispute, such Dispute shall be resolved in a state or federal court sitting in New York, in accordance with Section 9.11. If the Indemnified Party is the Buyer, the Surviving Corporation or an Affiliate of the Buyer, the Indemnifying Party and the Indemnified Party shall deliver to the Escrow Agent, promptly following the resolution of the Dispute (whether by mutual agreement, arbitration, judicial decision or otherwise), a written notice executed by both parties instructing the Escrow Agent as to what (if any) portion of the Escrow Fund shall be disbursed to the Buyer and/or the Company Securityholders (which notice shall be consistent with the terms of the resolution of the Dispute).

          (e) If, as set forth in Section 6.3(d), the Indemnified Party and the Indemnifying Party agree to submit any Dispute to binding arbitration, the arbitration shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association in effect from time to time and the following provisions. The Buyer and the Company shall each select one person to act as an arbitrator (each, an “Arbitrator” and collectively, the “Arbitrators”) and the two arbitrators so selected shall select a third Arbitrator

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within ten days after their appointment. If the Arbitrators selected by the Buyer and the Company are unable or fail to agree upon the third Arbitrator, the third Arbitrator shall be appointed by the American Arbitration Association.

               (i) In the event of any conflict between the Commercial Rules in effect from time to time and the provisions of this Agreement, the provisions of this Agreement shall prevail and be controlling.

               (ii) The parties shall commence the arbitration by jointly filing a written submission with the New York, New York office of the AAA in accordance with Commercial Rule 5 (or any successor provision).

               (iii) No depositions or other discovery shall be conducted in connection with the arbitration.

               (iv) Not later than 30 days after the conclusion of the arbitration hearing, the Arbitrators shall prepare and distribute to the parties a writing setting forth the arbitral award and the Arbitrators’ reasons therefor. Any award rendered by the Arbitrators shall be final, conclusive and binding upon the parties, and judgment thereon may be entered and enforced in any court of competent jurisdiction (subject to Section 9.11), provided that the Arbitrators shall have no power or authority to (x) award damages in excess of the portion of the Claimed Amount that is subject to such Dispute, (y) award multiple, consequential, punitive or exemplary damages, or (z) grant injunctive relief, specific performance or other equitable relief.

               (v) The Arbitrators shall have no power or authority, under the Commercial Rules or otherwise, to (x) modify or disregard any provision of this Agreement, including the provisions of this Section 6.3(e), or (y) address or resolve any issue not submitted by the parties.

               (vi) In connection with any arbitration proceeding pursuant to this Agreement, each party shall bear its own costs and expenses, except that the fees and costs of the AAA and the Arbitrators, the costs and expenses of obtaining the facility where the arbitration hearing is held, and such other costs and expenses as the Arbitrators may determine to be directly related to the conduct of the arbitration and appropriately borne jointly by the parties (which shall not include any party’s attorneys’ fees or costs, witness fees (if any), costs of investigation and similar expenses) shall be shared equally by the Indemnified Party and the Indemnifying Party.

          (f) Notwithstanding the other provisions of this Section 6.3, if a third party asserts (other than by means of a lawsuit) that an Indemnified Party is liable to such third party for a monetary or other obligation which may constitute or result in Damages for which such Indemnified Party may be entitled to indemnification pursuant to this Article VI, and such Indemnified Party reasonably determines that it has a valid business reason to fulfill such obligation, then (i) such Indemnified Party shall be entitled to satisfy such obligation, without prior notice to or consent from the Indemnifying Party if not providing notice is justified by reasonable business exigencies, (ii) such Indemnified Party may subsequently make a claim for

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indemnification in accordance with the provisions of this Article VI, and (iii) such Indemnified Party shall be reimbursed, in accordance with the provisions of this Article VI, for any such Damages for which it is entitled to indemnification pursuant to this Article VI (subject to the right of the Indemnifying Party to dispute the Indemnified Party’s entitlement to indemnification, or the amount for which it is entitled to indemnification, under the terms of this Article VI).

          (g) For purposes of this Section 6.3 and the second and third sentences of Section 6.4, (i) if the Company Securityholders comprise the Indemnifying Party, any references to the Indemnifying Party (except provisions relating to an obligation to make any payments) shall be deemed to refer to the Shareholder Representative, and (ii) if the Company Securityholders comprise the Indemnified Party, any references to the Indemnified Party (except provisions relating to an obligation to make or a right to receive any payments) shall be deemed to refer to the Shareholder Representative. The Shareholder Representative shall have full power and authority on behalf of each Company Securityholder to take any and all actions on behalf of, execute any and all instruments on behalf of, and execute or waive any and all rights of, the Company Securityholders under this Article VI. The Shareholder Representative shall have no liability to any Company Securityholder for any action taken or omitted on behalf of the Company Securityholders pursuant to this Article VI.

     6.4 Survival of Representations and Warranties. All representations and warranties that are covered by the indemnification agreements in Section 6.1(a) and Section 6.2(a) shall (a) survive the Closing and (b) shall expire on the date one year following the Closing Date. If an Indemnified Party delivers to an Indemnifying Party, before expiration of a representation or warranty, either a Claim Notice based upon a breach of such representation or warranty, or an Expected Claim Notice based upon a breach of such representation or warranty, then the applicable representation or warranty shall survive until, but only for purposes of, the resolution of the matter covered by such notice. If the Legal Proceeding or written claim with respect to which an Expected Claim Notice has been given is definitively withdrawn or resolved, the Indemnified Party shall promptly so notify the Indemnifying Party; and if the Indemnified Party has delivered a copy of the Expected Claim Notice to the Escrow Agent and funds have been retained in escrow after the Termination Date (as defined in the Escrow Agreement) with respect to such Expected Claim Notice, the Indemnifying Party and the Indemnified Party shall promptly deliver to the Escrow Agent a written notice executed by both parties instructing the Escrow Agent to disburse such retained funds in accordance with the resolution of such matter pursuant to the terms of the Escrow Agreement. The rights to indemnification set forth in this Article VI shall not be affected by (i) any investigation conducted by or on behalf of an Indemnified Party or any knowledge acquired (or capable of being acquired) by an Indemnified Party, whether before or after the date of this Agreement or the Closing Date (including through supplements to the Disclosure Schedule required by Section 4.6), with respect to the inaccuracy or noncompliance with any representation, warranty, covenant or obligation which is the subject of indemnification hereunder or (ii) any waiver by an Indemnified Party of any closing condition relating to the accuracy of representations and warranties or the performance of or compliance with agreements and covenants.

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     6.5 Limitations.

          (a) Notwithstanding anything to the contrary herein, (i) the aggregate liability of the Company Securityholders for Damages under Section 6.1 shall not exceed their pro rata share of the Escrow Fund and (ii) the Company Securityholders shall not be liable under Section 6.1(a) unless and until the aggregate Damages for which they or it would otherwise be liable under Section 6.1(a) exceed $200,000 (at which point the Company Securityholders shall become liable for the aggregate Damages under Section 6.1(a), and not just amounts in excess of $200,000); provided that the limitation set forth in clause (ii) of this sentence shall not apply to a claim pursuant to Section 6.1(a) relating to a breach of the representations and warranties set forth in each of Sections 2.9, 2.20 and 2.21 in each case solely to the extent relating to employees or operations of the Company outside the United States. For purposes solely of this Article VI, all representations and warranties of the Company in Article II (other than Sections 2.7 and 2.30) shall be construed as if the term “material” and any reference to “Company Material Adverse Effect” (and variations thereof) were omitted from such representations and warranties.

          (b) Notwithstanding anything to the contrary herein, (i) the aggregate liability of the Buyer for Damages under Section 6.2(a) shall not exceed $4,000,000, and (ii) the Buyer shall not be liable under Section 6.2(a) unless and until the aggregate Damages for which it would otherwise be liable under Section 6.2(a) exceed $200,000 (at which point the Buyer shall become liable for the aggregate Damages under Section 6.2(a), and not just amounts in excess of $200,000). For purposes solely of this Article VII, all representations and warranties of the Buyer in Article III shall be construed as if the term “material” were omitted from such representations and warranties.

          (c) The Escrow Agreement shall be the sole source of, and secure, the indemnification obligations of the Company Securityholders under this Agreement

          (d) No Company Securityholder shall have any right of contribution against the Company or the Surviving Corporation with respect to any breach by the Company of any of its representations, warranties, covenants or agreements.

          (e) The amount of any liability for Damages as to which indemnification exists under this Article VI shall be measured taking into account any insurance proceeds actually realized and any adverse insurance consequences incurred (such as premium adjustments) that affect the overall economic impact of the Damages on the party seeking indemnification.

     6.6 Treatment of Indemnity Payments. Any payments made to an Indemnified Party pursuant to this Article VI or pursuant to the Escrow Agreement shall be treated as an adjustment to the Initial Merger Consideration, the Initial Option Consideration and the Initial Warrant Consideration for tax purposes.

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ARTICLE VII
TERMINATION

     7.1 Termination of Agreement. The Parties may terminate this Agreement prior to the Closing (whether before or after Requisite Shareholder Approval, except as otherwise set forth below), as provided below:

          (a) the Parties may terminate this Agreement by mutual written consent;

          (b) the Buyer may terminate this Agreement by giving written notice to the Company in the event the Company or the Principal Shareholder is in breach of any representation, warranty or covenant contained in this Agreement, and such breach (i) individually or in combination with any other such breach, would cause the conditions set forth in clauses (c) or (d) of Section 5.2 not to be satisfied and (ii) is not cured within 20 days following delivery by the Buyer to the Company of written notice of such breach;

          (c) the Company may terminate this Agreement by giving written notice to the Buyer in the event the Buyer or the Transitory Subsidiary is in breach of any representation, warranty or covenant contained in this Agreement, and such breach (i) individually or in combination with any other such breach, would cause the conditions set forth in clauses (a) or (b) of Section 5.3 not to be satisfied and (ii) is not cured within 20 days following delivery by the Company to the Buyer of written notice of such breach;

          (d) the Buyer may terminate this Agreement by (A) giving written notice to the Company if (i) either the Company or the Buyer shall have received notice from any of the distribution partners, clients, customers or vendors of the Company set forth on Schedule 7.1(d) of the Disclosure Schedule indicating an intention to terminate or otherwise substantially adversely modify their relationship with the Company following the Closing (a “Company Relationship Termination Event”), and (B) contemporaneously with such notice, paying to the Company, by certified check or wire transfer of funds, the amount of $2,500,000;

          (e) the Company may terminate this Agreement prior to the receipt of the Requisite Shareholder Approval by (A) giving written notice to the Buyer in the event the Company’s Board of Directors, without a violation of Section 4.7 having occurred, shall have approved or recommended to the Company Shareholders a Superior Proposal prior to the receipt of the Requisite Shareholder Approval, (B) contemporaneously with such notice, paying to the Buyer, by certified check or wire transfer of funds, the amount of $2,500,000 and (C) within 10 business days after demand therefor, paying to the Buyer up to $300,000 as reimbursement for expenses of the Buyer actually incurred relating to the transactions contemplated by this Agreement prior to termination;

          (f) the Buyer may terminate this Agreement by giving notice to the Company if the Closing shall not have occurred on or before 60 days from the date of this Agreement (the “Termination Date”) by reason of the failure of any condition precedent under Section 5.2 (unless the failure results primarily from a breach by the Buyer or the Transitory Subsidiary of any representation, warranty or covenant contained in this Agreement); provided, however, that if the Closing shall not have occurred on or before the Termination Date by reason of the failure

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of the condition precedent in Section 5.2(g), the Termination Date shall automatically be extended to 180 days from the date of this Agreement;

          (g) the Company may terminate this Agreement by giving written notice to the Buyer if the Closing shall not have occurred on or before the Termination Date by reason of the failure of any condition precedent under Section 5.1 or 5.3 (unless the failure results primarily from a breach by the Company of any representation, warranty or covenant contained in this Agreement); provided, however, that if the Closing shall not have occurred on or before the Termination Date by reason of the failure of the condition precedent in Section 5.3(e), the Termination Date shall automatically be extended to 180 days from the date of this Agreement; or

           (h) the Buyer may terminate this Agreement by giving written notice to the Company if the Requisite Shareholder Approval shall not have been obtained by the 6^th day after the date of mailing of the Disclosure Statement.

     7.2 Effect of Termination. If any Party terminates this Agreement pursuant to Section 7.1, all obligations of the Parties hereunder shall terminate without any liability of any Party to any other Party (except for any liability of any Party for willful breaches of this Agreement). The termination of this Agreement shall not affect the operation or effect of the Nondisclosure Agreement.

ARTICLE VIII
DEFINITIONS

     For purposes of this Agreement, each of the following terms shall have the meaning set forth below.

     “2004 Company Revenue” shall have the meaning set forth in Section 1.9(c).

     “AAA” shall mean the American Arbitration Association.

     “Affiliate” shall mean any affiliate, as defined in Rule 12b-2 under the Securities Exchange Act of 1934.

     “Aggregate Option Exercise Price” shall mean an amount in cash equal to the aggregate sum of the products of the per Common Share exercise price of each Option outstanding immediately prior to the Effective time multiplied by the number of Common Shares underlying each such Option.

     “Aggregate Warrant Exercise Price” shall mean an amount in cash equal to the aggregate sum of the products of the per Common Share exercise price of each Warrant outstanding immediately prior to the Effective Time multiplied by the number of Common Shares underlying each such Warrant.

     “Agreed Amount” shall mean part, but not all, of the Claimed Amount.

     “Arbitrator” shall have the meaning set forth in Section 6.3(e).

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     “Articles of Merger” shall mean the articles of merger or other appropriate documents prepared and executed in accordance with Section 11.25 of the IBCA.

     “Buyer” shall have the meaning set forth in the first paragraph of this Agreement.

     “Buyer Certificate” shall mean a certificate to the effect that each of the conditions specified in clauses (a) through (c) (insofar as clause (c) relates to Legal Proceedings involving the Buyer or the Transitory Subsidiary) of Section 5.3 is satisfied in all respects.

     “CERCLA” shall mean the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended.

     “Change of Control” of a person shall mean (i) the acquisition of such person by another person or entity by means of any transaction or series of related transactions (including, without limitation, any stock acquisition, reorganization, merger or consolidation) other than a transaction or series of transactions in which (A) the holders of the voting shares of such person outstanding immediately prior to such transaction continue to retain, directly or indirectly (either by such voting shares remaining outstanding or by such voting shares being converted into voting shares of the surviving entity), at least fifty percent (50%) of the total voting power represented by the voting shares of such person or such surviving entity outstanding immediately after such transaction or series of transactions or (B) such person is combined, merged or consolidated with or into the parent entity by which such person is wholly-owned, or (ii) the sale of all or substantially all of the assets of such person or any series of related transactions resulting in the sale or other transfer of all or substantially all of the assets of such person.

     “Claim Notice” shall mean written notification which contains (i) a description of the Damages incurred or reasonably expected to be incurred by the Indemnified Party and the Claimed Amount of such Damages, to the extent then known, (ii) a statement that the Indemnified Party is entitled to indemnification under Article VI for such Damages and a reasonable explanation of the basis therefor, and (iii) a demand for payment in the amount of such Damages.

     “Claimed Amount” shall mean the amount of any Damages incurred or reasonably expected to be incurred by the Indemnified Party.

     “Client Agreement” shall have the meaning set forth in Section 2.14(a)(iii).

     “Closing” shall mean the closing of the transactions contemplated by this Agreement.

     “Closing Date” shall mean the date two business days after the satisfaction or waiver of all of the conditions to the obligations of the Parties to consummate the transactions contemplated hereby (excluding the delivery at the Closing of any of the documents set forth in Article V), or such other date as may be mutually agreeable to the Parties.

     “Code” shall mean the Internal Revenue Code of 1986, as amended.

     “Commercial Rules” shall mean the Commercial Arbitration Rules of the AAA.

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     “Common Shares” shall mean the shares of common stock, par value $0.001 per share, of the Company.

     “Company” shall have the meaning set forth in the first paragraph of this Agreement.

     “Company Certificate” shall mean a certificate to the effect that each of the conditions specified in Section 5.1 and in clauses (a) through (e) (insofar as clause (e) relates to Legal Proceedings involving the Company or the Subsidiary) of Section 5.2 is satisfied in all respects.

     “Company Closing Transaction Expenses” shall mean all Company Transaction Expenses incurred through the Closing Date as set forth in a certificate prepared in good faith by the Chief Financial Officer of the Company as of the Closing Date.

     “Company Material Adverse Effect” shall mean any material adverse change, event, circumstance or development with respect to, or material adverse effect on, (i) the business, assets, liabilities, capitalization, prospects, condition (financial or other), or results of operations of the Company and the Subsidiary, taken as a whole, or (ii) the ability of the Buyer to operate the business of the Company and the Subsidiary immediately after the Closing, other than as a result of the actions of the Buyer or as a result of circumstances or events in the Buyer’s business or operations or with respect to the Buyer’s employees or consultants; provided, however, that any adverse change, event, circumstance or development arising from or related to the loss of one or more customers or distribution partners of the Company solely as a result of the public announcement or disclosure of the Merger shall not be taken into account in determining whether a Company Material Adverse Effect has occurred. For the avoidance of doubt, the parties agree that the terms “material”, “materially” or “materiality” as used in this Agreement with an initial lower case “m” shall have their respective customary and ordinary meanings, without regard to the meaning ascribed to Company Material Adverse Effect.

     “Company Owned Intellectual Property” shall mean the Intellectual Property owned by the Company or the Subsidiary, including without limitation, all Intellectual Property covering, incorporated in, underlying or used in connection with the Customer Deliverables or the Internal Systems other than Company Used Intellectual Property or Open Source Materials.

     “Company Plan” shall mean any Employee Benefit Plan which is or has been maintained, or contributed to, by the Company, the Subsidiary, EmPowerHR or any ERISA Affiliate within the last five years with respect to any person providing services directly or indirectly to the Company, the Subsidiary or an ERISA Affiliate or with respect to which the Company may have any liability.

     “Company Relationship Termination Event” shall have the meaning set forth in Section 7.1(d).

     “Company Securityholders” shall mean, collectively, the Company Shareholders receiving the Initial Merger Consideration pursuant to Section 1.5, the holders of Options receiving the Option Consideration pursuant to Section 1.7 and the holders of Warrants receiving the Warrant Consideration pursuant to Section 1.7.

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     “Company Shareholders” shall mean the shareholders of record of the Company immediately prior to the Effective Time.

     “Company Shares” shall mean the Common Shares and the Preferred Shares together.

     “Company Stock Plan” shall mean any stock option plan or other stock or equity-related plan of the Company, other than an Employee Benefit Plan intended to be qualified under Section 401 of the Code.

     “Company Transaction Expenses” shall mean all costs and expenses (including legal, financial advisor and accounting fees and expenses and including any bonus payments to any employee for his or her participation in the successful negotiation of this Agreement and/or the consummation of the transactions contemplated hereby, and the amount of which as of the Closing Date shall be determined prior to Closing by the Company) incurred by the Company and the Subsidiary in connection with the Merger.

     “Company Used Intellectual Property” shall mean the Intellectual Property (excluding Company Owned Intellectual Property) owned or controlled by a third person and used by the Company or the Subsidiary and covering, incorporated in, underlying or used in connection with the Company’s business.

     “Copyrights” shall have the meaning set forth in the definition of Intellectual Property set forth below in this Article VIII.

     “Controlling Party” shall mean the party controlling the defense of any Third Party Action.

     “Customer Deliverables” shall mean (a) the products that the Company or the Subsidiary (i) currently manufactures, markets, sells or licenses, or (ii) has manufactured, marketed, sold or licensed within the previous three years, or (iii) currently plans to manufacture, market, sell or license in the future and (b) the services that the Company or the Subsidiary (i) currently provides, or (ii) has provided within the previous three years, or (iii) currently plans to provide in the future.

     “Damages” shall mean any and all debts, obligations and other liabilities (whether absolute, accrued, contingent, fixed or otherwise, or whether known or unknown, or due or to become due or otherwise), diminution in value, monetary damages, fines, fees, penalties, interest obligations, deficiencies, losses and expenses (including amounts paid in settlement, interest, court costs, costs of investigators, fees and expenses of attorneys, accountants, financial advisors and other experts, and other expenses of litigation), other than those costs and expenses of arbitration of a Dispute which are to be shared equally by the Indemnified Party and the Indemnifying Party as set forth in Section 6.3(e)(vi).

     “Disbursing Agent” shall mean J.P. Morgan Chase & Co.

     “Disbursing Agent Agreement” shall mean a disbursing agent agreement in substantially the form attached as Exhibit C.

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     “Disclosure Schedule” shall mean the disclosure schedule provided by the Company to the Buyer on the date hereof and accepted in writing by the Buyer, as the same may be supplemented pursuant to Section 4.6.

     “Disclosure Statement” shall mean a written proxy or information statement containing the information prescribed by Section 4.3(a).

     “Dispute” shall mean the dispute resulting if the Indemnifying Party in a Response disputes its liability for all or part of the Claimed Amount.

     “Dissenting Shares” shall mean Company Shares held as of the Effective Time by a Company Shareholder who has not voted such Company Shares in favor of the adoption of this Agreement and with respect to which dissenters’ rights shall have been duly demanded and perfected in accordance with Section 11.70 of the IBCA and not effectively forfeited or waived prior to the Effective Time.

     “Earnout Acceleration Event” shall have the meaning set forth in Section 1.9(f).

     “Earnout Certificate” shall have the meaning set forth in Section 1.9(b).

     “Earnout Dispute Resolution Period” shall have the meaning set forth in Section 1.9(d)(i).

     “Earnout Objection Certificate” shall have the meaning set forth in Section 1.9(d)(i).

     “Earnout Objection Deadline” shall have the meaning set forth in Section 1.9(d)(i).

     “Earnout Payment” shall have the meaning set forth in Section 1.9.

     “Effective Time” shall mean the time at which the Secretary of State of the State of Illinois files the Articles of Merger.

     “Employee Agreements” shall have the meaning set forth in Section 5.2(k).

     “Employee Benefit Plan” shall mean any “employee pension benefit plan” (as defined in Section 3(2) of ERISA), any “employee welfare benefit plan” (as defined in Section 3(1) of ERISA), and any other written or oral plan, agreement or arrangement involving direct or indirect compensation, including insurance coverage, severance benefits, disability benefits, deferred compensation, bonuses, stock options, stock purchase, phantom stock, stock appreciation or other forms of incentive compensation or post-retirement compensation, but excluding employment, consulting, severance and similar agreements.

     “EmPower Employee” shall mean any person who was jointly employed by the Company or the Subsidiary and EmPower HR under the terms of the Company’s agreement with EmPower HR.

     “Environmental Law” shall mean any federal, state or local law, statute, rule, order, directive, judgment, Permit or regulation or the common law relating to the environment, occupational health and safety, or exposure of persons or property to Materials of Environmental

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Concern, including any statute, regulation, administrative decision or order pertaining to: (i) the presence of or the treatment, storage, disposal, generation, transportation, handling, distribution, manufacture, processing, use, import, export, labeling, recycling, registration, investigation or remediation of Materials of Environmental Concern or documentation related to the foregoing; (ii) air, water and noise pollution; (iii) groundwater and soil contamination; (iv) the release, threatened release, or accidental release into the environment, the workplace or other areas of Materials of Environmental Concern, including emissions, discharges, injections, spills, escapes or dumping of Materials of Environmental Concern; (v) transfer of interests in or control of real property which may be contaminated; (vi) community or worker right-to-know disclosures with respect to Materials of Environmental Concern; (vii) the protection of wild life, marine life and wetlands, and endangered and threatened species; (viii) storage tanks, vessels, containers, abandoned or discarded barrels and other closed receptacles; and (ix) health and safety of employees and other persons. As used above, the term “release” shall have the meaning set forth in CERCLA.

     “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

     “ERISA Affiliate” shall mean any entity which is, or at any applicable time was, a member of (1) a controlled group of corporations (as defined in Section 414(b) of the Code), (2) a group of trades or businesses under common control (as defined in Section 414(c) of the Code), or (3) an affiliated service group (as defined under Section 414(m) of the Code or the regulations under Section 414(o) of the Code), any of which includes or included the Company or the Subsidiary.

     “Escrow Agreement” shall mean an escrow agreement in substantially the form attached hereto as Exhibit B.

     “Escrow Agent” shall mean J.P. Morgan Chase & Co.

     “Escrow Fund” shall mean the fund established pursuant to the Escrow Agreement, including the amount paid by the Buyer to the Escrow Agent at the Closing pursuant to Section 1.10(a) and any further sums to be paid into escrow pursuant to the last sentence of Sections 1.5(g) and 1.6(a).

     “Expected Claim Notice” shall mean a notice that, as a result of a legal proceeding instituted by or written claim made by a third party, an Indemnified Party reasonably expects to incur Damages for which it is entitled to indemnification under Article VI.

     “Financial Statements” shall mean:

          (a) the audited consolidated balance sheets and statements of income, changes in shareholders’ equity and cash flows of the Company as of the end of and for each of the fiscal years ended December 31, 2002 and 2003; and

          (b) the Most Recent Balance Sheet and the unaudited consolidated statements of income, changes in shareholders’ equity and cash flows for the three months ended as of the Most Recent Balance Sheet Date.

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     “Foreign Plan” shall have the meaning set forth in Section 2.21(m).

     “GAAP” shall mean United States generally accepted accounting principles.

     “Governmental Entity” shall mean any court, arbitrational tribunal, administrative agency or commission or other governmental or regulatory authority or agency.

     “IBCA” shall mean the Illinois Business Corporation Act of 1983.

     “Indemnified Party” shall mean a party entitled, or seeking to assert rights, to indemnification under Article VI.

     “Indemnifying Party” shall mean the party from whom indemnification is sought by the Indemnified Party.

     “Independent Accountant” shall mean the Chicago office of Ernst & Young LLP.

     “Initial Merger Consideration” shall mean the payment to which each Common Share and Preferred Share is entitled pursuant to Section 1.5(a) or 1.5(b), as the case may be, following adjustment for the Tangible Net Book Value pursuant to Section 1.5(f).

     “Initial Option Consideration” shall mean the Option Consideration payable at Closing and as adjusted pursuant to Section 1.5(f).

     “Initial Option Payment” shall mean the Option Consideration that would have been payable at the Closing if the Tangible Net Book Value were as set forth in a certificate prepared in good faith by the Chief Financial Officer of the Company as of the Closing Date.

     “Initial Payment” shall mean the payment to which each Common Share and Preferred Share would be entitled pursuant to Section 1.5 if the Tangible Net Book Value were as set forth in a certificate prepared in good faith by the Chief Financial Officer of the Company as of the Closing Date; provided, however, that in no event shall the aggregate Initial Payment, Initial Option Payment and Initial Warrant Payment exceed $60,000,000.

     “Initial Warrant Consideration” shall mean the Warrant Consideration payable at Closing and as adjusted pursuant to Section 1.5(f).

     “Initial Warrant Payment” shall mean the Warrant Consideration that would have been payable at the Closing if the Tangible Net Book Value were as set forth in a certificate prepared in good faith by the Chief Financial Officer of the Company as of the Closing Date.

     “Intellectual Property” shall mean all:

          (a) patents, patent applications, patent disclosures and all related continuation, continuation-in-part, divisional, reissue, reexamination, utility model, certificate of invention and design patents, patent applications, registrations and applications for registrations (collectively, the “Patents”);

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          (b) registered and common law trademarks, service marks, trade dress, Internet domain names, logos, trade names and corporate names and registrations and applications for registration thereof (collectively, the “Trademarks”);

          (c) copyrights, including without limitation moral rights and rights of attribution and integrity, copyrights in Software and in the content contained on any Web site, and registrations and applications for registration thereof (collectively, the “Copyrights”);

          (d) computer programs (whether in source code or object code form), databases, compilations of data, and all documentation related to any of the foregoing (collectively, the “Software”);

          (e) inventions, trade secrets and confidential business information, whether patentable or nonpatentable and whether or not reduced to practice, know-how, manufacturing and product processes and techniques, research and development information, copyrightable works, financial, marketing and business data, pricing and cost information, business and marketing plans and customer and supplier lists and information (collectively, the “Trade Secrets”);

          (f) other proprietary rights relating to any of the foregoing (including remedies against infringements thereof and rights of protection of interest therein under the laws of all jurisdictions); and

          (g) copies and tangible embodiments thereof.

     “Internal Systems” shall mean the internal systems of the Company or the Subsidiary that are used in its business or operations, including computer hardware systems, software applications and embedded systems.

     “Lease” shall mean any lease or sublease pursuant to which the Company or the Subsidiary leases or subleases from another party any real property.

     “Legal Proceeding” shall mean any action, suit, proceeding, claim, arbitration or investigation before any Governmental Entity or before any arbitrator.

     “License Agreements” shall mean all agreements (including without limitation outstanding decrees, orders, judgments, settlement agreements or stipulations) to which the Company or the Subsidiary is a party or otherwise bound (whether oral or written, and whether between the Company or the Subsidiary and an independent third party or inter-corporate) which contain provisions (a) granting to any third party right in Company Owned Intellectual Property or Company Used Intellectual Property or (b) granting to the Company or the Subsidiary any rights in Company Used Intellectual Property.

     “LLC Dissolution Articles” shall have the meaning set forth in Section 2.5(a).

     “Materials of Environmental Concern” shall mean any: pollutants, contaminants or hazardous substances (as such terms are defined under CERCLA), pesticides (as such term is defined under the Federal Insecticide, Fungicide and Rodenticide Act), solid wastes and

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hazardous wastes (as such terms are defined under the Resource Conservation and Recovery Act), chemicals, other hazardous, radioactive or toxic materials, oil, petroleum and petroleum products (and fractions thereof), or any other material (or article containing such material) listed or subject to regulation under any law, statute, rule, regulation, order, Permit, or directive due to its potential, directly or indirectly, to harm the environment or the health of humans or other living beings.

     “Merger” shall mean the merger of the Transitory Subsidiary with and into the Company in accordance with the terms of this Agreement.

     “Most Recent Balance Sheet” shall mean the unaudited consolidated balance sheet of the Company as of the Most Recent Balance Sheet Date.

     “Most Recent Balance Sheet Date” shall mean March 31, 2004.

     “Non-controlling Party” shall mean the party not controlling the defense of any Third Party Action.

     “Nondisclosure Agreement” shall mean that certain Mutual Nondisclosure Agreement, dated January 30, 2004, between he Buyer and the Company.

     “Open Source Materials” shall mean all Software or other material that is distributed as “free software,” “open source software” pursuant to no license or under a licensing or distribution model, including, but not limited to, the GNU General Public License (GPL), GNU Lesser General Public License (LGPL), Mozilla Public License (MPL), the Netscape Public License, the Sun Community Source License (SCSL), and the Sun Industry Standards License (SISL). Open Source Materials also includes all Software or other material that is made generally available to the public in source code format as “open source software,” which for purposes of this Agreement means under a license that allows use and redistribution in source code form but not require re-distribution in source code form, including, but not limited to, the BSD license, the Apache License, and the Artistic License. However, “Open Source Materials” excludes materials that are written in non-compiled languages, such as HTML or PERL.

     “Operating Plan” shall have the meaning set forth in Section 1.9(g)(i).

     “Option” shall mean each option to purchase or acquire Common Shares.

     “Option Consideration” shall mean an amount in cash equal to the product of (i) the excess of the Per Common Share Price per Company Share underlying such Option over the exercise price per Common Share of such Option and (ii) the number of Common Shares subject to such Option.

     “Ordinary Course of Business” shall mean the ordinary course of business consistent with past custom and practice (including with respect to frequency and amount) and on arm’s-length terms.

     “Owned Real Property” shall mean each item of real property owned by the Company or the Subsidiary.

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     “Partner Agreement” shall have the meaning set forth in Section 2.14(a)(iii).

     “Parties” shall mean the Buyer, the Transitory Subsidiary and the Company.

     “Patents” shall have the meaning set forth in the definition of Intellectual Property set forth above in this Article VIII.

     “Per Common Share Price” shall have the meaning set forth in Section 1.5(c).

     “Permits” shall mean all permits, licenses, registrations, certificates, orders, approvals, franchises, variances and similar rights issued by or obtained from any Governmental Entity (including those issued or required under Environmental Laws and those relating to the occupancy or use of owned or leased real property).

     “Preferred Share Liquidation Preference” shall mean with respect to the Series A Preferred Shares, $0.25 per share, with respect to the Series B Preferred Shares, $0.5729 per share, and with respect to the Series C Preferred Shares, $1.912 per share.

     “Preferred Shares” shall mean, collectively, the Series A Preferred Shares, the Series B Preferred Shares and the Series C Preferred Shares.

     “Primary Merger Consideration” shall mean Sixty Million Dollars ($60,000,000), less the sum of (A) the amount by which Tangible Net Book Value is less than $5,000,000 plus (B) the amount by which the Company Closing Transaction Expenses exceeds $220,000.

     “Principal Shareholder” shall have the meaning set forth in the first paragraph of this Agreement.

     “Qualified Plans” shall have the meaning set forth in Section 2.21(d).

     “Reasonable Best Efforts” shall mean best efforts, to the extent commercially reasonable.

     “Releasees” shall have the meaning set forth in Section 1.15(a).

     “Requisite Shareholder Approval” shall mean the adoption of this Agreement and the approval of the Merger by (i) at least a majority of the votes represented by the outstanding Common Shares and Preferred Shares (on an as-converted Common Share basis), as a single class, and (ii) at least a majority of the votes represented by the outstanding Series A Preferred Shares, Series B Preferred Shares and Series C Preferred Shares, voting as a single class.

     “Response” shall mean a written response containing the information provided for in Section 6.3(c).

     “Securities Act” shall mean the Securities Act of 1933, as amended.

     “Security Interest” shall mean any mortgage, pledge, security interest, encumbrance (other than licenses set forth in Section 2.13(b) of the Disclosure Schedule and client, customer or distribution partner licenses entered into in the Ordinary Course of Business), charge or other

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lien (whether arising by contract or by operation of law), other than (i) mechanic’s, materialmen’s, and similar liens, (ii) liens arising under worker’s compensation, unemployment insurance, social security, retirement, and similar legislation, (iii) liens on goods in transit incurred pursuant to documentary letters of credit, in each case arising in the Ordinary Course of Business of the Company and not material to the Company and (iv) liens for Taxes not yet due and payable.

     “Series A Preferred Shares” shall mean the Series A Preferred Stock, par value $0.001, of the Company.

     “Series B Preferred Shares” shall mean the Series B Preferred Stock, par value $0.001, of the Company.

     “Series C Preferred Shares” shall mean the Series C Preferred Stock, par value $0.001, of the Company.

     “Share Certificate” shall have the meaning set forth in Section 1.8(a).

     “Shareholder Representative” shall mean James Crouthamel.

     “Shareholder Representative Damages” shall have the meaning set forth in Section 1.16(c).

     “Shareholder Representative Expenses” shall have the meaning set forth in Section 1.16(d).

     “Software” shall have the meaning set forth in the definition of Intellectual Property set forth above in this Article VIII.

     “Superior Proposal” shall mean any unsolicited, bona fide written Takeover Proposal, (i) on terms which the Company’s Board of Directors determines in its good faith judgment to be materially more favorable from a financial point of view to the Company Shareholders than the transactions contemplated by this Agreement, taking into account all the terms and conditions of such proposal and this Agreement (including any proposal by the Buyer to amend the terms of this Agreement) and (ii) that is reasonably capable of being completed on the terms proposed, taking into account all financial, regulatory, legal and other aspects of such proposal; provided, however, that no Takeover Proposal shall be deemed to be a Superior Proposal if any financing required to consummate the Acquisition Proposal is not committed.

     “Surviving Corporation” shall mean the Company, as the surviving corporation in the Merger.

     “Takeover Proposal” shall have the meaning set forth in Section 4.7(a).

     “Tangible Net Book Value” shall mean the book value of the Company’s tangible assets (net of depreciation and amortization) less its liabilities (excluding any liabilities for deferred taxes attributable to timing differences between book and tax income) as of the Closing Date,

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determined in accordance with GAAP applied on a consistent basis and adjusted as specified in Schedule 1.5.

     “Taxes” (including with correlative meaning “Tax” and “Taxable”) shall mean (x) any and all taxes, and any and all other charges, fees, levies, duties, deficiencies, customs or other similar assessments or liabilities in the nature of a tax, including without limitation any income, gross receipts, ad valorem, net worth, premium, value-added, alternative or add-on minimum, disability, estimated, registration, recording, excise, severance, stamp, occupation, windfall profits, real property, personal property, assets, sales, use, capital stock, capital gains, documentary, recapture, transfer, transfer gains, estimated, withholding, employment, unemployment insurance, unemployment compensation, social security, business license, business organization, environmental, workers compensation, payroll, profits, license, lease, service, service use, gains, franchise and other taxes imposed by any federal, state, local, or foreign governmental entity, (y) any interest, fines, penalties, assessments, or additions resulting from, attributable to, or incurred in connection with any items described in this paragraph or any contest or dispute thereof, and (z) any items described in this paragraph that are attributable to another person but that the Company or the Subsidiary is liable to pay by law, by contract, or otherwise.

     “Tax Returns” shall mean any and all reports, returns, declarations, statements, forms, or other information required to be supplied to a Governmental Entity or to any individual or entity in connection with Taxes and any associated schedules, attachments, work papers or other information provided in connection with such items, including any amendments, thereof.

     “Termination Date” shall have the meaning set forth in Section 7.1(f).

     “Third Party Action” shall mean any suit or proceeding by a person or entity other than a Party for which indemnification may be sought by a Party under Article VI.

     “TNBV Adjustment Statement” shall have the meaning set forth in Section 1.5(f).

     “Trademarks” shall have the meaning set forth in the definition of Intellectual Property set forth above in this Article VIII.

     “Trade Secrets” shall have the meaning set forth in the definition of Intellectual Property set forth above in this Article VIII.

     “Transitory Subsidiary” shall have the meaning set forth in the first paragraph of this Agreement.

     “Vendor Agreement” shall have the meaning set forth in Section 2.14(a)(iii).

     “Warrant” shall mean each warrant or other contractual right to purchase or acquire Company Shares, provided that Options and Preferred Shares shall not be considered Warrants.

     “Warrant Consideration” shall mean an amount in cash equal to the product of (a) the excess of the Per Common Share Price per Company Share underlying such Warrant over the

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exercise price per Company Share of such Warrant and (b) the number of Company Shares subject to such Warrant.

ARTICLE IX
MISCELLANEOUS

     9.1 Press Releases and Announcements. No Party shall issue any press release or public announcement relating to the subject matter of this Agreement without the prior written approval of the other Parties; provided, however, that the Buyer may make any public disclosure it believes in good faith is required by applicable law, regulation or stock market rule (in which case the Buyer shall use reasonable efforts to advise the other Parties and provide them with a copy of the proposed disclosure prior to making the disclosure).

     9.2 No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any person other than the Parties and their respective successors and permitted assigns; provided, however, that (a) the provisions in Article I concerning payment of the Initial Merger Consideration, the Initial Option Consideration and the Initial Warrant Consideration and the provisions of Article VI concerning indemnification are intended for the benefit of the Company Securityholders, (b) the provisions in Section 1.16 concerning the Shareholder Representative are intended for the benefit of the Shareholder Representative and (c) the provisions of Section 4.14 concerning indemnification are intended for the benefit of directors and officers of the Company immediately prior to the Effective Time, and their heirs and personal representatives.

     9.3 Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements or representations by or among the Parties, written or oral, with respect to the subject matter hereof; provided that the Nondisclosure Agreement shall remain in effect in accordance with its terms.

     9.4 Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests or obligations hereunder without the prior written approval of the other Parties; provided that the Transitory Subsidiary may assign its rights, interests and obligations hereunder to an Affiliate of the Buyer.

     9.5 Counterparts and Facsimile Signature. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. This Agreement may be executed by facsimile signature.

     9.6 Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement.

     9.7 Notices. All notices, requests, demands, claims, and other communications hereunder shall be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly delivered four business days after it is sent by registered or

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certified mail, return receipt requested, postage prepaid, or one business day after it is sent for next business day delivery via a reputable nationwide overnight courier service, in each case to the intended recipient as set forth below:

If to the Company:		Copy to:
	Performics Inc.		Wilson Sonsini Goodrich & Rosati, P.C.
	180 North LaSalle Street, Suite 1100		650 Page Mill Road
	Chicago, IL 60601		Palo Alto, CA 94304
	Attn: James Crouthamel		Attention: Thomas C. Klein, Esq.
	Facsimile: (312) 739-0221		Facsimile: (650) 493-6811

If to the Buyer or the Transitory Subsidiary:		Copy to:
	DoubleClick Inc.		Hale and Dorr LLP
	111 Eighth Avenue		60 State Street
	10th Floor		Boston, MA 02109
	New York, NY 10011		Attn: Mark Borden, Esq.
	Attn: William Mills		Facsimile: (617) 526-5000
	Facsimile: (212) 287-7762
	With a copy to:
	General Counsel
	Facsimile: (212) 287-9165

     Any Party may give any notice, request, demand, claim or other communication hereunder using any other means (including personal delivery, expedited courier, messenger service, telecopy or ordinary mail but excluding electronic mail), but no such notice, request, demand, claim or other communication shall be deemed to have been duly given unless and until it actually is received by the party for whom it is intended. Any Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Parties notice in the manner herein set forth.

     9.8 Governing Law. This Agreement (including the validity and applicability of the arbitration provisions of this Agreement, the conduct of any arbitration of a Dispute, the enforcement of any arbitral award made hereunder and any other questions of arbitration law or procedure arising hereunder) shall be governed by and construed in accordance with the internal laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of laws of any jurisdictions other than those of the State of Delaware; except that the provisions of the IBCA shall govern the Merger.

     9.9 Amendments and Waivers. The Parties may mutually amend any provision of this Agreement at any time prior to the Closing; provided, however, that any amendment effected subsequent to the Requisite Shareholder Approval shall be subject to any restrictions contained in the IBCA. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by all of the Parties. No waiver of any right or remedy hereunder shall be valid unless the same shall be in writing and signed by the Party giving such waiver. No waiver by any Party with respect to any default, misrepresentation or breach of warranty or

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covenant hereunder shall be deemed to extend to any prior or subsequent default, misrepresentation or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence.

     9.10 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, the Parties agree that the court making the determination of invalidity or unenforceability shall have the power to limit the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified.

     9.11 Limitation on Remedies. Except with respect to payment of the Initial Merger Consideration, Option Consideration, Warrant Consideration and the Earnout Payment, if any, the indemnification obligations of the Buyer set forth in Section 4.13, claims based on fraud and except for equitable remedies, after the Closing, the rights of the Company, Company Securityholders, the Buyer, the Surviving Corporation and their Affiliates under Article VI and under the Escrow Agreement shall be the sole and exclusive remedy of such parties with respect to any and all matters arising out of, or related to, this Agreement and the transactions contemplated hereby.

     9.12 Submission to Jurisdiction. Each Party (a) submits to the jurisdiction of any state or federal court sitting in New York, New York in any action or proceeding arising out of or relating to this Agreement (including any action or proceeding for the enforcement of any arbitral award made in connection with any arbitration of a Dispute hereunder), (b) agrees that all claims in respect of such action or proceeding may be heard and determined in any such court, (c) waives any claim of inconvenient forum or other challenge to venue in such court, (d) agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court and (e) waives any right it may have to a trial by jury with respect to any action or proceeding arising out of or relating to this Agreement; provided in each case that, solely with respect to any arbitration of a Dispute, the Arbitrator shall resolve all threshold issues relating to the validity and applicability of the arbitration provisions of this Agreement, contract validity, applicability of statutes of limitations and issue preclusion, and such threshold issues shall not be heard or determined by such court. Each Party agrees to accept service of any summons, complaint or other initial pleading made in the manner provided for the giving of notices in Section 9.7, provided that nothing in this Section 9.11 shall affect the right of any Party to serve such summons, complaint or other initial pleading in any other manner permitted by law.

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     9.13 Construction.

          (a) The language used in this Agreement shall be deemed to be the language chosen by the Parties to express their mutual intent, and no rule of strict construction shall be applied against any Party.

          (b) Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise.

          (c) Any reference herein to “including” shall be interpreted as “including without limitation.”

          (d) Any reference to any Article, Section or paragraph shall be deemed to refer to an Article, Section or paragraph of this Agreement, unless the context clearly indicates otherwise.

[Remainder of Page Intentionally Left Blank]

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     IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first above written.

DOUBLECLICK INC.
By:	/s/ William E. Mills
Name:		William E. Mills
Title:		VP, Corporate Development

SHERLOCK SUBSIDIARY, INC.
By:	/s/ William E. Mills
Name:		William E. Mills
Title:		VP, Corporate Development

PERFORMICS INC.
By:	/s/ James Crouthamel
Name:		James Crouthamel
Title:		CEO and President

        /s/ James Crouthamel  

James Crouthamel 

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EX-10.2

EXHIBIT 10.2

	SAS Institute Inc. SAS Circle o Box 8000 Cary, NC 27512-8000 Phone (919)-677-8000 o Fax (919) 677-8123	Institute License Agreement Number 21446
Master License Agreement
For Institute Software

This Agreement is between SAS Institute Inc., SAS Circle, Box 8000, Cary, North Carolina 27512-8000 (“Institute”) and

Abacus Direct Corp.	1050 Walnut Street	Boulder, CO          80302
			(“Customer”).
Customer name	Street address	City, State, Zip

1. License:

In exchange for paying license fees and applicable taxes arising under this Agreement (“Agreement”), the Institute grants to the Customer a nonassignable and nonexclusive license to use the Institute Software designated under this Agreement (“Software”) for the initial period and for additional periods, if renewed. All Software is the copyrighted property of the Institute and is licensed for use with the supported operating system designated by the Customer.

2. What the Institute will do:

A.	The Institute will send the Software to the Customer and after the Customer pays the license fees, the Institute will authorize the Customer to use the Software for the full license period.
B.	The Institute will set the license beginning date to give the Customer a free thirty (30) day trial period for installation and testing. If a shipment delay shortens the trial period, the Customer can call the Institute for an extension. The Customer will not owe license fees for Software returned promptly after the trial period. The initial license fee for Software the Customer keeps will be prorated to the anniversary date of any associated base SAS® Software.
C.	The Institute will help the Customer by telephone or in writing solve specific problems installing and using the Software. The Institute does not guarantee that it will solve every such problem or correct every bug or error.
D.	As the Software is updated, the Institute will provide updated copies of the Software to the Customer.
E.	The Institute warrants that it has the right to license the Software to the Customer. The Institute warrants that the Software will substantially conform to its current published specifications. If the Software does not substantially conform to those specifications, the Institute will choose either to make it conform or to refund the current license fee paid by the Customer for that product. Distribution media will be replaced if defective upon delivery to the Customer.
	THESE WARRANTIES ARE IN LIEU OF ANY OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE.
F.	It claims of copyright, patent, trade secret or other proprietary rights violations arise from the Customer’s use of the most current versions of the Software provided to the Customer, the Customer agrees to immediately notify the Institute in writing and permit the Institute to control any resulting litigation or settlement. If such a violation occurs and the Customer has complied with this Agreement, the Institute will reimburse the Customer for any damages directly arising from that violation and finally awarded against the Customer.

3. What the Customer will do:

A.	The Customer will pay all fees arising under this Agreement according to the Institute’s invoices, including any applicable taxes unless Customer provides acceptable proof of tax exemption.
B.	The Customer will use all reasonable efforts to allow use of the Software only:

1.	on Customer-controlled hardware authorized under this Agreement or Customer-controlled back-up hardware to which the Software has been moved because the authorized hardware is temporarily inoperative; and
2.	by the Customer’s employees and any contractors or consultants performing work for the Customer on the Customer’s premises; and
3.	by the Customer’s students, if the Customer is a degree-granting institution.

C.	The Customer will implement procedures to validate input accuracy, output accuracy and correctness of results, and to establish back-up plans adequate for the Customer’s needs.
D.	So the Customer can properly update and distribute information needed to keep the Software functioning properly and account for authorized hardware, the Customer will:

1.	keep records of where workstation Software is used; and
2.	designate installation and technical support contact(s) and other information as specified on the applicable forms provided by the Institute; and
3.	explain the terms of this Agreement to those affected by it.

E.	If the Customer believes the Software is being used in violation of this Agreement, Customer will promptly notify Institute in writing and will cooperate in the Institute’s investigation and resolution of the situation.
F.	If this Agreement or any Software licensed under this Agreement is cancelled or not renewed, the Customer will discontinue use and destroy all useable copies of the Software, in whatever form, and notify the Institute.

4. The Customer will use the best efforts not to permit anyone having access to the Software to:

A.	modify, reverse engineer, or decompile the Software; or
B.	mask, modify, or suppress any copyright notices or other proprietary rights notices, or fail to properly label any authorized copy; or
C.	use the Software outside the United States or Canada; or timeshare, rent, or otherwise use the Software except as specifically permitted in this Agreement.

5. General License Terms:

A. Limitations of Liability:

1.	THE CUSTOMER AGREES THAT THE INSTITUTE’S LIABILITY TO THE CUSTOMER BASED ON THE PARTIES’ AGREEMENT AND/OR USE OF ANY SOFTWARE PRODUCT, EXCLUDING LIABILITY FOR COPYRIGHT, PATENT, TRADE SECRET OR OTHER PROPRIETARY RIGHTS VIOLATIONS UNDER SECTION 2(F) OF THIS AGREEMENT, WILL NOT EXCEED THE CUSTOMER’S CURRENT-YEAR LICENSE FEE PAID FOR THE SOFTWARE PRODUCT DIRECTLY RELATED TO THE LIABILITY.
2.	THE CUSTOMER AGREES THAT THE INSTITUTE WILL NOT BE LIABLE FOR ANY LOST PROFITS OR OTHER CONSEQUENTIAL DAMAGES, EVEN IF THE INSTITUTE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
3.	THE CUSTOMER FURTHER AGREES THAT THE INSTITUTE WILL NOT BE LIABLE FOR ANY CLAIM OR DEMAND AGAINST THE CUSTOMER BY ANYONE ELSE EXCEPT FOR A CLAIM OF COPYRIGHT, PATENT, TRADE SECRET OR OTHER PROPRIETARY RIGHTS VIOLATIONS UNDER SECTION 2(F) OF THIS AGREEMENT.

B.	THE CUSTOMER’S REMEDIES AS DESCRIBED IN SECTION 2(E) OF THIS AGREEMENT ARE EXCLUSIVE.
C.	The Customer may make a non-supported copy of the Software to meet its security, installation, and restart and recovery needs. If the Customer’s recovery needs include access by a disaster recovery contractor, that contractor’s employees shall be considered the Customer’s employees under this Agreement, and the Customer will remain responsible for any use of the Software in violation of this Agreement. The Customer will provide the name and address of the disaster recovery contractor to the Institute before the Customer delivers a copy of the Software to the disaster recovery contractor.
D.	This Agreement is governed by the laws of the United States and of North Carolina. If any part of this Agreement is held to be unconscionable or otherwise invalid, that part will be omitted, but the balance will remain in full force and effect.
E.	Any Software licensed under this agreement may be renewed for additional periods if the Institute and the Customer agree. License fees for any additional periods may differ. Fees for any additional periods or for hardware changes which result in additional license fees will be billed under the hardware’s then-current license fee schedule. The Customer can cancel this Agreement or any Software licensed under it during any license period for any reason. During any license period, the Institute can cancel this Agreement or any Software licensed under it and take other action if the Customer has not complied with this Agreement. The Institute will provide written notice giving the Customer thirty (30) days to correct the problem before cancelling this Agreement or any Software licensed under it.
F.	This Agreement, its supplements, and invoices arising under it constitute the complete and exclusive statement of the parties’ agreement about the Software, which supercedes all prior communications relating to the subject matter of this Agreement. Additional or conflicting terms on any current or future Customer purchasing documents are rejected. This Agreement can be modified only in writing signed by both parties. Both the Institute and the Customer have read this Agreement, understand it, and accept its terms.

Accepted by:

SAS Institute Inc.		Customer:	Abacus Direct Corp.
By	/s/ Dianne A. Johnson	By	/s/ Karl M. Friedman
	Authorized signature		Authorized signature
	Dianne A. Johnson		Karl M. Friedman
	Name (type or print)		Name (type or print)
	Manager, Contracts Administration		Chief Operating Officer
	Title		Title
On	April 25, 1990	On	April 19, 1990
	Date		Date

SAS is a registered trademark of SAS Institute Inc., Cary, NC, USA. A footnote must accompany the first use of each registered trademark or trademark and must state that the referenced trademark is used to identify products or services of SAS Institute, Inc.

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Kevin P. Ryan, certify that:

      1. I have reviewed this Quarterly Report on Form 10-Q of DoubleClick Inc.;

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

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

      4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

      a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

      b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986];

      c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

      d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

      5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

      a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

      b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:  /s/ KEVIN P. RYAN

Kevin P. Ryan

Chief Executive Officer

Date: August 9, 2004

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Bruce Dalziel, certify that:

      1. I have reviewed this Quarterly Report on Form 10-Q of DoubleClick Inc.;

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

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

      4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

      a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

      b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986];

      c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

      d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

      5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

      a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

      b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By:  /s/ BRUCE DALZIEL

Bruce Dalziel

Chief Financial Officer

Date: August 9, 2004

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

      In connection with the Quarterly Report on Form 10-Q of DoubleClick Inc. (the “Company”) for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Kevin P. Ryan, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

      (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

      (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ KEVIN P. RYAN

Kevin P. Ryan

Chief Executive Officer

Dated: August 9, 2004 EX-32.2 7 y99515exv32w2.htm CERTIFICATION

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

      In connection with the Quarterly Report on Form 10-Q of DoubleClick Inc. (the “Company”) for the period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Bruce Dalziel, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:

      (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

      (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ BRUCE DALZIEL

Bruce Dalziel

Chief Financial Officer

Dated: August 9, 2004 GRAPHIC 8 y99515y9951500.gif GRAPHIC begin 644 y99515y9951500.gif M1TE&.#EA/P`O`/<```````@("!`0$!@8&"$A(2DI*3$Q,3DY.4)"0DI*2E)2 M4EI:6F-C8VMK:W-SX2$A(R,C)24E)RWN?GY^_O[_?W]_______________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M____________________________________________________________ M_____________________RP`````/P`O```(_@`_"!Q(L*#!@ADT4*`PPHW,UC@W4'T00\.LA.DH,"` M601>?;":60I`=,$!;!5@D'H2=4"!`_W11I!"$TS`%P`(J'1!`0`4(,%#&X24 M($\8*"!``0((("%!(2)P5H$?7!`9>AL\Q($$;`WPU$H;5+``9SL2E(%X`!@0 M&E'2P7B0!B[>QE,'#OCG'F,$0<"6`F!=L$$#!()XGED"!/=1!DN=A0!OUOUH M%@$1:&"!!AEL)I2-,YI50'4?5<;6`P;5B>%I'VP@0(<79*:FG3QYL!Q;`0ZD M:%NN`6J!:X4NR5:'/&50UFT,5(#!9V1>21".Z$&D06#Z>92!E7U%,(``_I5J M<.@`5&+`JI*-B`ZDP:)@VN<1!FTQ M@.,"]@UX+`82/!#>?\D2Y$&S`!!0L$(.ADN(/V92]9P&8TU08:;#`I``>HW-BF"1_-D:YF/># M!D'!>76(\P<+:P=5GB;G!`0.DE0&'9[E54`<2 MLR6F4?#CRD'+CF9```.GXMB2(,`[`#@@8QZPP`,LQZ:#6,`_M!I(N9J4L.Q< M@$L&L!*\A.,`^(E$`9VCP`,F)@"32=!.O`&8Y8(E+P)F`#TIXY-`.%`8A`D@ M`L^Q0-0"<*Z'R,I.E!:`CL^8`ZB7#&`I/.3``HSB,XP08"S*PX`'%V.[&2HM M`;M980#`912'2:`!$#@B%S\0@0,0@``&.,"*!C*L%`5@``T87Y^:M@#V!.". M;_P0SQPP@*DPQ5X.D$`$%F<=Z.6GB@0!F'\4$($%-(`!^='C031U@+ATCB<< -----END PRIVACY-ENHANCED MESSAGE-----

EX-32.2

CERTIFICATION