10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2006
	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: 1-14355

24/7 Real Media, Inc.

(Exact name of registrant as specified in its charter)

Delaware	13-3995672
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

132 West 31st Street, New York, New York	10001
(Address of principal executive offices)	(Zip Code)

(212) 231-7100

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer     o     Accelerated Filer     x     Non-Accelerated Filer o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding At September 30, 2006
Common Stock, par value $.01 per share	49,164,811 Shares

24/7 REAL MEDIA, INC.
FORM 10-Q
SEPTEMBER 30, 2006
INDEX

Open AdStream®, Insight XE®, Insight ACT®, Open Advertiser® and 24/7 Search® are registered trademarks of 24/7 Real Media, Inc. and Decide DNA™ is a pending trademark of 24/7 Real Media, Inc. All other brand names or trademarks appearing herein are the property of their respective holders.

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

24/7 REAL MEDIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

	September 30, 2006			December 31, 2005
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	51,046		$	40,009
Accounts receivable, less allowances of $2,726 and $2,306, respectively	48,053			38,316
Prepaid expenses and other current assets	2,691			2,369
Total current assets	101,790			80,694
Property and equipment, net	7,782			7,131
Goodwill	39,573			39,573
Intangible assets, net	8,126			9,715
Other assets	4,215			5,691
Total assets	$	161,486		$	142,804
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	23,309		$	19,396
Accrued liabilities	20,210			23,987
Deferred revenue	3,051			3,218
Subordinated convertible debentures, 2%, due 2009	7,500			14,542
Total current liabilities	54,070			61,143
Subordinated convertible debentures, 2%, due 2009	7,500			—
Warrant liability	585			897
Other long-term liabilities	876			489
Total liabilities	63,031			62,529
Commitments and contingencies:
Minority interests in consolidated subsidiaries	1,650			1,556
Stockholders’ equity:
Preferred stock; $.01 par value; 10,000,000 shares authorized; no shares issued and none outstanding	—			—
Common stock; $.01 par value; 350,000,000 shares authorized; 49,164,811 and 46,227,772 shares issued and outstanding, respectively	492			462
Additional paid-in capital	1,203,480			1,177,715
Accumulated other comprehensive income	1,582			896
Accumulated deficit	(1,108,749		)	(1,100,354		)
Total stockholders’ equity	96,805			78,719
Total liabilities and stockholders’ equity	$	161,486		$	142,804

See accompanying notes to unaudited interim condensed consolidated financial statements.

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24/7 REAL MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, expect share and per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenues:
Media	$	19,082		$	15,547		$	58,646		$	46,460
Search	22,669			13,731			60,247			35,063
Technology	7,392			5,839			21,367			16,550
Total revenues	49,143			35,117			140,260			98,073
Cost of revenues:
Media	12,736			10,516			39,754			31,470
Search	17,357			10,026			45,243			24,405
Technology (inclusive of $139, $7, $384 and $23 of stock-based compensation, respectively)	1,592			1,005			4,661			3,190
Total cost of revenues	31,685			21,547			89,658			59,065
Gross profit	17,458			13,570			50,602			39,008
Operating expenses:
Sales and marketing (inclusive of $1,109, $117, $3,269 and $323 of stock-based compensation, respectively)	7,867			5,723			23,089			16,950
General and administrative (inclusive of $2,616, $318, $10,814 and $950 of stock-based compensation, respectively)	7,638			5,203			25,982			15,407
Product development (inclusive of $471, $51, $1,734 and $151 of stock-based compensation, respectively)	2,425			1,614			7,327			4,322
Amortization of intangible assets and deferred financing costs	882			1,140			2,661			3,419
Restructuring costs	—			—			—			973
Total operating expenses	18,812			13,680			59,059			41,071
Loss from operations	(1,354		)	(110		)	(8,457		)	(2,063		)
Interest income (expense), net	220			(48		)	428			(190		)
Change in fair value of warrant liability	22			(384		)	(97		)	(344		)
Recovery of investment	—			—			—			2,100
Impairment of marketable securities	—			—			—			(588		)
Loss on sale of marketable securities	—			(25		)	—			(18		)
Other income (expense), net	(27		)	(55		)	97			(95		)
Loss before provision for income taxes and minority interest in operations of consolidated subsidiary	(1,139		)	(622		)	(8,029		)	(1,198		)
Provision for income taxes	(126		)	(164		)	(268		)	(184		)
Minority interest in operations of consolidated subsidiary	(103		)	21			(98		)	21
Net loss	$	(1,368	)	$	(765	)	$	(8,395	)	$	(1,361	)
Dividends on preferred stock	—			(3		)	—			(25		)
Net loss attributable to common stockholders	$	(1,368	)	$	(768	)	$	(8,395	)	$	(1,386	)
Basic and diluted net loss per share attributable to common stockholders	$	(0.03	)	$	(0.02	)	$	(0.17	)	$	(0.03	)
Weighted average shares outstanding used in basic and diluted net loss per share	48,977,525			45,478,444			48,175,289			45,097,696

See accompanying notes to unaudited interim condensed consolidated financial statements.

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24/7 REAL MEDIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	Nine Months Ended September 30,
	2006			2005
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net loss	$	(8,395	)	$	(1,361	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	2,772			2,079
Provision for doubtful accounts and sales reserves	1,721			1,672
Amortization of intangible assets and deferred financing costs	2,661			3,419
Amortization of debt discount	458			458
Non-cash compensation	16,201			1,447
Accrued interest on note payable	76			76
Change in fair value of warrant liability	97			344
Minority interest in operations of consolidated joint venture	98			(21		)
Loss on sale of marketable securities	—			18
Impairment of marketable securities	—			588
Recovery of investment	—			(2,100		)
Changes in operating assets and liabilities, net of  effect of acquisitions and dispositions:
Accounts receivable	(11,458		)	(4,762		)
Prepaid expenses and other current assets	(478		)	334
Other assets	325			(510		)
Accounts payable and accrued liabilities	4,660			5,412
Deferred revenue	(167		)	(429		)
Net cash provided by operating activities	8,571			6,664
Cash flows from investing activities:
Capital expenditures, including capitalized software	(2,697		)	(4,916		)
Recovery of investment	—			2,100
Proceeds from sale of marketable securities	—			856
Proceeds from sale / maturities of short-term investments	—			648
Net cash used in investing activities	(2,697		)	(1,312		)
Cash flows from financing activities:
Proceeds from exercise of stock options	5,790			677
Proceeds from note receivable	200			—
Cash paid for acquisitions	(1,250		)	—
Proceeds from minority investor of consolidated subsidiary	—			1,729
Payment of capital lease obligations	(259		)	(62		)
Net cash provided by financing activities	4,481			2,344
Net change in cash and cash equivalents	10,355			7,696
Effect of foreign currency on cash	682			(483		)
Cash and cash equivalents at beginning of year	40,009			27,690
Cash and cash equivalents at end of period	$	51,046		$	34,903

See accompanying notes to unaudited interim condensed consolidated financial statements.

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NOTE 1 — ORGANIZATION AND NATURE OF OPERATIONS

24/7 Real Media, Inc. (the “Company”), together with its subsidiaries, provides advertising services and software solutions for the online advertising needs of Web publishers and advertisers, including advertising sales, search engine marketing (“SEM”) services, online advertisement serving, analytics and audience management. As of September 30, 2006, the Company principally operated in North America, Europe, South Korea, Japan and Australia and provided the following products and services:

Media, collectively marketed as the 24/7 Real Media Web Alliance, a global alliance of Web sites represented by the Company, through which advertisers can place campaign orders directly with the Company.

Search, primarily consisting of full budget management services, including paid-inclusion service and pay-per-click bid management, optimization services and search engine and consulting services, including natural search engine optimization services designed to help advertisers promote their Web sites in or in association with relevant search results displayed by the Company’s partner search engines and to optimize their search marketing budgets.

Technology, primarily consisting of the Open AdStream advertisement delivery and management platform and services, which includes web analytics and audience management applications and services and behavioral targeting applications and services. The Company licenses software products to customers that are hosted locally and provides services from software hosted centrally on its servers as an application service provider.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company and its majority-owned and controlled subsidiaries from their respective dates of acquisition. The interest of shareholders other than those of the Company is recorded as minority interest in the accompanying consolidated statements of operations and consolidated balance sheets. When losses applicable to minority interest holders in a subsidiary exceed the minority interest in the equity capital of the subsidiary, these losses are included in the Company’s results, as the minority interest holder has no obligation to provide further financing to the subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation.

The accompanying interim consolidated financial statements are unaudited, except for the condensed consolidated balance sheet as of December 31, 2005, which has been derived from audited financial statements. In the Company’s opinion, the consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position and the results of the operations and cash flows of the Company for the interim periods presented. The financial statements, financial data and other information disclosed in the notes to the consolidated results are not necessarily indicative of the results expected for the full fiscal year or any future period.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2005. Certain information and footnote disclosures normally included in financial statements prepared in accordance

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with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).

(b) Use of Estimates

The preparation of interim consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the interim consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, accruals, allowance for doubtful accounts, fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

(c) Cash and Cash Equivalents

The Company considers all highly liquid securities, with original maturities of three months or less from the balance sheet date, to be cash equivalents. Cash and cash equivalents consist principally of money market accounts and investments in short-term debt securities.

The Company maintains letters of credit, secured by cash, related to its office leases. Cash secured by letters of credit with maturities of one year or less from the balance sheet date is classified as other current assets, and cash secured by letters of credit with maturities greater than one year from the balance sheet date is classified as other assets on the consolidated balance sheets.

(d) Investments

Investments consist of securities with stated maturities of three months or more and marketable securities consisting of registered corporate equity securities. The Company classifies the marketable securities as available-for-sale in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Available-for-sale securities are carried at fair value, with the unrealized gains or losses, net of tax, reported as a separate component of stockholders’ equity. In determining realized gains and losses, the cost of securities sold is based upon specific identification. Realized gains and losses and declines in value judged to be other-than-temporary, are included in the consolidated statements of operations.

Investments in non-marketable equity securities of companies in which the Company owns less than 20% of a company’s stock and does not have the ability to exercise significant influence are accounted for on the cost basis. On an ongoing basis, the Company assesses the need to record impairment losses on investments and records such losses when the impairment is determined to be other-than-temporary.

(e) Accounts Receivable

Accounts receivable are recorded at the invoiced amount net of allowance for doubtful accounts and sales allowance. The Company does not require collateral. The Company maintains an allowance for doubtful accounts to reserve for potentially uncollectible receivables and a sales allowance to reserve for potential credits issued to customers. The allowances are estimates calculated based on an analysis of current business and economic risks, customer credit-worthiness, specific identifiable risks such as bankruptcies, terminations or discontinued customers, or other factors that may indicate a potential loss.

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As a normal part of the business, the Company has receivables that are invoiced in the month following the completion of the earnings process. All unbilled receivables are billed within 30 days after each month-end.

(f) Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, accounts receivable and debentures. The fair value of cash equivalents and accounts receivable instruments approximate their financial statement amount because of the short-term maturity of these instruments. The fair value of the debentures approximates their financial statement carrying value based on interest rates for similar borrowing.

At times, cash may exceed the federally insured limits. In addition, the majority of the Company’s cash is managed by a few financial institutions.

Accounts receivable are typically unsecured. To appropriately manage credit risk, the Company performs ongoing evaluations of customer credit and limits the amount of credit extended, but generally no collateral is required. The Company maintains reserves for estimated credit losses and these losses have generally been within management’s expectations.

(g) Significant Customers and Suppliers

No single customer accounted for greater than 10% of net revenues for the three or nine month periods ended September 30, 2006 and 2005.

Substantially all Media revenue is generated from advertising inventory provided by partner Web sites. Search revenue is generated from relationships with search engine distribution partners, and substantially all Search revenue is derived from two such relationships. In each case, with the exception of Lycos, arrangements with the Company’s partners are often short-term or subject to termination upon short notice. The Company may not be successful in renewing any of these agreements, or if they are renewed, they may not be on terms as favorable as current agreements. The Company may not be successful in entering into agreements with new distribution partners on commercially acceptable terms.

On a geographic basis, the Company may also experience significant concentration among its customers or partners. The Company examines this concentration on a country-by-country basis.

(h) Property and Equipment; Capitalized Software

Property and equipment are recorded at cost and are depreciated using the straight-line method over the shorter of the estimated useful life of the related asset, generally three to five years, and the lease term.

In accordance with Statement of Position (“SOP”) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, software development costs incurred during the application development stage are capitalized. Costs incurred during the preliminary project and post implementation stages of an internal use software project are expensed as incurred. The capitalized cost of internal use software is charged over the estimated useful life of two to three years.

As required by SFAS No. 86, Accounting for the Costs of Computer Software To Be Sold, Leased, or Otherwise Marketed, the Company requires certain product development costs to be capitalized when a product’s technological feasibility has been established by completion of a working model of the product,

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and discontinues capitalization when a product is available for general release to customers. Capitalized software is depreciated using the greater of the amount computed using (a) the ratio that current gross revenues for a product bears to the sum of current and anticipated future gross revenue for that product and (b) the straight-line method over the remaining estimated economic life of the software, generally four years.

(i) Business Combinations

The Company’s acquisitions are accounted for as purchase business combinations in accordance with SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. The Company allocates a portion of the purchase price to tangible and intangible assets based on their respective estimated fair values, and records as goodwill any remaining unallocated portion of the purchase price.  Intangible assets include trademarks, customer relationships, acquired technology and covenants not to compete. Such intangible assets are amortized on a straight-line basis over their estimated useful lives, which are generally two to seven years, except for trademarks that have an indefinite life.

(j) Impairment of Long-Lived Assets

The Company evaluates goodwill and indefinite lived intangible assets on an annual basis and whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable.  Long-lived assets, including property and equipment, long-term assets and amortizable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent to which or manner in which an asset is used, or a significant adverse change that indicates that the carrying amount of an asset or group of assets is not recoverable. The Company assesses impairment in accordance with the requirements of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company assesses the impairment of goodwill and intangible assets in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. The Company determines the recoverability of the assets by comparing the carrying amount of the assets to net future cash flows that the assets are expected to generate. The impairment recognized is the amount by which the carrying amount exceeds the fair market value of the assets.

(k) Income Taxes

The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and 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 the tax change occurs.

(l) Foreign Currency Translation

Assets and liabilities denominated in foreign functional currencies are translated at the exchange rate as of the balance sheet date. Revenues, costs and expenses denominated in foreign functional currencies are translated at the weighted average exchange rate for each period. Translation adjustments are recorded as a separate component of stockholders’ equity. Gains or losses from foreign currency transactions are included in the consolidated statements of operations.

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(m) Revenue Recognition; Cost of Revenues; Deferred Revenue

Media

Media revenues are generated from fees paid by client advertisers for advertising impressions. The Company typically offers advertisers a pricing model based on a cost-per-thousand impressions, or CPM, which enables a client advertiser to pay a fee based on the number of times its advertisement is displayed.  E-mail related revenue is derived from delivering advertisements to e-mail lists for advertisers.  Agreements are primarily short-term and revenues are recognized as services are delivered, provided that no significant Company obligations remain outstanding and collection of the resulting receivable is probable. The Company becomes obligated to make royalty payments to Web sites and e-mail lists that have contracted with the Company in the period in which the advertising impressions or e-mails are delivered. Such expenses are classified as cost of revenues in the accompanying consolidated statements of operations.

Search

Search revenue is primarily based on either a percentage of media spend or a cost-per-click, or CPC, fee model paid by client advertisers. These fees are generated each time users click on Web site listings that the Company submitted into search engine databases and are directed to our client advertisers’ Web sites. To a lesser extent, the Company also generates revenue from fees paid by search engines that employ the Company to optimize the submission of Web site listings and report on advertising campaigns for their advertisers.  Agreements are primarily short-term and revenues are recognized as services are delivered, provided that no significant Company obligations remain outstanding and collection of the resulting receivable is probable. The Company becomes obligated to make payments to search engine distribution partners that have contracted with the Company in the period in which the clicks occur. Such expenses are classified as cost of revenues in the accompanying consolidated statements of operations.

When the Company provides SEM services as an agent for a fixed commission, or otherwise in transactions in which it does not have principal risk and reward, the Company recognizes revenue on a net basis.

Technology

Technology revenues are derived primarily from licensing of the Company’s software, hosted advertisement serving and software maintenance and technical support services. The Company recognizes revenue from advertisement serving hosted centrally on its servers upon delivery.  Revenue from software licensing agreements is recognized in accordance with SOP No. 97-2, Software Revenue Recognition, and Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, upon delivery of the software, which is generally when the software is made available for download, there is persuasive 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. Contracts that bundle the software license with maintenance and technical support are recognized ratably over the contract term. Revenue from software maintenance and technical support contracts is recognized ratably over the term of the agreement, which typically does not exceed one year.

Expenses from Technology revenues are primarily payroll costs incurred to deliver and support the software, hosting, bandwidth and license fees paid to third-party software vendors. These expenses are classified as cost of revenues in the accompanying consolidated statements of operations.

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Deferred Revenue

The Company defers revenues billed or collected in advance of services being completed until the conclusion of the service period to which the advance billing or collection relates. Deferred revenues are included on the consolidated balance sheets as a current liability until the service is performed, and then recognized in the period in which the service is completed. The Company’s deferred revenues primarily consist of billings in advance for software license subscriptions and software maintenance and technical support services.

(n) Stock-Based Compensation

Effective January 1, 2006, the Company adopted the revised SFAS No. 123, Share-Based Payment (“SFAS No. 123R”), using the modified prospective transition method, and accordingly, prior periods have not been restated to reflect the impact of SFAS No. 123R. Under SFAS No. 123R, stock-based awards granted prior to its adoption will be expensed over the remaining portion of their vesting period. These awards will be expensed using the same fair value measurements which were used in calculating pro forma stock-based compensation expense under SFAS No. 123. For stock-based awards granted on or after January 1, 2006, the Company will amortize the stock-based compensation over the requisite service period.

Prior to the adoption of SFAS 123R, the Company accounted for stock-based awards using the intrinsic value method under the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and Financial Accounting Standards Board (“FASB”) interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation — an interpretation of APB Opinion No. 25, and complied with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. Under APB Opinion No. 25, stock-based compensation cost is recognized based on the difference, if any, on the date of grant between the fair value of the Company’s common stock and the amount an employee must pay to acquire the common stock.

(o) Restructuring Estimates

Restructuring activities are accounted for in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Restructuring-related liabilities include estimates for, among other things, involuntary terminations of employees and disposition of lease obligations. Key variables in determining such estimates include timing of sublease rentals, estimates of sublease rental payment amounts and tenant improvement costs, and estimates for brokerage and other related costs. The Company periodically evaluates and, if necessary, adjusts the estimates based on currently available information.

(p) Warrant Liability

Warrant liability is presented in accordance with EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. EITF 00-19 requires freestanding contracts that are settled in a company’s own stock, including common stock warrants, to be designated as an equity instrument, asset or liability. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value until exercised or expired, with any changes in fair value recorded in the results of operations. A contract designated as an equity instrument must be included within equity, and no fair value adjustments are required. The Company reviews the classification of its contracts at each balance sheet date.

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(q) Advertising Costs

Costs of advertising and promoting the Company’s products and services are expensed as incurred. Such costs are included in sales and marketing on the statement of operations.

(r) Basic and Diluted Net Income (Loss) Per Share

Net loss per share is presented in accordance with the provisions of SFAS No. 128, Earnings Per Share (“EPS”). Basic EPS excludes dilution for potentially dilutive securities and is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock. Potential common shares consist of incremental common shares issuable upon the exercise of stock options and warrants and the vesting of restricted stock (using the treasury stock method) and the conversion of subordinated convertible debentures and preferred stock (using the if-converted method).

Diluted EPS is equal to basic EPS for the three and nine month period ended September 30, 2006 since all potentially dilutive securities are antidilutive. The computation excludes outstanding options of 7.7 million to purchase shares of common stock, 2.4 million shares of unvested restricted stock, the effects of 0.6 million shares issuable upon the exercise or conversion of common stock warrants, and the effects of 1.7 million shares issuable upon the conversion of the subordinated convertible debentures since their inclusion would have an antidilutive effect.

Diluted EPS is equal to basic EPS for the three and nine month period ended September 30, 2005 since all potentially dilutive securities are antidilutive. The computation excludes outstanding options of 7.4 million to purchase shares of common stock, 0.9 million shares of unvested restricted stock, the effects of 0.6 million shares issuable upon the exercise or conversion of common stock warrants, and the effects of 1.7 million shares issuable upon the conversion of the subordinated convertible debentures since their inclusion would have an antidilutive effect.

(s) Recent Accounting Pronouncements

In July 2006 the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), as an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109 and prescribes a recognition threshold of more-likely-than-not to be sustained upon examination. Measurement of the tax uncertainty occurs if the recognition threshold has been met. FIN 48 also provides guidance on derecognition, classification, interest, penalties, accounting in interim periods, disclosure, and transition. FIN 48 will be effective beginning January 1, 2007. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The Company is still evaluating the impact, if any, the adoption of this interpretation will have on the Company’s financial position, cash flows, and results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which clarifies the definition of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 will be effective for the Company on January 1, 2008. The Company is currently evaluating the impact of adopting SFAS No. 157 on the Company’s financial position, cash flows, and results of operations.

In September 2006, the SEC released SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides interpretive guidance on the SEC’s views on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The provisions of SAB No. 108 will be effective for the Company for the fiscal year ended December 31, 2006. The Company is currently evaluating the impact of applying SAB No. 108 but does not  believe that the application of SAB No. 108 will have a material effect on its financial position, cash flows, and results of operations.

NOTE 3 — BALANCE SHEET COMPONENTS

(a) Goodwill

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The $39.6 million in goodwill at September 30, 2006 and December 31, 2005 related $25.0 million to Decide, $12.0 million to 24/7 Real Media Korea, $1.1 million to 24/7 Real Media Canada (formerly ClickThrough), $1.1 million to Real Media and $0.4 million to 24/7 Real Media Search (formerly Website Results).

(b) Intangible Assets, Net

The $8.1 million in intangible assets, net at September 30, 2006 related $5.4 million to Decide and $2.7 million to 24/7 Real Media Korea. The $9.7 million in intangible assets, net at December 31, 2005 related $6.6 million to Decide and $3.1 million to 24/7 Real Media Korea.

NOTE 4 — RESTRUCTURING COSTS

The Company’s restructuring reserve related to office closing costs decreased from $1.2 million at December 31, 2005 to $0.9 million at September 30, 2006.  The amount is included in accrued liabilities in the consolidated balance sheet.

NOTE 5 — 2% SUBORDINATED CONVERTIBLE DEBENTURES

On September 26, 2003, the Company completed the placement of $15.0 million of subordinated convertible debentures due September 2006 (“Debentures”). The Debentures are convertible into shares of the Company’s common stock at $8.75 per share, which is subject to adjustment. In September 2006, on the terms and conditions set forth in the Debentures, the holder elected to extend the maturity of the Debentures until September 2009. The Debentures continue to bear interest at the rate of 2% to be paid semi-annually. The Company may elect to pay the principal of, and interest on, the debentures in cash, shares of its common stock or a combination of cash and shares of its common stock.

If the Company elects to pay all or a portion of the principal amount due under the Debentures at maturity in shares of its common stock, rather than in cash, the maturity date conversion price will be equal to 90% of the average of the daily volume-weighted average prices of the Company’s common stock on the NASDAQ Global Market (or such other market on which the common stock are then listed or quoted) for the fifteen consecutive trading days immediately preceding the maturity date. If the Company elects to make interest payments due under the Debentures in shares of its common stock, the interest conversion price will be equal to 90% of the average of the daily volume-weighted average prices of the Company’s common stock on the NASDAQ Global Market (or such other market on which the common stock are then listed or quoted) for the five consecutive trading days immediately preceding the interest payment date. Interest expense on the Debentures amounted to approximately $0.1 million and $0.2 million for the three and nine month periods ended September 30, 2006, respectively, and $0.1 million and $0.2 million for the three and nine month periods ended September 30, 2005, respectively.

If specific conditions set forth in the Debentures are satisfied, the Company may require the holder to convert the Debentures into shares of the Company’s common stock at the conversion rate then in effect, or the Company may prepay the Debentures prior to the maturity date, for an amount in cash equal to 150% of the amount prepaid. In addition, based on conditions met, the holder has the right, in its sole discretion, to require the Company to immediately redeem up to $7.5 million principal amount of the Debentures in cash. The redemption right constitutes an embedded derivative. The value of this embedded derivative at September 30, 2006 is immaterial to the financial position of the Company. The Company reviews the value of the derivative on a quarterly basis, in accordance with SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.

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The holder of the Debentures also acquired a five-year warrant (the “Warrants”) to purchase 0.4 million shares of the Company’s common stock at $9.5685 per share. The Company valued the Warrants at $1.8 million using a Black-Scholes pricing model with the following factors: risk free interest rate of 1.48%, volatility of 143%, dividend yield of 0% and a life of 2.5 years. The aggregate fair market value of the Warrants was reflected as a reduction of the face amount of the Debentures on the consolidated balance sheet and was amortized over the initial term of the Debentures, using the effective interest method. Accordingly, the carrying value of the Debentures was increased over three years beginning October 2003. Pursuant to EITF Issue No. 00-19, since the effective registration of the securities underlying the warrants was an event outside the control of the Company, the Company recorded the fair value of the warrants as long-term liabilities. In connection with the amendment to the registration rights agreement entered into during 2004, the Company reclassified the fair value of the warrants, approximately $1.0 million, on the amendment date to additional paid in capital. Interest expense attributable to the amortization of the warrants amounted to approximately $0.1 million and $0.4 million for the three and nine month periods ended September 30, 2006, respectively, and $0.1 million and $0.4 million for the three and nine month periods ended September 30, 2005, respectively.

In connection with the issuance of the Debentures and Warrants, the Company incurred placement agent fees, legal fees and other expenses of approximately $1.2 million and issued warrants to the placement agent. The warrants to purchase 86,000 shares of common stock at an exercise price of $10.068 are in the same form and on the same terms and conditions as the Warrants issued to the investor. The Company included the value of the warrants, approximately $0.4 million, using the factors above, and the cash placement fees of $1.2 million in other assets on the consolidated balance sheet. Collectively, the debt issuance costs of $1.6 million were amortized over three years, the initial term of the Debentures. Approximately $0.1 million and $0.4 million for the three and nine month periods ended September 30, 2006, respectively, and approximately $0.1 million and $0.4 million for the three and nine month periods ended September 30, 2005, respectively, of the deferred financing costs are included in amortization expense.

NOTE 6 - EQUITY INSTRUMENTS

Common Stock

Additional Paid-in Capital

During the nine month period ended September 30, 2006, the Company’s additional paid-in capital increased by $25.7 million, primarily due to $15.8 million in employee stock-based compensation, $5.8 million from exercise of stock options, $3.7 million related to earn-out provisions in a prior acquisition and $0.4 million related to cashless exercises of warrants.

NOTE 7 - STOCK PLANS

The Company maintains the 1998 Stock Incentive Plan, 2001 Equity Compensation Plan, 2001 Stock Incentive Plan for Non-Officers, 2002 Equity Compensation Plan, 2002 Stock Incentive Plan and plans assumed through acquisitions which are collectively referred to as the “Stock Plans.” The Stock Plans provide for the grant of any or all of the following types of awards: (i) stock options, including incentive and non-qualified stock options; (ii) stock appreciation rights, in tandem with stock options or free standing; and (iii) restricted stock to eligible participants. The awards must generally be priced to be at least 85% of the fair market value of the Company’s common stock at the date of the grant (100% in the

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case of incentive stock options). The majority of the Company’s awards vest over three year periods contingent upon employment with the Company on the dates of vesting.

(a) Stock Options

Effective January 1, 2006, the Company adopted SFAS No. 123R, using the modified prospective transition method, and accordingly, prior periods have not been restated to reflect the impact of SFAS No. 123R. Under SFAS No. 123R, stock-based awards granted prior to its adoption will be expensed over the remaining portion of their vesting period. These awards will be expensed using the same fair value measurements which were used in calculating pro forma stock-based compensation expense under SFAS No. 123. For stock-based awards granted on or after January 1, 2006, the Company will amortize the stock-based compensation over the requisite service period.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The expected life selected for options granted during the quarter represents the period of time that the options are expected to be outstanding based on historical data of option holder exercise and termination behavior. Expected volatilities are based upon historical volatility of the Company’s monthly stock closing prices over a period equal to the expected life of each option grant. The risk-free interest rate was selected based on yields from U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the options being valued. The Company historically has not paid dividends.

The following table represents the weighted-average assumptions used to estimate fair values of the stock options granted in the periods presented:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Expected dividend yield	0	%	0	%	0	%	0	%
Risk-free interest rate	4.72	%	4.22	%	4.38	%	3.09	%
Expected life (in years)	3.0		3.0		3.0		2.5
Expected volatility	56	%	99	%	62	%	103	%

The weighted average fair value per option at the date of grant for options granted during the three and nine months ended September 30, 2006 were $3.55 and $3.46, respectively, and $2.74 and $2.51 during the three and nine months ended September 30, 2005, respectively. Stock option activity for the nine month period ended September 30, 2006 is summarized as follows (in thousands, except share amounts and as noted):

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	Options		Weighted Average Exercise Price		Weighted Average Remaining   Contractual Life   (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2005	9,595		$	5.74
Granted	429		$	6.91
Exercised	(1,577	)	$	3.67
Forfeited	(703	)	$	6.01
Outstanding at September 30, 2006	7,744		$	6.26	$	7.4	28,539
Vested and exercisable at September 30, 2006	3,398		$	7.16	$	6.1	15,444

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the aggregate difference between the closing stock price of the Company common stock on September 30, 2006 and the exercise price for in-the-money options) that would have been received by the option holders if all in-the-money options had been exercised on September 30, 2006. The intrinsic value for options exercised during the three and nine month periods ended September 30, 2006 was $1.5 million and $8.9 million, respectively.

The following table summarizes additional information regarding outstanding and exercisable stock options at September 30, 2006 (in thousands, except share amounts as noted):

Range of Exercise Prices (in dollars)	Number Outstanding	Weighted Average Remaining Contractual Life  (in years)	Weighted Average  Exercise Price		Number  Exercisable	Weighted Average Exercise Price
0.00 - 2.00	1,129	5.1	$	1.12	1,128	$	1.12
2.01 - 5.00	3,134	7.6	$	4.20	1,224	$	4.15
5.01 - 10.00	3,335	8.1	$	6.60	955	$	6.82
10.01 - 320.00	146	5.3	$	82.35	91	$	126.45
	7,744	7.4	$	6.26	3,398	$	7.16

The following table summarizes the activity for unvested stock option activity for the nine months ended September 30, 2006 (in thousands, except share amounts and as noted):

	Options		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2005	5,470		$	2.95
Granted	429		$	3.27
Vested	(925	)	$	3.01
Forfeited	(628	)	$	3.03
Nonvested at September 30, 2006	4,346		$	2.97

The total fair value of shares vested during the three and nine month periods ended September 30, 2006 was $0.8 million and $2.8 million, respectively.

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As a result of adopting SFAS No. 123R, the Company recorded pretax compensation expense of $2.5 million and $5.5 million for the three and nine month periods ended September 30, 2006, respectively. Stock-based compensation is included in each expense category that includes salary expense. The Company has recorded a full valuation allowance on the deferred tax asset related to stock-based compensation and therefore, no tax benefit is recognized for the three and nine month periods ended September 30, 2006.

During 2006, the Company modified certain agreements to issue options to purchase the Company’s common stock in conjunction with the separation of certain employees. As a result of the modifications, shares of options were vested or cancelled as of modification date. In accordance with SFAS No. 123R, the Company recognized approximately $0.1 million in incremental stock-based compensation costs, or the excess of the fair value of the replacement award over the fair value of the original award which was cancelled as of the modification date.

SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from the initial forecast. For the nine months ended September 30, 2006, the Company recorded additional expense of $1.2 million related to a revision in forecasted forfeitures. As of September 30, 2006, there were $4.8 million of unrecognized compensation costs related to outstanding stock option awards, net of forecasted forfeitures, expected to be recognized through the year 2010.

Prior to the adoption of SFAS No. 123R, the Company accounted for stock-based awards using the intrinsic value method under the provisions of APB Opinion No. 25. Under this method, stock-based compensation was recognized to the extent that the exercise price is less than the market price for the underlying stock on the date of grant. The following table illustrates the effects on net loss attributable to common shareholders and net loss per share attributable to common shareholders if the Company had applied the fair value recognition provisions of SFAS No. 123R to stock-based compensation (in thousands, except per share amounts):

	Three Months Ended			Nine Months Ended
	September 30, 2005			September 30, 2005
Net loss attributable to common shareholders:
As reported	$	(768	)	$	(1,386	)
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects	1,383			4,298
Pro forma	$	(2,151	)	$	(5,684	)
Earnings per share:
Basic, as reported	$	(0.02	)	$	(0.03	)
Basic, pro forma	$	(0.05	)	$	(0.13	)

(b)  Restricted Stock

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During 2005 and 2006, the Company entered into agreements to issue shares of restricted stock to certain employees. The awards vest over various periods, generally three years, contingent upon employment with the Company on the dates of vesting. The restricted stock awards have a fair value equal to the respective market price of the Company’s common stock at the date of grant. The restricted stock awards require no payment from the employee and compensation cost is valued based on the market price on the grant date and is expensed over the vesting period.

Restricted stock awards activity for the nine month period ended September 30, 2006 is summarized as follows (in thousands, except share amounts and as noted):

			Weighted Average		Weighted Average
			Grant Date		Remaining Contractual
	Shares		Fair Value		Life (in years)
Unvested at December 31, 2005	3,054		$	4.96
Granted	563		$	7.82
Vested	(890	)	$	3.48
Forfeited	(342	)	$	5.84
Unvested at September 30, 2006	2,385		$	6.07	$	1.5

Compensation expense related to vesting of restricted stock awards totaled $1.8 million and $10.5 million for the three and nine month periods ended September 30, 2006, respectively, and $0.4 million and $1.4 million for the three and nine month periods ended September 30, 2005, respectively. As of September 30, 2006, there were $7.0 million of unrecognized compensation costs related to unvested restricted stock awards, net of forecasted forfeitures, expected to be recognized through the year 2009.

During 2006, the Company modified certain agreements to issue restricted stock originally expected to vest on January 1, 2007 in conjunction with the separation of an employee. As a result of the modification, shares of restricted stock were vested as of June 27, 2006. In accordance with SFAS No. 123R, the Company recognized approximately $0.1 million in incremental stock-based compensation costs, or the excess of the fair value of the replacement award over the fair value of the original award which was cancelled as of the modification date.

SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from the initial forecast. For the nine months ended September 30, 2006, the Company recorded a benefit of $0.3 million related to a revision in forecasted forfeitures.

NOTE 8 — RECOVERY OF INVESTMENT

In the first quarter of 2005, the Company received $2.1 million as a recovery of an investment in Bidland Systems, Inc. (“Bidland”), and subsequently received another $0.2 million in the fourth quarter of 2005. The recovery of the investment was a result of the settlement of pending litigation between Bidland and another party and the subsequent dissolution and liquidation of Bidland. In 2000, Bidland ceased operations and, accordingly, the Company recorded an impairment charge related to the cost-based investment.

NOTE 9 - SUPPLEMENTAL CASH FLOW INFORMATION

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Cash paid for interest was $0.3 million for each of the nine month periods ended September 30, 2006 and 2005.

Capital lease obligations incurred during the nine month period ended September 30, 2006 amounted to approximately $1.0 million.

Warrants to purchase 64,161 shares of the Company’s common stock at an average price of $1.21 per share were exercised in the nine month period ended September 30, 2006 in exchange for 55,718 shares of the Company’s common stock in cashless exercises of warrants. As a result of the exercises, approximately $0.4 million of the related warrant liability was reclassified as equity.

NOTE 10 — SEGMENTS

The Company’s business is comprised of three reportable segments: Media, Search and Technology.  Revenue is attributed to individual countries primarily based on where sales are generated.  The Company adjusted prior period segment disclosures to conform to the current presentation. The summarized segment information at and for the three and nine month periods ended September 30, 2006 and 2005, is as follows:

	Three Month Period Ended September 30, 2006										Nine Month Period Ended September 30, 2006
	Media		Search			Technology		Total			Media			Search			Technology			Total
			(in thousands)											(in thousands)
Revenues	$	19,082	$	22,669		$	7,392	$	49,143		$	58,646		$	60,247		$	21,367		$	140,260
Depreciation	132		260			591		983			579			890			1,303			2,772
Amortization of intangible assets and deferred financing costs	284		387			211		882			1,008			1,177			476			2,661
Income (loss) from operations	197		(1,708		)	157		(1,354		)	(1,047		)	(6,680		)	(730		)	(8,457		)

	Three Month Period Ended September 30, 2005										Nine Month Period Ended September 30, 2005
	Media		Search			Technology		Total			Media		Search			Technology			Total
	(in thousands)										(in thousands)
Revenues	$	15,547	$	13,731		$	5,839	$	35,117		$	46,460	$	35,063		$	16,550		$	98,073
Depreciation	81		176			504		761			323		516			1,240			2,079
Amortization of intangible assets and deferred financing costs	495		395			250		1,140			1,485		1,185			749			3,419
Restructuring	—		—			—		—			252		228			493			973
Income (loss) from operations	313		(838		)	415		(110		)	892		(2,513		)	(442		)	(2,063		)
Total assets (1):
September 30, 2006	49,484		$	61,038		$	11,508	$	122,030		—		—			—			—
December 31, 2005	$	47,316	53,352			14,325		114,993			—		—			—			—

(1)Not inclusive of corporate segment assets of $39,456 and $27,811, respectively.

	United		United		South		Other-
	States		Kingdom		Korea		International		Total
	(in thousands)
Revenues for the three month period ended September 30, 2006	$	18,970	$	10,715	$	6,307	$	13,151	$	49,143
Revenues for the nine month period ended September 30, 2006	56,047		28,853		19,631		35,729		140,260
Long-lived assets as of September 30, 2006	11,297		713		15,294		32,392		59,696
Revenues for the three month period ended September 30, 2005	$	15,343	$	7,141	$	3,489	$	9,144	$	35,117
Revenues for the nine month period ended September 30, 2005	44,575		20,450		9,349		23,699		98,073
Long-lived assets as of December 31, 2005	11,747		762		15,738		33,863		62,110

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NOTE 11 - COMMITMENTS AND CONTINGENCIES

(a) Commitments

Lycos, Inc. Services Agreements

The Company pre-paid a total of $2.0 million of royalties to Lycos during 2004 and 2005 and will retain an additional 25% of quarterly royalties due to Lycos until the date on which the full amount of pre-paid royalties has been recouped or otherwise paid in cash by Lycos.  Accordingly, at September 30, 2006 the Company had a net $0.6 million in prepaid royalties, of which $0.5 million is included in prepaid expenses and other current assets and the remaining portion of $0.1 million is included in other assets.

In addition to the royalties, the Company paid Lycos a $4.5 million transition fee, which the Company recorded as an other asset and is amortizing the fee over the term of the agreement of five years. Amortization related to the transition fee was $0.2 million for each of the three month periods ended September 30, 2005 and 2006 and $0.7 million for each of the nine month periods ended September 30, 2005 and 2006. In accordance with SFAS No. 144, the Company periodically evaluates the recoverability of this asset.

Acquisition Earn-Out Liability

The Company had contingent obligations related to its August 2004 acquisition of Decide. The former Decide stockholders could receive up to an additional $10.0 million, consisting of up to $2.5 million in cash and up to $7.5 million in common stock, subject to achievement of earn-out targets relating to Decide’s operating performance in 2005. In March 2006, the Company paid $1.3 million and issued 0.4 million shares of common stock, valued at $3.7 million, related to the achievement of 2005 earn-out targets. The payment was accrued at December 31, 2005.

Indemnifications

In connection with the Company’s commercial agreements, it provides indemnifications of varying scope and terms to customers, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements and out of intellectual property infringement claims made by third parties.

(b) Litigation

The Company is not involved in any material pending legal proceedings at this time.

NOTE 12 — SUBSEQUENT EVENTS

Denstu 24/7 Search Holdings

On November 1, 2006, the Company and Dentsu, the minority investor of the existing joint venture, K.K. 24-7 Search, expanded their search engine marketing partnership. Through a new holding company, tentatively to be called “Dentsu 24/7 Search Holdings”, the Company and Dentsu will establish new operations within other strategically important advertising markets throughout Asia and the Pacific Rim, including China, India, Korea, Thailand, and Taiwan. Under the terms of the agreement, the Company and Dentsu will each provide initial capital of $5.0 million, which will be used to fund operations in the identified expansion countries. The Company will license its Decide DNA technology to the new operating subsidiaries. Initial management of the new venture will be fully-supported by K.K. 24-7 Search.

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

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward-looking. We use words such as “anticipates,” “believes,” “expects,” “future” and “intends” and similar expressions to identify forward-looking statements. Forward-looking statements also include any other passages that relate to expected future events or trends that can only be evaluated by events or trends that will occur in the future. Forward-looking statements reflect management’s current subjective opinions, expectations, plans or projections and are inherently uncertain. Our actual results may differ significantly from management’s current expectations, plans or projections. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Certain risks and uncertainties that could cause our actual results to differ significantly from management’s expectations are described in the section entitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking or other statements, whether as a result of new information, future events or otherwise. Readers are urged, however, to review the risk factors set forth in reports that we file from time to time with the Securities and Exchange Commission (“SEC”). Unless the context requires otherwise in this Quarterly Report on Form 10-Q, the terms “24/7 Real Media,” the “Company,” “we,” “us” and “our” refer to 24/7 Real Media, Inc. and its consolidated subsidiaries, references to “24/7 Real Media Search” refer to 24/7 Search, Inc., formerly 24/7 Website Results, Inc., and references to “Decide” refer to Decide Holdings Pty Limited, each a wholly owned subsidiary of 24/7 Real Media, Inc.

GENERAL

24/7 Real Media is a leading global digital marketing company, providing online advertising and search engine marketing (“SEM”) strategies since 1995, and has been publicly traded since 1998. We have three distinct lines of business, Media, Search and Technology, and operate in twelve countries. Our Media business helps advertisers increase their reach through sophisticated targeting and a network of over 1,500 affiliated Web sites. Our Search business enables marketers to maximize their SEM spending and achieve optimum returns on their investments. Our Technology business develops and licenses our powerful technology, which serves as the underlying engine for everything we do.

Media

We sell advertising space for Web publishers through the 24/7 Real Media Web Alliance, a global alliance of Web sites with brand names, quality content and global reach. Web publishers join the Web Alliance to increase advertising revenues from the available advertising space on their Web sites, and we pay them a royalty for their advertising space. We solicit advertisers seeking online strategies to target audiences, build their brands and generate greater customer response. Advertisers purchase space through the Web Alliance to make one purchase across several Web sites and to increase the return on their advertising spending. We also use targeting technology to best select advertising space made available through the Web Alliance for advertisers and to improve the performance of under-utilized advertising space for Web publishers.

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We generate Media revenue from fees paid by client advertisers for advertising space. We typically sell advertising space on a cost-per-thousand-impressions (“CPM”) basis, enabling a client advertiser to pay a fee based on the number of times its advertisement is displayed. We typically count an advertising impression each time a user’s Web browser requests that our computer servers transmit the advertisement. We may charge higher CPMs to advertisers that purchase our advanced targeting solutions, such as our behavioral targeting solution, in comparison to those that purchase advertising space that requires less specific targeting. We have also generated limited media revenue from e-mail advertisements and marketing services.

Search

We provide SEM services that connect advertisers with consumers using search engines to find information, products and services. We leverage our relationships with search engines and our understanding of search engine algorithms to help advertisers optimize their Web pages and achieve better placement in algorithmic search engines. We also create Web site listings for advertisers and submit their listings into the databases of pay-for-placement (“P4P”) and paid-inclusion (“PI”) search engine platforms. We help advertisers determine the keywords most relevant to their products and services and use advanced technology to manage keyword bidding simultaneously across P4P search platforms. Our technology shows advertisers which keywords lead users from search engines to their Web sites and helps them optimize their advertising spending to convert click-throughs (users who click on their advertisement and are directed to their Web site) into sales.

Search revenue is primarily based on either a percentage of media spend or a cost-per-click, or CPC, fee model paid by client advertisers. These fees are generated each time search engine users click Web site listings submitted by us into search engine databases and are directed to our client advertisers’ Web sites. To a lesser extent, we also generate revenue from fees paid by advertisers for consulting services and search engine optimization services, and from fees paid by search engines that employ us to optimize the relevancy of Web site listings and report on advertising campaigns for their advertisers. We develop direct relationships with P4P and algorithmic search engines in order to enhance the services we provide to our client advertisers. We refer to search engines we work with as search engine distribution partners.

Technology

We provide online advertisement serving and analytics software to customers from software hosted locally on the customers’ servers or from software hosted centrally on our servers. Our technology products and services are all based on our proprietary Open AdStream platform. We generate Technology revenue in the following ways:

Open AdStream Central Service. We charge service fees to Web publishers for operating our Open AdStream (“OAS”) online advertisement serving software centrally from our servers. We typically charge a service fee determined by multiplying an agreed CPM by the number of advertising impressions served using OAS. The service fee may vary based on the forecasted number of advertising impressions a Web publisher will serve using our software and the service term, among other factors. We typically bill service fees monthly.

Open AdStream Local Software. We charge fees to Web publishers for operating our OAS software locally from their own servers. Our license agreements typically provide for a license fee, a software maintenance and technical support services fee and a training fee. We often base license fees on the forecasted number of advertising impressions a Web publisher will serve using our software, the use of advanced software modules and the license term.

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Open Advertiser Service. We charge service fees to advertisers and agencies for operating our Open Advertiser (“OAD”) advertisement serving software centrally from our servers. We determine our service fee by multiplying the CPM by the number of advertising impressions delivered. We typically bill service fees monthly. The service fee may vary based on the forecasted number of advertising impressions a Web publisher will serve using our software and the service term, among other factors.

Open AdStream Analytics Application and Service.  Our analytics application offers Web publishers active campaign reporting and marketing intelligence and helps advertisers measure, analyze and manage online audiences. We charge service fees to Web publishers for operating our analytics application centrally on our servers. We determine the service fees by multiplying an agreed CPM by the number of page views measured by our analytics application.

Open AdStream Behavioral Targeting Application and Service. Our behavioral targeting applications, which reside on our Open AdStream platform, enables Web publishers to identify and target segments of their audiences based on user activity. We generate revenue from behavioral targeting on the same basis as the associated OAS and analytics arrangements.

We upgrade and issue new releases of our OAS technologies from time to time.  We recently released a new version, 6.0, of our Decide DNA platform for search marketers.  We also recently released a new version, 6.0, of our OAS platform targeted at publishers, which builds on the previous 5.8 version, and also incorporates our analytics and behavioral targeting applications, resulting in better integration of these previously stand alone technologies. Future versions of our OAS platform may also incorporate our Decide DNA technology, as well as functionalities of our OAD solution targeting advertisers.

To a lesser extent, we generate revenue by providing professional services charged at an hourly rate and from fees paid by Web publishers for trafficking their advertisements. Trafficking advertisements refers to entering advertisement creative material and campaign specifications into our OAS software.

RECENT DEVELOPMENTS

On November 1, 2006, the Company and Dentsu, our minority investor of the existing joint venture, K.K. 24-7 Search, expanded our search engine marketing partnership. Through a new holding company, tentatively to be called “Dentsu 24/7 Search Holdings”, the Company and Dentsu will establish new operations within other strategically important advertising markets throughout Asia and the Pacific Rim, including China, India, Korea, Thailand, and Taiwan. Under the terms of the agreement, the Company and Dentsu will each provide initial capital of $5.0 million, which will be used to fund operations in the identified expansion countries. We will license our Decide DNA technology to the new operating subsidiaries. Initial management of the new venture will be fully-supported by K.K. 24-7 Search.

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RESULTS OF OPERATIONS

The following table compares the results of operations for the three and nine month periods ended September 30, 2006 to the results of operations for the three and nine month periods ended September 30, 2005 (in thousands):

	Three Months Ended September 30,									Nine Months Ended September 30,
	2006			2005			$Var			2006			2005			$Var
	(unaudited)			(unaudited)						(unaudited)			(unaudited)
Revenues:
Media	$	19,082		$	15,547		$	3,535		$	58,646		$	46,460		$	12,186
Search	22,669			13,731			8,938			60,247			35,063			25,184
Technology	7,392			5,839			1,553			21,367			16,550			4,817
Total revenues	49,143			35,117			14,026			140,260			98,073			42,187
Cost of revenues:
Media	12,736			10,516			2,220			39,754			31,470			8,284
Search	17,357			10,026			7,331			45,243			24,405			20,838
Technology (inclusive of $139, $7, $384 and $23 of stock-based compensation, respectively)	1,592			1,005			587			4,661			3,190			1,471
Total cost of revenues	31,685			21,547			10,138			89,658			59,065			30,593
Gross profit	17,458			13,570			3,888			50,602			39,008			11,594
Operating expenses:
Sales and marketing (inclusive of $1,109, $117, $3,269 and $323 of stock-based compensation, respectively)	7,867			5,723			2,144			23,089			16,950			6,139
General and administrative (inclusive of $2,616, $318, $10,814 and $950 of stock-based compensation, respectively)	7,638			5,203			2,435			25,982			15,407			10,575
Product development (inclusive of $471, $51, $1,734 and $151 of stock-based compensation, respectively)	2,425			1,614			811			7,327			4,322			3,005
Amortization of intangible assets and deferred financing costs	882			1,140			(258		)	2,661			3,419			(758		)
Restructuring costs	—			—			—			—			973			(973		)
Total operating expenses	18,812			13,680			5,132			59,059			41,071			17,988
Loss from operations	(1,354		)	(110		)	(1,244		)	(8,457		)	(2,063		)	(6,394		)
Interest income (expense), net	220			(48		)	268			428			(190		)	618
Change in fair value of warrant liability	22			(384		)	406			(97		)	(344		)	247
Recovery of investment	—			—			—			—			2,100			(2,100		)
Impairment of marketable securities	—			—			—			—			(588		)	588
Loss on sale of marketable securities	—			(25		)	25			—			(18		)	18
Other income (expense), net	(27		)	(55		)	28			97			(95		)	192
Loss before provision for income taxes and minority interest in operations of consolidated subsidiary	(1,139		)	(622		)	(517		)	(8,029		)	(1,198		)	(6,831		)
Provision for income taxes	(126		)	(164		)	38			(268		)	(184		)	(84		)
Minority interest in operations of consolidated subsidiary	(103		)	21			(124		)	(98		)	21			(119		)
Net loss	$	(1,368	)	$	(765	)	$	(603	)	$	(8,395	)	$	(1,361	)	$	(7,034	)

Revenues; Cost of Revenues and Gross Profit

Media

Revenue. We generate Media revenue primarily from our 24/7 Real Media Web Alliance. Web Alliance revenue was $18.8 million and $57.7 million for the three and nine month periods ended September 30, 2006, respectively, as compared to $15.3 million and $45.5 million for the three and nine month periods ended September 30, 2005, respectively, an increase of 23.8% and 26.7%, respectively. The increase is primarily related to an increase in the number of advertising impressions sold. The remaining Media revenue related to our e-mail services.

Cost of Revenues. Media cost of revenues consisted primarily of fees paid to Web publishers in our Web Alliance. Cost of revenues also included advertisement serving costs, which are intercompany charges from our Technology segment based on a fixed CPM.

Gross Profit. Gross profit margins for Media were 33.3% and 32.2% for the three and nine month periods ended September 30, 2006, respectively, as compared to 32.4% and 32.3% for the three and nine month periods ended September 30, 2005, respectively. The gross profit margin were consistent although there is a slight upward trend due to increases in the percentage of revenue retained from

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Web sites in the 24/7 Real Media Web Alliance offset by a downward trend due to the increased contribution from regions with a lower gross profit percentage, particularly Korea.

Advertisement serving costs were $0.4 million and $1.3 million for the three and nine month periods ended September 30, 2006, respectively. Advertisement serving costs were $0.5 million and $1.3 million for the three and nine month periods ended September 30, 2005, respectively.

Search

Revenue. Search revenue was $22.7 million and $60.2 million for the three and nine month periods ended September 30, 2006, respectively, as compared to $13.7 million and $35.1 million for the three and nine month periods ended September 30, 2005, respectively, an increase of 65.1% and 71.8%, respectively.  The increase was due to an increase in the number of accounts under management and an increase in the average revenue per advertiser account.

Cost of Revenues. Search cost of revenues consisted primarily of fees paid to our search engine distribution partners, which are calculated as a percentage of revenues for algorithmic search engines and a fixed CPC for pay-for-placement search engines.

Gross Profit. Gross profit margins for Search were 23.4% and 24.9% for the three and nine month periods ended September 30, 2006, respectively, and 27.0% and 30.4% for the three and nine month periods ended September 30, 2005, respectively.  The decrease in gross profit margin was primarily due to a decrease in margin in our Managed Account Service offering as a result of competition in the marketplace as well as the addition of higher volume accounts, which usually command a better price.  Adding to the decline is the faster pace of growth of our lower margin Managed Account Service offering relative to other search product offerings. These decreases were partially offset by an increase in revenue from Dentsu which is at a higher margin.

Technology

Revenue. Technology revenue was $7.4 million and $21.4 million for the three and nine month periods ended September 30, 2006, respectively, as compared to $5.8 million and $16.6 million for the three and nine month periods ended September 30, 2005, respectively, representing an increase of 26.6% and 29.1%, respectively. The increase primarily reflects expanded usage of OAS by existing customers and the addition of new customers.

Cost of Revenues. Technology cost of revenues consisted of costs for hosting, bandwidth, third-party license and support fees, support and maintenance of the infrastructure, and salaries and benefits of related technical personnel, and is inclusive of stock-based compensation. The cost of revenues was offset by intercompany fees charged to our Media segment for advertisement serving.

Gross Profit. Gross profit margins were 78.5% and 78.2% during the three and nine month periods ended September 30, 2006, respectively, and 82.8% and 80.7% for the three and nine month periods ended September 30, 2005, respectively.  The margin decrease is due to increases in the cost of advertisement serving equipment and facilities and the increase in stock-based compensation.  Stock-based compensation was $0.1 million and $0.4 million for the three and nine month periods ended September 30, 2006, respectively, and approximately $7,000 and $23,000 for the three and nine month periods ended September 30, 2005, respectively.

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Sales and Marketing Expenses

Sales and marketing expenses consisted primarily of compensation and personnel related expenses for sales, account management, business development, affiliate relations and marketing, and marketing costs such as advertising, trade shows and public and investor relations firms.

Sales and marketing expenses were $7.9 million and $23.1 million for the three and nine month periods ended September 30, 2006, respectively, and $5.7 million and $17.0 million for the three and nine month periods ended September 30, 2005, respectively. The increase was primarily due to additional personnel costs and the inclusion of stock-based compensation of $1.1 million and $3.3 million for the three and nine month periods ended September 30, 2006, respectively, and $0.1 million and $0.3 million for the three and nine month periods ended September 30, 2005, respectively. Excluding stock-based compensation, sales and marketing expenses decreased as a percentage of revenue from 16.0% to 13.8% for the three month periods ended September 30, 2005 and 2006, respectively, and from 17.0% to 14.1% for the nine month periods ended September 30, 2005 and 2006, respectively, as we continued to gain operating leverage.

General and Administrative Expenses

General and administrative expenses consisted primarily of compensation and related expenses for executive and administrative personnel, costs related to leasing, maintaining and operating our facilities and systems, insurance, bad debts, fees for professional services, fees associated with the reporting and other obligations of a public company, depreciation and other general and administrative costs. Fees for professional services included payments to external lawyers, accountants and other professionals in connection with operating our business, compliance and evaluating and pursuing new opportunities.

General and administrative expenses were $7.6 million and $26.0 million for the three and nine month periods ended September 30, 2006, respectively, and $5.2 million and $15.4 million for the three and nine month periods ended September 30, 2005, respectively. The increase was primarily due to the inclusion of stock-based compensation of $2.6 million and $10.8 million for the three and nine month periods ended September 30, 2006, respectively, and $0.3 million and $1.0 million for the three and nine month periods ended September 30, 2005 and 2006, respectively. The remaining increase was due primarily to increased depreciation due to the improvement and expansion of our infrastructure, additional professional fees as a result of increased compliance costs and additional personnel related costs. Excluding stock-based compensation, as a percentage of revenue, the expenses decreased from 13.9% to 10.2% for the three month periods ended September 30, 2005 and 2006, respectively, and from 14.7% to 10.8% for the nine month periods ended September 30, 2005 and 2006, respectively.

Product Development Expenses

Product development expenses consisted primarily of compensation and related expenses for personnel responsible for the development and maintenance of features, enhancements and functionality and quality assurance for our software and services and development of new products.

Product development expenses were $2.4 million and $7.3 million for the three and nine month periods ended September 30, 2006, respectively, and $1.6 million and $4.3 million for the three and nine month periods ended September 30, 2005, respectively. These amounts are inclusive of stock-based compensation of $0.5 million and $1.7 million for the three and nine month periods ended September 30, 2006, respectively, and $0.1 million and $0.2 million for the three and nine month periods ended September 30, 2005, respectively.  The increase reflects our continued investment in the development and

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enhancement of our existing products and services, as well as our exploration of new markets and product offerings.

Amortization of Intangible Assets and Deferred Financing Costs

Amortization expense related to intangible assets acquired with Real Media in October 2001, 24/7 Real Media Korea in January 2004 and Decide in August 2004; deferred financing costs associated with our subordinated convertible debenture offering in September 2003; and a transition payment to Lycos in connection with a strategic business relationship that we entered into in February 2004.

For the nine month period ended September 30, 2006, amortization expense related $1.1 million to acquired technology, $0.5 million to other intangible assets, $0.4 million to deferred financing costs, and $0.7 million to the transition payment to Lycos. For the nine month period ended September 30, 2005, amortization expense related $1.7 million to acquired technology, $0.6 million to other intangible assets, $0.4 million to deferred financing costs and $0.7 million to the transition payment to Lycos.

Restructuring Costs

During the nine month period ended September 30, 2005, we recorded a restructuring charge of $1.0 million relating to our former New York headquarters.

Interest Income (Expense), Net

Interest income (expense), net relates to our long-term debt and capital lease obligations offset by interest income related to our cash and cash equivalents. Interest income (expense), net for 2006 and 2005 primarily related to the $15.0 million of subordinated convertible debentures initially due September 2006, of which a portion of the interest incurred relates to cash payments due and a portion relates to the amortization of warrants issued with the debentures, offset by interest income from cash in overnight deposits and money market accounts. In September 2006, on the terms and condition set forth in the debentures, the holder elected to extend the maturity of the debentures until September 2009.

Change in Fair Value of Warrant Liability

Our liability relates to warrants outstanding from our preferred stock offering, and is adjusted to fair value at the end of each reporting period. The expense for the nine month period ended September 30, 2006 was due to an increase in the fair market value of the warrants outstanding, which increased the corresponding liability. The increase in the fair market value was primarily due to the higher fair market value of our common stock compared to the fair market value of our common stock at December 31, 2005.

Recovery of Investment

In January 2005, we received $2.1 million as a recovery of an investment in Bidland Systems, Inc. (“Bidland”), and subsequently received another $0.2 million in the fourth quarter of 2005. The recovery was a result of the settlement of pending litigation between Bidland and another party and the subsequent dissolution and liquidation of Bidland.

Impairment of Marketable Securities

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During the first quarter of 2005, we wrote down our available-for-sale investment in chinadotcom and recognized an impairment charge of approximately $0.6 million for other-than-temporary declines in the value of the investment.

Loss on Sale of Marketable Securities

During the nine month period ended September 30, 2005, the Company sold 278,700 shares of its chinadotcom common stock, which resulted in proceeds of approximately $0.9 million and an immaterial realized loss.

Other Income (Expense), Net

Other income (expense), net for the nine month period ended September 30, 2006 consisted of earn-out payments received in excess of amounts recorded, offset by legal fees associated with a former subsidiary that we shut down and realized foreign currency losses. Other income (expense), net for the nine month period ended September 30, 2005 consisted primarily of legal fees associated with a former subsidiary that we shut down.

Provision for Income Taxes

The increase in the provision for income taxes from the nine month period ended September 30, 2005 to the nine month period ended September 30, 2006 was primarily a result of increases in taxes, driven by higher pretax income.

Minority Interest in Operations of Consolidated Subsidiary

Minority interest in operations of consolidated subsidiary represents the percentage share of income (losses) attributable to holders who have a minority interest in subsidiaries in which we hold an interest that is greater than fifty percent, but less than 100 percent, and the results of which we consolidate in our consolidated financial statements. This amount relates to the activity of K.K. 24-7 Search, our joint venture with Dentsu.

LIQUIDITY AND CAPITAL RESOURCES

Cash flows for the nine month periods ended September 30, 2006 and 2005 were as follows (in thousands):

	Nine Months Ended September 30,
	2006			2005
Net cash provided by operating activities	$	8,571		$	6,664
Net cash used in investing activities	$	(2,697	)	$	(1,312	)
Net cash provided by financing activities	$	4,481		$	2,344

Historically we have financed our operations through equity financings and long-term debt and more recently through cash generated by operations. Net cash provided by operating activities was $8.6 million and $6.7 million during the nine month periods ended September 30, 2006 and 2005, respectively. Net cash provided by operating activities is generally due to our net operating losses, adjusted for certain non-cash items included in our net operating results, as well as changes in various components of working capital, particularly fluctuations in accounts receivable.

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Net cash used in investing activities was approximately $2.7 million during the nine month period ended September 30, 2006, and consisted of capital expenditures for operational purposes. Net cash used in investing activities was approximately $1.3 million during the nine month period ended September 30, 2005, and consisted of $0.6 million of proceeds from maturities of short-term investments, $0.9 million of proceeds from the sale of marketable securities and $2.1 million from the recovery of an investment, offset by $4.9 million in capital expenditures for operational purposes.

Financing activities provided $4.5 million and $2.3 million in the nine month periods ended September 30, 2006 and 2005, respectively. Financing activities during the nine month period ended September 30, 2006 were attributed as follows: $0.2 million of proceeds from the note receivable from IMAKE and $5.8 million from the exercise of common stock options offset by $1.3 million earn-out payment to the former shareholders of Decide and $0.2 million in payments of capital lease obligations. Financing activities during the nine month period ended September 30, 2005 were attributed as follows: $1.7 million from proceeds received from Dentsu, the minority investor of our consolidated subsidiary, K.K. 24-7 Search, and $0.7 million from the exercise of common stock options offset by $0.1 million in payments of capital lease obligations.

On September 26, 2003, we completed the placement to an institutional accredited investor of $15.0 million of our subordinated convertible debentures due September 2006. In September 2006, on the terms and conditions set forth in the Debentures, the holder elected to extend the maturity date of the debentures until September 2009. If at any time on or after September 26, 2005, the second anniversary of the initial issuance date, the weighted average price of our common stock is less than $8.75 on any five consecutive trading days, the holder has the right, in its sole discretion, to require that we redeem up to $7.5 million in principal amount of the debentures. This condition has been met, and management believes the holder may exercise its right to require redemption. Management believes existing cash and investments will be sufficient to meet the obligation to redeem, should the holder exercise its right.

The Company maintains cash balances at the subsidiary level to meet short-term capital requirements and to satisfy local statutory liquidity requirements. These requirements, as well as local tax implications, may limit the amount of capital that can be repatriated from certain subsidiaries. These funds are freely available to the subsidiaries for operational purposes. Specifically, K.K. 24-7 Search has $3.0 million in cash as of September 30, 2006 that must be kept in Japan for operational purposes.

We continue to increase capital expenditures and operating lease commitments, which is consistent with our increased staffing and operational expansion, and we anticipate this will continue in the future as business conditions merit. Additionally, we will continue to evaluate possible acquisitions of, or investments in businesses, products and technologies that are complementary to our business, which may require the use of cash. Management believes existing cash and investments will be sufficient to meet operating requirements for at least the next twelve months; however, we may sell additional equity or debt securities or obtain credit facilities to further enhance our liquidity position. The sale of additional securities could result in further dilution to our stockholders.

We are subjected to routine tax examinations by taxing authorities at the federal, state and local levels in the United States and by various taxing authorities in foreign countries.  As of September 30, 2006, there are several reviews being conducted and Management is of the opinion that the ultimate outcome of these examinations will not have a material adverse impact on our financial position or results of operations.

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OFF-BALANCE SHEET ARRANGEMENTS

We did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes at September 30, 2006. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Common stock warrants issued in conjunction with our subordinated convertible debentures are equity-linked derivatives and accordingly represent off-balance sheet arrangements. In addition, the conversion and redemption features of the subordinated convertible debentures constitute an embedded derivative.  Some of the common stock warrants and the conversion and redemption features meet the scope exception in paragraph 11(a) of the Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, and are accordingly not accounted for as derivatives for purposes of SFAS No. 133, but instead are accounted for as equity.

CRITICAL ACCOUNTING POLICIES

General

Our interim consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. As such, management is required to make certain estimates, judgments and assumptions that it believes are reasonable based upon the information available. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating the reported consolidated financial results are the following:

Revenue Recognition; Cost of Revenue; Deferred Revenue

Media

Our Media revenue is generated from fees paid by client advertisers for advertising impressions. We typically offer advertisers a pricing model based on CPM, which enables a client advertiser to pay a fee based on the number of times its advertisement is displayed. E-mail related revenue is derived from delivering advertisements to e-mail lists for advertisers. Agreements are primarily short-term and revenue is recognized as services are delivered, provided that no significant obligations remain outstanding and collection of the resulting receivable is probable. We become obligated to make royalty payments to Web sites and e-mail lists that have contracted with us in the period in which the advertising impressions or e-mails are delivered. Such expenses are classified as cost of revenue in the consolidated statements of operations.

Search

Our revenue from our Search segment is primarily based on CPC fees paid by client advertisers. CPC fees are generated each time users click on Web site listings that we submitted into search engine databases and are directed to our client advertisers’ Web sites. To a lesser extent, we also generate revenue from fees paid by search engines that employ us to optimize the submission of Web site listings and report on advertising campaigns for their advertisers. Agreements are primarily short-term and revenue is recognized as services are delivered, provided that no significant obligations remain outstanding and collection of the resulting receivable is probable. We become obligated to make payments to search

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engine distribution partners that have contracted with us in the period in which the clicks occur. Such expenses are classified as cost of revenue in the consolidated statements of operations. When we provide SEM services as an agent for a fixed commission or in other transactions in which we do not have principal risk and reward, we recognize revenue on a net basis.

Technology

Our Technology revenue is derived primarily from licensing of our software, hosted advertisement serving and software maintenance and technical support services. Revenue from advertisement serving hosted centrally on our servers is recognized upon delivery. Revenue from software licensing agreements is recognized in accordance with Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition, and SEC Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, upon delivery of the software, which is generally when the software is made available for download, there is persuasive 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. Contracts that bundle the software license with software maintenance and technical support are recognized ratably over the contract term. Revenue from software maintenance and technical support contracts is recognized ratably over the life of the agreement, which typically does not exceed one year.

Expenses related to our Technology revenue are primarily payroll costs incurred to deliver and support the software, and hosting, bandwidth and license fees paid to third-party software vendors. These expenses are classified as cost of revenue in the consolidated statements of operations.

Deferred Revenue

We defer revenue billed or collected in advance of services being completed until the conclusion of the service period to which the advance billing or collection relates. Deferred revenue is included on the consolidated balance sheets as a current liability until the service is performed, and then recognized in the period in which the service is completed. Our deferred revenue primarily consist of advance billings for software license subscriptions and software maintenance and technical support services.

Allowance for Doubtful Accounts; Sales Allowance

We maintain an allowance for doubtful accounts to reserve for potentially uncollectible receivables and a sales allowance to reserve for potential credits issued to customers. The allowances are estimates calculated based on an analysis of current business and economic risks, customer credit-worthiness, specific identifiable risks such as bankruptcies, terminations or discontinued customers, or other factors that may indicate a potential loss.

Impairment of Long-Lived Assets

We evaluate goodwill and indefinite lived intangible assets on an annual basis and whenever events or changes in circumstances indicate that a carrying amount may not be fully recoverable. Long-lived assets, including property and equipment, long-term assets and amortizable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent to which or manner in which an asset is used or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. We assess impairment in accordance with the requirements of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We assess the impairment of goodwill and intangible assets in accordance with the provisions of SFAS No. 142,

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Goodwill and Other Intangible Assets. We determine the recoverability of the assets by comparing the carrying amount of the assets to net future cash flows that the assets are expected to generate. The impairment we recognize is the amount by which the carrying amount exceeds the fair market values of the assets.

Business Combinations

Our acquisitions are accounted for as purchase business combinations in accordance with SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. We allocate a portion of the purchase price to identifiable tangible and intangible assets based on their respective fair values, and record as goodwill any remaining unallocated portion of the purchase price. Intangible assets include trademarks, customer relationships, acquired technology and covenants not to compete. Such intangible assets are amortized on a straight-line basis over their estimated useful lives, which are generally two to seven years, except for trademarks that have an indefinite life.

Contingencies and Litigation

We evaluate contingent liabilities, including threatened or pending litigation, in accordance with SFAS No. 5, Accounting for Contingencies, and record accruals when the outcome of these matters is deemed probable and the potential liability is reasonably estimable. We make these assessments based on the facts and circumstances and in some instances based in part on the advice of outside legal counsel.

Restructuring Estimates

We account for restructuring activities in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Restructuring-related liabilities include estimates for, among other things, involuntary terminations of employees and disposition of lease obligations. Key variables in determining such estimates include timing of sublease rentals, estimates of sublease rental payment amounts and tenant improvement costs, and estimates for brokerage and other related costs. We periodically evaluate and, if necessary, adjust the estimates based on currently available information.

Investments

Investments consist of securities with stated maturities of three months or more and marketable securities consisting of registered corporate equity securities. We classify the marketable securities as available-for-sale in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Available-for-sale securities are carried at fair value, with the unrealized gains or losses, net of tax, reported as a separate component of stockholders’ equity. In determining realized gains and losses, the cost of securities sold is based upon specific identification. Realized gains and losses and declines in value judged to be other-than-temporary, are included in the consolidated statements of operations.

Investments in non-marketable equity securities of companies in which we own less than 20% of a company’s stock and do not have the ability to exercise significant influence are accounted for on the cost basis. On an ongoing basis, we assess the need to record impairment losses on investments and record such losses when the impairment is determined to be other-than-temporary.

Stock-Based Compensation

Effective January 1, 2006, we adopted the revised SFAS No. 123, Share-Based Payment (“SFAS No. 123R”), using the modified prospective transition method, and accordingly, prior periods have not been restated to reflect the impact of SFAS No. 123R. Under SFAS No. 123R, stock-based awards granted prior to its adoption

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will be expensed over the remaining portion of their vesting period. These awards will be expensed using the same fair value measurements which were used in calculating pro forma stock-based compensation expense under SFAS No. 123. For stock-based awards granted on or after January 1, 2006, we will amortize the stock-based compensation over the requisite service period. We determine the fair value of these awards using the Black-Scholes option pricing model.

Prior to the adoption of SFAS No. 123R, we accounted for stock-based awards using the intrinsic value method under the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and Financial Accounting Standards Board (“FASB”) Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation — an interpretation of APB Opinion No. 25, and complied with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure.  Under APB Opinion No. 25, stock-based compensation cost is recognized based on the difference, if any, on the date of grant between the fair value of the Company’s common stock and the amount an employee must pay to acquire the common stock.

MARKET FOR COMPANY’S COMMON EQUITY

From our initial public offering on August 13, 1998 until June 2002, our common stock was traded on the NASDAQ Global Market under the symbol “TFSM.”  In June 2002, we transferred our common stock to the NASDAQ SmallCap Market, where it continued to trade under the same symbol. Our common stock was approved for re-listing on the NASDAQ Global Market effective November 3, 2005, where it continues to trade under the symbol “TFSM.”

We have not declared or paid any dividends on our capital stock since our inception and do not anticipate paying dividends in the foreseeable future. Our current policy is to retain earnings, if any, to finance the expansion of our business. In addition, our debentures restrict our ability to pay cash dividends on our capital stock. The future payment of dividends will depend on the results of operations, financial condition, capital expenditure plans and other factors that we deem relevant and will be at the sole discretion of our Board of Directors.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to the impact of interest rate changes and foreign currency fluctuations.

Interest Rate Risk

The primary objective of our investment activities is to preserve capital. Cash and cash equivalents are investments with original maturities of three months or less. Therefore, changes in the market’s interest rates do not affect the value of the investments as recorded by 24/7 Real Media.

Foreign Currency Risk

International revenues accounted for approximately 60% of our total revenues during the nine month period ended September 30, 2006, as compared to 55% for the fiscal year ended December 31, 2005. The growth in our international operations has increased our exposure to foreign currency fluctuations. Revenues and related expenses generated from our international subsidiaries are generally denominated in the functional currencies of the local countries. Primary currencies include Euros, British Pounds Sterling, Japanese Yen, Korean Won, Canadian Dollars and Australian Dollars. The income statements of our international operations are translated into U.S. Dollars at the average exchange rates in each applicable

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period. To the extent the U.S. Dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions results in increased revenues, operating expenses and net income (loss) for our foreign operations. Similarly, our revenues, operating expenses and net income (loss) will decrease for our international segments when the U.S. Dollar strengthens against foreign currencies. Realized foreign currency transaction gains (losses) included in other income in the consolidated statements of operations were immaterial for the nine month period ended September 30, 2006. We expect to use the assets denominated in foreign currencies for project execution expenditures in the currency in which they are held as the risk of realized translation losses is mitigated.

We considered the historical trends in currency exchange rates and determined that it was reasonably possible that changes in exchange rates of 10% for all currencies could be experienced in the near term.  These changes would have resulted in an immaterial impact on income (loss) before provision for income taxes and minority interest in operations of consolidated subsidiary for the nine month period ended September 30, 2006.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was carried out by us under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Operating Officer. Based on that conclusion, our Chief Executive Officer and Chief Operating Officer concluded that our disclosure controls and procedures have been designed and are being operated in a manner that provides reasonable assurance that the information required to be disclosed in reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Operating Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

In 2006, as a complement to our existing overall program of internal control, we initiated a company-wide review of our internal control over financial reporting as part of the process for compliance with Section 404 of the Sarbanes-Oxley Act of 2002. As a result of the review, we have made improvements to the design and effectiveness of our internal controls through the nine month period ended September 30, 2006.  We anticipate that improvements will continue to be made.

Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors.

Our management, with the participation of our Chief Executive Officer and Chief Operating Officer, has evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report.  Based on such

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evaluation, our Chief Executive Officer and Chief Operating Officer have concluded, as of September 30, 2006, that the Company’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and to ensure that information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Operating Officer, as appropriate to allow timely decisions regarding required disclosure.

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Exchange Act Rules 13a — 15(f) and 15d — 15(f)) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

We are not involved in any material pending legal proceedings at this time, and management is not aware of any contemplated proceeding by any governmental authority.

ITEM 1A.  RISK FACTORS

RISKS RELATED TO 24/7 REAL MEDIA, INC.

WE MAY NOT BE ABLE TO SUSTAIN OUR PROFITABILITY.

We have achieved profitability in accordance with generally accepted accounting principles in the United States, or GAAP, in certain reporting periods; however, we have also incurred net losses in other periods. We may not achieve profitability in future quarterly or annual reporting periods. We may incur net losses for the foreseeable future. Even if we do achieve profitability in future periods, we may not be able to sustain or increase our profitability in the short-term or long-term, on a quarterly or an annual basis, in subsequent periods.

WE MAY NOT BE ABLE TO SUCCESSFULLY UPGRADE AND INTEGRATE OUR EXISTING PRODUCTS AND TECHNOLOGY.

Our ability to compete depends, in part, on our success at upgrading and integrating our existing products and technology globally. From time to time we upgrade and issue new releases of our existing technology to integrate new functionalities and respond to industry developments. For example, we recently released a new version, 6.0, of our Decide DNA platform for search marketers and a new version, 6.0, of our OAS platform targeted at publishers. OAS 6.0 builds on the previous 5.8 version, and also incorporates our analytics and behavioral targeting applications as modules; a limited number of our customers are now running on OAS 6.0 and we will transition the balance of our central adserving customers to it over the remainder of 2006 and in 2007. Future versions of OAS 6.0 may incorporate our Decide DNA technology. We may also build functionalities of our existing OAD solution and create a version of OAS targeted at advertisers. We may experience delays, difficulties or increased costs that could hinder or prevent the successful design, integration, development, introduction, implementation or marketing of new releases of our technology globally. In addition, we must ensure that the performance levels and capacity of our technology remain steady when we release new versions to our customers and that we are able to migrate customers onto new technology promptly. Any material delays in introducing or implementing a new release or performance problems could cause us to lose customers and cause our revenue to decline.

OUR INTERNATIONAL OPERATIONS FACE LEGAL AND CULTURAL CHALLENGES AND SUBJECT US TO ADDITIONAL RISKS.

We have operations in a number of international markets, including Australia, Canada, Europe, Japan and South Korea, and we currently derive over half of our revenue from non-U.S. markets. To date, we have limited experience in marketing, selling and distributing our solutions internationally in certain regions. Our international operations are subject to additional risks, including:

·changes in regulatory requirements;

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·potentially adverse tax consequences and restrictions on cash flow resulting from, among other things:

·local statutory liquidity requirements for businesses operating in certain foreign countries;

·the need to maintain cash balances to meet short-term capital requirements;

·operations in foreign countries with higher tax rates than the United States;

·application of withholding taxes at a high rate on intercompany royalty and other payments;

·the inability to utilize certain foreign tax credits; and

·the inability to utilize some or all of losses generated in one or more foreign countries;

·difficulties and costs of staffing and managing foreign operations;

·reduced protection for intellectual property rights in some countries;

·general import/export restrictions relating to encryption technology and/or privacy matters;

·local law requirements governing employment contracts, which may impose, among other things, minimum notice periods and minimum severance payments for involuntary terminations;

·political and economic instability;

·fluctuations in currency exchange rates; and

·seasonal reductions in business activity during the summer months in Europe and certain other parts of the world.

Any or all of these risks could affect our business outside of the United States and negatively impact our results of operations.

OUR SEARCH BUSINESS IS CURRENTLY OUR FASTEST GROWING BUSINESS SEGMENT, AND WE MAY HAVE INEFFICIENCIES IN OUR BUSINESS MODEL OR MAY BE UNABLE TO CAPITALIZE ON CURRENT OR FUTURE SEARCH TRENDS.

Our Search segment has been growing faster than our other business segments. The search industry is still relatively new, competition is high and there are no set parameters among service providers as to how to run campaigns, track data or include more complex features, such as behavioral targeting. We are working to develop set standards as our Search business grows, but our current strategies may not be successful in the long-run. As a result, it is difficult to predict how our Search segment will perform in the future. For example, revenue in the segment has increased significantly in recent periods, while margins have decreased as our lower gross margin managed SEM services business performed better than other search areas. Further, we have and may continue to encounter inefficiencies, such as the under or over-

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delivery of campaigns due to programming difficulties or set-backs, such as outdated methodologies and tools that must be reconfigured or replaced. Furthermore, our success in SEM is dependent in part on our ability to develop and maintain good relationships with our search engine distribution partners, who both cooperate and compete with us for search clients and who change the requirements as to how external software must interact with their software on an on-going basis and are unwilling to negotiate those terms and conditions. There is no guarantee that our current or future Search software and techniques will meet our clients’ needs and the demands of search engine partners, successfully manage increasingly complex campaigns or be profitable for our business.

STRATEGIC BUSINESS VENTURES, WHICH HAVE BEEN CRITICAL TO OUR GROWTH, MAY NOT BE SUCCESSFUL OR AVAILABLE TO US IN THE FUTURE.

We were formed in February 1998 to consolidate three Internet advertising companies, and have since acquired or entered into joint ventures with many other companies. Most recently, in November 2006, we announced the planned expansion of our joint venture with Dentsu to provide our SEM services throughout Asia. We may continue pursuing selective acquisitions of businesses, technologies and product lines and additional joint ventures as a key component of our growth strategy. If we are unable to enter into new strategic business ventures in the future, our ability to grow and adapt in our industry may be impaired and our revenue may suffer.

If we are able acquire new companies or expand our business lines through joint ventures, any such business venture may result in the use of significant amounts of cash, potentially dilutive issuances of equity securities and the incurrence of debt and amortization expenses related to intangible assets. In addition, any such business venture may involve numerous risks, including:

·the difficulty and cost of implementing new processes and procedures, integrating and assimilating any existing operations, technologies, products and personnel, and expanding, training and managing the work force;

·implementing new, or remediating existing, financial and management controls, reporting systems, procedures and policies appropriate for a U.S. public company;

·the dedication of global resources, personnel and members of management, on a short or long-term basis, which take a significant period of time and may distract management’s attention from our other operations;

·the availability of favorable acquisition or other financing for the venture; and

·the potential loss of key senior managers or employees of any acquired business.

Our inability to successfully integrate any acquired company, or failure to achieve any expected synergies of an acquisition or joint venture, could adversely affect our business.

OUR FUTURE REVENUES AND RESULTS OF OPERATIONS MAY BE DIFFICULT TO FORECAST AND RESULTS IN PRIOR PERIODS MAY NOT BE INDICATIVE OF FUTURE RESULTS.

At times our global revenue and revenue in certain segments and operating units has grown significantly and has decreased significantly. Accurate predictions of future revenues are difficult, among other things, because of the rapid changes in the markets and regulatory environment in which we operate.

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

·the addition of new clients or the loss of existing clients;

·changes in fees paid by advertisers or other clients;

·changes in the amount of royalties payable by us to owners of Web sites or the imposition of new charges or fees by Web site owners;

·changes in the amount of our liability for our customers’ bad debt in our full service search business;

·the introduction of new Internet marketing services by us or our competitors;

·variations in the levels of capital or operating expenditures, accounts receivable and payable, and other costs relating to the maintenance or expansion of our operations, including personnel costs;

·seasonality, which tends to result in lower revenue during the summer months of the third quarter and higher revenue in the fourth quarter of each year;

·changes in results of operations brought about by newly acquired businesses or new joint ventures, which may be exceedingly difficult to predict due to management’s lack of history with such businesses or joint ventures;

·changes in governmental regulation of the Internet or other regulatory requirements;

·changes in accounting principles or any determination that one or more of the estimates or assumptions underlying our financial statements is faulty; and

·general economic conditions.

Our future revenues and results of operations may be difficult to forecast due to the above factors and the time we may need to adequately respond to any changes in them. For example, certain of the search engines that we partner with in the management of SEM services plan to impose additional charges for using their technology interfaces to assist our clients. Our profit margins may suffer if we are unable to pass some of these types of costs on to our customers. In addition, our expense levels are based in large part on our investment plans and estimates of future revenues. Any increased expenses may precede or may not be followed by increased revenues, as we may be unable to, or may elect not to, adjust spending in a timely manner to compensate for any unexpected revenue shortfall. As a result, we believe that period-to-period and year-to-year comparisons of our results of operations may not be meaningful.

OUR TECHNOLOGY PRODUCTS AND SERVICES ARE BASED ON OUR PROPRIETARY OPEN ADSTREAM PLATFORM, AND OUR BUSINESS WOULD SUFFER IF OPEN ADSTREAM WAS DISRUPTED.

Open AdStream is our proprietary advertisement serving technology and serves as our sole advertisement serving solution. We have incorporated a variety of functionalities and modules into this platform, and

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our Media business also utilizes Open AdStream technology. We must, among other things, ensure that the technology will continue to function efficiently at high volumes, interact properly with our database, offer the functionality demanded by our customers and assimilate our sales and reporting functions. 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 or report on advertisement delivery without significant delay. Sustained or repeated system failures would reduce the attractiveness of our solutions to advertisers, advertising agencies and Web publishers and result in contract terminations, fee rebates and make-goods, thereby reducing our revenue.  Slower response time or system failures may also result from straining the capacity of our deployed software or hardware due to an increase in the volume of advertising 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 REVENUE COULD DECLINE IF WE FAIL TO EFFECTIVELY ACQUIRE AND MANAGE ADVERTISING INVENTORY.

Our success depends in part on our ability to effectively obtain web publisher advertising inventory and sell it to advertisers. The Web publishers that currently list their unsold advertising inventory with us, including a small number of large Web publishers that provide us with a sizable amount of inventory, are not bound by long-term contracts and can change the amount of inventory they make available to us at any time. If a Web publisher reduces or cancels the advertising space from its Web sites available to us, we may not be able to locate replacement advertising space from other Web sites with comparable traffic patterns and user demographics quickly enough to fulfill our advertisers’ requests. If we fail to manage our existing advertising space effectively to anticipate or meet our customers’ changing requirements, our revenue could decline.

We expect that our customers’ requirements will become increasingly sophisticated as the Web continues to mature as an advertising medium. Our growth depends on our ability to attract and retain advertisers by providing high quality advertising inventory with attractive demographics, innovative and quality content and large audiences. Our ability to provide such inventory is dependant on our capacity to screen out illegitimate or unreliable Web sites and attract and retain trustworthy, quality Web publishers.  Web publisher retention depends on a number of factors, some of which are beyond our control, including our ability to introduce new and innovative product lines and services, our ability to efficiently manage our existing advertising inventory, our pricing policies and the cost-efficiency to Web publishers of outsourcing all or part of their advertising sales. In addition, the number of competing intermediaries that purchase advertising inventory from Web publishers continues to increase. The amount of our inventory may not increase or even remain constant in the future, which could cause our advertising revenue to decline significantly.

WE COULD LOSE CUSTOMERS OR ADVERTISING INVENTORY IF WE FAIL TO MEASURE IMPRESSIONS, CLICKS AND ACTIONS ON ADVERTISEMENTS IN A MANNER THAT IS ACCEPTABLE TO OUR ADVERTISERS AND WEB PUBLISHERS.

We earn advertising revenue and make payments to Web publishers based on the number of impressions, clicks and actions from advertisements delivered on our network. Advertisers’ and Web publishers’ willingness to use our services and join our network will depend on the extent to which they perceive our delivery of advertisements and our measurements of clicks to be accurate and reliable. Advertisers and Web publishers often maintain their own technologies and methodologies for counting clicks, and from time to time we have had to resolve differences between our measurements and theirs or regarding over-delivery of advertising impressions. Further, search and media advertisers are paying much closer attention to allegations of click fraud — which can occur when a user intentionally clicks on an

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advertisement displayed on a Web site for a reason other than to view the related content or where a “clickbot” software program is used to artificially inflate click throughs — in the industry generally and have become more willing to inquire about or challenge click counts related to SEM and media services. Search engine robots that are masked as valid browser agents could bypass industry standard robot and spider lists and our filters and also cause artificial inflation in click results.  Any significant dispute over the proper measurement of clicks or other user responses to advertisements could cause us to lose customers, advertising inventory and revenue, could substantially reduce the gross profit margin we generate in our media and search businesses and could lead to a class action or other litigation.

WE ARE UNDERTAKING SEVERAL GLOBAL INITIATIVES IN ORDER TO BETTER LEVERAGE OUR BUSINESS, AND OUR EFFORTS MAY NOT BE SUCCESSFUL OR MAY NOT BE BENEFICIAL TO EACH OF THE OFFICES IN WHICH WE OPERATE.

In order to realign and better leverage our business we have commenced several global initiatives, including harmonizing our global product lines across the offices in which we operate, creating global standards for product management, development and marketing and implementing global databases for our sales personnel, which we will continue during the remainder of 2006 and 2007. In order to synchronize our various offices and create a uniform worldwide business model we will need to, among other things, set up uniform processes, formalize and build out training courses, set up global information sharing and communication processes, identify and track productivity and cost measurements and identify areas of inefficiency and develop global recovery plans.  While we anticipate that the global realignment will have cost and efficiency savings for our business, there is no guarantee that our global efforts will be successful over the long run. Additionally, the global business model that we implement for each of our business segments may not be the ideal standard for each of our offices, and may result in increased costs and decreased savings for particular offices and lines of business throughout our organization.

CHANGES IN THE ACCOUNTING RULES FOR STOCK-BASED COMPENSATION MAY ADVERSELY AFFECT OUR OPERATING RESULTS, OUR STOCK PRICE AND OUR ABILITY TO ATTRACT AND RETAIN EMPLOYEES.

We have a history of using employee stock options and other stock-based compensation to attract, motivate and retain our staff. In December 2004, the Financial Accounting Standards Board issued the revised SFAS No. 123(R), Share-Based Payment, which required us, as of January 1, 2006, to measure compensation costs for all stock-based compensation (including stock options) at fair value and to recognize these costs as expenses in our statements of operations. The recognition of these expenses in our statements of operations has had a negative effect on our earnings per share since the adoption of SFAS No. 123(R) and is likely to have a negative effect on our earnings per share in future periods, which could negatively impact our stock price. In addition, if we reduce or alter our use of stock-based compensation to minimize the recognition of these expenses, our ability to attract, motivate and retain qualified personnel may be impaired, which could be detrimental to our business.

OUR NET OPERATING LOSS CARRYFORWARDS MAY BE LIMITED.

Due to the “change in ownership” provisions of the Internal Revenue Code, the availability of our net operating loss and credit carryforwards may be subject to an annual limitation against taxable income in future periods, which could substantially limit the eventual utilization of these carryforwards.

WE COULD BE ADVERSELY AFFECTED BY AN IMPAIRMENT OF A SIGNIFICANT AMOUNT OF GOODWILL AND/OR INTANGIBLE ASSETS ON OUR BALANCE SHEET.

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In the course of our operating history, we have acquired and disposed of numerous assets and businesses. Some of our acquisitions have resulted in the recording of a significant amount of goodwill and/or intangible assets on our balance sheet. The goodwill and/or intangible assets were recorded because the fair value of the net assets acquired was less than the purchase price. We may not realize the full value of the goodwill and/or intangible assets. As such, we evaluate on at least an annual basis whether events and circumstances indicate that all or some of the carrying value of goodwill and/or intangible assets are no longer recoverable, in which case we would write off the unrecoverable portion as a charge to our earnings.

To improve our operating performance, we may decide to acquire other assets or businesses complementary to our business and, as a result, we may record additional goodwill and/or intangible assets on our balance sheet in the future. The possible write-off of the goodwill and/or intangible assets could negatively impact our future earnings. We will also be required to allocate a portion of the purchase price of any acquisition to the value of any intangible assets that meet the criteria specified in the Statement of Financial Accounting Standards No. 141, “Business Combinations,” such as marketing, customer or contract-based intangibles. The amount allocated to these intangible assets could be amortized over a fairly short period. As a result, our earnings and the market price of our common stock could be negatively affected.

THE SUCCESS OF OUR 24/7 REAL MEDIA SEARCH OPERATIONS DEPENDS ON A FEW SEARCH ENGINE DISTRIBUTION PARTNERS, AND THE LOSS OF ONE OF THEM COULD RESULT IN A SUBSTANTIAL DECREASE IN OUR SEARCH REVENUE.

We have generated the majority of our global Search revenue from clicks originating on Google and Yahoo! Search Marketing, through relationships in many countries in which we operate. We expect that these search engines will continue to generate a majority or more of our 24/7 Real Media Search revenue for the foreseeable future. The interruption, loss or deterioration of our relationship with Google or Yahoo! would cause a significant decrease in our Search revenue. As a result of consolidation among search engines, and other SEM companies, we could lose one or more of our clients or face increased competition from clients that internally develop or acquire capabilities similar to our service. In addition, as our search engine clients’ operations continue to evolve, we may be required to adjust our business strategy to maintain relationships with our clients. The loss of, or a change in, one or more of these relationships could have a material adverse effect on our Search revenue.

OUR MAJOR BUSINESS PARTNERS MAY EXPERIENCE ADVERSE BUSINESS CONDITIONS THAT COULD ADVERSELY AFFECT OUR BUSINESS.

We have a joint venture with Dentsu to promote SEM services in Japan, the expansion of which we recently announced, a strategic business relationship with Lycos, we have major search engine distribution partners, such as Google and Yahoo! Search Marketing, and we may enter into similar relationships with other companies. A substantial portion of our revenue is, directly or indirectly, attributable to these major relationships. If one or more of these companies experiences adverse business conditions that may render them unable to meet our expectations for the strategic business relationship or to fulfill their contractual obligations to us, such an event could have a material adverse impact on our business, financial condition and results of operations.

IF WE LOSE ANY KEY PERSONNEL, OUR BUSINESS WILL BE ADVERSELY AFFECTED.

Our success depends, to a significant extent, upon our senior management and key sales and technical personnel, particularly our Chief Executive Officer, our Chief Operating Officer, our Chief Financial Officer and our Chief Technical Officer. The competition for experienced and talented executives, senior

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managers and technical and sales personnel has become intense in our industry. The loss of the services of one or more of these persons, other similarly positioned members of management or other key personnel could materially and adversely affect our ability to develop our business.

IN ORDER TO CONTINUE TO OPERATE EFFICIENTLY AND TO GROW OUR BUSINESS, WE WILL NEED TO ATTRACT AND RETAIN QUALIFIED PERSONNEL AND MANAGE OUR COSTS, WHICH WE MAY BE UNABLE TO DO.

Our success depends on our ability to attract and retain qualified technical, sales and marketing, customer support, financial and accounting, and managerial personnel. We may expand our total workforce and will need to continue to attract qualified personnel in order to grow our business successfully. Additionally, as our business has escalated, we have increased our reliance on contractors and outside firms for development. We may not be able to attract, integrate and retain the numbers and types of candidates that we desire, and we may not be able to retain our contractors and outside firms and may not be able to replace them. Even if we are successful in attracting new staff and retaining existing staff, we may not be able to increase revenue quickly enough to offset the costs of the additional personnel or increased cost of retaining personnel.  Any of these contingencies could cause our business to suffer.

We have experienced, are experiencing and may continue to experience, particular difficulty in hiring and retaining qualified staff. Competition for staff throughout all our business segments and geographies is very high, and training is difficult because the required skill set is complex and there is no industry standard. If we are unable to attract, train and retain qualified staff, we may not remain competitive in and could lose business and our customers, which could have an adverse effect on revenue.

OUR OPERATIONS ARE VULNERABLE TO NATURAL DISASTERS AND OTHER EVENTS, INCLUDING TERRORIST ATTACKS, BECAUSE WE HAVE LIMITED BACKUP SYSTEMS.

We have limited backup systems and have experienced system failures and electrical outages from time to time in the past, which have disrupted our operations. We have a limited disaster recovery plan in the event of damage from fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins and similar events. Our operations are dependent on our ability to protect our computer systems against these unexpected adverse events.

If any of the foregoing occurs, we may experience a complete system shutdown. Any business interruption insurance that we carry is unlikely to be sufficient to compensate us for loss of business in the event of a significant catastrophe.

In addition, interruptions in our services could result from the failure of our telecommunications providers to provide the necessary data communications capacity in the time frame we require. Our Open AdStream technology resides on computer systems located in our data centers housed by Equinix, Switch and Data, and Savvis in the United States and Level 3 Communications in Europe. These systems’ continuing and uninterrupted performance is critical to our success, as a substantial portion of the revenue depend on the continuing availability of these systems. Despite precautions that we have taken, 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 solutions. Our business, results of operations and financial condition could be materially and adversely affected by any damage or failure that interrupts or delays our operations. To improve the performance and to prevent disruption of our services, we may have to make substantial investments to deploy additional servers or one or more copies of our Web sites to mirror our online resources. Although we believe we carry property insurance with adequate coverage limits, our coverage may not be adequate to compensate us for all losses, particularly with respect to loss of business and reputation that may occur.

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In addition, terrorist acts or acts of war may cause damage to our employees, facilities, clients, our clients’ customers and vendors, which could significantly impact our revenues, costs and expenses and financial position. The potential for future terrorist attacks, the national and international responses to terrorist attacks or perceived threats to national security, and other acts of war or hostility have created many economic and political uncertainties that could adversely affect our business and results of operations in ways that cannot be presently predicted. We are predominantly uninsured for losses and interruptions caused by terrorist acts and acts of war.

OUR NETWORK OPERATIONS MAY BE VULNERABLE TO HACKING, VIRUSES AND OTHER DISRUPTIONS, WHICH MAY MAKE OUR PRODUCTS AND SERVICES LESS ATTRACTIVE AND RELIABLE.

Internet usage could decline if any well-publicized compromise of security occurs. “Hacking” involves efforts to gain unauthorized access to information or systems or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment. Hackers have made many attempts to breach the security of our network operations, with minimal disruption to date. If hackers are successful in the future, they could misappropriate proprietary information or cause substantial disruptions in our service. We may be required to expend capital and other resources to protect our Web site against hackers. Any measures we may take may not be effective. In addition, the inadvertent transmission of computer viruses could expose us to a material risk of loss or litigation and possible liability, as well as materially damage our reputation and decrease our user traffic.

WE DEPEND ON PROPRIETARY RIGHTS, AND WE FACE THE RISK OF INFRINGEMENT.

Our success and ability to compete are substantially dependent on our internally developed technologies and trademarks, which we protect through a combination of patent, copyright, trade secret and trademark law. We own three patents in the United States, and have filed and intend to file additional patent applications in the United States. In addition, we apply to register our trademarks in the United States and internationally. Our patent applications and trademark applications may not be approved. Even if they are approved, such patents or trademarks may be successfully challenged by others or invalidated. If our trademark registrations are not approved because third parties own such trademarks, our use of such trademarks will be restricted unless we enter into arrangements with such third parties that may be unavailable on commercially reasonable terms.

We generally enter into confidentiality or license agreements with our employees, consultants and corporate partners, and generally control access to and distribution of our technologies, documentation and other proprietary information. Despite our efforts to protect our proprietary rights from unauthorized use or disclosure, parties may attempt to disclose, obtain or use our solutions or technologies. The steps we have taken may not prevent misappropriation of our solutions or technologies, particularly in many foreign countries in which we operate, where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States.

We have from time to time licensed, and we may license in the future, elements of our trademarks, trade dress and similar proprietary rights to third parties. While we attempt to ensure that the quality of our brand is maintained by these business partners, such partners may take actions that could materially and adversely affect the value of our proprietary rights or our reputation. The value of our proprietary rights could decline in the future since the validity, enforceability and scope of protection of certain proprietary rights in Internet-related industries is uncertain and still evolving.

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We have, from time to time, been, and may in the future be, subject to claims of alleged infringement of the trademarks and other intellectual property rights of third parties by us or by Web publishers with Web sites in our Web Alliance, or by customers who employ our Technology solutions. We may be required, or may elect, to indemnify these parties against such claims. Such claims and any resultant litigation could subject us to significant liability for damages and could result in the invalidation of our proprietary rights. In addition, even if we prevail, such litigation could be time-consuming and expensive to defend, and could result in the diversion of our time and attention, any of which could materially and adversely affect our business, results of operations and financial condition. Any claims or litigation from third parties may also result in limitations on our ability to use the trademarks and other intellectual property subject to such claims or litigation unless we enter into arrangements with the third parties responsible for such claims or litigation, which may be unavailable on commercially reasonable terms, if at all.

From time to time, we may selectively pursue claims of infringement of our patents and other intellectual property rights by third parties. Such claims and any resultant litigation present the risk that a court could determine, either preliminarily or finally, that some of our patents or other intellectual property rights are not valid, which may make it difficult to sell our technology solutions and may lead to a loss of and an inability to generate licensing revenue from our patents. In addition, even if we prevail, such litigation could be time-consuming and expensive to pursue, and could result in the diversion of our time and attention, any of which could materially and adversely affect our business, results of operations and financial condition.

RISKS RELATED TO OUR COMMON STOCK AND THE MARKET FOR OUR COMMON STOCK.

THE TRADING PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE HISTORICALLY AND MAY CONTINUE TO BE VOLATILE IN RESPONSE TO VARIOUS INTERNAL AND EXTERNAL FACTORS.

The trading price of our common stock has been volatile historically and may continue to be unstable. For example, during the past twelve months, the closing sales price of our common stock on the NASDAQ Global Market has ranged from a high of $11.61 per share to a low of $5.62 per share. The trading price of our common stock may fluctuate widely in response to various events and factors, some of which are beyond our control, such as quarterly or annual variations in the operating results and stock price performance of the Company, our competitors or our business partners; announcements by us or our competitors of acquisitions, new or improved products or services or business relationships; the initiation or discontinuation of coverage by securities analysts; guidance and reports by securities analysts, including changes in their financial earnings estimates and recommendations; announcements about our earnings estimates or earnings that are not in line with analyst expectations or prior Company guidance; announcements by our competitors about their earnings, especially if they are not in line with analyst expectations; sales of stock by us or by our stockholders; and new reports relating to trends in our markets and general economic conditions.

In addition, the stock market in general, and the market prices for technology or Internet-related companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations may negatively impact the market price for our common stock, regardless of our actual operating performance. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources. Additionally, volatility or a lack of positive performance in

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our stock price may adversely affect our ability to retain key employees, all of whom have been granted stock options or other equity-based awards.

WE HAVE A VERY SUBSTANTIAL OVERHANG OF COMMON STOCK AND FUTURE SALES OF OUR COMMON STOCK WILL CAUSE SUBSTANTIAL DILUTION AND MAY NEGATIVELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.

As of September 30, 2006, there were approximately 49.2 million shares of our common stock outstanding. As of that date, we also had an aggregate of approximately 12.4 million shares of common stock that may be sold into the market in the future, including approximately 7.7 million shares of our common stock issuable upon exercise of options, approximately 0.1 million shares of our common stock issuable upon the exercise of the warrants related to our preferred stock, approximately 2.4 million shares of our common stock issuable upon vesting of restricted shares, and approximately 2.2 million shares of our common stock issuable upon conversion of the debentures and exercise of the related warrants. In addition, if we undertake an additional acquisition or financing involving securities convertible into shares of our common stock, the aggregate number of shares into which those securities are convertible will further increase our overhang.

We cannot predict the effect, if any, that future sales of shares of our common stock into the market, or the availability of shares of common stock for future sale, will have on the market price of our common stock. Sales of substantial amounts of common stock (including the sale of securities convertible into shares of our common stock), or the perception that such sales could occur, or the grant of a large number of options, may materially and adversely affect prevailing market prices for our common stock.

WE DISCLOSE PRO FORMA INFORMATION, WHICH MAY EXCLUDE ITEMS THAT ARE IMPORTANT TO AN INVESTOR’S UNDERSTANDING OF OUR RESULTS OF OPERATIONS.

We prepare and release quarterly financial statements prepared in accordance with GAAP. We also disclose and discuss certain pro forma and other non-GAAP information in the related earnings releases and investor conference calls. This pro forma financial information excludes or may exclude certain special charges and other costs. We believe the disclosure of the pro forma financial information helps investors more meaningfully evaluate the results of our ongoing operations. However, we urge investors to carefully review the GAAP financial information included as part of our Quarterly Reports on Form 10-Q, our Annual Reports on Form 10-K, and our quarterly earnings releases, and to compare the GAAP financial information to the pro forma financial results disclosed in our quarterly earnings releases and investor calls.

OUR ABILITY TO GENERATE SUFFICIENT CASH FLOW TO REPAY OUR INDEBTEDNESS DEPENDS ON MANY FACTORS, SOME OF WHICH ARE BEYOND OUR CONTROL.

On September 26, 2003, we issued to a single holder $15.0 million in principal amount of our 2% subordinated convertible debentures due September 2006, subsequently extended to September 2009 at the election of the holder. On January 1, 2004, we began making semi-annual interest payments, which, thus far, we have elected to pay with cash flow from operations. We need to ensure that we have sufficient cash on hand to cover any portion of the balance that we elect to pay in cash at maturity, or, if the holder elects to exercise its redemption right with respect to $7.5 million in principal amount of the debentures, any amount thereof that we elect to redeem in cash. Our ability to generate cash flow is subject to economic, financial, competitive, regulatory and other factors beyond our control. If we are unable to generate sufficient cash flow to meet our debt service obligations, we may need to, among other things, seek additional financing, refinance or restructure our debt or reduce or issue a large amount of common stock, which, if possible, would be very dilutive or delay planned expenditures.

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THE TERMS OF THE DEBENTURES HAVE ANTI-DILUTION PROVISIONS FAVORING THE HOLDER, WHICH DISCOURAGE US FROM ENGAGING IN TRANSACTIONS IN WHICH THE ISSUANCE OF COMMON STOCK MIGHT BE REQUIRED AND WHICH OTHERWISE MIGHT BE BENEFICIAL TO OUR BUSINESS.

The terms of the debentures provide that, subject to certain exceptions, if, for financing purposes, we issue or sell any shares of our common stock at a price less than the conversion price of the debentures, which is $8.75 per share of our common stock, the conversion price of the debentures will be reduced to the price at which we issue new shares. This device, which is anti-dilutive for the debenture holder, may discourage us from engaging in a transaction that might otherwise be beneficial to our security holders, if we would be required to issue common stock at a price below $8.75 per share.

THE POWER OF OUR BOARD OF DIRECTORS TO DESIGNATE AND ISSUE SHARES OF STOCK COULD HAVE AN ADVERSE EFFECT ON HOLDERS OF OUR COMMON STOCK.

Our Board of Directors is authorized to issue up to 350,000,000 shares of common stock for such consideration as they may consider sufficient, without seeking stockholder approval. The issuance of additional shares of common stock in the future would reduce the proportionate ownership and voting power of current stockholders. Our Amended and Restated Certificate of Incorporation also authorizes our Board of Directors to issue up to 10,000,000 shares of preferred stock, the rights and preferences of which our Board of Directors may designate without stockholder approval. The designation and issuance of preferred stock in the future could create additional securities with dividend and liquidation preferences prior in right of payment to the outstanding shares of common stock.

EFFECTS OF ANTI-TAKEOVER PROVISIONS COULD INHIBIT THE ACQUISITION OF OUR COMPANY.

Some of the provisions of our Amended and Restated Certificate of Incorporation, our By-laws and Delaware law could, among other things, together or separately:

·discourage, delay or prevent potential acquisition proposals;

·discourage, delay or prevent transactions involving an actual or threatened change in control;

·impede the ability of our stockholders to change the composition of our board of directors in any one year; and

·limit the price that investors might be willing to pay for shares of our common stock.

These provisions may apply even if the action that is limited or prevented might be in the best interest of our shareholders.

WE DO NOT INTEND TO PAY FUTURE CASH DIVIDENDS.

We currently do not anticipate paying cash dividends on our common stock at any time in the near future. We may never pay cash dividends or distributions on our common stock. In addition, the terms of our debentures restrict our ability to pay cash dividends on our common stock. Whether we pay cash dividends in the future will be at the discretion of our Board of Directors and will be dependent upon our

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financial condition, results of operations, capital requirements, contractual restrictions and any other factors that the Board of Directors decides is relevant.

RISKS RELATED TO OUR INDUSTRY.

OUR FAILURE TO COMPETE SUCCESSFULLY MAY HINDER OUR GROWTH.

The markets for Internet advertising and related products and services are intensely competitive and such competition is expected to increase. Our failure to compete successfully may hinder our growth. We believe that our ability to compete depends upon many factors both within and beyond our control, including:

·the development of new online advertising media and methods;

·the timing and market acceptance of new products and enhancements of existing services developed by us and our competitors;

·the ability to attract and retain qualified personnel;

·changing demands regarding customer service and support;

·shifts in sales and marketing efforts by us and our competitors; and

·the ease of use, performance, price and reliability of our services and products.

Some of our competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than ours. In addition, current and potential competitors 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 clients.  In addition, most online advertising companies are seeking to broaden their business models, so that companies that do not currently compete directly with us may decide to compete more directly with us in the future. We may be unable to compete successfully against current or future competitors.

CHANGES IN GOVERNMENT REGULATION COULD DECREASE OUR REVENUES AND INCREASE OUR COSTS.

Laws and regulations directly applicable to Internet communications, commerce and advertising are becoming more prevalent, and new laws and regulations are under consideration by the United States Congress and state legislatures. Any legislation enacted or restrictions arising from current or future government investigations or policy could dampen the growth in use of the Internet generally and decrease the acceptance of the Internet as a communications, commercial and advertising medium. State governments or governments of foreign countries might attempt to regulate our transmissions or levy sales or other taxes relating to our activities. The laws governing the Internet, however, remain largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws such as those governing intellectual property, privacy, libel and taxation apply to the Internet and Internet advertising. In addition, the growth and development of Internet commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, which may impose additional burdens on companies conducting business over the Internet. Our

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business, results of operations and financial condition could be materially and adversely affected by the adoption or modification of laws or regulations relating to the Internet.

CHANGES IN DOMESTIC OR INTERNATIONAL LAWS AND STANDARDS RELATING TO DATA COLLECTION AND USE PRACTICES AND THE PRIVACY OF INTERNET USERS, OR RELATED LITIGATION, COULD HARM OUR BUSINESS.

The U.S. federal and various state governments have recently proposed limitations on the collection and use of information regarding Internet users. In 2004 and 2005, the U.S. Congress proposed several new pieces of legislation that would limit the use of technologies deemed to be “spyware,” which some bills have defined to include cookies, Web beacons and javascript, which are required by our products and services. The effectiveness of our Open AdStream products and services could be significantly limited by federal and state regulations limiting the collection or use of information regarding Internet users that are inconsistent with our policies and practices. Since many of the proposed federal and state laws or regulations are being developed, we cannot yet determine the impact these regulations may have on our business. In addition, growing public concern about privacy and the collection, distribution and use of personal information has led to self-regulation of these practices by the Internet advertising and direct marketing industry, and to increased federal and state regulation.  Lastly, a number of civil actions have been brought by federal and state authorities against companies alleged to have distributed “spyware” without the proper consent of users. The Network Advertising Initiative, of which we are a member, has developed self-regulatory principles for online preference marketing. We are also subject to various federal and state regulations concerning the collection, distribution and use of personal information. These laws include the Children’s Online Privacy Protection Act and state laws that limit or preclude the use of voter registration and drivers license information, as well as other laws that govern the collection and use of consumer credit information. While we monitor legislative initiatives, in the event that more onerous federal or state laws or regulations are enacted or applied to us or to our clients, our business, financial condition and results of operations could be materially and adversely affected.

We also face risks associated with international data and privacy protection. The interpretation and application of data protection laws in Europe and elsewhere are still uncertain and subject to change. It is possible that one or more of these laws may be interpreted and applied in a manner that is inconsistent with our policies on data collection and use, or that new laws may be enacted that conflict with our data collection and use. If so, we could be subjected to fines, face increased compliance costs, be required to change our data practices or be exposed to lawsuits, any one of which could have a material adverse effect on our business and results of operations.

PRIVACY CONCERNS MAY PREVENT US FROM COLLECTING USER DATA.

Growing concerns about the use of cookies and data collection may limit our ability to develop user profiles. Web sites typically place small files of information, commonly known as “cookies,” on a user’s hard drive, generally without the user’s knowledge or consent. Cookie information is passed to the Web site through the Internet user’s browser software. Our Open AdStream technology enables the use of cookies and other non-personally-identifying information to deliver targeted advertising and to limit the frequency with which an advertisement is shown to a user. Most currently available Internet browsers allow users to modify their browser settings to prevent cookies from being stored on their hard drive, and Microsoft Corporation changed the design and instrumentation of its Web browser to give users the option to accept or reject third-party cookies. A small minority of users are currently choosing to prevent certain cookies. Users can also delete cookies from their hard drive or modify them at any time. Some Internet commentators and privacy advocates have suggested limiting or eliminating the use of cookies. Any reduction or limitation in the use of cookies or increase in the number of users blocking cookies could limit the effectiveness of our sales and marketing efforts and impair our profiling and targeting

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capabilities. Such changes also could adversely affect our ability to determine the reach of advertising campaigns sold and delivered by us and the frequency with which users of sites in the Web Alliance see the same advertisement.

If the use or effectiveness of cookies is limited, we would likely have to switch to other technology that would allow us to gather demographic and behavioral information. While such technology currently exists, it is substantially less effective than cookies. Replacement of cookies could require significant engineering time and resources, might not be completed in time to avoid negative consequences to our business, financial condition or results of operations, and might not be commercially feasible.

WE FACE RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE.

The Internet and Internet advertising markets are characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions and changing customer demands. Our future success will depend on our ability to adapt to rapidly changing technologies and to enhance existing solutions and develop and introduce a variety of new solutions to address our customers’ changing demands. We may experience difficulties that could delay or prevent the successful design, development, introduction or marketing of our solutions. In addition, our new solutions or enhancements must meet the requirements of our current and prospective customers and must achieve significant market acceptance. Material delays in introducing new solutions and enhancements may cause customers to forego purchases of our solutions and purchase those of our competitors.

In addition, the development of commercial software and technology that blocks, eliminates or otherwise screens out Internet advertising may reduce the value of advertising inventory on our Web Alliance and the benefits of our technology solutions to our customers. We cannot guarantee that a new commercial software or technology, for end-users or enterprises, will not be capable of eliminating a portion or all of the advertisement formats, including banners, pop-ups, pop-unders and other formats, that we utilize through our Web Alliance or that we currently deliver through our technology solutions. To the extent that our customers refuse to pay for advertisements that are blocked, or if the use of blocking software exceeds our expectations, our business, results of operations and financial condition may be materially and adversely affected.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5.  OTHER INFORMATION

None.

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ITEM 6.  EXHIBITS

Exhibits

Exhibit 31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
Exhibit 31.2	Certification of Chief Operating Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
Exhibit 32.1	Certification of Chief Executive Officer and Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.†

________________________

*              Filed herewith.

†              Furnished herewith.

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SIGNATURES

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.

	24/7 REAL MEDIA, INC.
	(Registrant)
Date: November 9, 2006	By:	/s/ DAVID J. MOORE
		David J. Moore
		Chairman and Chief Executive Officer (Principal Executive Officer)

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EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, David J. Moore, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of 24/7 Real Media, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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.

Date: November 9, 2006

/s/ David J. Moore

Chairman and Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Jonathan K. Hsu, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of 24/7 Real Media, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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.

Date: November 9, 2006

/s/ Jonathan K. Hsu

Executive Vice President, Chief Operating Officer, and

    Chief Financial Officer

(Principal Financial and Accounting Officer)

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 of 24/7 Real Media, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers does hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 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 result of operations of the Company.

Dated: November 9, 2006	/s/ David J. Moore
	Chairman and Chief Executive Officer
	(Principal Executive Officer)
Dated: November 9, 2006	/s/ Jonathan K. Hsu
	Executive Vice President, Chief Operating Office and Chief Financial Officer
	(Principal Financial and Accounting Officer)

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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