24/7 MEDIA INC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

or

/ / TRANSITIONAL 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 (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

7319
(STANDARD INDUSTRIAL CLASSIFICATION CODE)

1250 BROADWAY, NEW YORK, NY 10001
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(212) 231-7100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

Indicate by check mark whether the registrant 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 / /

APPLICABLE ONLY TO CORPORATE ISSUERS:

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 August 14, 2002
Common Stock, par value $.01 per share 51,720,332 Shares

24/7 REAL MEDIA, INC.
JUNE 30, 2002
FORM 10-Q
INDEX

Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001.............. 2
Consolidated Statements of Operations for the three and six month periods ended
June 30, 2002 and 2001 (unaudited)....................................................... 3
Consolidated Statements of Cash Flows for the three and six month periods ended
June 30, 2002 and 2001 (unaudited)........................................................ 4
Notes to Unaudited Interim Consolidated Financial Statements................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................. 19
Item 3. Quantitative and Qualitative Disclosure about Market Risk............................. 28
Part II. Other Information
Item 1. Legal Proceedings..................................................................... 42
Item 2. Changes in Securities and Use of Proceeds............................................. 42
Item 3. Defaults Upon Senior Securities....................................................... 42
Item 4. Submission of Matters to a Vote of Security Holders................................... 42
Item 5. Other Information..................................................................... 42
Item 6. Exhibits and Reports on Form 8-K...................................................... 42
Item 7. Signatures............................................................................ 42

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24/7 REAL MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

See accompanying notes to unaudited interim consolidated financial statements.

2

24/7 REAL MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

See accompanying notes to unaudited interim consolidated financial statements.

3

24/7 REAL MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

See accompanying notes to unaudited interim consolidated financial statements.

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(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF OPERATIONS AND GOING CONCERN

24/7 Real Media together with its subsidiaries is a provider of marketing
solutions to the digital advertising industry including Web publishers, online
advertisers, advertising agencies, e-marketers and e-commerce merchants. In
October 2001, through the merger with Real Media, the Company has expanded its
operations into Europe. The Company operates in two principal lines of business:
Integrated Media Solutions and Technology Solutions.

- Integrated Media Solutions connects advertisers to audiences via
Web-based advertising including banner ads, sponsorships, targeted
search traffic delivery, and promotions, and also serves as a list
broker for permission-based email lists.
- Technology Solutions, through Open Adstream, its propriety technology,
provides advertising delivery and management.

The Company's business is characterized by rapid technological change, new
product development and evolving industry standards. Inherent in the Company's
business are various risks and uncertainties, including its limited operating
history, unproven business model and the limited history of commerce and
advertising on the Internet. The Company's success may depend, in part, upon the
continued expansion of the Internet as a communications medium, prospective
product development efforts and the continued acceptance of the Company's
solutions by the marketplace.

The Company's independent public accountants have included a "going concern"
explanatory paragraph in their audit report accompanying the 2001 consolidated
financial statements that have been prepared assuming that the Company will
continue as a going concern. The explanatory paragraph states that the Company's
recurring losses from operations since inception and working capital deficiency
raise substantial doubt about the Company's ability to continue as a going
concern and that the consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

FACTORS AFFECTING COMPARABILITY OF 2002 AND 2001

On October 30, 2001, the Company acquired Real Media. The merger created cost
synergies for the combined company, one of which was to focus on Real Media's
proprietary Open Adstream technology and abandon the existing ad serving
technology, 24/7 Connect. The transition of the network business onto the Open
Adstream platform began in December 2001 and was completed in February 2002
resulting in the elimination of redundant personnel and operating costs
associated with the two ad serving platforms, Open Adstream and 24/7 Connect.
Throughout 2001, in accordance with its business plan, the Company divested or
discontinued many non-core assets, including:
- In May 2001, the Company completed the sale of certain technology
assets and intellectual property of Sabela and completed the shut down
of Sabela operations on June 30, 2001.
- In May 2001, the Company completed the sale of Exactis, an email
service bureau.
- In August 2001, the operations of 24/7 Europe were shut down, which
have been restated in the consolidated financial statements to reflect
the disposition of this international segment.
- In January 2002, the Company completed the sale of our IMAKE
subsidiary. The financial statements of prior periods have been
restated to reflect the disposition of IMAKE.
- In May 2002, the Company completed the sale of certain assets related
to the US email management product.

The revenue attributed to the disposition of these non-core assets for the three
and six month periods ended June 30, 2002 was approximately $0.4 million and
$1.6 million, respectively, and $4.1 million and $12.8 million for the three and
six month periods ended June 30, 2001. This does not include $6.0 million and
$14.0 million for the three and six month periods ended June 30, 2001, related
to 24/7 Europe and IMAKE, which are shown as part of discontinued operations in
the 2001 consolidated statement of operations.

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As a result of the cost-cutting and divestiture efforts, which began in
November 2000 through January 2002, the Company reduced its headcount by
approximately 1,000 and closed several offices, both domestic and foreign
(see notes 2,3 and 4 for additional information).

ORGANIZATION AND BASIS OF PRESENTATION

PRINCIPLES OF CONSOLIDATION

The Company's consolidated financial statements as of June 30, 2002 and December
31, 2001 and for the three and six month periods ended June 30, 2002 and 2001
include the accounts of the Company and its majority-owned and controlled
subsidiaries from their respective dates of acquisition (see note 2). 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.

INTERIM RESULTS

The consolidated financial statements as of June 30, 2002 and for the three and
six month periods ended June 30, 2002 and 2001 have been prepared by 24/7 Real
Media and are unaudited. In the Company's opinion, the unaudited 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 as of June 30, 2002 and the results of the Company's operations and
cash flows for the interim periods ended June 30, 2002 and 2001. The financial
data and other information disclosed in these notes to the consolidated results
for the three and six month periods ended June 30, 2002 and 2001 are not
necessarily indicative of the results to be expected for any subsequent quarter
or the entire fiscal year ending December 31, 2002.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations. It is suggested that these unaudited
consolidated financial statements be read in conjunction with our audited
consolidated financial statements and notes thereto for the year ended December
31, 2001 as included in the Company's report on Form 10-K.

In addition, the Company restated the 2001 financial statement information
included in this Form 10-Q in order to reflect the January 2002 sale of IMAKE as
a discontinued operation in accordance with the Financial Accounting Standards
Board ("FASB") SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (see note 3).

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid securities, with original maturities of
three months or less, to be cash equivalents. Cash and cash equivalents
consisted principally of money market accounts.

UNBILLED RECEIVABLES

At June 30, 2002 and December 31, 2001, accounts receivable included
approximately $3.2 million and $2.4 million, respectively, of earned but
unbilled receivables, which are a normal part of the Company's business, as
receivables are generally invoiced only after the revenue has been earned. The
terms of the related advertising contracts typically require billing at the end
of each month. All unbilled receivables as of June 30, 2002 have been
subsequently billed.

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COMPREHENSIVE LOSS

Total comprehensive loss for the six month periods ended June 30, 2002 and 2001
was $(7.8) million and $(136.3) million, respectively. Comprehensive loss
resulted primarily from net losses of $(7.9) million and $(132.5) million,
respectively, as well as a change in unrealized gains (losses)(net of tax), of
marketable securities of $0 and $(3.8) million, respectively, and foreign
currency translation adjustments of $0.1 and $0, respectively. The net change in
unrealized gains (losses) of $3.8 million for the six months ended June 30, 2001
is comprised of net unrealized holding losses arising during the period of $5.4
million related to chinadotcom, a reclassification adjustment of $4.1 million
for net gains on the sale of investments in marketable securities and a
reclassification adjustment of $2.5 million for other-than-temporary losses
related to available-for-sale securities of Network Commerce and i3Mobile.

LOSS PER SHARE

Loss per share is presented in accordance with the provisions of Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("EPS"). Basic EPS
excludes dilution for potentially dilutive securities and is computed by
dividing income or 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. Diluted net loss per share is equal to basic net loss
per share since all potentially dilutive securities are anti-dilutive for each
of the periods presented. Diluted net loss per common share for the periods
ended June 30, 2002 and 2001 does not include the effects of options to purchase
10.3 million and 8.9 million shares of common stock, respectively; 4.0 million
and 2.8 million common stock warrants; and in 2001, 0.1 million shares of
unvested restricted stock, respectively, on an "as if" converted basis, as the
effect of their inclusion is anti-dilutive during each period.

RECLASSIFICATIONS

Certain reclassifications have been made to prior year consolidated financial
statements to conform to current year's presentation.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and
64, Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 4 required
all gains and losses from the extinguishment of debt to be reported as
extraordinary items and SFAS No. 64 related to the same matter. SFAS No. 145
requires gains and losses from certain debt extinguishment not to be reported as
extraordinary items when the use of debt extinguishment is part of the risk
management strategy. SFAS No. 44 was issued to establish transitional
requirements for motor carriers. Those transitions are completed, therefore SFAS
No. 145 rescinds SFAS No. 44. SFAS No. 145 also amends SFAS No. 13 requiring
sale-leaseback accounting for certain lease modifications. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. The provisions relating
to sale-leaseback are effective for transactions after May 15, 2002. The
adoption of SFAS No. 145 is not expected to have a material impact on the
Company's financial position or results of operations.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." The
principal difference between SFAS No. 146 and EITF 94-3 relates to the timing
of liability recognition. Under SFAS No. 146, a liability for a cost
associated with an exit or disposal activity is recognized when the liability
is incurred. Under EITF 94-3, a liability for an exit cost was recognized at
the date of an entity's commitment to an exit plan. The provisions of SFAS
No. 146 are effective for exit or disposal activities

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that are initiated after December 31, 2002. The adoption of SFAS No. 146 is not
expected to have a material impact on the Company's financial position or
results of operations.

(2) BUSINESS COMBINATIONS

ACQUISITION OF REAL MEDIA

On October 30, 2001, the Company entered into a merger agreement with Real
Media, Inc. ("Real Media"), a privately-held Delaware Corporation. Pursuant to
the Agreement and Plan of Merger, the Company acquired all the outstanding
common and preferred shares of Real Media in a merger transaction whereby an
indirect subsidiary of the Company was merged with and into Real Media, in
exchange for approximately 8.2 million shares valued at $2.2 million of the
Company's common stock, equal to 19.9 percent of the Company common stock prior
to the merger. The total purchase price of $6.4 million also included
acquisition and transaction costs of $0.9 million and assumption of $3.3 million
in net liabilities. The merger created cost reductions for the combined Company,
a significant portion of which resulted from the Company's decision to fully
adopt Real Media's proprietary Open AdStream technology ("OAS") and abandon the
Company's existing ad-serving technology, 24/7 Connect. Other cost reductions
were achieved through the elimination of redundant personnel, renegotiating
affiliate contracts with low split rates on the Real Media network,
renegotiation of supplier contracts at better rates due to increased volume and
the consolidation of numerous offices. The Company also adopted a new name "24/7
Real Media, Inc." to capitalize on the Real Media and 24/7 brand names. The
purchase price in excess of the value of net liabilities acquired of $6.4
million has been allocated $3.5 million to acquired technology, $0.5 million to
tradename and $2.4 million to goodwill. The acquired technology and tradename
are being amortized over the expected period of benefit of four years. The
acquisition was accounted for as a purchase business combination in accordance
with Statement of Financial Accounting Standards Board 141, "Business
Combinations" and Statement of Financial Accounting Standards Board 142,
"Goodwill and Other Intangible Assets". Accordingly, goodwill was not amortized.

The Company also guaranteed a Promissory Note for $4.5 million issued to
Publigroupe USA Holding, Inc. ("Publigroupe"), former principal shareholder of
Real Media, as of the acquisition date, which was to be used primarily to
finance Real Media's restructuring plan. The note bears interest at 4.5% and
principal and interest are due on October 30, 2006. The restructuring plan
provides for office closings of $0.2 million, workforce reduction of
approximately 120 employees for $3.1 million and other related obligations of
$1.2 million (see note 9). In addition, certain key executives had clauses in
their Real Media employment agreements that called for transactional bonuses to
be paid in the case of a change in control. These bonuses of $0.5 million were
assumed as part of the acquisition and were paid by the Company in November
2001. Publigroupe also promised to provide additional funding in the form of
three-year notes of $1.5 million which was received in January 2002 and $1.5
million based on the Company achieving certain target operating results for the
three months ended March 31, 2002, which was received on May 13, 2002 (see note
3).

The net liabilities acquired consist of the following:

The following unaudited pro forma consolidated amounts give effect to the
Company's acquisition of Real Media accounted for by the purchase method of
accounting as if it had occurred at the beginning of the

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period by consolidating the results of operations of the acquired entity for the
three and six month periods ended June 30, 2001.

The unaudited pro forma consolidated statements of operations are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of the beginning of the periods presented
and should not be construed as being representative of future operating results.

(1) See Factors Affecting Comparability of 2002 and 2001 in footnote 1 as the
pro formas are not comparable to the current period due to divestitures
during 2001 and 2002.

(2) The weighted average shares used to compute pro forma basic and diluted net
loss per share for the three and six month periods ended June 30, 2001 includes
the 8,216,868 shares issued for Real Media as if the shares were issued on
January 1, 2001.

(3) DISCONTINUED OPERATIONS

EUROPE
On August 6, 2001, the Company, determined that it would cease funding its
European subsidiaries and communicated that to 24/7 Europe NV's management team
and Board of Directors. Subsequently, management of 24/7 Europe advised the
Company that 24/7 Europe NV was insolvent and shut down all operations in the
third quarter of 2001. During the second quarter of 2001, the Company had
reduced the carrying value of the net assets of the European operations to zero.
The write down included $12.3 million in impairment charges related to goodwill
and other intangible assets, which was included in the second quarter of 2001
statements of operations within discontinued operations.

IMAKE
In accordance with SFAS 144, operations meeting the definition of a component of
an entity are treated as discontinued operations when sold. On January 22, 2002,
the Company completed the sale of its wholly owned subsidiary, IMAKE Software &
Services, Inc, to Schaszberger Corporation, the previous owner and officer of
IMAKE. Under the terms of the sale, the purchase price payable by the buyer was
approximately $6.5 million for the stock of IMAKE of which $2.0 million was in
the form of a 6% four year secured note, approximately $500,000 in cash
consideration, a potential earnout of up to $4 million over the next three years
based on gross revenue as defined in the agreement and Series A preferred stock
of Schaszberger Corp which as of the closing date represented 19.9% of the
buyer. The Note secured by certain assets of IMAKE is guaranteed by Schaszberger
Corporation. In the event that the earnout is not met within the three year
period, the Company is entitled to receive a $1.00 Warrant for common stock
equivalent to the difference between $3.0 million and actual earn out paid to
date. The shares to be received is based on a

9

third party outside valuation of the Buyer at December 31, 2005 and a ratio set
forth in the agreement. The consideration paid to the Company was determined as
a result of negotiations between the buyer and the Company. The Company has
discounted the note receivable and recorded the net present value of the earnout
based on its estimates of projected revenues and reflected $0.5 million and $1.5
million, respectively. In January, the Company received the upfront cash
consideration of $0.5 million and has been receiving the monthly earnout
payments. As of June 30, 2002, there are approximately $0.3 million in short
term and $1.7 million in long term in notes and amounts receivable from
disposition related to IMAKE on the consolidated balance sheet. In July, the
Company received $0.1 million in earn-out payments for the second quarter of
2002.

The consolidated financial statements of the Company have been restated to
reflect the disposition of the international segment and the sale of the IMAKE
subsidiary as a discontinued operation in accordance with APB Opinion No. 30.
Accordingly, revenues, costs and expenses, assets, liabilities, and cash flows
of Europe and IMAKE have been excluded from the respective captions in the
Consolidated Statements of Operations, Consolidated Balance Sheets and
Consolidated Statements of Cash Flows, and have been reported through the date
of disposition as "Loss from discontinued operations," "Net assets of
discontinued operations," and "Net cash used by discontinued operations," for
all periods presented.

Summarized financial information for the discontinued operations is as follows
(in thousands):

STATEMENT OF OPERATIONS DATA

BALANCE SHEET DATA

(4) DISPOSAL OF NON-CORE ASSETS

On May 23, 2001, the Company completed the sale of Exactis to Direct Marketing
Technologies, Inc., a subsidiary of Experian Marketing Solutions, Inc.
("Experian"). The purchase price was $15.25 million of which $1.5 million was
deposited into escrow until August 2002 as security for the Company's
indemnification obligations under the Stock Purchase Agreement and $1.75 million
was retained as a prepayment for future services that are to be purchased by the
Company from Experian pursuant to a services agreement that expires on December
31, 2002. During the second quarter of 2001, the $1.5 million in escrow and
$1.75 million prepayment had been reflected as deferred gain on sale of non-core
assets on the consolidated balance sheet. As the prepaid services are used, the
deferred gain is recognized.

In September 2001, the Company received a letter from Experian alleging that the
Company made certain misrepresentations and omissions in connection with the
Stock Purchase Agreement relating to the sale of Exactis. On March 27, 2002, the
Company and Experian reached a settlement agreement whereby the Company
authorized the escrow agent to release $750,000 to Experian, and Experian
authorized the escrow agent to release the remaining balance of approximately
$780,000 to the Company. On March 28, 2002, the funds were released to the
Company. Upon release of the escrow balance, the Company recognized $750,000 of
the deferred gain related to the sale as gain on sale of non-core assets in the
2002 statement of operations and $30,000 as interest income.

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During the six month period ended June 30, 2002, the Company has been billed
approximately $172,000 in services which have been reflected as cost of revenues
and gain on sale of non-core assets in the statement of operations. Through June
30, 2002, the sale has resulted in a loss of $3.5 million, not including the
remainder of the aforementioned deferred gains of $0.1 million. The Company has
reflected the remaining $0.1 million of prepaid services in prepaid and other
current assets on the consolidated balance sheet.

SALE OF CERTAIN US EMAIL ASSETS
On May 3, 2002, the Company completed the sale of certain assets related to
its US email management product, including customer contracts, certain
intangibles and employee relationships, to 24/7 Mail, Inc., a wholly owned
subsidiary of Naviant, Inc. Under the terms of the sale, the purchase price
payable is up to $4.5 million. The purchase price is comprised of (i) $1.0
million that was paid at closing; (ii) $1.0 million in the form of a
non-interest bearing installment note with $350,000 due in ninety days,
$350,000 due in one hundred and eighty days and $300,000 due in two hundred
seventy days from closing; (iii) an earn-out payable quarterly over the next
45 months, based on 5% of Net Revenue (as defined in the Asset Purchase
Agreement), with minimum payments of $600,000 and a maximum of $2.0 million.
Lastly, pursuant to a $500,000 non-interest bearing installment note, half of
which is payable on each of April 30, 2004 and April 30, 2005, Naviant has
the option either to (i) issue to the Company a number of shares currently
comprising 19.9% of 24/7 Mail, Inc., or (ii) pay the Company cash in lieu of
the shares. The consideration paid to the Company was determined as a result
of arms-length negotiations between the buyer and the Company. The Company
recorded a loss of $0.8 million on the sale.

As of June 30, 2002, there are approximately $1.0 million in short term and
$1.1 million in long term notes and amounts receivables from disposition
related to the sale of certain US email assets on the consolidated balance
sheet. On July 30, 2002, the Company received a letter from Naviant alleging
that the Company made certain misrepresentations with respect to Naviant's
purchase of the assets of the US email management product. Naviant is
claiming damages of approximately $2.3 million, which it intends to offset
against the amounts due to the Company. Based on the Company's preliminary
review of the information supplied, the Company believes that Naviant's
claims are unfounded and that we remain entitled to receive all of the
amounts owed, although there can be no assurance that we will collect all, or
any, additional amounts owed. Naviant did not make its initial payment of
$350,000 which was due on August 1, 2002.

In summary, for the three months ended June 30, 2002, the $0.6 million loss
on sale of non-core assets includes $0.8 million related to the sale of
certain assets related to the US email management product, offset by a $0.1
million gain related to the amortization of prepaid Exactis services and a
$0.1 million gain related to the reversal of an accrual related to the sale
of Exactis that was deemed unnecessary. For the six months ended June 30,
2002, the $0.3 million gain on sale of non-core assets consists of a $0.8
million for the release of the Exactis escrow amount, $0.2 million related to
the amortization of prepaid services and a $0.1 million related to the
reversal of an accrual related to the sale of Exactis that was deemed
unnecessary, offset by a loss of $0.8 million related to the sale of certain
assets related to the US email management product.

(5) INTANGIBLE ASSETS, NET

The Company performs on-going business reviews and, based on quantitative and
qualitative measures, assesses the need to record impairment losses on
long-lived assets used in operations when impairment indicators are present.
Where impairment indicators were identified, the Company determined the amount
of the impairment charge by comparing the carrying values of goodwill and other
long-lived assets to their fair values.

Through August 2000, the Company completed numerous acquisitions that were
financed principally with shares of the Company's common stock and were valued
based on the price of the common stock at that time. Starting with the fourth
quarter of 2000, the Company reevaluated the carrying value of its businesses on
a quarterly basis. The revaluation was triggered by the continued decline in the
Internet advertising and marketing sectors throughout 2000 and 2001. In
addition, each of these entities have experienced declines in operating and
financial metrics over several quarters, primarily due to the continued weak
overall demand of on-line advertising and marketing services, in comparison to
the metrics forecasted at the time of their

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respective acquisitions. These factors significantly impacted current projected
revenue generated from these businesses. The Company's evaluation of impairment
was also based on achievement of the unit's business plan objectives and
milestones, the fair value of each business unit relative to its carrying value,
the financial condition and prospects of each business unit and other relevant
factors. The business plan objectives and milestones that were considered
included, among others, those related to financial performance, such as
achievement of planned financial results, and other non-financial milestones
such as successful deployment of technology or launching of new products and the
loss of key employees. The impairment analysis also considered when these
properties were acquired and that the intangible assets recorded at the time of
acquisition were being amortized over useful lives of 2 - 4 years. The amount of
the impairment charge was determined by comparing the carrying value of goodwill
and other long-lived assets to fair value at each respective period end.

Where impairment was indicated, the Company determined the fair value of its
business units based on a market approach, which included an analysis of market
price multiples of companies engaged in similar businesses. To the extent that
market comparables were not available, the Company used discounted cash flows in
determining the value. The market price multiples are selected and applied to
the business based on the relative performance, future prospects and risk
profile of the business in comparison to the guideline companies. The
methodology used to test for and measure the amount of the impairment charge was
based on the same methodology used during the initial acquisition valuations. As
a result, during the Company's review of the value and periods of amortization
of both goodwill and certain other intangibles it was determined that the
carrying value of goodwill and certain other intangible assets were not
recoverable. The other intangible assets that were determined to be impaired
related to the decline in fair market value of acquired technology, a
significant reduction in the acquired customer bases and turnover of workforce
which was in place at the time of the acquisition of these companies.

As a result, the Company determined that the fair value of goodwill and other
intangible assets attributable to several of its operating units were less than
their recorded carrying values. Accordingly, the Company recognized $35.5
million in impairment charges to adjust the carrying values in the first quarter
of 2001 and an additional $11.6 million in the second quarter of 2001. Of this
amount $25.3 million related to Mail, $17.3 million related to WSR and $4.5
million related to Exactis.

The impairment factors evaluated may change in subsequent periods, given that
the Company's business operates in a highly volatile business environment. This
could result in significant additional impairment charges in the future.

As of June 30, 2002, the goodwill and other intangibles, net was $9.3 million:
$5.9 million related to Real Media, $2.3 million related to WSR and $1.1 million
related to ClickThrough.

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(1) On May 3, 2000, the Company sold certain assets related to the US email
management product which included $3.8 million in goodwill.
(2) In connection with the adoption of SFAS 142, on January 1, 2002, the Company
reclassified $420 in net book value associated with its assembled workforce to
goodwill.

Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards Board 142, "Goodwill and Other Intangible Assets" ("SFAS 142") and
Statement of Financial Accounting Standards Board 144, "Accounting for the
Impairment or Disposal of Long-Lived Asset ("SFAS 144"). SFAS 142 eliminates the
amortization of goodwill and indefinite-lived intangible assets, addresses the
amortization of intangible assets with finite lives and addresses impairment
testing and recognition for goodwill and intangible assets. SFAS 144 establishes
a single model for the impairment of long-lived assets and broadens the
presentation of discontinued operations to include more disposal transactions.
The Company has completed its initial transitional goodwill impairment
assessment in the second quarter of 2002 and determined that there was no
impairment of goodwill.

The Company assesses goodwill for impairment annually unless events occur that
require more frequent reviews. Long-lived assets, including amortizable
intangibles, are tested for impairment if impairment triggers occur. Discounted
cash flow analyses are used to assess nonamortizable intangible impairment while
undiscounted cash flow analyses are used to assess long-lived asset impairment.
If an assessment indicates impairment, the impaired asset is written down to its
fair market value based on the best information available. Estimated fair market
value is generally measured with discounted estimated future cash flows.
Considerable management judgment is necessary to estimate undiscounted and
discounted future cash flows. Assumptions used for these cash flows are
consistent with internal forecasts.

The amortization expense and net loss for the three and six month periods ended
June 30, 2002 and 2001 had SFAS 142 been applied for both periods is as follows:

13

(6) INVESTMENTS

The fair value of the available-for-sale marketable securities is based on the
quoted market values reported on NASDAQ. As of September 30, 2001, the Company
has sold all of its marketable and cost based securities.

During the six months ended June 30, 2001, the Company sold all its remaining
shares of chinadotcom stock at prices ranging from $2.00 to $7.69 per share. The
shares had a cost basis of $1.7 million, which resulted in a gain of
approximately $4.6 million. The Company also sold all of its investments in
Network Commerce and i3Mobile, which resulted in proceeds of $0.6 million and a
loss of approximately $0.5 million. The Company's net gain on the sale of these
investments are included in "Gain on sale of investments, net" within other
income (expense) in the Company's consolidated statement of operations.

During the first quarter of 2001, the Company wrote down certain of its
investments and recognized impairment charges of approximately $3.1 million for
other-than-temporary declines in value of certain investments. The Company's
management made an assessment of the carrying value of its cost-based
investments and determined that they were in excess of their carrying values due
to the significance and duration of the decline in valuations of comparable
companies operating in the Internet and technology sectors. The write down of
cost based investments was $0.6 million related to Media-Asia. The Company's
management also recognized that the decline in value of its available-for-sale
investments in Network Commerce and i3Mobile were other-than-temporary and
recorded an impairment of $2.3 million and $0.2 million, respectively. These
impairment charges are included in "Impairment of investments" within other
income (expense) in the Company's 2001 consolidated statement of operations.

(7) COMMON STOCK

In April 2002, the Company issued 416,784 shares, valued at $0.1 million,
principally to the CEO, for 2001 bonuses as reported in the Company's 10-K and
accrued as of December 31, 2001.

During the first quarter of 2002, approximately 52 employees including members
of senior management agreed to receive between 5-20% of their compensation in
the form of the Company's common stock in lieu of cash. As a result,
approximately 682,000 shares, valued at $0.2 million, were issued by March 31,
2002. These shares were issued out of the Company's 2001 Equity Compensation
Plan ("2001 Equity Plan"). During the second quarter of 2002, approximately 19
employees participated in a similar plan under the Company's 2002 Equity
Compensation Plan. As a result, approximately 255,000 shares, valued at
approximately $0.1 million, were issued in August 2002. These amounts are
recorded as stock based compensation in the period that they are earned.

On March 23, 2001, the Company issued 710,000 shares of common stock to
employees of the Company for meeting the earn-out provisions in the WSR merger
agreement, as amended. The related compensation expense of approximately $0.2
million is reflected as stock based compensation expense in the

14

consolidated statements of operations. Substantially all of these shares were
returned as part of the settlement with the former principal stockholders on
September 25, 2001.

On May 23, 2000, the Company offered certain members of management the option of
exchanging their January 1, 2000 option grants for restricted stock in a ratio
of one share for three options. As a result, the Company cancelled 832,500
options and issued approximately 285,000 shares of restricted stock to these
employees of the Company, which vest over a period of three to four years. Such
grants resulted in a deferred compensation expense of approximately $4.5
million, which is being amortized over the vesting period of those shares. For
the three and six month periods ended June 30, 2002 and 2001, 6,646, 13,292,
10,396, and 140,168 shares, respectively, were granted to employees according to
their vesting schedule.

(8) STOCK INCENTIVE PLAN

For the six month period ended June 30, 2002, the Company granted approximately
7.3 million stock options under the 1998 Stock Incentive Plan and 1.6 million
stock options under the 2001 Stock Incentive Plan for Non-officers to employees
at exercise prices based on the fair market value of the Company's common stock
at the respective dates of grant.

On January 1, 2002, in accordance in the terms of the 2001 Plan, shares
available under the Plan were increased by 1,485,230.

On April 22, 2002, the Board approved the 24/7 Real Media, Inc. 2002 Equity
Compensation Plan to enable the Company to offer and issue to certain employees,
former employees, advisors and consultants of the Company and its affiliates its
common stock in payment of amounts owed to such third parties. The aggregate
number of shares of common stock that may be issued pursuant to the 2002 Equity
Compensation Plan shall not exceed 3,000,000 shares. The Company may from time
to time issue to employees, former employees, advisors and consultants to the
Company or its affiliates shares of its common stock in payment or exchange for
or in settlement or compromise of amounts due by the Company to such persons for
goods sold and delivered or to be delivered or services rendered or to be
rendered. Shares of the Company's common stock issued pursuant to the 2002
Equity Compensation Plan will be issued at a price per share of not less than
eighty-five percent (85%) of the fair market value per share on the date of
issuance and on such other terms and conditions as determined by the Company.
The Chief Executive Officer of the Company is authorized to issue shares
pursuant to and in accordance with the terms of the 2002 Equity Compensation
Plan, provided that all issuances shall be co-authorized by at least one of the
President, any Executive Vice President, the Chief Financial Officer or the
General Counsel. The plan may be amended at any time by the Company.

(9) RESTRUCTURING CHARGES

During the three and six month periods ended June 30, restructuring charges of
approximately $0.1 million and $0.4 million, respectively, were recorded by the
Company in accordance with the provisions of EITF 94-3, and Staff Accounting
Bulletin No. 100. The Company's restructuring initiatives were to reduce
employee headcount by the involuntary termination of approximately 100
employees.

The following sets forth the activities in the Company's restructuring reserve
for the six months ended June 30, 2002, which is included in accrued expenses in
the consolidated balance sheet (in thousands):

15

During the second quarter of 2002, the Company reversed $320,000 of
restructuring reserves acquired with the Real Media acquisition against goodwill
as they were no longer deemed necessary.

(10) SEGMENT INFORMATION

On October 30, 2001, the Company merged with Real Media. As a result of this
merger and the restructuring performed by both companies, the Company has
changed how it operates its businesses and views its reportable segments. Based
on these operational changes the consolidated financial statements presented
have been restated to reflect these new reportable segments. The Company's
business is currently comprised of two reportable segments: Integrated Media
Solutions and Technology Solutions. The Integrated Media Solutions segment
generates the majority of its revenues by delivering advertisements and
promotions to affiliated Web sites, search engine traffic delivery and marketing
services to target online users compiled by list management. The Technology
Solutions segment generates revenue by providing third party ad serving, email
delivery service bureau and technology services. The Company's management
reviews corporate assets and overhead expenses for each segment. The
summarized segment information as of and for the three and six month periods
ended June 30, 2002 and 2001, is as follows:

16

(1) Not included in the segment columns are stock based compensation of
$111,000 and $124,000 for the three months ended June 30, 2002 and 2001,
respectively, and $343,000 and $451,000 for the six months ended June 30,
2002 and 2001, respectively.
(2) Not included above at December 31, 2001 are $2.4 million in assets related
to discontinued operations.

Geographical information is as follows:

Not included above at December 31, 2001 are $1.7 million in long-lived assets
related to discontinued operations.

(11) SUPPLEMENTAL CASH FLOW INFORMATION

The amount of cash paid for interest was $4,000 for the six month periods ended
June 30, 2002 and 2001.

(12) RELATED PARTY

LOAN PAYABLE
In conjunction with the merger with Real Media, the Company also guaranteed a
Promissory Note for $4.5 million issued to Publigroupe as of the acquisition
date, which was to be used in accordance with Real Media's restructuring plan
and in payment of transactional bonuses. The restructuring plan provides for
office closings, workforce reduction and other related obligations (see note 9
for details).

The note bears interest at 4.5% and principal and interest are due on October
30, 2006. In addition, in accordance with the Real Media purchase agreement,
in January 2002 the Company received cash of $1.5 million and signed a
promissory note bearing interest at 6%, with interest and principal due in
January 2006. Based on the Company achieving certain target operating results
for the three months ended March 31, 2002 it received another $1.5 million in
the form of a 6% three year promissory note on May 13, 2002, with principal
and interest due in May 2005.

The interest expense related to these notes for the six months ended June 30,
2002 was approximately $150,000.

(13) SUBSEQUENT EVENTS

On July 2, 2002, the Company entered into a Series A and Series A-1 Preferred
Stock and Common Stock Warrant Purchase Agreement with Sunra Capital Holdings
Limited ("Sunra"). Sunra purchased $1.6 million of the Company's newly created
Series A Convertible Preferred Stock at $10 per share, $3.4 million of its newly

17

created Series A-1 Non Voting Convertible Preferred Stock at $10 per share,
and may, at its option, purchase up to an additional $2 million of the Series
A Preferred Stock. On August 8, the parties mutually agreed to increase the
option amount to $3 million of Series A Preferred Stock and Sunra irrevocably
exercised such option, bringing the total potential investment to $8 million.
The issuance of this additional Series A Preferred Stock is subject to
approval of the stockholders of the Company, which will be sought, along with
approval for the conversion of the outstanding Series A-1 Preferred Stock
into Series A Preferred Stock, at the Company's Annual Meeting of
Stockholders on September 10, 2002, as well as to other customary conditions.

All then-outstanding shares of Series A-1 Preferred Stock will automatically be
converted into shares of Series A Preferred Stock upon the approval of the
Company's stockholders of such conversion ("Conversion") and will not otherwise
be convertible into Series A Preferred Stock or any other class of capital stock
of the Company. The Series A-1 Preferred Stock will be redeemable in full at the
option of Sunra in the event the stockholders reject the Conversion or fail to
approve the Conversion by October 15, 2002, or if the Company's Board of
Directors withdraws its recommendation that the stockholders approve the
Conversion. To secure its potential obligation to redeem the Series A-1
Preferred Stock, the Company has placed $3.4 million into escrow, which will be
released either to the Company if and when stockholder approval for the
Conversion is obtained or to to Sunra when it redeems its Series A-1 Preferred
Stock. The Series A Preferred Stock is not redeemable.

Each share of Series A Preferred Stock is convertible into common stock of the
Company at any time at the option of the holder thereof at a conversion price of
$0.20535 per share of Common Stock. There will be no change to the conversion
ratio of the Series A Preferred Stock based upon the future trading price of the
Common Stock. The conversion ratio of the Series A Preferred Stock is subject to
adjustment in the event of certain future issuances of Company equity at an
effective per share purchase price lower than the Per Share Purchase Price.

The Company has also issued three warrants to Sunra to purchase shares of Common
Stock at an exercise price per share of $0.20535, of which (i) one warrant
entitles Sunra to purchase up to approximately 780,000 shares of Common Stock
and is immediately exercisable; (ii) another warrant entitles Sunra to purchase
up to approximately 1.66 million additional shares of Common Stock and only
becomes exercisable upon the effective date of the Conversion; and (iii) a final
warrant entitles Sunra to purchase up to approximately 1.0 million additional
shares of Common Stock and only becomes exercisable in the event Sunra becomes
entitled to redeem its Series A-1 Preferred Stock. Each such warrant will remain
exercisable until the fifth anniversary of the date on which the warrant first
became exercisable. Upon issuance of the additional 300,000 shares of Series A
Preferred pursuant to Sunra's exercise of its $3 million option, the Company
expects to issue an additional warrant that entitles Sunra to purchase
approximately 1.46 million shares of common stock at an exercise price of
$.20535.

18

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE TERMS "WE" AND "OUR COMPANY" MEAN 24/7 REAL MEDIA, OUR SUBSIDIARIES AND EACH
OF OUR PREDECESSOR ENTITIES.

FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, and Section 21E of the Securities Exchange
Act of 1934. We intend such forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and we are including this statement
for purposes of complying with these safe harbor provisions. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are not guarantees of future
performance and are subject to risks, uncertainties and assumptions, including
those set forth under "--Risk Factors" below.

Words such as "expect", "anticipate", "intend", "plan", "believe", "estimate"
and variations of such words and similar expressions are intended to identify
such forward-looking statements. We undertake no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks, uncertainties
and assumptions, the forward-looking events discussed in this report might not
occur.

GENERAL

24/7 Real Media provides marketing solutions to the digital advertising
industry. Through its comprehensive suite of online marketing and technologies
services, 24/7 Real Media connects media buyers and media sellers across
multiple digital platforms and works closely with individual clients to develop
a comprehensive, customized, value-enhancing solution. Our business is organized
into two principal lines of business:

- Integrated Media Solutions: 24/7 Real Media connects advertisers to
high-quality audiences through three products: (i) the 24/7 Network of
marquee branded Web sites and prestigious niche Web sites; (ii) a
comprehensive promotions suite; and (iii) a leading search engine
results listings service. We also act as a broker for permission-based
email lists.

- Technology Solutions: OpenAdstream, our proprietary advertising delivery
and management technology suite was developed by Real Media, which was
subsequently acquired by 24/7 Media on October 30, 2001. 24/7 Real Media
also partners with other companies to offer complementary plug-ins and
modules. Through a global sales force and account management team, both
local and centrally-served solutions are offered to Web sites, ad
networks, ad agencies, and advertisers.

CRITICAL ACCOUNTING POLICIES

Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission (SEC), requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 of the Notes to the Consolidated Financial
Statements includes a summary of the significant accounting policies and methods
used by the Company. In addition, Financial Reporting Release No. 61 was
recently released by the SEC to require all companies to include a discussion to
address, among other things, liquidity, off balance sheet arrangements,
contractual obligations and commercial commitments.

GENERAL
The consolidated financial statements of the Company are prepared in conformity
with accounting principles generally accepted in the United States of America.
As such, the Company is required to make certain estimates, judgments and
assumptions that management believes are reasonable based upon the information

19

available. These estimates 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 which the Company believes are the most critical to aid in fully
understanding and evaluating the reported consolidated financial results include
the following:

REVENUE RECOGNITION

INTEGRATED MEDIA SOLUTIONS
Our network revenues are derived principally from short-term advertising
agreements in which we deliver advertising impressions for a fixed fee to
third-party Web sites comprising our Network. Our email related revenues were
derived principally from short-term delivery based agreements in which we
deliver advertisements to email lists for advertisers and Web sites. Revenues
are recognized as services are delivered provided that no significant
obligations remain outstanding and collection of the resulting receivable is
probable. Service revenue is derived from driving traffic to a client website
or the delivery of email messages for clients both of which are recognized
upon delivery. On May 3, 2002 the Company sold its US email management
product and starting in May 2002, we will only recognize commissions from
brokerage sales as revenue. Third party Web sites that register Web pages
with our network and display advertising banners on those pages are commonly
referred to as "Affiliated Web sites." These third party Web sites are not
"related party" relationships or transactions as defined in Statement of
Financial Accounting Standards No. 57, "Related Party Disclosures." We pay
Affiliated Web sites a fee for providing advertising space to our network. We
become obligated to make payments to Affiliated Web sites, which have
contracted to be part of our network, in the period the advertising
impressions are delivered. Such expenses are classified as cost of revenues
in the consolidated statements of operations.

TECHNOLOGY SOLUTIONS
Our technology revenues are derived from licensing of our ad serving software
and related maintenance and support contracts. In addition, we derived
revenue from and our email service bureau subsidiary, Exactis, and our third
party ad serving subsidiary, Sabela, both of which were sold in May of 2001.

Revenue from software licensing agreements is recognized in accordance with
Statements of Position ("SOP") 97-2, "Software Revenue Recognition," and Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" upon
delivery of the software, which is generally when customers begin utilizing the
software, there is pervasive evidence of an arrangement, collection is
reasonably assured, the fee is fixed or determinable, and vendor-specific
objective evidence exists to allocate the total fees to all elements of the
arrangement. Revenue related to the central ad serving product is recognized
based on monthly usage fees. Revenue from software maintenance and support
services is recognized ratably over the life of the maintenance agreements,
which typically do not exceed one year. Maintenance revenue invoiced in advance
of the related services is recorded as deferred revenue. Expense from our
licensing, maintenance and support revenues are primarily payroll costs incurred
to deliver, modify and support the software. These expenses are classified as
cost of revenues in the accompanying consolidated statements of operations.

ACCOUNTS RECEIVABLE
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current credit worthiness, as
determined by a review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon historical experience and any specific
customer collection issues that have been identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss
rates that have been experienced in the past.

IMPAIRMENT OF LONG-LIVED ASSETS
We assess the need to record impairment losses on long-lived assets, including
fixed assets, goodwill and other intangible assets, to be held and used in
operations whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If events or changes in
circumstances indicate that the

20

carrying amount of an asset may not be recoverable, we estimate the undiscounted
future cash flows to result from the use of the asset and its ultimate
disposition. If the sum of the undiscounted cash flows is less than the carrying
value, we recognize an impairment loss, measured as the amount by which the
carrying value exceeds the fair value of the asset. Assets to be disposed of are
carried at their lower of carrying value or fair value less costs to sell. On an
on-going basis, management reviews the value and period of amortization or
depreciation of long-lived assets, including goodwill and other intangible
assets. During this review, we reevaluate the significant assumptions used in
determining the original cost of long-lived assets. Although the assumptions may
vary from transaction to transaction, they generally include revenue growth,
operating results, cash flows and other indicators of value. Management then
determines whether there has been an impairment of the value of long-lived
assets based upon events or circumstances, which have occurred since
acquisition. The impairment policy is consistently applied in evaluating
impairment for each of our wholly owned subsidiaries and investments. The
impairment factors evaluated by us may change in subsequent periods, given that
our business operates in a highly volatile business environment. This could
result in significant additional impairment charges in the future.

RESULTS OF OPERATIONS

FACTORS AFFECTING COMPARABILITY OF 2002 TO 2001
On October 30, 2001, we acquired Real Media. The merger created cost synergies
for our combined company, one of which was to focus on Real Media's proprietary
Open Adstream technology and abandon our existing ad serving technology, 24/7
Connect. The transition of the network business onto the Open Adstream platform
began in December 2001 and was completed in February 2002 resulting in the
elimination of redundant personnel and operating costs associated with the two
ad serving platforms, Open Adstream and 24/7 Connect. Throughout 2001, in
accordance with our business plan, we divested or discontinued many of our
non-core assets, including:
- In May 2001, we completed the sale of certain technology assets and
intellectual property of Sabela and completed the shut down of Sabela
operations on June 30, 2001.
- In May 2001, we completed the sale of Exactis, our email service bureau.
- In August 2001, the operations of 24/7 Europe were shut down, which have
been restated in our consolidated financial statements to reflect the
disposition of this international segment.
- In January 2002, we completed the sale of our IMAKE subsidiary. The
financial statements of prior periods have been restated to reflect the
disposition of IMAKE.
- In May 2002, we completed the sale of certain assets related to our US
email management product.

The revenue attributed to the disposition of these non-core assets for the three
and six month periods ended June 30, 2002 was approximately $0.4 million and
$1.6 million, respectively, and $4.1 million and $12.8 million for the three and
six month periods ended June 30, 2001. This does not include $6.0 million and
$13.6 million for the three and six month periods ended June 30, 2001, related
to 24/7 Europe and IMAKE, which are shown as part of discontinued operations in
the 2001 consolidated statement of operations.

As a result of our cost-cutting and divestiture efforts, which began in November
2000 through December 31, 2001, we reduced our headcount by approximately 1,000
and closed several offices, both domestic and foreign. The core elements of our
business that remain are:
- Open Adstream ad serving technology, with one of the largest installed
base of any ad serving solution in the world;
- The 24/7 Network, one of the largest branded ad networks online;
- 24/7 iPromotions, one of the most innovative online promotions and
sweepstakes services; and
- 24/7 Website Results, a leading traffic driving and keyword monetizing
solution.

21

RESULTS OF OPERATIONS

REVENUES

INTEGRATED MEDIA SOLUTIONS. Our Integrated Media Solutions revenues were $7.3
million and $14.8 million for the three and six month periods ended June 30,
2002, respectively, as compared to $8.9 million and $21.2 million for the three
and six month periods ended June 30, 2001, respectively, representing a 17.4%
and 30.1% decrease, respectively. The decrease in revenue was due to a decrease
in advertising dollars spent as the economy continued to deteriorate as a result
of the economic recession. Online advertising was especially hard hit due to the
collapse of other Internet companies, which were a significant portion of our
customer base and as the advertising dollars available went toward traditional
media and larger competitors. The declines in revenue were partially offset by
our merger with Real Media on October 30, 2001. The US email management product,
which was sold on May 3, 2002 accounted for $0.4 million and $1.3 million for
the three months ended June 30, 2002 and 2001, respectively, and $1.6 million
and $4.4 for the six months ended June 30, 2002 and 2001, respectively.

TECHNOLOGY SOLUTIONS. Our Technology Solutions revenues were $3.3 million and
$6.5 million for the three and six month periods ended June 30, 2002,
respectively, as compared to $2.8 million and $8.1 million for the three and six
month periods ended June 30, 2001, respectively, representing an increase of
15.5% for the three month period and a decrease of 19.6% for the six month
period. The periods are not comparable as the revenue in 2002 is derived solely
from operations that were acquired with Real Media on October 30, 2001, while
the revenue in 2001 relates to operations that have been sold or shut down,
including Exactis and Sabela.

COST OF REVENUE AND GROSS PROFIT

INTEGRATED MEDIA SOLUTIONS COST OF REVENUES AND GROSS PROFIT. The cost of
revenues consists primarily of fees paid to affiliated Web sites, which are
calculated as a percentage of revenues resulting from ads delivered on our
Network; list providers and traffic providers; depreciation of our 24/7
Connect ad serving system (in 2001) and internet access costs. In 2002, cost
associated with ad serving is accounted for in our Technology Solutions
segment cost of revenues and an allocation based on usage is reflected in the
Integrated Media Solutions cost of revenues, making these costs variable
versus fixed as they were under 24/7 Connect. Gross margins were 33.6% and
32.0% for the three and six month periods ended June 30, 2002, respectively,
and 15.5% and 18.4% for the three and six month periods ended June 30, 2001.
The increase is due to lower adserving costs as the operations in 2001 could
not support the fixed costs of 24/7 Connect which adversely affected the
gross margin. Excluding the US email management product, the margins were
33.4% and 31.0% for the three and six month periods ended June 30, 2002 and
13.9% and 15.7% for the three and six month periods ended June 30, 2001.

TECHNOLOGY SOLUTIONS COST OF REVENUES AND GROSS PROFIT. The cost of technology
revenues consists of the cost of equipment and broadband capacity for our third
party adserving solutions and payroll costs to deliver, modify and support
software offset by the portion allocated to integrated media solutions for
adserving. Gross margins were 72.7% and 67.8% for the three and six month
periods ended June 30, 2002, respectively, and 73.2% and 73.4% for the three and
six month periods ended June 30, 2001, respectively. As noted above, the periods
are not comparable as the segment is comprised of completely different
operations.

OPERATING EXPENSES. Each of sales and marketing, general and administrative,
product technology expenses decreased significantly in the periods ended June
30, 2002 compared to the periods ended June 30, 2001 as a result of our
restructuring activities, the decisions to exit Latin America and the sale of
Sabela and Exactis. The decreases were partially offset by the acquisition of
Real Media.

SALES AND MARKETING EXPENSES. Sales and marketing expenses consist primarily of
sales force salaries and commissions, advertising expenditures and costs of
trade shows, conventions and marketing materials. Sales and marketing expenses
were $3.2 million and $6.3 million for the three and six month period ended June
30, 2002, respectively, and $4.3 million and $12.3 million for the three and six
month periods ended

22

June 30, 2001, respectively. As a percentage of revenue, the expense decreased
from 37.0% to 30.6% for the three month periods ended June 30, 2001 and 2002,
respectively, and from 42.1% to 29.4% for the six month periods ended June 30,
2001 and 2002. This decrease is due to our successful rationalization efforts
and reduction of discretionary expenses.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist
primarily of compensation, facilities expenses and other overhead expenses
incurred to support the business. General and administrative expenses were $3.5
million and $7.4 million for the three and six month periods ended June 30,
2002, respectively, and $10.5 million and $22.7 million for the three and six
month periods ended June 30, 2001, respectively. As a percentage of revenue, the
expense decreased from 89.6% to 32.9% for the three month periods ended June 30,
2001 and 2002, respectively, and from 77.4% to 34.9% for the six month periods
ended June 30, 2001 and 2002. The significant decrease is due to our
rationalization efforts in eliminating headcount, office space and unnecessary
expenses. In 2002, General and administrative expenses include cost recoveries
in connection with patent claims.

PRODUCT TECHNOLOGY EXPENSES. Product technology expenses consist primarily of
compensation and related costs incurred to further enhance our ad serving and
other technology capabilities. Product technology expenses were $1.1 million and
$2.4 million for the three and six month period ended June 30, 2002,
respectively, and $3.2 million and $8.2 million for the three and six month
periods ended June 30, 2001, respectively. As a percentage of revenue, the
expense decreased from 27.8% to 10.4% for the three month periods ended June 30,
2001 and 2002, respectively, and from 28.1% to 11.5% for the six month periods
ended June 30, 2001 and 2002. The decrease is due to the sale of Exactis on
whose technology we spent significant dollars and our focus on OAS which
requires less enhancements than did 24/7 Connect.

AMORTIZATION OF GOODWILL AND INTANGIBLES. Amortization of goodwill and
intangibles were $0.5 million and $1.0 million for the three and six month
period ended June 30, 2002, respectively, and $3.4 million and $10.4 million
for the three and six month periods ended June 30, 2001, respectively. The
decrease is due to impairment charges taken during 2001 for Exactis, Sabela,
AwardTrack, iPromotions, ConsumerNet and Website Results as well as the sale
of Exactis in May 2001. The adoption of FAS 142, which states that goodwill
is no longer amortized, also contributed to the decline. The Company's loss
from continuing operations for the three and six months ended June 30, 2001,
excluding goodwill amortization would have been ($27.1) million, or ($0.62)
per share and ($84.3) million, or ($1.95) per share, respectively.

STOCK-BASED COMPENSATION. Stock based compensation was $0.1 million and $0.4
million for the three and six month periods ended June 30, 2002, respectively,
and $0.3 million and $1.3 million for the three and six month periods ended June
30, 2001, respectively. The expense for the six months ended June 30, 2002
consists of $0.2 million in salary for certain employees who elected to receive
stock instead of cash and $0.1 million in amortization of deferred compensation
for restricted shares issued to certain employees. The expense for the six
months ended June 30, 2001 consists of a $0.8 million in amortization of
deferred compensation for restricted shares issued to certain employees, $0.3
million in amortization of deferred compensation from acquisitions and $0.2
million in stock to be given as bonuses to certain employees.

RESTRUCTURING COSTS. During the three and six months ended June 30, 2001 a
restructuring charge of approximately $0.1 million and $0.4 million was recorded
related to the reduction of employee headcount. This restructuring involved the
involuntary termination of approximately 100 employees.

GAIN ON SALE OF ASSETS, NET. The $0.3 million gain for the six months ended
June 30, 2002 includes a $1.1 million gain related to the sale of Exactis in
May 2001, offset by a $0.8 million loss on the sale of certain assets related
to our US email management product. As part of the sale of Exactis, there
were approximately $1.5 million in deferred gains related to an escrow
balance and $1.75 million in deferred gains related to prepaid service
amounts. The gains are recognized as the escrow balance is released and the
prepaid services are utilized. During the first quarter of 2002, we agreed to
pay Experian, the acquirer of Exactis, $0.75 million of the escrow balance,
with the remainder released to the Company immediately. Therefore, $0.75
million of the deferred gain was recognized and $0.75 million of deferred
gain was reversed against the escrow balance. During the six month period
ended June 30, 2002, we used approximately $0.2 million in Exactis services
and

23

recorded the related gain. The $0.1 million remaining amount of the gain relates
to the reversal of unnecessary accrual related to Exactis. The $0.9 million for
the six months ended June 30, 2001 relates to the sale of Exactis and the sale
of intellectual property of Sabela and AwardTrack.

IMPAIRMENT OF INTANGIBLE ASSETS. We perform on-going business reviews and, based
on quantitative and qualitative measures, assess the need to record impairment
losses on long-lived assets used in operations when impairment indicators are
present. Where impairment indicators were identified, we determined the amount
of the impairment charge by comparing the carrying values of goodwill and other
long-lived assets to their fair values.

Through August 2000, we completed numerous acquisitions that were financed
principally with shares of our common stock and were valued based on the price
of the common stock at that time. Starting with the fourth quarter of 2000, we
reevaluated the carrying value of our businesses on a quarterly basis. The
revaluation was triggered by the continued decline in the Internet advertising
and marketing sectors throughout 2000 and 2001. In addition, each of these
entities have experienced declines in operating and financial metrics over
several quarters, primarily due to the continued weak overall demand of on-line
advertising and marketing services, in comparison to the metrics forecasted at
the time of their respective acquisitions. These factors significantly impacted
current projected revenue generated from these businesses. Our evaluation of
impairment was also based on achievement of the unit's business plan objectives
and milestones, the fair value of each business unit relative to its carrying
value, the financial condition and prospects of each business unit and other
relevant factors. The business plan objectives and milestones that were
considered included, among others, those related to financial performance, such
as achievement of planned financial results, and other non-financial milestones
such as successful deployment of technology or launching of new products and the
loss of key employees. The impairment analysis also considered when these
properties were acquired and that the intangible assets recorded at the time of
acquisition were being amortized over useful lives of 2 - 4 years. The amount of
the impairment charge was determined by comparing the carrying value of goodwill
and other long-lived assets to fair value at each respective period end.

Where impairment was indicated, we determined the fair value of its business
units based on a market approach, which included an analysis of market price
multiples of companies engaged in similar businesses. To the extent that market
comparables were not available, we used discounted cash flows in determining the
value. The market price multiples are selected and applied to the business based
on the relative performance, future prospects and risk profile of the business
in comparison to the guideline companies. The methodology used to test for and
measure the amount of the impairment charge was based on the same methodology
used during the initial acquisition valuations. As a result, during our review
of the value and periods of amortization of both goodwill and certain other
intangibles it was determined that the carrying value of goodwill and certain
other intangible assets were not recoverable. The other intangible assets that
were determined to be impaired related to the decline in fair market value of
acquired technology, a significant reduction in the acquired customer bases and
turnover of workforce which was in place at the time of the acquisition of these
companies.

As a result, we determined that the fair value of goodwill and other intangible
assets attributable to several of our operating units were less than their
recorded carrying values. Accordingly, we recognized $47.1 million in impairment
charges to adjust the carrying values in 2001 - $25.3 million related to Mail,
$17.3 million related to WSR and $4.5 million related to Exactis.

The impairment factors evaluated may change in subsequent periods, given that
our business operates in a highly volatile business environment. This could
result in significant additional impairment charges in the future.

Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards Board 142, "Goodwill and Other Intangible Assets" ("SFAS 142") and
Statement of Financial Accounting Standards Board 144, "Accounting for the
Impairment or Disposal of Long-Lived Asset ("SFAS 144"). SFAS 142 eliminates the
amortization of goodwill and indefinite-lived intangible assets, addresses the
amortization of intangible assets with finite lives and addresses impairment
testing and recognition for goodwill and intangible assets. SFAS 144 establishes
a single model for the impairment of long-lived assets and broadens the
presentation of discontinued operations to include more disposal transactions.
We have completed our initial transitional

24

goodwill impairment assessment in the second quarter of 2002 and determined that
there was no impairment of goodwill.

INTEREST INCOME (EXPENSE), NET. Interest income, net includes interest income
from our cash and cash equivalents and short-term investments and interest
expense, net related to our long term debt and capital lease obligations.
Interest expense was $0.1 million for both the three and six month periods ended
June 30, 2002. Interest income, net was $0.3 million and $0.6 million for the
three and six month periods ended June 30, 2001 The net decrease was due to the
addition of debt as the related interest expense offset any interest income.

GAIN ON SALE OF INVESTMENTS. The gain on sale of investments was $0.1 million
and $4.1 million for the three and six months periods ended June 30, 2001. These
gains relate to the sale of the Company's remaining available-for-sale
securities.

IMPAIRMENT OF INVESTMENTS. During 2001, the Company wrote down certain of its
investments and recognized impairment charges of approximately $3.1 million for
other-than-temporary declines in value. Management made an assessment of the
carrying value of our cost-based investments and determined that they were in
excess of their carrying values due to the significance and duration of the
decline in valuations of comparable companies operating in the Internet and
technology sectors. The write down of cost based investments was $0.6 million
related to Media-Asia. Management also recognized that the decline in value of
our available-for-sale investments in Network Commerce and i3Mobile were
other-than-temporary and recorded an impairment of $2.3 million and $0.2
million, respectively.

LOSS FROM DISCONTINUED OPERATIONS. On August 6, 2001, the Company determined
that it would cease funding to its European subsidiaries and communicated that
to 24/7 Europe NV's Board of Directors. Management of 24/7 Europe has shut down
all operations.

On January 22, 2002, we completed the sale of our wholly owned subsidiary,
IMAKE. In accordance with FAS 144, we accounted for the operations of this
component as a discontinued operation.

All revenue, cost and expenses related to these discontinued businesses are
included in this line for the current period and prior periods have been
reclassified to reflect this presentation.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2002, we had cash and cash equivalents of $3.5 million versus $7.0
million at December 31, 2001. Cash and cash equivalents are comprised of highly
liquid short term investments with maturities of three months or less.

During 2002, we have received liquidity through $3.0 million in long-term
debt financing from Publigroupe, a related party, and $2.3 million in
proceeds from the sale of non-core assets. In 2001, we generated a portion of
our liquidity through the sale of non-core assets and monetization of our
investments primarily in chinadotcom common stock; which generated
approximately $16.8 million and $7.0 million in proceeds, respectively. The
debt financing and proceeds from the sale of investments were used to finance
restructurings and sustain operations during periods of declining revenues.
We used approximately $8.7 million and $22.2 million of cash in operating
activities during 2002 and 2001, respectively, generally as a result of our
net operating losses, adjusted for certain non-cash items such as
amortization of goodwill and other intangible assets, gain on sales of
investments, gain on sale of non-core assets, impairment of investments and
intangibles and non-cash related equity transactions and restructuring and
exit costs, and also significant decreases in accounts receivable and prepaid
and other current assets which were partially offset by decreases in accounts
payable and accrued expenses and deferred revenue. As a result, our working
capital deficit was reduced by $3.2 million during the first half of 2002.

25

Net cash provided by investing activities was approximately $2.2 million in 2002
versus $23.0 million in 2001. The majority of the cash provided by investing
activities during 2002 and 2001 related to proceeds received from the sale of
our non-core assets and investments in 2001, primarily related to chinadotcom.
During 2001, as a result of divestitures of non-core assets and numerous
restructurings, we had significantly scaled back our capital expenditures. As a
result of the merger with Real Media and the decision to consolidate onto the
Open Adstream technology platform, we have sufficient equipment to support
current ad serving volumes and did not budget for a significant amount of
capital expenditures in 2002.

The Company has various employment agreements with employees, the majority of
which are for one year with automatic renewal. The obligation under these
contracts is approximately $2.8 million for 2002 including salary and
performance based target bonuses. These contracts call for severance in the
event of involuntary termination which range in amount from two months to two
years' salary. All European employees have employment contracts as required by
local law. The majority of these contracts allow for resignation or termination
by either party at any time, according to the notice period provisions contained
in the employment contracts, or according to the minimum notice period as
mandated by local law. The contracts, or if no expressed provision is included
in the contract, local law, also require severance for involuntary terminations
ranging from one to six months. As of August 1, 2002, there were approximately
73 employees in Europe whose annualized base salaries were approximately $3.0
million.

As of June 30, 2002, we had approximately $1.0 million remaining of cash outlay
obligations relating to restructuring and exit costs. These amounts consist
primarily of costs to exit contracts, which we expect to settle by December
2002.

Our capital requirements depend on numerous factors, including market demand of
our services, the capital required to maintain our technology, and the resources
we devote to marketing and selling our services. We have received a report from
our independent accountants containing an explanatory paragraph stating that our
recurring losses from operations since inception and working capital deficiency
raise substantial doubt about our ability to continue as a going concern.
Management believes that the support of our vendors, customers, stockholders,
and employees, among other, continue to be key factors affecting our future
success. Moreover, management's plans to continue as a going concern rely
heavily on achieving revenue targets, raising additional financing and
controlling our operating expenses. Management believes that significant
progress has been made in reducing operating expenses since the Real Media
merger. In addition, management is currently exploring a number of strategic
alternatives and is also continuing to identify and implement internal actions
to improve our liquidity. These alternatives may include selling assets which
could result in changes in our business plan. To the extent we encounter
additional opportunities to raise cash, we may sell additional equity
securities, which would result in further dilution of our stockholders.
Stockholders may experience extreme dilution due to both our current stock price
and the significant amount of financing we may be required to raise. These
securities may have rights senior to those of holders of our common stock. We do
not have any contractual restrictions on our ability to incur debt. Any
indebtedness could contain covenants, which would restrict our operations.

With the acquisition of Real Media, Inc. in October 2001, the Company acquired a
note payable of $4.5 million to Publigroupe, who as a result of the merger is a
significant shareholder. The note bears interest at 4.5% and principal and
interest are due on October 30, 2006. In addition, in accordance with the Real
Media purchase agreement in January 2002, the Company received cash of $1.5
million and signed a promissory note bearing interest at 6%, with interest and
principal due in January 2005. The Company achieved certain target operating
results for the three months ended March 31, 2002 and as a result, on May 13,
2002, we received another $1.5 million in exchange for a 6% three-year
promissory note with interest and principal due in May 2005.

On March 21, 2001, we entered into a common stock purchase agreement with Maya
Cove Holdings. The agreement gives us the ability to sell our common stock to
Maya pursuant to periodic draw downs once a Registration Statement covering
these shares has been declared effective by the SEC. The draw downs would be
subject to our ability to continue trading on the Nasdaq, our trading volumes
and prices and our ability to comply with securities registration requirements
for this type of facility. Based on current market

26

price, we estimate the maximum potential draw down is approximately $2.0
million. To date, no amounts have been drawn under this facility. There can be
no assurances that it will provide the resources necessary to fund our needs and
we are continuing to evaluate other fund raising vehicles.

On January 22, 2002, we completed the sale of our wholly owned subsidiary,
IMAKE, to Schaszberger Corporation. Under the terms of the sale, the purchase
price payable to Schaszberger Corporation payable to us was up to approximately
$6.5 million for the stock of IMAKE consisting of $2.0 million in the form of a
6% four year secured note due in January 2006, approximately $0.5 million in
cash consideration, and a potential earnout of up to $4.0 million over the next
three years based on gross revenue. Additionally, we received Series A preferred
stock of Schaszberger Corp which, as of the closing date, represented 19.9% of
the buyer. The note is secured by certain assets of IMAKE and is guaranteed by
Schaszberger Corporation. We have recorded the consideration received at its
estimated fair value of $0.5 million for the note receivable and $1.5 million
for the earnout as part of assets held for sale at December 31, 2001. In January
2002, we received the cash consideration of $0.5 million for the note
receivable. We have received monthly payments for the periods through June 2002.

On May 3, 2002, the Company completed the sale of certain assets related to
its US email management product, including customer contracts, certain
intangibles and employee relationships, to 24/7 Mail, Inc., a wholly owned
subsidiary of Naviant, Inc. Under the terms of the sale, the purchase price
payable is up to $4.5 million. The purchase price is comprised of (i) $1.0
million that was paid at closing; (ii) $1.0 million in the form of a
non-interest bearing installment note with $350,000 due in ninety days,
$350,000 due in one hundred and eighty days and $300,000 due in two hundred
seventy days from closing; (iii) an earn-out payable quarterly over the next
45 months, based on 5% of Net Revenue (as defined in the Asset Purchase
Agreement), with minimum payments of $600,000 and a maximum of $2.0 million.
Lastly, pursuant to a $500,000 non-interest bearing installment note, half of
which is payable on each of April 30, 2004 and April 30, 2005, Naviant has
the option either to (i) issue to the Company a number of shares currently
comprising 19.9% of 24/7 Mail, Inc., or (ii) pay the Company cash in lieu of
the shares. The consideration paid to the Company was determined as a result
of arms-length negotiations between the buyer and the Company.

As of June 30, 2002, there are approximately $1.0 million in short term and
$1.1 million in long term notes and amounts receivable related to the sale of
certain US email assets on the consolidated balance sheet. On July 30, 2002,
the Company received a letter from Naviant alleging that the Company made
certain misrepresentations with respect to Naviant's purchase of the assets
of the US email management product. Naviant is claiming damages of
approximately $2.3 million, which it intends to offset against the amounts
due to the Company. Based on the Company's preliminary review of the
information supplied, the Company believes that Naviant's claims are
unfounded and that we remain entitled to receive all of the amounts owed
although there can be no assurance that we will collect all, or any,
additional amounts owed to us. Naviant did not make its initial payment of
$350,000 which was due on August 1, 2002.

On July 2, 2002, the Company entered into a Series A and Series A-1 Preferred
Stock and Common Stock Warrant Purchase Agreement with Sunra Capital Holdings
Limited ("Sunra"). Sunra purchased $1.6 million of the Company's newly
created Series A Convertible Preferred Stock, $3.4 million of its newly
created Series A-1 Non Voting Convertible Preferred Stock, and may, at its
option, purchase up to an additional $2 million of the Series A Preferred
Stock. On August 8, the parties mutually agreed to increase the option amount
to $3 million of Series A Preferred Stock and Sunra irrevocably exercised
such option, bringing the total potential investment to $8 million. The
issuance of this additional Series A Preferred Stock is subject to approval
of the stockholders of the Company, which will be sought, along with approval
for the conversion of the outstanding Series A-1 Preferred Stock into Series
A Preferred Stock, at the Company's Annual Meeting of Stockholders on
September 10, 2002, as well as to other customary conditions (see
footnote 13).

MARKET FOR COMPANY'S COMMON EQUITY

The shares of our common stock are currently listed on the Nasdaq national
market. Due to the low share price of our common stock, in February 2002, we
received a letter from Nasdaq stating that they have determined that we have
failed to meet Nasdaq's minimum listing requirements and as a result, our common
stock could be delisted if we do not satisfy the minimum $1.00 bid price
requirement for at least ten consecutive days by May 15, 2002.

27

As a result, the Company transitioned its listing to the Nasdaq SmallCap
Market. Our common stock will remain listed on Nasdaq SmallCap through at
least February 10, 2003. Should our stock price remain consistently below
$1.00, we will be deemed to be out of compliance with the Nasdaq requirements
and will have to explore certain avenues, including a potential reverse stock
split, to increase our stock price above $1.00 and thus regain compliance.
There can be no assurance that the Company will be able to maintain its
Nasdaq listing in the future.

Our failure to meet NASDAQ's maintenance criteria may result in the delisting of
our common stock from Nasdaq. In such event, trading, if any, in the securities
may then continue to be conducted in the non-NASDAQ over-the-counter market in
what are commonly referred to as the electronic bulletin board and the "pink
sheets". As a result, an investor may find it more difficult to dispose of or
obtain accurate quotations as to the market value of the securities. In
addition, we would be subject to a Rule promulgated by the Securities and
Exchange Commission that, if we fail to meet criteria set forth in such Rule,
imposes various practice requirements on broker-dealers who sell securities
governed by the Rule to persons other than established customers and accredited
investors. For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transactions prior to sale. Consequently, the
Rule may have a materially adverse effect on the ability of broker-dealers to
sell the securities, which may materially affect the ability of shareholders to
sell the securities in the secondary market.

Delisting could make trading our shares more difficult for investors,
potentially leading to further declines in share price. It would also make it
more difficult for us to raise additional capital. We would also incur
additional costs under state blue sky laws to sell equity if we are delisted.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and
64, Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 4 required
all gains and losses from the extinguishment of debt to be reported as
extraordinary items and SFAS No. 64 related to the same matter. SFAS No. 145
requires gains and losses from certain debt extinguishment not to be reported as
extraordinary items when the use of debt extinguishment is part of the risk
management strategy. SFAS No. 44 was issued to establish transitional
requirements for motor carriers. Those transitions are completed, therefore SFAS
No. 145 rescinds SFAS No. 44. SFAS No. 145 also amends SFAS No. 13 requiring
sale-leaseback accounting for certain lease modifications. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002. The provisions relating
to sale-leaseback are effective for transactions after May 15, 2002. The
adoption of SFAS No. 145 is not expected to have a material impact on the
Company's financial position or results of operations.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force ("EITF") 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." The
principal difference between SFAS No. 146 and EITF 94-3 relates to the timing
of liability recognition. Under SFAS No. 146, a liability for a cost
associated with an exit or disposal activity is recognized when the liability
is incurred. Under EITF 94-3, a liability for an exit cost was recognized at
the date of an entity's commitment to an exit plan. The provisions of SFAS
No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of SFAS No. 146 is not expected to have
a material impact on the Company's financial position or results of
operations.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

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.

Our accounts receivables are subject, in the normal course of business, to
collection risks. We regularly assess these risks and have established policies
and business practices to protect against the adverse effects of collection
risks. Due to the current economic environment, we believe that we have
sufficiently provided for any material losses in this area, however, there can
be no assurance that unanticipated material losses may not result.

We transact business in various foreign countries. Accordingly, we are subject
to exposure from adverse movements in foreign currency exchange rates. This
exposure is primarily related to revenue and operating expenses in the United
Kingdom and in countries which the currency is the Euro. The effect of foreign
exchange rate fluctuations for 2002 and 2001 was not material. We do not use
derivative financial instruments to limit our foreign currency risk exposure.

Our debt is at fixed rates; therefore, there is no rate risk.

28

RISK FACTORS

WE MAY NEED TO RAISE ADDITIONAL FUNDS TO CONTINUE OPERATIONS AND OUR RECURRING
OPERATING LOSSES AND WORKING CAPITAL DEFICIENCY RAISE SUBSTANTIAL DOUBT ABOUT
OUR ABILITY TO CONTINUE AS A GOING CONCERN.

Our current cash may not be sufficient to meet our anticipated operating
cash needs for 2002 and there can be no assurance that new funds can be secured
when needed. The support of our vendors, customers, stockholders and employees
will continue to be key to our future success. There can be no assurance that we
will be able to raise additional financing to meet our cash and operational
needs or reduce our operating expenses or increase revenues significantly to
address this going concern issue.

Since our inception, we have incurred significant operating losses and we
believe we will continue to incur operating losses for the foreseeable future.
We also expect to incur negative cash flows for the foreseeable future as a
result of our operating losses.

We have received a report from our independent accountants on our December
31, 2001 consolidated financial statements containing an explanatory "going
concern" paragraph stating that our recurring losses from operations and working
capital deficiency since inception raise substantial doubt about our ability to
continue our business as a going concern. Management's plans to continue as a
going concern rely heavily on achieving revenue targets, reducing operating
expenses and raising additional financing. Management is currently exploring a
number of strategic alternatives and is also continuing to identify and
implement internal actions to improve our liquidity. These alternatives may
include selling assets, which could result in changes in our business plan.

To the extent we encounter additional opportunities to raise cash, we may
sell additional equity or debt securities. Stockholders may experience extreme
dilution due to our current stock price and the significant amount of financing
we need to raise and these securities may have rights senior to those of holders
of our common stock. We do not have any contractual restrictions on our ability
to incur debt. Any indebtedness could contain covenants that restrict our
operations.

We have limited access to the capital markets to raise capital. The capital
markets have been unpredictable in the past, especially for unprofitable
companies such as ours. In addition, it is difficult to raise capital in the
current market conditions. The amount of capital that a company such as ours is
able to raise often depends on variables that are beyond our control, such as
the share price of our stock and its trading volume. As a result, there is no
guarantee that our efforts to secure financing will be available on terms
attractive to us, or at all. Due to our operating losses, it may be difficult to
obtain debt financing. If we are able to consummate a financing arrangement,
there is no guarantee that the amount raised will be sufficient to meet our
future needs. If adequate funds are not available on acceptable terms, or at
all, our business, results of operation, financial condition and continued
viability will be materially adversely affected.

THE LOW PRICE OF OUR COMMON STOCK COULD RESULT IN ITS DELISTING FROM THE NASDAQ
NATIONAL MARKET.

The shares of our common stock are currently listed on the Nasdaq national
market. Due low share price of our common stock, on February 14, 2002, we
received a letter from Nasdaq stating that they have determined that we have
failed to meet Nasdaq's minimum listing

29

requirements and as a result, our common stock could be delisted if we do not
satisfy these requirements by May 15, 2002.

As a result, the Company transitioned its listing to the Nasdaq SmallCap
Market. Our common stock will remain listed on Nasdaq SmallCap through at
least February 10, 2003. Should our stock price remain consistently below
$1.00, we will be deemed to be out of compliance with the Nasdaq requirements
and will have to explore certain avenues, including a potential reverse stock
split, to increase our stock price above $1.00 and thus regain compliance.
There can be no assurance that the Company will be able to maintain its
Nasdaq listing in the future.

Our failure to meet Nasdaq's maintenance criteria may result in the
delisting of our common stock from Nasdaq. In such event, trading, if any, in
the securities may then continue to be conducted in the non-NASDAQ
over-the-counter market in what are commonly referred to as the electronic
bulletin board and the "pink sheets". As a result, an investor may find it more
difficult to dispose of or obtain accurate quotations as to the market value of
the securities. In addition, we would be subject to a Rule promulgated by the
Securities and Exchange Commission that, if we fail to meet criteria set forth
in such Rule, imposes various practice requirements on broker-dealers who sell
securities governed by the Rule to persons other than established customers and
accredited investors. For these types of transactions, the broker-dealer must
make a special suitability determination for the purchaser and have received the
purchaser's written consent to the transactions prior to sale. Consequently, the
Rule may have a materially adverse effect on the ability of broker-dealers to
sell the securities, which may materially affect the ability of shareholders to
sell the securities in the secondary market.

Delisting could make trading our shares more difficult for investors,
potentially leading to further declines in share price. It would also make it
more difficult for us to raise additional capital. We would also incur
additional costs under state blue sky laws to sell equity if we are delisted.

HIGH VOLATILITY OF STOCK PRICE.

The market price of our common stock has fluctuated in the past and may
continue to be volatile. In addition, the stock market has experienced extreme
price and volume fluctuations. The market prices of the securities of
Internet-related companies have been especially volatile. Investors may be
unable to resell their shares of our common stock at or above the purchase
price. In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against that company. Many companies in our industry have been
subject to this type of litigation in the past. We may also become involved in
this type of litigation. Litigation is often expensive and diverts management's
attention and resources, which could materially and adversely affect our
business, financial condition and results of operations.

REVENUE GROWTH IN PRIOR PERIODS MAY NOT BE INDICATIVE OF FUTURE GROWTH.

At times in the past, our revenues have grown significantly, primarily as a
result of our numerous acquisitions. Our limited operating history makes
prediction of future revenue growth difficult. Accurate predictions of future
revenue growth are also difficult because of the rapid

30

changes in our markets and the possible need by us to sell assets to fund
operations. Accordingly, investors should not rely on past revenue growth rates
as a prediction of future revenue growth.

WE HAVE A LIMITED OPERATING HISTORY ON WHICH AN INVESTOR CAN EVALUATE OUR
BUSINESS.

We have a limited operating history. You must consider the risks, expenses
and difficulties typically encountered by companies with limited operating
histories, particularly companies in new and rapidly expanding markets such as
Internet advertising. These risks include our ability to:

- develop new relationships and maintain existing relationships with our
Web sites, advertisers, and other third parties;

- further develop and upgrade our technology;

- respond to competitive developments;

- implement and improve operational, financial and management information
systems; and

- attract, retain and motivate qualified employees.

WE ANTICIPATE CONTINUED LOSSES AND WE MAY NEVER BE PROFITABLE.

We have not achieved profitability in any period and we may not be able to
achieve or sustain profitability in the future. We incurred net losses of $7.9
million and $132.5 million for the six months ended June 30, 2002 and 2001,
respectively. Even if we do achieve profitability, we cannot assure you that we
can sustain or increase profitability on a quarterly or annual basis in the
future.

OUR FUTURE REVENUES AND RESULTS OF OPERATIONS MAY BE DIFFICULT TO FORECAST.

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 or loss of existing clients;

- changes in fees paid by advertisers and direct marketers or other
clients;

- changes in service fees payable by us to owners of Web sites or email
lists, or ad serving fees payable by us to third parties;

- the demand by advertisers, Web publishers and direct marketers for our
advertising solutions;

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

31

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

- changes in governmental regulation of the Internet; and

- general economic conditions.

Our future revenues and results of operations may be difficult to forecast
due to the above factors. 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 comparisons of our results of operations may not be meaningful.
You should not rely on past periods as indicators of future performance. In
future periods, our results of operations may fall below the expectations of
securities analysts and investors, which could adversely affect the trading
price of our common stock.

OUR FINANCIAL PERFORMANCE AND REDUCTION OF OUR WORKFORCE MAY AFFECT THE MORALE
AND PERFORMANCE OF OUR PERSONNEL.

We have incurred significant net losses since our inception. In an effort
to reduce our cash expenses, we began to implement certain restructuring
initiatives and cost reductions. During 2001, we reduced our workforce by over
1,000 employees. We have also left positions unfilled when employees have left
the company. In addition, recent trading levels of our common stock have
decreased the value of the stock options granted to employees pursuant to our
stock option plan. As a result of these factors, our remaining personnel may
seek employment with larger, more stable companies they perceive to have better
prospects. Our failure to retain qualified employees to fulfill our current and
future needs could impair our future growth and have a material adverse effect
on our business.

OUR FINANCIAL PERFORMANCE MAY AFFECT OUR ABILITY TO ENTER INTO NEW BUSINESS
RELATIONSHIPS AND TO COLLECT REVENUES.

The publicity we receive in connection with our financial performance and
our measures to remedy this performance generate negative publicity, which may
negatively affect our reputation and our business partners' and other market
participants' perception of our company. If we are unable to maintain the
existing relationships and develop new ones, our revenues and collections could
suffer materially.

UNCERTAINTY OF COLLECTION OF RECEIVABLES

While we perform standard credit checks on all customers, our level of
uncollectible receivables has been significantly affected by our advertising
customers which traditionally have had limited operating histories and modest
financial resources. Additionally, many of the technology customers obtained
as a result of the Real Media acquisition have similar financial histories.
Historically, our uncollectible receivables has been substantially higher
than our current levels.

Furthermore, as a result of our dispositions of certain assets and
businesses, our balance sheet currently reflects notes and amounts receivable
of approximately $4.1 million. The entities that owe us these monies are
Internet-enabled businesses which may face significant competition and their
ability to pay us these amounts in full depend to a large extent on their own
successful financial performance. In addition, these entities may require
additional financing to meet their cash and operational needs; however, there
can be no assurance that such funds will be available to them, to the extent
needed, or on terms acceptable to the entities, if at all. Additionally,
Naviant, Inc., which owes us approximately $2.1 million that is reflected as
notes and amounts receivable on our balance sheet, has sent us a letter
contesting the amount owed to us. If we are unable to collect all receivables
reflected on our balance sheet, we will be required to write-down our assets
in future reporting periods, adversely affecting our financial results, cash
flows and financial position in future periods.

OUR BUSINESS MAY NOT GROW IF THE INTERNET ADVERTISING MARKET DOES NOT CONTINUE
TO DEVELOP.

The Internet as a marketing medium has not been in existence for a
sufficient period of time to demonstrate its effectiveness. Our business would
be adversely affected if the Internet advertising continues to remain soft or
fails to develop in the near future. There are currently no widely accepted
standards to measure the effectiveness of Internet marketing other than
clickthrough rates, which generally have been declining. We cannot be certain
that such standards will develop to sufficiently support Internet marketing as a
significant advertising medium. Actual or perceived ineffectiveness of online
marketing in general, or inaccurate measurements or database information in
particular, could limit the long-term growth of online advertising and cause our
revenue levels to decline.

32

OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS
MODEL

A significant part of our business model is to generate revenue by
providing interactive marketing solutions to advertisers, ad agencies and Web
publishers. The profit potential for this business model is unproven. To be
successful, both Internet advertising and our solutions will need to achieve
broad market acceptance by advertisers, ad agencies and Web publishers. Our
ability to generate significant revenue from advertisers will depend, in part,
on our ability to contract with Web publishers that have Web sites with adequate
available ad space inventory. Further, these Web sites must generate sufficient
user traffic with demographic characteristics attractive to our advertisers. The
intense competition among Internet advertising sellers has led to the creation
of a number of pricing alternatives for Internet advertising. These alternatives
make it difficult for us to project future levels of advertising revenue and
applicable gross margin that can be sustained by us or the Internet advertising
industry in general.

Intensive marketing and sales efforts may be necessary to educate
prospective advertisers regarding the uses and benefits of, and to generate
demand for, our products and services. Enterprises may be reluctant or slow to
adopt a new approach that may replace, limit or compete with their existing
direct marketing systems. In addition, since online direct marketing is emerging
as a new and distinct business apart from online advertising, potential adopters
of online direct marketing services will increasingly demand functionality
tailored to their specific requirements. We may be unable to meet the demands of
these clients. Acceptance of our new solutions will depend on the continued
emergence of Internet commerce, communication and advertising, and demand for
its solutions. We cannot assure you that demand for its new solutions will
emerge or become sustainable.

BANNER ADVERTISING, FROM WHICH WE CURRENTLY DERIVE A SIGNIFICANT PORTION OF OUR
REVENUE, MAY NOT BE AN EFFECTIVE ADVERTISING METHOD IN THE FUTURE.

A significant portion of our revenues are derived from the delivery of
banner advertisements. Online banner advertising has dramatically decreased
since the middle of 2000, which could have a material adverse effect on our
business. If advertisers determine that banner advertising is an ineffective or
unattractive advertising medium, we cannot assure you that we will be able to
effectively make the transition to any other form of Internet advertising. Also,
there are "filter" software programs that limit or prevent advertising from
being delivered to a user's computer. The commercial viability of Internet
advertising, and our business, results of operations and financial condition,
would be materially and adversely affected by Web users' widespread adoption of
such software. In addition, many online advertisers have been experiencing
financial difficulties, which could materially impact our revenues and our
ability to collect our receivables.

GROWTH OF OUR BUSINESS DEPENDS ON THE DEVELOPMENT OF ONLINE DIRECT MARKETING.

Adoption of online direct marketing, particularly by those entities that
have historically relied upon traditional means of direct marketing, such as
telemarketing and direct mail, is an important part of our business model.
Intensive marketing and sales efforts may be necessary to educate prospective
advertisers regarding the uses and benefits of our products and services to
generate demand for our direct marketing services. Enterprises may be reluctant
or slow to adopt

33

a new approach that may replace, limit, or compete with their existing direct
marketing systems. In addition, since online direct marketing is emerging as a
new and distinct market apart from online advertising, potential adopters of
online direct marketing services will increasingly demand functionality tailored
to their specific requirements. We may be unable to meet the demands of our
clients.

LOSS OF OUR MAJOR WEB SITES WOULD SIGNIFICANTLY REDUCE OUR REVENUES.

The 24/7 Network generates a significant portion of our revenues, and we
expect that the 24/7 Network will continue to account for a significant portion
of our revenue for the foreseeable future. The 24/7 Network consists of a
limited number of our Web sites that have contracted for our services under
agreements cancelable generally upon a short notice period. We experience
turnover from time to time among our Web sites, and we cannot be certain that
the Web sites named above will remain associated with us or that such Web sites
will not experience a reduction in online traffic on their sites. We cannot
assure you that we will be able to replace any departed Web site in a timely and
effective manner with a Web site with comparable traffic patterns and user
demographics. Our business, results of operations and financial condition would
be materially adversely affected by the loss of one or more of the Web sites
that account for a significant portion of our revenue from the 24/7 Network.

LOSS OF MAJOR CUSTOMERS WOULD REDUCE OUR REVENUES.

We generate a significant portion of our revenues from a limited number of
customers. We expect that a limited number of these entities may continue to
account for a significant percentage of our revenues for the foreseeable future.
For the three months ended June 30, 2002, our top ten customers accounted for
approximately 25.0% of our total revenues. Customers typically purchase
advertising or services under agreements on a short-term basis. Since these
contracts are short-term, we will have to negotiate new contracts or renewals in
the future that may have terms that are not as favorable to us as the terms of
existing contracts. We cannot be certain that current customers will continue to
purchase advertising or services from us or that we will be able to attract
additional customers successfully, or that customers will make timely payment of
amounts due to us. 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. Our business, results of operations and
financial condition would be materially adversely affected by the loss of one or
more of our customers that account for a significant portion of our revenue.

WE HAVE GROWN OUR BUSINESS THROUGH ACQUISITION.

We were formed in February 1998 to consolidate three Internet advertising
companies and have since acquired thirteen more companies. In combining these
entities, we have faced risks and continue to face risks of integrating and
improving our financial and management controls, ad serving technology,
reporting systems and procedures, and expanding, training and managing our work
force. This process of integration may take a significant period of time and
will require the dedication of management and other resources, which may
distract management's attention from our other operations. We may continue
pursuing selective acquisitions of businesses, technologies and product lines as
a key component of our growth strategy. Any future acquisition or investment may
result in the use of significant amounts of cash, potentially dilutive issuances
of equity securities, incurrence of debt and amortization expenses related to
goodwill and other intangible assets. In addition, acquisitions involve numerous
risks, including:

34

- the difficulties in the integration and assimilation of the operations,
technologies, products and personnel of an acquired business;

- the diversion of management's attention from other business concerns;

- the availability of favorable acquisition financing for future
acquisitions; and

- the potential loss of key employees of any acquired business.

Our inability to successfully integrate any acquired company could
adversely affect our business.

OUR ADVERTISING CUSTOMERS AND THE COMPANIES WITH WHICH WE HAVE STRATEGIC
RELATIONSHIPS MAY EXPERIENCE ADVERSE BUSINESS CONDITIONS THAT COULD ADVERSELY
AFFECT OUR BUSINESS.

As a result of unfavorable conditions in the public and private capital
markets, some of our customers may have difficulty raising sufficient capital to
support their long-term operations. As a result, these customers have reduced
their spending on Internet advertising, which has materially and adversely
affected our business, financial condition and results of operations. In
addition, from time to time, we have entered into strategic business
relationships with other companies, the nature of which varies, but generally in
the context of customer relationships. These companies may experience similar
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.

OUR REVENUES ARE SUBJECT TO SEASONAL FLUCTUATIONS.

Our revenues are subject to seasonal fluctuations because advertisers
generally place fewer advertisements during the first and third calendar
quarters of each year and direct marketers mail substantially more marketing
materials in the third quarter each year. Internet user traffic typically drops
during the summer months, which reduces the number of advertisements to sell and
deliver. Expenditures by advertisers and direct marketers tend to vary in cycles
that reflect overall economic conditions as well as budgeting and buying
patterns. Our revenue could be materially reduced by a decline in the economic
prospects of advertisers, direct marketers or the economy in general, which
could alter current or prospective advertisers' spending priorities or budget
cycles or extend our sales cycle. Due to such risks, you should not rely on
quarter-to-quarter comparisons of our results of operations as an indicator of
our future results.

OUR TECHNOLOGY SOLUTIONS MAY NOT BE SUCCESSFUL AND MAY CAUSE BUSINESS
DISRUPTION.

Open Adstream is our proprietary next generation ad serving technology that
is intended to serve as our sole ad serving solution. We launched Open Adstream
Central and Network in mid-2001, and we must, among other things, ensure that
this technology will function efficiently at high volumes, interact properly
with our database, offer the functionality demanded by our customers and
assimilate our sales and reporting functions. This development effort could fail
technologically or could take more time than expected. Our Open Adstream
technology resides

35

on a computer system located in our data centers housed by Exodus
Communications. These systems' continuing and uninterrupted performance is
critical to our success. Customers may become dissatisfied by any system failure
that interrupts our ability to provide our services to them, including failures
affecting our ability to deliver advertisements without significant delay to the
viewer. Sustained or repeated system failures would reduce the attractiveness of
our solutions to advertisers, ad agencies and Web publishers and result in
contract terminations, fee rebates and make goods, thereby reducing 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 operations are dependent on our ability to protect our computer
systems against damage from fire, power loss, water damage, telecommunications
failures, vandalism and other malicious acts, and similar unexpected adverse
events. In addition, interruptions in our solutions could result from the
failure of our telecommunications providers to provide the necessary data
communications capacity in the time frame we require. 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.

OUR FAILURE TO SUCCESSFULLY COMPETE 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 successfully compete may hinder our growth. We believe that our ability to
compete depends upon many factors both within and beyond our control, including:

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

- 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.

Many 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. We cannot be certain
that we will be able to successfully compete against current or future
competitors. In addition, the Internet must compete for a share of advertisers'
total budgets with traditional advertising media, such as television, radio,
cable and print, as well as content aggregation companies and other companies
that facilitate Internet advertising. To the extent that the Internet is
perceived to be a limited or ineffective advertising or direct marketing medium,
advertisers and direct marketers may be reluctant to devote a significant
portion of their advertising budgets to Internet marketing, which could limit
the growth of Internet marketing.

36

CHANGES IN LAWS AND STANDARDS RELATING TO DATA COLLECTION AND USE PRACTICES AND
THE PRIVACY OF INTERNET USERS AND OTHER INDIVIDUALS 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 October 1998, the European Union adopted a directive that may limit our
collection and use of information regarding Internet users in Europe. The
effectiveness of our Open Adstream technology could be limited by any regulation
limiting the collection or use of information regarding Internet users. Since
many of the proposed laws or regulations are just being developed, we cannot yet
determine the impact these regulations may have on its business. In addition,
growing public concern about privacy and the collection, distribution and use of
information about individuals has led to self-regulation of these practices by
the Internet advertising and direct marketing industry and to increased federal
and state regulation. The Network Advertising Initiative, or NAI, of which 24/7
Real Media is a member along with other Internet advertising companies, has
developed self-regulatory principles for online preference marketing. These
principles were recently endorsed by the Federal Trade Commission, and are in
the process of being adopted by the NAI companies. The Direct Marketing
Association, or DMA, the leading trade association of direct marketers, has
adopted guidelines regarding the fair use of this information which it
recommends participants, such as us, through our services, in the direct
marketing industry follow. We are also subject to various federal and state
regulations concerning the collection, distribution and use of information
regarding individuals. 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. Although our compliance
with the DMA's guidelines and applicable federal and state laws and regulations
has not had a material adverse effect on us, we cannot assure you that the DMA
will not adopt additional, more burdensome guidelines or that additional, more
burdensome federal or state laws or regulations, including antitrust and
consumer privacy laws, will not be enacted or applied to us or our clients,
which could materially and adversely affect our business, financial condition
and results of operations.

IF WE LOSE OUR CEO OR OTHER SENIOR MANAGERS OUR BUSINESS WILL BE ADVERSELY
EFFECTED.

Our success depends, to a significant extent, upon our senior management
and key sales and technical personnel, particularly David J. Moore, Chief
Executive Officer. The loss of the services of one or more of these persons
could materially adversely affect our ability to develop our business. Our
success also depends on our ability to attract and retain qualified technical,
sales and marketing, customer support, financial and accounting, and managerial
personnel. Competition for such personnel in the Internet industry is intense,
and we cannot be certain that we will be able to retain our key personnel or
that we can attract, integrate or retain other highly qualified personnel in the
future. We have experienced in the past, and may continue to experience in the
future, difficulty in hiring and retaining candidates with appropriate
qualifications, especially in sales and marketing positions.

OUR INTERNATIONAL OPERATIONS MAY POSE LEGAL AND CULTURAL CHALLENGES.

We have operations in a number of international markets, including Canada,
Europe and Asia. To date, we have limited experience in marketing, selling and
distributing our solutions internationally. International operations are subject
to other risks, including changes in regulatory

37

requirements, reduced protection for intellectual property rights in some
countries, potentially adverse tax consequences, general import/export
restrictions relating to encryption technology and/or privacy, difficulties and
costs of staffing and managing foreign operations, 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.

In addition to these factors, due to our minority stake in 24/7 Real Media
Korea in Asia, we are relying on our partner to conduct operations, build the
network, aggregate Web publishers and coordinate sales and marketing efforts.
The success of the 24/7 Network in Asia is directly dependent on the success of
our partner and its dedication of sufficient resources to our relationship.

DEPENDENCE ON PROPRIETARY RIGHTS AND 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 have
received two 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. We cannot
assure you that any of our patent applications or trademark applications will 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. We cannot assure you that the steps we have taken
will prevent misappropriation of our solutions or technologies, particularly in
foreign countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States.

We have 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. We
cannot assure you that any of our proprietary rights will be of value in the
future since the validity, enforceability and scope of protection of certain
proprietary rights in Internet-related industries is uncertain and still
evolving.

We may be subject to claims of alleged infringement of the trademarks and
other intellectual property rights of third parties by us or the Web publishers
with Web sites in the 24/7 Network. 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

38

responsible for such claims or litigation which may be unavailable on
commercially reasonable terms.

INTELLECTUAL PROPERTY LIABILITY.

We may be liable for content available or posted on the Web sites of our
publishers. We may be liable to third parties for content in the advertising we
serve if the music, artwork, text or other content involved violates the
copyright, trademark or other intellectual property rights of such third parties
or if the content is defamatory. Any claims or counterclaims could be time
consuming, result in costly litigation or divert management's attention.

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
targets advertising to users through the use of identifying data, or "cookies"
and other non-personally-identifying information. Open Adstream enables the use
of cookies to deliver targeted advertising and to limit the frequency with which
an advertisement is shown to the user. Most currently available Internet
browsers allow users to modify their browser settings to prevent cookies from
being stored on their hard drive, and a small minority of users are currently
choosing to do so. Users can also delete cookies from their hard drive 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 could limit the effectiveness of our sales and marketing efforts and
impair our targeting capabilities. Recently, Microsoft Corporation changed the
design and instrumentation of its Web browser in such a way as to give users the
option to accept or reject third party cookies. Giving users the option to
decline such cookies could result in a reduction of the number of Internet users
we are capable of profiling anonymously. 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 24/7 Network
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 reengineering 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. In addition, privacy
concerns may cause some Web users to be less likely to visit Web sites that
contribute data to our databases. This could have a material adverse effect on
our financial condition. In addition, we are developing our database to collect
data derived from user activity on our networks and from other sources. We
collect and compile information in databases for the product offerings of all
our businesses. Individuals or entities may claim in the future, that our
collection of this information is illegal. Although we believe that we have the
right to use and compile the information in these databases, we cannot assure
you that our ability to do so will remain lawful, that any trade secret,
copyright or other intellectual property protection will be available for our
databases, or that statutory protection that is or becomes available for
databases will enhance our rights. In addition, others may claim rights to the
information in our databases. Further, pursuant to our contracts with Web
publishers using our solutions, we are obligated to keep certain information
regarding each Web publisher confidential and, therefore, may be restricted from
further using that information in our business.

39

WE MAY HAVE TO CHANGE OUR BUSINESS PLANS BASED UPON CHANGES IN INFORMATION
COLLECTION PRACTICES.

There has been public debate about how fair information collection practices
should be formulated for the online and offline collection, distribution and use
of information about a consumer. Some of the discussion has focused on the fair
information collection practices that should apply when information about an
individual that is collected in the offline environment is associated with
information that is collected over the Internet about that individual. We are
working with industry groups, such as the NAI and the Online Privacy Alliance,
to establish such standards with the U.S. government regarding the merger of
online and offline consumer information. We cannot assure you that we will be
successful in establishing industry standards acceptable to the U.S. government
or the various state governments, or that the standards so established will not
require material changes to our business plans. We also cannot assure you that
our business plans, or any U.S. industry standards that are established, will
either be acceptable to any non-U.S. government or conform to foreign legal and
business practices. As a consequence of governmental legislation or regulation
or enforcement efforts or evolving standards of fair information collection
practices, we may be required to make changes to our products or services in
ways that could diminish the effectiveness of the product or service or their
attractiveness to potential customers. In addition, given the heightened public
discussion about consumer online privacy, we cannot assure you that our products
and business practices will gain market acceptance, even if they do conform to
industry standards.

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 European Union has
enacted its own privacy regulations that may result in limits on the collection
and use of certain user information by us. 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, that may impose
additional burdens on companies conducting business over the Internet. Our
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.

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

40

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.

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

Some of the provisions of our certificate of incorporation, our bylaws and
Delaware law could, together or separately:

- discourage potential acquisition proposals;

- delay or prevent a 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 in the future for
shares of our common stock.

41

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

None.

(b) Reports on Form 8-K.

Report on Form 8-K dated May 7, 2002 (file no. 1-14355). The report
contained information about the sale of certain assets related to the
US Mail product.

Report on Form 8-K/A dated May 20, 2002 (file no. 1-14355). The report
contained updated information about the sale of certain assets related
to the US email management product.

ITEM 7. 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.

Date: August 14, 2002

By: /s/ David J. Moore
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David J. Moore
Chairman and Chief Executive Officer

By: /s/ Norman M. Blashka
----------------------
Norman M. Blashka
EVP and Chief Financial Officer

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