---

---

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

ZIFF DAVIS HOLDINGS INC.

(Exact name of Registrant as Specified in Its Charter)

28 East 28th Street

New York, New York 10016

(Address of Principal Executive Offices and Zip Code)

(212) 503-3500

(Registrant’s Telephone Number, Including Area Code)

Shares registered pursuant to Section 12(b) of the Act:     None

Shares registered pursuant to Section 12(g) of the Act:     None

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by references in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).     Yes o          No þ

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

      As of March 25, 2005, 2,311,049 shares of common stock, par value, $0.001 per share, were outstanding. The issuer’s common stock is not publicly traded.

DOCUMENTS INCORPORATED BY REFERENCE

None

---

---

ZIFF DAVIS HOLDINGS INC.

Index to Form 10-K for the Year Ended December 31, 2004

PART I

      Important Note: Please see the sections entitled “Forward-Looking Statements” and “Certain Risk Factors” appearing below in Item 1.

      References to “we,” “us,” “our,” “Ziff Davis” and “the Company” refer to Ziff Davis Holdings Inc. and its subsidiaries. In those situations where it is important to distinguish between Ziff Davis Holdings Inc. and Ziff Davis Media Inc., we use the term “Ziff Davis Holdings” to refer to Ziff Davis Holdings Inc. and the term “Ziff Davis Media” to refer to Ziff Davis Media Inc.

Background and Organization

      We are an information services and marketing solutions provider of technology media including publications, websites, conferences, events, eSeminars^tm, eNewsletters, custom publishing, list rentals, research and market intelligence. Ziff Davis Holdings is majority owned by various investment funds managed by Willis Stein & Partners Management III, L.L.C. (“Willis Stein” or “controlling stockholders”), a private equity investment firm. Ziff Davis Holdings is a holding company which indirectly owns 100% of Ziff Davis Media. Ziff Davis Holdings does not conduct any business, but rather all operations are conducted by Ziff Davis Media and its direct and indirect subsidiaries. Ziff Davis Holdings has no material assets other than its investment in the capital stock of Ziff Davis Media. Ziff Davis Holdings was incorporated in the state of Delaware and was formed to acquire certain publishing assets (“Ziff-Davis Publishing,” “ZDP” or “Predecessor”) from Ziff-Davis Inc. (“ZDI”), an unrelated company. Our major operating subsidiaries are Ziff Davis Publishing Inc., Ziff Davis Development Inc. and Ziff Davis Internet Inc. In January 2002, we changed our fiscal year-end from March 31 to December 31, effective December 31, 2001.

      We had no operations prior to April 5, 2000, when we completed the acquisition of ZDP for $780.0 million plus expenses. This acquisition was accounted for under the purchase method of accounting and was funded by: (1) issuing preferred and common stock for $353.7 million in proceeds; (2) executing a $405.0 million senior credit facility (“Senior Credit Facility”) of which $355.0 million was borrowed at closing; and (3) issuing a bridge loan totaling $175.0 million in proceeds. Fees and expenses, including debt issuance costs associated with the acquisition, which totaled approximately $30.0 million, were paid with the equity and debt proceeds. On July 18, 2000, we issued $250.0 million 12% senior subordinated notes due 2010 (the “12% Notes”). The proceeds from the offering of the 12% Notes were used to repay the bridge loan and approximately $59.7 million of the Senior Credit Facility. In addition, proceeds from the offering of the 12% Notes were used to pay approximately $8.5 million of expenses associated with the offering and approximately $6.8 million of accrued interest.

      In August 2002, we completed a financial restructuring, including an exchange of most of our 12% Notes for new compounding notes and equity as well as the amendment and restatement of our Senior Credit Facility. (See “Management Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Financial Restructuring” and Note 12 to our audited Consolidated Financial Statements.)

      We have historically reported and managed our business in conjunction with the reporting requirements set forth in the Senior Credit Facility and indenture agreements which mandated certain restrictions on the sources of funding provided to the Restricted Subsidiaries and Unrestricted Subsidiaries, as defined in these debt agreements. Effective July 1, 2004, we amended the terms of our Senior Credit Facility which eliminated the distinction between the Restricted and Unrestricted Subsidiaries (as defined in the Senior Credit Facility) and allows the Company to be viewed in its entirety for purposes of financial covenant compliance. As a result, effective July 1, 2004, we now report and manage our business along the following operating segments: the Consumer Tech Group, the Enterprise Group and the Game Group.

      The Consumer Tech Group is principally comprised of three of the Company’s magazine publications, PC Magazine, Sync and ExtremeTech; a number of consumer-focused websites, including pcmag.com and extremetech.com; and our new consumer electronics event, DigitalLife.

      The Enterprise Group is comprised of several businesses in the magazine, Internet, event, research and marketing tools areas. The three magazine publications in this segment are eWEEK, CIO Insight and Baseline. The Internet properties in this segment are primarily those affiliated with our enterprise brands, including eweek.com, cioinsight.com and baselinemag.com, but also include over 20 weekly eNewsletters and the eSeminars area, which produces sponsored interactive webcasts. This segment also includes the Custom Conference Group, which creates and manages several hundred face-to-face events for marketing clients per year; Business Information Services, a research and marketing tools unit launched in 2003; and Contract Publishing, which produces custom magazines, white papers, case studies and other sales and marketing collateral for customers.

      The Game Group is focused on the videogame market and is now principally comprised of three magazine publications (Electronic Gaming Monthly, Computer Gaming World and Official U.S. PlayStation Magazine) and 1up.com, the online destination for gaming enthusiasts, which was launched in October 2003. The Game Group discontinued publishing GMR and reduced the frequency of XBox Nation during the fourth quarter of 2004. See Note 9 to our audited Consolidated Financial Statements. The results of these publications are included in the financial statements.

      For additional information on the Company’s operating segments, see Note 21 to our audited Consolidated Financial Statements.

General

      We are a leading integrated media company serving the technology and videogame markets and one of the largest technology magazine publishers in the United States as measured by revenue. In 2004, we had an estimated 20.1% share of advertising pages in the technology magazine industry based on data compiled by IMS/ The Auditor (Toronto, Canada) (“IMS”). Our current U.S. titles have a combined circulation of approximately 2.5 million and our U.S. based brands reach over 22 million people per month at work, home and play based on syndicated research and management’s estimates. Our audiences also cover the full spectrum of readership, from corporate technology buyers and users to consumer enthusiasts, influencers and gamers.

      We distinguish our products through our comprehensive labs-based evaluations, trusted buying advice, recognized industry experts, and thought-provoking news, reviews, opinions and insights. We publish nine industry-leading technology, videogame and consumer lifestyle magazines including PC Magazine, Sync, ExtremeTech, eWEEK, Baseline, CIO Insight, Electronic Gaming Monthly, Computer Gaming World and Official U.S. Playstation Magazine. PC Magazine was the number one technology magazine in the United States in 2004, as measured by the Publishers Information Bureau using advertising pages. eWEEK ranked fifth in advertising pages among information technology magazines in the United States, according to IMS. Our videogame publications led the market in 2004 with an estimated 41.8% market share of advertising pages based on IMS. Additionally, we launched a new consumer lifestyle publication, Sync, which debuted in the summer of 2004, and ExtremeTech, a new do-it-yourself technology publication, which debuted in October 2004.

      Our readers are well-educated, influential buyers of technology and other products and decision-makers in their professional fields and households, which makes them attractive to a wide range of advertisers. For example, the 2,971,000 estimated business professionals (individuals who are involved in purchasing technology for their businesses) who read PC Magazine each spend an estimated average of $211,314 per year on technology products and services according to the IntelliQuest CIMS 2004 Business Study released in 2004. Similarly, in December 2004, the average annual information technology budget for corporate business readers of eWEEK was approximately $44.4 million, according to our subscriber qualification surveys. Lastly,

according to internal readership surveys, the average Game Group reader purchases two games per month and influences approximately five other people regarding which games to buy.

      We extend the power of our brands online through companion sites, as well as original technology and videogame enthusiast websites. These include pcmag.com, eweek.com, extremetech.com and 1up.com. We also produce highly targeted business-to-business and consumer technology events. Furthermore, we export the power of our brands internationally, licensing our content to publications in 41 countries that are produced in 20 languages.

Consumer Tech Group

      The Consumer Tech Group is principally comprised of three of the Company’s magazine publications, PC Magazine, Sync and ExtremeTech; a number of consumer-focused websites, including pcmag.com and extremetech.com; and the Company’s new consumer electronics event, DigitalLife.

      The following table sets forth information regarding the publications within the Consumer Tech Group:

      PC Magazine is one of the largest technology publications in the world, delivering the most authoritative, comprehensive labs-based reviews and trusted recommendations for buyers of technology products and services. PC Magazine publishes 22 times a year in print (plus occasional special issues) with a paid circulation of 700,000. PC Magazine had a recent U.S. readership of nearly 5.2 million readers (MRI Fall 2004). Reaching highly engaged technology influencers, PC Magazine differentiates itself through unique and extensive product reviews based on its exclusive benchmark testing performed in the PC Magazine Labs, supplemented by its “First Looks” section covering emerging technologies and products and opinion columns from its renowned technology authorities.

      Sync is our new technology consumer lifestyle magazine and our entrance into the growing consumer electronics market. According to the Consumer Electronics Association, this market is estimated to be nearly $100 billion in sales in 2005. Sync is designed to give readers a stylish, exciting look at how consumers can use digital products in the context of everyday life. Sync’s first issue debuted during the summer of 2004 and published four issues throughout the year. Sync launched with a target circulation of 200,000, consisting primarily of affluent readers, ages 25-44. The launch of Sync also coincides with the launch of our new consumer technology event, DigitalLife.

      ExtremeTech is our latest newsstand special magazine for the hardcore technology do-it-yourselfer, helping these users design and build their PC’s and related technology systems. Whether a reader is configuring the ultimate gaming PC or building a digital audio workstation, ExtremeTech provides the component reviews, how-to features and tips to help that reader succeed.

      In September 2003, we launched the Ziff Davis Event Marketing Group, a new business unit that develops and builds large-scale and trade-focused events for the business and consumer technology communities. Leveraging the editorial content and the highly qualified subscriber base of our market-leading publications, these events provide technology marketers with the best portfolio of integrated marketing solutions to attract new customers, accelerate the customer buying process and achieve more efficient use of their marketing dollars. In October 2004, the Ziff Davis Event Marketing Group debuted DigitalLife, a new four-day special event that brings together the latest in digital technology for the home, work and play. The

event attracted over 30,000 consumers and technology enthusiasts, all eager to experience the next generation of digital technology products.

      Our Consumer Tech Group Internet sites provide online destinations for IT and business professionals and technology enthusiasts. The portfolio of online products is also grounded in a tradition of labs-based reviews, advice and commentary from leading experts, and in-depth analyses and reporting.

      The following February 2005 monthly page view and unique visitor statistics show the relative scale of our Consumer Tech Group Internet properties:

      Pcmag.com is the premier online destination for helping technology buyers make informed product choices for their business and personal lives. Offering labs-based reviews, solutions, leading columnists and articles from PC Magazine, pcmag.com also offers original content such as online-only reviews, product buying guides, proprietary downloads, eNewsletters, and special features by dedicated online editors. Once a user has made an informed product decision, pcmag.com’s online shopping features help the user find the best price and service options to complete the transaction.

      Extremetech.com follows the same do-it-yourself style as ExtremeTech, offering this passionate audience in-depth coverage of new and emerging technologies, community swapping tips and online shopping.

Enterprise Group

      The Enterprise Group is comprised of several businesses in the magazine, Internet, event, research and marketing tools areas. The three magazine publications in this segment are eWEEK, CIO Insight and Baseline. The Internet properties in this segment are primarily those affiliated with the Company’s enterprise brands, including eweek.com, cioinsight.com and baselinemag.com, but also include over 20 weekly eNewsletters and the eSeminars area, which produces sponsored interactive webcasts. This segment also includes the Company’s Custom Conference Group, which creates and manages several hundred face-to-face events for marketing clients per year; Business Information Services, a research and marketing tools unit launched in 2003; and Contract Publishing, which produces custom magazines, white papers, case studies and other sales and marketing collateral for customers.

      The following table sets forth information regarding the publications within the Enterprise Group:

      eWEEK is one of the largest controlled-circulation publications in the United States, reaching over 1.8 million enterprise technology decision-makers per week who are evaluating and purchasing technology solutions for their companies, according to the May 2004 BPA Pass Along Audit. Controlled-circulation publications like eWEEK are distributed directly to qualified professionals for no charge and generate revenue principally from the sale of advertising. In order to qualify for a free subscription, eWEEK subscribers must be involved in one or more stages of the IT decision-making process within an enterprise and be active in the specification, recommendation, purchase or approval of multiple technologies, services and business applications. These qualifications are audited by BPA International. The criteria we use to qualify subscribers for this magazine are among the highest standards in the industry. eWEEK differentiates itself by delivering to its readers breaking news, technology evaluations and strategic analyses of the technologies, platforms and trends that impact enterprise-wide computing. This makes eWEEK extremely attractive to advertisers selling products and services to IT professionals and senior business readers evaluating and implementing enterprise technology solutions.

      CIO Insight is a 50,000 subscriber, controlled-circulation strategic business journal for today’s senior IT decision makers. Its mission is to provide IT executives with cutting-edge strategies, management techniques and technology perspectives that align business with IT. Each month, CIO Insight provides senior-level technology executives with in-depth analysis and proprietary research about new trends in IT. Writers are either proven experts in their fields or journalists who are well-versed in technology and management issues. In order to qualify for a free subscription, CIO Insight subscribers must be senior IT executives actively charged with setting their company’s IT business goals, direction and strategy. These senior IT executives must also have personal purchase authority for IT within their organizations or have personal budgets in certain IT categories.

      Baseline is a 125,000 subscriber, controlled-circulation magazine that is a guide to selecting and managing the deployment of leading-edge information systems for senior IT and business leaders. Through case studies, news stories, company dossiers and financial tools, the publication provides these senior executives with a detailed look at how their peers are implementing strategic information technology projects and systems. The success, or failure, of each implementation is measured by the company’s actual progress against “baseline” expectations of financial returns and technology deliverables. In the four years since its inception, Baseline has won five Jesse H. Neal National Business Journalism Awards for its excellent editorial coverage of business and technology issues, and in March 2005 was awarded the Grand Neal award, the highest distinction awarded by the Association of Business Media Companies. In order to qualify for a free subscription, Baseline subscribers must be actively involved in setting goals, evaluating or managing a company’s IT investment, or planning major IT projects or upgrades in the next 12 months. The subscriber must have a director-level title or higher, have a minimum personal budget authority of $50,000 and an organizational spending minimum of $100,000.

      Our Enterprise Group Internet sites offer products and services consisting of Internet advertising, eNewsletters, select lead-generation programs, integrated e-commerce opportunities, email direct marketing, sponsorship and custom site development. The Group also produces eSeminars, which are sponsored interactive webcasts that connect IT experts, buyers and sellers in online interactive groups to explore the latest issues in technology. The Company held several hundred eSeminars in 2004 with over 600 average registrants per event.

      The following February 2005 monthly page views and unique visitor statistics show the relative scale of our Enterprise Group Internet properties:

** Unadjusted for duplication of unique visitors between all sites.

      Eweek.com is the real-time resource for IT professionals who evaluate and purchase technology solutions for their organizations. With a dedicated team of online journalists, eweek.com offers 24/7 technology news coverage, timely features, analysis and reports on major topical issues and technology vertical markets. Information can be accessed by topic or industry, helping IT professionals get the information they need in a fast and informative format. Eweek.com includes the award-winning journalism, reviews and insights of eWEEK, plus case studies, research and tools from CIO Insight and Baseline.

      Cioinsight.com is the IT portal of record for Chief Information Officers and other senior-level technology decision-makers. It provides easy access to progressive articles, interviews, surveys and proprietary research on technology strategies and cost-cutting techniques through the lens of experienced industry journalists. As a result of its elevated editorial approach, cioinsight.com offers marketers a targeted subscriber readership that includes senior-level IT executives directly involved in their organization’s technology budget, direction and strategy.

      Baselinemag.com provides senior IT and business executives with timely case studies, cutting-edge articles and extensive interactive online tools so that they can make the best decisions about implementing information technology. Baselinemag.com’s content gets deep into project-based ROI goals, defining core and valuable metrics with the key players involved while profiling the specific technology solutions used. Baselinemag.com not only details what technology products and projects work best, but also which products and projects failed and why they failed.

Game Group

      The Game Group is focused on the videogame market and is now principally comprised of three magazine publications (Electronic Gaming Monthly, Computer Gaming World, and Official U.S. Playstation Magazine) and 1up.com, the online destination for gaming enthusiasts, which was launched in October 2003. These paid publications are positioned to capitalize on the large and growing enthusiast market for videogames. According to DFC Intelligence, the global videogame market was estimated to be $22.9 billion in 2004 and is forecasted to grow to $33.3 billion in 2008. Because readers of videogame magazines are principally 18-to-34 year old males, these publications also offer advertisers access to a highly focused, difficult-to-reach readership with attractive demographics and spending patterns. For the year ended December 31, 2004, the Company was the leader in the United States in this valuable publishing segment in three major categories: IMS advertising pages (41.8% share); total circulation (35.5% share); and newsstand circulation (44.5% share). On average, our videogame publications sell nearly 420,000 copies at the newsstand per issue.

      The following table sets forth information regarding the publications within the Game Group segment:

      Computer Gaming World is the first magazine and the last word in computer gaming, with over 20 years of editorial leadership. It provides readers with the most informed, best-written and entertaining reviews, previews, features and strategies about PC games.

      Electronic Gaming Monthly is the ultimate guide to video gaming and leads the industry with exclusive scoops, authoritative articles and the world’s most famous and hardest hitting reviews. The magazine, which reaches the most influential and engaged videogame players, is about to celebrate its 200th issue.

      Official U.S. PlayStation Magazine is the only magazine that provides a disc supplied by Sony Computer Entertainment America, containing interactive samples of games and other materials. It is a critical voice, independent of SCEA, that helps readers get more out of their PlayStation systems (PS1 and PS2).

      The following February 2005 monthly page views and unique visitor statistics show the relative scale of 1up.com:

      In October 2003, 1up.com was launched as our new online destination for videogame enthusiasts and provides up-to-the-minute news, multiple game reviews, tips and tricks and live forums with industry celebrities covering all game platforms. Unlike other competing videogame sites, 1up.com incorporates the unique editorial features from the Game Group’s industry-leading publications together with unique site functions and features for social networking, discussion groups, consumer news and lifestyle coverage of movies, music and gadgets.

Revenue

      Our principal sources of revenue for the year ended December 31, 2004 were advertising (63.7% of total revenue), circulation (18.6%) and other ancillary sources of revenue (17.7%). Circulation comprises both subscriptions (10.0%) and newsstand sales (8.6%). We record revenue net of agency commissions, estimated subscription cancellations and newsstand returns.

      Advertising. Advertising rates and rate structures vary among our publications and Internet properties and are based on, among other things, the circulation or audience of the particular property, the readership demographics, the scheduled frequency and the size and placement of the advertisement in the publication or website. Our advertising revenue is influenced by a number of external factors, including the volume of new technology product introductions, the amount and allocation of marketing expenditures by our advertising clients and the extent to which our customers elect to advertise using print and online media.

      Subscriptions. Generally, we sell subscriptions to our publications either directly by our circulation staff or by independent subscription direct marketing companies or agents. We receive approximately 11.3% of the total price of subscriptions sold through agents. In addition to agents, we have historically sold subscriptions using a variety of techniques including direct reply subscription cards, direct mail and the Internet.

      Newsstand. We sold approximately 5.1 million single copies of magazines for the year ended December 31, 2004. Generally we receive approximately 47.5% of the cover price of an individual magazine sold through the newsstand with the balance of the cover price going to the magazine’s distributor, wholesaler and retailer.

      Other Revenue Sources. We also derive revenue from a variety of ancillary activities, including mailing list rentals, custom conferences and events, royalty and license agreements and eNewsletters.

Operating Costs

      The principal components of our production costs are raw materials, printing and distribution, which represented 24.1%, 39.0% and 36.9%, respectively, of our publishing production expenses for the year ended December 31, 2004. Our principal raw material is paper. Paper supply and prices are subject to volatility and may be significantly affected by many factors, including market and economic conditions.

      We outsource the printing process, including the majority of our pre-press and paper buying operations, for all of our publications. To facilitate efficient and timely printing of our publications, we have established long-term contractual relationships with certain printing companies, including R.R. Donnelley and Brown Printing Company. For the year ended December 31, 2004, approximately 43.0% of our total production costs were for printing services and paper supplied by or through R.R. Donnelley.

      Our other principal operating costs are selling, general and administrative expenses. Included in these costs are compensation expenses (salaries, commissions and incentives), benefits, editorial costs and circulation, marketing and promotion expenses.

Circulation

      Our publications include paid-circulation magazines, which generate revenue principally from advertising, newsstand sales and subscriptions, and controlled-circulation publications, which in our case are distributed to qualified IT professionals and generate revenue principally from the sale of advertising. Our controlled-circulation publications offer technology content that appeals to a professional audience in need of technology information and enterprise IT solutions, specifically in the areas of news, lab testing reviews, analysis, opinion and case studies. Our paid-circulation publications offer consumer and business-oriented content that appeals to a broader audience interested in technology products and services, the Internet and/or videogame hardware and software. As of December 31, 2004, we published six domestic paid-circulation publications and three domestic controlled-circulation publications.

      Our paid-circulation publications are distributed to subscribers and are also available for sale at newsstands and other retail outlets. We have an agreement with Warner Publishing Services to manage our newsstand and retail distribution. Warner Publishing Services in turn has agreements with magazine wholesalers to arrange for national and regional placements of our publications and to manage billing and collection of amounts due from the magazine retailers. Our paid subscribers receive their publications through the U.S. Postal Service and via Zinio Systems Inc. for digital delivery. We also have an agreement with Kable Fulfillment Services to manage our subscription billing, collection and processing, which includes providing mailing labels for each of the paid publications. Our controlled-circulation publications are distributed free of charge to individuals who meet demographic standards we established in an effort to make the publication attractive to advertisers. The qualified subscribers of our controlled-circulation publications receive these publications via the U.S. Postal Service and also via Zinio Systems Inc. for digital delivery. In addition, we have an agreement with Omeda Communications to manage our list and mailing labels for each of the controlled publications.

Customers

      The size and composition of our readership offers advertisers concentrated and efficient exposure to their critical target audiences. As a result, our top advertisers, including Microsoft, Computer Discount Warehouse, Dell Computer and Hewlett Packard, have consistently advertised in our publications and on our Internet sites. Importantly, as technology and videogames have become more mainstream and appeal to broader demographics, our publications are becoming increasingly more appealing to a larger range of advertisers who are interested in marketing lifestyle and other general consumer products to this reader audience.

      We had over 800 advertising customers in 2004 according to internal records and an average paid circulation of over 1.9 million individuals according to the figures filed with the Audit Bureau of Circulation for the six months ended December 31, 2004. No single advertiser comprised more than 10.7% of our advertising revenue or 6.8% of total revenue for the year ended December 31, 2004. Our top ten advertisers accounted for 42.0% of our advertising revenue and 26.8% of our total revenue for the year ended December 31, 2004.

Competition

      The magazine publishing industry is highly competitive. We compete with several much larger international companies that operate in many markets and have broad product offerings in publishing and trade shows and conferences. We compete for readers and advertisers in the general publishing marketplace, which is fragmented. According to SRDS Media, there are about 7,900 domestic trade magazine titles. We also compete for advertising and circulation revenue principally with publishers of other technology magazines and Internet sites with similar editorial content to ours. We believe our core competitive set includes approximately 20 print publishing and Internet companies. The technology magazine industry has traditionally been dominated by a small number of large publishers. In 2004, the three largest technology-publishing companies, Ziff Davis, International Data Group and CMP Media, accounted for 65.5% of total technology magazine gross advertising revenue and 69.0% of total technology advertising pages according to IMS.

      Our publications and Internet sites generally compete on the basis of:

      We believe that we compete successfully with other technology and videogame publications and Internet sites based on our market-leading positions within the technology and videogame magazine sectors, the nature and quality of our magazines’ editorial content and the attractive demographics of our readers. In addition, our magazines also compete for advertising revenue with general-interest consumer and business magazines and other forms of media, including broadcast and cable television, radio, newspapers, direct marketing and other electronic media. In competing with general-interest consumer and business magazines and other forms of media, we rely on our ability to reach a targeted segment of the population in an efficient, cost-effective manner.

Certain License Agreements and Service Contracts

      Agreements with CNET Networks and ZDNet. On January 19, 2001, we amended a pre-existing content license agreement with ZDNet and its parent, CNET Networks Inc. (“CNET”), such that, beginning on March 1, 2001, ZDNet’s previously granted license to display certain of our magazine content online became non-exclusive and on March 1, 2002, all of ZDNet’s license rights to content from our magazines was

terminated. The term of the content license agreement was subsequently extended until April 30, 2002, without any further payments required from ZDNet. In addition, ZDNet’s right and obligation to maintain websites for our publications terminated and we obtained the right to host these websites starting April 1, 2001. As consideration for amending the license agreement, ZDNet paid us a royalty termination fee of $4.5 million in two installments, of which $2.2 million and $2.3 million were paid on March 1, 2001 and 2002, respectively.

      Under the previous five-year license agreement with ZDNet, we were providing the editorial content of our publications existing as of April 4, 2000 to ZDNet, and ZDNet maintained websites for those publications. This agreement did not cover any new publications acquired or developed by us after the date of the acquisition of ZDP to which we retained all rights in every medium, and it specifically allowed us, in certain circumstances, to transact e-commerce independently of ZDNet for all publications. We have a perpetual, royalty-free license from ZDNet to use the trademark “ZD” in print. ZDNet continues to use the trademark “ZD” online and may use certain derivations of the trademark “ZD” in print.

      In connection with the closing of the acquisition of ZDP, we entered into a services agreement with ZDI. Under this agreement, we provided distribution, circulation and production services to ZDI for its Computer Shopper magazine, and ZDI paid us our costs in relation to the performance of these services plus an additional $5.0 million annually in fees. On January 19, 2001, we agreed with ZDI to terminate this services agreement and we entered into a new agreement effective March 1, 2001 with CNET which contained substantially similar terms, except that CNET was not required to pay us any annual fee and was only required to reimburse us for our out-of-pocket expenses incurred in connection with producing and distributing Computer Shopper. On March 1, 2001, CNET paid us a $2.0 million non-refundable fee in connection with the termination of the original Computer Shopper services agreement. We entered into a new agreement with CNET as of March 1, 2003, which was terminated effective March 2005, pursuant to which we were entitled to be paid a fixed monthly fee plus reimbursement of certain direct expenses in connection with circulation services we provided for Computer Shopper.

      Other Agreements. We were granted an exclusive license until June 30, 2004 to use certain trademarks owned by Sony Computer Entertainment America Inc. in connection with the publishing of the magazine Official U.S. PlayStation Magazine in the United States and Canada. The parties have been negotiating the renewal of the license to extend the term to March 31, 2007 but have not yet executed a renewal. In the meantime, Sony has agreed to continue having us publish Official U.S. PlayStation Magazine in the United States and Canada.

      We have also been granted a license to use certain trademarks owned by Microsoft Corporation in connection with the publishing of Xbox Nation magazine both in print and online. The term of our right to use these trademarks expires on October 31, 2005.

      We also were licensed to use certain trademarks and copyrighted content owned by Electronics Boutique of America, Inc., in connection with our publication of GMR. The parties agreed to terminate this license in connection with the discontinuation of GMR in February 2005.

      Lastly, we license various of our trademarks and copyrighted content to third parties, including publishers of foreign editions of our magazines and other foreign magazines. Our brands and content currently appear in 41 countries and 20 languages worldwide.

Trademarks and Intellectual Property Rights

      We have developed strong brand awareness for our principal publications and services. Accordingly, we consider our trademarks, copyrights, trade secrets and similar intellectual property critical to our success and rely on trademark, copyright and trade secrets laws, as well as licensing and confidentiality agreements, to protect our intellectual property rights. We generally register our material trademarks in the U.S. and in certain other key countries in which these trademarks are used. Effective trademark, copyright and trade secret protection may not be available in every country where our publications and services are available.

      We may be subject to claims by third parties of alleged infringement of trademarks, copyrights, patents and other intellectual property rights, from time to time in the ordinary course of business. We do not believe there are any such legal proceedings or claims that are likely to have, individually or in the aggregate, a material adverse affect on our business, financial condition or results of operations.

Employees

      As of December 31, 2004, we had a total of approximately 525 employees, all based in the U.S. None of our employees are represented by a labor union. We believe that our relations with our employees are good.

Forward-Looking Statements

      All statements in this Form 10-K that are not statements of historical fact are “forward-looking statements,” as that term is used in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Examples of forward-looking statements include: projections of earnings, revenue, financing needs or other financial items; statements of the plans and objectives of management for future operations; statements concerning proposed new products and services; and any statements of assumptions underlying any of the foregoing. In some cases, you can identify forward-looking statements by the use of words such as “may,” “will,” “expects,” “should,” “believes,” “plans,” “anticipates,” “estimates,” “predicts,” “projects,” “should,” “potential” or “continue,” and any other words of similar meaning.

      Any or all of our forward-looking statements in this Form 10-K and in any other public statements we make may turn out to be materially wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in this Form 10-K will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. Forward-looking statements herein speak only as of the date of filing of this Form 10-K. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our reports to the Securities and Exchange Commission (“SEC”).

      Statements regarding our future financial performance or results of operations, including expected revenue growth; future paper, postage, printing or other expenses; future operating margins; licensing or contract renewals; anticipated capital spending; our ability to obtain funding and other future or expected performance are subject to risk factors, some of which are discussed immediately below under “Certain Risk Factors.”

Certain Risk Factors

      Below we provide a cautionary discussion of certain risks, uncertainties and possibly inaccurate assumptions relevant to our businesses. These are certain factors that we think could cause our actual results to differ materially from expected and historical results. Other factors besides those listed here could also adversely affect us. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. In addition to other information in this Form 10-K, you should carefully evaluate the following risk factors:

We require a significant amount of cash to service our indebtedness, which could make it difficult for us to satisfy our obligations with respect to our long-term debt and preferred stock and which reduces the cash available to finance our growth.

      We have a significant amount of indebtedness. As of December 31, 2004, we had long-term debt and redeemable preferred stock (which has been classified as debt since January 1, 2004) totaling $308.9 million and $814.5 million, respectively, and approximately $948.5 million of stockholders’ deficit.

      Our substantial indebtedness could:

      Our ability to service our indebtedness will depend on our future performance, which will be affected by prevailing economic conditions and financial, business and other factors. Certain of these factors are beyond our control. We believe that, based upon current levels of operations, we will be able to meet our debt service obligations for 2005 when due. The scheduled maturities for our principal indebtedness for 2005, 2006 and 2007 are approximately $16.7 million (plus an obligation to pay an “excess cash flow” payment in 2005 currently estimated to be $7.3 million), $83.1 million and $67.0 million, respectively. If we cannot generate sufficient cash flow from operations to service our indebtedness and to meet our other obligations and commitments, we will be required to refinance our debt or to dispose of assets to obtain funds for such purposes. There is no assurance that refinancings or asset dispositions could be achieved on a timely basis or on satisfactory terms, if at all, or would be permitted by the terms of the indentures governing our senior subordinated compounding notes due 2009 (the “Compounding Notes”), the 12% Notes, or by our Senior Credit Facility agreement. In the event that we were unable to refinance our Senior Credit Facility or raise funds through asset sales, sales of equity or otherwise, our ability to pay the principal of, and interest on, the amounts borrowed under the Senior Credit Facility, 12% Notes and Compounding Notes, or to make any payment on the accrued dividends on our preferred stock, would be impaired.

If Ziff Davis Holdings does not receive loans, advances or dividends from its subsidiaries, Ziff Davis Holdings may be unable to redeem or pay accrued dividends on its preferred stock.

      Ziff Davis Holdings is a holding company with no assets other than its ownership of the capital stock of a holding company that owns the capital stock of Ziff Davis Media. Accordingly, Ziff Davis Holdings’ ability to perform its obligations to the holders of its preferred stock depends upon the operating cash flow of Ziff Davis Media and its direct and indirect subsidiaries and their payments to Ziff Davis Holdings in the form of loans, dividends or otherwise. Ziff Davis Media is restricted from making any payments to Ziff Davis Holdings before such time as its obligations under the Compounding Notes and the Senior Credit Facility are satisfied. In addition, the making of loans, advances or other payments by Ziff Davis Media to Ziff Davis Holdings may be subject to regulatory and contractual restrictions. Subsidiary payments are also contingent upon earnings and various business and other considerations. If Ziff Davis Holdings is unable to obtain payments from Ziff Davis Media or its direct and indirect subsidiaries, Ziff Davis Holdings may be unable to redeem its preferred stock upon mandatory redemption on March 31, 2010 (or upon an earlier change in control, in certain circumstances with respect to certain classes of our preferred stock), or pay any cash dividends accruing on its preferred stock. In addition, Ziff Davis Holdings will be unable to pay any cash dividends on certain classes of preferred stock unless it has first paid in full all accrued dividends on classes that have liquidation preference.

Our controlling stockholder may have interests that conflict with the interests of other investors.

      A majority of the equity securities of Ziff Davis Holdings are held by Willis Stein and its equity co-investors. Through their controlling interest in us and pursuant to the terms of an investor rights agreement among certain of Ziff Davis Holdings’ stockholders (“Investor Rights Agreement”), Willis Stein has the

ability to control our operations and policies. Circumstances may occur in which the interests of Willis Stein and its affiliates, as controlling stockholders, could be in conflict with the interests of other investors. In addition, our equity investors may have an interest in pursuing acquisitions, divestitures or other transactions that, in their judgment, could enhance their equity investment, even though such transactions might involve risks to holders of our debt.

We may not be able to finance a change of control offer.

      Under the terms of the indenture governing the Compounding Notes and under the terms of the series E redeemable preferred stock (the “Series E Preferred Stock”) as set forth in the certificate of incorporation of Ziff Davis Holdings, we will be required to offer to repurchase all the Compounding Notes for a price equal to 101% of the principal amount, plus interest that has accrued but has not been paid as of the repurchase date, and to offer to redeem all the Series E Preferred Stock, if a change of control (as defined in the indenture governing the Compounding Notes or in the certificate of incorporation of Ziff Davis Holdings, respectively) occurs. However, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchases, or that we will not have sufficient funds to pay our other debts. In addition, our Senior Credit Facility may prohibit us from repurchasing the Compounding Notes and/or redeeming the Series E Preferred Stock after a change in control until we have repaid in full our debt under such credit facilities. If we fail to repurchase the Compounding Notes upon a change in control, we will be in default under the indenture governing the Compounding Notes and our Senior Credit Facility. Any future debt that we incur may also contain restrictions on repurchases in the event of a change in control or similar event. These repurchase restrictions may delay or make it harder for others to obtain control over us.

Stockholders’ proportional equity interest in Ziff Davis Holdings could be reduced in the future.

      The Series E Preferred Stock offers limited preemptive rights on issuances by Ziff Davis Holdings that are senior to such shares and a right to approve the issuance of shares junior to the series D redeemable preferred stock (“Series D Preferred Stock”) but senior to or on par with the Series E Preferred Stock. However, these rights are subject to certain limitations, which may result in the dilution of your equity interest in Ziff Davis Holdings. We may offer and sell additional shares of capital stock in the future, including capital stock issued under our Amended and Restated 2002 Employee Stock Option Plan (“2002 Stock Option Plan”). In connection with our financial restructuring, we issued approximately 38.6 million common stock warrants to Willis Stein, each entitling Willis Stein to obtain upon exercise one share of the common stock of Ziff Davis Holdings at an exercise price of $0.001 per share, and approximately 5.2 million common stock warrants to the tendering holders of our 12% Notes (of which approximately 1.4 million common stock warrants were issued to Willis Stein as a tendering holder), each giving such holders the right to acquire upon exercise one share of the common stock of Ziff Davis Holdings at an exercise price of $0.001 per share.

Non-compliance with our debt facilities could accelerate our obligations.

      Our Senior Credit Facility and the Compounding Notes indenture contain restrictive and information covenants and a breach of any of these restrictive covenants under the Senior Credit Facility or our inability to comply with the amended financial ratios would result in an event of default under our Senior Credit Facility. If such default occurs, the lenders under our Senior Credit Facility may elect to declare all outstanding borrowings, together with accrued and unpaid interest and other fees, to be immediately due and payable. Further, they may require us to use all of our available cash to partially repay such borrowings and could prevent us from making debt service payments on the Compounding Notes, which would result in an event of default under the indenture governing the Compounding Notes. Our Senior Credit Facility lenders also have the right in such circumstances to terminate any commitments they have to provide further financing, including those under the revolving portion of our Senior Credit Facility. Finally, our Senior Credit Facility lenders could foreclose on our assets.

We depend on advertising as a principal source of revenue, which decreases during economic cycle downturns and fluctuates due to seasonal buying.

      We expect that advertising revenue will continue to be the principal source of our revenue in the foreseeable future. Most of our advertising contracts are either short-term contracts and/or can be terminated by the advertiser at any time with little notice. We cannot assure you that we will be able to retain current advertisers or obtain new advertising contracts. Advertising revenue for the magazine industry is cyclical and dependent upon general economic conditions. Advertising revenue for the technology magazine industry has decreased significantly over the last several years due to the downturn in the technology sector (and the general U.S. economy for much of that period). The technology sector has declined as technology capital spending has slowed dramatically which has led to further industry consolidation and reduction of advertising budgets. If the technology sector downturn continues or a general economic downturn resumes, our advertisers may continue to reduce their advertising budgets and any material decline in these revenues would have a material adverse effect on our business, results of operations and financial condition. In addition, factors such as competitive pricing pressures and delays in new product launches may affect technology product advertisers. We cannot assure you that advertisers will maintain or increase current levels of advertising in special-interest magazines.

If the U.S. economy worsens, we may have to implement further cost saving efforts to achieve the benefits we expect, which could result in further restructuring charges and materially impact our business.

      In 2001 and 2002, we experienced a significant decline in revenue and earnings, primarily due to weak economic conditions, which were exacerbated by the terrorist attacks of September 11, 2001. We took a number of steps designed to improve our profits and margins despite decreased revenue. We restructured a number of our businesses and support departments and reduced overhead infrastructure by consolidating and closing several offices and outsourcing certain corporate functions. As a result, we recorded special restructuring and writedown charges to our operations of $277.5 million in 2001 and $128.2 million during 2002 related to these operating and financial restructuring decisions. Additionally, due to marketplace conditions in the technology and videogame markets that our publishing and events operations serve, on December 31, 2004 we committed to a plan to restructure certain of our operations in order to improve our profitability that included discontinuing the publication of GMR magazine and the Business4site event, reducing the frequency of Xbox Nation magazine and reducing certain other operating, general and administrative expenses. As a result, we recorded a restructuring charge of $5.5 million during the fourth quarter of 2004. If the U.S. economy worsens, our revenue would likely decline further. Because of our fixed cost structure, decreases in our revenue cause disproportionately greater decreases in our earnings. Accordingly, if revenue declines beyond our expectations, we will be forced to take additional cost-saving steps that could result in additional restructuring charges and materially adversely affect our business.

We may not be able to protect our intellectual property.

      We rely on copyright and trademark rights to protect our publishing products. Effective trademark and copyright protection may be unavailable or limited, or we may not have applied for such protection in the United States or abroad. In addition, we have been, and may in the future be, notified of claims that our publishing products may infringe trademarks, copyrights, patents and/or other intellectual property rights of others. Such claims, including any related litigation, could result in significant expense to us and adversely affect our cash flow, whether or not such litigation is resolved in our favor.

Our business might suffer if we fail to retain our senior management or to recruit and retain key personnel.

      Our business is managed by a small group of key executive officers. The loss of services of one or more of these senior executives could adversely affect our ability to effectively manage our overall operations or successfully execute current or future business strategies. In addition, our success depends on our continued

ability to recruit and retain highly skilled, knowledgeable and sophisticated editorial, sales and technical personnel. Competition for these key executives and personnel is intense. We cannot assure you of our ongoing ability to attract and retain such qualified employees.

New product launches or acquired products may reduce our earnings or generate losses.

      Our future success will depend in part on our ability to continue offering new products and services that successfully gain market acceptance by addressing the needs of our current and future customers. Our efforts to introduce new or integrate acquired products may not be successful or profitable. The process of internally researching and developing, launching, gaining acceptance and establishing profitability for a new product or service, or assimilating and marketing an acquired product, is both risky and costly. New products generally incur initial operating losses.

      Costs related to the development of new products and services are generally expensed as incurred and, accordingly, our profitability from year to year may be adversely affected by the number and timing of new product launches.

      We face significant competition from a number of technology and website publishers, some of which may have greater financial and other resources than we have, which may enhance their ability to compete in the technology publishing market. We principally compete for advertising and circulation revenue with publishers of other technology publications. We also face broad competition from media companies that produce general-interest magazines and newspapers. Competition for advertising revenue is primarily based on advertising rates, the nature and scope of readership, reader response to advertisers’ products and services and the effectiveness of sales teams. Other competitive factors in publishing include product positioning, editorial quality, circulation, price and customer service, which impact readership audience, circulation revenues and, ultimately, advertising revenues. Because our industry is relatively easy to enter, we anticipate that additional competitors, some of whom have greater resources than we do, may enter these markets and intensify competition. We announced effective January 2005 a reduction in the rate base of PC Magazine to 700,000 as did our primary competitor, PC World, when it reduced its rate base to 850,000 effective January 2005. We also have announced reductions in rate base or target circulation for certain other of our magazines. Although reduced circulation lowers our production and distribution expenses, it could also have a negative impact on our revenues that potentially equals or exceeds the production and distribution cost savings.

      We rely on our principal vendors and their ability or willingness to sell goods and services to us at favorable prices and other terms. Many factors outside our control may harm these relationships and the ability and willingness of these vendors to sell these goods and services to us on such terms. Our principal vendors include paper suppliers, printers, subscription fulfillment houses and national newsstand wholesalers, distributors and retailers. Each of these industries is currently experiencing consolidation among its principal participants. Such consolidation may result in all or any of the following, which could adversely affect our results of operations:

      Our principal raw material is paper. Paper prices have fluctuated over the past several years. We generally enter into contracts for the purchase of paper that adjust the price on a quarterly basis. We have not entered, and do not currently plan to enter, into long-term forward price or option contracts for paper. Accordingly, significant increases in paper prices could adversely affect our future results of operations.

      Postage for magazine distribution is also one of our significant expenses. We primarily use the U.S. Postal Service to distribute magazine subscriptions. We may not be able to recover, in whole or in part, paper or postage cost increases. Postal rates increased 9.9% in January 2001, 2.6% in July 2001 and 9.9% in June 2002. Each of these price increases has had a significant adverse effect on our cash flow, and any further significant cost increases will also have an adverse effect on our cash flow. Due to legislation in 2003, the Postmaster General has announced that postage rates will not increase until 2006, however, current industry projections are that the 2006 postage increase could be in a range of 15-18%.

      The magazine industry has seen a weakening of newsstand sales during the past few years. A continuation of this decline could adversely affect our financial condition and results of operations by reducing our circulation revenue and thereby causing us to either incur higher circulation expense to maintain our rate bases, or to reduce our rate bases which could then cause further negative impacts to our revenue.

      Our principal properties and the approximate square feet occupied by us (excluding excess space vacated or sublet to others) are currently as follows:

      Properties other than those listed above include smaller sales and/or general offices in Chicago, Illinois and Atlanta, Georgia, under leases expiring through 2007. We do not own real property and we lease all of our offices from third parties. We believe our facilities are in good operating condition and are suitable and adequate for our current operations.

      In connection with prior years’ cost reduction programs, we undertook a real estate consolidation and relocation project designed to reduce our total real estate costs and square feet leased. In 2001, we closed eight facilities covering approximately 60,000 square feet with lease terms expiring through 2006. Two of the facilities covering approximately 24,000 square feet have been subleased. We also subleased approximately 194,000 square feet of our New York headquarters with sublease terms expiring in 2019. In 2002, we closed three more facilities covering approximately 125,000 square feet with terms expiring in 2010 and vacated approximately 60,000 square feet in our New York headquarters, which runs through 2019. In 2003, we entered into a sublease agreement for the vacated space in our New York headquarters that will also expire in 2019. We are currently in the process of attempting to negotiate subleases or lease terminations relating to the remaining closed facilities and excess leased space. We cannot assure you, however, that we will successfully negotiate and execute these additional subleases or lease terminations, or comment as to the terms on which we could do so.

      On October 17, 2001, the former Publisher of The Net Economy initiated a lawsuit in the Supreme Court of the State of New York, Nassau County, alleging breach of contract, fraudulent inducement and various other claims arising out of the termination of his employment. We filed a motion to dismiss in December 2001, which was subsequently denied as against Ziff Davis Media and granted as against defendants Alan Perlman and Willis Stein. In June 2003, the Appellate Division modified the lower court’s order to grant defendants’ motion to dismiss plaintiff’s claim for punitive damages and otherwise affirmed the lower court’s order. In November 2004 the Supreme Court granted in part and denied in part defendants’ motion for summary judgment, dismissing four of plaintiff’s six causes of action, and dismissed defendants’ counterclaim. In December 2004 plaintiff filed a notice of appeal of that order. In March 2005 a settlement agreement was executed pursuant to which the case is to be dismissed. This matter will not have a material effect on our financial condition or results of operations.

      In May 2004, we gave notice of our election not to renew the then-existing license agreement pursuant to which the licensee (the “Former Licensee”) was licensed to publish the Greek edition of PC Magazine. In July 2004, we were informed that the Former Licensee had commenced litigation against us in Greece. In December 2004, a Greek court denied plaintiff’s request for an injunction against us, and granted our request for an injunction against plaintiff related to the PC Magazine trademark in Greece. In December 2004, we were informed that the Former Licensee sued us in Greece for damages. We currently do not anticipate that this matter will have a material impact on our financial condition or results of operations. We cannot give any assurances as to the outcome of these matters, however.

      We are also subject to various claims and legal proceedings that arise in the ordinary course of business. However, we do not expect any of these claims or legal proceedings, either individually or in the aggregate, to have a material adverse effect on our financial condition, results of operations or liquidity.

      Not applicable.

PART II

      There is no public trading market for Ziff Davis Holdings’ common stock. There are approximately 35 holders of record of Ziff Davis Holdings’ common stock.

      Ziff Davis Holdings did not pay cash dividends on its common stock and currently intends to retain any future earnings to finance operations, debt service and business expansion. Therefore, the payment of any cash dividends on the common stock is unlikely in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of the Board of Directors of Ziff Davis Holdings and subject to terms of the Senior Credit Facility, the indenture governing the Compounding Notes and Ziff Davis Holdings’ certificate of incorporation and will be dependent upon our earnings, capital requirements, financial condition and such other factors deemed relevant by the Board of Directors.

      Ziff Davis Holdings did not repurchase any of its equity securities during 2004.

      The following table presents the selected historical financial information of Ziff Davis Holdings. The selected financial information as of December 31, 2004, 2003, 2002, and 2001, March 31, 2001, and for the

years ended December 31, 2004, 2003, and 2002 and the nine month period ended December 31, 2001, and the fiscal year ended March 31, 2001, were derived from the audited consolidated financial statements and the related notes of Ziff Davis Holdings, which appear in Item 8 in this Form 10-K. Certain of the selected historical financial information may not be comparable due to differing accounting bases resulting from changes in ownership. On April  5, 2000, ZDP was purchased by Ziff Davis Holdings. Accordingly, we have separated the periods of different ownership in the table below.

      The following selected historical financial and operating information of Ziff Davis Holdings should be read in conjunction with “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes of Ziff Davis Holdings, which appear in this Form 10-K.

ZIFF DAVIS HOLDINGS INC.

SELECTED FINANCIAL DATA

      The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements, including the notes to those statements, which are included in Item 8 of this Form 10-K and in conjunction with the sections of Item 1 of this Form 10-K titled “Forward-Looking Statements” and “Certain Risk Factors.” Historical results and percentage relationships set forth in the audited consolidated financial statements, including trends that might appear, should not be taken as indicative of results of future operations.

Overview

      We are a leading integrated media company focused on the technology and videogame markets. We are an information services and marketing solutions provider of technology media including publications, websites, conferences, events, eSeminars, eNewsletters, custom publishing, list rentals, research and market intelligence. Ziff Davis Holdings is majority owned by various investment funds managed by Willis Stein, a private equity investment firm. Ziff Davis Holdings is a holding company that indirectly owns 100% of Ziff Davis Media. Ziff Davis Holdings does not conduct any business, but rather all operations are conducted by Ziff Davis Media and its direct and indirect subsidiaries. Ziff Davis Holdings has no material assets other than its investment in the capital stock of Ziff Davis Media. Ziff Davis Holdings was incorporated in the state of Delaware and was formed to acquire certain publishing assets from Ziff-Davis Inc., an unrelated company. Our major operating subsidiaries are Ziff Davis Publishing Inc., Ziff Davis Development Inc. and Ziff Davis Internet Inc. In January 2002, we changed our fiscal year-end from March 31 to December 31, effective December 31, 2001.

      The Company has historically reported and managed its business in conjunction with the reporting requirements set forth in the Company’s Senior Credit Facility and indenture agreements which mandated certain restrictions on the source of funding provided to the Restricted Subsidiaries and Unrestricted Subsidiaries, as defined in these debt agreements. Effective July 1, 2004, the Company amended the terms of its Senior Credit Facility which eliminated the distinction between the Restricted and Unrestricted Subsidiaries and allows the Company to be viewed in its entirety for purposes of financial covenant compliance. As a result, effective July 1, 2004, the Company now reports and manages its business along the following operating segments: the Consumer Tech Group, the Enterprise Group and the Game Group.

      The Consumer Tech Group is principally comprised of three of the Company’s magazine publications, PC Magazine, Sync and ExtremeTech; a number of consumer-focused websites, including pcmag.com and extremetech.com; and the Company’s new consumer electronics event, DigitalLife.

      The Enterprise Group is comprised of several businesses in the magazine, Internet, event, research and marketing tools areas. The three magazine publications in this segment are eWEEK, CIO Insight and Baseline. The Internet properties in this segment are primarily those affiliated with the Company’s enterprise brands, including eweek.com, cioinsight.com and baselinemag.com, but also include over 20 weekly eNewsletters and the eSeminars^tm area, which produces sponsored interactive webcasts. This segment also includes the Company’s Custom Conference Group, which creates and manages several hundred face-to-face events for marketing clients per year; Business Information Services, a research and marketing tools unit launched in 2003; and Contract Publishing, which produces custom magazines, white papers, case studies and other sales and marketing collateral for customers.

      The Game Group is focused on the videogame market and is now principally comprised of three magazine publications (Electronic Gaming Monthly, Computer Gaming World and Official U.S. PlayStation Magazine) and 1up.com, the online destination for gaming enthusiasts, which was launched in October 2003. The Game Group discontinued publishing GMR and reduced the frequency of XBox Nation during the fourth quarter of 2004. The results of these publications are included in the financial statements.

      For additional information on the Company’s operating segments, see Note 21 to the Consolidated Financial Statements.

      Ziff Davis Holdings’ financial statements as of December 31, 2004, 2003 and 2002, and for the years then ended are prepared on a consolidated basis and include the accounts of Ziff Davis Holdings and its subsidiaries.

Technology Sector and Economic Trends

      Our revenue and profitability are influenced by a number of external factors, including the volume of new technology product introductions; the amount and allocation of marketing expenditures by our clients; the extent to which sellers elect to advertise using print and online media; changes in paper prices and postage rates; and competition among computer technology marketers including print publishers and providers of other technology information services. Accordingly, we may experience fluctuations in revenue and profitability from period to period. Many of our large customers concentrate their advertising expenditures around major new product or service launches. Marketing expenditures by technology companies can also be affected by factors generally impacting the technology industry, including pricing pressures and temporary surpluses of inventory.

      Our revenue and profitability are also influenced by internal factors such as product mix and the timing and frequency of our new product launches. New publications generally require several years to achieve profitability and upon achieving initial profitability, often have lower operating margins than more established publications. Accordingly, our total revenue and profitability from year to year may be affected by the number and timing of new product launches. If we conclude that a new publication or service will not achieve certain milestones with regard to revenue, profitability and cash flow within a reasonable period of time, management may discontinue such publication or service or merge it into another existing publication or service.

      In 2001 and 2002, economic trends in the United States had a significant negative impact on our business. These trends included a general decline in all advertising spending, consolidation among our technology and videogame advertisers and a significant decrease in core technology advertising spending. In response to this decline, we undertook a cost reduction and restructuring program in 2001, which continued into 2002, and as a result of which we have discontinued unprofitable publications, consolidated operations and reduced our workforce. In August 2002, we also completed a comprehensive financial restructuring (see “Liquidity and Capital Resources — Financial Restructuring” and Note 12 to the Consolidated Financial Statements). In addition, due to marketplace conditions in the technology and videogame markets that our publishing and events operations serve, we committed to a plan to restructure certain of our operations in December 2004.

Results of Operations — Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

      The table below presents results for the year ended December 31, 2004 and compares this to the results for the year ended December 31, 2003.

Revenue, Net

      Revenue was $204.5 million for the year ended December 31, 2004, compared to $194.1 million in the comparable prior year period, an increase of $10.4 million, or 5.4%.

      Revenue for the Consumer Tech Group was $81.0 million compared to $77.0 million in the comparable prior year period, an increase of $4.0 million, or 5.2%. The increase was primarily related to higher advertising revenue for the Company’s Internet operations and incremental revenue for Sync and ExtremeTech magazines and DigitalLife, all three of which debuted in 2004. However, these gains were partially offset by lower advertising revenue for PC Magazine related to a decrease in advertising pages and average revenue per page. Total paid advertising pages for the Consumer Tech Group increased by 11.0% for the year ended December 31, 2004. Circulation revenue for the Consumer Tech Group decreased $0.5 million, or 3.4%, to $14.6 million, primarily due to decreased subscription revenue for PC Magazine, partially offset by incremental newsstand revenue for Sync and ExtremeTech. Other revenue related to the Consumer Tech Group increased $6.6 million, or 97%, primarily driven by increased PC Magazine branded event revenue, rights and permissions revenue and e-commerce revenue.

      Revenue for the Enterprise Group was $72.9 million compared to $60.2 million in the comparable prior year period, an increase of $12.7 million, or 21.1%. The increase primarily related to higher advertising revenue from CIO Insight and the Internet operations, substantially increased Custom Conference Group event revenues for eWEEK, Baseline and CIO Insight, and incremental revenue from the BIS business. There was one additional issue of Baseline and CIO Insight published during year ended December 31, 2004 compared to the same prior year period. Total paid advertising pages for the Enterprise Group increased by 6.8% for the year ended December 31, 2004.

      Revenue for the Game Group was $50.6 million compared to $56.9 million in the comparable prior year period, a decrease of $6.3 million, or 11.1%. The decrease was primarily related to significant advertising page declines and five fewer issues published in the portfolio during the year, partially offset by an increase in the

average revenue per page compared to the same prior year period. Circulation revenue for the Game Group decreased $1.5 million, or 5.9%, to $23.2 million, primarily due to decreased newsstand revenue. These decreases were partially offset by increases in 1up.com revenue and other revenue related to the Game Group which increased $1.2 million, primarily driven by increased revenue from GMR magazine, a joint venture with Electronics Boutique that has been discontinued. Total paid advertising pages for the Game Group decreased by 23.2% for the year ended December 31, 2004.

Cost of Production

      Cost of production was $59.7 million for the year ended December 31, 2004, compared to $60.6 million for the comparable prior year period, a $0.9 million or 1.5% decrease.

      Cost of production related to the Consumer Tech Group decreased $0.2 million, or 1.0% from $20.8 million in 2003 to $20.6 million for the year ended December 31, 2004. The decrease primarily related to manufacturing, paper and distribution cost savings achieved through the implementation of a number of new production and distribution initiatives across all of our publications and the impact of more favorable supplier contracts. These savings were partially offset by the increase in advertising pages for the Consumer Tech Group and the incremental costs associated with DigitalLife. As a result, cost of production for the Consumer Tech Group as a percentage of revenue decreased from 27.0% to 25.4% for the years ended December 31, 2003 and 2004, respectively.

      Cost of production related to the Enterprise Group of $14.2 million remained flat in 2004 when compared to the comparable prior year period. Increased costs associated with the increase in advertising pages for the Enterprise Group and higher Internet costs due to more eSeminars and the Business 4Site West event were offset by lower manufacturing, paper and distribution cost savings achieved through the implementation of a number of new production and distribution initiatives across all of our publications and the impact of more favorable supplier contracts. As a result, cost of production for the Enterprise Group as a percentage of revenue decreased from 23.6% to 19.5% for the years ended December 31, 2003 and 2004, respectively.

      Cost of production related to the Game Group decreased $0.7 million, or 2.7% from $25.6 million in 2003 to $24.9 million in 2004. The decrease primarily relates to manufacturing, paper and distribution cost savings as a result of the significant decline in advertising pages, five fewer issues published within the portfolio during the year and lower manufacturing, paper and distribution costs achieved through the implementation of a number of new production and distribution initiatives across all of our publications. These savings were partially offset by additional costs incurred for retail partner fees and premiums (e.g., posters, CDs, etc.) used to stimulate newsstand and subscriber sales. As a result, cost of production for the Game Group as a percentage of revenue increased from 45.0% to 49.2% for the years ended December 31, 2003 and 2004, respectively.

Selling, General and Administrative Expenses

      Selling, general and administrative expenses for the year ended December 31, 2004 were $110.9 million, compared to $99.0 million for the year ended December 31, 2004, a $11.9 million or 12.0% increase.

      Selling, general and administrative expenses related to the Consumer Tech Group increased $6.6 million, or 19.9%, from $33.2 million to $39.8 million. The increase was primarily due to incremental costs associated with Sync and ExtremeTech magazines and DigitalLife, and increased Internet promotion, content and sales costs due to higher sales volume, costs associated with PC Magazine branded events and non-cash employee stock option expense. These higher costs were partially offset by lower overhead costs as a result of the Company’s continued cost management efforts. As a result, selling, general and administrative expenses for the Consumer Tech Group as a percentage of revenue increased from 43.1% to 49.1% for the years ended December 31, 2003 and 2004, respectively.

      Selling, general and administrative expenses related to the Enterprise Group increased $4.0 million, or 9.4%, from $42.7 million to $46.7 million. The increase was primarily due to higher sales volumes for Custom Conference events, BBIS development costs, increased Internet promotion, content and sales costs due to

higher sales volume and non-cash employees stock option expense. These higher costs were partially offset by lower overhead costs as a result of the Company’s continued cost management efforts. As a result, selling, general and administrative expenses for the Enterprise Group as a percentage of revenue decreased from 70.9% to 64.1% for the years ended December 31, 2003 and 2004, respectively.

      Selling, general and administrative expenses related to the Game Group increased $1.3 million, or 5.6%, from $23.1 million to $24.4 million. The increase was primarily due to incremental costs associated with 1up.com and non-cash employee stock option expense, partially offset by lower overhead costs as a result of the Company’s continued cost management efforts. As a result, selling, general and administrative expenses for the Game Group as a percentage of revenue increased from 40.6% to 48.2% for the years ended December 31, 2003 and 2004, respectively.

Depreciation and amortization

      Depreciation and amortization expenses were $21.4 million and $25.9 million for the years ended December 31, 2004 and 2003, respectively. The decrease is primarily attributable to a greater portion of assets being fully depreciated as of December 31, 2004 as compared to December 31, 2003.

Restructuring charges, net

      During the fourth quarter 2004, we implemented a comprehensive cost reduction and restructuring program. The program included the closure of GMR, the reduction in frequency of Xbox Nation and canceling the Business 4Site show scheduled for November 2004. The program was also designed to reduce the Company’s workforce in order to decrease excess operating costs. As a result of the restructuring, we recorded a restructuring charge of $5.5 million as of December 31, 2004 which is comprised of $3.3 million in employee severance costs and $2.2 million in costs to exit certain activities.

      For the year ended December 31, 2003, we reversed a portion of the prior years’ accrued restructuring balance and recognized a credit of $6.2 million to Restructuring charges, net in our Consolidated Statement of Operations. This credit primarily related to real estate lease costs and reflected our recent sublet of excess space in our New York headquarters for an amount higher than originally estimated.

Gain on sale of assets, net

      In September 2003, we sold an international trademark to an unrelated third-party for approximately $5.0 million and realized a gain on sale of $2.5 million. We also received a final contingent payment of the 2002 sale of our eTESTING LABS, Inc. subsidiary that was recognized as a gain of $0.1 million.

Interest expense, net

      Interest expense was $91.8 million for the year ended December 31, 2004, compared to $19.1 million for the year ended December 31, 2003. Our weighted average debt outstanding was approximately $310.2 million and $306.8 million, and our weighted average interest rate was 9.07% and 8.81% for the years ended December 31, 2004 and 2003, respectively.

      Interest expense at December 31, 2004 included the following non-cash items: (1) $74.9 million related to the accrued dividends on the redeemable Preferred Stock (previously recorded in Accumulated deficit on the Condensed Consolidated Balance Sheet), (2) $1.5 million related to long-term real estate leases recorded in prior periods at their net present value, (3) $2.3 million of amortization of debt issuance costs and (4) $1.5 million of net interest expense related to the Compounding notes.

Income taxes

      The income tax provisions of $0.2 million for the years ended December 31, 2004 and 2003 represent effective rates of negative 0.4% and negative 13.4%, respectively. The negative effective rates result from foreign withholding taxes on our international licensing revenue as well as certain minimum state and local taxes, despite the consolidated entity having a pre-tax loss.

Net loss

      Net loss of $85.2 million for the year ended December 31, 2004, represents a decrease of $83.3 million compared to net loss of $1.9 million for the year ended December 31, 2003. The increased loss is primarily due to the adoption of SFAS 150, the result of which the Company, effective January 1, 2004, recorded the accrued dividends on the Redeemable Preferred Stock of $74.9 million as interest expense; restructuring charges of $5.5 million; and non-cash employee stock option expense of $1.1 million for the year ended December 31, 2004.

Results of Operations — Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Revenue, net

      Revenue was $194.1 million for the year ended December 31, 2003, compared to $209.0 million in the comparable prior year period, a decrease of $14.9 million, or 7.1%. Excluding discontinued publications and a business sold in 2002 (Yahoo! Internet Life, Ziff Davis SMART BUSINESS, The Net Economy and eTESTING LABS, Inc.) revenue increased $3.9 million, or 2.1%.

      Revenue from the Consumer Tech Group was $77.0 million compared to $89.8 million in the comparable prior year period, a decrease of $12.8 million, or 14.3%. Excluding discontinued publications within the Consumer Tech Group (Yahoo! Internet Life, Ziff Davis SMART BUSINESS), revenue increased $0.3 million, or 0.4% from $76.6 million. The increase was primarily related to higher advertising revenue for the Company’s Internet operations. However, these gains were partially offset by lower advertising revenues for PC Magazine, related to a decrease in advertising pages and average revenue per page. Total paid advertising pages for the Consumer Tech Group decreased by 2.3% for the year ended December 31, 2003. Circulation

revenue for the Consumer Tech Group decreased $1.1 million, or 6.8%, to $15.2 million, due to lower subscription and newsstand revenue.

      Revenue from the Enterprise Group was $60.2 million compared to $60.6 million in the comparable prior year period, a decrease of $0.4 million, or 0.7%. Excluding discontinued publications within the Enterprise Group (The Net Economy, eTESTING LABS, Inc.), revenue increased $5.3 million, or 9.7% from $54.9 million. The increase was primarily related to higher advertising revenue for Baseline and CIO Insight magazines and the Company’s Internet operations, increased Custom Conference Group event revenues for eWEEK, Baseline and CIO Insight and list rental revenue. Total advertising pages for the Enterprise Group increased 1.7% for the year ended December 31, 2003.

      Revenue from the Game Group was $56.9 million compared to $58.6 million in the comparable prior year period, a decrease of $1.7 million, or 2.9%. The decrease in revenue was largely due to a decrease in videogame advertising pages due to fewer new game releases and “hit” games during the year. This decrease was partially offset by an increase in the average revenue per page for our videogame publications and incremental revenue from 1up.com. Total paid advertising pages for the Game Group decreased by 14.1% for the year ended December 31, 2003. Circulation revenue for the Game Group decreased $0.6 million, or 2.5%, to $24.6 million, primarily due to decreased newsstand revenue for our videogame publications, partially offset by an increase in subscription revenue for these publications. Other revenue related to the Game Group increased $1.1 million or 174.3%, primarily due to increased revenue from GMR, list rental and insert revenue.

Cost of Production

      Cost of production was $60.6 million for the year ended December 31, 2003, compared to $75.8 million for the comparable prior year period, a $15.2 million or 20.1% decrease. Excluding discontinued publications and a business sold in 2002, cost of production decreased $7.8 million, or 11.4%.

      Cost of production related to the Consumer Tech Group decreased $8.8 million, or 29.7% from $29.6 million in 2002 to $20.8 million for the year ended December 31, 2003. Excluding discontinued publications within the Consumer Tech Group, cost of production decreased 8.4% from $22.7 million to $20.8 million. The decrease primarily related to manufacturing, paper and distribution cost savings achieved through the implementation of a number of new production and distribution initiatives across all of our publications, the impact of more favorable third-party supplier contracts, the decrease in the total number of advertising pages and reduced Internet infrastructure and operating costs resulting from our cost management initiatives. As a result, cost of production for continuing businesses in the Consumer Tech Group as a percentage of revenue decreased from 29.6% to 27.0% for the years ended December 31, 2002 and 2003 respectively.

      Cost of production related to the Enterprise Group decreased $4.1 million, or 22.4% from $18.3 million in 2002 to $14.2 million for the year ended December 31, 2003. Excluding discontinued publications within the Enterprise Group, cost of production decreased 20.7% from $17.9 million to $14.2 million. The decrease primarily related to manufacturing, paper and distribution cost savings achieved through the implementation of a number of new production and distribution initiatives across all of our publications, the impact of more favorable third-party supplier contracts, a re-design of eWEEK and reduced Internet infrastructure and operating costs resulting from our cost management initiatives, partially offset by the costs associated with the 1.7% increase in the number of advertising pages. As a result, cost of production for continuing businesses in the Enterprise Group as a percentage of revenue decreased from 32.6% to 23.6% for the years ended December 31, 2002 and 2003 respectively.

      Cost of production related to the Game Group decreased $2.2 million, or 7.9% from $27.9 million in 2002 to $25.7 million for the year ended December 31, 2003. There were no discontinued operations in 2002 for the Game Group. The decrease primarily related to manufacturing, paper and distribution cost savings achieved through the implementation of a number of new production and distribution initiatives across all of our publications, the impact of more favorable third-party supplier contracts and cost savings associated with the decrease in the total number of advertising pages. As a result, cost of production for the Game Group as a

percentage of revenue decreased from 47.5% to 45.0% for the years ended December 31, 2002 and 2003 respectively.

Selling, General and Administrative Expenses

      Selling, general and administrative expenses for the year ended December 31, 2003 were $99.0 million, compared to $125.2 million for the year ended December 31, 2002, a $26.2 million or 20.9% decrease. Excluding discontinued publications and a business sold in 2002, selling, general and administrative expenses decreased $4.0 million or 3.9%.

      Selling, general and administrative expenses related to the Consumer Tech Group decreased $16.5 million, or 33.2% from $49.7 million to $33.2 million for the year ended December 31, 2003. Excluding $12.8 million of expenses from discontinued publications within the Consumer Tech Group for the year ended December 31, 2002, selling, general and administrative expenses decreased $3.7 million or 10.0% from $36.9 million to $33.2 million. The decrease was primarily due to the workforce, facilities and other cost savings achieved as a result of cost management initiatives, our ability to reduce our bad debt expense from prior year levels and other year-end adjustments. The decrease was partially offset by incremental costs associated with our new business initiatives: Sync and the Event Marketing Group and increased Internet audience promotion costs. As a result, selling, general and administrative expenses for continuing businesses in the Consumer Tech Group as a percentage of revenue decreased from 48.2% to 43.1% for the years ended December 31, 2002 and 2003, respectively.

      Selling, general and administrative expenses related to the Enterprise Group decreased $9.9 million, or 18.8% from $52.6 million to $42.7 million for the year ended December 31, 2003. Excluding $9.3 million of expenses from discontinued publications within the Enterprise Group for the year ended December 31, 2002, selling, general and administrative expenses decreased $0.6 million or 1.4% from $43.3 million to $42.7 million. The decrease was primarily due to the workforce, facilities and other cost savings achieved as a result of cost management initiatives, our ability to reduce our bad debt expense from prior year levels and other year-end adjustments. The decrease was partially offset by increased Internet audience promotion costs and higher eWEEK, Baseline and CIO Insight event costs due to higher sales volume in these areas. As a result, selling, general and administrative expenses for continuing businesses in the Enterprise Group as a percentage of revenue decreased from 78.9% to 70.9% for the years ended December 31, 2002 and 2003, respectively.

      Selling, general and administrative expenses related to the Game Group increased $0.2 million, or 0.9% from $22.9 million to $23.1 million for the year ended December 31, 2003. There were no discontinued publications within the Game Group for the year ended December 31, 2002. The increase was due to incremental costs associated with our new business initiative, 1up.com and partially offset by facilities and other cost savings achieved as a result of cost management initiatives, our ability to reduce our bad debt expense from prior year levels and other year-end adjustments. As a result, selling, general and administrative expenses for the Game Group as a percentage of revenue increased from 39.0% to 40.6% for the years ended December 31, 2002 and 2003, respectively.

Depreciation and amortization

      Depreciation and amortization expenses were $25.9 million and $37.8 million for the years ended December 31, 2003 and 2002, respectively. The decrease is principally attributable to lower depreciation and amortization expense resulting from the write-off of finite-lived intangible assets and certain fixed assets as part of our 2002 cost reduction and restructuring program.

Restructuring charges, net

      For the year ended December 31, 2003, we reversed a portion of the prior years’ accrued restructuring balance and recognized a credit of $6.2 million to Restructuring charges, net in our Consolidated Statement of Operations. This credit primarily related to real estate lease costs and reflected our recent sublet of excess space in our New York headquarters for an amount higher than originally estimated. As of December 31, 2003, there were $23.4 million of accrued restructuring charges included in our Consolidated Balance Sheet

under the Accrued expenses and other current liabilities and Accrued expenses — long-term captions. The remaining accrued balance primarily relates to future real estate lease costs for vacated facilities.

      We incurred a total pre-tax charge of $128.2 million for the cost reduction and restructuring program for the year ended December 31, 2002, $79.2 million of which was recorded as a write-down of intangible assets and the remainder as Restructuring charges, net in our Consolidated Statement of Operations. The total charge of $128.2 million is comprised of non-cash asset impairment costs of $85.2 million, employee severance costs of $8.1 million and costs to exit certain activities of $34.9 million. These costs primarily relate to: (1) the discontinuation of Yahoo! Internet Life, Ziff Davis SMART BUSINESS and the Net Economy; (2) the write-down of certain intangible assets; and (3) the further consolidation of our real estate facilities.

Gain on sale of assets, net

      In September 2003, we sold an international trademark to an unrelated third-party for approximately $5.0 million and realized a gain on sale of $2.5 million. We also received a final contingent payment of the 2002 sale of our eTESTING LABS, Inc. subsidiary that was recognized as a gain of $0.1 million. In July 2002, we sold our eTESTING LABS, Inc. subsidiary for approximately $1.6 million in net proceeds, realizing a gain of approximately $0.6 million.

Interest expense, net

      Interest expense was $19.1 million for the year ended December 31, 2003, compared to $39.3 million for the year ended December 31, 2002. Our weighted average debt outstanding was approximately $306.8 million and $390.9 million, and our weighted average interest rate was 8.81% and 10.35% for the years ended December 31, 2003 and 2002, respectively.

      The decline in interest expense is a reflection of the full year benefit from our financial restructuring, which was completed in August 2002. As a result, we reduced our outstanding debt balance by $147.4 million and our Senior Credit Facility was amended such that we are now paying market interest rates. Interest expense for the year ended December 31, 2003, included the following non-cash items: (1) $2.1 million of amortization of debt issuance costs; (2) $1.9 million related to long-term real estate leases recorded in prior year periods at their net present value and (3) $1.3 million of net interest expense related to the Compounding Notes. Of the $39.3 million of interest in 2002, $2.5 million and $0.5 million was non-cash in nature related to amortization of debt issuance costs and the Compounding Notes, respectively.

Income taxes

      The income tax provision of $0.2 million for the year ended December 31, 2003, and the income tax provision of $0.3 million for the year ended December 31, 2002, represent effective rates of negative 13.4% and negative 0.1%, respectively. The negative effective rates result from foreign withholding taxes on our international licensing revenue as well as certain minimum state and local taxes, despite the consolidated entity having a pre-tax loss.

Net loss

      Net loss of $1.9 million for the year ended December 31, 2003, represents an improvement of $194.9 million compared to net loss of $196.8 million for the year ended December 31, 2002. The improvement is primarily due to the absence in 2003 of a write-down of intangible assets, the impact of our cost reduction and financial restructuring program and the development and revenue growth of our business.

Liquidity and Capital Resources

      Total cash at December 31, 2004 was $32.6 million. We have historically relied upon cash flow from operating activities, borrowings under our Senior Credit Facility and additional investments from our equity sponsors to finance our operations.

      As of December 31, 2004, we were in compliance with all of our debt covenants. Total indebtedness at December 31, 2004 was $308.9 million and consisted of $165.9 million of outstanding principal under the term loan portion of the Senior Credit Facility, $8.2 million of outstanding principal under the revolving portion of the Senior Credit Facility, $122.5 million under the Compounding Notes and $12.3 million under the 12% Notes.

      Borrowings under the Senior Credit Facility bore interest rates ranging from 6.58% to 7.08% as of December 31, 2004. At December 31, 2004, approximately $1.0 million of borrowing capacity was available under the revolving portion of our Senior Credit Facility. Interest on the Senior Credit Facility is now payable quarterly in cash. Interest of $0.7 million on the 12% Notes is payable on January 15 and July 15 of each year. No cash payments of interest or principal are required on the Compounding Notes until February 2007.

      Our commitments under the amended Senior Credit Facility are subject to quarterly principal payments, which commenced September 30, 2004, with the final payment due on March 31, 2007. The aggregate principal payments under the Senior Credit Facility are approximately $24.0 million in 2005, $83.1 million in 2006 and a final payment of $67.0 million in 2007. We are required to make an “excess cash flow” payment, as defined in our Senior Credit Facility, on or before April 15, 2005. This represents a mandatory repayment of our loans under the Senior Credit Facility, which we estimate will be approximately $7.3 million. This amount, along with our scheduled principal payments of approximately $16.7 million in 2005, has been classified as Current portion of long-term debt on our Consolidated Balance Sheet as of December 31, 2004.

Financial Restructuring

      In order to address certain liquidity and debt compliance issues, we initiated a financial restructuring plan in 2001, which was completed on August 12, 2002. As part of the restructuring, we exchanged a combination of cash, Compounding Notes, Series E Preferred Stock and warrants to purchase Ziff Davis Holdings common stock for most of our existing 12% Notes. In addition, we amended and restated our Senior Credit Facility.

      Key terms of the financial restructuring were as follows: (1) we received an equity contribution of $80.0 million from Willis Stein in exchange for the issuance of Series D Preferred Stock with an aggregate liquidation preference of $80.0 million, as well as approximately 38.6 million warrants, each representing the right to purchase one share of our common stock at an exercise price of $0.001 per share; (2) accredited investors holding approximately 95.1% in aggregate principal amount of our 12% Notes tendered their notes and received an aggregate of approximately $21.2 million in cash and $90.3 million in aggregate principal amount of Compounding Notes. These holders also received an aggregate of approximately $28.5 million in liquidation preference of Series E Preferred Stock and warrants for the purchase of approximately 5.2 million shares of our common stock in exchange for their 12% Notes; and (3) we amended and restated our Senior Credit Facility providing for, among other terms: (a) waiver of all existing defaults, (b) deferral of principal payments for eight quarters, (c) removal of the obligation to pay the default interest rate on the outstanding principal, and (d) mandatory use of a portion of “excess cash flows”, as defined, to repay amounts owed under the Senior Credit Facility.

      The financial restructuring was accounted for in accordance with the troubled debt restructuring provisions of SFAS 15. Accordingly, no gain was recognized on the exchange, but rather the value of the Compounding Notes as reported on our balance sheet increased by an amount deemed to be accrued interest. After completing the financial restructuring, our total debt was reduced by approximately $147.4 million.

Liquidity Position

      As a result of our financial restructuring and cost reduction program, we believe our cash on hand, coupled with future cash generated from operations, will be sufficient to meet our liquidity, working capital and capital spending needs for 2005. In addition, we believe that, based upon current levels of operations, we

will be able to meet our debt service obligations for 2005 when due and will be able to comply with financial and other covenants contained in our Senior Credit Facility and Compounding Notes indenture during 2005. Significant assumptions and risks apply to this belief, including, among other things, that we will continue to be successful in implementing our business strategy and that there will be no material adverse developments in our business, liquidity or capital requirements. See “Business  — Certain Risk Factors”.

Sources and Uses of Cash — Years Ended December 31, 2004 and 2003

      Details for the changes in cash and cash equivalents during the years ended December 31, 2004 and 2003 are discussed below:

      Operating Activities. Cash provided/(used) by operating activities was $9.8 million for the year ended December 31, 2004, compared to $8.5 million for year ended December 31, 2003, an improvement of $1.3 million. This change was primarily attributable to improvements in working capital.

      Investing Activities. Cash provided/(used) by investing activities was $(9.0) million and $2.4 million for the years ended December 31, 2004 and 2003, respectively. In 2004, the Company made $5.8 million of capital expenditures and $3.1 million of acquisitions. For the year ended December 31, 2003, $2.5 million was spent on capital expenditures. This was offset by net proceeds from the sale of assets of $4.9 million. The $4.9 million of net proceeds in 2003 related to the sale of an international trademark to an unrelated third-party.

      Financing Activities. Cash provided/(used) by financing activities was $(15.5) million for the year ended December 31, 2004 compared to $(4.9) million for the year ended December 31, 2003. The 2004 outflow relates to $15.0 million of principal repayments made on the Senior Credit Facility and $0.5 million in debt issuance costs related to the amendment of our Senior Credit Facility. The 2003 outflow related to an unscheduled principal payment of $4.9 million of our Senior Credit Facility related to the proceeds from the sale of the international trademark.

Contractual Obligations and Commitments

      As of December 31, 2004, we had long-term debt and preferred stock obligations totaling $308.9 million and $814.5 million, respectively. The long-term debt obligations include amounts outstanding under the Senior Credit Facility, Compounding Notes and 12% Notes. Such obligations were incurred to obtain proceeds for general corporate purposes, finance acquisitions and refinance other debt obligations. Our obligations with respect to these debt instruments can be found in the agreements which govern them which were filed as Exhibits 4.3, 4.4, and 10.9 to our Registration Statement on Form S-4 dated October 9, 2002.

      The following table sets forth our contractual obligations at December 31, 2004, excluding future interest and dividends:

      The caption Non-cancelable operating lease obligations in the above table includes our real estate operating lease obligations, net of existing subleases, at December 31, 2004. However, the lease obligation amounts have not been reduced for estimated future sublease income related to vacated facilities that were not subleased as of December 31, 2004.

      In connection with our commercial agreements, we often provide indemnifications of varying scope and terms to customers, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements and out of intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with certain of our directors and officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and officers in certain circumstances. The indemnification provided by us to our officers and directors does not have a stipulated maximum, therefore we are not able to develop a reasonable estimate of the maximum liabilities. To date, we have not incurred material costs as a result of such obligations and have not accrued any liabilities related to such indemnification obligations in our financial statements.

      Lastly, certain legal proceedings described in Item 3 of this Form 10-K are potential contingencies, which could also affect our liquidity in future periods.

Off-Balance-Sheet Arrangements

      At December 31, 2004, we did not have any relationships with variable interest (otherwise known as “special purpose”) entities that have been established for the purpose of facilitating off-balance-sheet debt.

      In the ordinary course of business, we have indemnification obligations with respect to letters of credit primarily used as security against non-performance in relation to certain of our non-cancelable operating lease obligations. The outstanding letters of credit approximated $0.8 million at December 31, 2004, and are not recorded on the Consolidated Balance Sheet as of December 31, 2004.

      We enter into certain incentive agreements, from time to time, with executives and senior management that include earn-out payments that are calculated based on the achievement of future revenue and other financial thresholds. Several of these agreements currently exist with measurement dates beginning with the close of our 2006 fiscal year. As of December 31, 2004, we cannot provide a reasonable estimate of the likelihood and amount we would be required to pay to fulfill these commitments. Based on this, we have not accrued any liabilities in relation to these incentive obligations as of December 31, 2004.

Cyclicality

      Revenue from print advertising accounted for approximately 51% of our total revenue for the year ended December 31, 2004. Cyclicality in advertising expenditures generally, or with respect to magazine-based advertising specifically, could therefore have a material effect on our business, financial condition and operating results with respect to comparability to prior periods.

Seasonality

      Historically, our business has been seasonal and we have earned a significant portion of our annual revenue in the fourth calendar quarter. This is largely due to the general increase in advertising revenue in the fourth quarter as a result of increased consumer buying activity during the holiday season. Other factors affecting the seasonality of our business are customer budgetary spending patterns, new product introductions and general economic trends. Quarterly results may also be affected by variations in the number of magazines sold in any quarter, timing and termination of existing contractual agreements, costs incurred in connection with internal growth, changes in our mix of customers, fluctuation in the costs of raw materials and other general economic conditions. Accordingly, our operating results in any particular quarter may not be indicative of the results that can be expected for any future quarter or for the entire year. We also cannot assure that our fourth quarter revenue will be higher than revenue for our other quarters.

Critical Accounting Policies and Estimates

      In December 2001, the Securities and Exchange Commission (“SEC”) issued disclosure guidance for “critical accounting policies.” The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

      The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to allowances for doubtful accounts, reserves for sales returns and allowances, reserves for severance, closures and restructuring-related costs and the recoverability of long-lived assets, including the excess of purchase price over net assets acquired. We base our estimates on historical experience and on various assumptions that we believe are reasonable under the circumstances. These form the basis of our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates which would affect our reported results of operations. We believe the following is a description of the critical accounting policies and estimates used in the preparation of our consolidated financial statements.

      Allowances for doubtful accounts are estimated losses resulting from our customers’ failure to make required payments. We continually monitor collections from customers and provide for estimated credit losses. We aggressively pursue collection efforts on these overdue accounts and upon collection reverse the write-off in future periods. If future payments by our customers were to differ from our estimates, we may need to increase or decrease our allowances for doubtful accounts.

      Reserves for sales returns and allowances are primarily related to our newsstand sales, and to a lesser extent, subscription sales in which subscribers are billed. We estimate and maintain these reserves based primarily on our distributors’ historical return practices, our subscribers’ historical collection rates and our actual return experience. If actual sales returns and allowances differ from the estimated returns and allowances rates used, we may need to increase or decrease our reserve for sales returns and allowances.

      Reserves for restructuring-related costs, including severance, magazine and facilities closures, are estimated costs resulting from management’s plans and actions to consolidate operations and eliminate headcount to reduce total operating costs. If the future payments of these costs were to differ from our estimates, we may need to increase or decrease our reserves. We recorded restructuring charges or (credits) related to our 2001, 2002 and 2004 cost reduction and restructuring programs of approximately $5.5 million, $(6.2) million and $50.0 million for the years ended December 31, 2004, 2003 and 2002, respectively.

      We periodically evaluate the recoverability of our long-lived assets, including property and equipment, goodwill and identifiable intangible assets, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or in connection with our annual financial review process. Our evaluations include analyses based on the cash flows generated by the underlying assets and profitability information, including estimated future operating results, trends or other determinants of fair value. If the fair value of the asset determined by these evaluations is less than its carrying amount, an impairment charge is recognized for the difference. Future adverse changes in market conditions or continuing poor operating results of certain businesses may also indicate an inability to recover the carrying value of the assets, thereby possibly requiring an impairment evaluation and charge. For the year ended December 31, 2002, we recognized a goodwill impairment charge of approximately $25.0 million, an impairment of our indefinite-lived intangible assets of approximately $16.9 million and wrote-off a net book value of approximately $6.0 million of fixed assets in connection with an assessment of the recoverability of such long-lived assets and our cost reduction and restructuring program.

Effect of Recently Issued Accounting Standards

      In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”, or SFAS 123R, which replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, or SFAS 123, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS 123, no longer will be an alternative to financial statement recognition. The Company is required to adopt SFAS 123R in the third quarter of 2005, beginning July 1, 2005. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that

compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The Company does not believe that adoption of SFAS 123R will have a material impact on its operating results or financial position.

      In December 2004, the FASB issued SFAS No. 153, “Exchange of Nonmonetary Assets”, which eliminated the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153 will have a material impact on its operating results or financial position.

      In May 2003, the FASB issued Statement No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments that have characteristics of both liabilities and equity. It requires than an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). The FASB has directed that the effective date of SFAS 150 be deferred for certain nonpublic entities with mandatorily redeemable financial instruments until fiscal periods beginning after December 31, 2003. We believe that under SFAS 150, we are defined as a nonpublic entity and have outstanding preferred stock that is considered mandatorily redeemable. Therefore, effective January 1, 2004, we recorded the accrued dividends on the mandatorily redeemable preferred stock as interest expense and classified the mandatorily redeemable preferred stock as a long-term liability on the balance sheet. The adoption of this statement increased our total liabilities by $814.5 million as of December 31, 2004, and increased our consolidated interest expense by approximately $74.9 million in 2004. This had no impact on our debt covenants or our ability to service our debt payments in 2004.

Interest Rate Risk

      In connection with our Senior Credit Facility, we entered into an interest rate swap agreement on September 27, 2000, for the notional amount of $25.0 million and a maturity date of October 11, 2003. Under this swap agreement, we received a floating rate of interest based on three-month London Inter-Bank Offering Rate (“LIBOR”), which resets quarterly, and paid a fixed rate of interest each quarter for the term of the agreement. The interest rate swap agreement ended on October 11, 2003 and was not renewed.

      Due to the Senior Credit Facility having a floating interest rate based on LIBOR, but our Compounding Notes and 12% Notes having fixed rates, only $134.7 million or 43.6% of our total debt is effectively set at a fixed rate of interest as of December 31, 2004. Accordingly a 1.00% fluctuation in market interest rates would cause a $1.7 million fluctuation in interest expense.

Inflation and Fluctuations in Paper Prices and Postage Costs

      We continually assess the impact of inflation and changes in paper and postage prices as these costs represent a significant portion of our cost of production. In 2001 and 2002, paper prices declined significantly and have remained essentially unchanged throughout 2004. In addition, during 2001 we outsourced the majority of our paper buying to our printers. As a result, we hold significantly lower levels of inventory and have generally been able to purchase paper at or below market prices at the time of use. However, there can be no assurance that these trends will continue or that we can recover future paper price increases.

      Postage rates increased 5.0% in January 1999, 9.9% in January 2001, 2.6% in July 2001 and most recently 9.9% in July 2002. Due to new legislation in 2003, the Postmaster General has announced that postage rates will not increase again until 2006.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Ziff Davis Holdings Inc.

      In our opinion, the accompanying consolidated balance sheets and the related statements of operations, cash flows and stockholders’ equity present fairly, in all material respects, the financial position of Ziff Davis Holdings Inc. and its subsidiaries (the Company) at December 31, 2004 and 2003, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” effective January 1, 2004.

ZIFF DAVIS HOLDINGS INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except per share data)

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

ZIFF DAVIS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands)

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

ZIFF DAVIS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

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

ZIFF DAVIS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

(dollars in thousands)

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

ZIFF DAVIS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION

      Ziff Davis Holdings Inc. (“Ziff Davis Holdings” or, collectively with its subsidiaries, the “Company”) is majority owned by various investment funds managed by Willis Stein & Partners Management III, L.L.C. (“Willis Stein” or “controlling stockholders”), a private equity investment firm. Ziff Davis Holdings is a holding company which indirectly owns 100% of Ziff Davis Media Inc. (“Ziff Davis Media”). Ziff Davis Holdings does not conduct any business, but rather all operations are conducted by Ziff Davis Media and its direct and indirect subsidiaries. Ziff Davis Holdings has no material assets other than its investment in the capital stock of Ziff Davis Media.

      The Company is an integrated media company focused on the technology and videogame markets. The Company is an information services and marketing solutions provider of technology media including publications, websites, conferences, events, eSeminars, eNewsletters, custom publishing, list rentals, research and market intelligence. Ziff Davis Holdings was incorporated in the state of Delaware and was formed to acquire certain publishing assets (“Ziff-Davis Publishing”, “ZDP” or “Predecessor”) from Ziff-Davis Inc. (“ZDI”), an unrelated company. The Company’s major operating subsidiaries are Ziff Davis Publishing Inc., Ziff Davis Development Inc. and Ziff Davis Internet Inc..

      The Company had no operations prior to April 5, 2000 when it completed the acquisition of ZDP for $780,000 plus expenses (see Note 3). This acquisition was accounted for under the purchase method of accounting and was funded by: (1) issuing preferred and common stock for $353,700 in proceeds; (2) executing a $405,000 senior credit facility (“Senior Credit Facility”) of which $355,000 was borrowed at closing; and (3) issuing a bridge loan totaling $175,000 in proceeds. Fees and expenses, including debt issuance costs associated with the acquisition of ZDP, which totaled approximately $30,000, were paid with the equity and debt proceeds. On July 18, 2000, the Company issued $250,000 of 12% Senior Subordinated Notes due 2010 (the “12% Notes”). The proceeds from the offering were used to repay the bridge loan and approximately $59,700 of the Senior Credit Facility. In addition, proceeds from the offering of the 12% Notes were used to pay approximately $8,500 of expenses associated with the offering and approximately $6,800 of accrued interest.

      In connection with the acquisition of ZDP, the Company determined that ZDP’s wholly-owned international operations (excluding international licensing operations and international joint ventures) did not meet its long-term strategic objectives. As a result, the operations were sold on August 4, 2000 (see Note 3).

      During 2002, the Company restructured certain debt obligations in connection with its financial restructuring (see Note 12).

      The Company has historically reported and managed its business in conjunction with the reporting requirements set forth in the Company’s Senior Credit Facility and indenture agreements which mandated certain restrictions on the source of funding provided to the Restricted Subsidiaries and Unrestricted Subsidiaries, as defined in these debt agreements. Effective July 1, 2004, the Company amended the terms of its Senior Credit Facility which eliminated the distinction between the Restricted and Unrestricted Subsidiaries (as defined in the Senior Credit Facility) and allows the Company to be viewed in its entirety for purposes of financial covenant compliance. As a result, effective July 1, 2004, the Company now reports and manages its business along the following operating segments: the Consumer Tech Group, the Enterprise Group and the Game Group.

ZIFF DAVIS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(dollars in thousands, except per share data)

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION (continued)

      The Consumer Tech Group is principally comprised of three of the Company’s magazine publications, PC Magazine, Sync and ExtremeTech; a number of consumer-focused websites, including pcmag.com and extremetech.com; and the Company’s new consumer electronics event, DigitalLife.

      The Enterprise Group is comprised of several businesses in the magazine, Internet, event, research and marketing tools areas. The three magazine publications in this segment are eWEEK, CIO Insight and Baseline. The Internet properties in this segment are primarily those affiliated with the Company’s enterprise brands, including eweek.com, cioinsight.com and baselinemag.com, but also include over 20 weekly eNewsletters and the eSeminars area, which produces sponsored interactive webcasts. This segment also includes the Company’s Custom Conference Group, which creates and manages several hundred face-to-face events for marketing clients per year; Baseline Business Information Services, a research and marketing tools unit launched in 2003; and Contract Publishing, which produces custom magazines, white papers, case studies and other sales and marketing collateral for customers.

      The Game Group is focused on the videogame market and is now principally comprised of three magazine publications (Electronic Gaming Monthly, Computer Gaming World and Official U.S. PlayStation Magazine) and 1up.com, the online destination for gaming enthusiasts, which was launched in October 2003. The Game Group discontinued GMR and reduced the frequency of Xbox Nation during the fourth quarter of 2004 (see Note 9). The results of these publications are included in the financial statements.

      For additional information on the Company’s operating segments, see Note 21.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      The financial statements of the Company as of December 31, 2004 and 2003, and for the years ended December 31, 2004, 2003 and 2002 are prepared on a consolidated basis and include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

      The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

      The Company places its temporary cash investments with high credit quality financial institutions. At times, such investments may be in excess of federally insured limits. The Company has not experienced losses in such accounts.

      The Company’s advertisers primarily include customers who represent a variety of technology companies in the United States and some overseas countries. The Company extends credit to its customers and historically has not experienced significant losses relating to receivables from individual customers or groups of customers. No one customer accounted for more than 10% of total revenue or total accounts receivable for the years ended December 31, 2004, 2003 and 2002.

ZIFF DAVIS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(dollars in thousands, except per share data)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      Inventories, which consist of paper, are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. The Company does not carry any significant paper inventory as it has outsourced its paper buying function to its printer suppliers. The inventories amount reflected on the Consolidated Balance Sheet is primarily related to the production of eWEEK.

      Property and equipment have been recorded at cost or their estimated fair value at the date of acquisition. Depreciation is computed using the straight-line method over the estimated useful lives of the acquired assets, ranging from 2 to 20 years. Leasehold improvements are amortized using the straight-line method over the service life of the improvement or the life of the related lease, whichever is shorter. Maintenance and repair costs are charged to expense as incurred.

      In accordance with Statement of Position 98-1 “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” the Company capitalizes certain costs incurred for the development of internal use software. Capitalized costs include direct labor and related overhead for software produced by the Company and the cost of software purchased from third parties. These costs are included in property, plant and equipment in the accompanying Consolidated Balance Sheet. Costs incurred in connection with business process re-engineering are expensed as incurred. The Company capitalized approximately $3,300, $1,700 and $1,400 of internal use software costs, principally in connection with its Internet properties, during the years ended December 31, 2004, 2003 and 2002, respectively. Approximately $3,500 and $2,100 of unamortized software costs remained at December 31, 2004 and 2003, respectively. As part of the Company’s cost reduction and restructuring program further described in Note 9, a write-off of $1,238 of capitalized software was recorded in the year ended December 31, 2002.

      Intangible assets consist principally of advertising lists, subscriber lists, trademarks and trade names and goodwill. Amortization of the definite-lived assets is computed on a straight-line basis over estimated useful lives, ranging from 2 to 20 years.

      Goodwill represents the excess purchase price over the fair value of identifiable net assets of businesses acquired. The Company reviews the recoverability of goodwill and indefinite-lived intangible assets in the fourth quarter of each year and also performs such tests if any event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company compares the estimated fair values of reporting units with their respective net book values. Fair value is generally determined based on estimated future cash flows of the related assets. If the fair value of a reporting unit equals or exceeds its carrying amount, the goodwill and indefinite-lived intangible assets of the reporting unit is not considered impaired. If the carrying amount of the reporting unit exceeds its fair value, the goodwill and indefinite-lived intangible assets impairment loss is measured as the excess of the carrying value of goodwill over its implied fair value. The Company did not recognize any impairment of its indefinite-lived intangible assets for the years ended December 31, 2004 and 2003, however, the Company did recognize a goodwill impairment charge of $25,025 and an impairment of its indefinite-lived intangible assets of $16,934 for the year ended December 31, 2002. See Notes 7 and 9 for further information about intangible assets and related impairment charges.

ZIFF DAVIS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(dollars in thousands, except per share data)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      The Company reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment losses for assets to be held and used are recognized in operating results in the event that the undiscounted expected future cash flows to be generated by the related asset are less than the carrying value of the asset. If undiscounted expected future cash flows are not sufficient to support the recorded value of the assets, an impairment loss is recognized for the difference between fair value and the carrying value to reduce the intangible assets to their estimated recoverable value. Fair value is determined using quoted market prices in an active market (if available). If quoted market prices are not available, management estimates the fair market value using the best information available including prices for similar assets and the results of established valuation techniques. The Company wrote-off fixed assets, including capitalized software described above, and intangible assets and goodwill during the year ended December 31, 2002 as part of its cost reduction and restructuring program (see Notes 6, 7 and 9).

      The cost to issue debt is recorded in other assets and amortized to interest expense over the term of the related debt using the effective interest rate method. At December 31, 2004 and 2003, the Consolidated Balance Sheet included $10,964 and $12,712 in net debt issuance costs, respectively, within Other assets, net. The Company wrote off approximately $1,948 of debt issuance costs for the year ended December 31, 2002 in connection with its financial restructuring and amortized $1,748, $2,158 and $2,473 for the years ended December 31, 2004, 2003 and 2002, respectively.

      Advertising revenue for the Company’s magazine publications, less agency commissions and sales incentives, is recognized as income in the month that the related publications are sent to subscribers or become available for sale at newsstands. Circulation revenue consists of both subscription and single copy newsstand sales. Subscription revenue (which is net of agency fees), less estimated cancellations, is deferred when paid and then recognized as income in the month that the related publications are sent to subscribers. Newsstand sales, less estimated returns and certain sales incentives, are recognized in the month that the related publications are sold at newsstands. The Company also derives revenue from Internet advertising, royalty agreements, list rentals, custom conferences and other sources. These other revenues are recognized over the terms of related agreements or when services are provided.

      Cost of production includes the direct costs of producing magazines, which are primarily paper, manufacturing, distribution and fulfillment expenses. It also includes the direct costs of the Company’s Internet operations, such as telecommunication and hosting fees.

      Selling, general and administrative costs include compensation, editorial, product development, advertising and subscriber acquisition costs, sales and marketing and other general and administrative costs. Editorial and product development costs, including pre-publication expenses, are expensed as incurred. Product development costs include the cost of artwork, graphics, prepress, plates and photography for new products. Advertising costs are expensed as incurred.

ZIFF DAVIS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(dollars in thousands, except per share data)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

      SFAS No. 123, “Accounting for Stock-based Compensation,” requires that companies with stock-based compensation plans either recognize compensation expense based on the fair value of options granted or continue to apply the existing accounting rules and disclose pro forma net income and earnings per share assuming the fair value method had been applied. The Company has chosen to continue applying Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employers” and related interpretations in accounting for the 2001 Stock Option Plan. The Company has applied SFAS No. 123 for the Amended and Restated 2002 Employee Stock Option Plan (the “2002 Stock Option Plan”) (see Note 16).

      Comprehensive loss, which is reported on the accompanying Consolidated Statement of Changes in Stockholders’ Deficit as a component of Accumulated other comprehensive loss, consists of net income (loss) and other gains and losses affecting stockholders’ equity (deficit) that, under generally accepted accounting principles, are excluded from net income (loss). The only such change was the change in certain derivative financial instruments as detailed in the Consolidated Statement of Changes in Stockholders’ Deficit.

      Income taxes are based upon income for financial reporting purposes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefit, or that future deductibility is uncertain (see Note 10).

      The Company utilized an interest rate swap to reduce the impact of fluctuating interest rates on its variable rate debt and interest expense. Under its interest rate swap agreement, the Company agreed with the counter parties to exchange, at quarterly intervals, the difference between the Company’s fixed pay rate and the counter parties’ variable pay rate based on three-month London Inter-Bank Offering Rate (“LIBOR”). The Company’s interest rate swap agreement ended on October 31, 2003 and was not renewed.

      The Company’s financial instruments recorded on the Consolidated Balance Sheet include cash and cash equivalents, accounts receivable, accounts payable, preferred stock, interest rate swap agreements and debt. Because of their short maturity, the carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximate fair value. Fair value of long-term bank debt is based on rates available to the Company for debt with similar terms and maturities. Fair value of public debt is based on quoted market prices, where available, or quoted market prices of comparable instruments. Fair value of preferred stock is based on the present value of expected future cash flows, discounted at a risk-adjusted required rate of return (see Note 23).

      The preparation of financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent

ZIFF DAVIS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(dollars in thousands, except per share data)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to allowances for doubtful accounts, reserves for sales returns and allowances, reserves for severance, closures and restructuring related costs and the recoverability of long-lived assets, including the excess of purchase price over net assets acquired. The Company bases its estimates on historical experience and on various other assumptions that the Company believes are reasonable under the circumstances. These form the basis of the Company’s judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates which would effect the Company’s reported results of operations. The Company believes the following is a description of the policies related to recording estimates used in the preparation of its consolidated financial statements.

      Allowances for doubtful accounts are estimated losses resulting from its customers’ failure to make required payments. The Company continually monitors collections from customers and provides for estimated credit losses. The Company aggressively pursues collection efforts on these overdue accounts and upon collection reverses the allowance in future periods. If future payments by the Company’s customers were to differ from its estimates, the Company may need to increase or decrease the Company’s allowances for doubtful accounts.

      Reserves for sales returns and allowances are primarily related to the Company’s newsstand sales, and to a lesser extent, subscription sales in which subscribers are billed. The Company estimates and maintains these reserves based primarily on the distributors’ historical return practices, our subscribers’ historical collection rates and the Company’s actual return experience. If actual sales returns and allowances differ from the estimated returns and allowances rates used, the Company may need to increase or decrease the reserve for sales returns and allowances.

      Reserves for restructuring related costs including severance, magazine and facilities closures are estimated costs resulting from management’s plans and actions to consolidate operations and eliminate headcount to reduce total operating costs. If the future payments of these costs were to differ from its estimates, the Company may need to increase or decrease its reserves. The Company recorded restructuring charges or (credits) related to its 2001, 2002 and 2004 cost reduction and restructuring programs of $5,491, $(6,238) and $49,950 for the years ended December 31, 2004, 2003 and 2002, respectively.

      The Company periodically evaluates the recoverability of its long-lived assets, including property and equipment, goodwill and intangible assets, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or in connection with its annual financial review process. The Company’s evaluations include analyses based on the cash flows generated by the underlying assets and profitability information, including estimated future operating results, trends or other determinants of fair value. If the fair value of the asset determined by these evaluations is less than its carrying amount, an impairment charge is recognized for the difference. Future adverse changes in market conditions or continuing poor operating results of certain businesses may also indicate an inability to recover the carrying value of the assets, thereby possibly requiring an impairment evaluation and charge.

     

      In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”, or SFAS 123R, which replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, or SFAS 123, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS 123, no longer will be an alternative to financial statement recognition. The Company is required to adopt SFAS 123R

ZIFF DAVIS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(dollars in thousands, except per share data)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

in the third quarter of 2005, beginning July 1, 2005. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The Company is evaluating the requirements of SFAS 123R and expects that the adoption of SFAS 123R will not have a material impact on our consolidated results of operations.

      In December 2004, the FASB issued SFAS No. 153, “Exchange of Nonmonetary Assets”, which eliminated the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 will be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153 will have a material impact on its operating results or financial position.

      In May 2003, the FASB issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments that have characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). The FASB has directed that the effective date of SFAS 150 be deferred for certain nonpublic entities with mandatorily redeemable financial instruments until fiscal periods beginning after December 31, 2003. The Company believes that under SFAS 150 it is defined as a nonpublic entity and has outstanding preferred stock that is considered mandatorily redeemable. Effective January 1, 2004, the Company recorded the accrued dividends on the mandatorily redeemable preferred stock as interest expense and classified the mandatorily redeemable preferred stock as a long term liability on the Consolidated Balance Sheet. The adoption of this statement increased the Company’s total liabilities by $814,549 as of December 31, 2004 and increased the Company’s consolidated interest expense by $74,947 in 2004. This had no impact on the Company’s debt covenants or its ability to service its debt payments in 2004.

      Certain amounts have been reclassified, where appropriate, to conform to the current financial statement presentation.

NOTE 3 — ACQUISITIONS AND DISPOSITIONS

      In September 2003, the Company sold an international trademark to an unrelated third-party generating net proceeds of $4,929. The Company realized a gain of $2,544 related to the sale.

      On July 15, 2002, the Company sold its subsidiary, eTESTING LABS Inc. to Lionbridge Technologies, Inc. (“Lionbridge”) for approximately $2,250. The Company further agreed to license its proprietary benchmark software to Lionbridge for its commercial testing purposes and also entered into a two-year agreement with them for reciprocal software development, testing and marketing services. The Company

ZIFF DAVIS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(dollars in thousands, except per share data)

NOTE 3 — ACQUISITIONS AND DISPOSITIONS (continued)

realized a gain on sale of approximately $65 and $634 for the years ended December 31, 2003 and 2002, respectively.

      The acquisition of ZDP was accounted for using the purchase method of accounting. The assets and liabilities of ZDP acquired by the Company on April  5, 2000, have been recorded at estimated fair value as of the acquisition date with the excess of purchase price over net assets acquired being allocated to intangible assets, including goodwill (see Note 7).

      In connection with the acquisition of ZDP in April 2000, the Company determined that ZDP’s wholly-owned international operations (excluding international licensing operations and international joint ventures) did not meet its long-term strategic objectives and initiated a plan to sell these operations. As a result, the operations were sold on August 4, 2000. The net proceeds from this sale were $38,767. The remaining net assets and liabilities related to these operations have been recorded in the Consolidated Balance Sheet as Other non-current liabilities. As of December 31, 2004, the balance was $5,072 and represents contingent tax liabilities for the Company’s former European operations.

      In October 2004, the Company acquired Connexus Media Inc. (“CMI”), a business-to-business online publishing company based in Topsfield, Massachusetts. Under the terms of the agreement, the Company acquired CMI’s portfolio of 25 prominent business-to-business, vertical and technology-specific websites, 10 weekly eNewsletters, 25 list rental databases and other ancillary paid content programs. CMI resides in the Enterprise Group segment for reporting purposes.

      In December 2004, the Company acquired DeviceForge LLC (“DeviceForge”), a vertical online business-to-business publishing company for the application developers, business executives and technologists. DeviceForge resides in the Enterprise Group segment for reporting purposes.

      The purchase price of these acquisitions was $3,146 of which $1,356 was allocated to intangible assets, $1,764 was allocated to goodwill and the remainder was allocated to tangible assets. These acquisitions are accounted for in the Enterprise Group. There would not be a material impact to the financial statements had these acquisitions occurred at the beginning of any year presented.

NOTE 4 — ACCOUNTS RECEIVABLE, NET

      Trade accounts receivable are recorded at the invoiced amount and do not reflect interest although the Company may have the right to demand interest for certain delinquent accounts. The allowance for doubtful accounts is the best estimate of the amount of probable credit losses in our existing accounts receivable. The Company determines the allowance based on historical write-off experience. The Company reviews the allowance for doubtful accounts on a monthly basis and assigns an estimate reserve to the balances. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. All other balances are reviewed on a pooled basis by type of receivable. Account balances are charged off against the allowance when it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposure related to its customers.

ZIFF DAVIS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(dollars in thousands, except per share data)

NOTE 4 — ACCOUNTS RECEIVABLE, NET (continued)

      Gross accounts receivable consists of the following at December 31, 2004 and 2003:

      Following are the changes in allowance for doubtful accounts, returns and cancellations during the years ended December 31, 2004 and 2003:

NOTE 5 — PREPAID EXPENSES AND OTHER CURRENT ASSETS

      Prepaid expenses and other current assets consist of the following:

      Deferred expenses and deposits primarily represent prepaid postage and other deferred expenses related to future issues of our publications or future conferences and events. Production expenses represent prepaid manufacturing and distribution expenses related to future issues of our publications.

NOTE 6 — PROPERTY AND EQUIPMENT, NET

      Property and equipment, net consist of the following:

ZIFF DAVIS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(dollars in thousands, except per share data)

NOTE 6 — PROPERTY AND EQUIPMENT, NET (continued)

      In connection with the facilities consolidation aspect of the 2002 cost reduction and restructuring program, the Company wrote-off fixed assets with a net book value of $5,974 consisting of capitalized computer software ($1,238), leasehold improvements ($4,443) and furniture and fixtures ($293) during the year ended December 31, 2002 (see Note 9).

NOTE 7 — INTANGIBLE ASSETS, NET

      The purchase price of acquisitions is allocated to tangible and identifiable intangible assets with the remaining amount being allocated to goodwill. Advertising lists and subscriber lists were recorded at estimated fair value as determined by an income approach. Trademarks/trade names were recorded at estimated fair value using a relief from royalty approach.

      Definite-lived intangible assets are being amortized using the straight-line method over estimated useful lives, ranging from 2 to 20 years. In determining the estimated useful lives, the Company considered its competitive position in the markets in which it operates, the historical attrition rates of advertisers and subscribers, legal and contractual obligations, and other factors.

      Recoverability of goodwill and intangible assets is assessed both on an annual basis or on an interim basis if events or circumstances change that would likely reduce the fair value of related assets below their carrying values. During 2004 and 2003, the Company recorded no impairment of its intangible assets. During 2002, the Company recorded impairments of $79,241 related primarily to trademarks/trade names, advertiser lists and goodwill related to the closures of Ziff Davis SMART BUSINESS and Yahoo! Internet Life and the impairment of certain other intangible assets.

      In September 2003, the Company sold an international trademark to an unrelated third party which had a gross book value of $2,669 and accumulated amortization of $284.

      As of December 31, 2004 and December 31, 2003, the Company’s intangible assets and related accumulated amortization consisted of the following:

ZIFF DAVIS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(dollars in thousands, except per share data)

NOTE 7 — INTANGIBLE ASSETS, NET (continued)

      During the year ended December 31, 2003 a reversal of unused purchase accounting reserves resulted in a $201 net book value reduction of goodwill.

      During the fourth quarter of 2004, the Company made two acquisitions for $3,146 in which $1,764 was recorded to goodwill (see Note 3). Also, pursuant to the closing of GMR, the Company acquired the subscriber list from Electronics Boutique which is included in Intangible assets as of December 31, 2004.

      The majority of goodwill relates to the Consumer Tech Group.

      Based on the current amounts of intangible assets subject to amortization, the estimated amortization expense for each of the next 5 years ending December 31, are as follows: