SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-29361

aQuantive, Inc.

(Exact Name of Registrant as Specified in its Charter)

(206) 816-8800

(Registrant’s Telephone Number, Including Area Code)

Securities Registered Pursuant To Section 12(b) of the Act:

None.

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock

      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 the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

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

      The aggregate market value of the voting and nonvoting stock held by nonaffiliates of the registrant as of June 30, 2004 was approximately $605,613,678.

      The number of shares of the registrant’s Common Stock outstanding at February 28, 2004 was 62,719,341.

AQUANTIVE, INC.

2004 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

DOCUMENTS INCORPORATED BY REFERENCE

      The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference to the Registrant’s definitive proxy statement relating to the annual meeting of shareholders to be held on May 25, 2005, which definitive proxy statement will be filed with the Securities and Exchange Commission (SEC) within 120 days after the end of the fiscal year to which this Report relates.

PART I

      This Annual Report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Annual Report are forward looking. We use words such as “anticipates,” “believes,” “expects,” “future” and “intends” and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations, plans or projections and are inherently uncertain. Our actual results may differ significantly from management’s expectations, plans or projections. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Certain risks and uncertainties that could cause our actual results to differ significantly from management’s expectations are described in the section entitled “Business — Additional Factors That May Affect Our Business, Future Operating Results and Financial Condition.” This section, along with other sections of this Annual Report, describes some, but not all, of the factors that could cause actual results to differ significantly from management’s expectations. We undertake no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are urged, however, to review the factors set forth in reports that we file from time to time with the Securities and Exchange Commission. Unless the context requires otherwise in this Annual Report the terms “aQuantive,” the “Company,” “we,” “us” and “our” refer to aQuantive, Inc. and its subsidiaries.

Company Background and Overview

      aQuantive, Inc., a Washington corporation, is a digital marketing services and technology company. We were founded in 1997 under the brand name Avenue A to help marketers acquire, retain and grow customers across digital media. Our initial public offering took place in February 2000. In 2001, we established a separate business unit, Atlas, to sell our proprietary campaign management technology to other interactive agencies and direct advertisers. At the end of 2002, we acquired Philadelphia-based i-FRONTIER, an interactive agency that specializes in creative and website development and combined its capabilities with our Avenue A agency. At the end of 2003, we acquired search management technology provider GO TOAST and incorporated it into the Atlas business as Atlas OnePoint and Atlas Search. In early 2004, we acquired website usability technology provider NetConversions, which we also incorporated into our Atlas business. We also launched a new business unit in early 2004, DRIVEpm, which was created internally. DRIVEpm is a performance media company that resells publisher inventory on a targeted basis to advertisers. More recently, in July of 2004 we acquired SBI.Razorfish, an Internet marketing, web development, design and consulting firm, and combined its capabilities with our Avenue A agency offering, rebranding the combined unit as Avenue A | Razorfish. Also in 2004, we acquired United Kingdom (UK) based TechnologyBrokers and MediaBrokers. Prior to the acquisition, TechnologyBrokers was the sole provider of sales and client support for Atlas customers in Europe and subsequent to the acquisition it has been renamed Atlas Europe. MediaBrokers is a performance media company and is now the European arm of DRIVEpm.

      In early 2005, we launched the rebranding of our collective digital marketing services offerings, including i-FRONTIER, as Avenue | Razorfish and our collective digital marketing technologies offerings from Atlas DMT to Atlas.

      Currently, aQuantive is organized into three lines of business:

      Digital Marketing Services. Avenue A | Razorfish is an interactive advertising agency offering digital marketing services that help advertisers use the Internet as an integrated business channel.

      Digital Marketing Technologies. Atlas is a provider of digital marketing technologies to manage digital marketing programs and website effectiveness for advertising agencies and enterprise marketers, small and mid-size businesses and select publishers.

      Digital Performance Media. DRIVEpm and MediaBrokers serve as a liaison between online publishers and advertisers by buying blocks of online advertising inventory from publishers and reselling that inventory to advertisers on a highly targeted basis.

Digital Marketing Services

      Avenue A | Razorfish is an interactive advertising agency that helps our clients use the Internet as an integrated online business channel. We do this by using a combination of experienced, multi-disciplinary teams, robust technology and proven methodologies to design and execute programs that leverage online media and search engines, email, website development and analytics to attract, convert and service our client’s customers.

      We provide the following digital marketing services:

      Media planning and buying. We evaluate a client’s needs and objectives, outline a media strategy for the client, develop a media plan by identifying appropriate media placements and execute this plan by both negotiating the rates for these placements and purchasing advertising space.

      Ad serving. We use the Atlas Digital Marketing Suite to serve advertisements on third-party websites to execute our clients’ advertising campaigns. We then coordinate and monitor this ad serving process once an advertising campaign begins. Our systems allow us to adjust advertising campaigns quickly and efficiently because changes required to the advertisements are made on our ad serving systems rather than on each individual website where the advertisements appear.

      Campaign analysis. We evaluate advertising campaigns based on criteria important to our client, such as sales, leads, registrations and software downloads. We provide this campaign data to our clients in comprehensive online performance reports generated by our system, as well as custom reports, and we use this data to review the results with our clients and to generate insights and recommendations for future campaigns.

      Optimization. Based upon consultations with our clients, our client service teams can adjust an advertising campaign in progress to improve its performance. If a publisher’s website is generating unacceptably low response rates, we can remove that website from the campaign, reduce the number of impressions allocated to that site or seek to negotiate a lower rate for advertisement placements on that site. If a publisher website is generating high responses, we can serve more advertisements to that website. We can also determine what creative unit and offer message is generating the most conversions and adjust those areas of the campaign accordingly.

      Search Engine Marketing. Our Search Engine Marketing program, also known as Avenue A | Razorfish Search, enables our clients to improve their rankings on Internet search engines. This program manages and optimizes paid listings, direct inclusion and natural listings. Through this program, we help our clients enhance their online visibility, attract customers to their websites and increase sales by leveraging our digital marketing insights, historical learnings and relationships with search engines.

      Business Intelligence System. The Avenue A | Razorfish Business Intelligence System is a powerful data warehouse and flexible custom reporting tool that aggregates data from a number of sources and presents it in a way that allows us and our clients to make informed decisions regarding online advertising and marketing. By using the Business Intelligence System, clients are able to define exactly which data they want to see, in what format, and with what frequency. The Business Intelligence System provides our clients with a means of bringing order to the extraordinarily rich vein of data generated by digital marketing campaigns.

      Website and Web Application Development. We provide a wide range of website development solutions, ranging from rich media branded experiences for some of the world’s biggest consumer brands to highly sophisticated web-based applications that enable business-to-business commerce and customer servicing. We do this through methodologies that combine Internet business strategy, user experience, creative design,

technology consulting and project management to create custom solutions that meet the exacting needs of our clients. We then perform ongoing optimization to ensure our solutions maximize the value of our client’s investment.

      Ad Creative. In connection with our media planning and buying efforts, we often develop online advertising creative campaigns. Our focus for every creative assignment is to achieve client marketing objectives. To have the greatest impact on our client’s businesses, we use our continually growing knowledge base of creative strategies and tactics that drive bottom line results.

      Portal Relationship Management. We manage both exclusive and complex partnerships between our clients and web portals. These types of arrangements typically have terms ranging from six months to one year. We consult with clients to determine their objectives and to negotiate the terms of both of these kinds of longer-term advertising relationships with appropriate web portals. We then help manage the partnership by providing clients with ongoing advertising campaign analysis and optimization services with respect to their exclusive sponsorship links and complex advertising placement arrangements.

      Customer Targeting. The Customer Targeting program enables us to target tailored advertisements to the browsers of users based on anonymous data collected from their previous visits to client sites, web surfing behavior, or other third party data. The program is designed to strengthen the clients’ relationship with their customers, improve response rates and accelerate the sales cycle. For example, if the information in our data warehouse indicates that the computer of a particular web user was previously used to purchase an airline ticket to New York City from our client, our ad serving systems can serve an advertisement to that user’s computer recommending additional, complementary purchases, such as hotels near Times Square or tickets to a Broadway show.

      ChannelScope. ChannelScope is a proprietary analytics tool that provides our clients with a means of directly measuring the offline sales impact of their online advertising campaigns. This system associates a client’s anonymous customer identifier with our anonymous browser identifier. Once this association is made it is possible to directly measure the total return on investment of online campaigns, including the effect of sales both on the client’s website, as well as through other direct channels, such as in-store, catalog or telephone sales.

      BrandOptics. BrandOptics is an analytics tool that allows our clients to associate behavioral marketing metrics with attitudinal measures. For instance, most of our clients use online surveys to determine the ability of Internet advertising to build awareness, change attitudes and increase purchase intent. Using BrandOptics, we can then assess these survey results to determine the long-range sales and overall financial impact of these changes, allowing our clients to measure the return on investment of their branding campaigns.

      E-mail. Through our E-mail program, we work with third party email service providers who deliver messages on our client’s behalf. We provide this service to help our clients deliver emails to specific customer segments based on their shopping and browsing behavior. This program also includes opt-in list prospecting, customer database segmentation, list maintenance, personalization and customization, multiple formats, comprehensive reports, regular debriefs, real-time tracking, and automatic response-handling. Our E-mail program enables us to assist our clients in acquiring new customers and expanding their relationships with existing customers.

Digital Marketing Technologies

      Our Atlas business offers digital marketing technology solutions for advertising agencies and enterprise marketers, small and mid-size businesses and publishers. We provide agencies and enterprise marketers with online campaign management through our proprietary digital marketing management system known as the Atlas Digital Marketing Suite, search marketing through Atlas Search and website optimization solutions through Atlas NetConversions. In addition, our Atlas OnePoint service offering provides solutions for small and mid-size businesses through paid search management and optimization tools to improve their search engine marketing efforts. We also provide select publishers a technology product that enables them to increase revenue in connection with low value and unsold inventory through Atlas Publisher.

      We provide the following Atlas technologies and services for managing digital marketing programs for advertising agencies and enterprise marketers:

      Atlas Digital Marketing Suite. The Atlas Digital Marketing Suite is an end-to-end solution for managing Internet advertising that includes innovative tools that span the entire campaign process, including media planning and buying, campaign delivery, and reporting and analytics. Our solutions are based on the needs of our customers and advertisers who purchase media, the “buy-side” approach. We believe that the buy-side focus of the Atlas Digital Marketing Suite enables us to develop effective tools and services that meet the needs of our target customers, including large traditional advertising agencies, specialty interactive advertising agencies and enterprise marketers. Atlas Search is also integrated into the Atlas Digital Marketing Suite.

      Atlas Search. Atlas Search is an integrated search marketing and online campaign management toolset. AtlasSearch is built from Atlas OnePoint’s paid search management and optimization tools and is integrated with the Atlas Digital Marketing Suite’s campaign management and analytics system.

      Atlas NetConversions. Atlas NetConversions is a website usability technology for optimizing our clients’ websites and enhancing our clients’ ability to track website behavior and improve usability and conversion rates through data-driven analysis and recommendations. Atlas NetConversions provides our clients with a website analytics offering that can diagnose where within a website users drop out of the purchase process and then identify elements that need to be changed to improve conversion rates.

      We provide the following Atlas technologies and services for managing digital marketing programs for small and mid-size businesses:

      Atlas OnePoint. Atlas OnePoint is a provider of paid search management and optimization. Atlas OnePoint provides a single interface for clients to manage the results of all their active search entries and keywords side-by-side. The Atlas OnePoint system provides clients with a relevant comparison across search engines, letting them quickly determine which paid search marketing programs are working most effectively and how much revenue each program is generating. This allows clients to maximize their online marketing return on investment.

      We provide the following Atlas technologies and services for select publishers:

      Atlas Publisher. Atlas Publisher is a highly-scalable, ad serving solution focused solely on helping publishers maximize revenue and lower costs associated with performance-focused advertisers. Atlas Publisher can work as a stand-alone ad serving system or in conjunction with a publisher’s existing system. As a feature-rich, analytically-sophisticated series of modules, the Atlas Publisher system simplifies the complexity publishers face when trying to serve direct marketers well.

Digital Performance Media

      DRIVEpm and UK-based MediaBrokers serve as a liaison between online publishers and advertisers by buying blocks of online advertising inventory from publishers and reselling the inventory to advertisers on a highly targeted basis. We provide multiple services for managing behavioral targeting programs, including:

      DRIVEpm’s Selector and MediaBrokers’ Cost Per Impression (CPM) Program. Selector and MediaBrokers’ CPM program are targeting tools that allow clients to focus ad impressions on those users that fit a predetermined customer segment. We start by building a target profile using anonymous identifiers, which may be based on client website visits, web surfing behavior or other third-party data. When publisher advertising requests come to our ad serving system, the Selector or CPM system, depending on the client, determines if the user fits one of the pre-determined target profiles selected by our clients. If it does, an ad impression is served for that specific client to the user. If the user does not fit any client’s target profile, the ad request is redirected back to other ad serving queues and Selector or CPM clients are not charged. Using Selector or CPM, clients can dramatically reduce the number of unnecessary impressions in their online advertising campaigns, thereby increasing efficiency and effectiveness.

      DRIVEpm’s Performance and MediaBrokers’ Pay For Performance (PFP) Programs. DRIVEpm’s Performance Program and MediaBrokers’ PFP Program are service offerings that allow clients to control the costs of a desired action by paying on a cost per click or cost per action basis. Clients designate specific actions desired and only pay once the specified actions are achieved.

Sales and Marketing

      We use a variety of marketing methods to build awareness of our digital marketing services and technologies in our target markets and to establish credibility and leadership in the marketplace. These methods include marketing materials, advertising, press coverage and other public relations efforts, direct marketing, trade shows, seminars and conferences, relationships with recognized industry analysts, partner programs and our websites.

      Avenue A | Razorfish acquires clients primarily through a consultative approach, using our client service teams to propose integrated solutions for clients’ Internet advertising and consulting needs. Atlas acquires clients primarily through its domestic and international sales force. Atlas OnePoint acquires clients primarily through advertising, client sign-ups on its website and trade shows. DRIVEpm and MediaBrokers primarily acquire new clients through referrals from existing Avenue A | Razorfish and Atlas clients and are developing a domestic and international sales force.

Competition

      Our digital marketing services, offered by Avenue A | Razorfish, compete with interactive advertising agencies, traditional advertising agencies that perform Internet advertising and marketing as part of their services to clients, such as the Internet advertising arms of traditional advertising companies, and companies that provide marketing services, such as Digitas. We also compete in the digital marketing services market with several technology system integrators, such as IBM Global Solutions and Accenture. Our digital marketing technologies, through Atlas, compete with third-party ad serving companies and campaign management technology companies, such as DoubleClick and ValueClick. In addition, Atlas OnePoint competes with providers of search management capabilities, such as Did It and Bid Rank, and Atlas NetConversions competes with providers of website usability and effectiveness metrics tools, such as Keynote Systems, Optimost and Offermatica. Our digital performance media, through DRIVEpm and MediaBrokers competes with providers of performance media such as Advertising.com and Aptimus, Inc.

      We believe that the principal competitive factors affecting the Internet advertising market are data analysis capabilities, client service, strategy, ad serving technology, functionality and price. We believe we compete adequately with respect to these factors. Our digital marketing services line of business provides a full-service range of services to meet the needs of any businesses wanting to effectively advertise and conduct business on the Internet. In particular, our digital marketing services include sophisticated data modeling techniques and dedicated client service teams that seek to employ the best methods, technologies and approaches to make client programs successful. Through our digital marketing technologies line of business, we offer advertising agencies and direct advertisers an efficient buy-side solution for managing effective, end-to-end online campaigns. Our integrated system features technology and services that include search management and rich media capabilities along with efficient supplier management, advanced optimization and other analytical tools, and expert support to make it simple to plan, deliver, analyze and manage fully integrated online advertising campaigns. Although we believe we currently compete adequately with respect to each of these factors, our ability to continue to compete favorably is subject to a number of factors identified in the section titled “Additional Factors That May Affect Our Business, Future Operating Results and Financial Condition” below.

Intellectual Property

      To protect our proprietary rights, we rely generally on patent, copyright, trademark and trade secret laws, confidentiality agreements with many of our employees and consultants, and confidentiality provisions in our vendor and client agreements. Despite these protections, third parties might obtain and use our technologies

without authorization or develop similar technologies independently. The steps we have taken may not prevent infringement or misappropriation of our intellectual property, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States.

      We have obtained an issued U.S. trademark registration for, among others, “AQUANTIVE,” “AVENUE A MEDIA,” “AVENUE A,” “BY MARKETERS. FOR MARKETERS.,” “KNOW WHAT WORKS,” “ATLAS” “ATLAS DMT,” “NETCONVERSIONS,” “I-FRONTIER,” “RAZORFISH,” “SBI” and the Avenue A logo. We also have applied for registration of a number of other marks, including: “ATLAS ARBITER,” “ARBITER,” “ATLAS ON DEMAND,” “ATLAS ONEPOINT,” “DRIVE PM” “DRIVE PERFORMANCE MEDIA,” “ATLAS SOLUTIONS,” and “PARTNER FOR RESULTS.” We cannot assure you that any of our service mark applications will ultimately proceed to registration. Some of our pending applications or registrations may be successfully challenged by others or invalidated. We are aware of third parties that use marks or names, including Internet domain names, that are the same or similar to the name for which we have sought service mark protection. There may be other third parties using names similar to ours of whom we are unaware. If our service mark applications do not proceed to registration or if our service marks are invalidated because of prior third-party registrations, applications or rights, our use of these marks could be restricted unless we enter into arrangements with these third parties, which might not be available on commercially reasonable terms, if at all. Even if our service mark applications proceed to registration, our use of these marks could be restricted to the services set forth in our service mark applications.

      We seek to protect our proprietary rights through patent protection, and have several pending patent applications in the United States for aspects of our technologies, processes and methods. However, we have not received any issued patents to date with the exception of an issued patent acquired in connection with our acquisition of SBI.Razorfish. We cannot assure you that our pending or future patent applications will be granted, that any future patent of ours will not be challenged, invalidated or circumvented, or that the rights granted under any future patent of ours will provide competitive advantages to us. If a blocking patent has issued or issues in the future to a third party and we are not able to distinguish our technologies, processes or methods from those covered under the patent, we may need to either obtain a license or develop non-infringing technologies, processes or methods with respect to that patent. We may not be able to obtain a license on commercially reasonable terms, if at all, or design around the patent, which could impair our ability to provide our services. We also cannot assure you that any proprietary rights with respect to our technologies will be viable or of value in the future since the validity, enforceability and scope of protection of proprietary rights in Internet-related industries are uncertain and still evolving.

      Other parties have been issued patents that may cover some of the technologies, processes or methods we use. We cannot assure you that we will be able to distinguish our technologies, processes or methods from those covered under any of these third-party patents or that these patents would be invalidated if challenged. The patent field covering Internet-related technologies is rapidly evolving and surrounded by a great deal of uncertainty, and other patents or patent applications relating to the delivery of Internet advertising may exist of which we are unaware. Any claims that might be brought against us relating to intellectual property infringement may cause us to incur significant expenses and, if successfully asserted against us, may cause us to pay substantial damages and limit our ability to use the intellectual property subject to these claims. Even if we were to prevail, such litigation could be costly and time-consuming and could divert the attention of our management and key personnel from our business operations. Furthermore, as a result of a patent infringement suit, we may be prevented from providing some of our services, including our core ad serving services, unless we enter into royalty or license agreements. We may not be able to obtain royalty or license agreements on terms acceptable to us, if at all.

      Our technology enables us to collect and use data derived from user activity on the Internet. Although we believe that we have the right to use this information and to compile it in our databases, we cannot assure you that any trade secret, copyright or other protection will be available for this information. In addition, our clients and other parties may claim rights to this information.

Employees

      As of December 31, 2004, we had 1,130 employees. We believe that we have good relationships with our employees. None of our employees is represented under a collective bargaining agreement or by a union. We believe that our future success will depend in part on our ability to attract, integrate, retain and motivate highly skilled personnel and upon the continued service of our senior management. Competition for qualified personnel in our industry can be intense, and we cannot assure you that we will succeed in attracting, integrating, retaining and motivating a sufficient number of qualified personnel to conduct our business in the future.

Website Access to Reports

      Our website address is aquantive.com and our periodic and current reports, and amendments to those reports, are available, free of charge, on our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

Additional Factors That May Affect Our Business, Future Operating Results and Financial Condition

      You should carefully consider the following factors that may affect our business, future operating results and financial condition, as well as other information included in this Annual Report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, financial condition and operating results could be materially adversely affected.

      Our prospects for financial and operational success must be considered in light of the risks frequently encountered by companies in the Internet marketing and advertising industry. These risks include the need to:

      If we do not successfully address these risks, our business could suffer.

      We incurred net losses of $105.1 million for the period from our inception on July 1, 1997 through September 30, 2002. As of December 31, 2004, our accumulated deficit was $48.1 million. We expect to continue to make additional operating and capital expenditures and, as a result, we will need to generate additional revenue to maintain profitability, which we first achieved in the quarter ended December 31, 2002. If our revenue grows more slowly than we anticipate or declines, or if our operating expenses exceed our expectations, we may be unable to maintain profitability.

      Our quarterly operating results have fluctuated in the past and are likely to continue to do so in the future. It is possible that in the future our operating results in a particular quarter or quarters will not meet the expectations of securities analysts, investors or us. If our operating results fail to meet these expectations, the

market price of our common stock could decline. We believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance and should not be relied upon to predict the future performance of our stock price.

      Our revenue, expenses and operating results could vary significantly from quarter to quarter for several reasons, including:

      Our business would be harmed by the loss of any of our major clients, a reduction in the Internet advertising or marketing budgets of any of these clients or any significant reduction in revenue generated from these clients. Current clients may decide not to continue purchasing advertising or marketing services from us or may significantly reduce their advertising or marketing spending, and we may not be able to successfully attract additional clients. For example, in July 2003, a major client discontinued its use of most of our services. In addition, the non-payment of amounts due to us from one or more of our significant clients could harm our business.

      We derive a significant portion of our revenue from the sale of advertising services under advertising campaign services contracts, all of which are terminable upon 90 days’ or less notice. In addition, these contracts generally do not contain penalty provisions for termination before the end of the contract term. As a result of our acquisition of SBI.Razorfish, a significant portion of our revenue is now derived from the provision of Internet marketing and consulting services, which tend to be project based and terminable on short notice. The non-renewal, termination or deferral of a significant number of these contracts or the termination or deferral of engagements for Internet marketing and consulting services in any one period could cause an immediate and significant decline in our revenue and harm our business.

      In our DRIVEpm performance media business we purchase publisher inventory that has to be resold. Generally, we purchase this inventory on a CPM basis, which means we pay based on the number of ad impressions we serve, and often sell it on a CPA basis, under which we are compensated only if a specific action (such as a sale of a customer’s product) results from serving an ad. Our ability to resell this inventory at a profit depends on the price at which we bought it, the price that our customers are willing to pay for it, and the successful use of our technology. While we often negotiate relatively short-term “outs” to our purchase obligations, there can be no guarantees that we will be successful in selling the inventory profitably.

      If the market for Internet advertising or marketing deteriorates, or develops more slowly than we expect, our business could suffer. Our future success is highly dependent on an increase in the use of the Internet, the commitment of advertisers and marketers to the Internet as an advertising and marketing medium, the willingness of our potential clients to outsource their Internet advertising and marketing needs, and our ability to sell technology services to advertising agencies. The Internet advertising and marketing market is relatively new and rapidly evolving. As a result, demand and market acceptance for Internet advertising, marketing and technology services is uncertain. Many of our current or potential clients have little or no experience using the Internet for advertising or marketing purposes and have allocated only a limited portion of their advertising or marketing budgets to Internet advertising or marketing. Also, we must compete with traditional advertising media, including television, radio, cable and print, for a share of our clients’ total advertising budgets. Businesses, including current and potential clients, may find Internet advertising or marketing to be less effective than traditional advertising media or marketing methods for promoting their products and services, and therefore the market for Internet advertising, marketing and technology services may deteriorate or develop more slowly than expected. In addition, “filter” software programs are available that limit or prevent advertising from being delivered to an Internet user’s computer. The widespread adoption of such software could significantly undermine the commercial viability of Internet advertising and seriously harm our business.

      We have completed several acquisitions, including: GO TOAST, a Denver-based provider of paid search management and optimization tools; NetConversions, a Seattle-based provider of website usability technology; SBI.Razorfish, a provider of internet marketing and consulting services; TechnologyBrokers, a UK-based company that resells Atlas technologies, and MediaBrokers, a UK-based company that provides performance media. We may in the future acquire or make investments in other businesses, or acquire products and technologies, to complement our current businesses. Any future acquisition or investment may require us to use significant amounts of cash, issue potentially dilutive equity securities or incur debt. In addition, acquisitions involve numerous risks, any of which could harm our business, including:

      We have been subject to class action lawsuits alleging, among other things, that our collection and use of Internet user information violates federal and state laws, and we may be subject to additional suits in the future. Class action litigation is often expensive and time-consuming, and the outcome of such litigation is

often uncertain. Such lawsuits, regardless of their outcome, may cause us to incur significant expenses and divert the attention of our management and key personnel from our business operations. In addition, such lawsuits may require us to pay substantial damages or prevent us from conducting targeted advertising and aggregating data from our clients’ advertising campaigns. Furthermore, several Internet-related companies, including some in the Internet advertising industry, have had claims brought against them before the Federal Trade Commission regarding the collection and use of Internet user information, and we may be subject to similar claims. Such claims, and any other claim by a government entity or other third party against us regarding our collection and use of Internet user information, could seriously harm our business.

      Privacy concerns could lead to legislative and other limitations on our ability to conduct targeted advertising campaigns and compile data that we use to formulate campaign strategies for our clients. Our systems use “cookies” and “action tags” to track Internet users and their online behavior, which allows us to build anonymous user profiles. A cookie is a small file of information stored on a user’s computer that allows us to recognize that user’s browser when we serve advertisements. An action tag functions similarly to a banner ad, except that the action tag is not visible. Our action tags may be placed on specific pages of our clients’ or prospective clients’ websites. This enables us to measure an advertising campaign’s effectiveness in driving consumers to take specific actions.

      We are substantially dependent on cookie and action tag technology to target our clients’ advertising campaigns and measure their effectiveness. Any reduction in our ability to use cookies or action tags or other means to build anonymous user profiles could harm our business. Such a reduction may result from several causes, including governmental action, technology or litigation. First, governmental bodies concerned with the privacy of Internet users have suggested limiting or eliminating the use of cookies, action tags or user profiling. Bills aimed at regulating the collection and use of personal data from Internet users are currently pending in Congress and many state legislatures. Other bills, which are intended to regulate spyware, may be drafted in such a way as to include technology like cookies and action tags in the definition of spyware, thereby creating restrictions that could reduce our ability to use them. In addition, the Federal Trade Commission and the Department of Commerce have conducted hearings regarding user profiling, the collection of non-personally identifiable information and online privacy. Outside the United States, privacy concerns have led to legal and technical limitations on the use of cookies, action tags and user profiling. For example, the European Union has adopted a directive addressing data privacy that limits the collection, disclosure and use of information regarding European Internet users. In addition, the European Union has enacted an electronic communications directive that imposes certain restrictions on the use of cookies and action tags and also places restrictions on the sending of unsolicited communications. Each European Union member country was required to enact legislation to comply with the provisions of the electronic communications directive by October 31, 2003 (though not all have done so). Germany has imposed its own laws limiting the use of user profiling, and other countries (both in and out of the European Union) may impose similar limitations. Second, users may limit or eliminate the placement of cookies on their computers by using third-party software that blocks cookies, or by disabling or restricting the cookie functions of their Internet browser software. Internet browser software upgrades may also result in limitations on the use of cookies or action tags. Technologies like the Platform for Privacy Preferences (P3P) Project may limit collection of cookie and action tag information. In addition, third parties have brought class action lawsuits against us and other companies relating to the use of cookies, and we may be subject to similar lawsuits in the future. The results of such lawsuits could limit or eliminate our ability to use cookies and action tags. In certain instances at the request of some of our Avenue A | Razorfish clients, we collect personally identifiable information of Internet users. We disclose our information collection and dissemination practices in a published privacy statement on our web sites, which we may modify from time to time to meet operational needs or changes in the law or industry best practices. We may be subject to legal claims, government action and damage to our reputation if we act or are perceived to be acting inconsistently with the terms of our privacy statement, customer expectations or the law.

      If our ability to use cookies or action tags or to build user profiles were substantially restricted, we would likely have to use other technology or methods that allow the gathering of user profile data in other ways in order to provide our services to our clients. This change in technology or methods could require significant reengineering time and resources, and might not be done in time to avoid negative consequences to our business. In addition, alternative technology or methods might not be available on commercially reasonable terms, if at all.

      We and some of the underwriters of our initial public offering of common stock in February 2000 are defendants in a consolidated class action lawsuit that alleges violations of federal securities laws in connection with our initial public offering. Razorfish is similarly involved in this lawsuit relating to its public offering in April 1999. The claims in the lawsuit include, among other things, allegations of misrepresentations or failures to disclose alleged facts relating to the defendant underwriters’ compensation and commissions in connection with our initial public offering and alleged agreements between the underwriters and their customers relating to future purchases of our stock and/or the stock of other companies. In 2004 we accepted a settlement proposal for this litigation. In February 2005 the court gave preliminary approval of the motion for approval of the settlement, over the objections of the co-defendant underwriters. The final settlement remains subject to a number of procedural conditions and cannot be assured. Class action litigation is often expensive and time-consuming, and the outcome of such litigation is often uncertain. Such lawsuits, regardless of their outcome, may cause us to incur significant expenses and divert the attention of our management and key personnel from our business operations. In addition, such lawsuits may result in the payment by us of substantial damages and may otherwise seriously harm our business.

      Patents have been issued to third parties that may cover some of the technologies, processes or methods that we use. We cannot assure you that we would be able to distinguish our technologies, processes or methods from those covered under any of these third-party patents or that these patents would be invalidated if challenged. The patent field covering Internet-related technologies is rapidly evolving and surrounded by a great deal of uncertainty, and other patents or patent applications relating to the delivery of Internet advertising may exist of which we are unaware.

      Several companies in the Internet advertising field have brought patent infringement suits against competitors in connection with patents relating to ad serving technologies, and we expect this type of litigation to increase in the future. Any patent infringement claims brought against us may cause us to incur significant expenses and, if successfully asserted against us, may cause us to pay substantial damages and prevent us from using the intellectual property subject to these claims. Even if we were to prevail, any litigation would likely be costly and time-consuming and divert the attention of our management and key personnel from our business operations. Furthermore, as a result of a patent infringement suit, we may be prevented from providing some of our services, including our core ad serving services, unless we enter into royalty or license agreements. We may not be able to obtain royalty or license agreements on terms acceptable to us, if at all.

      Our use of our trademarks may result in infringement claims and other legal challenges, which could cause us to incur significant expenses, pay substantial damages and be prevented from using these marks. We are aware of third parties that use marks or names, including Internet domain names, that are the same or similar to the names for which we have sought trademark protection. There may be other third parties using names similar to ours of whom we are unaware. As a result of any infringement claims or challenges, we may incur significant expenses, pay substantial damages and be prevented from using our trademarks unless we enter into royalty, license or coexistence agreements. We may not be able to obtain such royalty, license or

coexistence agreements on terms acceptable to us, if at all. Use of our trademarks by third parties may also cause confusion to our clients and confusion in the market, which could decrease the value of our brand and harm our reputation.

      In addition to patent and trademark claims, third parties may claim that we are infringing or violating their other intellectual property rights, including their copyrights and trade secrets, or otherwise challenge our intellectual property, which may cause us to incur significant expenses and, if successfully asserted against us, pay substantial damages and be prevented from providing our services. Even if we were to prevail, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations. Furthermore, as a result of an intellectual property challenge, we may be prevented from providing some of our services unless we enter into royalty, license or coexistence agreements. We may not be able to obtain such royalty, license or coexistence agreements on terms acceptable to us, if at all.

      If our services fail to perform properly for our clients, we may be exposed to liability to our clients or to the customers for whom our clients used our services. In addition, our clients may use our technology-based services in a manner that fails to comply with applicable laws, including but not limited to laws and regulations surrounding the Internet. For example, because our services may be used by clients to transmit information over the Internet, our services might be used by clients to transmit information that violates laws or regulations, or to transmit negative messages, unauthorized reproduction of copyrighted material, inaccurate data, harmful applications or computer viruses to end-users in the course of delivery. Any claims made against us arising in connection with our clients’ use of our services, regardless of their outcome, may cause us to incur significant expenses and divert the attention of our management and key personnel from business operations. In addition, such claims may require us to pay substantial damages, modify or discontinue some of our services and otherwise seriously harm our business and damage our reputation.

      The loss of the services of members of our management team or other key personnel could harm our business. Our future success depends to a significant extent on the continued service of our key management, client service, product development, sales and technical personnel. We do not maintain key person life insurance on any of our executive officers and do not intend to purchase any in the future. Although we generally enter into non-competition agreements with our employees, our business could be harmed if one or more of our officers or key employees decided to join a competitor or otherwise compete with us.

      Our business of delivering Internet professional services is dependent upon the expertise of highly skilled personnel. Accordingly, our future success also depends in large part on our ability to identify, attract, hire, train, retain and motivate highly skilled personnel who can provide the Internet strategy, technology, marketing and creative skills required by our clients. If we fail to hire and retain a sufficient number of qualified client service, product development, sales and technical personnel, we may not be able to maintain or expand our business.

      The market for Internet advertising and consulting services is relatively new, yet competitive. In the digital marketing services segment, Avenue A | Razorfish competes with interactive advertising agencies, traditional advertising agencies that perform Internet advertising and marketing as part of their services to

clients, and companies that provide marketing services, such as Digitas. We also compete in the digital marketing services market with several technology system integrators, such as IBM Global Solutions and Accenture. Our digital marketing technologies, through Atlas, compete with third-party ad serving companies and campaign management technology companies, such as DoubleClick and ValueClick. In addition, the Atlas OnePoint offering competes with providers of search management capabilities, such as Did It and Bid Rank, and Atlas NetConversions competes with providers of website usability and effectiveness metrics tools, such as Keynote Systems, Optimost and Offermatica. Our digital performance media, through DRIVEpm and MediaBrokers competes with providers of performance media such as Advertising.com and Aptimus, Inc.

      Many of our competitors have longer operating histories, greater name recognition, larger client bases and significantly greater financial, technical and marketing resources than we have. Also, many of our current and potential competitors have established or may establish cooperative relationships among themselves or with third parties. In addition, several of our competitors have combined or may combine in the future with larger companies with greater resources than ours. These competitors may engage in more extensive research and development, undertake more far-reaching marketing campaigns and make more attractive offers to existing and potential employees and clients than we do. They could also adopt more aggressive pricing policies and may even provide services similar to ours at no additional cost by bundling them with their other product and service offerings. They may also develop services that are equal or superior to our services or that achieve greater market acceptance than our services. Increased competition is likely to result in price reductions, reduced margins and loss of market share. We cannot assure you that we will be able to compete successfully, and competitive pressures may harm our business.

      In addition, our ability to maintain existing client relationships and generate new clients will depend to a significant degree on the quality of our services and our reputation among clients and potential clients, as compared with our competitors. To the extent we lose clients to our competitors because of dissatisfaction with our services or because our reputation is harmed for any other reason, our business could be negatively affected.

      The consolidation of Internet advertising networks, web portals, Internet search engine sites and web publishers could harm our business. This type of consolidation could eventually lead to a concentration of desirable advertising space on a very small number of networks and websites. This type of concentration could substantially impair our ability to serve advertisements if these networks or websites decide not to permit us to serve, track or manage advertisements on their websites, or if they develop ad placement systems that are not compatible with our ad serving systems. These networks or websites could also use their greater bargaining power to increase their rates for advertising space or prohibit or limit our aggregation of advertising campaign data. In addition, concentration of desirable advertising space in a small number of networks and websites could diminish the value of our advertising campaign databases, as the value of these databases depends to some degree on the continuous aggregation of data from advertising campaigns on a variety of different advertising networks and websites.

      Sustained or repeated system failures could significantly impair our operations and reduce the attractiveness of our services to our current and potential clients. The continuous and uninterrupted performance of our systems is critical to our success. Our operations depend on our ability to protect these systems against damage from fire, power loss, water damage, earthquakes, telecommunications failures, viruses, vandalism and other malicious acts and similar unexpected adverse events. Clients may become dissatisfied by any system failure that interrupts our ability to provide our services to them. In particular, the failure of our ad serving systems, including failures that delay or prevent the delivery of targeted advertisements to websites and advertising networks, could reduce client satisfaction and damage our reputation.

      Our services are substantially dependent on certain systems provided by third parties over whom we have little control. Interruptions in our services could result from the failure of telecommunications providers and other third parties to provide the necessary data communications capacity in the time frame required. Our ad serving systems and computer hardware are primarily located in the Seattle, Washington metropolitan area and in Weehawken, New Jersey, Dallas, Texas and London, England at facilities operated by Savvis, Inc. and MCI Worldcom Communications, Inc. Additionally, Speedera Networks Inc. provides content delivery for us at its facilities. We depend on these third-party providers of Internet communication services to provide continuous and uninterrupted service. We also depend upon Internet service providers that provide access to our services. In the past, we have occasionally experienced significant difficulties delivering advertisements to Internet advertising networks and websites due to system failures unrelated to our own systems. Any disruption in the Internet access provided by third-party providers or any failure of third-party providers to handle higher volumes of user traffic could impair our ability to deliver advertisements and harm our business.

      To use our services more effectively, clients often provide us with confidential business and marketing information. Many companies are wary of third parties having access to this information, because access by third parties increases the risk that confidential business and marketing information may become known, even if unintentionally, to these companies’ competitors. These confidentiality concerns may prompt our clients to attempt to contractually prohibit us from managing the Internet advertising campaigns of their competitors. Limitation of our client base in a particular industry in this manner could limit the growth of our business.

      Legislation, regulations or standards may be adopted or amended that could impair our ability to provide our services to clients or otherwise harm our business. The legal and regulatory environment governing the Internet and Internet advertising is uncertain and may change. Laws, regulations and standards may be adopted or amended covering issues such as privacy, pricing, acceptable content, consumer protection and quality of products and services on the Internet. These laws, regulations and standards could dampen the growth in use of the Internet generally and decrease the acceptance of the Internet as an advertising medium. Also, due to the global nature of the Internet, it is possible that multiple federal, state or foreign jurisdictions might inconsistently regulate our activities or the activities of advertising networks or websites. Any of these developments could harm our business.

      In addition, laws, regulations and standards may be adopted or amended relating to the taxation of our services. We received reporting instructions from Washington State tax authorities that require us to pay Washington State business and occupation tax on the media we purchase on behalf of our clients. We expect to assert administrative remedies with the Washington State tax authorities and evaluate tax strategies that might allow deduction of media purchases in connection with the measure of business and occupation tax. If these efforts are not successful, this business and occupation tax requirement, and any other tax-related requirements, could substantially increase our cost of conducting business.

      In conjunction with third-party contractors, our service offerings include email advertising and marketing services. The market for email advertising and marketing in general is vulnerable to the negative public perception associated with unsolicited email. Federal, state and foreign governments have enacted legislation, including the CAN-SPAM Act of 2003 that limits or prohibits the use of unsolicited email and imposes liability on those that assist sending such email. The Federal Trade Commission, under the CAN-SPAM Act, is commencing rulemaking that may further limit the use of email for advertising. Government action, public perception or press reports related to solicited or unsolicited email could reduce the overall demand for email advertising and marketing in general and our email services in particular. The negative public perception surrounding providers and users of email advertising, which may include us and our clients, may also lead third party vendors and/or partners to choose not to work with us, or to discontinue current relationships. In addition, although our email delivery program is based on the email addressee’s consent or other indication of

willingness to receive such email where required by law, it is possible that laws, regulations or standards may be adopted or amended that may require us to change or discontinue our current practices or may subject us to liabilities. Furthermore, we may be the target of lawsuits or enforcement actions if a plaintiff or government agency believes that legal requirements regarding the delivery of email have not been followed by us, our clients or a third-party contractor or that emails have been received contrary to the email addressee’s wishes. Any of these circumstances could harm our business.

      The Internet and Internet advertising markets are characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions and changing client demands, particularly in the areas of search marketing and rich media. The introduction of new products and services embodying new technologies and the emergence of new industry standards may render our services obsolete. Our future success will depend on our ability to adapt to rapidly changing technologies, enhance our existing Internet advertising services and develop and introduce a variety of new services to address our clients’ changing demands. We may experience difficulties that could delay or prevent the successful design, development, introduction or marketing of our services. In addition, any new services or enhancements must meet the requirements of our current clients and must achieve market acceptance. Material delays in introducing new services and enhancements may cause clients to discontinue use of our services and to use the services of our competitors.

      The trading price of our common stock has been and is likely to continue to be highly volatile. For example, during the 52-week period ended March 4, 2005, the closing price of our common stock ranged from $7.56 to $11.06 per share. The market price of our common stock may fluctuate significantly in response to a number of factors, including:

      In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We have been the subject of securities class action litigation in the past and may be the target of additional lawsuits in the future. Any securities class action litigation against us could result in substantial costs and divert our management’s attention from business concerns, which could harm our business.

      As of June 30, 2004, we had no outstanding debt. In August and September 2004, we incurred $80.0 million of indebtedness through the sale of convertible notes, substantially all of the proceeds of which were used to repay in full certain indebtedness incurred in connection with the closing of the acquisition of SBI.Razorfish in July 2004. As a result of this indebtedness, we have substantial principal and interest

payment obligations, which we previously did not have. The degree to which we are leveraged could materially and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will depend on our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control.

      We may need additional funds to finance our operations in the future, as well as to enhance our services, respond to competitive pressures or acquire complementary businesses or technologies. We may be unable to obtain financing on terms favorable to us, if at all. Poor financial results, unanticipated expenses or unanticipated opportunities that require financial commitments could give rise to additional financing requirements sooner than we expect. If we raise additional funds through the issuance of equity or convertible debt securities, this may reduce the percentage ownership of our existing shareholders, and these securities might have rights, preferences or privileges senior to those of our common stock. If adequate funds are not available or are not available on acceptable terms, our ability to enhance our services, respond to competitive pressures or take advantage of business opportunities would be significantly limited, and we might need to significantly restrict our operations.

      In the website design and development portion of our digital marketing services, we have a number of strategic relationships with leading hardware and software companies. The loss of any one of these strategic relationships would deprive us of the opportunity to gain early access to leading-edge technology, cooperatively market products with the vendor, cross-sell additional services and gain enhanced access to vendor training and support. Maintenance of our strategic relationships is based primarily on an ongoing mutual business opportunity and a good overall working relationship. The legal contracts associated with these relationships would not be sufficient to force the strategic relationship to continue effectively if the strategic partner wanted to terminate the relationship. In the event that any strategic relationship is terminated, our business may be negatively affected.

      We regard our intellectual property rights, such as copyrights, trademarks, trade secrets, practices and tools, as important to our success. To protect our intellectual property rights, we rely on a combination of trademark and copyright law, trade secret protection and confidentiality agreements and other contractual arrangements with our employees, affiliates, clients, strategic partners, acquisition targets and others. Effective trademark, copyright and trade secret protection may not be available in every country in which we intend to offer our services. The steps we have taken to protect our intellectual property rights may not be adequate, third parties may infringe or misappropriate our intellectual property rights and we may not be able to detect unauthorized use and take appropriate steps to enforce our rights.

      Many of our consulting engagements regarding website design and development in our digital marketing services business involve the development, implementation and maintenance of applications that are critical to the operations of our clients’ businesses. Our failure or inability to meet a client’s expectations in the performance of its services could injure our business reputation or result in a claim for substantial damages against us, regardless of our responsibility for the failure. In addition, we possess technologies and content that may include confidential or proprietary client information. Although we have implemented policies to prevent this client information from being disclosed to unauthorized parties or used inappropriately, any unauthorized disclosure or use of this information could result in a claim for substantial damages. Contractual damages limitation provisions that we attempt to implement to limit our damages from negligent acts, errors, mistakes or omissions in rendering professional services may not be enforceable or may not otherwise protect us from liability for damages.

      Clients often hire us for complex development engagements that they cannot complete themselves. These projects often involve the use of new technology that has not been extensively tested or used in actual applications. We attempt to negotiate appropriate provisions into our professional services agreements to protect us against unexpected delays or failures caused by this new technology, but we are often unable to do so. In any event, if we fail to successfully complete projects according to the agreed upon schedule and budget, our client relationships suffer, and our business could be adversely impacted.

      Part of our business involves the development of software applications for discrete client engagements. Ownership of client-specific software is generally retained by the client, although we typically retain the right to reuse some of the applications, processes and other intellectual property developed in connection with client engagements. Issues relating to the rights to intellectual property can be complicated, and disputes may arise that could adversely affect our ability to reuse these applications, processes and other intellectual property. These disputes could damage our relationships with our clients and our business reputation, divert our management’s attention and have a material adverse effect on our business.

      The website design and development portion of our digital marketing services business performs some of its services on a fixed fee basis. Because of the complexity of many of these fixed fee engagements, accurately estimating the cost, scope, expectations and duration of a particular fixed fee engagement can be a difficult task. If we fail to appropriately structure one or more fixed fee engagements, we could be forced to devote additional resources to these engagements for which we will not receive additional compensation. To the extent that an expenditure of additional resources is required on a fixed fee engagement, this could harm our reputation and result in a loss on the engagement.

      The website design and development portion of our digital marketing services business derives much of its revenue from projects that use billable employees. If clients who use our services fail to retain us for future projects or if clients or prospective clients delay planned projects, we may be unable to quickly reassign billable employees to other engagements so as to minimize under-utilization of these employees. This under-utilization could reduce our revenues and gross margins.

      Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Any inability to provide reliable financial reports or prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 requires management and our auditors to evaluate and assess the effectiveness of our internal controls. These Sarbanes-Oxley requirements may be modified, supplemented or amended from time to time. Implementing these changes may take a significant amount of time and may require specific compliance training of our directors, officers and other personnel. We are continuing to evaluate and, where appropriate, enhance our policies, procedures and internal controls. If we fail to maintain the adequacy of our internal controls we could be subject to regulatory scrutiny and investors could lose confidence in the accuracy and completeness of our financial reports. We cannot assure you that we will be able to complete the work necessary to fully comply with the requirements of the Sarbanes-Oxley Act or that management or our auditors will conclude that our internal controls are effective.

      Our digital marketing services and digital performance media lines of business and corporate headquarters lease 60,708 square feet of office space in Seattle, Washington for its principal offices. This lease expires in October 2012. Our digital marketing services line of business also has significant offices in Chicago, Illinois, where it leases 23,597 square feet of office space and in New York City, where it leases office space in three locations, the largest being 12,500 square feet. The Chicago lease and the largest New York City lease expire in November 2011 and September 2007, respectively.

      Our digital marketing technologies line of business leases 32,376 square feet of office space for its principal offices in Seattle, Washington. This lease expires in April 2009.

      Our ad serving systems and computer hardware are primarily located at facilities operated by Savvis Inc. in the Seattle metropolitan area, Weehawken, New Jersey, and Dallas, Texas and by MCI Worldcom Communications, Inc. in London, England. Our agreement with Savvis Inc. expires in June 2005 with automatic one-year renewals. Our agreement with MCI has a three year term, expiring in May 2007.

      Both aQuantive and Razorfish are defendants in consolidated securities class action complaints filed in the United States District Court for the Southern District of New York. These consolidated complaints are among over 300 similar consolidated class action lawsuits filed against underwriters and other issuers of stock in initial public offerings. The court has coordinated the cases under a single case number for pretrial proceedings.

      aQuantive. The consolidated complaint against aQuantive was filed on or about April 19, 2002 and captioned In re Avenue A, Inc. Initial Public Offering Securities Litigation. This consolidated complaint relates to several previously filed class action complaints against us, the first of which was originally filed on or about June 15, 2001. Plaintiffs filed the consolidated complaint on behalf of themselves and all others who acquired our common stock between February 28, 2000 and December 6, 2000, pursuant or traceable to our prospectus dated February 28, 2000. The complaint also named as defendants Morgan Stanley & Co., Salomon Smith Barney, Inc., Thomas Weisel Partners, LLC, and RBC Dain Rauscher, Inc., certain of the underwriters of our initial public offering; Brian P. McAndrews, our President and Chief Executive Officer; Nicolas Hanauer, our Chairman of the Board; and Robert Littauer, our former Chief Financial Officer. The complaint contains the following purported claims against all defendants: (1) violation of 15 U.S.C. § 77k (Section 11 of the Securities Act of 1933), and (2) violation of 15 U.S.C. § 78j(b) (Section 10(b) of the Securities Exchange Act of 1934) and 17 C.F.R. § 240.10b-5 (Exchange Act Rule 10b-5). The complaint contains the following purported claims against the individual defendants alone: (1) violation of 15 U.S.C. § 77o (Section 15 of the Securities Act of 1933) and (2) violation of 15 U.S.C. § 78t(a) (Section 20(a) of the Securities Exchange Act of 1934). Plaintiffs seek monetary damages. The complaint alleges violations of federal securities laws in connection with disclosures contained in our prospectus dated February 28, 2000, for our initial public offering of common stock. The complaint alleges incorrect disclosure or omissions in our prospectus relating generally to commissions to be earned by the underwriters and certain allegedly improper agreements between the underwriters and certain purchasers of our common stock. It also alleges that the SEC and/or other regulatory authorities are investigating underwriting practices similar to those alleged in the complaint. We have no knowledge as to whether aQuantive or our initial public offering is the subject of any such investigation.

      On July 15, 2002, the issuer defendants as a group filed a motion to dismiss the claims alleged in the consolidated complaints. On October 8, 2002, the court entered an order dismissing, without prejudice, all of the claims against Messrs. McAndrews, Hanauer and Littauer. On February 19, 2003, the court granted aQuantive’s motion to dismiss the claims against us under Section 10(b) of the Securities Exchange Act of 1934 and denied our motion to dismiss the claims against us under Section 11 of the Securities Act of 1933.

      By action of a special committee of disinterested directors (who were neither defendants in the litigation nor members of our Board of Directors at the time of the actions challenged in the litigation), we recently decided to accept a settlement proposal presented to all issuer defendants. In this settlement, plaintiffs will

dismiss and release all claims against us and Messrs. McAndrews, Hanauer and Littauer, in exchange for a contingent payment by the insurance companies collectively responsible for insuring the issuers in all of the consolidated IPO cases, and for the assignment or release of certain potential claims that we may have against the underwriters. We will not be required to make any cash payments in the settlement, unless the pro rata amount paid by the insurers in the settlement on our behalf exceeds the amount of the insurance coverage, a circumstance that we believe is not likely to occur. The settlement is subject to a number of procedural conditions, described below.

      Razorfish. The consolidated complaint against Razorfish was filed on April  19, 2002 and relates to its initial public offering in March 2000. The lawsuit also names certain of the underwriters of the IPO, including Credit Suisse First Boston Corp., BancBoston Robertson Stephens Inc., BT Alex. Brown Inc. and Lehman Brothers, Inc., as well as officers and directors Jeffrey A. Dachis, Craig M. Kanarick, Per I.G. Bystedt, Jonas S.A. Svensson, Susan Black, Carter F. Bales, Kjell A. Nordstrom and John Wren, as defendants. The complaint alleges that the prospectus and the registration statement for the IPO failed to disclose that the underwriters allegedly solicited and received “excessive” commissions from investors and that some investors in the IPO allegedly agreed with the underwriters to buy additional shares in the aftermarket in order to inflate the price of Razorfish’s stock. The complaint asserts claims against Razorfish and its officers and directors pursuant to Section 11 of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934, and other related provisions. The complaint seek unspecified damages, attorney and expert fees, and other unspecified litigation costs.

      As described above, on July 15, 2002, Razorfish, along with other issuer defendants in the coordinated cases, moved to dismiss the litigation. On February 19, 2003, the court ruled on the motions. The court denied Razorfish’s motion to dismiss the claims against it under Rule 10b-5. The motions to dismiss the claims under Section 11 of the Securities Act were denied as to virtually all of the defendants in the consolidated cases, including Razorfish. In addition, the court granted the motion to dismiss the Rule 10b-5 claims as to individual defendants Jeffrey A. Dachis, Craig M. Kanarick, Per I.G. Bystedt, Jonas S.A. Svensson and Kjell A. Nordstrom. Razorfish’s other officers named as individual defendants, Susan Black, Carter F. Bales and John Wren, signed a tolling agreement and were dismissed from the action without prejudice on October 9, 2002.

      As described above, a proposed settlement of this litigation was structured between the plaintiffs, the issuer defendants in the consolidated actions, the issuer officers and directors named as defendants, and the issuers’ insurance companies. On or about July 31, 2003, Razorfish conditionally approved the proposed partial settlement. The settlement would provide, among other things, a release of Razorfish and of the individual defendants for the conduct alleged to be wrongful in the consolidated complaint. Razorfish would agree to undertake other responsibilities under the settlement, including agreeing to assign away, not assert, or release certain potential claims Razorfish may have against its underwriters. Any direct financial impact of the proposed settlement is expected to be borne by Razorfish’s insurance carriers.

      Settlement Approval. In June 2004, an agreement of settlement was submitted to the court for preliminary approval. The court requested that any objections to preliminary approval of the settlement be submitted by July 14, 2004, and the underwriter defendants formally objected to the settlement. The plaintiffs and issuer defendants separately filed replies to the underwriter defendants’ objections to the settlement on August 4, 2004. The court granted the motion for preliminary approval, and now notice will be given to all class members of the settlement, a “fairness” hearing will be held and if the court determines that the settlement is fair to the class members, the settlement will be approved. There can be no assurance that this proposed settlement would be finally approved and implemented in its current form, or at all.

      No matters were submitted to a vote of our shareholders during the fourth quarter of the fiscal year ended December 31, 2004.

PART II

      Our Common Stock is traded on the Nasdaq National Market (symbol “AQNT”). The number of shareholders of record of our Common Stock at March 5, 2005, was approximately 400.

      High and low bid quotations for our Common Stock as quoted on the Nasdaq National Market for the periods indicated are as follows.

      We have never declared or paid any cash dividends on our Common Stock. We currently anticipate that we will retain all future earnings for use in the expansion and operations of our business and do not anticipate paying cash dividends in the foreseeable future.

      On February 28, 2000, the SEC declared effective our Registration Statement on Form S-1 (Registration No. 333-92301) as filed with the SEC in connection with our initial public offering of common stock, par value $0.01 per share. As of December 31, 2004, we have used all of the net proceeds of the public offering primarily for general corporate purposes, including working capital and capital expenditures and the acquisition of SBI.Razorfish.

      The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto and the information contained herein in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Historical results are not necessarily indicative of future results.

      The discussion in this Annual Report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Additional factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section entitled “Factors that May Affect Our Business, Future Operating Results and Financial Condition”, included elsewhere in this Annual Report. When used in this document, the words “believes,” “expects,” “anticipates,” “intends,” “plans” and similar expressions, are intended to identify certain of these forward-looking statements. However, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The cautionary statements made in this document should be read as being applicable to all related forward-looking statements wherever they appear in this document.

      The information presented in this annual report on Form 10-K includes financial information prepared in accordance with Generally Accepted Accounting Principles (GAAP), as well as other financial measures that may be considered non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented

in accordance with GAAP. As described more fully below, management believes these non-GAAP measures provide meaningful additional information about our performance. The non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with GAAP.

      We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with an introduction to aQuantive’s lines of business and an overview of the significant highlights for the year ended December 31, 2004. This is followed by a discussion of the Critical Accounting Policies and Judgments that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. In the next section, beginning on page 28, we discuss our results of operations for 2004 compared to 2003 and 2002. Next we provide our outlook for 2005. We then provide an analysis of changes in our cash flows, and discuss our financial commitments in the section titled “Liquidity and Capital Resources.”

Overview

      We are a digital marketing services and technology company that helps marketers acquire, retain and grow customers across digital media. We are organized into three lines of business: digital marketing services, digital marketing technologies, and, digital performance media.

      Beginning in 2004, we moved revenue associated with a technology product for publishers, which was developed and managed by Avenue A | Razorfish and had been included in digital marketing services results in the past, to the digital marketing technologies segment. The results for 2003 and 2002 have been adjusted to reflect this change and to provide consistency with the 2004 presentation. In addition, beginning in 2004, we are now reporting all revenues derived from selling proprietary ad serving technologies through our digital marketing services line of business as part of revenue of Atlas and the digital marketing technologies line of business. The results for 2003 and 2002 have also been adjusted to reflect this change and provide consistency with the 2004 presentation.

      Our results of operations for the year ended December 31, 2004 include the results of several acquisitions including NetConversions in February 2004, MediaBrokers, TechnologyBrokers and SBI.Razorfish in July 2004. The results of these acquisitions must be factored into any comparison of our 2004 results to the results for 2003 or 2002. See Note 3 of our consolidated financial statements as of and for the year ended December 31, 2004 for pro forma financial information as if these entities had been acquired on January 1, 2003 and 2004.

      Effective January 1, 2004, Avenue A | Razorfish’s clients are directly liable for the cost of media purchases pursuant to those contractual agreements. As a result, we began recording revenue generated under such contractual agreements on a net basis, which excludes the cost of media purchased for our clients.

      In July 2004, we completed the acquisition of interactive advertising agency, SBI.Razorfish, an Internet marketing and consulting firm. Combined with interactive agency Avenue A, the resulting brand identity for the Company’s agency business is now Avenue A | Razorfish. Avenue Avenue A | Razorfish offers advertisers a suite of digital marketing services to help clients use the Internet as an integrated online business channel. All our capabilities include a process anchored in strategy, user-centric design, dynamic technology platforms, channel integration and optimization. We provide digital marketing services, including media planning and buying, ad serving, campaign analysis, optimization, search engine marketing, creative and website development, customer targeting and email, using proprietary tools including Business Intelligence System, ChannelScope and BrandOptics.

      Due to the contributions made as a result of the acquisition of SBI.Razorfish, new media and search clients, increased spending from existing clients, and the impact of these and other industry trends, our digital marketing services line of business experienced significant growth during the year ended December 31, 2004 resulting in revenues of $87.7 million, compared to $30.3 million in net revenue, which management believes is a non-GAAP financial measure, and which excludes the cost of media purchased for our clients, during the years ended December 31, 2003. See “Results of Operations” below for a reconciliation of revenue and cost of revenue as reported to net revenue and cost of revenue. Contributions to revenue made as a result of the acquisition of SBI.Razorfish were $40.8 million while the existing media and search business of Avenue A contributed $46.9 million to revenue during the year ended December 31, 2004. This represents a 55% increase in revenue from our existing media and search business during the year ended December 31, 2004. With the acquisition of SBI.Razorfish, our web development business accounts for the majority of the clients added during the year ended December 31, 2004, however the media and search portion of the business also experienced growth in customer base. As the integration of SBI.Razorfish progresses, we expect to see cross selling between the media, search and web development customer bases in the long term.

      The digital marketing services line of business experienced a decrease in income from operations as a percentage of revenue, to $13.0 million of income from operations, or 14.8% of revenue, during the year ended December 31, 2004 compared to $5.2 million, or 17.1% of net revenue, during the year ended December 31, 2003. This decrease is primarily due to the lower operating margins generated by the web development portion of this business since the acquisition of SBI.Razorfish in July 2004. For the web development business, both the addition of new clients and increased spending from existing clients requires a proportionately greater increase in client support expense in order to fulfill the client contracts than our media and search business. Whereas, in general, for our media and search business, increased spending from existing clients requires only modest increases in client support costs, while the addition of new clients results in a more significant increase in client support costs. As such, we expect the margins generated by the web development portion of this business to be relatively lower than those of our existing media and search business. However, we have implemented long-term initiatives to improve the margins and profitability of the web development portion of this line of business and anticipate the income from operations to increase as a percentage of revenue near the level of industry standards of approximately 15% in the future.

      Atlas provides digital marketing technologies to manage digital marketing programs and website effectiveness for advertising agencies and enterprise marketers, small and mid-size businesses and select publishers. We provide the following Atlas services for managing digital marketing programs:

      Our Atlas business offers digital marketing solutions for advertising agencies and enterprise marketers, small and mid-size businesses and publishers. We provide agencies and enterprise marketers with online campaign management through our proprietary digital marketing management system known as the Atlas Digital Marketing Suite, search marketing utilizing Atlas Search and website optimization solutions utilizing Atlas NetConversions. In addition, our Atlas OnePoint service offering provides solutions for small and mid-size businesses through paid search management and optimization to improve their search engine marketing

efforts. We also provide select publishers a technology product that enables them to increase revenue in connection with low value and unsold inventory through Atlas Publisher.

      Our digital marketing technologies line of business increased revenues to $60.9 million during the year ended December 31, 2004, compared to $33.4 million during the year ended December 31, 2003. This was achieved primarily through the increased use of Atlas technology by existing clients and the contributions in revenue from new clients added during the year. In addition, the growth in revenue was a result of our new technology service offerings provided from the acquisition of NetConversions in February 2004, and GO TOAST in December 2003. As a result of the growth in revenue, our digital marketing technologies line of business generated $26.1 million of income from operations, or 42.9% of revenue, during the year ended December 31, 2004 compared to $11.6 million, or 34.8% of revenue during the year ended December 31, 2003. The increase in operating income as a percentage of revenue is due to the relatively low incremental cost of providing Atlas services to new clients. During the year ended December 31, 2004, we continued to integrate the technologies purchased to support our search engine and rich media capabilities and enhance our existing Atlas Digital Marketing Suite, resulting in an increase in product development expenses. With the new client additions and recent acquisitions, we experienced increases in cost of revenue, sales and marketing and general and administrative, which are necessary to support this growth.

      Digital performance media includes DRIVEpm and MediaBrokers. We purchased MediaBrokers in July 2004. DRIVEpm and MediaBrokers serve as a liaison between online publishers and advertisers by buying blocks of online advertising inventory from publishers and reselling that inventory to advertisers on a highly targeted basis. We provide the following services for managing behavioral targeting programs:

      DRIVEpm offers both the Performance and Selector programs and MediaBrokers offers both the MediaBrokers PFP and CPM programs. Under the Performance and PFP programs, our clients designate specific actions desired and pay once the specified actions are achieved. Under the Selector and CPM programs, our clients can focus ad impressions on those users that fit a predetermined customer segment. Our digital performance media line of business had revenue of $9.4 million during the year ended December 31, 2004 and incurred $9.5 million in costs and expenses resulting in a $70,000 loss from operations. This business is in the early stage of development and as such, we expect increased growth and improved profitability in future periods.

Critical Accounting Policies and Judgments

      The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company’s most critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and that require 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. Based on this definition, we have identified the critical accounting policies and judgments addressed below. Although we believe that our estimates and assumptions are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions or conditions.

      Avenue A | Razorfish follows SOP 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” and recognizes revenue from fixed-fee consulting contracts as services are rendered using the percentage-of-completion method with progress-to-complete measured using labor hour inputs and milestone outputs, as applicable. Cost estimates on percentage-of-completion contracts are reviewed periodically with adjustments recorded in the period in which the revisions are made. Any anticipated losses on contracts are charged to operations as soon as they are determinable. Billings on uncompleted contracts may be less than or greater than the revenues recognized and are recorded as either unbilled receivable (an asset) or deferred revenue (a liability) in the consolidated financial statements.

      The complexity of the estimation process and factors relating to the assumptions, risks and uncertainties inherent with the application of the percentage-of-completion method of accounting affect the amounts of revenue and related expenses reported in our consolidated financial statements. A number of internal and external factors can affect our estimates, including labor rates, utilization and efficiency variances and specification and testing requirement changes.

      Revenue for all types of contracts is deferred in cases where we have not yet earned revenue but have billed the customer or received payment from the customer prior to providing the services. Revenue is recognized only when collection of the resulting receivable is reasonably assured.

      Revenue also includes any reimbursements received from our clients related to expenses incurred by our employees in servicing our clients. Such expenses include airfare, mileage, meals and hotel stays.

      Significant judgment is required to estimate the fair value of purchased assets and liabilities at the date of acquisition, including estimating future cash flows from the acquired business, determining appropriate discount rates, asset lives and other assumptions. Our process to determine the fair value of the non-compete agreements, customer relationships, developed technology and consulting service model includes the use of estimates including: the potential impact on operating results if the non-compete agreements were not in place; revenue estimates for customers acquired through the acquisition based on an assumed customer attrition rate; estimated costs willing to be incurred to purchase the capabilities gained through the developed technology and consulting service model; and appropriate discount rates based on the particular business’s weighted average cost of capital. Our estimates of an entity’s growth and costs are based on historical data, various internal estimates and a variety of external sources, and are developed as part of our routine long-range planning process.

      Goodwill is initially recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. We perform an annual review in the fourth quarter of each year, or more frequently if indicators of potential impairment exist at the reporting unit level, to determine if the recorded goodwill is impaired. A reporting unit level is defined as an operating segment or one level below an operating segment. This determination requires significant judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. Our impairment review process compares the fair value of the reporting unit to its carrying value, including the goodwill related to the reporting unit. To determine the fair value, our review process uses the income method and is based on a discounted future cash flow approach that uses estimates including the following for the reporting units: revenue based on assumed market segment growth rates; estimated costs; and appropriate discount rates based on the particular business’s weighted average cost of capital. Our estimates of market segment growth and costs are based on historical data, various internal estimates and a variety of external sources. In addition to being used in our goodwill impairment analysis, the same estimates are used in the planning for both our long-term and short-term business planning and forecasting. We test the reasonableness of the inputs and outcomes of our discounted cash flow analysis by comparison to available and comparable market data. Changes in these

estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment of each reporting unit. During the fourth quarter of 2004, we completed our most recent review which did not result in the recording of an impairment charge. We will perform our next annual review during the fourth quarter of 2005. We may incur charges for the impairment of goodwill in the future if a reporting unit fails to achieve our assumed revenue growth rates or assumed operating margin results.

      The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” The objectives of accounting for income taxes are to recognize the amount of taxes payable for the current year and deferred tax assets and liabilities for future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The Company performs periodic evaluations of recorded tax assets and liabilities and maintains a valuation allowance if deemed necessary. The determination of taxes payable for the current year includes estimates. In the event that actual results differ materially from management’s expectations, the estimated taxes payable could materially change, directly impacting the Company’s financial position or results of operations.

Estimates and Assumptions Related to Financial Statements

      The discussion and analysis of our financial condition and results of operations is based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those affecting revenues, the allowance for doubtful accounts, allowance for sales credits, intangible assets, goodwill, state, local and federal income taxes and general business contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

      Washington State tax authorities issued a ruling in 2002 that permits us to exclude amounts paid by us to purchase media for clients that is ultimately billed to and paid for by clients, from the measure of Washington State business and occupation tax. We received reporting instructions from Washington State tax authorities that disallows this exclusion after periods beginning in February 2003. We have since implemented tax planning strategies that may mitigate any potentially adverse tax consequences resulting from this change.

      The Company has been selected by the City of Seattle for a routine business and occupation tax audit. The period under audit is January 1, 1999 through September 30, 2003. The audit has not been completed. In managements’ judgment, the Company has complied with the Seattle Municipal Tax Code. The tax audit could result in findings that materially change taxes payable, directly impacting our financial position or results of operations.

Results of Operations

      The following table presents statements of operations data as reported for each of our lines of business for the years ended December 31, 2004, 2003 and 2002. Our discussion of revenue and cost of revenue for our digital marketing services segment also provides revenue and cost of revenue as if cost of media purchases were excluded (net revenue). Net revenue and cost of revenue for 2003 and 2002 are non-GAAP financial measures. We believe this net revenue and cost of revenue analysis facilitates a better comparison to results of our digital marketing services line of business in 2004 due to the contractual changes discussed previously.

Beginning January 1, 2004 all revenue from Avenue A | Razorfish is recorded net of media purchases. The results of any period are not necessarily indicative of results for any future period.

      The following table provides a reconciliation of revenue as reported in 2004, 2003 and 2002 to net revenue, which excludes the cost of media purchased for our Avenue A | Razorfish clients (in thousands):

      Revenue was $157.9 million during the year ended December 31, 2004 compared to $222.0 and $132.7 million during the years ended December 31, 2003 and 2002, respectively. Revenue increased in 2003 due to increased client spending and higher volumes of media purchased by digital marketing services on behalf of our Avenue A | Razorfish clients. Revenue decreased in 2004 as beginning on January 1, 2004, due to revised contractual arrangements with clients, digital marketing services generates all revenue under the net method, which excludes the cost of media purchased for our Avenue A | Razorfish clients. Prior to January 1, 2004 revenue was generated under the gross method and included the cost of media purchased for our Avenue A | Razorfish clients. The decrease in revenue attributable to recognizing revenue under the net method was offset by the contributions of the SBI.Razorfish acquisition.

      Revenue was $157.9 million during the year ended December 31, 2004 compared to $64.1 million and $41.2 million in net revenue during the years ended December 31, 2003 and 2002, respectively. Net revenue

increased during the years ended December 31, 2003 and 2004 due to acquisitions made in late 2003 and throughout 2004 in addition to increased product offerings, the addition of new clients and increased spending from our existing clients.

      Revenue from digital marketing services increased to $87.7 million during the year ended December 31, 2004, from $30.3 million and $22.5 million in net revenue for the years ended December 31, 2003 and 2002, respectively. The increase in revenue is primarily attributed to the acquisition of i-FRONTIER in November 2002 and SBI.Razorfish in July 2004 and increases in revenue from contributions made by new clients and increased spending from existing clients. During the year ended December 31, 2004, SBI.Razorfish contributed revenue of $40.8 million to the digital marketing services line of business. Excluding the revenue generated from SBI.Razorfish, revenue from digital marketing services was $46.9 million during the year ended December 31, 2004. In addition to new media and search clients, we experienced strong spending from several existing large clients as they expanded their online advertising budgets. With the acquisition of SBI.Razorfish in July 2004, we also experienced a significant decrease in our client concentration compared to 2003 and 2002. During the year ended December 31, 2004, our top five clients generated 26% of our revenue compared to 62% and 71% during the year ended December 31, 2003 and 2002, respectively.

      Revenue from digital marketing technologies increased to $60.9 million for the year ended December 31, 2004 from $33.4 million and $18.7 million for the years ended December 31, 2003 and 2002, respectively. The increase in revenue is primarily the result of increased use of the Atlas technology by existing customers combined with a consistent increase in client base over the past two years of both agencies and direct advertisers around the world. In addition, Atlas OnePoint and Atlas NetConversions contributed $7.4 million to revenue of digital marketing technologies during the years ended December 31, 2004 and none in 2003 and 2002.

      Revenue from digital performance media was $9.4 million during the year ended December 31, 2004 and is comprised of the gross value of the advertising space that was purchased for our clients and our fee for providing such service. Digital performance media consists of our DRIVEpm operating unit that was formed during the quarter ended December 31, 2003 and launched as a separate line of business to the public during the quarter ended March 31, 2004. In addition, digital performance media includes MediaBrokers, which was acquired in July 2004. During the year ended December 31, 2004, MediaBrokers contributed revenue of $2.8 million to the digital performance media line of business.

      The following table provides a reconciliation of cost of revenue as reported in 2004, 2003 and 2002 to net revenue, which excludes the cost of media purchased for our Avenue A | Razorfish clients (in thousands):

      Cost of revenue was $22.6 million during the year ended December 31, 2004, compared to $167.7 and $97.9 million during the years ended December 31, 2003 and 2002, respectively. Cost of revenue increased in 2003 primarily due to increased media purchases as a result of increased client spending in our digital marketing services line of business. Cost of revenue decreased in 2004 as beginning on January 1, 2004, we revised our contractual arrangements with clients such that cost of media purchased for our Avenue A | Razorfish clients is excluded from revenue and cost of revenue resulting in no cost of revenue for our digital marketing services line of business in 2004. Prior to January 1, 2004, the cost of revenue was generated under the gross method and included the cost of media purchased for our Avenue A | Razorfish clients

      Cost of revenue associated with our digital marketing technologies line of business consists primarily of the salaries and related expenses of the digital marketing technologies’ client support personnel and personnel

directly supporting the maintenance of our ad serving system. In addition, cost of revenue includes bandwidth and technology infrastructure costs associated with delivering advertisements over the Internet. Cost of revenue associated with digital marketing technologies increased to $14.7 million for the year ended December 31, 2004 from $9.4 million and $6.5 million for the years ended December 31, 2003 and 2002, respectively. The increase in cost of revenue was primarily due to increased headcount associated with client support for our digital marketing technologies line of business. The increased headcount was a result of the acquisitions of Atlas OnePoint in December 2003, NetConversions in February 2004, TechnologyBrokers in July 2004 and additional client support personnel necessary to support new Atlas clients. As of December 31, 2004, there were 63 client support personnel associated with digital marketing technologies, including 16 Atlas OnePoint and NetConversions client support personnel, compared to 30 and 9 as of December 31, 2003 and 2002, respectively. In addition, there were 29 production support personnel as of December 31, 2004 compared to 26 and 20 as of December 31, 2003 and 2002.

      Cost of revenue associated with our digital performance media line of business was $7.3 million for the year ended December 31, 2004, and relates to the cost of the advertising space that is purchased from websites to resell to our clients.

      Client support expenses associated with our digital marketing services line of business consist primarily of salaries and related expenses for client support personnel for our media, search and web development business, Avenue A | Razorfish. Client support expenses also include expenses for contractors retained for their specialized skill set to work on client projects. Client support expenses associated with digital marketing services increased to $65.5 million for the year ended December 31, 2004 from $20.6 million and $13.6 million for the years ended December 31, 2003 and 2002, respectively. The increase in client support expenses was primarily due to the acquisition of i-FRONTIER in November 2002, and SBI.Razorfish in July 2004. During the year ended December 31, 2004, SBI.Razorfish contributed $36.7 million in client support expenses associated with the digital marketing services line of business. In addition to the impact of the acquisition of SBI.Razorfish, the increase in client support expenses was due to increased salary and facilities expenses related to increased headcount necessary to support new clients and increased spending by existing clients. As of December 31, 2004 there were 813 client support personnel in our digital marketing services line of business, including 530 from the acquisition of SBI.Razorfish, compared to 213 and 113 as of December 31, 2002 and 2003, respectively.

      Client support expenses associated with our digital performance media consist primarily of salaries and related expenses for client support personnel for DRIVEpm and MediaBrokers. As of December 31, 2004, there were 18 client support personnel in our digital performance media line of business, including 10 from the acquisition of MediaBrokers. Client support expenses associated with digital performance media were $1.7 million during the year ended December 31, 2004 compared to $96,000 during the year ended December 31, 2003.

      Product development expenses consist primarily of salaries and related expenses for product development personnel. In addition, product development expenses include the costs of software development and the costs incurred in preparing new versions of our Atlas Digital Marketing Suite for marketing to external clients. Product development expenses increased to $6.2 million for the year ended December 31, 2004 compared to $4.0 million and $6.9 million for the years ended December 31, 2003 and 2002, respectively. The increase in product development expenses in 2004 was primarily due to an increase in product development personnel as a result of the acquisition of GO TOAST in December 2003 and development efforts toward integration of our search management and ad serving technologies. The increase is also attributed to lower capitalization of certain direct costs incurred in the development of our Atlas Digital Marketing Suite. During the year ended December 31, 2004, we capitalized $934,000 of certain direct costs in accordance with the guidance provided in Statement of Position 98-1 “Accounting for the Costs of Computer Software Developed or obtained for Internal Use.” Similarly, during the years ended December 31, 2003 and 2002, we capitalized $1.1 million and

$210,000, respectively, of such costs. The decrease in product development expenses in 2003 is due to the increase in capitalization of certain direct costs incurred in the development of our Atlas Digital Marketing Suite and changes in headcount as a result of the cost reduction programs initiated in late 2002 in which we terminated 16 product development personnel. As of December 31, 2004, there were 61 product development personnel compared to 42 and 32 as of December 31, 2003 and 2002, respectively.

      In general, our digital marketing services line of business acquires clients through a consultative approach using our existing client service teams. Sales and marketing expenses associated with our digital marketing services line of business consist primarily of salaries and related expenses for personnel dedicated entirely to the sales and marketing efforts of our interactive agency, Avenue A | Razorfish. In addition, sales and marketing expenses include professional service fees and marketing costs such as trade shows and the costs of advertising our services in trade publications. Sales and marketing expenses associated with digital marketing services increased to $1.6 million for the year ended December 31, 2004 from $803,000 and $1.3 million for the years ended December 31, 2003 and 2002, respectively. The increase in sales and marketing expenses was primarily due to the acquisition of SBI.Razorfish in July 2004. During the year ended December 31, 2004, SBI.Razorfish contributed $852,000 in sales and marketing expenses to the digital marketing services line of business. As of December 31, 2004 there were 10 sales and marketing personnel in our digital marketing services line of business, including 6 from the acquisition of SBI.Razorfish, compared to 3 and 2 as of December 31, 2003 and 2002, respectively.

      Sales and marketing expenses associated with our digital marketing technologies line of business consist primarily of salaries and related expenses for our sales force, including an agreement with TechnologyBrokers to provide sales of the Atlas Digital Marketing Suite in the U.K. This agreement was ended in late July 2004 in connection with the acquisition of TechnologyBrokers. In addition, these expenses include salaries of marketing personnel and marketing costs such as trade shows and the costs of advertising our services on the Internet. Sales and marketing expenses associated with digital marketing technologies increased to $7.3 million during the year ended December 31, 2004, from $4.1 million and $4.0 million for the years ended December 31, 2003 and 2002, respectively. The increase in sales and marketing expenses was primarily due to an increase in sales and marketing efforts in order to gain increased acceptance in the marketplace, especially in Europe. Prior to July 2004, we contracted with TechnologyBrokers to provide sales support to Atlas in the United Kingdom, and, in turn, we paid commissions based on a specified percentage of qualifying revenues. Subsequent to the acquisition in July 2004, we no longer pay commissions to TechnologyBrokers. In addition, the increase is attributed to the addition of Atlas OnePoint and Atlas NetConversion’s sales personnel and their related sales and marketing efforts. As of December 31, 2004 there were 28 sales and marketing personnel in our digital marketing technologies line of business compared to 18 and 18 as of December 31, 2003 and 2002, respectively.

      General and administrative expenses consist of the salaries and related expenses for executive, legal, finance, human resource, corporate IT and administrative personnel, professional fees, insurance and other general corporate expenses such as rent for our corporate headquarters in Seattle. General and administrative expenses included in our digital marketing services, technologies, and performance media lines of business consist primarily of a direct allocation of these corporate costs based on several allocation methods including headcount and the percentage of revenue generated by the respective entity. General and administrative expenses increased to $21.2 million for the year ended December 31, 2004 from $13.8 million and $12.4 million for the years ended December 31, 2003 and 2002, respectively. The increase in general and administrative expenses was partially due to the acquisition of SBI. Razorfish in July 2004 in which we acquired certain general and administrative personnel and costs. During the year ended December 31, 2004, SBI.Razorfish contributed $1.4 million in general and administrative expenses. The increase in general and administrative expenses was also due to increased headcount necessary to support the growth of our operating units including costs associated with continued development and support of a new corporate financial system.

In addition, we experienced increased expenses associated with efforts to comply with the new corporate governance requirements, as well as increases in performance-based compensation expenses. As of December 31, 2004, there were 108 general and administrative personnel, including 25 from the acquisition of SBI.Razorfish, compared to 44 and 30 as of December 31, 2003 and 2002, respectively.

      Amortization of intangible assets relates to intangible assets primarily consisting of customer relationships purchased through various acquisitions. Amortization of intangible assets was $4.0 million and $276,000 during the years ended December 31, 2004 and 2003, respectively. The increase in 2004 was due to the acquisition of GO TOAST in December 2003, NetConversions in February 2004 and SBI.Razorfish, TechnologyBrokers and MediaBrokers in July 2004. Amortization of the intangible assets associated with purchased technology is recorded as a cost of revenue and was $576,000 during the year ended December 31, 2004. Estimated future amortization expense for i-FRONTIER, GO TOAST, SBI.Razorfish, TechnologyBrokers and MediaBrokers for the next five years and thereafter is as follows (in thousands):

      Client reimbursed expenses include all reimbursable project expenses billed to customers. The reimbursements received from clients for these expenses are also recorded as a component of revenue. We recorded $1.3 million of client reimbursed expenses for the year ended December 31, 2004 and none for the years ended December 31, 2003 and 2002. The increase in client reimbursed expenses during the year ended December 31, 2004 is due to the SBI.Razorfish acquisition.

      Amortization of deferred stock compensation consists of expenses related to employee stock option grants with option exercise prices below the fair value of our common stock as of the date of grant. Deferred stock compensation was being amortized on an accelerated basis over the four-year vesting period of the applicable options. There is no amortization expense for deferred stock compensation for the year ended December 31, 2004 as deferred stock compensation was fully amortized as of December 31, 2003. Amortization of deferred stock compensation was $1.1 million and $2.7 million for the years ended December 31, 2003 and 2002, respectively.

      Corporate restructuring charges consist of severance costs and other expenses associated with our cost reduction program initiated during September 2002 when we terminated approximately 16 employees. Corporate restructuring charges for the year ended December 31, 2002 were $497,000 and related entirely to employee severance and benefits for terminated employees. There were no such charges for the years ended December 31, 2003 and 2004.

      Net interest and other income consist primarily of earnings on our cash, cash equivalents and short-term investments, and foreign currency transaction exchange gains and losses. Interest and other income, net was $1.9 million, $3.2 million and $3.7 million for the years ended December 31, 2004, 2003, and 2002,

respectively. The decrease in net interest and other income is primarily related to the decrease in cash, cash equivalents and short-term investments associated with our various acquisitions.

      Interest expense was $875,000, $33,000, and $129,000 during the years ended December 31, 2004, 2003 and 2002, respectively. During the year ended December 31, 2004, interest expense relates to the outstanding debt issued in connection with the acquisition of SBI.Razorfish in July 2004 which was subsequently paid off with a portion of the proceeds from the sale and issuance of new interest bearing convertible debt in August and September 2004. During the years ended December 31, 2003 and 2002, interest expense relates to an equipment term loan facility the Company borrowed under during November and December 1999 and July 2000. The Company repaid the outstanding principal and accrued interest in December 2002 and February 2003. The Company had no outstanding debt as of December 31, 2003.

      During the year ended December 31, 2002, we recorded an impairment of cost-basis investment of $50,000 related to a minority investment in a private company.

      During the year ended December 31, 2004, we incurred a $15.3 million net benefit to provision for income taxes. This is comprised of a decrease to our valuation allowance offset by the income tax provision for the year ended December 31, 2004. This compares to a $875,000 income tax provision for the year ended December 31, 2003. At December 31, 2004, we had a federal net operating loss carryforward of approximately $55.8 million related to U.S. federal and state jurisdictions. Utilization of net operating loss carryforwards and research and development credit carryforwards are subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended. Net operating loss carryforwards begin to expire at various times commencing in 2017.

      On January 1, 2002, we adopted SFAS No. 142 and completed a transitional impairment test for the intangible assets recorded in connection with the purchase of Avenue A/ NYC LLC during September 1999. Upon adoption of SFAS No. 142, we reclassified all previously recorded intangible assets as goodwill, as those assets, related to workforce and customer base, did not meet the criteria under SFAS No. 142 for separate identification. Furthermore, as a result of the impairment test, we recorded an impairment charge of $1.3 million during the year ended December 31, 2002 that has been recognized as a cumulative effect on prior years of a change in accounting principle in the accompanying consolidated financial statements.

Liquidity and Capital Resources

      Since our inception, we have financed our operations primarily through the net proceeds from private sales of equity securities, which raised $30.4 million through December 31, 1999, and our initial public offering of common stock, which raised $132.5 million during the first quarter of 2000. In addition, we issued $74.7 million in convertible debt to the sellers of SBI.Razorfish in connection with its acquisition in July 2004. This was subsequently paid off with the proceeds from the sale in September and August 2004 of $80.0 million in convertible senior subordinated notes due 2024.

      As of December 31, 2004, we had cash and cash equivalents of $24.6 million, short-term investments of $34.7 million and $80 million of outstanding convertible debt.

      Net cash provided by operating activities was $38.9, $20.6 and $12.2 million during the years ended December 31, 2004, 2003 and 2002, respectively. Our net cash provided by operating activities is primarily a

result of our net income (loss) adjusted by non-cash expenses such as depreciation and amortization and changes in working capital components, which are influenced by the timing of cash collections from our clients and cash payments for purchases of media and other expenses.

      The changes in working capital are significantly influenced by the increases in accounts receivable due to both the organic growth in the business and the new growth resulting from the recent acquisitions. Due to this growth, we have experienced changes in the composition of our accounts receivables and this change has increased the timing of cash collections from our clients. The growth in the business is also contributing to the increases in amounts owed for media and other purchases.

      In addition to the effect of organic growth and growth from recent acquisitions on working capital, we believe that beginning in 2004, the change in the contractual terms with our clients influenced our cash flow from operating activities. The timing of payments for media purchases is now directly influenced by the timing of payment received from our clients for such media purchases. Under our prior Avenue A | Razorfish contract structure in 2003, we were liable for media purchases for our clients and the payment of publisher invoices was not dependent on receipt of payment from our clients. As such, during the year ended December 31, 2003, the cash generated from operating activities was influenced by the timing of payments received from clients. Effective January 1, 2004, under our new contract structure, Avenue A | Razorfish’s clients are directly liable for media purchases and we are not contractually required to pay publisher invoices without previous payment from our client for that media purchase.

      Our investing activities include the purchase and sale of short term investments, purchases of property and equipment and the funding of acquisitions. Net cash used in investing activities was $55.2 million, $21.7 million and $7.9 million for the years ended December 31, 2004, 2003 and 2002, respectively.

      In accordance with our investment policy, we purchase primarily investment-grade marketable securities. Net cash from investing activities relates primarily to the timing of the purchases and sales of these marketable securities. During the year ended December 31, 2004 we had net sales of marketable securities of $55.0 million to meet funding requirements for the various acquisitions completed in 2004. During the years ended December 31, 2003 and 2002 we had net purchases of $3.1 million and $2.8 million, respectively. The increase in 2003 is due to increases in excess cash and cash equivalents available for reinvestment

      Capital expenditures relate primarily to the purchase of computers and software for general operational purposes, including our ad serving capabilities and the development of our proprietary technology, and leasehold improvements for our facilities. During the year ended December 31, 2004, 2003 and 2002, capital expenditures were $12.3 million, $6.1 million and $2.2 million, respectively.

      In February 2004, we purchased NetConversions for $4.6 million. We acquired $60,000 of cash and incurred acquisition costs of $136,000. An additional amount up to $550,000 in cash could be paid upon completion of certain post-closing requirements.

      In July 2004, we purchased TechnologyBrokers and MediaBrokers for approximately $3.4 million. We acquired $348,000 of cash and incurred acquisition costs of $116,000. In addition, approximately $762,000 of excess working capital, as defined by the purchase and sale agreement, will be paid to the previous owners.

      In July 2004, we purchased SBI.Razorfish for approximately $164.3 million, which includes $4.3 million in acquisition costs. The purchase was funded using $85.3 million in cash and $74.7 million in convertible debt.

      In December 2003, we purchased GO TOAST for approximately $14.2 million. We acquired $47,000 of cash and incurred $145,000 in acquisition costs. Upon acquisition in 2003, we paid $12.4 million in cash and $1.3 million in common stock (139,669 shares at $9.43 per share). In 2004 upon completion of certain post closing requirements of the purchase and sale agreement, we paid an additional $200,000 to the previous owners.

      In November 2002, we purchased i-FRONTIER for approximately $5.0 million. We acquired $2.0 million in cash and incurred $191,000 in acquisition costs. Upon acquisition in 2002, we paid $4.8 million to the previous owner and in 2004 we paid $176,000 upon completion of certain post closing requirements of the purchase and sale agreement. The purchase agreement provides for contingent payments in 2004 and 2006 which are determined based upon the operating results of i-FRONTIER through December 31, 2005. Based on the earnings results of i-FRONTIER for the years ended December 2002 and 2003, the first contingency payment earned by i-FRONTIER was $1.5 million and $715,000 of this amount was paid to i-FRONTIER’s previous owner in October 2004 after offset with certain receivables.

      Our financing activities primarily relate to the proceeds from and payments made on notes payable and the proceeds from issuance of common stock through our stock option and employee stock purchase plans.

      In 2002 and 2001, we entered into an equipment term loan facility totaling $5.5 million to finance the purchase of computer equipment used for general operational purposes. In 2003 and 2002, we paid $1.6 million and $2.0 million on these notes payable. As of December 31, 2003, we had no outstanding debt. In August and September 2004, we sold approximately $80.0 million in convertible senior subordinated notes, the proceeds of which were used to redeem 100% of the convertible notes issued in connection with the acquisition of SBI.Razorfish. In connection with the offering, we also paid $2.3 million in debt issuance costs. See discussion of interest and principal payments in Note 12 of our Notes to Consolidated Financial Statements.

      Proceeds from the exercises of common stock options and issuance of common stock through our employee stock purchase plan were $5.1 million, $3.1 million and $926,000 for the years ended December 31, 2004, 2003 and 2002 respectively. The increase in proceeds each year is due to the increase in the fair value of our common stock, increased volume of stock option exercises and an increased employee base participating in our employee stock purchase plan.

      With the acquisition of SBI.Razorfish, we have experienced a significant increase in operating expenditures, including the addition of interest expense associated with the $80.0 million in senior subordinated convertible notes. Interest costs will continue to result in a material use of our cash resources. We also estimate an increase in revenue in 2005 related to both traditional aQuantive service lines and new services provided through the acquisition of SBI.Razorfish. We believe that our current cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for working capital, capital expenditures, and debt service for at least the next 12 months.

      As of December 31, 2004, we had material commitments related to our convertible debt and operating leases for office space and office equipment. In addition, we had material obligations related to ad content delivery services. The following are our contractual commitments and obligations as of December 31, 2004 (in thousands):

      The i-FRONTIER purchase agreement provides for future contingent payments in 2004 and 2006, which are determined based upon the operating results of i-FRONTIER through December 31, 2005. Any contingent payments will be recorded as goodwill when actual amounts are determined, due to the uncertainty of achieving these results. The calculation of the contingent payments is based upon a combination of a multiple of earnings through December 31, 2005 and an amount equal to the value of net assets at the date of acquisition. The agreement includes an interim payment based upon i-FRONTIER earnings during the two years ending December 31, 2003, which is partially refundable based upon i-FRONTIER earnings during the four years ending December 31, 2005. In October 2004, we paid the previous owner of i-FRONTIER consideration in the amount of $1.5 million for this interim payment. In the event that i-FRONTIER achieves results consist with management’s estimates, we estimate that the final contingency payment will be between $22.0 million and $26.0 million and there is no maximum payment specified in the agreement.

      The GO TOAST purchase agreement provides for future contingent payments in 2005 and 2006, which will be determined based upon the actual revenue results of GO TOAST through December 31, 2005. These payments will be recorded when the actual amounts are determined, due to the uncertainty of achieving these results. Any contingent payments will be recorded as goodwill. The agreement includes an interim payment based upon GO TOAST revenue during the year ending December 31, 2004 and a final payment based on revenue during the two years ending December 31, 2005. In the event that GO TOAST achieves results consist with management’s estimates, we estimate the total contingency payments to be between $500,000 and $2.4 million with a maximum potential payment of $4.0 million.

      The NetConversions purchase agreement provides for future contingent payments from 2004 to 2006 based on actual earnings results of NetConversions through January 31, 2006. These payments will be recorded when the actual amounts are determined, due to the uncertainty of achieving these results. The first contingency payment shall be paid after the month in which a certain operating income milestone is met and the second contingency payment shall be made in 2006 based upon the cumulative earnings of NetConversions through January 31, 2006. In the event that NetConversions achieves results consist with management’s estimates, we estimate the total contingency payments will be between $375,000 and $1.1 million with a maximum potential payment of $2.5 million.

      The TechnologyBrokers and MediaBrokers purchase agreement provides for future contingent payments, which shall be paid provided certain earnings thresholds are met through July 31, 2006. These payments will be recorded when the actual amounts are determined, due to the uncertainty of achieving these results. The payments will be adjusted based on actual earnings through July 31, 2006. In the even that TechnologyBrokers and MediaBrokers achieves results consist with management’s estimates, we estimate these payments will be between $3.0 and $9.0 million and there is no maximum payment specified in the agreement.

      In 2005, we expect the growth of the industry to continue, however at a somewhat slower rate than in 2004. While 2003 and 2004 online advertising growth was largely driven by search, we believe that in 2005 we will see growth driven by increases in the use of rich media (including video-targeting) and performance media. We believe the Company will benefit from this growth as we play key roles in these growth areas. In each of our businesses we expect to grow our customer bases, and will be targeting increased spending from existing customers. Although most of our revenue and profits will continue to be generated domestically, we expect to make more investments to support international growth. We believe that international markets represent long-term growth opportunities for us, and we anticipate greater international expansion. Accordingly, we anticipate revenues of $250.0 to $260.0 million in 2005, compared to $157.9 million in 2004. We anticipate adopting SFAS No. 123 (revised 2004), “Share-Based Payments” (SFAS 123R) in the three months ended September 31, 2005 and expect it to have a material impact on net income for the year ending December 31, 2005. See “Recent Accounting Pronouncements” below for additional information.

Recent Accounting Pronouncements

      In December 2004, the FASB issued SFAS 123R, which requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in an entity’s statement of income. The accounting provisions of SFAS 123R are effective for reporting periods beginning after June 15, 2005. The Company is required to adopt SFAS 123R in the quarter ending September 30, 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. See “Stock-Based Compensation” under Note 2 of our consolidated financial statements as of and for the year ended December 31, 2004 for the pro forma net income (loss) and net income (loss) per share amounts, for the fiscal years ended December 31, 2004, 2003 and 2002, as if the Company had applied the fair value recognition provisions of SFAS 123 to measure compensation expense for employee stock incentive awards. The Company has completed a preliminary evaluation of the impact of adopting SFAS 123R and estimates that it will have a material impact on income from operations for the six months ended December 31, 2005. This estimate is based on preliminary information available to the Company and could materially change based on actual facts and circumstances arising during the six months ended December 31, 2005.

Other Events

      In accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the Exchange Act), and our insider trading policy, Nicolas J. Hanauer, a cofounder of the Company and Chairman of the Company’s Board of Directors, entered into a sales plan on February 25, 2005. The sales plan, which terminates in February 2006, provides for the sale of up to a maximum of 750,000 shares of common stock that he currently owns. Sales executed under this plan will be reported on Forms 4 as required under Section 16 of the Exchange Act.

      In March 2004, Brian McAndrews, the Chief Executive Officer and a member of our Board of Directors, also adopted a 10b5-1 stock trading plan in accordance the Exchange Act and our insider trading policy. The sales plan, which terminates in December 2005, provides for the sale of up to a maximum of 500,000 shares of common stock that he currently owns or plans to acquire upon exercise of outstanding employee stock options. Sales executed under this plan will be reported on Forms 4 as required under Section 16 of the Exchange Act.

      Messrs. Hanauer and McAndrews entered into their sales plans in order to diversify their investment portfolios. Rule 10b5-1 permits the implementation of a written prearranged plan entered into at a time when the insider is not aware of any material nonpublic information and allows the insider to trade on a regularly scheduled basis as specified in the plan regardless of any material nonpublic information thereafter received by the insider. These plans generally allow corporate insiders to gradually diversify holdings of stock while minimizing any market effects of such trades by spreading them out over an extended period of time. The shares subject to these sales plans constitute approximately 13% and 19% of the shares, including shares subject to issuance upon exercise of options, currently held by Messrs. Hanauer and McAndrews, respectively.

      Except as required by law, by disclosing this information, we do not undertake to report modifications to or a termination of this trading plan, nor the establishment of future trading plans by these officers or other officers or directors of aQuantive.

      Our exposure to market risk is limited to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term, investment-grade debt securities issued by corporations and U.S. government agencies. We place our investments with high-quality issuers and limit the amount of credit exposure to any one issuer. Due to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure. We do not have any foreign currency or other derivative financial instruments.

      The following consolidated financial statements and supplementary data are included beginning on page 40 of this Report.

AQUANTIVE, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

aQuantive, Inc.:

      We have audited the accompanying consolidated balance sheets of aQuantive, Inc. and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2004. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

      We conducted our audits 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of aQuantive, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

      We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of aQuantive, Inc.’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

Seattle, Washington

March 15, 2005

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

aQuantive, Inc.:

      We have audited management’s assessment, included in the accompanying Management’s report on internal control over financial reporting appearing under Item 9A that aQuantive, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

      We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

      In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

      The Company acquired NetConversions, SBI.Razorfish, TechnologyBrokers and MediaBrokers during 2004, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, NetConversions, SBI.Razorfish, TechnologyBrokers, and MediaBrokers’s internal control over financial reporting associated with total assets of $189.8 million and total revenues of $48.9 million included in the consolidated financial statements of the Company and subsidiaries as of and for the year ended December 31, 2004. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of NetConversions, SBI.Razorfish, TechnologyBrokers, and MediaBrokers.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2004 and 2003, and the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2004, and our report dated March 15, 2005 expressed an unqualified opinion on those consolidated financial statements.

Seattle, Washington

March 15, 2005

AQUANTIVE, INC.

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

AQUANTIVE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

See accompanying notes to consolidated financial statements.

AQUANTIVE, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY