VALUECLICK INC/CA - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-30135

VALUECLICK, INC.

(Exact name of registrant as specified in its charter)

Delaware		77-0495335
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4353 PARK TERRACE DRIVE WESTLAKE VILLAGE, CALIFORNIA 91361
(Address of principal executive offices, including zip code)

(818) 575-4500
(Registrant’s telephone number, including area code)

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 ý No o

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

The number of shares of the registrant’s common stock outstanding as of July 30, 2004 was 80,080,167.

VALUECLICK, INC.

INDEX TO FORM 10-Q FOR THE

QUARTERLY PERIOD ENDED JUNE 30, 2004

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003
	Condensed Consolidated Statements of Operations and Comprehensive Income for the Three-month Periods Ended June 30, 2004 and 2003 (unaudited)
	Condensed Consolidated Statements of Operations and Comprehensive Income for the Six-month Periods Ended June 30, 2004 and 2003 (unaudited)
	Condensed Consolidated Statements of Cash Flows for the Six-month Periods Ended June 30, 2004 and 2003 (unaudited)
	Notes to the Condensed Consolidated Financial Statements (unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosure about Market Risk
Item 4.	Controls and Procedures

PART II.	OTHER INFORMATION AND SIGNATURES
Item 1.	Legal Proceedings
Item 2.	Changes in Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
	Signature

	Certification of CEO - Sarbanes-Oxley Act Section 302
	Certification of CFO - Sarbanes-Oxley Act Section 302
	Certification of CEO and CFO - Sarbanes-Oxley Act Section 906

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VALUECLICK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	June 30, 2004			December 31, 2003
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	25,691		$	36,642
Marketable securities	213,581			183,478
Accounts receivable, net	20,031			21,942
Income taxes receivable	5			440
Deferred tax assets	1,309			1,446
Prepaid expenses and other current assets	2,339			1,768
Total current assets	262,956			245,716
Property and equipment, net	9,681			10,559
Goodwill	49,625			49,375
Intangible assets, net	14,246			15,974
Other assets	1,436			1,475
TOTAL ASSETS	$	337,944		$	323,099

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	29,863		$	29,567
Income taxes payable	641			811
Deferred revenue	1,252			1,264
Capital lease obligation, current portion	177			265
Total current liabilities	31,933			31,907
Capital lease obligation, less current portion	349			187
Deferred tax liabilities	1,745			1,996
Other non-current liabilities	2,022			3,493
Total liabilities	36,049			37,583
Minority interest in consolidated subsidiary	—			11,309
STOCKHOLDERS’ EQUITY:
Convertible preferred stock, $0.001 par value; 20,000,000 shares authorized; no shares issued or outstanding at June 30, 2004 and December 31, 2003	—			—
Common stock, $0.001 par value; 500,000,000 shares authorized; 80,062,104 and 77,953,774 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively	80			78
Additional paid-in capital	348,644			339,597
Deferred stock compensation	(751		)	(1,163		)
Accumulated deficit	(45,421		)	(64,383		)
Accumulated other comprehensive (loss) income	(657		)	78
Total stockholders’ equity	301,895			274,207
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	337,944		$	323,099

See accompanying Notes to Condensed Consolidated Financial Statements

VALUECLICK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share data)

	Three-month Period Ended June 30,
	2004			2003
	(Unaudited)

Revenue	$	34,606		$	20,086
Cost of revenue	11,416			6,947
Gross profit	23,190			13,139
Operating expenses:
Sales and marketing (excludes stock-based compensation of $56 and $31 for 2004 and 2003, respectively)	7,198			4,931
General and administrative (excludes stock-based compensation of $89 and $50 for 2004 and 2003, respectively)	5,931			4,634
Product development (excludes stock-based compensation of $29 and $16 for 2004 and 2003, respectively)	4,168			2,497
Stock-based compensation	174			97
Amortization of intangible assets	864			342
Restructuring reserve reversal	(1,003		)	—
Total operating expenses	17,332			12,501

Income from operations	5,858			638
Interest income, net	843			934
Income before taxes and minority interest	6,701			1,572
Provision for income taxes	1,187			233
Income before minority interest	5,514			1,339
Minority share of income of consolidated subsidiary	—			(55		)
Net income	$	5,514		$	1,284

Other comprehensive income (loss):
Foreign currency translation adjustment	218			68
Unrealized gain (loss) on marketable securities, net of tax	(1,026		)	389
Comprehensive income	$	4,706		$	1,741

Net income per common share:
Basic	$	0.07		$	0.02
Diluted	$	0.07		$	0.02

Weighted-average shares used to calculate net income per common share:
Basic	79,459			73,881
Diluted	83,816			77,226

See accompanying Notes to Condensed Consolidated Financial Statements

VALUECLICK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share data)

	Six-month Period Ended June 30,
	2004			2003
	(Unaudited)

Revenue	$	71,315		$	39,549
Cost of revenue	22,545			13,448
Gross profit	48,770			26,101
Operating expenses:
Sales and marketing (excludes stock-based compensation of $133 and $61 for 2004 and 2003, respectively)	14,643			9,909
General and administrative (excludes stock-based compensation of $211 and $100 for 2004 and 2003, respectively)	12,582			9,086
Product development (excludes stock-based compensation of $68 and $33 for 2004 and 2003, respectively)	8,244			5,069
Stock-based compensation	412			194
Amortization of intangible assets	1,728			654
Restructuring reserve reversal	(1,003		)	—
Total operating expenses	36,606			24,912

Income from operations	12,164			1,189
Gain on sale of equity interest in Japan subsidiary	8,007			—
Interest income, net	1,539			1,973
Income before taxes and minority interest	21,710			3,162
Provision for income taxes	2,878			618
Income before minority interest	18,832			2,544
Minority share of loss (income) of consolidated subsidiary	130			(74		)
Net income	$	18,962		$	2,470

Other comprehensive income (loss):
Foreign currency translation adjustment	137			(298		)
Unrealized (loss) gain on marketable securities, net of tax	(872		)	218
Comprehensive income	$	18,227		$	2,390

Net income per common share:
Basic	$	0.24		$	0.03
Diluted	$	0.23		$	0.03

Weighted-average shares used to calculate net income per common share:
Basic	78,935			73,727
Diluted	83,566			76,520

See accompanying Notes to Condensed Consolidated Financial Statements

VALUECLICK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Six-month Period Ended June 30,
	2004			2003
	(Unaudited)
Cash flows from operating activities:
Net income	$	18,962		$	2,470
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	4,822			3,493
Tax benefit from stock option exercises	3,032			—
Provision for bad debts	370			599
Stock-based compensation	412			194
Minority share of (loss) income of consolidated subsidiary	(130		)	74
Provision for deferred income taxes	(380		)	27
Non-cash restructuring reversal	(1,003		)	—
Gain on sale of equity interest in Japan subsidiary	(8,007		)	—
Changes in operating assets and liabilities, net of the effects of disposition of consolidated subsidiary	410			(281		)
Net cash provided by operating activities	18,488			6,576

Cash flows from investing activities:
Purchase of marketable debt securities	(89,049		)	(80,637		)
Proceeds from the sale of marketable debt securities	54,143			94,145
Sale of equity interest in Japan subsidiary, net	2,351			—
Purchases of property and equipment	(3,356		)	(1,543		)
Purchases of intangible assets	—			(811		)
Net cash used in purchased business combinations	—			(4,613		)
Net cash (used in) provided by investing activities	(35,911		)	6,541

Cash flows from financing activities:
Purchase of treasury stock	—			(9,161		)
Proceeds from the exercises of common stock options	6,017			543
Repayments of notes payable and capital leases, net	(238		)	(764		)
Net cash provided by (used in) financing activities	5,779			(9,382		)
Effect of currency translations	693			(298		)
Net (decrease) increase in cash and cash equivalents	(10,951		)	3,437

Cash and cash equivalents, beginning of period	36,642			27,066
Cash and cash equivalents, end of period	$	25,691		$	30,503

See accompanying Notes to Condensed Consolidated Financial Statements

VALUECLICK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. THE COMPANY AND BASIS OF PRESENTATION

The condensed consolidated financial statements are unaudited and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. As required by the Securities and Exchange Commission (the “SEC”) under Rule 10-01 of Regulation S-X, the accompanying condensed consolidated financial statements and related footnotes have been condensed and do not contain certain information that may be included in ValueClick, Inc.’s annual consolidated financial statements and footnotes thereto. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in ValueClick, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, filed with the SEC on March 15, 2004.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.

The condensed consolidated financial statements include the accounts of ValueClick, Inc. and its subsidiaries (collectively “ValueClick” or the “Company”) from the beginning of the accounting month nearest to the dates of their respective acquisitions.

ValueClick provides digital marketing solutions and advertising technology tools. ValueClick offers a broad range of media and technology products and services to its customers to allow them to address all aspects of the digital marketing process, from pre-campaign to execution, including measurement and campaign refinements.

The Company derives its revenue from three reportable business segments based on the types of products and services provided. These business segments are Media, Affiliate Marketing and Technology.

MEDIA —ValueClick’s Media business segment provides a comprehensive suite of online media services and tailored programs that help marketers create awareness, attract visitors and generate leads and sales through the Internet. The Company’s Media segment has grown both organically and through the acquisition of complementary firms such as Search123.com, completed in May 2003, and Hi-Speed Media, completed in December 2003.

The Company offers advertisers and agencies a range of online media solutions in the categories of Web/Display Advertising, Email Marketing, Lead Generation Marketing, and Search Marketing. The Company has aggregated thousands of online publishers to provide advertisers and agencies with access to one of the largest online advertising networks.

The Company’s Media services are sold on a variety of pricing models, including cost-per-impression (CPM), cost-per-click (CPC), cost-per-lead (CPL) and cost-per-action (CPA).

AFFILIATE MARKETING —The ValueClick Affiliate Marketing business segment operates through its wholly-owned subsidiaries Be Free, acquired on May 23, 2002, and Commission Junction, acquired on December 7, 2003.

The Company’s Affiliate Marketing segment offers technology and services that enable advertisers to manage, track and analyze a variety of online marketing programs. Specifically, the Company’s affiliate marketing services enable its advertiser clients to: build relationships with affiliate partners, manage the offers they make available to their affiliate partners, track the online traffic, leads and sales that these offers drive to the advertiser’s Website, analyze the effectiveness of the offers and affiliate partners and track the commissions due to their affiliates.

ValueClick’s affiliate marketing services address the needs of advertisers that seek to build and manage a private-labeled network of third party online publishers, as well as advertisers that wish to conduct an affiliate marketing program through the Company’s existing network of third party online affiliate publishers. Affiliate Marketing revenues are driven by a combination of fixed fees and variable compensation that is based on either a cost-per-lead (CPL) basis or on a percentage of transaction revenue generated from the programs managed with the Company’s affiliate marketing platforms.

TECHNOLOGY —ValueClick’s Technology business segment operates through its wholly-owned subsidiaries Mediaplex, Inc. (“Mediaplex”) and AdWare Systems, Inc. (“AdWare”), which were acquired in 2001.

Mediaplex offers technology infrastructure tools and services that enable advertisers, advertising agencies and online publishers to implement and manage their own online display advertising and email campaigns. Mediaplex’s products are based on its proprietary MOJO® technology platform, which has the ability to automatically configure messages in response to real-time information from a marketer’s enterprise data system and to provide ongoing campaign optimization. Mediaplex’s revenues are primarily derived from software access and use charges paid by its software clients. These fees vary based on the client’s use of the technology.

AdWare is an applications service provider (“ASP”) delivering high-quality information management systems to advertising agencies, marketing communications companies, and public relations agencies. AdWare’s revenue is generated primarily from monthly service fees paid by customers over the service periods.

2. RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2003, the FASB issued Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities. Until this interpretation, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN No. 46 requires a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns. FIN No. 46 is effective for reporting periods ending after December 15, 2003. In December 2003, the FASB issued Interpretation 46R (FIN 46R), a revision to FIN 46. FIN 46R clarifies some of the provisions of FIN 46 and exempts certain entities from its requirements. FIN 46R is effective at the end of the first interim period ending after March 15, 2004. Entities that have adopted FIN 46 prior to this effective date can continue to apply the provisions of FIN 46 until the effective date of FIN 46R or elect early adoption of FIN46R. This statement does not have a material impact on the Company’s financial statements.

3. RECENT BUSINESS COMBINATIONS AND DIVESTITURE

Sale of ValueClick Japan. On March 26, 2004, the Company completed the sale of its approximate 59% equity interest in ValueClick Japan, Inc. to livedoor Co., Ltd., a Japanese Internet and technology product and services company. The Company received approximately $24 million in cash, excluding transaction fees. In addition, the Company will continue to provide services to ValueClick Japan including licensing of technology and technical support under a cancelable support agreement for specified fees. This transaction resulted in a gain on sale of approximately $8.0 million, which was fully offset by the anticipated utilization of capital loss carryforwards generated by the Company in prior years. The sale did not qualify as a discontinued operation and as such, the operating results of ValueClick Japan are included in the Company’s operating results through the date of disposition.

Hi-Speed Media, Inc. On December 17, 2003, the Company completed the acquisition of Hi-Speed Media, Inc., a California corporation (“Hi-Speed Media”), pursuant to an Agreement and Plan of Merger, dated as of December 7, 2003, by and among ValueClick, Inc., HS Acquisition Corp., a wholly-owned subsidiary of ValueClick, Hi-Speed Media, the shareholders of Hi-Speed Media and Farshad Fardad, in his capacity as Shareholder Agent. Hi-Speed Media provides e-mail marketing services.

The Company accounted for the acquisition under the purchase method. Accordingly, the results of Hi-Speed Media’s operations are included in the Company’s consolidated financial statements from the beginning of the accounting period nearest to the date of acquisition. Under the terms of the agreement, ValueClick acquired all of the outstanding capital stock of Hi-Speed Media for an aggregate purchase price of approximately $9.0 million in cash and additional contingent cash consideration of up to $1.0 million per quarter, assuming the achievement of certain revenue and operating income milestones over the eight quarters beginning January 1, 2004. Contingent cash consideration earned for the three and six months ended June 30, 2004 totaled approximately $250,000. In connection with the transaction, Hi-Speed Media’s outstanding employee stock options were converted into options to purchase approximately 80,000 shares of ValueClick common stock with an estimated aggregate fair value of $389,000.

Commission Junction, Inc. On December 7, 2003, the Company completed the acquisition of Commission Junction, Inc., a Delaware corporation (“Commission Junction”), pursuant to an Agreement and Plan of Merger and Reorganization, dated as of October 9, 2003, by and among ValueClick, NCJ Acquisition Corp., a wholly-owned subsidiary of ValueClick, Commission Junction and Idealab Holdings LLC, a Delaware limited liability company, in its capacity as Stockholder Agent. Pursuant to the terms of the

merger agreement, Commission Junction was merged with and into NCJ Acquisition and became a wholly-owned subsidiary of ValueClick. Commission Junction runs an affiliate marketing business, which provides technology and services that enable advertisers to manage, track and analyze a variety of online marketing programs.

The Company accounted for the acquisition under the purchase method. Accordingly, the results of Commission Junction’s operations are included in the Company’s consolidated financial statements from the beginning of the accounting period nearest to the date of acquisition. Pursuant to the terms of the agreement, ValueClick acquired all the outstanding capital stock of Commission Junction for approximately 3.0 million shares of ValueClick common stock, valued at approximately $29.5 million, and approximately $26.1 million in cash. The cash portion of the purchase price was derived from existing working capital. Additionally, outstanding options to acquire common stock of Commission Junction were converted into an aggregate of 1.2 million options to acquire ValueClick common stock with an estimated aggregate fair value of $6.1 million.

Search123.com Inc. On May 30, 2003, the Company completed the acquisition of Search123.com Inc. (“Search123”). Under the terms of the merger agreement, a wholly-owned subsidiary of ValueClick was merged with and into Search123, with Search123 surviving as a wholly-owned subsidiary of ValueClick. Search123 is a search marketing company that allows marketers to find prospective customers who are actively engaged in researching and buying products and services online.

The Company accounted for the acquisition under the purchase method. Accordingly, the results of Search123’s operations are included in the Company’s consolidated financial statements from the beginning of the accounting period nearest to the date of acquisition. The aggregate consideration, constituting the purchase price of approximately $4.9 million, included a cash payment of $3.2 million, the assumption of a net working capital deficit of $1.5 million and transaction costs of approximately $200,000.

The historical operating results of Hi-Speed Media, Commission Junction and Search123 prior to the acquisition date have not been included in the Company’s historical condensed consolidated operating results. Pro forma data (unaudited) for the three- and six-month periods ended June 30, 2004 and 2003 as if these acquisitions had been effective as of January 1, 2003, and excluding the results of the Company’s investment in ValueClick Japan as if the sale had been effective as of January 1, 2003, is as follows (in thousands, except per share data):

	Three-month Period Ended June 30, 2004		Six-month Period Ended June 30, 2004
Revenue	$	34,606	$	69,509
Net income	$	5,514	$	19,077
Basic net income per share	$	0.07	$	0.24
Diluted net income per share	$	0.07	$	0.23

	Three-month Period Ended June 30, 2003		Six-month Period Ended June 30, 2003
Revenue	$	26,587	$	52,202
Net income	$	1,064	$	1,966
Basic net income per share	$	0.01	$	0.03
Diluted net income per share	$	0.01	$	0.03

4. STOCK COMPENSATION

The Company accounts for its employee stock option plan in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and the related interpretations of FASB Interpretation (FIN) No. 44, “Accounting for Certain Transactions involving Stock Compensation.” Accordingly, compensation expense related to employee stock options is recorded only if, on the date of the grant, the fair value of the underlying stock exceeds the exercise price.

The following table illustrates the effect on stock-based compensation, net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

	Three-month Period Ended June 30,						Six-month Period Ended June 30,
	2004			2003			2004			2003
	(In thousands)						(In thousands)

Net income, as reported	$	5,514		$	1,284		$	18,962		$	2,470
Add:
Stock-based employee compensation included in reported net income, net of related tax effects	174			97			412			194
Deduct:
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(794		)	(348		)	(1,824		)	(782		)
Net income, pro forma	$	4,894		$	1,033		$	17,550		$	1,882

Net income per share:
Basic—as reported	$	0.07		$	0.02		$	0.24		$	0.03
Diluted—as reported	$	0.07		$	0.02		$	0.23		$	0.03
Basic—pro forma	$	0.06		$	0.01		$	0.22		$	0.03
Diluted—pro forma	$	0.06		$	0.01		$	0.21		$	0.02

5. ACCOUNTS RECEIVABLE

Accounts receivable are stated net of an allowance for doubtful accounts and returns of $2,183,000 and $2,060,000 at June 30, 2004 and December 31, 2003, respectively.

6. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (in thousands):

	June 30, 2004			December 31, 2003

Computer equipment	$	23,055		$	22,321
Furniture and equipment	3,036			3,124
Vehicles	41			35
Leasehold improvements	750			558
	26,882			26,038
Less: accumulated depreciation	(17,201		)	(15,479		)
	$	9,681		$	10,559

7. MARKETABLE SECURITIES

Marketable securities as of June 30, 2004 consist primarily of marketable debt securities in high-grade corporate and government securities with maturities of less than two years. All of the Company’s investments are classified as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported in a separate component of stockholders’ equity within the accumulated other comprehensive income balance.

Marketable securities at June 30, 2004 have an aggregate cost of $214.7 million and an estimated fair value of $213.6 million. Marketable securities at December 31, 2003 had an aggregate cost and estimated fair value of $183.6 million and $183.5 million, respectively.

8. COMMITMENTS AND CONTINGENCIES

Legal Action

Lorenc v. Be Free, Inc. et al.

On September 27, 2000, Joseph Lorenc, a former employee of Be Free, Inc. filed a lawsuit against Be Free and two officers of Be Free, Steven Joseph and Gordon Hoffstein, in the United States District Court, District of Massachusetts. The complaint alleges, among other things, breach of contract. Lorenc seeks, among other things, compensatory damages, punitive damages and attorney’s fees to the greatest extent allowed by law. The case was pending before state court in Massachusetts. On the day the case was set for trial, May 3, 2004, Lorenc dismissed his case with prejudice in exchange for an agreement from the Company not to sue Lorenc for the recovery of its attorney’s fees incurred in defending this action. The Company paid no money to Lorenc in exchange for his dismissal with prejudice. The case is now concluded.

Chahal v. ValueClick, Inc. et al.

This case was filed on September 5, 2003 and brought against ValueClick and Company executives Sam Paisley, Jim Zarley and Scott Barlow by Gurbaksh Chahal and Tajinder Chahal for, among other things, fraud. The Chahals are former employees of the Company’s Click Agents Inc. subsidiary and the case arises out of the Company’s repurchase of the Chahals’ ValueClick stock. The case was pending before the Los Angeles County Superior Court. The Chahals sought, among other things, general, special and punitive damages according to proof as well as the imposition of a constructive trust. On July 19, 2004, the Company reached a settlement with the Chahals, which was not material to the Company’s financial statements. Terms of the settlement agreement are confidential.

Other than the matters discussed above, the Company is not a party to any other material legal proceedings, nor is it aware of any pending or threatened litigation that would have a material adverse effect on its business, operating results, cash flows or financial condition. From time to time, the Company may become subject to additional legal proceedings, claims, and litigation arising in the ordinary course of business. In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. The Company’s management believes that these letters are without merit and intends to contest them vigorously.

9. RESTRUCTURING CHARGES

In the second quarter of 2002 and in the fourth quarter of 2001, the Company recorded restructuring charges of $2.3 million and $515,000, respectively. These restructuring charges were the result of certain personnel redundancies and consolidation of certain leased facilities, for which the Company was committed to pay through 2010. The Company will be relocating back to a previously vacated leased facility and accordingly, reversed $1,003,000 of the related restructuring charge originally established. As of June 30, 2004, $1,082,000 of the charges has been paid. The following table reflects activity in the restructuring accrual during the six-month period ended June 30, 2004 (in thousands):

Accrual at December 31, 2003	$	1,914
Cash payments	(160		)
Restructuring reserve reversal	(1,003		)

Accrual at June 30, 2004	$	751

10. STOCK REPURCHASE PROGRAM

stock issuances such as issuances under employee stock plans. There is no guarantee as to the exact number of shares that will be repurchased by the Company and the Company may discontinue purchases at any time that management determines additional purchases are not warranted. As of June 30, 2004, and since the initiation of the Stock Repurchase Program, the Company has repurchased approximately 26.3 million shares of the Company’s common stock for approximately $71.4 million, $68.0 million of which was purchased pursuant to the Stock Repurchase Program. At June 30, 2004 and December 31, 2003, existing shares of treasury stock have been retired. As of June 30, 2004, up to an additional $7.0 million of the Company’s capital may be used to purchase shares of the Company’s outstanding common stock under the Stock Repurchase Program.

11. SEGMENTS, GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS

For the quarter ended June 30, 2003, we operated in two reportable operating segments: Media and Technology. With the acquisition of Commission Junction, Inc. (“Commission Junction”) in December 2003, we reassessed our reportable operating segments and determined that we now have an additional reportable operating segment, Affiliate Marketing, which combines the operations of Be Free, Inc. (“Be Free”) and Commission Junction. In the prior year, Be Free was included in the technology reporting segment. Accordingly, our prior period operating segment information has been reclassified to conform to the 2004 presentation.

The Company derives its revenues from three business segments based on the types of products and services provided. These business segments are Media, Affiliate Marketing and Technology. Media segment revenue includes sales of certain technology and affiliate marketing products made by Media operations outside the United States, approximating $767,000 and $1,789,000, respectively, for the three month period ended June 30, 2004. For the three month period ended June 30, 2003, sales of technology and affiliate marketing products made by Media operations outside the United States were $624,000 and $321,000, respectively.

Management believes that segment gross profit is an appropriate measure of evaluating the operational performance of the Company’s segments. However, this measure should be considered in addition to, not as a substitute for, or superior to, income from operations or other measures of financial performance prepared in accordance with generally accepted accounting principles.

Revenue and gross profit by segment are as follows (in thousands):

	Revenue						Gross Profit
	Three-month Periods Ended June 30,
	2004			2003			2004		2003

Media	$	17,376		$	9,374		$	8,188	$	4,724
Affiliate Marketing	13,063			4,924			10,632		3,702
Technology	5,476			6,020			4,232		4,713
Intercompany eliminations and other	(1,309		)	(232		)	138		—

Total	$	34,606		$	20,086		$	23,190	$	13,139

	Revenue						Gross Profit
	Six-month Periods Ended June 30,
	2004			2003			2004		2003

Media	$	35,407		$	18,712		$	17,252	$	9,874
Affiliate Marketing	27,492			9,566			22,725		7,091
Technology	11,064			11,743			8,655		9,136
Intercompany eliminations and other	(2,648		)	(472		)	138		—

Total	$	71,315		$	39,549		$	48,770	$	26,101

The Company’s operations are domiciled in the United States with operations in Europe through our wholly-owned subsidiaries, ValueClick Europe, ValueClick France and ValueClick Germany. Prior to March 26, 2004, the Company had operations in Japan through its majority owned subsidiary, ValueClick Japan. The Company sold its equity interest of approximately 59% in ValueClick Japan on March 26, 2004 and the operating results of ValueClick Japan are included in the Company’s operating results through the date of disposition.

The Company’s geographic information is as follows (in thousands):

	Three-month Period Ended June 30, 2004
	Revenue			Income from Operations		Long-lived Assets at June 30, 2004

United States	$	30,093		$	5,313	$	73,261
Europe	5,822			407		291
Intercompany eliminations and other	(1,309		)	138		—
Total	$	34,606		$	5,858	$	73,552

	Three-month Period Ended June 30, 2003
	Revenue			Income (loss) from Operations			Long-lived Assets at June 30, 2003

United States	$	15,540		$	811		$	15,630
Japan	2,025			125			1,141
Europe	2,753			(298		)	185
Intercompany eliminations and other	(232		)	—			—
Total	$	20,086		$	638		$	16,956

	Six-month Period Ended June 30, 2004
	Revenue			Income (loss) from Operations

United States	$	60,457		$	10,963
Japan	1,806			(526		)
Europe	11,700			1,589
Intercompany eliminations and other	(2,648		)	138
Total	$	71,315		$	12,164

	Six-month Period Ended June 30, 2003
	Revenue			Income (loss) from Operations

United States	$	30,429		$	1,362
Japan	3,901			219
Europe	5,691			(392		)
Intercompany eliminations and other	(472		)	—
Total	$	39,549		$	1,189

For the three- and six-month periods ended June 30, 2004, no customer comprised more than 10% of total revenue. For the three- and six-month periods ended June 30, 2003, one customer comprised 11.6% and 13.8% of total revenue, respectively. At June 30, 2004 and December 31, 2003, no customer comprised more than 10% of accounts receivable.

12. SUBSEQUENT EVENT

On August 3, 2004, the Company entered into an agreement to acquire privately-held Pricerunner AB (“Pricerunner”), a leading provider of online comparison shopping services in Europe. Under the terms of the agreement, ValueClick would acquire all outstanding equity interests in Pricerunner for an adjusted purchase price of approximately $29 million, including cash and approximately 263,000 shares of ValueClick common stock to be issued to three management shareholders of Pricerunner. ValueClick has agreed to provide additional cash and stock consideration totaling up to $6 million, contingent upon Pricerunner exceeding certain performance milestones. The transaction has been approved by the shareholders of Pricerunner and by the Company’s board of directors, subject to customary closing conditions. The transaction is anticipated to be consummated in August 2004.

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

CAUTIONARY STATEMENT

This Report contains forward-looking statements based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The section entitled “Risk Factors” in this Form 10-Q and similar discussions in our Annual Report on Form 10-K for the year ended December 31, 2003, and in our other SEC filings, discuss some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this Report, and in our other filings with the SEC, before deciding to invest in our company or to maintain or increase your investment. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. The information contained in this Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the SEC that discuss our business in greater detail and advise interested parties of certain risks, uncertainties and other factors that may affect our business, results of operations or financial condition.

Overview

We offer a suite of products and services that enable marketers to advertise and sell their products through all major online marketing channels—display/web advertising, search marketing, email marketing, and affiliate marketing. Additionally, we provide software that assists advertising agencies with information management regarding their financial, workflow, and offline media buying and planning processes. The broad range of products and services that we provide enables our customers to address all aspects of the marketing process, from strategic planning through execution, including results measurement and campaign refinements. By combining our media, affiliate marketing and technology offerings with our experience in both online and offline marketing, we help our customers around the world optimize their marketing campaigns both on the Internet and through offline media.

We derive our revenue from three business segments based on the types of products and services provided. These business segments are Media, Affiliate Marketing and Technology.

MEDIA —Our Media segment provides a comprehensive suite of online media services and tailored programs that help marketers create awareness, attract visitors and generate leads and sales through the Internet. Our Media segment has grown both organically and through the acquisition of complementary firms such as Search123.com, completed in May 2003, and Hi-Speed Media, completed in December 2003.

We offer advertisers and agencies a range of online media solutions in the categories of Web/Display Advertising, Email Marketing, Lead Generation Marketing and Search Marketing. To accomplish this, we have partnered with thousands of online publishers to provide advertisers and agencies with access to one of the largest and most reputable online advertising networks, and we have employed rigorous network quality control and advanced proprietary targeting technology.

Our Media services are sold on a variety of pricing models, including cost-per-impression (CPM), cost-per-click (CPC), cost-per-lead (CPL) and cost-per-action (CPA).

AFFILIATE MARKETING —Our Affiliate Marketing segment operates through our wholly-owned subsidiaries Be Free acquired on May 23, 2002, and Commission Junction, acquired on December 7, 2003.

Our affiliate marketing business includes technology and services that enable advertisers to manage, track and analyze a variety of online marketing programs. Specifically, our affiliate marketing services enable our advertiser clients to: build relationships with affiliate partners; manage the offers they make available to their affiliate partners; track the online traffic, leads and sales that these offers drive to the advertiser’s Website; analyze the effectiveness of the offers and affiliate partners; and track the commissions due to their affiliates.

We offer affiliate marketing services that address the needs of advertisers that seek to build and manage a private-labeled network of third party online publishers, as well as advertisers that wish to conduct an affiliate marketing program through our existing network of third party online affiliate publishers. Affiliate Marketing revenues are driven by a combination of fixed fees and variable compensation that is based on either a cost-per-lead (CPL) scenario or on a percentage of transaction revenue generated from the programs managed with our affiliate marketing platforms.

TECHNOLOGY —Our Technology segment operates through our wholly-owned subsidiaries Mediaplex, Inc. (Mediaplex) and AdWare Systems, Inc. (AdWare), which were acquired on October 19, 2001.

Our Mediaplex subsidiary offers technology infrastructure tools and services that enable advertisers, advertising agencies and online publishers to implement and manage their own online display advertising and email campaigns. Mediaplex’s products are based on proprietary MOJO® technology platform, which has the ability to automatically configure messages in response to real-time information from a marketer’s enterprise data system and to provide ongoing campaign optimization. Mediaplex’s revenues are primarily derived from software access and use charges paid by our software clients. These fees vary based on the client’s use of the technology.

Revenue and gross profit by segment are listed in the following table (in thousands). Media segment revenue includes sales of certain technology and affiliate marketing products made by Media operations outside the United States, approximating $767,000 and $1,789,000, respectively for the three months period ended June 30, 2004. For the three months period ended June 30, 2003, sales of technology and affiliate marketing products made by Media operations outside the United States were $624,000 and $321,000, respectively.

	Revenue						Gross Profit
	Three-month Periods Ended June 30,
	2004			2003			2004		2003
Media	$	17,376		$	9,374		$	8,188	$	4,724
Affiliate Marketing	13,063			4,924			10,632		3,702
Technology	5,476			6,020			4,232		4,713
Intercompany eliminations and other	(1,309		)	(232		)	138		—
Total	$	34,606		$	20,086		$	23,190	$	13,139

	Revenue						Gross Profit
	Six-month Periods Ended June 30,
	2004			2003			2004		2003
Media	$	35,407		$	18,712		$	17,252	$	9,874
Affiliate Marketing	27,492			9,566			22,725		7,091
Technology	11,064			11,743			8,655		9,136
Intercompany eliminations and other	(2,648		)	(472		)	138		—
Total	$	71,315		$	39,549		$	48,770	$	26,101

RESULTS OF OPERATIONS—THREE-MONTH PERIOD ENDED JUNE 30, 2004 COMPARED TO JUNE 30, 2003

Revenue. Consolidated net revenues for the three-month period ended June 30, 2004 was $34.6 million, representing a 72.3% increase over the same period in 2003 of $20.1 million. Media segment revenue increased 85.4% to $17.4 million for the three-month period ended June 30, 2004 compared to $9.4 million for the same period in 2003. The increase of $8.0 million in Media segment revenue was primarily due to strong performance by our U.S. and European media teams and a full quarter contribution from Search123 and Hi-Speed Media in the second quarter of 2004. Affiliate Marketing revenue increased to $13.1 million in the second quarter of 2004 compared to $4.9 million for the same period in 2003. This increase of $8.2 million is attributable to a full quarter of Commission Junction’s operations in the second quarter of 2004. Technology revenue was $5.5 million for the three-month period ended June 30, 2004 compared to $6.0 million for the same period in 2003. The decrease of $0.5 million or 9.0% was attributable to Mediaplex having a slight year-over-year revenue increase, offset by new rates on renewed long-term contracts in the Adware business.

Cost of Revenue. Cost of revenue for the Media segment consists primarily of amounts that we pay to Web site publishers on the ValueClick consolidated networks. We pay these publishers on either a CPC, CPA, CPL or CPM basis. Cost of revenue for the Media, Affiliate Marketing and Technology segments also includes labor costs, depreciation on revenue producing technologies and Internet access costs. Consolidated cost of revenue was $11.4 million for the three-month period ended June 30, 2004 compared to $6.9 million for the same period in 2003, an increase of $4.5 million or 64.3%. Cost of revenue for our Media segment increased $4.5 million to $9.2 million for the three-month period ended June 30, 2004 compared to the same period in 2003 of $4.7 million. Media cost of revenues increased as a percentage of revenue over the 2004 period. This increase, as well as the corresponding decrease in the gross profit to 47.1% for the second quarter of 2004 from 50.4% for the same period in 2003, reflects the inclusion of one full quarter’s results of Search123, which generates lower margins than our other media products, and lower margins in Europe due to price concessions to a key ad serving client. Cost of revenues for the Affiliate Marketing segment increased $1.2 million to $2.4 million for the three-month period ended June 30, 2004 compared to the same period in 2003 of $1.2 million. Affiliate Marketing cost of revenue decreased as a percentage of revenue to 18.6% in the second quarter of 2004 from 24.8% in the same period in 2003. This decrease, as well as the corresponding increase in gross profit to 81.4% for the second quarter of 2004 from 75.2% in the same period in 2003 is primarily attributable through the operating leverage of our combined affiliate marketing infrastructure, supporting significantly higher revenue levels. Technology cost of revenue remained fairly stable at $1.3 million in the second quarter of 2004 and 2003. In spite of lower revenue, Technology gross profit was 77.3% in the second quarter of 2004 compared to 78.3% in the same period in 2003.

Sales and Marketing. Sales and marketing expenses consist primarily of compensation of sales and marketing, network development and related support teams, sales commissions, travel, advertising, trade show costs and costs of marketing materials. Sales and marketing expenses for the three-month period ended June 30, 2004 were $7.2 million compared to $4.9 million for the same period in 2003, an increase of $2.3 million or 46.0%. The increase in sales and marketing expenses was due primarily to the inclusion of three full months of sales and marketing expenses for Hi-Speed Media, Commission Junction and Search123 in the second quarter of 2004. Our sales and marketing costs as a percentage of revenue improved to 20.8% for the three-month period ended June 30, 2004 from 24.5% for the same period in 2003, due primarily to the productivity of our sales teams and the sale of ValueClick Japan in the first quarter of 2004.

General and Administrative. General and administrative expenses consist primarily of facilities costs, executive and administrative compensation, depreciation and professional service fees. General and administrative expenses increased to $5.9 million for the three-month period ended June 30, 2004 compared to $4.6 million for the same period in 2003, an increase of $1.3 million or 28.0%. General and administrative expense increased primarily due to the additional three full months of expense for Hi-Speed Media, Commission Junction and Search123 in the second quarter of 2004. Our general and administrative costs as a percentage of revenue decreased to 17.1% for the three-month period ended June 30, 2004 from 23.1% for the same period in 2003 due to cost reduction activities, operating leverage on relatively fixed general and administrative costs and the sale of ValueClick Japan in the first quarter of 2004.

Product Development. Product development costs include expenses for the development of new technologies designed to enhance the platform performance of our service and costs associated with the maintenance of our technology platforms, including the salaries and related expenses for our software engineering department, as well as costs for contracted services and supplies. With the exception of certain internal use software qualifying for capitalization, all product development costs have been expensed as incurred. Product development expenses for the three-month period ended June 30, 2004 were $4.2 million compared to $2.5 million for the same period in 2003, an increase of $1.7 million or 66.9%. The increase in product development expenses was due primarily to the additional three full months of expense for Hi-Speed Media, Commission Junction and Search123 in the second quarter of 2004. Our product development costs as a percentage of revenue improved to 12.0% for the three-month period ended June 30, 2004 from 12.4% for the same period in 2003 due primarily to continuing efforts to reduce the number of our co-location facilities, consolidation of our technology teams and the sale of ValueClick Japan in March 2004.

Stock-Based Compensation. Stock-based compensation included in the accompanying consolidated statements of operations reflects the amortization of the difference between the deemed fair value of our common stock for financial accounting purposes and the exercise price of options on the date the options were granted, as well as amortization of the fair value of options converted in business purchase combinations. Stock-based compensation expense for the three-month period ended June 30, 2004 amounted to $174,000. The increase in stock-based compensation from $97,000 for the three-month period ended June 30, 2003 is a result of the amortization of options assumed in the Hi-Speed Media and Commission Junction acquisitions.

Amortization of Intangible Assets. Amortization of intangible assets for the three-month period ended June 30, 2004 was $864,000 compared to $342,000 in the second quarter of 2003. This represents principally the amortization of intangible assets acquired through business combinations and purchased intellectual property. The increase compared to the second quarter of 2003 is due to the additional intangible assets purchased in the Hi-Speed Media, Commission Junction and Search123 acquisitions. We anticipate a higher level of amortization expense in 2004, compared to 2003, as a result of the intangible assets acquired in 2003.

Restructuring Reserve Reversal. In the second quarter of 2002 and in the fourth quarter of 2001, the Company recorded restructuring charges of $2.3 million and $515,000, respectively. These restructuring charges were the result of certain personnel redundancies and consolidation of certain leased facilities, for which the Company was committed to pay through 2010. The Company will be relocating back to a previously vacated leased facility and accordingly, reversed $1.0 million of the related restructuring charge originally established.

Interest Income, Net. Interest income, net, consists principally of interest earned on our cash and cash equivalents and marketable debt securities and is net of interest paid on debt obligations. Interest income was $843,000 for the three-month period ended June 30, 2004 compared to $934,000 for the same period in 2003. The slight decrease is primarily attributable to the effects of decreasing average investment yields from 2003. Interest income in the second half of 2004 is expected to increase as a result of anticipated regulatory rate increases and related increases in market rates available for our investments.

Provision for Income Taxes. For the three-month period ended June 30, 2004, we recorded a provision for income taxes of $1,187,000 compared to $233,000 for the same period in 2003. The effective income tax rate reflects the Company’s anticipated pretax profitability by tax jurisdiction and the application of benefits relating primarily to net operating loss carryforwards subject to statutory limitations. Income tax benefits from all available net operating losses are not fully reflected in the provision as the realization of these benefits of all such benefits is not deemed more likely than not. Income taxes for interim periods are computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to our ongoing review and evaluation.

Minority Share of Income (Loss) of Consolidated Subsidiary. Minority share of income of ValueClick Japan was $55,000 for the three-month period ended June 30, 2003. We accounted for our interest in ValueClick Japan on a consolidated basis for financial reporting purposes, resulting in a minority interest in the net income or losses incurred by ValueClick Japan. On March 26, 2004, the Company completed the sale of its equity interest in ValueClick Japan to livedoor Co., Ltd.

RESULTS OF OPERATIONS—SIX-MONTH PERIOD ENDED JUNE 30, 2004 COMPARED TO JUNE 30, 2003

Revenue. Consolidated net revenues for the six-month period ended June 30, 2004 was $71.3 million, representing a 80.3% increase over the same period in 2003 of $39.5 million. Media segment revenue increased $16.7 million or 89.2% for the six-month period ended June 30, 2004 over the same period in 2003. The increase in Media segment revenue was primarily due to strong performance by our U.S. and European media teams and the inclusion of a full period of Media revenue from the Search123 and Hi-Speed Media acquisitions in the 2004 period. Affiliate Marketing revenue increased $17.9 million to $27.5 million for the six-month period ended June 30, 2004 compared to $9.6 million for the same period in 2003. This increase is attributable to the inclusion of a full period of Affiliate Marketing revenue from the Commission Junction acquisition in the 2004 period. Technology revenue was $11.1 million for the six-month period ended June 30, 2004 compared to $11.7 million for the same period in 2003. The decrease of $0.6 million or 5.8% was attributable to Mediaplex having a slight year-over-year revenue increase, offset by new rates on renewed long-term contracts in the Adware business.

Cost of Revenue. Consolidated cost of revenue was $22.5 million for the six-month period ended June 30, 2004 compared to $13.4 million for the same period in 2003, an increase of $9.1 million or 67.6%. Cost of revenue for our Media segment increased $9.3 million to $18.2 million for the three-month period ended June 30, 2004 compared to the same period in 2003 of $8.8 million. Media cost of revenues increased as a percentage of revenue over the 2004 period. This increase, as well as the corresponding decrease in the gross profit to 48.7% for the six-month period ended June 30, 2004 from 52.8% for the same period in 2003, reflects the inclusion of the full period results of Search123, which generates lower margins than our other media products, and lower margins in Europe due to price concessions to a key ad serving client. Cost of revenues for the Affiliate Marketing segment increased $2.3 million to $4.8 million for the six-month period ended June 30, 2004 compared to the same period in 2003 of $2.5 million. Affiliate Marketing cost of revenue decreased as a percentage of revenue to 17.3% for the six-month period ended June 30, 2004 from 25.9% in the same period in 2003. This decrease, as well as the corresponding increase in gross profit to 82.7% for the six-month period in 2004 from 74.1% in the same period in 2003 is primarily attributable through the operating leverage of our combined affiliate marketing infrastructure, supporting significantly higher revenue levels. Technology cost of revenue decreased $0.2 million to $2.4 million for the six-month period ended June 30, 2004 compared to the same period in 2003 of $2.6 million. In spite of lower revenue, Technology gross profit was 78.2% for the six-month ended June 30, 2004 compared to 77.8% for the same period in 2003.

Sales and Marketing. Sales and marketing expenses for the six-month period ended June 30, 2004 were $14.6 million compared to $9.9 million for the same period in 2003, an increase of $4.7 million or 47.8%. The increase in sales and marketing expense was due primarily to the inclusion of six full months of sales and marketing expenses for Hi-Speed Media, Commission Junction and Search123 in 2004. Our sales and marketing costs as a percentage of revenue improved to 20.5% for the six-month period ended June 30, 2004 from 25.1% for the same period in 2003, due primarily to the productivity of our sales teams and the sale of ValueClick Japan in the first quarter of 2004.

General and Administrative. General and administrative expenses increased to $12.6 million for the six-month period ended June 30, 2004 compared to $9.1 million for the same period in 2003, an increase of $3.5 million or 38.5%. General and administrative expense increased primarily due to the additional six full months of expense for Hi-Speed Media, Commission Junction and Search123 in 2004. Our general and administrative costs as a percentage of revenue decreased to 17.6% for the six-month period ended June 30, 2004 from 23.0% for the same period in 2003 due to cost reduction activities, operating leverage on relatively fixed general and administrative costs and the sale of ValueClick Japan in the first quarter of 2004.

Product Development. Product development expenses for the six-month period ended June 30, 2004 were $8.3 million compared to $5.1 million for the same period in 2003, an increase of $3.2 million or 62.6%. The increase in product development expenses was due primarily to the additional six full months of expense for Hi-Speed Media, Commission Junction and Search123 in 2004. Our product development costs as a percentage of revenue improved to 11.6% for the six-month period ended June 30, 2004 from 12.8% for the same period in 2003 due primarily to continuing efforts to reduce the number of our

co-location facilities and consolidation of our technology teams and sale of ValueClick Japan in March 2004.

Stock-Based Compensation. Stock-based compensation expense for the six-month period ended June 30, 2004 amounted to $412,000. The increase in stock-based compensation from $194,000 for the six-month period ended June 30, 2003 is a result of the amortization of options assumed in the Hi-Speed Media and Commission Junction acquisitions.

Amortization of Intangible Assets. Amortization of intangible assets for the six-month period ended June 30, 2004 was $1,728,000 compared to $654,000 for the same period in 2003. This represents principally the amortization of intangible assets acquired through business combinations and purchased intellectual property. The increase compared to the same period in 2003 is due to the additional intangible assets purchased in the Hi-Speed Media, Commission Junction and Search123 acquisitions. We anticipate a higher level of amortization expense in 2004, compared to 2003, as a result of the intangible assets acquired in 2003.

Gain on Sale of Equity Interest in Japan Subsidiary. Gain on sale of equity interest in Japan subsidiary for the six-month period ended June 30, 2004 was $8,007,000, which represents the pretax gain recognized from the sale of our equity interest of approximately 59% in ValueClick Japan, Inc. on March 26, 2004, net of related transaction expenses.

Interest Income, Net. Interest income was $1.5 million for the six-month period ended June 30, 2004 compared to $2.0 million for the same period in 2003. The decrease is attributable to a lower average cash balance over the period primarily due to the acquisitions of Hi-Speed Media, Commission Junction, and Search123, along with the effects of decreasing average investment yields. Interest income in the second half of 2004 is expected to increase as a result of anticipated regulatory rate increases and related increases in market rates available for our investments.

Provision for Income Taxes. For the six-month period ended June 30, 2004, we recorded a provision for income taxes of $2,878,000 compared to $618,000 for the same period in 2003. The effective income tax rate reflects the Company’s anticipated pretax profitability by tax jurisdiction and the application of benefits relating primarily to net operating loss carryforwards subject to statutory limitations. Income tax benefits from all available net operating losses are not fully reflected in the provision as the realization of these benefits of all such benefits is not deemed more likely than not. The taxable gain from the sale of the equity interest in ValueClick Japan of $8.0 million has been fully offset by the anticipated utilization of capital loss carryforwards generated by the Company in prior years. Income taxes for interim periods are computed using the effective tax rate estimated to be applicable for the full fiscal year, which is subject to our ongoing review and evaluation.

Minority Share of Income (Loss) of Consolidated Subsidiary. Minority share of loss of ValueClick Japan was $130,000 for the six-month period ended June 30, 2004 and minority share of income of ValueClick Japan was $74,000 for the six-month period ended June 30, 2003. We accounted for our interest in ValueClick Japan on a consolidated basis for financial reporting purposes, resulting in a minority interest in the net income or losses incurred by ValueClick Japan. On March 26, 2004, the Company completed the sale of its equity interest in ValueClick Japan to livedoor Co., Ltd.

Liquidity and Capital Resources

Since our inception, we have financed our operations through working capital generated from operations, equity financings and cash from acquisitions of other businesses. As of June 30, 2004, we had combined cash and cash equivalents and marketable securities balance of $239.3 million. Net cash provided by operating activities for the six-month period ended June 30, 2004 totaled $18.5 million compared to $6.6 million for the same period in 2003. The increase was primarily attributable to an increase in net income, adjusted for non-cash items, including depreciation and amortization of approximately $4.8 million and tax benefits from stock options of approximately $3.0 million.

The net cash used by investing activities for the six-month period ended June 30, 2004 of $35.9 million was primarily the result of the net purchase of marketable debt securities of $34.9 million and $3.4 million of primarily computer equipment purchases, offset by net proceeds from the sale of the Company’s equity interest in ValueClick Japan of $2.4 million. For the six-month period ended June 30, 2003, cash provided by investing activities was $6.5 million and was primarily a result of proceeds received from the sale of marketable debt securities.

Net cash provided by financing activities for the six-month period ended June 30, 2004 of $5.8 million resulted primarily from proceeds received from the exercise of stock options of $6.0 million. Cash used in financing activities was $9.4 million for the six-month period ended June 30, 2003 resulted primarily from the treasury stock repurchases under the stock repurchase program.

Stock Repurchase Program

In September 2001, the Company’s board of directors authorized a $10 million Stock Repurchase Program to purchase outstanding shares of ValueClick common stock from time to time at prevailing market prices in the open market or through unsolicited negotiated transactions depending on market conditions. The Stock Repurchase Program was increased by the board of directors to $30 million in February 2002, to $50 million in July 2002 and to $75 million in November 2002. Under the program, the purchases are funded from available working capital, and the repurchased shares will be retired, held in treasury or used for ongoing stock issuances such as issuances under employee stock plans. There is no guarantee as to the exact number of shares that will be repurchased by the Company and the Company may discontinue purchases at any time that management determines additional purchases are not warranted. As of June 30, 2004, and since the initiation of the Stock Repurchase Program, the Company has repurchased approximately 26.3 million shares of the Company’s common stock for approximately $71.4 million, $68.0 million of which was purchased pursuant to the Stock Repurchase Program. All purchases of treasury stock have been retired. As of June 30, 2004, up to an additional $7.0 million of the Company’s capital may be used to purchase shares of the Company’s outstanding common stock under the Stock Repurchase Program.

Commitments and Contingencies

As of June 30, 2004, we had no material commitments other than obligations under operating and capital leases for office space and office equipment, of which some commitments extend through 2010.

We believe that our existing cash and cash equivalents and our marketable securities are sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. However, it is possible that we may need or elect to raise additional funds to fund our activities beyond the next year or to consummate acquisitions of other businesses, products or technologies. We could raise such funds by selling more stock to the public or to selected investors, or by borrowing money. In addition, even though we may not need additional funds, we may still elect to sell additional equity securities or obtain credit facilities for other reasons. We cannot assure you that we will be able to obtain additional funds on commercially favorable terms, or at all. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing stockholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock.

Although we believe we have sufficient capital to fund our activities for at least the next twelve months, our future capital requirements may vary materially from those now planned. The amount of capital that we will need in the future will depend on many factors, including:

• the market acceptance of our products and services;

• the levels of promotion and advertising that will be required to launch our new products and achieve and maintain a competitive position in the marketplace;

• our business, product, capital expenditure and research and development plans and product and technology roadmaps;

• capital improvements to new and existing facilities;

• technological advances;

• our competitors’ response to our products and services;

• our pursuit of strategic transactions;

• our relationships with customers; and

• our level of common stock repurchases.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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. We evaluate our estimates on an on-going basis, including those related to revenue recognition, allowance for doubtful accounts, investments, deferred taxes, impairment of long-lived assets and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the 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.

We apply the following critical accounting policies in the preparation of our consolidated financial statements:

• Revenue Recognition Policy. We recognize revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements”. Under SAB 104, we recognize revenue when the following criteria have been met: persuasive evidence of an arrangement exists, the fees are fixed and determinable, no significant Company obligations remain and collection of the related receivable is reasonable assured.

Our Media segment revenue is recognized in the period that the advertising impressions, click-throughs or actions occur or when lead-based information is delivered, provided that no significant obligations remain and collection of the resulting receivable is reasonably assured and prices are fixed and determinable.

Our Affiliate Marketing and Technology segment revenue is generated primarily from fixed fees for campaign management services and from application management services and professional services. Campaign management service revenue is recognized when the related services are performed, provided no significant obligations remain, collection of the resulting receivable is reasonably assured and fees are fixed and determinable. Application management services revenue is recognized as the services are performed, provided no significant obligations remain, collection of the resulting receivable is reasonably assured and fees are fixed and determinable. Application management services provide customers rights to access applications, hardware for the application access and customer service. Our customers do not have the right to take possession of the software at any time during the hosting agreement. Contracts for application management services that exceed designated minimum monthly or quarterly volume usage are recognized as revenue in the month or quarter in which minimum volume is exceeded.

• Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

• Investments. We record an impairment charge when we believe an asset has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

• Deferred Taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to subsequently determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income or reduce corresponding intangible assets in the period such determination was made. Similarly, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would reduce income in the period such determination was made consistent with prior periods. In evaluating the need for a valuation allowance at June 30, 2004, we evaluated both positive and negative evidence in accordance with the requirements of SFAS No. 109. The key factors evaluated included: significant cumulative losses with only a recent trend towards profitability; annual limitations on utilization of acquired net operating losses pursuant to Internal Revenue Code Section 382 and related expiration dates; limitations on the utilization of capital loss carryforwards and related expiration dates; potential for future stock option deductions to significantly reduce taxable income thus limiting the ability to utilize net operating loss carryforwards prior to expiration; and future income projections and tax planning strategies with the need to generate significant amounts of taxable income in future periods on a consistent and prolonged basis. Based upon an evaluation of these factors, we concluded that, with the exception of short-term net deferred tax asset temporary differences that will reverse in the next year, it is not more likely than not that the remaining deferred tax assets will be realized. In future periods, we will reassess the available evidence and if we continue to meet our financial projections, generate improved and sustained taxable income and develop additional tax planning strategies, it is possible that we may develop enough positive evidence to release a portion or all of our valuation allowance in future periods.

• Impairment of Long-Lived Assets and Goodwill. We evaluate the recoverability of our identifiable intangible assets and other long-lived assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, adopted on January 1, 2002. These standards generally require us to assess these assets for recoverability when events or circumstances indicate a potential impairment by estimating the undiscounted cash flows to be

generated from the use and ultimate disposition of these assets. If significant events or circumstances occur in the future, we may be required to determine if any impairment charges are necessary to reduce the carrying value of these assets to fair value.

We test goodwill for impairment in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangibles”, adopted on January 1, 2002. Accordingly, goodwill is tested at least annually at the reporting unit level or whenever events or circumstances indicate that goodwill might be impaired. At June 30, 2004, our goodwill principally resides in the Affiliate Marketing and Media reporting units as a result of the 2003 acquisitions of Commission Junction (Affiliate Marketing reporting unit) and Search 123 and High Speed Media (Media reporting unit). The Company has elected to test for goodwill impairment annually as of December 31. If significant declines in the fair value were to occur in the future related to our acquired businesses, impairment changes may be necessary to reduce the carrying value of goodwill to fair market value.

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

Inflation

Inflation was not a material factor affecting either revenue or operating expenses during the six-month periods ended June 30, 2004 and 2003.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

INTEREST RATE RISK

The primary objective of our investment activities is to preserve capital while at the same time maximizing yields without significantly increasing risk. We are exposed to the impact of interest rate changes and changes in the market values of our investments. Our interest income is sensitive to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on our cash equivalents and marketable debt securities. Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We have not used derivative financial instruments in our investment portfolio. We invest a portion of our excess cash in debt instruments of high-quality corporate issuers and, by policy, limit the amount of credit exposure to any one issuer. We protect and preserve our invested funds by limiting default, market and reinvestment risk. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if forced to sell securities, which have declined in market value due to changes in interest rates.

Marketable securities as of June 30, 2004 consist primarily of marketable debt securities in investment-grade corporate and government securities with maturities of less than two years. As of June 30, 2004, our investment in marketable securities had a weighted-average time to maturity of approximately 313 days. We classify all of our investments as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported in a separate component of stockholders’ equity. As of June 30, 2004, unrealized losses in our investments in marketable securities aggregated $1.1 million.

During the quarter ended June 30, 2004, our investments in marketable securities yielded an effective interest rate of 1.70%. If interest rates were to decrease 1%, the result would be an annual decrease in our interest income related to our marketable securities of approximately $2.1 million. However, due to the uncertainty of the actions that would be taken in such a scenario and their possible effects, this analysis assumes no such action. Further, this analysis does not consider the effect of the change in the level of overall economic activity that could exist in such an environment.

FOREIGN CURRENCY RISK

We transact business in various foreign countries and are thus subject to exposure from adverse movements in other foreign currency exchange rates. This exposure is primarily related to revenue and operating expenses for ValueClick Europe, which denominates its transactions in primarily U.K. pounds or euros. The effect of foreign exchange rate fluctuations for the three and six-month periods ended June 30, 2004 were not material to the consolidated results of operations. If there were an adverse change of 10% in overall foreign currency exchange rates over an entire year, the result of translations would be a reduction of revenue of approximately $2.3 million, a reduction of income before income taxes of $0.3 million and a reduction of net assets, excluding intercompany balances, of $1.2 million. Historically, we have not hedged our exposure to exchange rate fluctuations. Accordingly, we may experience economic loss and a negative impact on earnings, cash flows or equity as a result of foreign currency exchange rate fluctuations. We assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis. As of June 30, 2004, we had $10.0 million in cash and cash equivalents denominated in foreign currencies, primarily the U.K. pound.

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

RISK FACTORS

You should carefully consider the following risks before you decide to buy shares of our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties, including those risks set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below, may also adversely impact and impair our business. If any of the following risks actually occur, our business, results of operations or financial condition would likely suffer. In such case, the trading price of our common stock could decline, and you may lose all or part of the money you paid to buy our stock.

This Report contains forward-looking statements based on the current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements as a result of certain factors, as more fully described in this section and elsewhere in this Report. We do not undertake to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

INTEGRATING OUR ACQUIRED OPERATIONS MAY DIVERT MANAGEMENT’S ATTENTION AWAY FROM OUR DAY-TO-DAY OPERATIONS.

We have grown in part because of business combinations with other companies, and we expect to continue to evaluate and consider future acquisitions. Acquisitions generally involve significant risks, including difficulties in the assimilation of operations, services, technologies and corporate culture of the acquired companies, diversion of management’s attention from other business concerns, overvaluation of the acquired companies, and the acceptance of the acquired companies’ products and services by our customers. The integration of our acquired operations, products and personnel may place a significant burden on management and our internal resources. The diversion of management attention and any difficulties encountered in the transition and integration process could harm our business. Moreover, we consummated the acquisitions of Search123, Commission Junction and Hi-Speed Media on May 30, 2003, December 7, 2003 and December 17, 2003, respectively. Because of the number of acquisitions we performed in 2003, the differences in the customer base and functionality of Search123, Commission Junction and Hi-Speed Media and our products, these acquisitions may present a materially higher product, marketing, research and development, facilities, information systems, accounting, personnel, and other integration challenges than those we have faced in connection with our prior acquisitions and may delay or jeopardize the complete integration of certain businesses we had acquired previously.

If we finance future acquisitions by using equity securities, this would dilute our existing stockholders. Any amortization of intangible assets, or other charges resulting from the costs of these acquisitions could have an adverse effect on the results of our operations. In addition, we may pay more for an acquisition than the acquired products, services, technology or business are ultimately worth.

IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR EXPENSES COULD INCREASE AND OUR MANAGEMENT’S TIME AND ATTENTION COULD BE DIVERTED.

As we continue to increase the scope of our operations, we will need an effective planning and management process to implement our business plan successfully in the rapidly evolving Internet advertising market. Our business, results of operations and financial condition will be substantially harmed if we are unable to manage our expanding operations effectively. We plan to continue to expand our sales and marketing, customer support and research and development organizations. Past growth has placed, and any future growth will continue to place, a significant strain on our management systems and resources. We will likely need to continue to improve our financial and managerial controls and our reporting systems and procedures. In addition, we will need to expand, train and manage our work force. Our failure to manage our growth effectively could increase our expenses and divert management’s time and attention.

WE HAVE AN ACCUMULATED DEFICIT AND MIGHT NOT REMAIN PROFITABLE.

At June 30, 2004 we had an accumulated deficit of approximately $45.4 million. Though we achieved operational profitability in 2003, events could arise that prevent us from achieving net income in future periods.

Because we have a relatively limited operating history, it may be difficult to evaluate our business and prospects. You should consider our prospects in light of the risks, expenses and difficulties frequently encountered by early-stage companies in the rapidly-changing Internet market. These risks include, but are not limited to, our ability to:

• maintain and increase our inventory of advertising space on Web sites and with email list owners and newsletter publishers;

• maintain and increase the number of advertisers that use our products and services;

• continue to expand the number of products and services we offer and the capacity of our systems;

• adapt to changes in Web advertisers’ promotional needs and policies, and the technologies used to generate Web advertisements;

• respond to challenges presented by the large number of competitors in the industry;

• adapt to changes in legislation regarding Internet usage, advertising and commerce;

• adapt to changes in technology related to online advertising filtering software; and

• adapt to changes in the competitive landscape.

If we are unsuccessful in addressing these risks and uncertainties, our business, results of operations and financial condition could be materially and adversely affected.

IF ADVERTISING ON THE INTERNET LOSES ITS APPEAL TO DIRECT MARKETING COMPANIES, OUR REVENUE COULD DECLINE.

Our Media segment accounted for 50.2% of our revenue for the quarter ended June 30, 2004 by delivering advertisements that generate impressions, click-throughs and other actions to our advertisers’ Web sites. This business model may not continue to be effective in the future for a number of reasons, including the following: click rates have always been low and may decline as the number of banner advertisements on the Web increases; Internet users can install “filter” software programs which allow them to prevent advertisements from appearing on their computer screens or email boxes; Internet advertisements are, by their nature, limited in content relative to other media; direct marketing companies may be reluctant or slow to adopt online advertising that replaces, limits or competes with their existing direct marketing efforts; and direct marketing companies may prefer other forms of Internet advertising we do not offer, including certain forms of search engine placements. If the number of direct marketing companies who purchase online advertising from us does not continue to grow, we may experience difficulty in attracting publishers, and our revenue could decline.

IF OUR BUSINESS MODEL IS NOT ACCEPTED BY INTERNET ADVERTISERS OR WEB PUBLISHERS, OUR REVENUE COULD DECLINE.

Traditionally, most of our revenue has been derived from our Media segment. Although we intend to grow our Affiliate Marketing and Technology segments, we expect that our Media segment will continue to generate a substantial amount of our revenue in the future. For the quarter ended June 30, 2004, our Media segment accounted for 50.2% of our revenue. In addition, our Media segment includes products and services that are based on a cost-per-click (“CPC”), cost-per-action (“CPA”) or cost-per-lead (“CPL”) pricing model. These business models differ from the cost-per-thousand impressions (“CPM”) pricing model, which many other Internet advertising companies use. Our ability to generate significant revenue from advertisers will depend, in part, on our ability to demonstrate the effectiveness of our various pricing models to advertisers, many of which may be more accustomed to the CPM pricing model, and to Web publishers; and on our ability to attract and retain advertisers and Web publishers by differentiating our technology and services from those of our competitors. One component of our strategy is to enhance advertisers’ ability to measure their return on investment and track the performance and effectiveness of their advertising campaigns. To date, not all advertisers have taken advantage of the most sophisticated tool we offer for tracking Internet users’ activities after they have reached advertisers’ Web sites. We will not be able to assure you that our strategy will succeed.

Intense competition among Web sites, search services and Internet advertising services has led to the proliferation of a number of alternative pricing models for Internet advertising. These alternatives, and the likelihood that additional pricing alternatives will be introduced, make it difficult for us to project the levels of advertising revenue or the margins that we, or the Internet advertising industry in general, will realize in the future. Moreover, an increase in the amount of advertising on the Web may result in a decline in click rates. Since we rely on performance-based pricing models to generate revenue, any decline in click rates may make our pricing models less viable or less attractive solutions for Web publishers and advertisers.

OUR REVENUE COULD DECLINE IF WE FAIL TO EFFECTIVELY MANAGE OUR EXISTING ADVERTISING SPACE AND OUR GROWTH COULD BE IMPEDED IF WE FAIL TO ACQUIRE NEW ADVERTISING SPACE.

Our success depends in part on our ability to effectively manage our existing advertising space. The Web publishers and list owners that list their unsold advertising space with us are not bound by long-term contracts that ensure us a consistent supply of advertising space, which we refer to as inventory. In addition, Web sites can change the amount of inventory they make available to us at any time. If a Web publisher or email list owner decides not to make advertising space from its Web sites, newsletters or lists available to us, we may not be able to replace this advertising space with advertising space from other Web sites or list owners that have comparable traffic patterns and user demographics quickly enough to fulfill our advertisers’ requests. This would result in lost revenue. We expect that our customers’ requirements will become more sophisticated as the Web matures as an advertising medium. If we fail to manage our existing advertising space effectively to meet our customers’ changing requirements, our revenue could decline. Our growth depends on our ability to expand our advertising inventory. To attract new customers, we must maintain a consistent supply of attractive advertising space. We intend to expand our advertising inventory by selectively adding to our network new Web publishers and list owners that offer attractive demographics, innovative and quality content and growing Web user traffic and email volume. Our ability to attract new Web publishers and list owners to our network and to retain Web publishers and list owners

currently in our network will depend on various factors, some of which are beyond our control. These factors include our ability to introduce new and innovative product lines and services, our ability to efficiently manage our existing advertising inventory, our pricing policies and the cost-efficiency to Web publishers and list owners of outsourcing their advertising sales. In addition, the number of competing intermediaries that purchase advertising inventory from Web publishers and list owners continues to increase. We will not be able to assure you that the size of our inventory will increase or even remain constant in the future.

Our pay-per-click search service is dependent upon a limited number of sources to direct Internet users to our search service. Our sources for users conducting searches are members of our affiliate network, including portals, browsers, or other affiliates and our own website. Revenues are generated when users conducting searches are directed to advertisers through a paid search link in our search results. The more traffic our sources direct to our advertisers through our search technology, the more revenue we will generate. Unfavorable changes in our relationship with these sources or loss of these relationships would adversely affect our revenue and results of operations.

WE MAY FACE INTELLECTUAL PROPERTY ACTIONS THAT ARE COSTLY OR COULD HINDER OR PREVENT OUR ABILITY TO DELIVER OUR PRODUCTS AND SERVICES.

We may be subject to legal actions alleging intellectual property infringement (including patent infringement), unfair competition or similar claims against us. Companies may apply for or be awarded patents or have other intellectual property rights covering aspects of our technology or business. One of the primary competitors of our Search123 subsidiary, Overture Services, Inc., purports to be the owner of U.S. Patent No. 6,269,361, which was issued on July 31, 2001 and is entitled “System and method for influencing a position on a search result list generated by a computer network search engine.” Overture has aggressively pursued its alleged patent rights by filing lawsuits against other pay-per-click search engine companies such as FindWhat.com and Google. FindWhat.com and Google have asserted counter-claims against Overture including, but not limited to, invalidity, unenforceability and non-infringement.

IF THE TECHNOLOGY THAT WE CURRENTLY USE TO TARGET THE DELIVERY OF ONLINE ADVERTISEMENTS AND TO PREVENT FRAUD ON OUR NETWORK IS RESTRICTED OR BECOMES SUBJECT TO REGULATION, OUR EXPENSES COULD INCREASE AND WE COULD LOSE CUSTOMERS OR ADVERTISING INVENTORY.

Web sites typically place small files of non-personalized (or “anonymous”) information, commonly known as cookies, on an Internet user’s hard drive, generally without the user’s knowledge or consent. Cookies generally collect information about users on a non-personalized basis to enable Web sites to provide users with a more customized experience. Cookie information is passed to the Web site through an Internet user’s browser software. We currently use cookies to track an Internet user’s movement through the advertiser’s Web site and to monitor and prevent potentially fraudulent activity on our network. Most currently available Internet browsers allow Internet users to modify their browser settings to prevent cookies from being stored on their hard drive, and some users currently do so. Internet users can also delete cookies from their hard drives at any time. Some Internet commentators and privacy advocates have suggested limiting or eliminating the use of cookies, and legislation (including, but not limited to, Spyware legislation) has been introduced in some jurisdictions to regulate the use of cookie technology. The effectiveness of our technology could be limited by any reduction or limitation in the use of cookies. If the use or effectiveness of cookies were limited, we would have to switch to other technologies to gather demographic and behavioral information. While such technologies currently exist, they are substantially less effective than cookies. We would also have to develop or acquire other technology to prevent fraud. Replacement of cookies could require significant reengineering time and resources, might not be completed in time to avoid losing customers or advertising inventory, and might not be commercially feasible. Our use of cookie technology or any other technologies designed to collect Internet usage information may subject us to litigation or investigations in the future. Any litigation or government action against us could be costly and time-consuming, could require us to change our business practices and could divert management’s attention.

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

We earn advertising revenue and make payments to Web publishers based on the number of impressions, clicks and actions from advertisements delivered on our network of Web sites and email lists. Advertisers’ and Web publishers’ willingness to use our services and join our network will depend on the extent to which they perceive our measurements of clicks to be accurate and reliable. Advertisers and Web publishers often maintain their own technologies and methodologies for counting clicks, and from time to time we have had to resolve differences between our measurements and theirs. Any significant dispute over the proper measurement of clicks or other user responses to advertisements could cause us to lose customers or advertising inventory.

IF WE FAIL TO COMPETE EFFECTIVELY AGAINST OTHER INTERNET ADVERTISING COMPANIES, WE COULD LOSE CUSTOMERS OR ADVERTISING INVENTORY AND OUR REVENUE COULD DECLINE.

The Internet advertising markets are characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions and changing client demands. The introduction of new services embodying new technologies and the emergence of new industry standards and practices could render our existing services obsolete and unmarketable or require unanticipated investments in research and development. Our failure to adapt successfully to these changes could harm our business, results of operations and financial condition.

The market for Internet advertising and related services is intensely competitive. We expect this competition to continue to increase because there are no significant barriers to entry. Increased competition may result in price reductions for advertising space, reduced margins and loss of our market share. Our principal competitors include other companies that provide advertisers with Internet advertising solutions, such as CPM, CPC, CPL or CPA, and companies that offer pay-per-click search services. We directly compete with a number of competitors in the CPC market segment, such as Advertising.com. We compete in the performance-based marketing segment with CPL and CPA performance-based companies such as Direct Response and Linkshare, and we compete with other Internet advertising networks that focus on the traditional CPM model, including 24/7 Real Media. We also compete with pay-per-click search companies such as Overture, recently acquired by Yahoo, Google and FindWhat. Large Web sites with brand recognition, such as Yahoo, AOL and MSN, have direct sales personnel and substantial proprietary inventory that provide significant competitive advantage compared to our networks and have significant impact on pricing for online advertising. These companies have longer operating histories, greater name recognition and have greater financial and marketing resources than we have.

Competition for advertising placements among current and future suppliers of Internet navigational and informational services, high-traffic Web sites and ISPs, as well as competition with other media for advertising placements, could result in significant price competition, declining margins and/or reductions in advertising revenue. In addition, as we continue to expand the scope of our Web services, we may compete with a greater number of Web publishers and other media companies across an increasing range of different Web services, including in vertical markets where competitors may have advantages in expertise, brand recognition and other areas. If existing or future competitors develop or offer services that provide significant performance, price, creative or other advantages over those offered by us, our business, results of operations and financial condition would be negatively affected. We will also compete with traditional advertising media, such as direct mail, television, radio, cable and print, for a share of advertisers’ total advertising budgets. Many current and potential competitors enjoy competitive advantages over us, such as longer operating histories, greater name recognition, larger customer bases, greater access to advertising space on high-traffic Web sites, and significantly greater financial, technical and marketing resources. As a result, we may not be able to compete successfully. If we fail to compete successfully, we could lose customers or advertising inventory and our revenue could decline.

OUR REVENUE GROWTH COULD BE NEGATIVELY IMPACTED IF INTERNET USAGE AND THE DEVELOPMENT OF INTERNET INFRASTRUCTURE DO NOT CONTINUE TO GROW.

Our business and financial results will depend on continued growth in the use of the Internet. Internet usage may be inhibited for a number of reasons, such as: inadequate network infrastructure; security concerns; inconsistent quality of service; and unavailability of cost-effective, high-speed service.

If Internet usage grows, our infrastructure may not be able to support the demands placed on it and our performance and reliability may decline. In addition, Web sites have experienced interruptions in their service as a result of outages and other delays occurring throughout the Internet network infrastructure, and as a result of sabotage, such as electronic attacks designed to interrupt service on many Web sites. The Internet could lose its viability as a commercial medium due to delays in the development or adoption of new technology required to accommodate increased levels of Internet activity. If use of the Internet does not continue to grow, or if the Internet infrastructure does not effectively support our growth, our revenue could be materially and adversely affected.

OUR LONG-TERM SUCCESS MAY BE MATERIALLY ADVERSELY AFFECTED IF THE MARKET FOR E-COMMERCE DOES NOT GROW OR GROWS SLOWER THAN EXPECTED.

Because many of our customers’ advertisements encourage online purchasing, our long-term success may depend in part on the growth and market acceptance of e-commerce. Our business will be adversely affected if the market for e-commerce does not continue to grow or grows slower than now expected. A number of factors outside of our control could hinder the future growth of e-commerce, including the following:

• the network infrastructure necessary for substantial growth in Internet usage may not develop adequately or our

performance and reliability may decline;

• insufficient availability of telecommunication services or changes in telecommunication services could result in inconsistent quality of service or slower response times on the Internet;

• negative publicity and consumer concern surrounding the security of e-commerce could impede our acceptance and growth; and

• financial instability of e-commerce customers.

In particular, any well-publicized compromise of security involving Web-based transactions could deter people from purchasing items on the Internet, clicking on advertisements, or using the Internet generally, any of which could cause us to lose customers and advertising inventory and could materially, adversely affect our revenue.

WE WILL DEPEND ON KEY PERSONNEL, THE LOSS OF WHOM COULD HARM OUR BUSINESS.

The successful integration of the companies we have acquired will depend in part on the retention of personnel critical to our combined business and operations due to, for example, unique technical skills or management expertise. We may be unable to retain existing management, technical, sales and customer support personnel that are critical to the success of the integrated company, resulting in disruption of operations, loss of key information, expertise or know-how and unanticipated additional recruitment and training costs and otherwise diminishing anticipated benefits of these acquisitions.

Our future success is substantially dependent on the continued service of our key senior management. Our employment agreements with our key personnel are short-term and on an at-will basis. We do not have key-person insurance on any of our employees. The loss of the services of any member of our management team, or of any other key employees, could divert management’s time and attention, increase our expenses and adversely affect our ability to conduct our business efficiently. Our future success also depends on our continuing ability to attract, retain and motivate highly skilled employees. We may be unable to retain our key employees or attract, assimilate or retain other highly qualified employees in the future. We have experienced difficulty from time to time in attracting the personnel necessary to support the growth of our business, and may experience similar difficulties in the future.

DELAWARE LAW AND OUR STOCKHOLDER RIGHTS PLAN CONTAIN ANTI-TAKEOVER PROVISIONS THAT COULD DETER TAKEOVER ATTEMPTS THAT COULD BE BENEFICIAL TO OUR STOCKHOLDERS.

Provisions of Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. Section 203 of the Delaware General Corporation Law may make the acquisition of the Company and the removal of incumbent officers and directors more difficult by prohibiting stockholders holding 15% or more of our outstanding voting stock from acquiring the Company without the board of director’s consent for at least three years from the date they first hold 15% or more of the voting stock. In addition, our Stockholder Rights Plan has significant anti-takeover effects by causing substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors.

SYSTEM FAILURES COULD SIGNIFICANTLY DISRUPT OUR OPERATIONS, WHICH COULD CAUSE US TO LOSE CUSTOMERS OR ADVERTISING INVENTORY.

Our success depends on the continuing and uninterrupted performance of our systems. Sustained or repeated system failures that interrupt our ability to provide services to customers, including failures affecting our ability to deliver advertisements quickly and accurately and to process users’ responses to advertisements, would reduce significantly the attractiveness of our solutions to advertisers and Web publishers. Our business, results of operations and financial condition could be materially and adversely affected by any damage or failure that interrupts or delays our operations. Our computer systems will be vulnerable to damage from a variety of sources, including telecommunications failures, power outages, malicious human acts and natural disasters. We lease server space in Los Angeles and Sunnyvale, California; Louisville, Kentucky; Pittsburgh and Pennsylvania. Therefore, any of the above factors affecting the Los Angeles, Sunnyvale, Louisville or Pittsburgh areas would substantially harm our business. Moreover, despite network security measures, our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems in part because we cannot control the maintenance and operation of our third-party data centers. Despite the precautions taken, unanticipated problems affecting our systems could cause interruptions in the delivery of our solutions in the future. Our data storage centers incorporate redundant systems, consisting of additional servers, but our primary system does not switch over to our backup system automatically. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures in our systems.

WE MAY EXPERIENCE CAPACITY CONSTRAINTS THAT COULD REDUCE OUR REVENUE.

Our future success depends in part on the efficient performance of our software and technology, as well as the efficient performance of the systems of third parties. As the numbers of Web pages and Internet users increase, our services and infrastructure may not be able to grow to meet the demand. A sudden and unexpected increase in the volume of advertising delivered through our servers or in click rates could strain the capacity of the software or hardware that we have deployed. Any capacity constraints we experience could lead to slower response times or system failures and adversely affect the availability of advertisements, the number of advertising views delivered and the level of user responses received, which would harm our revenue. To the extent that we do not effectively address capacity constraints or system failures, our business, results of operations and financial condition could be harmed substantially. We also depend on the Internet service providers, or ISPs, that provide consumers with access to the Web sites on which our customers’ advertisements appear. Internet users have occasionally experienced difficulties connecting to the Web due to failures of their ISPs’ systems. Any disruption in Internet access provided by ISPs or failures by ISPs to handle the higher volumes of traffic expected in the future could materially and adversely affect our revenue.

IT MAY BE DIFFICULT TO PREDICT OUR FINANCIAL PERFORMANCE BECAUSE OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.

Our revenue and operating results may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control. You should not rely on period-to-period comparisons of our results of operations as an indication of our future performance. Our results of operations may fall below the expectations of market analysts and investors or our own forecasts in some future periods. If this happens, the market price of our common stock may fall. The factors that may affect our quarterly operating results include:

• fluctuations in demand for our advertising solutions;

• fluctuations in click, lead and action rates;

• fluctuations in the amount of available advertising space, or views, on our networks;

• the timing and amount of sales and marketing expenses incurred to attract new advertisers;

• fluctuations in sales of different types of advertising, for example, the amount of advertising sold at higher rates rather than lower rates;

• seasonal patterns in Internet advertisers’ spending;

• changes in our pricing policies, the pricing policies of our competitors or the pricing policies for advertising on the Internet generally;

• timing differences at the end of each quarter between our payments to Web publishers for a advertising space and our collection of advertising revenue for that space; and

• costs related to acquisitions of technology or businesses.

Expenditures by advertisers also tend to be cyclical, reflecting overall economic conditions as well as budgeting and buying patterns. Any decline in the economic prospects of advertisers or the economy generally may alter current or prospective advertisers’ spending priorities, or may increase the time it takes us to close sales with advertisers, and could materially and adversely affect our business, results of operations and financial condition.

IF WE DO NOT SUCCESSFULLY DEVELOP OUR INTERNATIONAL STRATEGY, OUR REVENUE AND CASH FLOWS AND THE GROWTH OF OUR BUSINESS COULD BE HARMED.

We initiated operations, through wholly-owned subsidiaries or divisions, in the United Kingdom in 1999 and France and Germany in 2000. Our foreign operations subject us to foreign currency exchange risks. We currently do not utilize hedging instruments to mitigate foreign exchange risks.

Our international expansion will subject us to additional foreign currency exchange risks and will require management’s attention and resources. We expect to pursue expansion through a number of international alliances and to rely extensively on these business partners initially to conduct operations, establish local networks, register Web sites as affiliates and coordinate sales and marketing efforts. Our success in these markets will depend on the success of our business partners and their willingness to dedicate

sufficient resources to the relationships. We cannot assure you that we will be successful in our efforts overseas. International operations are subject to other inherent risks, including:

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

• changes in and differences between regulatory requirements, domestic and foreign;

• export restrictions, including export controls relating to encryption technologies;

• reduced protection for intellectual property rights in some countries;

• potentially adverse tax consequences;

• difficulties and costs of staffing and managing foreign operations;

• political and economic instability;

• tariffs and other trade barriers; and

• seasonal reductions in business activity.

Our failure to address these risks adequately could materially and adversely affect our business, results of operations and financial condition.

WE MAY BE LIABLE FOR CONTENT DISPLAYED ON OUR NETWORKS OF PUBLISHERS WHICH COULD INCREASE OUR EXPENSES.

We may be liable to third parties for content in the advertising we deliver if the artwork, text or other content involved violates copyright, trademark, or other intellectual property rights of third parties or if the content is defamatory. Any claims or counterclaims could be time-consuming, could result in costly litigation and could divert management’s attention.

IF WE FAIL TO ESTABLISH, MAINTAIN AND EXPAND OUR TECHNOLOGY BUSINESS AND MARKETING ALLIANCES AND PARTNERSHIPS, OUR ABILITY TO GROW COULD BE LIMITED, WE MAY NOT ACHIEVE DESIRED REVENUE AND OUR STOCK PRICE MAY DECLINE.

In order to grow our technology business, we must generate, retain and strengthen successful business and marketing alliances with advertising agencies.

We depend, and expect to continue to depend, on our business and marketing alliances, which are companies with which we have written or oral agreements to work together to provide services to our clients and to refer business from their clients and customers to us. If companies with which we have business and marketing alliances do not refer their clients and customers to us to perform their online campaign and message management, our revenue and results of operations would be severely harmed.

WE WILL BE DEPENDENT UPON TECHNOLOGIES, INCLUDING OUR MOJO, ADWARE, COMMISSION JUNCTION, HI-SPEED MEDIA, AND SEARCH123 TECHNOLOGIES, FOR OUR FUTURE REVENUE, AND IF THESE TECHNOLOGIES DO NOT GENERATE REVENUE, OUR BUSINESS MAY FAIL.

Our future revenue is likely to be dependent on the acceptance by clients of the use of technologies, which we believe to be the cornerstone of the technology business. If these technologies do not perform as anticipated or otherwise do not attract clients to use our services, our operations will suffer. In addition, we have incurred and will continue to incur significant expense developing our technologies. If our revenue generated from the use of our technologies does not cover these development costs, our financial condition would suffer.

IF OUR TECHNOLOGIES SUFFER FROM DESIGN DEFECTS, WE MAY NEED TO EXPEND SIGNIFICANT RESOURCES TO ADDRESS RESULTING PRODUCT LIABILITY CLAIMS.

Our business will be harmed if our technologies suffer from design or performance defects and, as a result, we could become subject to significant product liability claims. Technology as complex as our technology may contain design and/or performance defects which are not detectable even after extensive internal testing. Such defects may become apparent only after widespread

commercial use. Our contracts with our clients currently do not contain provisions to completely limit our exposure to liabilities resulting from product liability claims. Although we have not experienced any product liability claims to date, we cannot assure you that we will not do so in the future. A product liability claim brought against us, which is not adequately covered by our insurance, could materially harm our business.

TECHNOLOGY SALES AND IMPLEMENTATION CYCLES ARE LENGTHY, WHICH COULD DIVERT OUR FINANCIAL AND OTHER RESOURCES, AND ARE SUBJECT TO DELAYS, WHICH COULD RESULT IN DELAYED REVENUE.

If the sales and implementation cycle of our technology products and services are delayed, our revenue will likewise be delayed. Our sales and implementation cycles are lengthy, causing us to recognize revenue long after our initial contact with a client. During our sales effort, we spend significant time educating prospective clients on the use and benefit of our message management services. As a result, the sales cycle for our products and services is long, ranging from a few weeks to several months for our larger clients. The sales cycle for our message management services and media management applications is likely to be longer than the sales cycle for competitors because we believe that clients may require more extensive approval processes related to integrating internal business information with their advertising campaigns. In addition, in order for a client to implement our services, the client must commit a significant amount of resources over an extended period of time. Furthermore, even after a client purchases our services, the implementation cycle is subject to delays. These delays may be caused by factors within our control, such as possible technology defects, as well as those outside our control, such as clients’ budgetary constraints, internal acceptance reviews, functionality enhancements, lack of appropriate customer staff to implement our media management applications and the complexity of clients’ advertising needs. Also, failure to deliver service or application features consistent with delivery commitments could result in a delay or cancellation of a client agreement.

WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY FROM UNAUTHORIZED USE, WHICH COULD DIMINISH THE VALUE OF OUR SERVICES, WEAKEN OUR COMPETITIVE POSITION AND REDUCE OUR REVENUE.

Our success depends in large part on our proprietary technologies, including tracking management software, our affiliate marketing technologies and our MOJO platform. In addition, we believe that our trademarks are key to identifying and differentiating our services from those of our competitors. We may be required to spend significant resources to monitor and police our intellectual property rights. If we fail to successfully enforce our intellectual property rights, the value of our services could be diminished and our competitive position may suffer.

We rely on a combination of copyright, trademark and trade secret laws, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. Third-party software providers could copy or otherwise obtain and use our technology without authorization or develop similar technology independently which may infringe upon our proprietary rights. We may not be able to detect infringement and may lose competitive position in the market before we do so. In addition, competitors may design around our technology or develop competing technologies. Intellectual property protection may also be unavailable or limited in some foreign countries.

We generally enter into confidentiality or license agreements with our employees, consultants, vendor clients and corporate partners, and generally control access to and distribution of our technologies, documentation and other proprietary information. Despite these efforts, unauthorized parties may attempt to disclose, obtain or use our services or technologies. Our precautions may not prevent misappropriation of our services or technologies, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States.

IF WE FAIL TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGIES, WE COULD LOSE CUSTOMERS OR ADVERTISING INVENTORY.

The Internet advertising market is characterized by rapidly changing technologies, evolving industry standards, frequent new product and service introductions and changing customer demands. The introduction of new products and services embodying new technologies and the emergence of new industry standards and practices can render existing products and services obsolete and unmarketable or require unanticipated investments in research and development. Our success will depend on our ability to adapt to rapidly changing technologies, to enhance existing solutions and to develop and introduce a variety of new solutions to address our customers’ changing demands. For example, advertisers are increasingly requiring Internet advertising networks to have the ability to deliver advertisements utilizing new formats that surpass stationary images and incorporate rich media, such as video and audio, interactivity, and more precise consumer targeting techniques. Our system does not support some types of advertising formats, such as certain video and audio formats, and many of the Web sites in our network have not implemented systems to allow rich media

advertisements. In addition, an increase in the bandwidth of Internet access resulting in faster data delivery may provide new products and services that will take advantage of this expansion in delivery capability. If we fail to adapt successfully to such developments, we could lose customers or advertising inventory. We purchase most of the software used in our business from third parties. We intend to continue to acquire technology necessary for us to conduct our business from third parties. We cannot assure you that, in the future, these technologies will be available on commercially reasonable terms, or at all. We may also experience difficulties that could delay or prevent the successful design, development, introduction or marketing of new solutions. Any new solution or enhancement that we develop will need to meet the requirements of our current and prospective customers and may not achieve significant market acceptance. If we fail to keep pace with technological developments and the introduction of new industry and technology standards on a cost-effective basis, our expenses could increase, and we could lose customers or advertising inventory.

CHANGES IN GOVERNMENT REGULATION AND INDUSTRY STANDARDS COULD DECREASE DEMAND FOR OUR SERVICES AND INCREASE OUR COSTS OF DOING BUSINESS.

Laws and regulations that apply to Internet communications, commerce and advertising are becoming more prevalent. These regulations could affect the costs of communicating on the Web and adversely affect the demand for our advertising solutions or otherwise harm our business, results of operations and financial condition. The United States Congress has enacted Internet legislation regarding children’s privacy, copyrights, sending of unsolicited commercial email (e.g., the Federal CAN-Spam Act of 2003) and taxation. Other laws and regulations have been adopted and may be adopted in the future, and may address issues such as user privacy, Spyware, pricing, intellectual property ownership and infringement, copyright, trademark, trade secret, export of encryption technology, acceptable content, taxation and quality of products and services. This legislation could hinder growth in the use of the Web generally and decrease the acceptance of the Web as a communications, commercial and advertising medium.

Due to the global nature of the Web, it is possible that, although our transmissions originate in California, Kentucky and Pennsylvania, the governments of other states or foreign countries might attempt to regulate our transmissions or levy sales or other taxes relating to our activities. In addition, the growth and development of the market for Internet commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business over the Internet. The laws governing the Internet remain largely unsettled, even in areas where there has been some legislative action. It may take years to determine how existing laws, including those governing intellectual property, privacy, libel and taxation, apply to the Internet and Internet advertising. Our business, results of operations and financial condition could be materially and adversely affected by the adoption or modification of laws or regulations relating to the Internet, or the application of existing laws to the Internet or Internet-based advertising.

WE COULD BE HELD LIABLE FOR OUR OR OUR CLIENTS’ FAILURE TO COMPLY WITH FEDERAL, STATE AND FOREIGN LAWS GOVERNING CONSUMER PRIVACY.

Recent growing public concern regarding privacy and the collection, distribution and use of information about Internet users has led to increased federal, state and foreign scrutiny and legislative and regulatory activity concerning data collection and use practices. Any failure by us to comply with applicable foreign, federal and state laws and regulatory requirements of regulatory authorities may result in, among other things, indemnification liability to our clients and the advertising agencies we work with, administrative enforcement actions and fines, class action lawsuits, cease and desist orders, and civil and criminal liability. Recently, class action lawsuits have been filed alleging violations of privacy laws by Internet service providers. The European Union’s directive addressing data privacy limits our ability to collect and use information regarding Internet users. These restrictions may limit our ability to target advertising in most European countries. Our failure to comply with these or other federal, state or foreign laws could result in liability and materially harm our business.

In addition to government activity, privacy advocacy groups and the high-technology and direct marketing industries are considering various new, additional or different self-regulatory standards. This focus, and any legislation, regulations or standards promulgated, may impact us adversely. Governments, trade associations and industry self-regulatory groups may enact more burdensome laws, regulations and guidelines, including consumer privacy laws, affecting our clients and us. Since many of the proposed laws or regulations are just being developed, and a consensus on privacy and data usage has not been reached, we cannot yet determine the impact these regulations may have on our business. However, if the gathering of profiling information were to be curtailed, Internet advertising would be less effective, which would reduce demand for Internet advertising and harm our business.

Our customers are also subject to various federal and state regulations concerning the collection and use of information regarding individuals. These laws include the Children’s Online Privacy Protection Act, the Federal Drivers Privacy Protection Act of 1994, the privacy provisions of the Gramm-Leach-Bliley Act, the CAN-SPAM Act of 2003, as well as other laws that govern the collection and use of consumer credit information. We cannot assure you that our clients are currently in compliance, or will remain in compliance, with these laws and their own privacy policies. We may be held liable if our clients use our technology in a manner that is not in compliance with these laws or their own stated privacy standards.

OUR STOCK PRICE IS LIKELY TO BE VOLATILE AND COULD DROP UNEXPECTEDLY.

Our common stock has been publicly traded only since March 30, 2000. The market price of our common stock has been subject to significant fluctuations since the date of our initial public offering.

The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices of securities, particularly securities of technology companies. As a result, the market price of our common stock may materially decline, regardless of our operating performance. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. We may become involved in this type of litigation in the future. Litigation of this type is often expensive and diverts management’s attention and resources.

IF REQUIREMENTS RELATING TO ACCOUNTING TREATMENT FOR EMPLOYEE STOCK OPTIONS ARE CHANGED, WE MIGHT DECIDE TO CHANGE OUR COMPENSATION PRACTICES, WHICH MIGHT INCREASE OUR CASH COMPENSATION EXPENSE.

We currently account for the issuance of stock options under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” If proposals currently under consideration by administrative and governmental authorities are adopted, we may be required to treat the value of the stock options granted to employees as compensation expense. Such a change would likely have a negative effect on our earnings. In response to a requirement to expense the value of stock options, we might decide to decrease the number of employee stock options granted to our employees. Such a reduction could affect our ability to retain existing employees and attract qualified candidates, and increase the cash compensation we would have to pay to them. An increase in employee wages and salaries would decrease our cash available for marketing, product development and other uses.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934, as amended (“Exchange Act”) Rules 13a-15(e) and 15d-15(e)) under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective.

(b) Changes in Internal Controls

Additionally, our Chief Executive Officer and Chief Financial Officer have determined that there have been no changes to our internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION AND SIGNATURES

ITEM 1. LEGAL PROCEEDINGS

Reference is made to our Annual Report on Form 10-K filed with the SEC on March 15, 2004 under the heading “Legal Proceedings” for a discussion of litigation involving us relating to (i) the Lorenc v. Be Free litigation, and (ii) the Chahal v. ValueClick, Inc. litigation.

Lorenc v. Be Free, Inc. et al.

On September 27, 2000, Joseph Lorenc, a former employee of Be Free, Inc. filed a lawsuit against Be Free and two officers of Be Free, Steven Joseph and Gordon Hoffstein, in the United States District Court, District of Massachusetts. The complaint alleges, among other things, breach of contract. Lorenc seeks, among other things, compensatory damages, punitive damages and attorney’s fees to the greatest extent allowed by law. The case was pending before the state court in Massachusetts. On the day the case was set for trial, May 3, 2004, Lorenc dismissed his case with prejudice in exchange for an agreement by the Company not to sue Lorenc for the recovery of its attorney’s fees incurred in defending this action. The Company paid no money to Lorenc in exchange for his dismissal with prejudice. The case is now concluded.

Chahal v. ValueClick, Inc. et al.

This case was filed on September 5, 2003 and brought against ValueClick and Company executives Sam Paisley, Jim Zarley and Scott Barlow, by Gurbaksh Chahal and Tajinder Chahal for, among other things, fraud. The Chahals are former employees of the Company’s Click Agents Inc. subsidiary and the case arises out of the Company’s repurchase of the Chahals’ ValueClick stock. The case was pending before the Los Angeles County Superior Court. The Chahals seek, among other things, general, special and punitive damages according to proof as well as the imposition of a constructive trust. On July 19, 2004, the Company reached a settlement with the Chahals, which was not material to the Company’s financial statements. Terms of the settlement agreement are confidential.

Other than the matters discussed above, we are not a party to any other material legal proceedings, nor are we aware of any pending or threatened litigation that would have a material adverse effect on our business, operating results, cash flows or financial condition. From time to time, we may become subject to additional legal proceedings, claims, and litigation arising in the ordinary course of business. In addition, we may receive letters alleging infringement of patent or other intellectual property rights. Our management believes that these letters are without merit and intends to contest them vigorously.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

(a) The 2003 Annual Meeting of Stockholders was held on June 3, 2004 in Westlake Village, California.

(b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934. There was no solicitation in opposition to the management’s nominees as listed in the proxy statement, and all of such nominees were elected. At the Annual Meeting, our stockholders elected each of the following director nominees as directors, to serve on our board of directors until the next Annual Meeting of Stockholders or until their successors are duly elected and qualified. The vote for each director was as follows:

Name	For	Withheld
James R. Zarley	49,770,776	22,187,077
David S. Buzby	69,310,125	2,647,728
Martin T. Hart	69,276,743	2,681,110
Tom A. Vadnais	53,384,172	18,573,681
Jeffrey F. Rayport	47,469,157	24,488,696

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

Exhibit Number		Exhibit Description

31.1		Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated August 9, 2004

31.2		Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated August 9, 2004

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to section 18 U.S.C. § 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated August 9, 2004

(b) Reports on Form 8-K filed during the quarter ended June 30, 2004:

Current Report on Form 8-K was furnished by ValueClick to the Securities and Exchange Commission on April 27, 2004 to report under Item 12 the issuance of a press release announcing the financial results for the quarter ended March 31, 2004.

SIGNATURES

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

	VALUECLICK, INC. (Registrant)


	By:	/s/ SAMUEL J. PAISLEY
		Samuel J. Paisley
		Chief Financial Officer
		(Principal Financial and Accounting Officer)
Dated: August 9, 2004