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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

OR

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NUMBER: 000-29723

DIGITAS INC.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s Telephone Number, Including Area Code: 617-867-1000

NA

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: as of April 30, 2004 there were 64,505,097 shares of Common Stock, $.01 par value per share, outstanding.

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DIGITAS INC.

Form 10-Q

Table of Contents

March 31, 2004

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

DIGITAS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

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

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DIGITAS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)

(UNAUDITED)

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

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DIGITAS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

(UNAUDITED)

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

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DIGITAS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements have been prepared by Digitas Inc. (the “Company”) in accordance with generally accepted accounting principles. They do not include all of the information and footnotes required for complete financial statements and should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2003 included in the Company’s Annual Report on Form 10-K for that period. The accompanying unaudited financial statements reflect all adjustments (consisting solely of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of results of operations for the interim periods presented. The results for these periods are not necessarily indicative of the results for any future reporting period, including the fiscal year. The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenue and expenses for the period. Actual results could differ from these estimates.

Monetary assets and liabilities of the Company’s foreign branch are translated into U.S. dollars at the exchange rate in effect at period-end and nonmonetary assets and liabilities are remeasured at historical exchange rates. Income and expenses are remeasured at the weighted-average exchange rate for the period. Transaction gains and losses are reflected in selling, general and administrative expenses in the statements of operations.

Basic and diluted earnings per share are computed in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share.” SFAS No. 128 requires both basic earnings per share, which is based on the weighted-average number of common shares outstanding, and diluted earnings per share, which is based on the weighted-average number of common shares outstanding and all dilutive potential common equivalent shares outstanding. The dilutive effect of options is determined under the treasury stock method using the average market price for the period. Common equivalent shares are included in the per share calculations where the effect of their inclusion would be dilutive.

For the three months ended March 31, 2004 and 2003 the share numbers used in computing diluted earnings per share included the weighted-average number of common shares outstanding plus 10,504,000 and 5,991,000 dilutive common equivalent shares outstanding, respectively, consisting of stock options and warrants.

The Company accounts for its stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion (“APBO”) No. 25 as interpreted by FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25,” (“FIN 44”) and presents the pro forma disclosures required by SFAS No. 123 as amended by SFAS No. 148.

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Had compensation costs for the 1998, 1999 and 2000 stock option plans been determined using the fair value method at the grant dates, the effect on the Company’s net income and earnings per share would have been as follows:

The Company accounts for comprehensive income under SFAS No. 130, “Reporting Comprehensive Income.” Comprehensive income is summarized below (in thousands):

The components of other comprehensive income are cumulative foreign currency translation adjustments of $5,000 and ($28,000) at March 31, 2004 and December 31, 2003, respectively.

During 2001, the Company recorded restructuring expenses totaling $41.9 million, consisting of $16.7 million for workforce reduction and related costs and $25.2 million for the consolidation of facilities and abandonment of related leasehold improvements. The facility charge represented an estimate of future obligations under the terms of the leases for identified excess space less anticipated income from subleasing activities. In determining this estimate, management evaluated its potential to sublease its excess space and its ability to renegotiate various leases at more favorable terms and in some instances obtain relief through relocation of office space.

During 2002, the Company recorded restructuring expenses totaling $47.1 million, consisting of $3.3 million for workforce reduction and related costs and $43.8 million for the consolidation of facilities and abandonment of related leasehold improvements. These charges were recorded to further align the cost structure with changing market conditions and to update estimates originally made in 2001 for current information.

During 2003, the Company made significant progress towards eliminating its excess real estate, resulting in the recognition of $4.1 million of restructuring income related to the reversal of restructuring expense initially recorded in 2001 and 2002. The restructuring expense was reversed because of savings of $7.2 million as compared to the Company’s original estimates. The $7.2 million in savings was offset by revisions in estimates of future sublease rates and terms for remaining leases resulting in an increase in expected future obligations of $3.1 million.

The Company continues to evaluate alternatives and monitor its restructuring accrual on a quarterly basis to reflect new developments and prevailing economic conditions in the real estate markets in which the Company leases office space. These sublease estimates, which were made in consultation with the Company’s real estate advisers, were based on current and projected conditions at the time in the real estate and economic markets in which the Company determined it had excess office space. At March 31, 2004, approximately 70,000 square feet of the approximately 300,000 square feet initially identified as excess remained available for sublease.

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At March 31, 2004, the Company’s restructuring accrual totaled $26.8 million. Approximately $0.2 million of this balance is workforce related for final payments of severance and will be fully utilized in 2004. The remaining $26.6 million is related to remaining real estate obligations net of expected sublease income. The Company believes the restructuring accrual of $26.6 million is appropriate and adequate to cover these remaining obligations.

The following is a summary of restructuring activity since December 31, 2003 (dollars in thousands):

As a result of all restructuring activity, which commenced in the second quarter of 2001, the Company has reduced its workforce by approximately 700 employees across all business functions and regions.

For the three months ended March 31, 2004 and 2003, cash expenditures related to restructuring activities were $2.5 million and $2.4 million, respectively. As of March 31, 2004, total remaining cash expenditures related to restructuring activities were $26.8 million. Approximately $2.3 million in cash expenditures are expected in the second quarter of 2004, and the remaining cash expenditures of approximately $24.5 million, related to real estate rental obligations, over the following eleven years.

In November 2003, the Board of Directors authorized the Company to repurchase up to $20 million of common stock between December 13, 2003 and June 30, 2005 under a common stock repurchase program. As of March 31, 2004, the Company has not repurchased any shares under this program.

The Company is a party to stockholder class action law suits filed in the United States District Court for the Southern District of New York. Between June 26, 2001 and August 16, 2001, several stockholder class action complaints were filed in the United States District Court for the Southern District of New York against the Company, several of its officers and directors, and five underwriters of its initial public offering (the “Offering”). The purported class actions are all brought on behalf of purchasers of the Company’s common stock since March 13, 2000, the date of the Offering. The plaintiffs allege, among other things, that the Company’s prospectus, incorporated in the Registration Statement on Form S-1 filed with the Securities and Exchange Commission, was materially false and misleading because it failed to disclose that the underwriters had engaged in conduct designed to result in undisclosed and excessive underwriters’ compensation in the form of increased brokerage commissions and also that this alleged conduct of the underwriters artificially inflated the Company’s stock price in the period after the Offering. The plaintiffs claim violations of Sections 11, 12 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission and seek, among other things, damages, statutory compensation and costs of litigation. Effective October 9, 2002, the claims against the Company’s officers and directors were dismissed without prejudice. Effective February 19, 2003, the Section 10(b) claims against the Company were dismissed. The terms of a settlement have been tentatively reached between the plaintiffs in the suits and most of the defendants, including the Company, with respect to the remaining claims. If completed and if then approved by the court, the settlement would dismiss those claims against the Company and is expected to result in no material liability to it. The Company believes that the claims against it are without merit and, if they are not dismissed as part of a settlement, intends to defend them vigorously. Management currently

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believes that resolving these matters will not have a material adverse impact on the Company’s financial position or its results of operations; however, litigation is inherently uncertain and there can be no assurances as to the ultimate outcome or effect of these actions.

In April 2004, the Company entered into an agreement to lease approximately 200,000 square feet of office space in downtown Boston. The space will serve as the Company’s new headquarters. The lease commences upon the earlier of December 5, 2005 or the date the Company occupies the space. Regardless of when occupancy occurs, the Company is not required to commence rental payments until December 2005. The lease expires in November 2017. The Company’s total contractual obligations under the lease are $86.3 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We review and update these estimates, including those related to revenue recognition, the allowance for doubtful accounts, goodwill, stock-based compensation and restructuring, on an ongoing basis. We base our estimates on historical experience, and on various other assumptions that we believe to be reasonable under the circumstances. Among other things, these estimates form the basis for judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies and assumptions have remained substantially unchanged since December 31, 2003. For a detailed discussion of our critical accounting policies and estimates see our Annual Report on Form 10-K for the Year Ended December 31, 2003, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations “Critical Accounting Policies and Estimates.”

Results of Operations

COMPARISON OF THREE MONTHS ENDED MARCH 31, 2004 AND 2003

Revenue. Total revenue for the three months ended March 31, 2004 increased by $10.6 million, or 13%, to $89.8 million from $79.2 million for the same period of 2003. Total fee revenue for the three months ended March 31, 2004 increased by $7.8 million, or 15%, to $60.1 million from $52.3 million for the same period in 2003. Some of our contracts include a discretionary bonus provision whereby we earn additional compensation based on our performance as evaluated by our clients. We are typically informed of bonus revenue in the first and second quarters of the fiscal year. For the three months ended March 31, 2004 and 2003, fee revenue included bonus revenue of $5.2 million and $3.3 million, respectively. The increases in total revenue and fee revenue are due to an increase in demand for our services and higher bonus revenue. Clients began to increase their spending with us in the second half of 2003.

We attempt to limit our concentration of credit risk by securing clients with significant assets or liquidity. While we enter into written agreements with our clients, most of these contracts are terminable by the client without penalty on 30 to 90 days written notice. For the three months ended March 31, 2004, our three largest clients accounted for approximately 61% of our fee revenue and our largest client accounted for approximately 24% of our fee revenue. We believe a loss or any significant reduction in the use of our services by any one of our significant clients could have a material adverse effect on our business, financial condition and results of operations.

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Professional services costs. Professional services costs for the three months ended March 31, 2004 increased by $4.3 million, or 14%, to $34.9 million from $30.6 million in the same period of 2003. Professional services costs represented 58% of fee revenue in the three months ended March 31, 2004 compared to 59% in the three months ended March 31, 2003. The increase in costs was the result of adding headcount to meet the increased demand for our services. Professional services costs as a percentage of fee revenue improved slightly due to the increase in fee revenue. We anticipate that professional services costs as a percentage of fee revenue will remain consistent at 57% to 59% of fee revenue for the remainder of 2004.

Pass-through expenses. Pass-through expenses are reimbursable costs incurred by Digitas on behalf of our clients. Pass-through expenses include payments to vendors for media and production services and postage and travel-related expenses. Pass-through expenses for the three months ended March 31, 2004 increased by $2.8 million, or 10%, to $29.7 million from $26.9 million in the same period of 2003. The increase in pass-through expenses was attributable to increased media programs and production costs for our clients as a result of the increased demand for our services. Pass-through expenses are offset by pass-through revenue.

Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended March 31, 2004 were $17.1 million, remaining consistent with the $16.9 million reported in the same period of 2003. Selling, general and administrative expenses decreased as a percentage of fee revenue to 28% in the three months ended March 31, 2004 from 32% in the same period of 2003. The decrease was a result of the increase in our fee revenue during that period. We believe that for the remainder of 2004 selling, general and administrative expenses as a percentage of fee revenue will remain consistent with the first quarter of 2004.

Stock-based compensation. Stock-based compensation for the three months ended March 31, 2004 decreased by $1.4 million, or 78%, to $0.4 million from $1.8 million in the same period of 2003. The decrease is primarily due to a large number of options becoming fully expensed in the fourth quarter of 2003. We have not granted or repurchased any options nor issued common stock at a price below the estimated fair value subsequent to the initial public offering in March 2000. All remaining deferred stock-based compensation will be fully expensed during the remainder of 2004.

Liquidity and Capital Resources

We fund our operations primarily through cash generated from operations and proceeds from the exercise of common stock options.

Cash and cash equivalents increased from $73.6 million at December 31, 2003 to $80.9 million at March 31, 2004. Cash provided by operations for the three months ended March 31, 2004 was $1.8 million. Cash provided by operations was primarily the result of the timing of payments for payables and accrued compensation and of cash collections from customers offset by payments for restructuring activities. Included in accrued compensation as of March 31, 2004 are executive bonuses totaling $10.8 million, which will be paid out in the three months ended June 30, 2004. Cash used in investing activities for the three months ended March 31, 2004 was $1.1 million, consisting of capital expenditures relating primarily to computer equipment purchases. Cash provided by financing activities for the three months ended March 31, 2004 was $6.6 million, consisting primarily of proceeds from the issuance of 1.3 million shares of common stock through the exercise of employee stock options and through the employee stock purchase plan.

At March 31, 2004, we had no borrowings under our revolving credit facility and approximately $11.6 million outstanding under standby letters of credit, leaving approximately $8.4 million available for future borrowings.

We continue to evaluate our alternatives and monitor our restructuring accrual on a quarterly basis to reflect new developments and prevailing economic conditions in

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the real estate markets in which we lease office space. At March 31, 2004, approximately 70,000 square feet of the approximately 300,000 square feet initially identified as excess remained available for sublease. For the three months ended March 31, 2004, cash expenditures related to restructuring activities were $2.5 million. As of March 31, 2004, total remaining cash expenditures related to restructuring activities were $26.8 million. Approximately $2.3 million in cash expenditures are expected in the second quarter of 2004, and the remaining cash expenditures of approximately $24.5 million, related to real estate rental obligations, over the following eleven years.

The following table summarizes our contractual cash commitments as of March 31, 2004. (Note: interest expense is included in payments due by period where applicable.)

As of March 31, 2004, all minimum sublease income due in the future under non-cancelable subleases is related to restructured facilities.

In April 2004, we entered into an agreement to lease approximately 200,000 square feet of office space in downtown Boston. The space will serve as the Company’s new headquarters. The lease commences upon the earlier of December 5, 2005 or the date we occupy the space. Regardless of when occupancy occurs, we are not required to commence rental payments until December 2005. The lease expires in November 2017. Total contractual obligations under the lease are $86.3 million, which are not included in the table above.

We expect that at current revenue projections, we will continue to generate cash from operations. We believe that cash from operations combined with current cash and cash equivalents and funds available under the credit facility will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.

Forward-looking Statements

Statements contained in this Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. In some instances, you can identify forward-looking statements by the fact that they use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, any statements contained herein regarding expectations with respect to our future revenues, profitability, expenses or our restructuring of real estate are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those projected or implied in those forward-looking statements. Those factors include, without limitation, demand for our services (including the willingness and ability of our clients to maintain or expand their spending), overall economic and business conditions, our ability to sublease or renegotiate terms for our excess office space in the anticipated time frame, the ability of our sublease tenants to meet their obligations to us, resolution of ongoing litigation in which we are involved, continued uncertainty regarding an economic recovery, budgetary and spending decisions by our client base, competitive factors in the market and our ability to effectively manage our size and our client relationships, among other factors. A further review of the risks and uncertainties potentially impacting our future performance can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003.

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Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As required by new Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, we and our management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that they believe that as of the end of the period covered by this report, our disclosure controls and procedures were reasonably effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. In connection with the new rules, we will continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

None.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is a party to stockholder class action law suits filed in the United States District Court for the Southern District of New York. Between June 26, 2001 and August 16, 2001, several stockholder class action complaints were filed in the United States District Court for the Southern District of New York against the Company, several of its officers and directors, and five underwriters of its initial public offering (the “Offering”). The purported class actions are all brought on behalf of purchasers of the Company’s common stock since March 13, 2000, the date of the Offering. The plaintiffs allege, among other things, that the Company’s prospectus, incorporated in the Registration Statement on Form S-1 filed with the Securities and Exchange Commission, was materially false and misleading because it failed to disclose that the underwriters had engaged in conduct designed to result in undisclosed and excessive underwriters’ compensation in the form of increased brokerage commissions and also that this alleged conduct of the underwriters artificially inflated the Company’s stock price in the period after the Offering. The plaintiffs claim violations of Sections 11, 12 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission and seek, among other things, damages, statutory compensation and costs of litigation. Effective October 9, 2002, the claims against the Company’s officers and directors were dismissed without prejudice. Effective February 19, 2003, the Section 10(b) claim against the Company was dismissed. The terms of a settlement have been tentatively reached between the plaintiffs in the suits and most of the defendants, including the Company, with respect to the remaining claims. If completed and if then approved by the court, the settlement would dismiss those claims against the Company and is expected to result in no material liability to it. The Company believes that the claims against it are without merit and, if they are not dismissed as part of a settlement, intends to defend them vigorously. Management currently believes that resolving these matters will not have a material adverse impact on the Company’s financial position or its results of operations, however, litigation is inherently uncertain and there can be no assurances as to the ultimate outcome or effect of these actions.

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Item 6. Exhibits and Reports on Form 8-K

Current Report on Form 8-K, filed January 29, 2004, furnishing the Digitas Inc. press release dated January 29, 2004.

Current Report on Form 8-K, filed February 18, 2004, reporting that the executive officers of Digitas Inc. adopted stock trading plans for trading in Digitas Inc. common stock.

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SIGNATURES

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

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