VALUECLICK, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

		Page
PART I			1
ITEM 1.	BUSINESS		1
ITEM 1A.	RISK FACTORS		14
ITEM 1B.	UNRESOLVED STAFF COMMENTS		27
ITEM 2.	PROPERTIES		27
ITEM 3.	LEGAL PROCEEDINGS		28
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		28
PART II			29
ITEM 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		29
ITEM 6.	SELECTED FINANCIAL DATA		29
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		33
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		52
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		53
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		53
ITEM 9A.	CONTROLS AND PROCEDURES		53
ITEM 9B.	OTHER INFORMATION		55
PART III			56
ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT		56
ITEM 11.	EXECUTIVE COMPENSATION		56
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		56
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		57
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES		57
PART IV			58
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		58
	SIGNATURES
	CERTIFICATION OF CEO—Sarbanes-Oxley Act Section 302
	CERTIFICATION OF CFO—Sarbanes-Oxley Act Section 302
	CERTIFICATION OF CEO—Sarbanes-Oxley Act Section 906
	CERTIFICATION OF CFO—Sarbanes-Oxley Act Section 906

This annual report on Form 10-K (“Report”), including information incorporated herein by reference, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to expectations concerning matters that are not historical facts. Words such as “projects,” “believes,” “anticipates,” “will,” “estimate,” “plans,” “expects,” “intends,” and similar words and expressions are intended to identify forward-looking statements. Although we believe that such forward-looking statements are reasonable, we cannot assure you that such expectations will prove to be correct. Important language regarding factors which could cause actual results to differ materially from such expectations are disclosed in this Report, including without limitation under the caption “Risk Factors” beginning on page 12 of this Report and in the other documents we file, from time to time, with the Securities and Exchange Commission, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. All forward-looking statements attributable to ValueClick, Inc. are expressly qualified in their entirety by such language. 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.

PART I.

ITEM 1. BUSINESS

OVERVIEW

ValueClick is one of the world’s largest and most comprehensive online marketing services companies. We sell targeted and measurable online advertising campaigns and programs for approximately 6,000 advertisers and advertising agency clients, generating qualified customer leads, online sales and increased brand recognition on their behalf with large numbers of online consumers.

Our customers are primarily direct marketers, brand advertisers and the advertising agencies that service these groups. The proposition we offer our customers includes: one of the industry’s broadest online marketing services portfolios—including performance-based campaigns and programs where marketers only pay for advertising when it generates a customer lead or product sale; our ability to target campaigns to reach the online consumers our clients are most interested in; and, the scale at which we can deliver results for online campaigns. Additionally, our networks provide advertisers with a cost-effective and complementary source of online consumers relative to online portals and other large website publishers. Through this approach we have become an industry leader in generating qualified customer leads and online sales for advertisers and one of the industry’s largest display ad networks.

We generate the audiences for our advertisers’ campaigns primarily through networks of third-party websites and other online publisher partners. We aggregate our publisher partners’ online advertising inventory into networks, optimize these networks for specific marketing goals, and deliver the campaigns across the appropriate networks’ advertising inventory. We are one of the industry’s largest online network providers, with: industry expertise and proprietary technology platforms for online advertising inventory aggregation; campaign targeting, delivery and measurement; and, payment settlement and delivery services for our publisher partners.

Our publisher partners enjoy efficient and effective monetization of their online advertising inventory, including: representation by our direct sales teams in major U.S. and European media markets; participation in large-scale advertiser and advertising agency campaigns they may not have access to on their own; enhanced monetization through our campaign optimization technology; and, settlement services to ensure that publishers receive payment for the inventory utilized by advertisers. As we do not primarily own and operate websites that compete directly with our publisher partners for online consumers, we act as a trusted partner in helping online publishers monetize their online audience and advertising inventory.

We believe that the effectiveness of our online marketing services is dependent on the quality of our networks and our partner relationships. As such, we have established stringent quality standards that include publisher rejection from our networks due to inappropriate content, illegal activity and fraudulent clicking activity, among other criteria. We enforce these quality standards using a combination of manual and automated auditing processes that continually monitor and review both website content and adherence to advertiser campaign specifications.

In addition to our online marketing service offerings described above, we offer software that manages the targeting and delivery of website display ads and emails for customers with their own online consumer relationships, as well as software that assists advertising agencies and other companies with information management regarding their financial, workflow and offline media planning and buying processes.

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, which are described in more detail below. For information regarding the operating performance and total assets of these segments, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and note 17 “Segments and Geographic Information” to the December 31, 2005 consolidated financial statements included herein.

MEDIA

ValueClick’s Media segment provides a comprehensive suite of online marketing services and tailored programs that help marketers increase awareness for their products and brands, attract visitors and generate leads and sales through the Internet. Our Media segment has grown both organically and through the acquisition of complementary businesses such as Search123.com, completed in May 2003, Hi-Speed Media, completed in December 2003, Pricerunner, completed in August 2004, Webclients and E-Babylon, both completed in June 2005, and Fastclick, completed in September 2005. Our strategic expansion and subsequent integration within the Media segment has increased our presence in interactive marketing with powerful offerings that are provided to advertiser and advertising agency clients in the following product categories:

Display Advertising Network

We provide advertisers and advertising agencies with access to one of the largest and most reputable online advertising networks in the industry. With a single buy, these marketers can reach targeted online users on a large-scale, using a variety of online display ad units and any of 18 standard channels of online content. Through our acquisition of Fastclick, we are now one of the largest online display ad network operators in the industry, where we partner with third-party website publishers and apply our technology platforms and industry expertise to deliver our advertiser clients’ display ad campaigns to the appropriate pages of our publisher partners’ websites.

With more than 13,500 active online publisher relationships in the U.S. and more than 18,000 worldwide, our display ad network reached approximately 113 million unique Internet users in the U.S. in January 2006 according to published industry data.

We deliver a variety of display ad units to the Web pages of our online display ad network and track them to evaluate success against the goals of the advertising programs. With traditional banner ads, interstitials, text links, and other online ad units, we attempt to maximize the impact of marketing campaigns by using the most effective placement for each type of campaign. We can also execute a wide variety of rich media applications, providing even greater visual and auditory impact for a marketer’s online display advertising campaigns.

We began as a performance-based marketing network and we continue to offer multiple pricing models designed around maximizing our clients’ return on investment. Our display advertising placements are offered on cost-per-thousand-impression (“CPM”) pricing, whereby our clients pay based on the number of times the target audience is exposed to the advertisement, cost-per-click (“CPC”) pricing, whereby payment is triggered only when an interested individual clicks on our client’s advertisement, and cost-per-action (“CPA”) pricing, whereby payment is triggered only when a specific, pre-defined action is performed by an online consumer. As discussed in “Lead Generation Marketing” below, we also sell display ads on a cost-per-lead (“CPL”) basis.

The benefits that our advertiser and advertising agency clients enjoy in Web advertising include: flexible pricing models; the ability to target and reach significant numbers of online consumers in a way that complements media buys on portals and other large online properties; the ability to have a single source for negotiation of other media buys; and the ability to improve online advertising campaigns in a variety of ways while the campaigns are still running, by optimizing at site, placement and creative levels, based on both response and conversion experience.

Publishers in our display ad network enjoy efficient and effective monetization of their online advertising inventory, including: representation by our direct sales teams in major U.S. and European media markets; participation in large-scale advertiser and advertising agency campaigns they may not be able to access on their own; enhanced monetization through our campaign optimization technology; and, settlement services to ensure that publishers receive payment for the inventory utilized by the advertisers.

Our automated online application process for publishers is supported by a team of network development and customer service professionals across all ValueClick properties. Their responsibilities include screening prospective Web publishers, monitoring network quality, maintaining publisher relationships, consulting with publishers on additional revenue opportunities, and the trafficking and optimization of client advertising campaigns.

Lead Generation Marketing

In our lead generation marketing services, we manage online campaigns that generate qualified customer inquiries for an advertiser’s product or service. An online consumer generates a qualified customer inquiry when he or she responds to the advertiser’s offer by providing some personal information (such as their email address, phone number and/or mailing address) and requesting to be contacted by the advertiser. Lead generation advertiser clients only pay us when an online consumer opts in to being contacted by the advertiser.

We utilize a number of methods to distribute advertiser lead generation offers, including:

· Opt-in email lists—where online consumers have agreed to receive advertiser offers through email messages;

· Co-registration—where online consumers visiting or registering to use a publisher’s website are also invited to register for advertisers’ offers;

· Display ads—where publisher partners agree to display online ads focused on generating customer leads for specific offers; and

· ValueClick owned and operated websites—where we manage websites that host advertiser offers from which users can choose. ValueClick lead generation websites include survey websites, gift card and prize-related websites, and vertical industry category websites such as online continuing education and financial services.

Our lead generation capabilities have been developed organically and through acquisitions, including the recent acquisitions of Hi-Speed Media in December 2003 and Webclients in June 2005.

Email Marketing

Our email marketing services allow marketers to target qualified prospective customers on a large scale with opt-in email lists from our proprietary database of names and from a select group of email list partners who meet our stringent criteria for data integrity, as well as those who comply with all aspects of U.S. federal email legislation. Through ValueClick Media’s relationships with quality business and consumer opt-in email list owners and managers, email marketing clients can target audiences within specific selection criteria.

Through our acquisitions of Hi-Speed Media and Webclients, we now possess a database of approximately 80 million opt-in email profiles that comply with U.S. federal email legislation. Through this business, we provide marketers with the ability to advertise their products and services to the target audiences of our email database within specific selection criteria.

Search Marketing

Search marketing allows marketers to find prospective customers who are actively engaged in researching and buying products and services online. ValueClick Media’s search offerings are pay-per-click search engines, in which marketers bid for placement within search results and pay only when targeted leads are delivered to their website. ValueClick Media’s two search offerings are as follows:

Search123 is ValueClick’s self-service paid search offering that generates its traffic primarily through syndication relationships with other search engines, Web portals and content websites.

Simpli is ValueClick’s premium paid search offering. Simpli sources traffic through Simpli.com and websites where Simpli typically enables the entire search experience. Simpli’s meta-engine architecture queries leading paid and algorithmic search engines and presents highly relevant search results. Simpli also offers intelligent “are you looking for?” technology that allows users to refine their searches.

ValueClick Media search offerings act as an affordable complement to other pay-per-click search engines, enabling marketers to realize additional qualified sales leads from search results at a competitive price. ValueClick Media’s search network includes hundreds of online publisher partner websites, which collectively generate hundreds of millions of searches per month.

Online Comparison Shopping

Our online comparison shopping service enables consumers to research and compare products from among thousands of online and offline merchants through our Pricerunner destination websites. We gather product and merchant data and organize it into a comprehensive catalog on our destination websites, along with relevant consumer and professional reviews. Our service is free for consumers and merchants primarily pay us on a CPC basis when consumers click through to merchant websites from listings on our websites. Pricerunner currently runs websites in the United Kingdom, Sweden, the United States, Germany, France, and Denmark.

E-commerce

We sell a limited number of consumer products directly to end-user customers through a small number of Company-owned e-commerce websites. We entered this business through the acquisition of Hi-Speed Media in 2003, and added to our e-commerce capabilities with the acquisition of E-Babylon in June 2005.

AFFILIATE MARKETING

Through the combination of proprietary technology platforms, marketing expertise and a quality advertising network, our Affiliate Marketing business enables an advertiser to develop its own fully-commissioned online sales force comprised of third-party affiliate publishers. We believe we are the largest provider of affiliate marketing services.

In affiliate marketing, a publisher joins an advertiser’s affiliate marketing program and agrees to distribute the advertiser’s offers in exchange for commissions on leads or sales generated. The publisher places the advertiser’s display ads, text links or products on their website, in email campaigns, or in search listings, and receives a commission from the advertiser only when a visitor takes a specific action, such as filling out a form or making a purchase on the advertiser’s website.

ValueClick Affiliate Marketing segment services, outlined below, are offered through our wholly-owned subsidiaries Be Free, acquired in May 2002, and Commission Junction, acquired in December 2003. In 2004, we integrated Be Free and Commission Junction and began marketing our affiliate marketing offerings under the Commission Junction brand name.

Affiliate Marketing

Based on proprietary technology platforms, our Affiliate Marketing segment provides a suite of comprehensive services that enable an advertiser to manage and optimize an ongoing affiliate marketing program, including:

· Recruiting affiliate publishers to join the advertiser’s program;

· Managing the various offers made available to affiliates;

· Tracking and measuring online consumer traffic and desired actions (e.g., leads, sales) that each affiliate drives to the advertiser’s website;

· Analyzing the effectiveness of individual offers and affiliates; and

· Tracking and processing the payments due to each affiliate for the desired actions they enable across the advertiser’s program.

Our affiliate marketing services are offered on a hosted basis to enable marketers to execute their own affiliate marketing programs without the expense of building and maintaining their own in-house technical infrastructure and resources.

CJ Marketplace

To facilitate the advertiser recruitment of affiliates, we manage CJ Marketplace, an affiliate publisher network dedicated to our affiliate marketing business. Advertisers upload their offers onto CJ Marketplace, making them available for placement by affiliates. Affiliates apply to join the advertiser’s program, and upon acceptance, select and place the advertiser’s offers on their websites, in email campaigns, or in search listings. These links are served and tracked by Commission Junction. When a consumer clicks on one of the affiliate’s links and then makes an online purchase or fills out a form on the advertiser’s website, that transaction is tracked and recorded by Commission Junction.

CJ Marketplace provides an open environment whereby affiliates can view payment and conversion statistics to assess the effectiveness of every advertiser and advertisement, and advertisers can quickly gauge the quality and potential of every affiliate relationship in the marketplace, allowing them to maximize the performance and scale of their online advertising campaigns.

Affiliate Marketing revenues are driven by a combination of fixed fees and variable compensation that is based on either a percentage of commissions paid to affiliates or on a percentage of transaction revenue generated from the programs managed with our affiliate marketing platforms.

In addition to the transaction-related revenue streams, we also receive service fees from our advertiser clients who elect to utilize our Outsourced Program Management service and Commission Junction Vantage service offerings. With these services, we assume full responsibility for all aspects of managing the advertiser’s program including planning, affiliate recruitment, program review and management, and program administration.

The benefits of our affiliate marketing offerings include a large-scale pay-for-performance model, comprehensive technology platforms, professional services, and extensive expertise.

TECHNOLOGY

Our Technology segment provides marketers, advertising agencies, website publishers, and other companies with the tools they need to manage both their business operations and marketing programs effectively. The technology products and services outlined below are offered through our wholly-owned subsidiaries Mediaplex, Inc. and Mediaplex Systems, Inc. (formerly AdWare Systems, Inc.), both acquired in October 2001.

Mediaplex:

Our Mediaplex subsidiary is an application services provider (“ASP”) offering technology infrastructure tools and services that enable advertisers and advertising agencies to implement and manage their own online display advertising and email campaigns, and that assist online publishers with management of their website inventory. Our Mediaplex products are based on our 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 products are priced primarily on a CPM or email-delivered basis.

Mediaplex’s solutions span three primary categories—third-party adserving, publisher ad management and email campaign management, as outlined below.

Mediaplex—Third-Party Adserving

Our third-party adserving product, MOJO® Adserver, allows users to configure Web advertising campaigns, serve those campaigns according to time and site placements—commonly known in the industry as trafficking—and report results from such campaigns through to conversion. MOJO® Adserver operates on the same platform as MOJO® Mail (see Mediaplex—Email Campaign Management below), is Web-based and is available as either a full-service or self-service offering.

The benefits of our third-party adserving technology and services include an intuitive interface, advanced targeting options, response and conversion tracking, near real-time reporting, a choice of full-service or self-service offerings, automated creative and placement optimization, the ability to handle rich media, and back-end data feeds for quantitative analysis.

Mediaplex—Publisher Ad Management

MOJO® Publisher is an ad management technology solution for websites and networks and has powered the ValueClick Media network since 1999. With MOJO® Publisher, websites and networks can quickly implement, manage, sell, and traffic advertising inventory on their properties, ensuring maximum revenue from those properties.

The benefits of our publisher ad management technology and services include flexible configuration, effective inventory management, accurate forecasting, advanced targeting capabilities, near real-time reporting, conversion tracking, and financial system integration.

Mediaplex—Email Campaign Management

Either alone or in combination with ValueClick Media’s email marketing solutions described above, our email campaign management product, MOJO® Mail, allows users to configure, traffic and report results for permission-based prospect and customer email campaigns. In addition to basic email campaign execution, MOJO® Mail affords a user the ability to populate email messages with dynamic content that is updated in real-time when the recipient opens the email. The product’s Web-based interfaces, MOJO® Works (delivery configuration) and MOJO® Reports (tracking results), provide a single point of access for email messaging campaigns across all platforms, including online advertising and wireless devices. The system, available in both full-service and self-service offerings, provides the ability to target prospect customer and audience segments with tailored offers and creative message versions, and to track through to conversion activity in near real-time.

The benefits of our email campaign management technology include an intuitive interface, systematic list management and segmentation, advanced targeting options, unsubscribe and bounce management, near real-time reporting, response and conversion tracking, back-end data feeds for quantitative analysis, a choice of full-service or self-service offerings, the ability to handle rich media programs, and integration with our email marketing solutions described above.

Mediaplex Systems:

Our Mediaplex Systems subsidiary is an ASP that delivers high-quality, Web-based enterprise management systems to advertising agencies, marketing communications companies, public relations agencies, and other large corporate advertisers. The solutions that Mediaplex Systems provides span three primary categories—agency management, media management and content management, as outlined below. Mediaplex Systems’ revenue is generated primarily from monthly service fees paid by customers over the contractual service period.

The benefits offered by our enterprise management solutions include increased productivity, improved tracking and monitoring of business processes, ease of implementation, exceptional customer service, Web-based ASP, and significant scalability.

Mediaplex Systems—Agency Management

Our agency management systems consist of the following:

· AdVault PRODUCTION: A comprehensive Web-based business management system, this module efficiently monitors workflow and enables control of the complex day-to-day activities involved in tracking, producing and billing jobs. Cost and time tracking and analysis, bid comparisons, automated email task assignment notification, status reporting, purchase order generation, expense tracking, and production billing are combined in a single menu-driven package designed for ease of use.

· AdVault FINANCIALS: A robust multi-company, multi-office financial system that provides for the managing of accounts receivable, accounts payable, general ledger, budgeting, and cost accounting functions.

Mediaplex Systems—Media Management

Our media management systems enable media planners in corporate marketing departments and advertising agencies to plan, execute, track, analyze, and bill for media buys for network broadcast, spot broadcast, national cable, local cable, syndication, newspaper, magazine and trade publications, and outdoor media channels. Media planners use these systems to record the available advertising opportunities and their corresponding cost and choose the configuration that best meets their campaign needs. They can then generate a media plan that consists of the media placements they have selected. Different systems are available for each type of media buying:

· AdVault BROADCAST: A tool for making, tracking and analyzing spot broadcast, syndication and local cable media buys.

· AdVault NETWORK: A tool for making, tracking and analyzing network broadcast, national cable and syndication media buys. The system also enables efficient invoicing and payment capabilities for the commercial schedule.

· AdVault PRINT: A tool providing all of the functionality needed to estimate, contract for, buy, bill, and pay for advertisements scheduled in newspapers, magazines and trade publications. In addition, Ad Vault PRINT can handle outdoor media buys such as billboards.

Mediaplex Systems—Content Management

Content Depot is a Web-based digital asset management solution that stores, indexes, retrieves, and plays/views digital assets such as documents, audio files, video files, and graphics. Content Depot is designed for both easy installation and use, and is targeted at any business that needs an affordable way to manage and utilize their digital assets.

INTERNATIONAL OPERATIONS

We currently have international operations in the United Kingdom, Germany, France, and Sweden. All of these operations are wholly-owned subsidiaries. Prior to March 26, 2004, we had operations in Japan through our majority owned subsidiary, ValueClick Japan. We completed the sale of our 59% equity interest in ValueClick Japan to livedoor Co., Ltd., a Japanese Internet and technology product and services company, on March 26, 2004.

In August 1999, we commenced operations in the European market with ValueClick Europe Ltd., a wholly-owned subsidiary of ValueClick, Inc., based in the United Kingdom. In 2000, we expanded in Europe by opening wholly-owned subsidiaries in Paris, France and Munich, Germany. In August 2004, we acquired Pricerunner AB, a leading provider of online comparison shopping services in Europe, based in Sweden. Employees in our international subsidiaries totaled 199 as of December 31, 2005. For additional information regarding our international operations, see note 17 “Segments and Geographic Information” to our consolidated financial statements contained in this annual report on Form 10-K.

TECHNOLOGY PLATFORMS

Our proprietary applications are constructed from established, readily available technologies. These technologies are crafted into applications whose main objective is to outperform offerings of our competitors. Some of the basic components our products are built on come from leading software and hardware providers such as Oracle, IBM, Sun, Dell, EMC, and Cisco while some components are constructed from leading Open Source software projects such as Apache Web Server, FreeBSD and Perl. By striking the proper balance between using commercially available software and Open Source software, we direct our technology expenditures toward developing distinguishing application functionality while minimizing third-party technology supplier costs.

We build in high-performance, availability and reliability into our product offerings, and each offering outperforms industry-wide acceptable performance measurements. We safeguard against the potential for service interruptions at our third-party technology vendors by engineering failsafe controls into our critical components. ValueClick delivers its hosted solutions primarily from five co-location centers, geographically disbursed within the United States. ValueClick applications are monitored 24 hours a day, 365 days a year by specialized monitoring systems that aggregate alarms to a human staffed network operations center. If a problem occurs, appropriate engineers are notified and corrective action is taken.

Our continued investment in ValueClick’s technology infrastructure helps to ensure that our product offerings remain innovative, competitive and cost-effective.

SALES, MARKETING AND CUSTOMER SERVICE

We market our products and services primarily through direct marketing, print advertising and online advertising throughout the year. We also market them through the ValueClick properties’ websites, trade show participation and other media events. In addition, we actively pursue public relations programs to promote our brands, products and services to potential network Web publishers and advertisers, as well as to industry analysts.

Customers

We sell our products and services to a variety of advertisers and advertising agencies primarily through our internal sales team. We make extensive use of telemarketing and e-marketing strategies. Each of our account executives assists the advertisers he or she services with all aspects of media planning and design of their advertising campaigns and their related technology needs. These services and products include advertisement purchasing and placement, assessment of campaign results and optimization of campaign performance and related technology platforms.

Competition

We face intense competition in the Internet advertising market. We expect that this competition will continue to intensify in the future as a result of industry consolidation and the continuing maturation of the industry. We compete with a diverse and large pool of advertising, media and Internet companies.

Our ability to compete depends upon several factors, including the following:

· our ability to aggregate a large network of small- to medium-sized websites efficiently;

· the timing and market acceptance of new solutions and enhancements to existing solutions developed by us;

· our customer service and support efforts;

· our sales and marketing efforts;

· the ease of use, performance, price, and reliability of solutions developed by us; and

· our ability to remain price competitive while maintaining our gross margins.

Additional competitive factors include, but are not limited to, our and each of our competitor’s: reputation, knowledge of the advertising market, financial controls, geographical coverage, relationships with clients, technological capability, and quality and breadth of services.

Seasonality and Cyclicality

We believe that our business is subject to seasonal fluctuations with the fourth quarter generally being our strongest. Marketers generally place fewer advertisements during the first and third calendar quarters of each year, and direct marketers generally mail substantially more marketing materials in the third calendar quarter of each year. In addition, expenditures by advertisers and direct marketers vary in cycles and tend to reflect the overall economic conditions, as well as budgeting and buying patterns. Furthermore, user traffic on the Internet tends to decrease during the summer months which results in fewer advertisements to sell and deliver. A decline in the general economy or in the economic prospects of advertisers and direct marketers could adversely affect our revenue.

INTELLECTUAL PROPERTY RIGHTS

We currently rely on a combination of copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Our success depends on the protection of the proprietary aspects of our technology as well as our ability to operate without infringing on the proprietary rights of others. We also enter into proprietary information and confidentiality agreements with our employees, consultants and commercial partners and control access to, and distribution of, our software documentation and other proprietary information. We have registered the trademark “ValueClick” in the United States and the European Union. We currently have thirteen pending U.S. patent applications. In addition, we have been granted eight patents. We do not know if our current patent applications or any future patent application will result in a patent being issued within the scope of the claims we seek, if at all, or whether any patents we may have or may receive will be challenged or invalidated. Although patents are only one component of the protection of intellectual property rights, if our patent applications are denied, it may result in increased competition and the development of products substantially similar to our own. In addition, it is difficult to monitor unauthorized use of technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States, and our competitors may independently develop technology similar to those of our own. We will continue to assess appropriate occasions for seeking patent and other intellectual property protections for those aspects of our technology that we believe constitute innovations providing significant competitive advantages.

In October 2005, we purchased a perpetual, non-exclusive license from BTG International, Inc. (“BTG”) to use the BTG technologies for purposes of providing affiliate marketing services to Barnesandnoble.com (“B&N”). In connection with the Patent License Agreement, BTG and B&N also entered into a Confidential Release and Settlement Agreement under which BTG and B&N agreed to cease any and all current or future claims related to the technology in question.

In December 2002, we purchased a perpetual, non-exclusive license from 24/7 Real Media for the ‘368’ patent under a Patent License Agreement. In connection with the Patent License Agreement, 24/7 Real Media also agreed to terminate their lawsuit against us for patent infringement. The terms of the Patent License and Settlement Agreement are confidential.

CORPORATE HISTORY AND RECENT ACQUISITIONS

We commenced operations as ValueClick, LLC, a California limited liability company, on May 1, 1998. Prior to the formation of ValueClick, LLC, the ValueClick Internet advertising business began in July 1997 as a line of business within Web-Ignite Corporation, a company wholly-owned by the founding member of ValueClick, LLC. The reorganization and formation of ValueClick, LLC was effected by the transfer of the Internet advertising business of Web-Ignite to ValueClick, LLC. On December 31, 1998, ValueClick, LLC reorganized as ValueClick, Inc., a Delaware corporation. On March 30, 2000, we completed our initial public offering of common stock. Our common stock is publicly traded and is reported on the NASDAQ National Market under the symbol “VCLK.”

Fastclick, Inc. On September 27, 2005, we acquired 97% of the outstanding shares of Fastclick, Inc. (“Fastclick”) common stock upon the closing of its tender offer for all shares of Fastclick common stock. On September 29, 2005, we acquired the remaining 3% of outstanding shares of Fastclick common stock, at which time Fastclick became a wholly-owned subsidiary of ValueClick. Fastclick provides online advertising services and technologies, and has developed an advertising network of more than 9,000 third-party publisher websites. Combined with ValueClick’s existing market position in online media services, the addition of Fastclick to our suite of products and services positions ValueClick as one of the largest online advertising network providers.

The results of Fastclick’s operations are included in our consolidated financial statements from the beginning of the accounting period nearest to the date of acquisition, October 1, 2005. The results of operations of Fastclick for the period from the closing of the tender offer at midnight on September 27, 2005 through September 30, 2005 are not significant. Under the terms of the acquisition agreement, ValueClick acquired all of the outstanding capital stock of Fastclick for an aggregate purchase price of approximately $215.7 million, consisting of approximately 15.6 million shares of ValueClick common stock valued at approximately $202.5 million, stock options assumed valued at approximately $12.6 million, and transaction costs of the acquisition of approximately $600,000.

Web Marketing Holdings, Inc.. On June 24, 2005, we completed the acquisition of Web Marketing Holdings, Inc. (“Webclients’), a leading provider of online marketing services including lead generation, opt-in email distribution, and promotional and industry-focused online content. Webclients’ business activities complement our media and affiliate marketing businesses, and can be leveraged across our advertiser base.

The results of Webclients’ operations are included in our consolidated financial statements from the beginning of the accounting period nearest to the date of acquisition, July 1, 2005. The results of operations of Webclients for the period from June 24, 2005 through June 30, 2005 are not significant. Under the terms of the acquisition agreement, ValueClick acquired all of the outstanding capital stock of Webclients for an aggregate purchase price of approximately $142.5 million, consisting of cash of $122.2 million, approximately 1.8 million shares of ValueClick common stock valued at approximately $18.4 million, stock options assumed valued at approximately $1.5 million, and transaction costs of the

acquisition of approximately $420,000. The stock portion of the consideration represented approximately 14.0% of the total purchase price.

E-Babylon, Inc. On June 13, 2005, we completed the acquisition of E-Babylon, Inc. (“E-Babylon”), a leading online marketer of ink jet cartridges and toner. E-Babylon expands our e-commerce channel and provides an infrastructure with the capability to support all of our current e-commerce initiatives.

The results of E-Babylon’s operations are included in our consolidated financial statements from the beginning of the accounting period nearest to the date of acquisition, June 1, 2005. The results of operations of E-Babylon for the period from June 1, 2005 through June 12, 2005 are not significant. Under the terms of the acquisition agreement, ValueClick acquired all of the outstanding capital stock of E-Babylon for an aggregate purchase price of approximately $14.8 million, consisting of cash of $14.7 million and transaction costs of the acquisition of approximately $112,000.

Pricerunner AB. On August 6, 2004, we completed the acquisition of Pricerunner AB (“Pricerunner”), a leading provider of online comparison shopping services in Europe. With the addition of Pricerunner, we have expanded our suite of performance-based online marketing solutions into the area of comparison shopping. Together with our other services, Pricerunner increased our competitive position in Europe and the United States. In the second quarter of 2005, we launched Pricerunner in the United States, offering consumers a broad range of products from offline and online retailers throughout the country.

The results of Pricerunner’s operations are included in our consolidated financial statements from the beginning of the accounting period nearest to the date of acquisition, August 1, 2004. The results of operations of Pricerunner for the period from August 1, 2004 through August 5, 2004 are not significant. Under the terms of the acquisition agreement, ValueClick acquired all of the outstanding capital stock of Pricerunner for an aggregate purchase price of approximately $30.1 million, including cash of approximately $26.9 million, approximately 263,000 shares of ValueClick common stock valued at approximately $2.0 million, and transaction costs of the acquisition of approximately $1.2 million.

Hi-Speed Media, Inc. On December 17, 2003, we completed the acquisition of Hi-Speed Media, Inc. (“Hi-Speed Media”), a provider of email marketing and e-commerce services.

The results of Hi-Speed Media’s operations are included in our consolidated financial statements from the beginning of the accounting period nearest to the date of acquisition, January 1, 2004. The results of operations of Hi-Speed Media for the period from December 17, 2003 through December 31, 2003 are not significant. Under the terms of the acquisition agreement, ValueClick acquired all of the outstanding capital stock of Hi-Speed Media for an aggregate purchase price of approximately $10.5 million, including cash of $9.0 million, stock options assumed valued at approximately $0.4 million and transaction costs of $1.1 million. We also agreed to provide additional cash consideration of up to $1.0 million per quarter, contingent upon the achievement of certain revenue and operating income milestones over the eight quarters beginning January 1, 2004. Contingent cash consideration earned for the years ended December 31, 2005 and 2004 totaled approximately $3.6 million and $2.3 million, respectively, and were reflected as an increase in goodwill.

Commission Junction, Inc. On December 7, 2003, we completed the acquisition of Commission Junction, Inc. (“Commission Junction”), an affiliate marketing business which provides technology and services that enable advertisers to manage, track and analyze a variety of online marketing programs.

The results of Commission Junction’s operations are included in our consolidated financial statements from the beginning of the accounting period nearest to the date of acquisition, December 1, 2003. The results of operations of Commission Junction for the period from December 1, 2003 through December 6, 2003 are not significant. Pursuant to the terms of the acquisition agreement, ValueClick acquired all of the outstanding capital stock of Commission Junction for an aggregate purchase price of approximately $62.1 million, consisting of approximately 3.0 million shares of ValueClick common stock, valued at approximately $29.5 million, approximately $26.1 million in cash and transaction costs of the acquisition of approximately $0.4 million. Additionally, outstanding options to acquire common stock of Commission Junction were converted into an aggregate of approximately 1.2 million options to acquire ValueClick common stock valued at approximately $6.1 million.

Search123.com Inc. On May 30, 2003, we completed the acquisition of Search123.com Inc. (“Search123”), a search marketing company that allows marketers to find prospective customers who are actively engaged in researching and buying products and services online.

The results of Search123’s operations are included in our consolidated financial statements from the beginning of the accounting period nearest to the date of acquisition, June 1, 2003. The results of operations of Search123 for the period from May 30, 2003 through May 31, 2003 are not significant. The aggregate consideration paid for Search123 was approximately $4.9 million, consisting of a cash payment of approximately $3.2 million, the assumption of a net working capital deficit of approximately $1.5 million and transaction costs of the acquisition of approximately $200,000.

PRIVACY

We may collect personally identifiable information on a permitted basis. We store this data securely and do not use the data without the explicit, knowing permission of the user when we collect the data on behalf of our clients. We rely on our clients to treat such data with the appropriate precaution and responsibility as stated in their privacy policies. In addition, we use non-personally identifiable information provided by websites, pursuant to their privacy policies, about their viewers’ general demographics and interests in order to target appropriate advertising to the websites.

Moreover, if our clients have databases of their customers, we can use this data on behalf of those clients, again pursuant to their privacy policies. The premise is that both the website providing the ad space and the advertiser (1) have a relationship with the customer, or opt-in, (2) have an opportunity to share their privacy policies with their customers, and (3) provide an opportunity to opt-out.

Our clients retain the right to use data which they have obtained through explicit permission from an Internet user; for example, if a customer of our client provides an email address to receive information and updates. We rely on our clients’ consumer privacy policies, as well as the privacy practices of the publisher websites included in each campaign.

We collect certain technical data (such as type of browser, operating system, domain type, date and time of viewer’s response) when serving Internet advertisements. This type of information is defined by the Network Advertising Initiative as non-personally identifiable information (“Ad Delivery and Reporting Data”). We may retain this Ad Delivery and Reporting Data indefinitely.

We use “cookies,” among other techniques, to measure and report non-personalized information to advertisers, such as the number of people who see their advertisements or emails and the number of times people see the advertisement. A cookie is a small file that is stored in a Web-user’s hard drive. Cookies cannot read information from the user’s hard drive; rather they allow sites and advertisers to track advertising effectiveness and to ensure that viewers do not receive the same advertisements repeatedly. Cookies, by themselves, cannot be used to identify any user if the user does not provide any personally

identifiable information. They can be used to allow personalization features such as stock portfolio tracking and targeted news stories.

We are compliant with the Platform for Privacy Protection Project, or P3P, compliance criteria. P3P is the most current privacy standard effort in the industry, providing simple and automated privacy controls for users. Please refer to the section entitled “Government Enforcement Actions, Changes in Government Regulation and Industry Standards, Including But Not Limited To, Spyware and Privacy Matters, Could Decrease Demand For Our Services and Increase Our Costs of Doing Business” in Item 1A “Risk Factors” of this annual report on Form 10-K for further details about our compliance with privacy regulations.

EMPLOYEES

As of December 31, 2005, we had 815 employees in the U.S. and 199 employees in our international locations. None of these employees are covered by collective bargaining agreements. Management believes that our relations with our employees are good.

EXECUTIVE OFFICERS

See Part III, Item 10 “Directors and Executive Officers of the Registrant” of this annual report on Form 10-K for information about executive officers of the registrant.

WEBSITE ACCESS TO OUR PERIODIC SEC REPORTS

Our primary Internet address is www.valueclick.com. We make our Securities and Exchange Commission (“SEC”) periodic reports (Forms 10-Q and Forms 10-K) and current reports (Forms 8-K), and amendments to these reports, available free of charge through our website as soon as reasonably practicable after they are filed electronically with the SEC. We may from time to time provide important disclosures to investors by posting them in the investor relations section of our website, as allowed by SEC rules.

Materials we file with the SEC may be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding our Company that we file electronically with the SEC.

CODE OF ETHICS AND BUSINESS CONDUCT

We have adopted a Code of Ethics and Business Conduct (the “Code”) for our principal executive, financial and accounting, and other officers, and our directors, employees, agents, and consultants. The Code is publicly available on our website at www.valueclick.com under “Corporate Info.” Among other things, the Code addresses such issues as conflicts of interest, corporate opportunities, confidentiality, fair dealing, protection and proper use of Company assets, compliance with applicable laws (including insider trading laws), and reporting of illegal or unethical behavior.

Within the Code, ValueClick has established an accounting ethics complaint procedure for all employees of the Company and its subsidiaries. The complaint procedure is for employees who may have concerns regarding accounting, internal accounting controls and auditing matters. The Company treats all complaints confidentially and with the utmost professionalism. If an employee desires, he or she may submit any concerns or complaints on an anonymous basis, and his or her concerns or complaints will be addressed in the same manner as any other complaints. The Company does not, and will not, condone any retaliation of any kind against an employee who comes forward with an ethical concern or complaint.

ITEM 1A. 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 annual report on Form 10-K 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 annual report on Form 10-K. 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 integration process could harm our business. We consummated the acquisitions of Search123, Commission Junction, Hi-Speed Media, Pricerunner, E-Babylon, Webclients, and Fastclick on May 30, 2003, December 7, 2003, December 17, 2003, August 6, 2004, June 13, 2005, June 24, 2005, and September 29, 2005, respectively. Because of the number of acquisitions we completed in the past several years, the differences in the customer base and functionality of Search123, Commission Junction, Hi-Speed Media, Pricerunner, E-Babylon, Webclients, and Fastclick and our products, these acquisitions may present materially higher product, sales and marketing, customer support, 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 or convertible debt 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 businesses 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 technology 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 MIGHT NOT REMAIN PROFITABLE.

Although we achieved profitability in 2003 and have been profitable ever since, 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 websites 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 69.3% of our revenue for the year ended December 31, 2005 in part by delivering advertisements that generate impressions, click-throughs and other actions to our advertisers’ websites. 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.

Historically, a significant portion of our revenue has been derived from our Media segment. Although we intend to continue 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. Our Media segment

includes products and services that are based on a cost-per-click (“CPC”), cost-per-action (“CPA”), cost-per-lead (“CPL”) or cost-per-thousand-impressions (“CPM”) pricing model. 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 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 tools we offer for tracking Internet users’ activities after they have reached advertisers’ websites. We will not be able to assure you that our strategy will succeed.

Intense competition among websites, Internet 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 heavily 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, and our revenue could decline.

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 email 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, websites 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 websites, newsletters or email lists available to us, we may not be able to replace this advertising space with advertising space from other websites or email 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 networks new Web publishers and email 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 email list owners to our networks and to retain Web publishers and email list owners currently in our networks 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 email list owners of outsourcing their advertising sales. In addition, the number of competing intermediaries that purchase advertising inventory from Web publishers and email 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 websites. 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 MIVA and Google. MIVA and Google have asserted counter-claims against Overture including, but not limited to, invalidity, unenforceability and non-infringement. BTG International, Inc. (“BTG”) purports to own two patents related to affiliate marketing. The patents allegedly cover methods and apparatuses for “Attaching Navigational History Information to Universal Resource Locator Links on a World Wide Web Page” (U.S. Patent No. 5,712,979) and for “Tracking the Navigational Path of a User on the World Wide Web” (U.S. Patent No. 5,717,860). BTG has brought suit to enforce its patent rights against, among others, Barnesandnoble.com and Amazon.com.

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

Websites 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 websites to provide users with a more customized experience. Cookie information is passed to the website through an Internet user’s browser software. We currently use cookies to track an Internet user’s movement through the advertiser’s website and to monitor and prevent potentially fraudulent activity on our networks. 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 such as U.S. House of Representatives Bill HR 29 the “Spy Act”) 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 revenue from advertisers and make payments to Web publishers based on the number of impressions, clicks and actions from advertisements delivered on our networks of websites and email lists. Advertisers’ and Web publishers’ willingness to use our services and join our networks will depend on the extent to which they perceive our measurements of impressions, clicks and actions to be accurate and reliable. Advertisers and Web publishers often maintain their own technologies and methodologies for counting impressions, clicks and actions, and from time to time we have had to resolve differences between our measurements and theirs. Any significant dispute over the proper measurement of 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 AND RESULTS OF OPERATIONS 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 technology or other investments. 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 highly 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 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, acquired by AOL. We compete in the performance-based marketing segment with CPL and CPA performance-based companies such as Advertising.com, Performics, acquired by DoubleClick, Direct Response, acquired by Digital River, and Linkshare, acquired by Rakuten, and we compete with other Internet advertising networks that focus on the traditional CPM model, including 24/7 Real Media. Further, both Google and Yahoo have announced plans to pursue the creation of display ad networks. We also compete with pay-per-click search companies such as Overture, acquired by Yahoo, Google and MIVA. In addition, we now compete in the online comparison shopping market with focused comparison shopping websites such as Shopping.com, acquired by eBay, Kelkoo, acquired by Yahoo, NexTag, Shopzilla, acquired by EW Scripps, and Pricegrabber, acquired by Experian, and with search engines and portals such as Yahoo, Google and MSN, and with online retailers such as Amazon.com and eBay. Large websites with brand recognition, such as Yahoo, AOL and MSN, have direct sales personnel and substantial proprietary inventory that provide significant competitive advantages compared to our networks and have a significant impact on pricing for online advertising. These companies have longer operating histories, greater name recognition and have greater financial, technical and sales and marketing resources than we have.

Competition for advertising placements among current and future suppliers of Internet navigational and informational services, high-traffic websites and Internet service providers, or ISPs, as well as competition with other media for advertising placements, could result in significant price competition, declining margins and reductions in advertising revenue. Google has made available offline public-domain works through its search engine, which creates additional competition for advertisers. 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 websites, and significantly greater financial, technical and sales 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 and results of operations could decline.

OUR REVENUE AND RESULTS OF OPERATIONS 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, websites 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 websites. The Internet could lose its viability as a commercial medium due to delays in the development or adoption of new technologies 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 and results of operations 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 may 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 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 which could materially, adversely affect our revenue and results of operations.

WE 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 operations due to, for example, unique technical skills or management expertise. We may be unable to retain existing management, finance, engineering, sales, customer support, and operations 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 senior 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 directors’ 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 impacts data integrity or interrupts or delays our operations. Our computer systems are vulnerable to damage from a variety of sources, including telecommunications failures, power outages, malicious or accidental human acts, and natural disasters. We lease data center space in El Segundo, San Jose and Sunnyvale, California; Louisville, Kentucky; Mechanicsburg, Pennsylvania; Ashburn, Virginia; Stockholm, Sweden, and several small scale data centers or office locations throughout the United States and Europe. Therefore, any of the above factors affecting any of these areas could 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 and our ability to provide a record of past

transactions. Our data centers and systems incorporate varying degrees of redundancy. All data centers and systems may not automatically switch over to their redundant counterpart. 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 ISPs that provide consumers with access to the websites 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, but are not limited to, the following:

· fluctuations in demand for our advertising solutions;

· fluctuations in click, lead, action, and impression 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;

· fluctuations in our stock price which may impact the amount of stock-based compensation expense we are required to record;

· 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 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 advertisers’ current or prospective 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 EXECUTE OUR INTERNATIONAL STRATEGY, OUR REVENUE AND THE GROWTH OF OUR BUSINESS COULD BE HARMED.

We initiated operations, through wholly-owned subsidiaries or divisions, in the United Kingdom in 1999, France and Germany in 2000 and Sweden in 2004. Our foreign operations subject us to foreign currency exchange risks. We currently do not utilize hedging instruments to mitigate foreign currency exchange risks.

Our international expansion will subject us to additional foreign currency exchange risks and will require management’s attention and resources. We cannot assure you that we will be successful in our efforts overseas. International operations are subject to other inherent risks, including, but not limited to:

· 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 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 business, we must generate, retain and strengthen successful business and marketing alliances.

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 customers to us. If companies with which we have business and marketing alliances do not refer their customers to us to perform their online campaign and message management, our revenue and results of operations could be severely harmed.

WE WILL BE DEPENDENT UPON TECHNOLOGIES, INCLUDING OUR MOJO, MEDIAPLEX SYSTEMS, COMMISSION JUNCTION, HI-SPEED MEDIA, SEARCH123, PRICERUNNER, WEBCLIENTS, AND FASTCLICK TECHNOLOGIES, FOR OUR FUTURE REVENUE, AND IF THESE TECHNOLOGIES DO NOT GENERATE SUFFICIENT REVENUE, OUR BUSINESS WOULD BE HARMED.

Our future revenue is likely to be dependent on the acceptance by advertisers and Web publishers of the use of our technologies. If these technologies do not perform as anticipated or otherwise do not attract advertisers and Web publishers to use our services, our operations will suffer. In addition, we may incur significant expenses in the future enhancing our existing and purchased technologies. If our revenue generated from the use of our technologies does not cover these development costs, our results of operations and 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. Technologies as complex as our technologies 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 technology sales and implementation cycles are often lengthy, causing us to recognize revenue long after our initial contact with a prospective client. During our sales effort, we spend significant time educating prospective clients on the use and benefits of our products and services. As a result, the sales cycle for our technology products and services may range from a few weeks to several months to over one year for our larger clients. The sales cycle is likely to be longer 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 client personnel to implement our 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, vendors, 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 AND 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 technology investments. 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’ and publisher partners’ 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 systems do not support some types of advertising formats, such as certain video and audio formats, and many of the websites in our networks 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 technologies 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 and advertising inventory.

GOVERNMENT ENFORCEMENT ACTIONS, CHANGES IN GOVERNMENT REGULATION AND INDUSTRY STANDARDS, INCLUDING BUT NOT LIMITED TO, SPYWARE AND PRIVACY MATTERS, 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 could 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. The United States Congress has pending legislation regarding Spyware (e.g., H.R. 29, the “Spy Act”) and the New York Attorney General’s office has sued a major Internet marketer for alleged violations of legal restrictions against false advertising and deceptive business practices related to Spyware. 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, click fraud, acceptable content, taxation, and quality of products and services. This legislation could hinder growth in the use of the Web generally and could decrease the acceptance of the Web as a communications, commercial and advertising medium. The Company does not use any form of SPAM or Spyware and has policies to prohibit abusive Internet behavior, including prohibiting the use of SPAM and Spyware by our publisher partners.

Due to the global nature of the Web, it is possible that, although our transmissions originate in California, Kentucky, Pennsylvania, Virginia, England, and Sweden, 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 the 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 ISPs. 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, H.R. 29, 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 technologies 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 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.

WE MAY BE REQUIRED TO RECORD A SIGNIFICANT CHARGE TO EARNINGS IF OUR GOODWILL OR AMORTIZABLE INTANGIBLE ASSETS BECOME IMPAIRED.

As of December 31, 2005, we have total intangible assets, including goodwill, of $375.5 million. We are required under accounting principles generally accepted in the United States to review our amortizable intangible assets for impairment whenever events and circumstances indicate that the carrying value of such assets may not be recoverable. We are also required to review goodwill for impairment on an annual basis, or between annual tests whenever events and circumstances indicate that the carrying value of goodwill may not be recoverable. Events and circumstances considered in determining whether the carrying value of amortizable intangible assets and goodwill may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; a significant decline in the Company’s stock price for a sustained period of time; and changes in the Company’s business strategy. We may be required to record a significant charge to earnings in a period in which any impairment of our goodwill or amortizable intangible assets in determined.

IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR PREVENT FRAUD AND OUR STOCK PRICE MAY BE ADVERSELY IMPACTED.

Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. Any inability to provide reliable financial reports or to prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 requires management to evaluate and assess the effectiveness of our internal control over financial reporting. As a result of our assessment of our internal control over financial reporting as of December 31, 2004, we determined that we had a material weakness in our internal control over financial reporting related to the operation of our controls for evaluating and

documenting our deferred tax assets. As further described in Item 9A “Controls and Procedures,” we remediated this material weakness during 2005 and determined that our internal control over financial reporting was effective as of December 31, 2005. In order to continue to comply with the requirements of the Sarbanes-Oxley Act, we are required to continuously evaluate and, where appropriate, enhance our policies, procedures and internal controls. If we fail to maintain the adequacy of our internal controls, we could be subject to regulatory scrutiny and investors could lose confidence in the accuracy and completeness of our financial reports. We cannot assure you that we will be able to fully comply with the requirements of the Sarbanes-Oxley Act or that management will conclude that our internal control over financial reporting is effective. If we fail to fully comply with the requirements of the Sarbanes-Oxley Act, our stock price may decline.

DECREASED EFFECTIVENESS OF EQUITY COMPENSATION COULD ADVERSELY AFFECT OUR ABILITY TO ATTRACT AND RETAIN EMPLOYEES, AND CHANGES IN ACCOUNTING FOR EQUITY COMPENSATION WILL ADVERSELY AFFECT EARNINGS.

We have historically used stock options as a key component of our employee compensation program in order to align employees’ interests with the interests of our stockholders, encourage employee retention, and provide competitive compensation packages. Volatility or lack of positive performance in our stock price may adversely affect our ability to retain key employees, all of whom have been granted stock options, or attract additional highly-qualified personnel. A portion of our outstanding employee stock options have exercise prices in excess of our current stock price. To the extent these circumstances continue or recur, our ability to retain present employees may be adversely affected. In addition, the Financial Accounting Standards Board (“FASB”) has finalized changes to GAAP that will require an expense to be recorded by the Company for employee stock option grants and other equity incentives beginning January 1, 2006. Moreover, applicable NASDAQ listing standards relating to obtaining stockholder approval of equity compensation plans could make it more difficult or expensive for us to grant stock options to employees in the future. As a result, we may incur increased compensation costs, change our equity compensation strategy or find it difficult to attract, retain and motivate employees, any of which could materially adversely affect our business.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We lease a number of properties in both domestic and foreign locations.

Our principal corporate offices are located in Westlake Village, California, where we lease a property with approximately 35,000 square-feet of space. This facility is also used by our Media segment’s operations. Other leased facilities used in our Media segment operations include a 7,000 square-foot facility in New York, New York, shared with our Technology segment, another 3,900 square-foot facility in New York, New York, a 27,500 square-foot facility and a 6,500 square-foot facility in Harrisburg, Pennsylvania, a 14,900 square-foot facility and a 7,600 square-foot facility in Santa Barbara, California, a 8,800 square-foot facility and a 2,200 square-foot facility in Los Angeles, California, as well as a 10,600 square-foot facility in San Francisco, California, shared with our Technology segment. In November 2005, we signed a lease, to expand our principal corporate offices, for an additional 5,300 square-foot facility in Westlake Village, California, which is also used by our Media segment’s operations. Additionally, we own land and a building, approximating 61,900 square-feet and 23,800 square-feet, respectively, in Simi Valley, California, which is used by our Media segment’s operations.

Leased facilities used in our Affiliate Marketing segment operations include a 12,500 square-foot facility in Marlborough, Massachusetts and a 28,400 square-foot facility in Santa Barbara, California.

Leased facilities used in our Technology segment operations include a 10,600 square-foot facility in San Francisco, California, and a 7,000 square-foot facility in New York, New York, both shared by our Media Segment, and a 20,800 square-foot facility in Louisville, Kentucky.

We also lease small office space and facilities in: Agoura Hills, California; London, England; Paris, France; Munich, Germany; and, Stockholm, Sweden. Our foreign offices are used primarily for our Media segment operations and Affiliate Marketing segment operations. In addition, we use third-party co-location facilities that house our Web servers in: San Jose, California; Los Angeles, California; Sunnyvale, California; El Segundo, California; Louisville, Kentucky; Mechanicsburg, Pennsylvania; Ashburn, Virginia; London, England; and, Stockholm, Sweden. We are currently pursuing additional office space in response to our historical and projected growth. For additional information regarding our obligations under leases, see note 15 “Commitments and Contingencies” to our consolidated financial statements included in this annual report on Form 10-K.

ITEM 3. LEGAL PROCEEDINGS

BTG International Inc. v. Barnesandnoble.com

In September 2004, the Company received a letter from Barnesandnoble.com (“B&N”) requesting that the Company fully indemnify B&N for the costs and expenses associated with a lawsuit for patent infringement filed by BTG International, Inc. (“BTG”) against B&N and other defendants. The complaint alleged that through the use of certain online advertising technologies, B&N infringed two patents obtained by BTG purporting to cover methods and apparatuses for “Attaching Navigational History Information to Universal Resource Locator Links on a World Wide Web Page” (U.S. Patent No. 5,712,979) and for “Tracking the Navigational Path of a User on the World Wide Web” (U.S. Patent No. 5,717,860). On October 6, 2005, the Company and B&N, without acknowledging wrongdoing, entered into a Patent License Agreement with BTG under which the Company, for a fee of $502,000, acquired a perpetual, non-exclusive license to use the BTG technologies for purposes of providing services to B&N. This matter is now concluded.

Parrisch et al v. Fastclick, Inc.

Prior to closing the acquisition of Fastclick, its former directors and the Company were named as defendants in a putative class action complaint filed on August 17, 2005 in the Court of Chancery, County of New Castle, State of Delaware by Walter Parrisch, on behalf of himself and the other Fastclick stockholders. The complaint alleged, among other things, that the offer and merger would be a breach of fiduciary duty and that the indicated exchange ratio was unfair to the stockholders of Fastclick. The complaint sought, among other things, injunctive relief against consummation of the offer and merger, damages in an unspecified amount and rescission in the event the offer and merger occurs. The Company believes the claims are without merit. This complaint was dismissed without prejudice in March 2006.

Other Matters

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. Other than the matters discussed above, the Company is not a party to any other material legal proceedings, nor is the Company aware of any other pending or threatened litigation that would have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.

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

No matters were submitted to a vote of securities holders during the quarter ended December 31, 2005.

PART II.

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock has traded on The NASDAQ National Market under the symbol “VCLK” since our initial public offering on March 30, 2000. The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported on The NASDAQ National Market. On March 30, 2006, the last sale price of our common stock reported by The NASDAQ National Market was $16.83 per share.

	Price Range of Common Stock
	High		Low
Fiscal Year Ended December 31, 2005
Fourth Quarter	$	20.26	$	15.26
Third Quarter	$	17.64	$	12.03
Second Quarter	$	12.49	$	9.01
First Quarter	$	14.65	$	10.42

	Price Range of Common Stock
	High		Low
Fiscal Year Ended December 31, 2004
Fourth Quarter	$	13.93	$	9.02
Third Quarter	$	11.94	$	6.48
Second Quarter	$	12.48	$	9.47
First Quarter	$	11.94	$	9.24

Stockholders

As of December 31, 2005, there were 843 stockholders of record who held shares of our common stock.

Dividend Policy

We have not declared or paid any cash dividends on our capital stock since our inception and we do not anticipate paying cash dividends in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below with respect to our consolidated statements of operations for the years ended December 31, 2005, 2004 and 2003 and with respect to our consolidated balance sheets as of December 31, 2005 and 2004 have been derived from the audited consolidated financial statements of ValueClick which are included elsewhere herein. The consolidated statement of operations data for the years ended December 31, 2002 and 2001 and the consolidated balance sheet data as of December 31, 2003, 2002 and 2001 have been derived from our audited consolidated financial statements not included herein. The selected financial data for the year ended December 31, 2004, for each of the quarters in 2004, and for the second quarter of 2005, has been restated to reflect corrections that are further described in note 2 “Restatement of Previously Issued Financial Statements” to the consolidated financial statements included in Item 8 “Financial Statements and Supplementary Data” of this annual report on Form 10-K. The selected consolidated financial data set forth below is qualified in its entirety by, and should be read in conjunction with, Item 7 “Management’s Discussion and Analysis of

Financial Condition and Results of Operations” and the consolidated financial statements and the notes to those statements both included elsewhere herein.

CONSOLIDATED STATEMENT OF OPERATIONS DATA

	For the Year Ended December 31,
	2005			2004				2003		2002			2001
				(As Restated) (1)
	(in thousands, except per share data)
Consolidated Statement of Operations Data(4):
Revenue	$	304,007			$	169,178		$	92,516	$	62,554		$	44,873
Cost of revenue	88,839				50,762			32,024		21,733			20,370
Gross profit	215,168				118,416			60,492		40,821			24,503
Operating expenses:
Sales and marketing(2)	74,823				36,000			21,162		17,001			11,976
General and administrative(2)	40,526				27,168			19,699		17,784			13,301
Technology(2)	21,314				15,891			10,504		10,459			5,313
Stock-based compensation	2,022				739			352		1,527			2,699
Amortization of intangible assets	12,179				4,111			1,570		533			1,875
Merger-related costs	—				—			—		17			1,787
Restructuring expense (benefit), net	(73		)		(1,003		)	—		2,320			515
Total operating expenses	150,791				82,906			53,287		49,641			37,466
Income (loss) from operations	64,377				35,510			7,205		(8,820		)	(12,963		)
Interest income, net	5,077				3,665			3,364		5,909			5,051
Gain on sale of marketable securities	—				—			—		134			701
Gain on sale of equity interest in Japan subsidiary	—				8,007			—		—			—
Other income (expense)	—				63			—		32			(5		)
Income (loss) before income taxes, minority interest and cumulative effect of a change in accounting principle	69,454				47,245			10,569		(2,745		)	(7,216		)
Income tax expense	28,810				16,153			830		163			34
Income (loss) before minority interest and cumulative effect of a change in accounting principle	40,644				31,092			9,739		(2,908		)	(7,250		)
Minority share of loss (income) in consolidated subsidiary	—				130			84		(15		)	32
Income (loss) before cumulative effect of a change in accounting principle	40,644				31,222			9,823		(2,923		)	(7,218		)
Cumulative effect of a change in accounting principle(3)	—				—			—		(7,649		)	—
Net income (loss)	$	40,644			$	31,222		$	9,823	$	(10,572	)	$	(7,218	)
Basic net income (loss) per common share	$	0.46			$	0.39		$	0.13	$	(0.14	)	$	(0.20	)
Shares used to calculate basic net income (loss) per common share	87,722				80,063			74,300		73,744			37,058
Diluted net income (loss) per common share	$	0.45			$	0.37		$	0.13	$	(0.14	)	$	(0.20	)
Shares used to calculate diluted net income (loss) per common share	90,857				84,038			78,436		73,744			37,058

(1) See note 2 “Restatement of Previously Issued Financial Statements” to the consolidated financial statements.

(2) Excludes stock-based compensation for the following periods (in thousands):

	For the Year Ended December 31,
	2005		2004		2003		2002		2001
Sales and marketing	$	817	$	369	$	113	$	488	$	864
General and administrative	382		245		181		779		1,376
Technology	823		125		58		260		459
	$	2,022	$	739	$	352	$	1,527	$	2,699

(3) On January 1, 2002, we adopted the accounting standards set forth in Statement of Financial Accounting Standards No. 142, “Goodwill and other Intangible Assets” (“SFAS No. 142”). In accordance with the transitional guidance of SFAS No. 142, we completed our impairment assessment in the second quarter of 2002 from the adoption of this standard and determined that goodwill of $7.6 million related to the Bach Systems and ValueClick Japan acquisitions was impaired at January 1, 2002 and subsequently reflected a cumulative effect of a change in accounting principle for the goodwill impairment.

(4) The amounts included in the Consolidated Statement of Operations Data for the years presented reflect acquisitions and a disposition as follows:

Acquisitions				Date
Fastclick, Inc.				September 2005
Web Marketing Holdings, Inc. (“Webclients”)				June 2005
E-Babylon, Inc.				June 2005
Pricerunner AB				August 2004
Commission Junction, Inc.				December 2003
Hi-Speed Media, Inc.				December 2003
Search123.com Inc.				May 2003
Be Free, Inc.				May 2002
Mediaplex, Inc.				October 2001

Disposition				Date
ValueClick Japan				March 2004

Consolidated Balance Sheet Data:

	As of December 31,
	2005		2004			2003		2002		2001
			(As Restated) (1)
	(in thousands)
Cash, cash equivalents and marketable securities	$	240,783		$	242,583	$	220,120	$	232,978	$	163,355
Working capital	$	259,797		$	241,424	$	213,809	$	234,229	$	161,928
Total assets	$	720,861		$	384,714	$	323,099	$	263,850	$	190,626
Total non-current liabilities	$	35,372		$	14,964	$	5,676	$	4,626	$	1,025
Total stockholders’ equity	$	618,543		$	328,761	$	274,207	$	231,981	$	165,507

(1) See note 2 “Restatement of Previously Issued Financial Statements” to the consolidated financial statements.

Quarterly Results

The following table sets forth some of our selected financial information for our eight most recent fiscal quarters. In the opinion of our management, this unaudited financial information has been prepared on the same basis as the audited financial statements, and includes all adjustments, consisting only of normal recurring adjustments, necessary to present this information fairly when read in conjunction with our consolidated financial statements and the related notes contained elsewhere herein. These operating results are not necessarily indicative of results of any future period.

	For the Three-Month Period Ended
	Dec. 31, 2005		Sept. 30, 2005			Jun. 30, 2005			Mar. 31, 2005			Dec. 31, 2004		Sept. 30, 2004			Jun. 30, 2004		Mar. 31, 2004
						(As Restated)
						(1)						–—–—————(As Restated)(1)——————––
	(unaudited) (in thousands, except per share data)
Revenue	$	116,607		$	81,414		$	54,572		$	51,414	$	54,371		$	43,492	$	34,606		$	36,709
Cost of revenue	39,270			22,496			13,768			13,305		15,011			13,206		11,416			11,129
Gross profit	77,337			58,918			40,804			38,109		39,360			30,286		23,190			25,580

Delaware		77-0495335
(State or Other Jurisdiction of		(I.R.S. Employer Identification No.)
Incorporation or Organization)