**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

| **(Mark One)**                                  | ** ** | ** **                                                                                     |
|-------------------------------------------------|------------|------------------------------------------------------------------------------------------------|
| ý                                          | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**     |
| **For the fiscal year ended December 31, 2004** |
| **OR**                                          |
| o                                               | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

 

**Commission file number: 000-27907**

 

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**NETRATINGS, INC.**

(Exact name of Registrant as specified in itscharter)

 

| **Delaware**                                                    |   | **77-0461990**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction  of incorporation of organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **120 West 45th Street, 35th  Floor  New York, New York**       |   | **10036**                             |
| (Address of principal executive offices)                        |   | (Zip Code)                            |

 

Registrant’s telephone number, including areacode: **(212) 703-5900**

 

Securities registered pursuant to Section12(b) of the Act:

 

| **Title of  each class** | ** ** | **Name of  each exchange on which registered** |
|--------------------------|------------|------------------------------------------------|
| None                     |       | None                                           |

 

Securities registered pursuant to Section12(g) of the Act:

**Common Stock**

(Title of Class)

 

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Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days. Yes ýNo o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not becontained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. ý

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Rule 12b-2 of the Act). Yes ýNo o

 

The aggregate market value of the voting stock held by non-affiliatesof the Registrant, based on the closing price of the Registrant’s Common Stockas quoted on the Nasdaq National Market on June 30, 2004, was $213,734,607.

 

The number of shares of the Registrant’s Common Stock outstanding as ofFebruary 28, 2005 was 35,794,154.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Parts of the definitive proxy statement for the Registrant’s 2005Annual Meeting of Stockholders, which is to be filed with the Commission pursuantto Regulation 14A not later than 120 days after the end of the fiscalyear covered by this Report, are incorporated by reference into Part IIIof this Report.

 

 

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*Some of the statements contained in thisAnnual Report on Form 10-K (this “Report”) are forward-looking statements,including but not limited to those specifically identified as such, thatinvolve risks and uncertainties. The statements contained in this Report thatare not purely historical are forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934, including, without limitation, statementsregarding our expectations, beliefs, intentions or strategies regarding thefuture. All forward-looking statements included in this Report are based oninformation available to us on the date hereof, and we assume no obligation toupdate any such forward-looking statements. These statements are based oncurrent expectations and assumptions and involve known and unknown risks,uncertainties and other factors, which may cause our actual results to differmaterially from those implied by the forward-looking statements. Although webelieve that the expectations reflected in the forward- looking statements arereasonable, we cannot guarantee future results, levels of activity, performanceor achievements. Important factors that may cause actual results to differ fromexpectations include those discussed elsewhere in this Report on Form 10-Kunder the heading “Risk Factors That May Affect Our Performance.”*

 

**PART I**

 

**ITEM 1.  BUSINESS**

 

**OVERVIEW**

 

We are a leading provider of Internet audience measurement and analysisin the United States and around the world. All of our products and services aredesigned to assist companies in making critical business decisions regardingtheir Internet strategies and initiatives.

 

Our primary products and services include NetView, AdRelevance, @Plan,MegaPanel, Homescan Online and SiteCensus. We also offer Custom and AnalyticalServices to help clients better utilize and leverage our products and servicesto meet their specific media and market research goals and objectives. NetView,which is our original product, provides in-depth measurement of audiencebehavior for the World Wide Web and the digital media universe, includingproprietary channels, instant messaging, media players and other onlineapplications. AdRelevance offers comprehensive and accurate information ononline advertising expenditures, including where, when, how and how much companiesare advertising online. @Plan is a leading resource for demographic, lifestyleand product preferences to guide advertisers, agencies, Web publishers andothers in their online marketing and media planning strategies. MegaPanelprovides increased breadth and depth of Internet behavior and activity for themarket research industry, including detailed e-commerce transactioninformation. Homescan Online, which is a joint initiative with ACNielsen,combines ACNielsen’s offline consumer retail purchasing data with our in-depthInternet audience measurement data. SiteCensus offers extensive Web analytical services based on a Website’s actual traffic flows and visitor behavior. Our Custom and AnalyticalServices offer customized research and advisory services from experiencedindustry experts.

 

Our products and services are currently sold in the United States andin numerous countries throughout Europe, Asia Pacific and Latin America. InFrance, Japan and Brazil, we have partnered with leading local market researchand information services companies to market and sell some of our products andservices. We have a highly diversified and global client base, including largeand small companies in the media, technology, advertising, financial services,consumer products, retail and travel industries. As of December 31, 2004,we had 1,429 clients.

 

In 1998 and 1999, we formed strategic relationships with Nielsen MediaResearch, the leading source of television audience measurement and relatedservices in the United States, and ACNielsen, a leading global provider ofmarket research information and analysis. We believe that our strategicrelationships with Nielsen Media Research and ACNielsen, both of which aresubsidiaries of VNU N.V., provide us with a unique opportunity to leveragetheir brands, expertise and industry relationships to facilitate the rapidacceptance and deployment of our diverse portfolio of products and services.VNU N.V., through its subsidiaries, currently owns approximately 60% of ouroutstanding common stock.

 

**PRODUCTS AND SERVICES**

 

Since our founding until the second quarter of 2002, we primarilyfocused on selling our NetView service. Commencing in the second quarter of2002, as a result of acquisitions and internal product development, we began tooffer

 

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additional products and services designed to meet specific Internetmedia and market research needs. These products and services allow us to offercompanies much more detailed and complex solutions and information and to do soin a more timely manner. In addition, the increased amount of data that wecollect enables us to expand the specialized consulting and analytical servicesthat companies are increasingly seeking as Internet usage and commerce continueto grow around the world. We believe that our comprehensive portfolio ofproducts and services, which are all sold under the Nielsen//NetRatings brand,leaves us well positioned to become the standard for measuring the size,profile, activity and behavior of Internet users around the world.

 

***NetView***

 

Our NetView service, which includes syndicated and custom reports,provides detailed Internet audience information collected from ourhigh-quality, representative panels of computer and Internet users. Wecurrently operate NetView panels in eleven locations around the world and tracka large majority of global online activity. In addition to “at-home” panels,which measure Internet activity from the home computer, we also operate“at-work” panels, which collect data on Internet usage at the workplace, and“combo-panels”, which measure both home and work activity and allow us tocalculate the audience duplication to accurately report the true combinedaudience.

 

In order to obtain a representative sample of the total Internet userpopulation, our NetView panels are constructed using a process called randomdigit dialing, or RDD, which involves recruiting panel members by callingrandomly selected telephone numbers. RDD is the cornerstone of the Nielsenmethodology, which has been successfully established as the currency fortelevision audience measurement. Eligible households, namely those with a PCand Internet access, are recruited to participate in the panel. Those thatagree to participate are mailed a membership packet that includes trackingsoftware and installation instructions and are given a small incentive in theform of a savings bond for their participation. Once installed on a panelist’scomputer, our tracking software requires virtually no panelist intervention andsoftware updates are automatic. All panelist data is automatically encryptedprior to transmission to help ensure the privacy of panelist data.

 

In connection with our panel recruitment process, each panelist isrequired to fill out a detailed questionnaire, providing background demographicinformation including age, gender, household income, geographic location, levelof education, size of household and job classification. To assure thestatistical quality of our NetView panels, enumeration studies are conducted todetermine the total size and demographic makeup of the Internet user populationand are used as the basis for ensuring that sample behaviors are representativeof the total audience population. In order to accurately gauge the size andshape of the rapidly changing Internet user universe, we conduct ourindependent enumeration studies on a regular basis.

 

Our proprietary activity tracking and data collection technologygathers comprehensive and detailed information regarding computer and Internetuser behavior, including sites and pages visited, time spent on each site,advertising exposure and effectiveness, and bandwidth usage data. In addition,the NetView service is designed to offer clients the most complete view ofWorld Wide Web and digital media usage, including tracking of Web traffic, AOLproprietary channels, instant messaging applications, media players, wirelesscontent systems, Web phones, connected games, weather applications and shoppingassistants. Our technology collects the same data in the same way, regardlessof whether the user is accessing the Internet via a PC, a Macintosh platform orother Java-enabled Internet access device.

 

NetView provides customers with a variety of comprehensive weekly andmonthly reports on computer and Internet usage behavior. Our reports can bemodified by clients, enabling them to manipulate data easily to meet theirspecific information requirements. Our easy-to-use interface provides immediateaccess to various levels of detailed information, allows users to create andsave their own reports, and enables “on-the-fly“ custom queries on selectedinformation.

 

***@Plan***

 

We offer Internet media planning products and services in the UnitedStates through our @Plan service, which we acquired in May 2002. The @Planservice offers advertisers, advertising agencies, Web publishers and e-commercemarketers detailed demographics, lifestyle, brand and product preferences, andmedia consumption information to help them plan and implement successful onlinemarketing and media strategies. @Plan’s tools include @Plan Advertising and@Plan eCommerce.

 

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@Plan Advertising is a comprehensive advertising decision support andplanning system providing deep lifestyle, brand and product preferences, aswell as demographic profile information across a large number ofadvertising-supported Web sites. Internet advertisers and advertising agenciescan query the system on various targets, such as demographic and/or buyingbehavior groups to better understand the most efficient and effective ways toreach those groups through the Internet. The system also allows Web publishersto position their sites effectively against competitive sites and toefficiently drive advertising revenue by demonstrating the value of the siteaudience to advertisers or marketing partners.

 

@Plan eCommerce builds on the capabilities of @Plan Advertising withfeatures and data specifically designed for online retailers and consumer brandmarketers. Online retailers and consumer brand marketers utilize the system tounderstand and track their competitive strengths and weaknesses overall andagainst key market segments. Online retailers can also use this information todevelop more effective and cost-efficient customer acquisition and retentionstrategies by understanding which Web sites deliver the highest concentrationof their target audience. By providing both online and off-line data, the @PlaneCommerce system also allows online retailers and consumer brand marketers to helpmaximize multi-channel sales efforts by profiling online, catalog and in-storeaudiences and understanding where they overlap, thereby enhancing theiradvertising strategy in both traditional and online markets.

 

***AdRelevance***

 

We offer advertising measurement products and services in the UnitedStates through our AdRelevance service, which we acquired inApril 2002.  In our internationalmarkets, we market and sell our AdRelevance service under the brand AdRelevance(i).AdRelevance(i) currently provides online advertising intelligence for fourteenEuropean markets, and we expect to launch AdRelevance(i) in additionalinternational markets.

 

AdRelevance tracks competitive online advertising and advertiser datafor many broadly defined categories including, but not limited to, automotive,computer hardware, computer software, telecommunications, financial services,travel, retailing and Web media. The AdRelevance technology systematically andcontinuously searches commercial Web sites and captures detailed data aboutadvertising banners, promotions and rich media. AdRelevance’s intelligent agenttechnology sends out millions of probes a week to provide in-depth advertisingtracking information. Once captured, the data are warehoused, classified andstatistically analyzed.

 

By using the AdRelevance technology, our customers can query theAdRelevance database and generate Web-based reports on demand. This enablescustomers to monitor competitors’ marketing activities, plan more effectiveonline advertising campaigns and evaluate campaigns in real-time. Customers cangain access to up-to-date intelligence about their competitors’ onlinemarketing communications programs, enabling them to quickly and easily compareand report information by a wide range of criteria including advertiser,product, message, type, industry, technology and creative content.

 

## ***MegaPanel***

 

Our MegaPanel service is designed to address the expanding need foraccurate Internet market research data and intelligence.  The core feature of our MegaPanel service isa very large panel of computer and Internet users, representing a broadcross-section of home, work and university users.  Because of the panel’s size and scope, ourMegaPanel service allows us to provide increased breadth and depth of data,integration of online and off-line datasets and more advanced custom reporting.Currently available in the United States, United Kingdom, France and Germany,MegaPanel delivers detailed information that can be used to understand in-depthconsumer attitudes and behavior. Combined with comprehensive demographic andtrend data, MegaPanel demonstrates how people react and respond to companies’products, services, brands and promotions—both on and off the Internet.  We believe that our MegaPanel service complementsour NetView service in assisting clients in integrating the Internet into theirglobal marketing strategies.

 

OurMegaPanel is also able to provide clients with important analyses relating tosmaller Web sites which may not be available in NetView or our other productsand services. In addition, the size of the MegaPanel allows us to offer surveycapabilities to help clients better understand consumer attitudes and behavior.By administering real-time customized

 

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surveys, focusing, for example, on areas such as brand awareness,online-offline consumption and customer satisfaction, we can provide a robustunderstanding of the relationship between the online and offline consumer.

 

Panelists for our MegaPanel service are recruited through a variety ofmethods, including online survey and sweepstakes offers as well as throughpartnerships with leading market research providers. As with our NetViewpanels, our tracking software requires virtually no panelist intervention andsoftware updates are automatic. The information we collect, which is linked todemographic profiles of Internet households, is used to produce comprehensivesyndicated and custom reports regarding Internet behavior and activity acrossthe Internet. To enhance the statistical quality of our panels and theinformation we collect, our MegaPanel service is weighted to our NetViewpanels, which are recruited through RDD procedures.

 

The MegaPanel service includes both syndicated and custom offerings.  Our current offerings are as follows:

 

•                  *MegaView Online Retail*: Our retail service provides clients with comprehensive insight into theeCommerce landscape–by site and by product category.  Clients can assess total traffic to topretail sites, sales conversion rates, number of purchases and average ordersizes, as well as compare the success of customer acquisition, conversion andloyalty by site.

 

•                  *MegaView Financial: *Ourfinancial offering shows detailed activity at online financial services sites,including data related to checking and savings accounts, credit card activity,lending and mortgage information and online trading accounts.  The service allows companies to monitoraverage account balances, application completion figures and bill-pay activity,as well as to benchmark client performance versus the industry and/or keycompetitors.

 

•                  *MegaView Search:*  Oursearch product reports on behavior across various search categories, includinglocal, news, shopping and Web. Clients can view search query volume by type,evaluate the contextual advertising potential for search terms and gain aquantitative perspective of business opportunities at search sites.

 

***SiteCensus***

 

In April 2003, we launched ourSiteCensus service, a census-based site measurement service designed to addressthe emerging business needs of media companies, Web publishers and other onlinecompanies by providing them with comprehensive data and research metrics abouttheir own Web sites or network of Web sites. In December 2003, we acquiredRed Sheriff, a global provider of various Web site measurement services. Thisacquisition significantly expanded our SiteCensus business and our ability tooffer SiteCensus in new global regions. We currently offer SiteCensus in over twenty countries around the world.

 

Panel-based research products, such as ourNetView service, have historically been the standard by which demographics,frequency and other measurements are used for the buying and selling of onlinemedia. SiteCensus was designed to complement panel-based research by measuringevery visitor and providing a complete census count. For Web sites with smalleraudience sizes, SiteCensus provides focused and detailed research analysispreviously unavailable with panel-based research. For larger Web sites,SiteCensus supplements panel-based reporting with different levels ofsite-centric analysis, offering clients further insight into their Webaudience.

 

The SiteCensus service is provided throughuse of a page-tagging system. When encoded in any Web site page or component ofWeb site page, the tag provides an accurate and direct count of every pageview, visitor and click in real-time. Page-tagging allows a client to tracktheir entire online audience, including traffic from wireless and hand-helddevices, Internet appliances, shared home and office computers and universityPCs, as well as public terminals including libraries and

 

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Internet cafes. Data captured from the tags are warehoused, classifiedand statistically analyzed. A variety of comprehensive reports and metrics areavailable to clients through a Web-based interface, which can be customized tomeet a client’s specific online objectives.

 

In order to provide a more in-depth view ofthe visitors to a Web site, SiteCensus allows for the integration of detaileddemographic data obtained through online surveys. The SiteCensus survey engineallows us to randomly survey a visitor to a Web site, and incorporate theirsurvey responses into demographic composition reports of a Web site’s audience.Site panels are built by randomly selecting a sample of visitors to the clientWeb site, or groups of Web sites, for the purpose of delivering surveys. Thesurvey engine enforces a strict, random recruitment process to help ensure thatthe site panel is representative of the site’s audience.

 

Our SiteCensus service is currently comprisedof three core product offerings:

 

•                  *Customer Intelligence:*This census-based service providescompanies with the business critical information they need to understand theeffectiveness of their Web sites, including unique users, page impressions,session duration and demographic profiling. This data is used by companies to assess site performance, usage trends,content and product placement, audience circulation, visitor loyalty, searchengine performance and visitor behavior. The data is delivered via conciselyconstructed reporting modules so that each important process can be researchedindependently and benchmarked internally.

 

•                  *Market Intelligence:* This service provides census-based market rankings that provide insightinto a company’s positioning within an industry and relative to itscompetitors. Market Intelligence also reports on the overall Internet audiencebehavior among a single company’s site or network of sites.  Market Intelligence enables advertisers andagencies to identify the most effective sites for reaching primary andsecondary demographic targets as well as the best groups of sites in order to optimizereach and frequency.  The service alsoallows companies to identify their own demographic weaknesses within a wholecategory or against an entire market.

 

•                  *AdIntelligence:*  Thisservice provides census-based advertising measurement, thereby allowing onlineadvertisers to measure their online marketing activities.  AdIntelligence, which measures all types ofcampaign creatives, enables companies to identify the best performingadvertising campaigns and delivery locations throughout a marketing plan’sexecution.  AdIntelligence also enablesadvertisers to conduct effective post-campaign analysis, including themeasurement of impressions, clicks, campaign unique visitors and frequency.  The AdIntelligence technology may also bedeployed across an enterprise advertising network to provide third-party addelivery verification that can be used to report back to advertisers*.*

 

***Homescan Online***

 

In November 2003, we jointly announcedwith ACNielsen the launch of Homescan Online, a product designed to improve theeffectiveness of online marketing for the consumer packaged goods (CPG)industry and Web publishers. ACNielsen’s Homescan consumer panel records theoffline purchasing behavior of thousands of panelists using ACNielsen’sproprietary in-home UPC code scanners. Homescan Online combines the offline andonline data from thousands of members of ACNielsen’s Homescan consumer panelwho have also agreed to allow us to track their Internet activity and behavior.As a result, Homescan Online integrates consumer retail purchasing of up to12,000 CPG brands and online visitors to approximately 1,000 Web sites,enabling CPG marketers to better understand where their consumers are goingonline and what effect their online marketing is having on offline retailsales. The service also enables Web publishers to more effectively marketthemselves to the CPG industry by helping CPG marketers better target Web siteaudiences by their specific brand consumption.

 

# ***WebRF***

 

WebRF offers advertisers, advertisingagencies and Web publishers a comprehensive reach and frequency tool forplanning and evaluating the impact of advertising on the Internet, usingterminology and analysis capabilities comparable to those in traditional mediaadvertising. Through the WebRF software, which was designed in partnership withInteractive Market Systems (IMS), a provider of media planning and analysissoftware to the advertising industry, advertisers,

 

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advertising agencies and Web publishers can develop the analysesnecessary to compare online advertising reach with delivery of other media, mapadvertising campaigns for specified target markets and track how effectivelyadvertising budgets are being managed. WebRF is currently available in the UnitedStates and ten countries across Europe and Asia Pacific.

 

***WebIntercept***

 

WebIntercept, which we launched inNovember 2003, offers clients the ability to survey Internet users basedon their real-time behavior as they navigate the Internet. Linking surveys toreal-time Internet usage and behavior allows clients to reach consumers at aspecific moment of interest, as WebIntercept enables surveys to be triggeredwhen a panelist visits a predetermined Web site or exhibits a predeterminedbehavior. By allowing clients to connect directly with visitors to their ownWeb site as well as those of their competitors, WebIntercept provides a uniqueand efficient way for clients to benchmark performance, measure customersatisfaction across an industry and gain access to critical competitiveanalysis. In addition, WebIntercept’s global panel of approximately threemillion potential respondents enables clients to collect the number ofcompleted surveys necessary to ascertain localized behavior statistics notreadily available with smaller panels.

 

***Custom and Analytical Services***

 

As we have expanded our product offerings tomore completely address the media and market research needs of our customers,clients have increasingly relied on us to provide custom research and analyticalservices. These custom research and analytics services are designed to helpclients better utilize and leverage our services with their specific researchgoals and objectives. Our dedicated analytics team provides in-depthspecialized advice to clients of our NetView, AdRelevance, @Plan, MegaPanel,WebRF and WebIntercept products and services. Examples of the types of customresearch and analytics projects that we have conducted in recent months includethe following:

 

•                  *Search Marketing:*An advertising industry body commissionedus to complete a study to determine how search marketing contributes to brandawareness.  Separately, for a leading Webpublisher, we completed a global research study to understand how online searchbehavior changes across detailed user segments.

 

•                  *Advertising Campaign Analysis: *Weworked with a large CPG company, a leading ad serving company and a successfulWeb publisher, all of which use our NetView, MegaView and SiteCensus products,to integrate user-based and server-based audience information.

 

•                  *Multi-channel Analysis:*As online media continued to growduring 2004, many clients came to us for a greater understanding of how toincorporate the online world into their overall media plans.  For example, we executed a study for a retailclient focusing on the relationship between the Internet and traditional retailchannels during the holiday season.

 

**STRATEGIC RELATIONSHIP WITH VNU**

 

VNU N.V. is a global leader in marketresearch, providing measurement and analysis of marketplace dynamics, consumerbehavior and audience measurement. We believe that our strategic relationshipwith VNU and its subsidiaries, particularly Nielsen Media Research andACNielsen, provides us with a unique opportunity to leverage their brand,industry relationships and overall expertise in order to expand our productsand services around the globe. Since 1999, we have marketed our services underthe Nielsen//NetRatings brand. In addition to our strategic relationships, VNU,through its subsidiaries, also controls a majority of our outstanding votingstock and our Board of Directors.

 

For over fifty years, Nielsen MediaResearch’s core business has been to provide high-quality comprehensiveaudience viewing information on the television industry. The Nielsen ratingsare vital to television program production, distribution and schedulingdecision-making, and the currency for transactions between buyers and sellersof television advertising time. In October 1998, we formed a strategicrelationship with Nielsen Media Research to develop and market Internetaudience measurement products and services in the United States and Canadausing our technology with Nielsen Media Research’s proprietary panelmethodology. In March 1999, we launched our NetView service, whichconstituted an Internet audience panel product based on the Nielsen MediaResearch audience sampling methodology.

 

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Under our agreements with Nielsen MediaResearch, Nielsen Media Research provides for the development and maintenanceof panels in the United States that generate the data for our NetView service.We are responsible for the management, support and ongoing development of thedata collection and reporting system. We pay Nielsen Media Research ongoingfees for the costs of maintaining the NetView panels and costs associated withthe expansion of such panels. During the second half of 2003, we reached anagreement with Nielsen Media Research to provide us with certain researchservices in connection with our @Plan service, including telephone recruitmentof survey respondents and the administration of online surveys. In the firstquarter of 2004, we completed the re-location of our main data centerfacilities in San Jose, California to Nielsen Media Research’s technologycenter in Oldsmar, Florida, where Nielsen Media Research provides us withcertain technology-hosting services to support our mission critical computingplatforms, including server, network, storage and security management.

 

ACNielsen, which was founded over75 years ago, is a leading provider of media research services outsideNorth America. It is also a global leader in providing business information,analysis and insights to consumer-packaged goods companies, their brokers and retailorganizations. ACNielsen also provides television audience measurement servicesoutside of the United States to customers in over 100 countries. InSeptember 1999, we established ACNielsen eRatings.com, a joint venturewith ACNielsen, to develop and maintain audience measurement panels and tomarket our products and services in international markets. From the formationof the joint venture until May 2002, we had a 19.9% voting interest in theventure and ACNielsen had an 80.1% voting interest in the venture. InMay 2002, we acquired all of ACNielsen eRatings.com and entered into aservices agreement with ACNielsen pursuant to which ACNielsen will provide uswith certain back-office services for a period of five years.

 

**SALES AND MARKETING**

 

As of December 31, 2004, we had 1,429clients. Our global client base is a diverse group of large and small companiesin the media, technology, advertising, financial services, consumer products,retail and travel industries. The users of our products and services at ourclient companies hold diverse positions, demonstrating the importance of onlinemedia and market research to a company’s overall strategy and development. Inaddition to marketing and business development executives, our users includechief executive officers and presidents, and operations, strategic planning andinformation technology executives. No client accounted for more than 10% of ourrevenues in 2004.

 

We sell our products and services in theUnited States through a direct sales force. Our domestic sales representativesare located at our offices in Milpitas, California and New York, New York, andwe also maintain local representatives in various locations throughout theUnited States. Internationally, we sell our products and services through a directsales force as well as through our subsidiary and joint venture companies intheir respective markets. Our sales representatives receive a base salary andare eligible for commissions based on revenue and sales goals.

 

Our primary marketing objectives are tocross-market new products and services to our global clients and to leverageand build upon Nielsen//NetRatings’ brand awareness throughout our targetaudiences. To achieve these goals, we engage in a number of marketingactivities, including direct e-mail campaigns, conference presentations,industry tradeshow participation, involvement with industry organizations suchas the Interactive Advertising Bureau, Online Publishers Association, DirectMarketing Association and Advertising Research Foundation and aggressive publicrelations. We maintain standing arrangements for the use of our data with keybusiness and trade press including Reuters, The New York Times, USA Today, SanJose Mercury News, Hollywood Reporter, Boston Globe, Chicago Tribune, SportsBusiness Journal, American Banker, Media Life, Internet Retailer, Women’s WearDaily and numerous other media outlets. We provide the media with timelyinsights regarding current events and identify emerging Internet trends,generating valuable press coverage. Our analysts are regularly featured ontelevision and radio broadcasts, including segments on CNBC, CNN and NPR.

 

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**INTELLECTUAL PROPERTY**

 

We regard the protection of our proprietarytechnology and information as important to our future success and ability tocompete effectively in our markets. We rely on a combination of patent,copyright, trademark and trade secret laws, as well as confidentialityagreements and licensing arrangements, to establish and protect our proprietaryrights. The steps we have taken or will take in the future to establish andprotect our proprietary rights may not, however, be sufficient to protect ourtechnology and information from infringement or misappropriation, or to deterindependent development of similar or superior technologies by others. Inaddition, the laws of some foreign countries may protect our proprietary rightsto a greater or lesser extent as do the laws of the United States. Litigationmay be necessary in the future to enforce our intellectual property rights, andany such litigation could result in substantial expenses, the loss ofsignificant rights, findings of non-infringement and the diversion of resourcesfrom the operation of our business.

 

We seek to obtain the issuance of patents andthe registration of our trademarks and service marks in the United States andin selected other countries. In May 2002, NetRatings and Jupiter MediaMetrix, Inc. entered into a settlement agreement pursuant to which JupiterMedia Metrix agreed to dismiss with prejudice the patent infringement action ithad filed against NetRatings in March 2001. In connection with thesettlement, we also acquired patents and patent applications relating tocomputer use monitoring. As a result, we currently have two issued patents inthe United States with regard to our computer use tracking technology (U.S.Patent No. 5,675,510 and U.S. Patent No. 6,115,680). In addition,patents for the technology covered by U.S. Patent No. 5,675,510 have alsobeen issued in Japan, Canada, Australia and Mexico, and we have patentapplications pending in other jurisdictions.

 

As a result of our acquisition of RedSheriff, we obtained patents and patent applications in the United States andabroad also relating to technology for monitoring use of computer resourcesincluding Red Sheriff’s proprietary site-centric Internet audience measurementtechnology. We currently have four issued patents in the United States withrespect to this technology (U.S. Patent No. 5,796,952, U.S. Patent No.6,138,155, U.S. Patent No. 6,643,696 and U.S. Patent No. 6,673,386). Patents for the technology covered by these U.S. patents have also beenissued in Australia, Canada, Israel, New Zealand and South Korea, and we havepatent applications pending in other jurisdictions.

 

In addition, we have other pending patentapplications which relate to our proprietary technology, including pendingpatent applications for our AdRelevance technology.

 

Others may claim that we have misappropriateda trade secret or infringed a patent, copyright, trademark or other proprietaryright belonging to them with respect to past, current or future technologies.Any of those claims, whether meritorious or not, could be time-consuming,result in costly litigation, may distract management from other tasks ofoperating the business and may result in the loss of significant rights orrequire us to enter into royalty or licensing agreements. Royalty or licensingagreements might not be available on terms we find acceptable or at all. As aresult, any such claim could have a material adverse effect upon our business,results of operations and financial condition.

 

**TECHNOLOGY AND OPERATIONS**

 

Clients can access all of our primaryproducts and services via the Internet by using passwords specifically assignedto each client. Our services are available 24 hours a day and ourproprietary data is updated regularly to provide clients with access to themost recent data.

 

In connection with our NetView and MegaPanelservices, our panel-based data collection, retrieval and processing systems andsoftware have been designed utilizing well-known industry standards forhardware and software data architecture and infrastructure. The architectureadheres to numerous standard-programming languages, including hypertext machinelanguage, or HTML, Java and C++, and network protocols, including hypertexttransfer protocol or HTTP. In addition, we believe that our system architectureis flexible and powerful enough to allow for continued growth in our portfolioof products and services.

 

Our SiteCensus service operates on anaround-the-clock global infrastructure. The service’s Web site measurement tagsmeasure a Web site visitor’s experience and delivers the information back to ourhigh capacity measurement collection network consisting of nine fully redundantglobal data centers. The SiteCensus measurement network currently captures in

 

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excess of 90 gigabytes worth of new measurement information from over300 million transactions on a daily basis. In addition, the SiteCensustechnology supports a variety of different software implementations of itsmeasurement techniques, including pure Java, Java with CGI and CGI only.

 

Our hardware systems are hosted at threeprofessionally managed, off-site computer centers in San Jose, California,Oldsmar, Florida and Paris, France. For our SiteCensus service, our primaryresearch data center is located in Melbourne, Australia, along with eight otherdata centers worldwide. Backup procedures are built into the processingenvironment in order to reduce downtime in the event of outages or catastrophicoccurrences. Additionally, our data centers provide physical security, climatecontrol, 24 hour a day monitoring services and fire suppression systems tohelp ensure the security and continued operation of our technology.

 

**COMPETITION**

 

We believe that the primary competitivefactors determining success in our markets include:

 

•                  the ability toprovide high-quality, accurate and reliable data regarding Internet audiencebehavior and activity in a timely manner;

 

•                  the breadth anddepth of the product and services offered and their flexibility and ease ofuse;

 

•                  the availabilityof data across various geographic areas;

 

•                  the ability tooffer high-quality analytical services based on the Internet audiencemeasurement information;

 

•                  the ability tooffer products and services that meet the changing needs of our customers; and

 

•                  the prices thatare charged for the products and services, as well as the general economicconditions.

 

We believe that we compete favorably with respect to each of thesefactors.

 

We face competition in the United States and abroad for each of ourproducts and services. We face direct competition from companies, such ascomScore Networks, that provide panel-based Internet measurement services. Wealso directly compete with numerous providers of site-centric Web analyticssolutions, including CoreMetrics, Omniture, NetIQ and WebSideStory. Inaddition, we face competition from companies that offer survey researchcapabilities relating to online behavior and activity, such as HarrisInteractive and Greenfield Online. We compete less directly with the providersof syndicated and custom research on Internet behavior and commerce. Finally,we may face increased competition from individual Web sites that develop anindependent method of measuring their own audience and from other companiesthat develop new or alternative audience measurement technologies.

 

We expect competition to intensify because of the businessopportunities presented by the growth of Internet usage and Internet commercearound the world. Competition may also intensify as a result of industryconsolidation, because of technological advancements in the way to measureInternet behavior and activity or because some of our competitors may be ableto provide additional or complementary services. In addition, some of ourcurrent or future competitors may have longer operating histories, largercustomer bases and/or greater marketing resources than we have. Increasedcompetition may result in reduced operating margins, loss of market share anddiminished value in our services, as well as different pricing, service ormarketing decisions.

 

**EMPLOYEES**

 

As of December 31, 2004, we had 368 full-time employees. Ouremployees in the United States are not covered by a collective bargainingagreement. Outside of the United States, we are subject to extensive regulationwith respect to our employees in various jurisdictions. We have neverexperienced an employment-related work stoppage and consider our employeerelations to be good.

 

9

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**AVAILABLE INFORMATION**

 

Wemake available on our website (http://www.nielsen-netratings.com) under “AboutUs”_“Investor Relations”_“SEC Filings”, free of charge, our annual reports onForm 10-K, quarterly reports on Form 10-Q, current reports onForm 8-K and amendments to those reports as soon as reasonably practicableafter we electronically file or furnish such material with the Securities andExchange Commission.

 

**ITEM 2.  PROPERTIES**

 

Our primary executive offices in the United States are located in NewYork, New York, where we lease approximately 12,000 square feet, and Milpitas,California, where we lease approximately 30,000 square feet. We also leaseoffice space in Seattle, Washington.

 

Outside of the United States, we lease office space in variouscountries, including the United Kingdom, Italy, Spain, France, Germany,Australia, Japan, China and Hong Kong.

 

**ITEM 3.  LEGAL PROCEEDINGS**

 

Information regarding legal proceedings is set forth in Note 10 ofthe Notes to Financial Statements under the heading “Litigation” and suchinformation is hereby incorporated by reference.

 

**ITEM 4.  SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

No matters were submitted to a vote of security holders during thefourth quarter of 2004.

 

10

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**PART II**

**ITEM 5.****                        MARKET FORTHE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND**

**                      ISSUER PURCHASES OFEQUITY SECURITIES**

** **

**Price Range of Common Stock**

 

Our common stock is quoted on the Nasdaq National Market under thesymbol “NTRT”. The following table sets forth the range of high and low closingsales prices for each period indicated. The prices appearing in the tablesbelow reflect over the counter market quotations, which reflect inter-dealerprices, without retail mark-up, mark-down or commission and may not necessarilyrepresent actual transactions. During the periods indicated, we have not effectedany stock split.

 
| ** **     | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|           |       |     |       |     |       |   |   |   |   |
| First Quarter  |       | $        | 12.92      |     | $          | 9.85 |   | $ | 6.99 |   | $ | 5.50 |   |
| Second Quarter |       | 16.29    |       | 10.52    |       | 9.62 |   | 6.02 |   |
| Third Quarter  |       | 17.83    |       | 12.80    |       | 11.26 |   | 7.95 |   |
| Fourth Quarter |       | 20.71    |       | 17.72    |       | 11.65 |   | 9.36 |   |
|                |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

**Dividend Policy**

 

We have not declared or paid any cash dividends on our common stock andpresently intend to retain our future earnings, if any, to fund the developmentand growth of our business and, therefore, do not anticipate paying any cashdividends in the foreseeable future.

 

**Holders of Common Stock**

 

As of February 28, 2005, there were approximately 59 stockholdersof record of our common stock. Because many of our shares are held by brokersand other institutions on behalf of stockholders, we are unable to estimate thetotal number of stockholders represented by these record holders.

 

**Equity Compensation Plan Information**

 

Information for our equity compensation plans in effect as ofDecember 31, 2004, is as follows:

 
| **Plan Category**                                            | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **(a)**                                                                                            | ** ** | **(b)**                                                                            | ** ** | **(c)**                                                                                                                                              | ** ** |
| Equity compensation plans approved by  security holders      |       | 4,101,536                                                                                          |       | $                                                                                  | 10.21      |                                                                                                                                                 | 671,000    |   |
| Equity compensation plans not approved by  security holders* |       | 9,569                                                                                              |       | $                                                                                  | 106.84     |                                                                                                                                                 | —     |   |
| Total                                                        |       | 4,111,105                                                                                          |       | $                                                                                  | 10.43      |                                                                                                                                                 | 671,000    |   |

 

----

* Assumed in connection with our acquisition of eRatings in May 2002.

 

11

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**ITEM 6.****                       SELECTEDFINANCIAL DATA**

 

The following selected financial data should be read in conjunctionwith “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” and the consolidated financial statements and the notes theretoincluded elsewhere herein:

 
| ** **                                                                                         | ** ** | **For the years ended December 31,**      | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                                         | ** ** | **(in thousands, except per share data)** | ** ** |
| **Consolidated  Statements of Operations Data:**                                                   |       |                                      |       |   |   |   |   |   |   |   |   |
| Revenue                                                                                            |       | $                                         | 59,294     |   | $ | 41,432 |   | $ | 29,706 |   | $ | 23,504 |   | $ | 20,411 |   |
| Gross profit                                                                                       |       | 36,237                                    |       | 20,956 |   | 13,255 |   | 10,240 |   | 7,700 |   |
| Total operating expenses                                                                           |       | 56,422                                    |       | 50,665 |   | 53,128 |   | 37,830 |   | 39,615 |   |
| Operating loss                                                                                     |       | (20,185                                   | )          | (29,709 | ) | (39,873 | ) | (27,590 | ) | (31,915 | ) |
| Net loss                                                                                           |       | (17,419                                   | )          | (25,135 | ) | (38,876 | ) | (17,634 | ) | (14,302 | ) |
| Basic and diluted net loss per common share                                                        |       | $                                         | (0.50      | ) | $ | (0.74 | ) | $ | (1.17 | ) | $ | (0.54 | ) | $ | (0.45 | ) |
| Weighted average shares outstanding used in  computing basic and diluted net loss per common share |       | 34,637                                    |       | 33,792 |   | 33,168 |   | 32,864 |   | 31,969 |   |

 
| ** **                                         | ** ** | **December 31,**   | ** ** |
|----------------------------------------------------|------------|--------------------|------------|
| ** **                                         | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                         | ** ** | **(in thousands)** | ** ** |
| **Consolidated  Balance Sheet Data:**              |       |               |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and short-term  investments |       | $                  | 197,602    |   | $ | 210,039 |   | $ | 241,411 |   | $ | 322,563 |   | $ | 334,022 |   |
| Working capital                                    |       | 183,755            |       | 185,376 |   | 214,630 |   | 307,668 |   | 320,175 |   |
| Total assets                                       |       | 314,457            |       | 314,923 |   | 331,266 |   | 341,699 |   | 351,165 |   |
| Deferred revenue                                   |       | 11,435             |       | 10,449 |   | 10,823 |   | 7,031 |   | 10,876 |   |
| Total stockholders’ equity                    |       | $                  | 280,438    |   | $ | 274,054 |   | $ | 288,666 |   | $ | 318,468 |   | $ | 326,101 |   |

 

In 2002 and 2003, the Company completed several acquisitions whichimpacted the results of operations for those years and future years.  Also in 2002, the Company incurred expensesrelated to a restructuring and a write-off of investments.  See Item 7, Management's Discussion andAnalysis of Financial Condition and Results of Operations, for additionalinformation.

 

**ITEM 7.****                   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Summary**

 

We are a leading provider of Internet audience measurement and analysisin the United States and around the world. All of our products and services aredesigned to assist companies in making critical business decisions regardingtheir Internet strategies and initiatives. We have a highly diversified and global client base, including large andsmall companies in the media, technology, advertising, financial services,consumer products, retail and travel industries.  VNU N.V., through its subsidiaries ACNielsenCorporation and Nielsen Media Research, currently owns approximately 60% of ouroutstanding common stock.

 

Our revenues for the year ended December 31, 2004 totaled $59.3million, compared to $41.4 million and $29.7 million for the years endedDecember 31, 2003 and December 31, 2002, respectively. As of December 31, 2004,we had 1,429 clients, compared to 1,098 clients as of December 31, 2003 and 748clients as of December 31, 2002.  Theincreases in our revenues and number of clients during the last few years isthe result of both acquisitions that we have completed as well as organicgrowth in our product portfolio.  Weexpect our revenues and client base to continue to grow as (i) our recentlylaunched products gain marketplace acceptance, (ii) we develop additional productsand services and (iii) we launch our products and services in new internationalterritories.

 

We have incurred operating losses and net losses since our inceptionand, as of December 31, 2004, our accumulated deficit was $136.9 million. Since the beginning of 2002, however, we have made significant progressin reducing our annual

 

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operating loss and annual net loss.  Our operating loss decreasedfrom $39.9 million in 2002 to $29.7 million in 2003 and to $20.2 million in2004.  Likewise, our net loss decreased from $38.9 million in 2002 to$25.1 million in 2003 and to $17.4 million in 2004.  Our ability to reduceour operating and net losses, and our belief that we will make further progressin reducing such losses in 2005, is attributable to a number of factors.  First, we expect the revenue growth we haveexperienced in the past few years to continue.  Second, a significantinitial investment was required to launch certain of our services in 2003 and2004, including our MegaPanel services, and while the ongoing expense tooperate such services will continue, we expect such expenses to be less thanthe initial expenses required to launch such services.  In addition,because we offer syndicated panel services, and because we are able to utilizeour existing databases to expand our custom analytical offerings, our revenuegrowth does not require a corresponding increase in our expenses.

 

As of December 31, 2004, our cash and cash equivalents andshort-term investments totaled $197.6 million, which we believe is sufficientto meet our cash needs for at least the next twelve months.

 

**Industry Trends**

 

The success of our business depends heavily on the expanding use of theInternet for advertising, commerce and communications.  Internet advertising, e-commerce and thenumber of people logging onto the Internet, particularly through the use ofInternet broadband connections, have dramatically increased in recent years andwe expect this growth to continue in upcoming years both in the United Statesand abroad.  These growth trends havemade the Internet an increasingly important component of companies’ overallbusiness strategies.  As a result,companies conducting business online are increasingly seeking analysis andinsights to (i) define and reach their target audiences, (ii) measure theeffectiveness of their advertising and marketing strategies, (iii) benchmarktheir performance with their competitors and (iv) increase brand equity andcommerce revenue.

 

Companies are also increasingly recognizing that, compared with othermedia, the Internet allows online market participants to obtain a uniqueunderstanding of consumer behavior. Unlike with other forms of advertising, including print, radio andtelevision, advertisers can (i) target advertising in an unprecedented manner,(ii) confirm whether consumers have actually viewed advertisements (and when)and (iii) decipher whether consumers have taken certain actions, whethercompleting a purchase or visting a Web site, and understand exactly why.  Because of the unique dynamics of theInternet, we expect that Internet advertising and commerce will not onlycontinue to grow in coming years, but that Internet advertising and commercewill garner a larger percentage of total advertising and commerce dollars.  We believe that this growth will require acommensurate increase in Internet media and market research, and that we areparticularly well-suited to address the global needs of online participants.

 

**Product Portfolio**

 

Our goal for the last few years has been to offer the mostcomprehensive global portfolio of Internet media and market research productsand services.  In order to reach thisgoal, we have focused on both strategic acquisitions in the United States and abroadand investing in new products to meet changing marketplace needs.  As a result of these efforts, we currentlyoffer a wide range of products and services in the United States and in manycountries throughout Europe, Asia Pacific and Latin America.  We believe that this product portfolio andbreadth of coverage will enable us to continue to increase our client base,increase our ability to sell multiple products to clients and increase thetotal sales to individual clients.

 

In the first half of 2002, we acquired AdRelevance, our online advertisingexpenditure service, and @Plan, which provides demographic, lifestyle andproduct preference information.  During2002, we also made strategic acquisitions designed to expand our NetViewservice around the world, which provides detailed panel-based Internet audienceinformation.  These included ouracquisition of NetValue S.A., an international provider of Internet audiencemeasurement services, and the purchase from ACNielsen Corporation of the 80.1%interest in ACNielsen eRatings.com that we did not already own.  Since the beginning of 2003, we have acquiredLemonAd (now branded AdRelevance(i)), our international online advertisingmeasurement service, and Red Sheriff, a global provider of site-centric-based Internetaudience measurement tools.

 

In conjunction with these strategic acquisitions, we have also devotedsignificant resources to internal product

 

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development.  Our key newproducts and services include (i) MegaPanel, which includes our verticalofferings, such as MegaView Financial, MegaView Retail and MegaView Search, aswell as WebIntercept, a behavioral-based online survey research tool thatprovides surveying capabilities on real-time Internet behavior; and (ii)Homescan Online, a joint initiative with ACNielsen that combines offlineconsumer purchasing data with Internet audience measurement data.  We believe these new products and services,as well as additional MegaPanel offerings, will be important to our financialperformance over the next few years.

 

**Revenue Overview**

 

We generate revenues primarily from the sale of our Internet media andmarket research products and services, which include both syndicated productsand customized products.  Syndicatedproducts currently represent a very significant majority of our total revenues,and our goal is for syndicated products to continue to represent a significantmajority of our total revenues.

 

We sell a majority of our syndicated products and services on an annualsubscription basis.  We recognize revenuefrom the sale of our syndicated products and services ratably over the term ofthe subscription agreement.  Subscriptionfees invoiced in advance are recorded as deferred revenue until earned.  Revenue from customized products and servicesis recognized in the period in which the product or service is provided.  As a result, a significant portion of revenuerecognized in any period results from the amortization of deferred revenuebalances.

 

In France, Japan and Latin America, we offer many of our servicesthrough joint ventures with leading local market research and informationservices companies.  We currently own56.8% of NetRatings Japan, our Japanese subsidiary, while the remainingownership interest is owned by TransCosmos, Dentsu.com and otherinvestors.  We currently own 66% ofMediametrie NetRatings, our French subsidiary, and the remainder is owned byMediametrie.  We currently own 49% ofIbope eRatings.com, our Latin American joint venture, and the remainder isowned by Ibope.  NetRatings uses theequity method to account for its investment in Ibope eRatings.com.  In each of these locations, revenue isallocated between NetRatings and the subsidiary or joint venture companydepending on the location of the customer and the location of the panel whosedata is used in the service.  As a resultof the Red Sheriff acquisition, we also obtained a 50% ownership interest in anItalian company, Red Sheriff S.r.l., which offers site-centric-based servicesin Italy.  On February 25, 2005, wepurchased the remaining 50% of Red Sheriff S.r.l.

 

We have experienced revenue growth in each of the years since welaunched our first product in 1999, as demonstrated by the table below:

 
| **Years ended December 31:** | ** ** | **Revenues (in thousands)** | ** ** |
|------------------------------|------------|-----------------------------|------------|
| 2000                         |       | $                           | 20,411     |   |
| 2001                         |       | $                           | 23,504     |   |
| 2002                         |       | $                           | 29,706     |   |
| 2003                         |       | $                           | 41,432     |   |
| 2004                         |       | $                           | 59,294     |   |

 

We expect our 2005 revenues to exceed our 2004 revenues, primarily as aresult of sales from our new products and services and the launch of our newand existing products and services in new international territories.

 

**Critical Accounting Policies and Estimates**

 

Management’s Discussion and Analysis of Financial Condition and Resultsof Operations discuss our financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires our management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period. On an ongoing basis, our management evaluates itsestimates and judgments, including those related to bad debts, investments,income taxes, contingencies and litigation. Our management bases its estimatesand judgments about the carrying values of assets and liabilities on historicalexperience and on various other factors that are believed to be reasonableunder the circumstances. Actual results may differ from these estimates underdifferent assumptions or conditions.

 

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Our management believes the following critical accounting policiesaffect its more significant judgments and estimates used in the preparation ofits financial statements:

 

*Revenue Recognition*

 

We recognize revenue in accordance with SEC Staff Accounting BulletinNo. 104, Revenue Recognition. SAB 104 requires that four basic criteriamust be met before revenue can be recognized: (1) persuasive evidence thatan arrangement exists; (2) delivery has occurred or services rendered;(3) the fee is fixed and determinable; and (4) collectibility isreasonably assured. Determination of criteria (4) is based on management’sjudgment regarding the collectibility of those fees. We sell a majority of ourproducts and services pursuant to one-year subscription agreements. Werecognize revenue from the sale of these subscription products and servicesratably over the term of the subscription agreement. Subscription fees invoicedare recorded as deferred revenue until earned. If a contract’s collectibilitycomes into question, revenue recognition is discontinued until collectibilityis reasonably assured. This determination is based on management’s judgment andcould adversely affect both revenue and deferred revenue.

 

*Accounting for Joint Venture Transactions*

 

The results of operations for each joint venture entity are reflectedin the consolidated results of operations beginning on the date that weacquired majority control of such entity. In the second quarter of 2002, we acquired a majority interest inACNielsen eRatings.com.  In the secondquarter of 2003, we acquired a majority interest in NetRatings Japan, ourJapanese joint venture, and in the fourth quarter of 2003, we acquired a majorityinterest in Mediametrie NetRatings, our French joint venture.  Our transactions with these three entitiesprior to our acquisition of majority control, as well as our transactions withour Latin American joint venture, Ibope eRatings.com, and our Italian jointventure, Red Sheriff S.r.l., are accounted for in our financial statements asset forth below.  In the first quarter of2005, we acquired the remaining 50% interest in Red Sheriff S.r.l. and we will,as a result, consolidate the results of operations for such entity from thedate of acquisition.

 

Our joint ventures pay us a royalty for the use of our technology.  This royalty revenue is based on a percentageof each sale made by our equity method investees pursuant to each jointventure’s operating agreement.  Thisrevenue is recognized ratably over the period of the contract in our statementof operations.

 

Our joint venture partners maintain Internet audience measurementpanels in the countries in which the joint ventures are located.  Revenue from Internet audience measurementservices, which can either be sold by us or the joint venture partner, isallocated between the two parties based on the location of the customer and thelocation of the panel whose data is used in the service.  We record commission revenue and expenserelated to these sales ratably over the period of the contract in the revenueand cost of revenue lines in our statement of operations.

 

We provide data hosting and support services to the jointventures.  We charge the joint venturefor their share of the data center costs which is recorded as a reduction toour actual data center costs included in the cost of revenue line in ourstatement of operations.

 

Each of the transactions described in the three preceding paragraphs isincluded in the operating statement of our equity method joint ventures aswell.  We record our percentage of thejoint venture’s net profit (loss) in the net equity in earnings (losses) ofjoint ventures line in our statement of operations.

 

*Bad Debt*

 

We manage credit risk on accounts receivable by performing ongoingcredit evaluations of our customers, reviewing our accounts and contracts andby providing appropriate allowances for uncollectible amounts. We maintainallowances for doubtful accounts for estimated losses resulting from theinability of customers to make contractually required payments. If thefinancial conditions of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired. Allowances are based on management’s judgment which considershistorical experience and specific knowledge of accounts that may not becollectible.

 

*Legal Contingencies*

 

We are currently involved in certain legal proceedings as described inNote 10 of our Financial Statements. We are required to assess the likelihoodof any adverse judgments or outcomes to these matters as well as potentialranges of probable losses, in accordance with FAS 5. A determination of theamount of reserves required, if any, for these contingencies are made aftercareful analysis of each individual case. Losses are recognized for legalcontingencies when both the probability of occurrence and the loss can bereasonably estimated. We do not believe the outcomes to these matters will havea material adverse effect on our financial

 

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position. Nonetheless, it is possible that future results of operationsfor any particular quarterly or annual period could be materially affected bychanges in our assumptions or the effectiveness of our strategy related tothese proceedings.

 

*Goodwill and Intangible Assets*

 

Our long lived assets include goodwill and other intangibleassets.  In accordance with SFASNo. 142, goodwill and indefinite-lived intangibles are not amortized, butare reviewed at least annually for impairment. We retain an independent appraisal firm which annually provides avaluation of our company’s fair value, based on a discounted cash flowanalysis.  This cash flow analysisrequires significant judgment and estimates by management relating toassumptions about expected future operating performance and appropriatediscount rates.  An impairment loss is recordedif the estimated future cash flows plus net proceeds expected from dispositionof the asset (if any) are less than the carrying value of the asset.  Our estimate of discounted cash flows maydiffer from actual cash flows due to, among other things, economic conditions,changes to our business model and changes in operating performance.  An impairment loss recorded in the future, ifany, could have a material adverse impact on our financial position or resultsof operations.

 

We performed our annual evaluation of goodwill and intangibles as ofOctober 1, 2004 at which time no impairment was indicated.  There has been no indication of impairmentsince October 1, 2004.

 

**Results of Operations**

 

The following table sets forth for the years indicated certainfinancial data as a percentage of revenue:

 
| ** **                       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |     |       |
| Revenue                          |       | 100      | %          | 100      | %          | 100      | %          |
| Costs of revenue                 |       | 39       | %          | 49       | %          | 55       | %          |
| Gross profit                     |       | 61       | %          | 51       | %          | 45       | %          |
| Operating expenses:              |       |     |       |     |       |     |       |
| Research and development         |       | 20       | %          | 24       | %          | 30       | %          |
| Sales and marketing              |       | 38       | %          | 41       | %          | 46       | %          |
| General and administrative       |       | 21       | %          | 25       | %          | 22       | %          |
| Restructuring and other expenses |       | (1       | )%         | —   |       | 31       | %          |
| Litigation settlement recovery   |       | (3       | )%         | —   |       | —   |       |
| Acquisition-related expenses     |       | —   |       | —   |       | 10       | %          |
| Amortization of intangibles      |       | 6        | %          | 9        | %          | 8        | %          |
| Stock-based compensation         |       | 13       | %          | 22       | %          | 32       | %          |
| Total operating expenses         |       | 94       | %          | 122      | %          | 179      | %          |
| Loss from operations             |       | (33      | )%         | (72      | )%         | (134     | )%         |
| Interest income, net             |       | 5        | %          | 10       | %          | 27       | %          |
| Loss on joint ventures           |       | —   |       | —   |       | (9       | )%         |
| Impairment of investments        |       | —   |       | —   |       | (15      | )%         |
| Minority interest                |       | —   |       | 1        | %          | —   |       |
| Net loss                         |       | (28      | )%         | (61      | )%         | (131     | )%         |

 

16

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The following table sets forth operating results for each of the fourquarters ended December 31, 2004 and 2003:

 
|                 | ** ** | **2004**                                               | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **Q1**                                                 | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| ** **                                                                                 | ** ** | **(in thousands, except per share data)  (unaudited)** | ** ** |
|                                                                                       |       |                                                   |       |   |   |   |   |   |   |
| Revenue                                                                                    |       | $                                                      | 13,266     |   | $ | 14,473 |   | $ | 15,623 |   | $ | 15,932 |   |
| Gross profit                                                                               |       | 7,362                                                  |       | 8,440 |   | 9,970 |   | 10,465 |   |
| Loss from operations                                                                       |       | (7,249                                                 | )          | (4,817 | ) | (5,057 | ) | (3,062 | ) |
| Net loss                                                                                   |       | (6,490                                                 | )          | (4,272 | ) | (4,346 | ) | (2,311 | ) |
| Basic and diluted net loss per share                                                       |       | $                                                      | (0.19      | ) | $ | (0.12 | ) | $ | (0.12 | ) | $ | (0.07 | ) |

 
| ** **                           | ** ** | **2003**                                               | ** ** |
|--------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                           | ** ** | **Q1**                                                 | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| ** **                           | ** ** | **(in thousands, except per share data)  (unaudited)** | ** ** |
|                                 |       |                                                   |       |   |   |   |   |   |   |
| Revenue                              |       | $                                                      | 9,021      |   | $ | 10,201 |   | $ | 10,611 |   | $ | 11,599 |   |
| Gross profit                         |       | 4,813                                                  |       | 5,010 |   | 5,582 |   | 5,551 |   |
| Loss from operations                 |       | (6,523                                                 | )          | (7,399 | ) | (7,484 | ) | (8,303 | ) |
| Net loss                             |       | (5,185                                                 | )          | (6,133 | ) | (6,541 | ) | (7,276 | ) |
| Basic and diluted net loss per share |       | $                                                      | (0.15      | ) | $ | (0.18 | ) | $ | (0.19 | ) | $ | (0.21 | ) |

 

**Year Ended December 31, 2004 Compared to Year EndedDecember 31, 2003**

 

*Revenue.*  We generate revenue primarily from the saleof our Internet audience measurement products and services. We typically sellour syndicated services pursuant to one-year subscription agreements. We alsoderive a portion of our revenue from our customized products and services andfrom joint venture and other distribution partners.

 

As of December 31, 2004, 1,429 customers worldwide subscribed to ourproducts and services.  As of December31, 2003, 1,098 customers worldwide subscribed to our products andservices.  The increase of 331 customersduring 2004 is the result of organic growth in our worldwide customer base in2004, including the addition of 91 customers in the fourth quarter of2004.  We expect our global customer baseto continue to increase in the next few quarters as we market and sell our newproducts and services and expand into new geographical markets.

 

Our global contract renewal rate was 80% for the fourth quarter of2004, an increase over the global contract renewal rate of 74% for the fourthquarter of 2003. Our global average sales price was $46,000 for the fourthquarter of 2004, compared with $61,000 for the fourth quarter of 2003. Theaverage sales price decreased due to the acquisition in December 2003 of RedSheriff’s customer contracts, which typically have a lower average sellingprice.  During the year ended December31, 2004, no customer accounted for more than 10% of our revenue.

 

Revenue increased 43% to $59.3 million for the year endedDecember 31, 2004, compared to $41.4 million for the year endedDecember 31, 2003.  The acquisitions wecompleted in 2003 contributed approximately $10.9 million of the increase inrevenue.  The remaining increase inrevenue was primarily organic growth due to (i) new business sales of ourproducts and services; (ii) the launch of new product offerings; (iii) priceincreases for existing products and services; (iv) an increase in sales of ourcustom research and analytical services; and (v) the impact of foreign exchangerates relating to our international revenue. The increase in revenue was partially offset by the discontinuation ofour custom panel in Germany.

 

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*Cost of Revenue.*  Cost of revenue consists primarily ofexpenses related to the recruitment, maintenance and support of our Internetaudience measurement panels, which are expensed as they are incurred. Cost ofrevenue also includes data collection costs for our products and services andoperational costs related to data centers. Accordingly, such expenses are notmatched with any revenue or subscriptions generated in a given period and arehigher in periods in which we are involved in significant panel developmentactivities.

Cost of revenue increased 13% to $23.1 million, or 39% of revenue,for the year ended December 31, 2004 from $20.5 million, or 49% of revenuefor year ended December 31, 2003.  Theincrease in cost of revenue was due primarily to (i) the acquisitions in 2003for which we have incurred cost of revenue expense from their acquisitiondates; (ii) additional costs to build our MegaPanel in the United States in thefirst half of 2004; and (iii) the impact of foreign exchange rates relating toour international operations.  The increasewas partially offset by (i) reductions in our NetView home and work panelrecruitment costs; (ii) reduced expenses for @Plan as a result of retainingNielsen Media Research to handle recruitment; (iii) reduced costs to operateour data center in the United States; and (iv) reductions in our internationalMegaPanel and NetView panel costs.  As apercentage of revenue, our cost of revenue decreased 10% from 2003 to2004.  This decrease is due to the factthat a large portion of the expense related to launching a new product isincurred prior to the launch of such product. Once a product is launched, however, the cost of operating andmaintaining such product is reduced and, as a result, our cost of revenue declinesas a percentage of revenue.  During 2003,we incurred significant expenses related to launching our new products,particularly MegaPanel, and these expenses declined in 2004.

 

*Research and Development.*  Research and development expenses consistprimarily of compensation and related costs for personnel associated with ourresearch and product development activities. These costs are expensed asincurred.

 

Research and development expenses increased 20% to $12.0 million,or 20% of revenue, for the year ended December 31, 2004 from$10.0 million, or 24% of revenue, for the year ended December 31, 2003.The increase in research and development expenses was primarily due to(i) increased research and development personnel and associated payrollexpenses resulting from our acquisitions in 2003 and (ii) additionalquality assurance and research and development personnel primarily related toour MegaPanel service.

 

*Sales and Marketing.*  Sales and marketing expenses consistprimarily of salaries, benefits and commissions to our salespeople andanalysts, as well as costs related to seminars, promotional materials, publicrelations, corporate marketing and other sales and marketing programs.

 

Sales an d marketing expensesincreased 33% to $22.8 million, or 38% of revenue, for the year endedDecember 31, 2004 from $17.1 million, or 41% of revenue, for the yearended December 31, 2003.  The increase insales and marketing expenses was primarily related to (i) an increase insalary-related and travel expenses as a result of additional employees from ouracquisitions in 2003; (ii) additional personnel in our analytics arearelated to the launch of our MegaPanel service; and (iii) the impact of foreignexchange rates relating to our international operations.  The increase was partially offset byreductions in the number of personnel in our sales department.

 

 *General and Administrative.*  General and administrative expenses consistprimarily of salaries and related costs for executive management, finance,accounting, human resources, legal, information technology and otheradministrative personnel, in addition to professional fees and other generalcorporate expenses.

 

General and administrative expenses increased 19% to $12.6 million, or21% of revenue, for the year ended December 31, 2004 from $10.5 million,or 25% of revenue, for the year ended December 31, 2003.  The increase in general and administrativeexpenses was primarily due to (i) higher expenses, particularly personnelcosts, resulting from the acquisitions completed during 2003; (ii) the impactof foreign exchange rates relating to our international operations; and (iii)higher expenses related to compliance with new corporate governanceregulations, particularly Section 404 of the Sarbanes-Oxley Act of2002.  The increase was partially offsetby savings in costs to support our internal information technologyrequirements.

 

*Restructuring Expenses.*  During the first quarter of 2004, the Companynegotiated an amendment to the lease for its offices in Milpitas, Californiawhich included a release from its obligations for the abandoned portion of thefacility, resulting in a reversal of restructuring expense of $525,000.

 

*Litigation Settlement Recovery.*  During the fourth quarter of 2002, NetRatingsexpensed costs related to the settlement in

 

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2002 of the patent litigation initiated against the Company by JupiterMedia Metrix, Inc.  In the second quarterof 2004, NetRatings received, net of legal fees, $1.8 million from theCompany’s insurance company in reimbursement for these expenses.

 

*Amortization of Intangibles*.  Amortization of intangible expenses decreased4% to $3.7 million, or 6% of revenue, for the year ended December 31, 2004 from$3.9 million, or 9% of revenue, for the comparable period in 2003.  The decrease was primarily due to some assetsreaching their final amortization period during 2004.  The decrease was partially offset byadditional amortization related to specifically identified intangiblesassociated with the acquisition of Red Sheriff in the fourth quarter of 2003.

 

*Amortization of Stock-based Compensation*.  Stock-based compensation representsamortization of deferred service costs related to stock warrants which NielsenMedia Research exercised in December 1999. Amortization of stock-based compensation expenses decreased 17% to $7.6million, or 13% of revenue, for the year ended December 31, 2004 from$9.1 million, or 22% of revenue, for the comparable period in 2003.  The decrease is the result of reaching thefinal amortization period for the deferred service costs.  As of December 31, 2004 the deferred servicecosts are fully amortized.  Accordingly,no amortization costs related to the stock warrants exercised by Nielsen MediaResearch in December 1999 will be incurred in future periods.

 

In 2005, the Board of Directors and compensation committee approvedgrants of restricted stock in connection with certain modifications to theCompany's compensation policy.  As aresult of these restricted stock grants and the adoption of SFAS No. 123R, wewill record stock-based compensation expense during 2005.

 

*Equity in Earnings (Losses) of Joint Ventures.*  Equity in earnings from joint ventures was$0.1 million for each of the years ended December 31, 2004 and 2003.  In 2004, the equity in earnings from jointventures primarily reflected our equity in the earnings of our joint venture inItaly, Red Sheriff S.r.l., which was partially offset by losses related toIbope eRatings, our Latin America joint venture, in the first quarter of2004.  As a result of the losses incurredby Ibope eRatings.com, our balance in our investment in Ibope eRatings.com waszero as of March 31, 2004, therefore no losses were recorded after thefirst quarter of 2004.  In 2003, theequity in earning from joint ventures reflected our equity in earnings (losses)related to Ibope eRatings, Mediametrie NetRatings and NetRatings Japan throughthe respective dates that our ownership in each joint venture increased and,accordingly, we began consolidating their results of operations in ourfinancial statements.

 

*Interest Income, Net.*  Interest income, net, decreased 29% to $2.9million for the year ended December 31, 2004, from $4.1 million for the yearended December 31, 2003.  The decrease ininterest income was due to an overall reduction in cash and cash equivalents ascompared with the beginning of 2003 as a result of acquisitions and the fundingof our operations during 2003 and 2004. The reduction in cash in 2004 was partially offset by cash received as aresult of the exercise of employee stock options during the year.

 

*Minority Interest.*  Minority interest was $(242,000) and $455,000for the years ended December 31, 2004 and 2003, respectively. During the yearended December 31, 2004, we held majority interests in Red Sheriff, NetRatingsJapan and Mediametrie NetRatings.  RedSheriff had a negative equity balance on the date we acquired majority controlof Red Sheriff and, therefore, we recognized 100% of the loss of Red Sheriffduring the first half of 2004.  Minorityinterest for the year ended December 31, 2003 primarily represented theminority interest in the net losses of NetValue, MMXI Switzerland andNetRatings Japan.

 

*Operating Loss and Net Loss*.  Operating loss decreased 32% to$20.2 million, or 33% of revenue, for the year ended December 31, 2004from $29.7 million, or 72% of revenue, for the year ended December 31,2003. For the year ended December 31, 2004, our net loss decreased to$17.4 million, or $0.50 per share, on approximately 34.6 million weightedaverage shares outstanding, as compared with a net loss of $25.1 million,or $0.74 per share, on approximately 33.8 million weighted average sharesoutstanding, for the year ended December 31, 2003. The decreases in operatingloss and net loss were primarily due to (i) increased revenue from organicgrowth and our acquisitions in 2003; (ii) decreased cost of revenue related toour NetView home and work panels and @Plan recruitment costs; (iii) decreasedamortization of stock-based compensation; (iv) the litigation settlementrecovery; and (v) reversal of restructuring expenses.  These improvements to operating loss and netloss were partially offset by (i) increases in cost of revenue and operatingexpenses related to our acquisitions in 2003; (ii) additional quality assuranceand research and development personnel primarily related to our MegaPanelservice; (iii) lower interest income; and (iv) higher expenses related tocompliance with new corporate governance regulations, particularlySection 404 of the Sarbanes-Oxley Act of 2002.

 

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**YearEnded December 31, 2003 Compared to Year Ended December 31, 2002**

 

*Revenue.*  We generate revenue primarily from the saleof our Internet audience measurement products and services. We typically sellour syndicated services pursuant to one-year subscription agreements. We alsoderive a portion of our revenue from our customized products and services andfrom joint venture partners.

 

As of December 31,2003, 1,098 customers worldwide subscribed to our products and services.  As of December 31, 2002, 748 customersworldwide subscribed to our products and services.  The increase of 350 customers during 2004 islargely attributable to the acquisitions of Red Sheriff and NetCrawling in 2003.  Apart from our acquisitions, however, weincreased our worldwide customer base, including the addition of 17 customersin the fourth quarter of 2003.

 

Our globalcontract renewal rate was 74% for the fourth quarter of 2003, an increase overthe global contract renewal rate of 64% for the fourth quarter of 2002. Ourglobal average sales price was $61,000 for the fourth quarter of 2003, comparedwith $60,000 for the fourth quarter of 2002. During the year ended December 31,2003, no customer accounted for more than 10% of our revenue.

 

Revenue increased39% to $41.4 million for the year ended December 31, 2003 from$29.7 million for the year ended December 31, 2002.   The acquisitions we completed in 2002contributed approximately $10.0 million of the increase in revenue.  The remaining increase in revenue wasprimarily organic growth due to (i) new business sales of our products andservices; (ii) a custom panel in Germany; (iii) price increases for existingproducts and services; and (iv) the impact of foreign exchange rates relatingto our international revenue.

 

*Cost ofRevenue.*  Cost ofrevenue consists primarily of expenses related to the recruitment, maintenanceand support of our Internet audience measurement panels, which are expensed asthey are incurred. Cost of revenue also includes data collection costs for ourproducts and services and operational costs related to data centers.Accordingly, such expenses are not matched with any revenue or subscriptionsgenerated in a given period and are higher in periods in which we are involvedin significant panel development activities.

 

Cost of revenueincreased 24% to $20.5 million, or 49% of revenue, for the year endedDecember 31, 2003, from $16.5 million, or 55% of revenue, for theyear ended December 31, 2002. The increase in cost of revenue wasprimarily due to (i) recruitment and panel costs related to the expansionof our international MegaPanel and the building of our MegaPanel in the UnitedStates; (ii) the impact of foreign exchange rates relating to ourinternational operations; (iii) recruitment and panel costs related tobuilding our Hispanic panel; (iv) additional costs of revenue related tothe NetCrawling acquisition completed in the third quarter of 2003;(v) the full consolidation of the operating results of NetRatings Japanbeginning in the second quarter of 2003; and (vi) recruitment and panelcosts related to a custom panel in Germany. These increases were partiallyoffset by a reduction in panel related fees associated with our U.S. home andat-work panels.

 

*Researchand Development* Research and development expenses consistprimarily of compensation and related costs for personnel associated with ourresearch and product development activities. These costs are expensed asincurred.

 

Research and development expenses increased 14% to$10.0 million for the year ended December 31, 2003 from$8.8 million for the year ended December 31, 2002. Research anddevelopment expenses represented 24% and 30% of revenue for the years endedDecember 31, 2003 and 2002, respectively. The increase in research anddevelopment expenses was primarily due to (i) increased research anddevelopment personnel and associated payroll expenses resulting from ouracquisitions in 2002 and 2003; (ii) expenses incurred in connection withmoving our data center to a new facility in Florida during the fourth quarterof 2003; and (iii) the impact of foreign exchange rates relating to ourinternational operations.

 

*Sales andMarketing.*  Sales andmarketing expenses consist primarily of salaries, benefits and commissions toour salespeople and analysts, as well as costs related to seminars, promotionalmaterials, public relations, corporate marketing

 

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and other salesand marketing programs.

 

Sales andmarketing expenses increased 24% to $17.1 million for the year endedDecember 31, 2003 from $13.8 million for the year ended December 31,2002. Sales and marketing expenses represented 41% and 46% of revenue for theyears ended December 31, 2003 and 2002, respectively. The increase insales and marketing expenses was primarily due to (i) an increase insalary-related and travel expenses as a result of additional employees from our2002 and 2003 acquisitions; (ii) the consolidation of the operatingresults of NetRatings Japan beginning in the second quarter of 2003;(iii) the impact of foreign exchange rates relating to our internationaloperations; and (iv) increase in bonus and commission expenses due tohigher contract sales in 2003. The increases are partially offset by areduction in public relations, corporate marketing and trade show expensesduring 2003.

 

*Generaland Administrative.*  Generaland administrative expenses consist primarily of salaries and related costs forexecutive management, finance, accounting, human resources, legal, informationtechnology and other administrative personnel, in addition to professional feesand other general corporate expenses.

 

General andadministrative expenses increased 64% to $10.5 million for the year endedDecember 31, 2003 from $6.4 million for the year ended December 31,2002. General and administrative expenses represented 25% and 22% of revenuefor the years ended December 31, 2003 and 2002, respectively. The increasein general and administrative expenses was primarily due to (i) higherpayroll, travel and related expenses resulting from the acquisitions completedduring 2002 and 2003; (ii) the impact of foreign exchange rates relatingto our international operations; (iii) higher payroll expenses due to theconsolidation of the operating results of NetRatings Japan beginning in thesecond quarter of 2003; and (iv) higher legal expenses resulting fromlegal actions initiated in 2003.

 

*Restructuringand Other Expenses.* During the first quarter of 2002, we initiated a restructuring plan tostreamline our business to focus on core products, refine our product line andconsolidate space at our Milpitas, California facility. This plan also includeda 15% reduction in workforce. The restructuring expense of $6.9 millionrecorded in the first quarter of 2002 reflected (i) the severance expensesrelated to the termination of 24 employees, all of whom were terminated as ofDecember 31, 2002; (ii) accruals related to costs to terminate ortransition contracts due to the elimination of products; (iii) impairment chargesrelated to fixtures and equipment; and (iv) an accrual for the leasepayments related to office space in excess of our current and projected futureneeds. During the fourth quarter of 2002, we decreased by $0.4 million ouraccruals related to the elimination of products due to the successfulresolution of customer contract issues related to the eliminated products, andrecorded additional charges related to legal matters, intangible assets andseverance benefits based on the identification of 16 additional employees whowere terminated prior to December 31, 2002. There were no correspondingexpenses recorded during 2003.

 

*Acquisition-relatedExpenses.*  During thefirst quarter of 2002, we recognized acquisition-related expenses of$3.0 million related to the terminated merger between NetRatings andJupiter Media Metrix. There were no corresponding charges in 2003.

 

*Amortizationof Intangibles.* Amortization of intangible expenses increased 61% to $3.9 million,or 9% of revenue, for the year ended December 31, 2003 from$2.4 million, or 8% of revenue, for the year ended December 31, 2002. Theincrease was the result of including a full year of amortization in 2003 ofspecifically identified intangibles associated with the acquisitions ofAdRelevance, @Plan, eRatings, NetValue and other intangible assets, includingpatents.

 

*Amortizationof Stock-based Compensation.* Stock-based compensation primarily represents amortization of deferredcharges related to stock warrants which Nielsen Media Research exercised inDecember 1999. Stock-based compensation expenses decreased 3% to$9.1 million, or 22% of revenue, for the year ended December 31, 2003from $9.4 million, or 32% of revenue, for the year ended December 31,2002. The decrease primarily resulted from the scheduled amortization of ourstock-based compensation costs.

 

*Equity inEarnings (Losses) of Joint Ventures.*  For the year ended December 31, 2003,gain from joint ventures was $66,000 or 0.1% of revenue. Loss from jointventures was $2.5 million or 9% of revenue for the year ended December 31,2002. The variance was primarily due to our acquisition of the remaining equityinterest in ACNielsen eRatings in May 2002 and our increase in ownershipin NetRatings Japan in April 2003, after which each of their gains andlosses have been reported in our

 

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consolidatedresults rather than in equity in earnings (losses) of joint ventures.

 

*Impairmentof Investments.* Management performs regular reviews to determine if investments areimpaired. During our fourth quarter 2002 review, we determined that two of ourinvestments in equity securities were impaired due to changes in the companies‘business models and their deteriorating financial position. Since we concludedthat these impairments were other than temporary, we recognized one-timenon-cash charges of $4.5 million. As of December 31, 2002, we havewritten down our long-term investments to zero and there was no correspondingimpairment of investments in 2003.

 

*InterestIncome, Net.*  Interestincome, net, decreased 50% to $4.1 million for the year endedDecember 31, 2003 from $8.0 million for the year ended December 31,2002. The decrease reflects an overall reduction of interest rates in 2003 as comparedwith 2002. The decrease in interest income also resulted from an overallreduction in cash and cash equivalents as compared with the beginning of 2002as a result of the repurchase of common stock from two former executives in thefirst quarter of 2002, the acquisitions that were completed in 2002 and 2003and the funding of our normal operations.

 

*MinorityInterest.*  For the yearended December 31, 2003, we held majority interests in NetValue, MMXISwitzerland, NetRatings Japan and Mediametrie NetRatings. For the year endedDecember 31, 2002, we held a majority interest in NetValue. Minorityinterest in profit for the years ended December 31, 2003 and 2002 was$455,000 and $17,000, respectively.

 

*OperatingLoss and Net Loss.* Operating loss decreased 25% to $29.7 million, or 72% of revenue,for the year ended December 31, 2003 from $39.9 million, or 134% ofrevenue, for the year ended December 31, 2002. For the year endedDecember 31, 2003, our net loss decreased to $25.1 million, or $0.74per share on approximately 33.8 million weighted average sharesoutstanding, as compared with a net loss of $38.9 million, or $1.17 pershare on approximately 33.2 million weighted average shares outstanding,for the year ended December 31, 2002. The decrease in operating loss andnet loss is primarily due to (i) an increase in overall revenues in 2003;(ii) impairment of prior investments recorded in 2002; (iii) therestructuring and other expenses incurred in 2002; (iv) acquisition-relatedexpenses in 2002 related to our terminated merger with Jupiter Media Metrix;and (v) the reduction in amortization of stock-based compensation. Thesedecreases were partially offset by (i) an increase in our cost of revenueexpenses; (ii) an increase in research and development, sales and marketingand general and administrative expenses; (iii) higher amortization ofintangibles; (iv) lowered interest income; and (v) a decrease inminority interest.

 

**Inflation**

 

Our managementcurrently believes that inflation has not had a material impact on continuingoperations.

 

**Liquidityand Capital Resources**

 

AtDecember 31, 2004, the Company‘s cash and cash equivalents and short-terminvestments were $197.6 million, compared with $210.0 million atDecember 31, 2003.

 

Cash used inoperating activities was $13.4 million in 2004, due to our net loss of$17.4 million and cash used in working capital changes of $10.5 million,partially offset by non-cash expenses of $14.5 million. The non-cashexpenses include $7.6 million for stock-based compensation, $2.8 millionfor depreciation, $3.7 million for amortization of intangible assets, $0.3 millionfor provision for doubtful accounts, $0.2 million related to minority interestand $(0.1) related to equity in earnings of joint ventures. Cash used inoperating activities was $17.1 million in 2003, due to our net loss of$25.1 million and cash used in working capital changes of $6.8 million,partially offset by non-cash expenses of $14.8 million. The non-cashexpenses included $9.1 million for stock-based compensation, $2.1 millionfor depreciation, $3.9 million for amortization of intangible assets, $0.2million for provision for doubtful accounts and $(0.5) million related tominority interest. Cash used in operating activities was $18.8 million in 2002due to our net loss of $38.9 million and cash used in working capitalchanges of $1.6 million, partially offset by non-cash expenses of $21.7 million.The non-cash expenses included $9.5 million for stock-based compensation, $2.6million for depreciation, $2.6 million for loss on joint ventures, $2.4 millionfor amortization of intangible assets and $4.5 million for impairment ofinvestments, and $0.1 for provision for doubtful accounts.  We expect to continue to use cash in 2005 tofund our operations.

 

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Net cash used ininvesting activities during 2004 was $20.6 million, resulting from cashpaid for acquisitions, net of cash acquired, of $10.1 million, acquisitionsof property and equipment of $4.8 million, loans to related parties of$0.7 million and net purchases of our short-term investments of$5.0 million.  Net cash provided byinvesting activities during 2003 was $16.3 million, resulting from netsales of our short-term investments of $32.2 million and a decrease inloans to related parties of $0.4 million. The increase was partiallyoffset by cash paid for acquisitions, net of cash acquired, of$14.5 million and acquisition of property and equipment of$1.8 million. Net cash provided by investing activities during 2002 was $67.7 million,resulting from net sales of our short-term investments of $110.9 million.In 2002, the increase was partially offset by cash paid for acquisitions, netof cash acquired, cash investments in joint ventures and patent settlement andacquisition costs totaling $40.4 million, and acquisition of property andequipment of $2.8 million.  Weexpect net cash provided by investing activities to be further reduced by useof our short-term investments to support operations and other potential strategicinvestments.

 

Net cash providedby financing activities totaled $16.8 million and $1.4 million for theyears ended December 31, 2004 and 2003, respectively, primarily resultingfrom the exercise of options and the purchase of stock through our employeestock option and stock purchase plans.  Netcash used in financing activities totaled $18.8 million for the year endedDecember 31, 2002. This was primarily related to $20.6 million usedto repurchase 1.5 million shares of common stock from two former executiveofficers, offset by the exercise of options and stock issued through ouremployee stock option and stock purchase plans, totaling $1.9 million.

 

The followingsummarizes our contractual obligations as of December 31, 2004 (inthousands):

 
| ** **                                                             | ** ** | **Payments due by period** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------|------------|
| **Contractual Obligations**                                            | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| Long-Term Debt                                                         |       | —                     |       | — |   | — |   | — |   | — |   |
| Capital Lease Obligations                                              |       | —                     |       | — |   | — |   | — |   | — |   |
| Operating Leases                                                       |       | $                          | 9,665      |   | $ | 2,583 |   | $ | 4,403 |   | $ | 2,461 |   | $ | 218 |   |
| Purchase Obligations*                                                  |       | 17,374                     |       | 7,405 |   | 6,822 |   | 3,147 |   | — |   |
| Other Long-Term Liabilities Reflected on Our Balance  Sheet Under GAAP |       | —                     |       | — |   | — |   | — |   | — |   |
| Total                                                                  |       | $                          | 27,039     |   | $ | 9,988 |   | $ | 11,225 |   | $ | 5,608 |   | $ | 218 |   |

 

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*  The expected timing of payment of thepurchase obligations set forth above, which consist primarily of panel and datacenter costs,  is estimated based oncurrent information. Timing of payments and actual amounts paid may bedifferent depending on the time of receipt of goods or services or changes toagreed-upon amounts for some obligations.

 

While we have historically made additionalcontributions to our joint ventures in order to maintain our ownershippercentage, we are not contractually required to make such contributions. Inthe event of a request for capital infusion, we have the option as to whetheror not we participate in the round of funding. Should we elect not toparticipate, our equity position would be diluted in that joint venture.

 

We believe thatour existing balances of cash and cash equivalents and short-term investmentswill be sufficient to meet our cash needs for working capital and capitalexpenditures for at least the next 12 months, although we could elect toseek additional funding prior to that time.

 

**Off-BalanceSheet Arrangements**

 

We have nooff-balance sheet arrangements (as defined in Item 303 of Regulation S-K).

 

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**RISKFACTORS THAT MAY AFFECT OUR PERFORMANCE**

 

An investment inour company involves a high degree of risk. You should carefully consider therisks below, together with the other information contained in this report,before you make an investment decision with respect to our company. The risksdescribed below are not the only ones facing our company. Additional risks notpresently known to us or that we deem immaterial may also impair our businessoperations. Any of the following risks could (i) materially adverselyaffect our business, operating results and financial condition, (ii) causethe trading price of our common stock to decline and (iii) cause you tolose all or part of your investment.

 

**WE HAVE INCURRED LOSSES SINCE OUR INCEPTION AND WE MAY BE UNABLE TOACHIEVE PROFITABILITY**

 

We incurred net losses of $38.9 million for the year endedDecember 31, 2002, $25.1 million for the year ended December 31,2003 and $17.4 million for the year ended December 31, 2004. As ofDecember 31, 2004, our accumulated deficit was $136.9 million.  We intend to continue to incur significantexpenditures as our company grows and as we expand our portfolio of productsand services. As a result, we will need to generate significant additionalrevenue to achieve and maintain profitability. We may not be able to achievesignificant revenue growth in the future. Our operating results for futureperiods are subject to numerous uncertainties and we may not achieve sufficientrevenue to become profitable.

 

**WE HAVE A LIMITED OPERATING HISTORY IN THE EVOLVING MARKET FOR INTERNETAUDIENCE MEASUREMENT AND ANALYSIS**

 

We were incorporated in July 1997 and did not start generatingrevenue until the quarter ended September 30, 1998. We introduced ourNetView service in the quarter ended September 30, 1999. Many of our otherproducts and services were first offered by us during the last few years.Accordingly, we are still in the early stages of development and have only alimited operating history upon which to evaluate our business. One shouldevaluate our likelihood of financial and operational success in light of therisks, uncertainties, expenses, delays and difficulties associated with anearly-stage business in an evolving market, many of which may be beyond ourcontrol, including:

 

•                        the risk that a competing company’s Internet audience measurementservice will become the accepted standard in the marketplace;

 

•                        the extent of growth, if any, in the Internet media research and marketresearch markets;

 

•                        potential inability to successfully manage any significant growth wemay achieve in the future;

 

•                        potential inability to successfully integrate any acquired business,technology or service; and

 

•                        the risks associated with operating a business in numerousinternational markets.

 

**IF OUR NEW PRODUCTS OR SERVICES DO NOT GENERATE THE REVENUES THAT WEANTICIPATE, OUR FINANCIAL RESULTS WILL SUFFER**

 

During the past few years, we launched a number of new products andservices that we believe will generate interest in the marketplace and resultin increased revenues in the coming years. Our financial results during 2005and beyond will depend in part on the success of these new product initiativesand our ability to generate meaningful revenues from them. If we fail in ourefforts to market and sell these new products and services, our financialresults will be negatively affected. Furthermore, we believe that our newproducts and services fill gaps in our product portfolio and that theintroduction of new products will not result in decreased sales of our existingproducts. If we are mistaken in our view of the marketplace, and theintroduction of these new products results in decreased sales of our existingportfolio, then our financial results will also be negatively affected.

 

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**OUR QUARTERLY REVENUES MAY FLUCTUATE SIGNIFICANTLY AND BECAUSE OUREXPENSE LEVELS ARE BASED IN LARGE PART ON OUR ESTIMATES OF FUTURE REVENUES, ANUNEXPECTED SHORTFALL IN REVENUE WOULD SIGNIFICANTLY HARM OUR OPERATING RESULTSAND COULD LEAD TO REDUCED PRICES FOR OUR STOCK**

 

Due to the evolving nature of our business and the markets in which wecompete, our future revenue is difficult to forecast. Further, our expenselevels are based largely on our investment plans and estimates of futurerevenue. We may be unable to adjust our spending to compensate for anunexpected shortfall in revenue. Accordingly, any significant shortfall inrevenue relative to our planned expenditures in a particular quarter would harmour results of operations and could lead our stock price to fall sharply,particularly following quarters in which our operating results fail to meetexpectations.

 

Factors that may cause fluctuations in our revenues or operatingresults on a quarterly basis include the following, some of which are beyondour control:

 

•                  theamount and timing of operating costs and capital expenditures related to theexpansion of our business;

 

•                  theamount and timing of costs related to changes in the size or composition of ourpanels, particularly as a result of turnover among panel members;

 

•                  theimpact on our renewal rates caused by our customers’ budgetary constraints or aperceived lack of need for our services;

 

•                  changesin demand for our products and services due to the announcement or introductionof new products and services or the cancellation of existing products andservices by us or our competitors;

 

•                  changesin the pricing of our products and services in light of the services andpricing offered by our competitors;

 

•                  theimpact of possible acquisitions or equity investments both on our operationsand on our reported operating results due to associated accounting charges; and

 

•                  technicaldifficulties or service interruptions that significantly harm our ability todeliver our products and services on schedule.

 

**WE HAVE LIMITED ABILITY TO FORECAST THE RATE AT WHICH SUBSCRIPTIONS FOROUR SERVICES MAY BE RENEWED, AND WE MAY NOT ACHIEVE SUFFICIENTLY-HIGH RENEWALRATES TO BECOME PROFITABLE**

 

We derive a large percentage of our revenue from annual subscriptionsfor our services. As our business becomes more established, we expect subscriptionrenewals and sales of additional products and services to existing customers toaccount for an increasing proportion of our revenue. Any unexpectedly lowrenewal rates or a reduction in the number of products and services that we areable to sell to existing customers would harm our operating results and couldprevent us from becoming profitable. To date, renewals have been an essentialelement of our revenue growth. We cannot assure you that we will be able toachieve or sustain high renewal rates, particularly during an economicdownturn. Additionally, because many Internet-related businesses are still inthe early stages of development, consolidations in our customer base or thefailure of a significant number of our customers’ businesses could cause adecline in renewal rates for our products and services.

 

**IF THE INTERNET ADVERTISING AND ELECTRONIC COMMERCE MARKETS DEVELOPSLOWER THAN WE EXPECT, OUR BUSINESS WILL SUFFER**

 

Our future success will depend on an increase in the use of theInternet as an advertising medium, the proliferation of e-commerce and the useof the Internet as part of multi-channel marketing strategies. These marketsand marketing techniques are fairly new and rapidly evolving, and it is notcertain that the current trends will continue throughout the world.

 

The adoption of Internet advertising, particularly by entities thathave historically relied on traditional media for

 

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advertising, requires the acceptance of a newway of conducting business. These companies may find Internet advertising to beless effective than traditional advertising for promoting their products andservices. They may also be unwilling to pay premium rates for advertising thatis targeted at specific types of users based on demographic profiles or recentInternet behavior. The Internet advertising and e-commerce markets may also beadversely affected by privacy issues surrounding the targeting of this type ofadvertising or the use of personal information. Providers of goods and servicesonline continue to work toward the establishment of commerce models that arecost effective and unique, and effectively deal with issues such as channelconflict and infrastructure costs. Growth in the use of the Internet fore-commerce may not continue, or the Internet may not be adopted as a medium ofcommerce by a broad base of customers worldwide. Because of the foregoingfactors, among others, the market for Internet advertising and e-commerce maynot continue to grow or grow at significant rates. If these markets fail todevelop or develop slower than we expect, our business will suffer.

 

**THE MARKET FOR INTERNET AUDIENCE MEASUREMENT AND ANALYSIS IS HIGHLYCOMPETITIVE, AND IF WE CANNOT COMPETE EFFECTIVELY, OUR REVENUES WILL DECLINE**

 

The market for Internet audience measurement and analysis is rapidlyevolving and highly competitive. We compete with a number of companies in themarket for Internet audience measurement services and analytical services, andwe expect competition in this market to intensify in the future.

 

We believe that theprincipal competitive factors in our market are:

 

•                  theability to provide high-quality, accurate and reliable data regarding Internetaudience behavior and activity in a timely manner;

 

•                  thebreadth and depth of the product and services offered and their flexibility andease of use;

 

•                  theavailability of data across various geographic areas;

 

•                  theability to offer high-quality analytical services based on the Internetaudience measurement information;

 

•                  theability to offer products and services that meet the changing needs of ourcustomers; and

 

•                  theprices that are charged for the products and services, as well as the generaleconomic conditions.

 

Some of our competitors maybe able to:

 

•                  devotegreater resources to marketing and promotional campaigns;

 

•                  adoptmore aggressive pricing policies; or

 

•                  devotemore resources to technology and systems development.

 

In light of these factors,we may be unable to compete successfully in our market.

 

**IF WE FAIL TO SUCCESSFULLY CLOSE AND INTEGRATE ACQUISITIONS, OURBUSINESS WILL SUFFER**

 

We may continue to acquire or make investments in complementarybusinesses, technologies, services or products if appropriate opportunitiesarise. Negotiating such acquisitions can be difficult, time consuming andexpensive and our ability to close such transactions may often be subject toapprovals, such as governmental regulation, which are beyond our control.Consequently, we can make no assurances that such acquisitions, once undertakenand announced, will close.

 

Further, the process of integrating any acquired business, technology,service or product into our business may result in unforeseen operatingdifficulties and expenditures. Integration of an acquired company may alsoconsume significant management time and attention that would otherwise beavailable for the ongoing development of our business. Moreover, theanticipated benefits of any acquisition may not be realized. We may be unableto identify, negotiate or finance future acquisitions or investmentssuccessfully, or to integrate successfully any acquisitions with our currentbusiness. Future acquisitions could result in potentially dilutive issuances ofequity securities or the incurrence of debt, contingent liabilities oramortization expenses related to intangible assets, any of which could harm ourbusiness.

 

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**INVESTOR CONFIDENCE AND OUR SHARE PRICE MAY BE ADVERSELY IMPACTED IFOUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM IS UNABLE TO ATTEST TO THEADEQUACY OF OUR INTERNAL CONTROL OVER FINANCIAL REPORTING AS OFDECEMBER 31, 2004, AS REQUIRED BY SECTION 404 OF THE SARBANES-OXLEYACT OF 2002**

 

The Securities and Exchange Commission, pursuant to Section 404 ofthe Sarbanes-Oxley Act of 2002, adopted rules requiring public companies toinclude a report of management on the company’s internal control over financialreporting in its annual reports on Form 10-K that contains an assessment by managementof the effectiveness of the company’s internal control over financialreporting. In addition, a public company’s independent registered publicaccounting firm must attest to and report on management’s assessment of theeffectiveness of such company’s internal control over financial reporting.  These reports and attestations were originallyrequired to be filed with this Annual Report on Form 10-K.  In late November 2004, the Securities andExchange Commission issued an exemptive order providing a 45 day extension forthe filing of these reports and attestations by eligible companies. Because weelected to utilize this 45 day extension, our deadline for filing these reportshas been extended. These reports will be included in an amended Form 10-K expectedto be filed within the deadlines prescribed by the exemptive order.

 

If our independent registered public accounting firm is not satisfiedwith our internal controls over financial reporting or the level at which thesecontrols are documented, designed, operated, or reviewed, or if the independentregistered public accounting firm interprets the requirements, rules orregulations differently from us, then they may decline to attest to management’sassessment or may issue a report that is qualified. In the event thatmanagement is unable to complete its assessment of the effectiveness of ourinternal controls over financial reporting or our independent registered publicaccounting firm is unable to attest to management’s assessment, then we couldbe subject to regulatory scrutiny, class action lawsuits and a loss of publicconfidence in our internal controls.   Inaddition, any failure to implement required new or improved controls, ordifficulties encountered in their implementation, could harm our operatingresults or cause us to fail to meet our reporting obligations.  This could result in an adverse reaction inthe financial marketplace due to a loss of investor confidence in thereliability of our financial statements, which ultimately could negativelyimpact the market price of our shares.

 

**WE ARE DEPENDENT ON NIELSEN MEDIA RESEARCH AND ACNIELSEN FOR VARIOUSSERVICES RELATED TO OUR DOMESTIC AND INTERNATIONAL OPERATIONS**

 

The data for our NetView service is collected from randomly-selectedpanels of Internet users. Our NetView Internet audience measurement panel inthe United States has been developed and is maintained by Nielsen MediaResearch as part of our strategic relationship with that company. In addition,ACNielsen has granted us a license to use ACNielsen’s sampling methodology andthe “Nielsen“ name outside North America in the Internet audience measurementbusiness, and has entered into a service agreement to provide us with theservices of certain dedicated marketing and panel management personnel who areemployed by ACNielsen, as well as specific back office services. Accordingly,for a significant period of time, we expect that our business will besubstantially dependent upon these arrangements for the continued maintenanceof our international Internet audience measurement panels and for otherinternational business operations. Any failure on the part of Nielsen MediaResearch, ACNielsen or our other business partners to devote adequate resourcesto the development or maintenance of such panels or other samplingmethodologies, or to maintain the overall quality of these methodologies, willharm our business. In addition, Nielsen Media Research may terminate itsobligations with respect to Internet audience measurement panels in the event itno longer holds at least 5% of our outstanding stock on a fully-diluted basis.

 

**VNU N.V., THROUGH ITS WHOLLY-OWNED SUBSIDIARIES NIELSEN MEDIA RESEARCHAND ACNIELSEN, CONTROLS A MAJORITY OF OUR OUTSTANDING STOCK AND ITSREPRESENTATIVES CONSTITUTE A MAJORITY OF OUR BOARD OF DIRECTORS**

 

VNU, N.V., through its wholly-owned subsidiariesNielsen Media Research and ACNielsen, has a majority stock ownership positionin NetRatings, which enables it to control the direction and policies ofNetRatings, including the election of our board of directors, amendment of ourcertificate of incorporation, and decisions regarding mergers, acquisitions,consolidations and the sale of all or substantially all of our assets. Thiscontrol may have the effect of discouraging certain types of transactionsinvolving a change of control.

 

In addition, VNU can control or influence the terms ofour important commercial transactions, including our strategic relationshipswith Nielsen Media Research and ACNielsen. VNU’s representatives on our boardare expected to

 

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recuse themselves from deliberations in which theyhave a conflict of interest. However, these directors may take actions thatfavor VNU’s interests over the interests of other stockholders, as a result,for instance, of conflicts of interest that are not apparent at the time ofsuch actions.

 

**OUR BRAND IS DEPENDENT ON THE REPUTATIONS OF THIRD PARTIES OVER WHICHWE HAVE NO CONTROL**

 

The strength of the Nielsen//NetRatings brand is alsoclosely dependent on the reputations of Nielsen Media Research, ACNielsen andother business partners and the strength of their brands. Therefore, anynegative publicity generated by Nielsen Media Research, ACNielsen or our otherbusiness partners, whether or not directly related to any Nielsen//NetRatingsbranded products or services, as well as any erosion of the strength of any oftheir brands, will adversely affect our own brand identity.

 

**OUR COSTS TO DEVELOP AND MAINTAIN ACCURATE INTERNET AUDIENCEMEASUREMENT PANELS, INCLUDING PANELS FOR OUR MEGAPANEL SERVICE, ARE SIGNIFICANTAND MAY INCREASE**

 

We believe that the quality, size and scope of ourpanels are critical to the success of our business. To date, the expense ofrecruiting and operating our audience measurement panels has made up a verysignificant portion of the cost of revenue reported on our financial statementsand, therefore, any increase in this expense will likely result in a decreasein our gross margin. The costs associated with maintaining the quality, sizeand scope are dependent on many factors some of which are beyond our control,including the cooperation rate of potential panel members and turnover amongexisting panel members, and accordingly we cannot necessarily control thesecosts to match increases or decreases in revenue. To the extent that suchadditional expenses are not accompanied by increased revenue, our results ofoperations will be harmed. Recruiting panelists for our MegaPanel service inEurope and the United States has also required significant investment and therecan be no assurance that we will be able to achieve or maintain panels ofsufficient size to meet client demand. We have limited experience in developingInternet audience measurement panels, and we could experience lower cooperationrates or higher turnover rates in the future.

 

**OUR INTERNATIONAL OPERATIONS POSE UNIQUE RISKS THAT MAY DIVERT OURMANAGEMENT’S ATTENTION AND RESOURCES**

 

As a result of our acquisitions in the past few years,we offer our products and services in numerous countries around the world. Ourinternational markets will require significant management attention andresources. In addition, there can be no assurance of the continued growth ofInternet usage and electronic commerce in international markets. Theinternational markets for audience measurement services have historically beenlocalized and difficult to penetrate.

 

The success of our international operations willdepend on our ability to:

 

•                  effectivelyselect the appropriate countries to serve;

 

•                  recruitand maintain panels that are representative of a geographic area;

 

•                  controlcosts and effectively manage foreign operations;

 

•                  managethird-party vendors who will likely perform panel operations; and

 

•                  effectivelydevelop, market, and sell new products and services in new, unfamiliar markets.

 

Even if we are successful in managing our international operations, wewill be subject to a number of risks inherent in engaging in internationaloperations, including:

 

•                  changesin regulatory requirements;

 

•                  deficienciesin the telecommunications infrastructure in some countries;

 

•                  reducedprotection for intellectual property rights in some countries;

 

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•                  morerigorous levels of privacy protection in some countries;

 

•                  potentiallyadverse tax consequences;

 

•                  economicand political instability; and

 

•                  fluctuationsin currency exchange rates.

 

**OUR BUSINESS MAY BE HARMED IF WE SUPPLY INACCURATE INFORMATION TO OURCUSTOMERS**

 

If we furnish inaccurate information to our customers, our brand may beharmed. The information that we collect and information in our databases maycontain inaccuracies that our customers may not accept. Any dissatisfaction byour customers with our measurement or collection methodologies or databasescould have an adverse effect on our ability to attract new customers and retainexisting customers and could ultimately harm our brand. Our customer contractsgenerally provide that each customer must indemnify us for any damages arisingfrom the use of data, reports or analyses by the customer or the performance ofany consulting, analytic or other services by us. However, we cannot be certainthat our contract provisions provide sufficient protection and, in any event, enforcingthese protections could be very costly. Any liability that we incur or any harmto our brand that we suffer because of irregularities or inaccuracies in thedata we supply to our customers could harm our business.

 

**CONCERN OVER SPYWARE COULD IMPAIR OUR ABILITY TO RECRUIT PANELISTS ORMAINTAIN PANELS OF SUFFICIENT SIZE TO MEET CLIENT DEMAND, WHICH IN TURN COULDMATERIALLY ADVERSELY AFFECT OUR ABILITY TO PROVIDE OUR PRODUCTS AND SERVICES**

 

Public concern has increased recently regardingcertain kinds of downloadable software known as “spyware” and “adware.”  These types of programs are often installedon a computer without the consent of the user or without the user’s fullunderstanding while navigating the Internet. Concern over spyware and adware might cause users to be less inclined todownload software from the Internet, including our proprietary meteringtechnology, which could make it difficult to recruit additional panelists ormaintain panels of sufficient size to meet client demand.

 

Moreover, in response to spyware and adware concerns,numerous programs are available (many of which are available for free) thatclaim to identify and remove spyware and adware from users’ computers.  While our technology is not spyware, some ofthese anti-spyware programs have identified our software as spyware or as apotential spyware application.  Weactively seek to persuade the authors of these anti-spyware programs that oursoftware should not be included on their lists of spyware applications orpotential spyware applications.  However,to the extent that we are not successful, or to the extent that newanti-spyware programs classify our software as spyware or as a potentialspyware application, our goodwill might be harmed and users of these programsmight uninstall our software.  Loss ofgoodwill or a decrease in the size of our panels could increase the cost ofrecruiting panelists and materially adversely affect our ability to provide ourproducts and services to our clients, which in turn could cause our expectedrevenues to decline.

 

**TECHNOLOGICAL CHANGES MAY RESULT IN WIDESPREAD BLOCKING OR ERASING OFCOOKIES, WHICH COULD REDUCE THE AMOUNT AND VALUE OF THE INFORMATION WE COLLECTAND ADVERSELY AFFECT OUR ABILITY TO PROVIDE OUR PRODUCTS AND SERVICES TO CLIENTS**

 

Our SiteCensus technology currently uses “cookies” and “action tags” to track the behavior of Internetusers.  Cookies are small files ofinformation placed on an Internet user’s computer to collect information aboutthe user’s visits to a Web site.  Anaction tag, also known as “web beacon,” “pixel tag,” and “cleargif,” generally consists of asmall string of invisible code that represents a graphic image request on a Webpage that companies place on their Web sites to allow them to analyze the generalusage patterns of visitors to their Web sites. Third-party software and our owntechnology and privacy policy make it easy for users to block or delete ourcookies. Software programs, sometimes marketed as adware or spyware detectors,may block our cookies by default or prompt users to delete or block ourcookies. If a large percentage of users delete or block our cookies, thiscould, among other things, reduce the amount and value of the information wecollect, cause us to spend substantial money and time to change our technology,and adversely affect our ability to provide our SiteCensus service to ourclients.

 

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Changes in Web browsers may also encourage users to block our cookiesor impair our ability to use cookies and action tags for data collectionpurposes.  Technologies like the Platformfor Privacy Preferences (P3P) may also limit the collection of information fromcookies and action tags.  If these orother technological changes are implemented and we are unable to adapt ourtechnology and practices adequately in response to these changes, then thevalue of our SiteCensus service will be substantially impaired.

 

**PRIVACY CONCERNS COULD LEAD TO LEGISLATIVE, REGULATORY AND OTHERLIMITATIONS THAT COULD AFFECT OUR ABILITY TO COLLECT AND USE INFORMATION ABOUTINTERNET USERS, IMPAIR OUR ABILITY TO PROVIDE OUR PRODUCTS AND SERVICES TOCLIENTS AND EXPOSE US TO LIABILITY**

 

Privacy concerns could lead to legislative, judicial and regulatorylimitations on our ability to collect, maintain and use information aboutInternet users both in the United States and abroad. Restrictions could beplaced upon the collection, management, aggregation and use of information,which could require significant engineering time and resources.  Recently,the legislatures of the States of Utah and California enacted legislationdesigned to protect Internet users’ privacy by prohibiting certain kinds ofdownloadable software defined as “spyware.“ Similar legislation has been introducedin other states and the U.S. Congress, including the Safeguard Against PrivacyInvasions Act in the House of Representatives and the SPYBLOCK Act in theSenate.  In addition, the European Unionhas adopted a directive requiring the disclosure of the use of cookies andinstructions on their removal. It is possible that this legislation or futurelegislation intended to regulate spyware could affect our ability to collectinformation, which could prevent us from operating or distributing some of ourproducts and services or which could require us to change our businesspractices.  In addition, failure tocomply with the law and regulatory requirements may result in, among otherthings, administrative enforcement actions and fines, class action lawsuits andcivil and criminal liability. The occurrence of one or more of these eventscould materially harm our business, results of operation and financialcondition.

 

**WE MAY NOT BE SUCCESSFUL IN THE DEVELOPMENT OR INTRODUCTION OF NEWPRODUCTS AND SERVICES TO KEEP UP WITH THE PROLIFERATION OF ALTERNATIVE INTERNETACCESS DEVICES AND TECHNOLOGIES RELATED TO THE EXPECTED CONVERGENCE OF THEINTERNET AND TELEVISION**

 

We believe that an increasing proportion of Internet use will involvealternative Internet access devices such as Web-enabled phones, televisionset-top boxes and Internet enabled gaming consoles and that there willeventually be a convergence of Internet content and television programming.Accordingly, in order to continue to provide information about audiencebehavior throughout all major segments of the Internet, we will be required todevelop new products and services that address these evolving technologies. Wemay be unsuccessful in identifying new product and service opportunities or indeveloping or marketing new products and services in a timely or cost-effectivemanner. In addition, product innovations may not achieve the market penetrationor price stability necessary for profitability. Finally, we may not besuccessful in adapting our data collection software to evolving types ofInternet access devices or content. If we are unable to provide audiencemeasurement information regarding any significant segments of Internet use,demand for our products and services may suffer.

 

**WE MAY NOT BE ABLE TO RECRUIT OR RETAIN QUALIFIED PERSONNEL**

 

Our future success depends in large part on our ability to attract,retain and motivate highly skilled employees in many locations around theworld. Although we provide compensation packages that include competitive salaries,stock options, restricted stock, bonus incentives and other employee benefits,we may be unable to retain our key employees or to attract, assimilate andretain other highly qualified employees in the future. If we are unable toattract or retain key employees, our business would suffer.

 

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**THE AUDIENCE MEASUREMENT SERVICES OFFERED BY NIELSEN MEDIA RESEARCH ORACNIELSEN MAY EVENTUALLY HAVE FEATURES THAT OVERLAP WITH FEATURES OF OURINTERNET AUDIENCE MEASUREMENT SERVICES AS A RESULT OF CONVERGENCE OF TELEVISIONAND THE INTERNET**

 

Nielsen Media Research’s principal business consists of providingtelevision audience measurement services based on audience panels that itdevelops independent of its strategic relationship with us. ACNielsen alsoderives a substantial portion of its revenue from television audiencemeasurement services outside of the United States. If television and theInternet converge in the future as expected, any Internet audience informationthat is reported by television audience measurement services through these VNUsubsidiaries may overlap with the audience information that is reported by theNielsen//NetRatings Internet audience measurement services. In the event ofsuch overlap, VNU’s services could begin competing with our services for thesame research budgets among customers in the marketplace, and its offering ofsuch services could conflict with its obligation to develop and maintain ourInternet audience panels.

 

**WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS**

 

We regard our intellectual property as critical to our success. We relyon patent, trademark, copyright and trade secret laws to protect ourproprietary rights, and we seek to obtain the issuances of patents for our coretechnology and the registration of our material trademarks and service marks inthe United States and in selected other countries. We cannot assure you,however, that the steps we have taken will be sufficient to protect our intellectualproperty from infringement or misappropriation. Moreover, effectiveintellectual property protections may not be available in every country inwhich we offer our products and services to the extent these protections areavailable in the United States. Our patent applications or trademarkregistrations may not be approved or, even if approved, could be challenged byothers or invalidated through administrative process or litigation. If ourpatent applications or trademark registrations are not approved because thirdparties own rights to the technology we are trying to patent or the trademarkswe are trying to register, our use of such technology or trademark would berestricted unless we enter into arrangements with the third-party owners, whichmight not be possible on commercially reasonable terms or at all.

 

**WE MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT WOULD BECOSTLY TO RESOLVE OR MAY REQUIRE US TO MAKE CHANGES TO OUR TECHNOLOGY ORBUSINESS**

 

Third parties may, from time to time, assert claims that we haveinfringed upon their proprietary rights or claims that our own trademarks,patents or other intellectual property rights are invalid. Such claims couldadversely affect our reputation and the value of our own proprietary rights.From time to time we have been, and we may in the future be, subject to suchclaims in the ordinary course of our business, including claims of allegedinfringement of patents, trademarks and other intellectual property rights ofthird parties. Protection of proprietary rights in Internet-related industriesis inherently uncertain due to the rapidly evolving technological environment.As such, there may be numerous patent applications pending, many of which areconfidential when filed, that provide for technologies similar to ours.

 

Any claims of infringement and any resulting litigation, should theyoccur, could subject us to significant liability for damages, restrict us fromusing our technology or from operating our business generally or require us tomake changes to our technology. Any claims of this type, with or without merit,could be time-consuming to defend, result in costly litigation and divertmanagement attention and resources. In addition, such claims could result inlimitations on our ability to use the intellectual property subject to theseclaims unless we are able to enter into royalty, licensing or other similararrangements with the third parties asserting these claims. Such agreements, ifrequired, may be unavailable on terms acceptable to us, or at all. If we areunable to enter into these types of agreements, we may be required to eithercease offering the subject product or change our technology underlying theapplicable product. If a successful claim of infringement is brought against usand we fail to develop non-infringing technology or to license the infringed orsimilar technology on a timely basis, it could materially adversely affect ourbusiness, financial condition and results of operations.

 

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**SYSTEM FAILURES OR DELAYS IN THE OPERATION OF OUR COMPUTER ANDCOMMUNICATIONS SYSTEMS MAY HARM OUR BUSINESS**

 

Our success depends on the efficient and uninterrupted operation of ourcomputer and communications systems. A failure of our network or data gatheringprocedures could impede the processing of data, customer orders and day-to-daymanagement of our business and could result in the corruption or loss of data.

 

The servers on which we collect our panel members’ data reside inNielsen Media Research’s facilities in Oldsmar, Florida. We currently do nothave a backup facility to provide redundant network capacity in the event of asystem failure. Accordingly, our ability to collect Internet audience data inreal time is dependent upon the efficient and uninterrupted operation ofNielsen Media Research’s computer and communications hardware and softwaresystems. Despite any precautions we may take, damage from fire, floods,hurricanes, power loss, telecommunications failures, computer viruses, break-insand similar events at Nielsen Media Research’s computer facility could resultin interruptions in the flow of data to our servers. In addition, any failureby Nielsen Media Research’s computer facility to provide our required datacommunications capacity could result in interruptions in our service. In theevent Nielsen Media Research should discontinue its services to us, we would berequired to transfer our data collection operations to an alternative providerof server hosting services. Such a transfer could be costly and result insignificant delays in our ability to deliver our products and services to ourcustomers, which could damage our reputation and harm our business.

 

We intend to develop back-up systems outside of Nielsen Media Research’sfacilities in Oldsmar, Florida. However, as we replicate our systems at otherlocations, we will face a number of technical challenges, particularly withrespect to database replications, which we may not be able to addresssuccessfully. Although we carry property and business interruption insurance,our coverage may not be adequate to compensate us for all losses that mayoccur.

 

**ANY MISAPPROPRIATION OF PERSONAL INFORMATION ABOUT OUR PANELISTS THATIS STORED ON OUR COMPUTERS COULD HARM OUR REPUTATION OR EXPOSE US TO CLAIMSARISING FROM DAMAGES SUFFERED BY THOSE PANELISTS**

 

Personal information regarding our panelists is included in the datathat our software captures from a panelist’s Internet use. Our panel data arereleased only on an anonymous basis. However, if a person were to penetrate ournetwork security or otherwise misappropriate sensitive data about our panelmembers, our reputation could be harmed or we could be subject to claims orlitigation arising from damages suffered by panel members as a result of suchmisappropriation.  Under California SB1386, companies that maintain data on California residents are required toinform individuals of any security breaches that result in their personalinformation being stolen.  In the eventthat any personal information about our panelists residing in California wasmisappropriated, we could incur significant costs in complying with thedisclosure requirements of California SB 1386. In addition, any such disclosure could harm our reputation and result ina higher rate of panel attrition.

 

**GOVERNMENTAL REGULATION OF THE INTERNET MIGHT HARM OUR BUSINESS**

 

The applicability to the Internet of existing laws governing issuessuch as property ownership, libel and personal privacy is uncertain. Inaddition, governmental authorities in various countries may seek to furtherregulate the Internet with respect to issues such as user privacy, pornography,acceptable content, advertising, e-commerce, taxation and the pricing,characteristics and quality of products and services. Therefore, any newlegislation regulating the Internet could inhibit the growth of the Internetand decrease the acceptance of the Internet as a communications and commercialmedium, which might harm our business. Finally, the global nature of theInternet could subject us to the laws of a foreign jurisdiction in anunpredictable manner.

 

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**LEGISLATIVE ACTIONS, HIGHER INSURANCE COSTS AND REGULATORY REQUIREMENTSAPPLICABLE TO PUBLIC REGISTRANTS ARE LIKELY TO CAUSE OUR GENERAL ANDADMINISTRATIVE EXPENSES TO INCREASE AND MAY IMPACT OUR FUTURE FINANCIALPOSITION AND RESULTS OF OPERATIONS**

 

In order to comply with the Sarbanes-Oxley Act of 2002, as well aschanges to Nasdaq listing standards and rules adopted by the Securities andExchange Commission, we may be required to enhance our internal controls andhire additional personnel and additional outside legal, accounting and advisoryservices, all of which will cause our general and administrative costs toincrease. For example, in 2004 we hired outside consultants to assist us withour compliance with Section 404 of the Sarbanes-Oxley Act of 2002, whichresulted in additional general and administrative expenses during 2004.  Insurers may also increase premiums, causingour premiums for various insurance policies, including our directors’ andofficers’ insurance policy, to increase. Changes in the accounting rules, inparticular the rules relating to accounting for employee stock options, couldmaterially increase the expenses that we report under generally acceptedaccounting principles and adversely affect our operating results. In addition,any such changes may impact the amount of stock options we grant to ouremployees, which may affect our ability to recruit or retain key employees.

 

**WE ARE SUBJECT TO PENDING LEGAL PROCEEDINGS**

 

We are currently subject to a securities class action complaintrelating to our initial public offering. The plaintiffs allege that ourprospectus was materially false and misleading because it failed to disclosethat the underwriters required several investors who sought large allocationsof stock in the offering to pay excessive underwriters’ compensation in theform of increased brokerage commissions on other trades and required investorsto agree to buy shares of our stock after the offering was completed atpredetermined prices as a precondition to obtaining allocations in theoffering. The plaintiffs further allege that because of these purchases, ourstock price after its initial public offering was artificially inflated.Similar complaints have been filed against a number of other issuers that hadinitial public offerings in 1999 and 2000.  While we have accepted a settlement proposalfrom the plaintiffs, the settlement is subject to approval of the judge.  If the settlement is not approved by thejudge, the litigation will continue.  Anadverse outcome could materially affect our results of operations and financialposition.

 

**A SALE BY VNU OF ITS STAKE IN NETRATINGS COULD ADVERSELY AFFECT OURSTOCK PRICE**

 

There are no contractual restrictions on the ability of VNU, throughits Nielsen Media Research or ACNielsen subsidiaries, to sell shares of ourcommon stock, although sales in the public market will be subject to the volumelimitations of SEC Rule 144. Pursuant to these volume limitations, acontrolling stockholder may sell shares under Rule 144 only if the sharesto be sold, together with the shares sold during the past three months, do notexceed the greater of 1% of the issuer’s outstanding shares or the averageweekly trading volume of the issuer’s shares during the preceding four calendarweeks. Nielsen Media Research, ACNielsen and several of our other stockholdershave the right, under certain circumstances, to require us to register theirstock for sale to the public, with the exception of the shares issued toACNielsen in the acquisition of eRatings. Should VNU decide to sell its stakein NetRatings, it could adversely affect our stock price. Additionally, VNUwill have the ability to transfer control of NetRatings, possibly at a premiumover the then- current market price. Because VNU will have the ability toeffect such a transfer of control unilaterally, other stockholders could bedenied an opportunity to participate in the transaction and receive a premiumfor their shares.

 

**DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULDDISCOURAGE OR PREVENT A POTENTIAL TAKEOVER OF OUR COMPANY THAT MIGHT OTHERWISERESULT IN OUR STOCKHOLDERS RECEIVING A PREMIUM OVER THE MARKET PRICE OF THEIRSHARES**

 

Provisions of Delaware law and our certificate of incorporation andbylaws could make more difficult the acquisition of us by means of a tenderoffer, a proxy contest or otherwise, and the removal of incumbent officers anddirectors. These provisions include:

 

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•                  Section 203of the Delaware General Corporation Law, which prohibits a merger with a15%-or-greater stockholder, such as a party that has completed a successfultender offer, until three years after that party became a 15%-or-greaterstockholder;

 

•                  theauthorization in the certificate of incorporation of undesignated preferredstock, which could be issued without stockholder approval in a manner designedto prevent or discourage a takeover; and

 

•                  provisionsin our bylaws eliminating stockholders’ rights to call a special meeting ofstockholders and requiring advance notice of any stockholder nominations ofdirector candidates or any stockholder proposal to be presented at an annualmeeting, which could make it more difficult for stockholders to wage a proxycontest for control of our board or to vote to repeal any of the anti-takeoverprovisions contained in our certificate of incorporation and bylaws.

 

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**ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

As ofDecember 31, 2004, we had cash and cash equivalents and short-terminvestments of $197.6 million consisting of cash and highly liquid, short-terminvestments.  The primary objective ofour investment activities is to preserve capital while at the same timemaximizing yields without significantly increasing risk. To achieve thisobjective, we maintain our portfolio of cash equivalents and short-terminvestments in a variety of government and corporate obligations and moneymarket funds. As of December 31, 2004, our investments had a weighted-averagetime to maturity of approximately 205 days.

 

Investments inboth fixed-rate and floating-rate interest-earning instruments carry varyingdegrees of interest rate risk.  The fairmarket value of our fixed-rate securities may be adversely impacted due to arise in interest rates.  In general,securities with longer maturities are subject to greater interest-rate riskthan those with shorter maturities. While floating rate securities generally are subject to less interest-raterisk than fixed-rate securities, floating-rate securities may produce lessincome than expected if interest rates decrease.  Declines of interest rates over time willreduce our interest income from our cash and cash equivalents and short-terminvestments and, accordingly, could adversely affect our net income andearnings per share.  For example, ifinterest rates were to instantaneously increase (decrease) by 100 basis points,the fair market value of our total investment portfolio would decrease(increase) by approximately $0.8 million.

 

The followingtable presents the amounts of our financial instruments that are subject tointerest rate risk by expected maturity and average interest rates as ofDecember 31, 2004:

 
| ** **                 | ** ** | **Time to maturity**                                  | ** ** |
|----------------------------|------------|-------------------------------------------------------|------------|
| ** **                 | ** ** | **One year  or less**                                 | ** ** | **One to five  years** | ** ** | **Five to ten  years** | ** ** | **Greater than  ten years** | ** ** | **Total** | ** ** |
| ** **                 | ** ** | **(in thousands, except percent data)   (unaudited)** | ** ** |
| Cash and cash  equivalents |       | $                                                     | 33,234     |   | — |   | — |   | — |   | $ | 33,234 |   |
| Average interest  rates    |       | 0.54                                                  | %          | — |   | — |   | — |   | .54 | % |
| Short term  investments    |       | $                                                     | 83,659     |   | $ | 51,913 |   | — |   | $ | 28,796 |   | $ | 164,368 |   |
| Average interest  rates    |       | 1.95                                                  | %          | 2.39 | % |  — |   | 2.43 | % | 2.17 | % |
|                            |            |                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

NetRatings adjustsits equity investments in Ibope eRatings.com and Red Sheriff S.r.l. based onits share of the net gains/losses recorded by these joint ventures. AtDecember 31, 2004, Ibope eRatings.com and Red Sheriff S.r.l. are accountedfor under the equity method.   As aresult of the losses incurred by Ibope eRatings.com, our balance in ourinvestment in Ibope eRatings.com was zero as of March 31, 2004, thereforeno losses were recorded after the first quarter of 2004.  On February 25, 2005, we purchased theremaining 50% of Red Sheriff S.r.l. that we did not already own therebyincreasing our ownership to 100% of the company.

 

Revenues fromoutside of the United States accounted for approximately 53% of our totalrevenues during 2004.  Theseinternational sales are typically denominated in the local currency of therelevant country, and the international expenses are also primarily incurred inthe local currency.  When we consolidatethe financial results of our foreign operations, our financial results could bepositively or negatively affected depending on changes in the relevant currencyexchange rates.  As a result, ourfinancial results could be adversely affected by unfavorable exchange ratefluctuations.  Fluctuations in currencyexchange rates did not materially impact our net loss in 2004.  We have not entered into hedging transactionsin order to mitigate the risk from currency fluctuations, but we might considerusing currency forward contracts or other financial instruments commonlyutilized to reduce financial market risk if it is determined by us that suchinstruments are appropriate to reduce currency risk.

 

35

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**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**NETRATINGS, INC.**

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| Report  of Independent Registered Public Accounting Firm |   |
|----------------------------------------------------------|--------|
| Consolidated Balance Sheets                              |   |
| Consolidated  Statements of Operations                   |   |
| Consolidated  Statements of Stockholders‘ Equity    |   |
| Consolidated  Statements of Cash Flows                   |   |
| Notes to Consolidated  Financial Statements              |   |

 

36

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

 

The Board ofDirectors and Stockholders,

NetRatings, Inc.

 

We have auditedthe accompanying consolidated balance sheets of NetRatings, Inc. as ofDecember 31, 2004 and 2003, and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for each of the three years inthe period ended December 31, 2004. These financial statements are theresponsibility of NetRatings, Inc.’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted ouraudits in accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of NetRatings, Inc.at December 31, 2004 and 2003, and the consolidated results of itsoperations and its cash flows for each of the three years in the period endedDecember 31, 2004, in conformity with U.S. generally accepted accountingprinciples.

 

 
|   | /s/ Ernst & Young  LLP |   |
|--------|----------------------------|--------|
|   | Ernst & Young LLP      |   |

 

 

March 14 ,2005

New York, New York

 

37

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** **

**NETRATINGS, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(inthousands)**

 
| ** **                                                                                                                                                        | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **ASSETS**                                                                                                                                                        |       |                  |       |                  |       |
| **Current  assets:**                                                                                                                                              |       |                  |       |                  |       |
| Cash and cash  equivalents                                                                                                                                        |       | $                     | 33,234     |                  | $          | 49,909 |   |
| Short-term  investments                                                                                                                                           |       | 164,368               |       | 160,130               |       |
| Accounts  receivable, net                                                                                                                                         |       | 13,679                |       | 10,141                |       |
| Due from joint  ventures                                                                                                                                          |       | 870                   |       | 589                   |       |
| Due from related  parties                                                                                                                                         |       | 1,170                 |       | 458                   |       |
| Prepaid expenses  and other current assets                                                                                                                        |       | 3,106                 |       | 3,116                 |       |
| Total current  assets                                                                                                                                             |       | 216,427               |       | 224,343               |       |
| Property and  equipment, net                                                                                                                                      |       | 5,977                 |       | 3,943                 |       |
| Intangibles, net                                                                                                                                                  |       | 16,039                |       | 19,089                |       |
| Goodwill                                                                                                                                                          |       | 74,897                |       | 66,612                |       |
| Other assets                                                                                                                                                      |       | 1,117                 |       | 936                   |       |
| Total assets                                                                                                                                                      |       | $                     | 314,457    |                  | $          | 314,923 |   |
|                                                                                                                                                                   |       |                  |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                    |       |                  |       |                  |       |
| **Current  liabilities:**                                                                                                                                         |       |                  |       |                  |       |
| Accounts payable                                                                                                                                                  |       | $                     | 2,868      |                  | $          | 3,314 |   |
| Accrued  liabilities                                                                                                                                              |       | 8,727                 |       | 11,298                |       |
| Deferred revenue                                                                                                                                                  |       | 11,435                |       | 10,449                |       |
| Due to related  parties                                                                                                                                           |       | 9,017                 |       | 12,195                |       |
| Restructuring  liabilities                                                                                                                                        |       | 625                   |       | 1,711                 |       |
| Total current  liabilities                                                                                                                                        |       | 32,672                |       | 38,967                |       |
| Restructuring  liabilities, less current portion                                                                                                                  |       | 799                   |       | 1,680                 |       |
| Total  liabilities                                                                                                                                                |       | 33,471                |       | 40,647                |       |
| Minority  interest                                                                                                                                                |       | 548                   |       | 222                   |       |
| Commitments and  contingencies                                                                                                                                    |       | —                |       | —                |       |
|                                                                                                                                                              |       |                  |       |                  |       |
| **Stockholders’  equity:**                                                                                                                                   |       |                  |       |                  |       |
| Common stock,  par value $0.001:                                                                                                                                  |       |                  |       |                  |       |
| Authorized  shares: 200,000;                                                                                                                                      |       |                  |       |                  |       |
| Issued shares:  37,181 and 35,442 at December 31, 2004 and 2003, respectively; outstanding  shares: 35,681 and 33,942 at December 31, 2004 and 2003, respectively |       | 37                    |       | 35                    |       |
| Additional paid-in  capital                                                                                                                                       |       | 436,845               |       | 420,172               |       |
| Deferred  compensation and other costs                                                                                                                            |       | —                |       | (7,587                | )          |
| Accumulated  other comprehensive income                                                                                                                           |       | 1,079                 |       | 1,538                 |       |
| Treasury stock                                                                                                                                                    |       | (20,631               | )          | (20,631               | )          |
| Accumulated  deficit                                                                                                                                              |       | (136,892              | )          | (119,473              | )          |
| Total  stockholders‘ equity                                                                                                                                  |       | 280,438               |       | 274,054               |       |
| Total  liabilities and stockholders‘ equity                                                                                                                  |       | $                     | 314,457    |                  | $          | 314,923 |   |

 

See accompanyingnotes to the financial statements.

 

38

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**NETRATINGS, INC.**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(inthousands, except per share data)**

 
| ** **                                                                                  | ** ** | **For the years ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                  | ** ** | **2004**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenue                                                                                     |       | $                                    | 59,294     |   | $ | 41,432 |   | $ | 29,706 |   |
| Cost of revenue  (exclusive of the amortization of stock-based compensation reported below) |       | 23,057                               |       | 20,476 |   | 16,451 |   |
| Gross profit                                                                                |       | 36,237                               |       | 20,956 |   | 13,255 |   |
| Operating  expenses:                                                                        |       |                                 |       |   |   |   |   |
| Research and  development                                                                   |       | 12,029                               |       | 9,998 |   | 8,776 |   |
| Sales and  marketing                                                                        |       | 22,801                               |       | 17,125 |   | 13,801 |   |
| General and  administrative                                                                 |       | 12,588                               |       | 10,539 |   | 6,433 |   |
| Restructuring  and other expenses                                                           |       | (525                                 | )          | — |   | 9,228 |   |
| Litigation  settlement recovery                                                             |       | (1,800                               | )          | — |   | — |   |
| Acquisition-related  expenses                                                               |       | —                               |       | — |   | 3,033 |   |
| Amortization of  intangibles                                                                |       | 3,742                                |       | 3,898 |   | 2,425 |   |
| Amortization of  stock-based compensation                                                   |       | 7,587                                |       | 9,105 |   | 9,432 |   |
| Total operating  expenses                                                                   |       | 56,422                               |       | 50,665 |   | 53,128 |   |
| Loss from  operations                                                                       |       | (20,185                              | )          | (29,709 | ) | (39,873 | ) |
| Equity in  earnings (losses) of joint ventures                                              |       | 129                                  |       | 66 |   | (2,549 | ) |
| Impairment of  investments                                                                  |       | —                               |       | — |   | (4,500 | ) |
| Interest income,  net                                                                       |       | 2,879                                |       | 4,053 |   | 8,029 |   |
| Minority  interest in net (income) losses of consolidated subsidiaries                      |       | (242                                 | )          | 455 |   | 17 |   |
| Net loss                                                                                    |       | $                                    | (17,419    | ) | $ | (25,135 | ) | $ | (38,876 | ) |
|                                                                                             |       |                                 |       |   |   |   |   |
| Basic and  diluted net loss per common share                                                |       | $                                    | (0.50      | ) | $ | (0.74 | ) | $ | (1.17 | ) |
|                                                                                             |       |                                 |       |   |   |   |   |
| Shares used to  compute basic and diluted net loss per common share                         |       | 34,637                               |       | 33,792 |   | 33,168 |   |

 

See accompanyingnotes to the financial statements.

 

39

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**NETRATINGS, INC.**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

**(in thousands)**

 
| ** **                                          | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Deferred  Compensation  and  Other Costs** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Treasury Stock** | ** ** | **Accumulated  Deficit** | ** ** | **Total   Stockholders’  Equity** | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------|------------|--------------------|------------|--------------------------|------------|----------------------------------------|------------|
| ** **                                          | ** ** | **Shares**        | ** ** | **Amount**                       | **Shares** | ** **                                   | **Amount** |
|                                                |       |              |       |                             |       |                                         |       |                                                 |       |               |       |                     |       |                                   |       |   |   |   |   |
| Balances at December 31,  2001                 |       | 33,154            |       | $                                | 33         |                                         | $          | 398,868                                              |       | $                  | (25,939    | )                        | $          | 968                                    |       | — |   | — |   | $ | (55,462 | ) | $ | 318,468 |   |
| Net loss                                            |       | —            |       | —                           |       | —                                       |       | —                                               |       | —             |       | —                   |       | —                                 |       | (38,876 | ) | (38,876 | ) |
| Unrealized gain  from short-term investments        |       | —            |       | —                           |       | —                                       |       | —                                               |       | 203                |       | —                   |       | —                                 |       | — |   | 203 |   |
| Accumulated  translation adjustment                 |       | —            |       | —                           |       | —                                       |       | —                                               |       | 342                |       | —                   |       | —                                 |       | — |   | 342 |   |
| Comprehensive  loss                                 |       |              |       |                             |       |                                         |       |                                                 |       |               |       |                     |       |                                   |       |   |   | (38,331 | ) |
| Stock-based  compensation charges                   |       | —            |       | —                           |       | 1,287                                        |       | —                                               |       | —             |       | —                   |       | —                                 |       | — |   | 1,287 |   |
| Stock repurchase                                    |       | —            |       | —                           |       | —                                       |       | —                                               |       | —             |       | 1,500                    |       | $                                      | (20,631    | ) | — |   | (20,631 | ) |
| Issuance of stock  in conjunction with acquisitions |       | 1,521             |       | 2                                |       | 16,758                                       |       | —                                               |       | —             |       | —                   |       | —                                 |       | — |   | 16,760 |   |
| Issuance of  common stock                           |       | 439               |       | —                           |       | 1,949                                        |       | —                                               |       | —             |       | —                   |       | —                                 |       | — |   | 1,949 |   |
| Amortization of  deferred compensation              |       | —            |       | —                           |       | (83                                          | )          | 142                                                  |       | —             |       | —                   |       | —                                 |       | — |   | 59 |   |
| Amortization of  deferred service costs             |       | —            |       | —                           |       | —                                       |       | 9,105                                                |       | —             |       | —                   |       | —                                 |       | — |   | 9,105 |   |
| Balances at December 31,  2002                 |       | 35,114            |       | 35                               |       | 418,779                                      |       | (16,692                                              | )          | 1,513              |       | 1,500                    |       | (20,631                                | )          | (94,338 | ) | 288,666 |   |
| Net loss                                            |       | —            |       | —                           |       | —                                       |       | —                                               |       | —             |       | —                   |       | —                                 |       | (25,135 | ) | (25,135 | ) |
| Unrealized loss  from short-term investments        |       | —            |       | —                           |       | —                                       |       | —                                               |       | (1,307             | )          | —                   |       | —                                 |       | — |   | (1,307 | ) |
| Accumulated  translation adjustment                 |       | —            |       | —                           |       | —                                       |       | —                                               |       | 1,332              |       | —                   |       | —                                 |       | — |   | 1,332 |   |
| Comprehensive  loss                                 |       |              |       |                             |       |                                         |       |                                                 |       |               |       |                     |       |                                   |       |   |   | (25,110 | ) |
| Issuance of  common stock                           |       | 328               |       | —                           |       | 1,393                                        |       | —                                               |       | —             |       | —                   |       | —                                 |       | — |   | 1,393 |   |
| Amortization of  deferred service costs             |       | —            |       | —                           |       | —                                       |       | 9,105                                                |       | —             |       | —                   |       | —                                 |       | — |   | 9,105 |   |
| Balances at December 31,  2003                 |       | 35,442            |       | 35                               |       | 420,172                                      |       | (7,587                                               | )          | 1,538              |       | 1,500                    |       | (20,631                                | )          | (119,473 | ) | 274,054 |   |
| Net loss                                            |       | —            |       | —                           |       | —                                       |       | —                                               |       | —             |       | —                   |       | —                                 |       | (17,419 | ) | (17,419 | ) |
| Unrealized loss  from short-term investments        |       | —            |       | —                           |       | —                                       |       | —                                               |       | (756               | )          | —                   |       | —                                 |       | — |   | (756 | ) |
| Accumulated  translation adjustment                 |       | —            |       | —                           |       | —                                       |       | —                                               |       | 297                |       | —                   |       | —                                 |       | — |   | 297 |   |
| Comprehensive  loss                                 |       |              |       |                             |       |                                         |       |                                                 |       |               |       |                     |       |                                   |       |   |   | (17,878 | ) |
| Issuance of  common stock                           |       | 1,739             |       | 2                                |       | 16,547                                       |       | —                                               |       | —             |       | —                   |       | —                                 |       | — |   | 16,549 |   |
| Amortization of  deferred service costs             |       | —            |       | —                           |       | —                                       |       | 7,587                                                |       | —             |       | —                   |       | —                                 |       | — |   | 7,587 |   |
| Stock issued by  majority owned subsidiary          |       | —            |       | —                           |       | 126                                          |       | —                                               |       | —             |       | —                   |       | —                                 |       | — |   | 126 |   |
| Balances at  December 31, 2004                 |       | 37,181            |       | $                                | 37         |                                         | $          | 436,845                                              |       | $                  | 0          |                     | $          | 1,079                                  |       | 1,500 |   | $ | (20,631 | ) | $ | (136,892 | ) | $ | 280,438 |   |

 

See accompanying notes tothe financial statements.

 

40

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**NETRATINGS, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(in thousands)**

 
| ** **                                                                                                                                                               | ** ** | **For the years ended  December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                                               | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| **OPERATING  ACTIVITIES**                                                                                                                                                |       |                                       |       |   |   |   |   |
| Net loss                                                                                                                                                                 |       | $                                          | (17,419    | ) | $ | (25,135 | ) | $ | (38,876 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities, net of effects  of acquired businesses:                                                     |       |                                       |       |   |   |   |   |
| Depreciation                                                                                                                                                             |       | 2,763                                      |       | 2,132 |   | 2,647 |   |
| Equity in  (earnings) losses of joint ventures                                                                                                                           |       | (129                                       | )          | (66 | ) | 2,549 |   |
| Provision for  doubtful accounts                                                                                                                                         |       | 313                                        |       | 216 |   | 133 |   |
| Stock-based  compensation                                                                                                                                                |       | 7,587                                      |       | 9,105 |   | 9,432 |   |
| Impairment of  investments                                                                                                                                               |       | —                                     |       | — |   | 4,500 |   |
| Minority  interest                                                                                                                                                       |       | 242                                        |       | (455 | ) | (17 | ) |
| Amortization of  intangibles                                                                                                                                             |       | 3,742                                      |       | 3,898 |   | 2,425 |   |
| Changes in  current assets and liabilities:                                                                                                                              |       |                                       |       |   |   |   |   |
| Accounts  receivable                                                                                                                                                     |       | (3,807                                     | )          | 2,880 |   | 3,419 |   |
| Due from joint  ventures                                                                                                                                                 |       | (281                                       | )          | 679 |   | 1,609 |   |
| Prepaids, other  current assets, and other assets                                                                                                                        |       | (35                                        | )          | 1,477 |   | 5,706 |   |
| Accounts payable                                                                                                                                                         |       | (379                                       | )          | (5,884 | ) | (3,989 | ) |
| Accrued  liabilities                                                                                                                                                     |       | (2,049                                     | )          | (1,282 | ) | (6,681 | ) |
| Restructuring liabilities                                                                                                                                                |       | (1,566                                     | )          | (3,558 | ) | 723 |   |
| Due to/from  related parties                                                                                                                                             |       | (3,406                                     | )          | 395 |   | 812 |   |
| Deferred revenue                                                                                                                                                         |       | 987                                        |       | (1,545 | ) | (3,241 | ) |
| Net cash used in  operating activities                                                                                                                                   |       | (13,437                                    | )          | (17,143 | ) | (18,849 | ) |
| **INVESTING  ACTIVITIES**                                                                                                                                                |       |                                       |       |   |   |   |   |
| Acquisition of  property and equipment                                                                                                                                   |       | (4,798                                     | )          | (1,775 | ) | (2,743 | ) |
| Purchase of  investments                                                                                                                                                 |       | (163,793                                   | )          | (379,737 | ) | (360,183 | ) |
| Sale of  investments                                                                                                                                                     |       | 158,801                                    |       | 411,911 |   | 471,102 |   |
| Loan to related  parties                                                                                                                                                 |       | (712                                       | )          | 376 |   | — |   |
| Acquisitions,  net of cash acquired of $0, $2,375 and $15,504 in 2004, 2003 and 2002,  respectively, and investment in joint ventures and patent  settlement/acquisition |       | (10,117                                    | )          | (14,500 | ) | (40,438 | ) |
| Net cash (used  in) provided by investing activities                                                                                                                     |       | (20,619                                    | )          | 16,275 |   | 67,738 |   |
| **FINANCING  ACTIVITIES**                                                                                                                                                |       |                                       |       |   |   |   |   |
| Proceeds from  issuance of common stock                                                                                                                                  |       | 16,549                                     |       | 1,393 |   | 1,950 |   |
| Proceeds from  stock issued by majority owned subsidiary                                                                                                                 |       | 247                                        |       | — |   | — |   |
| Principal  payments on notes payable and capital lease obligations                                                                                                       |       | —                                     |       | — |   | (89 | ) |
| Stock repurchase                                                                                                                                                         |       | —                                     |       | — |   | (20,631 | ) |
| Net cash (used  in) provided by financing activities                                                                                                                     |       | 16,796                                     |       | 1,393 |   | (18,770 | ) |
| Effect of  exchange rate fluctuations                                                                                                                                    |       | 585                                        |       | 1,584 |   | — |   |
| Net (decrease)  increase in cash and cash equivalents                                                                                                                    |       | (16,675                                    | )          | 2,109 |   | 30,119 |   |
| Cash and cash  equivalents at beginning of period                                                                                                                        |       | 49,909                                     |       | 47,800 |   | 17,681 |   |
| Cash and cash  equivalents at end of period                                                                                                                              |       | $                                          | 33,234     |   | $ | 49,909 |   | $ | 47,800 |   |
| **Supplemental  disclosure of cash flow information**                                                                                                                    |       |                                       |       |   |   |   |   |
| Cash paid for  interest                                                                                                                                                  |       | $                                          | —     |   | $ | — |   | $ | 204 |   |
| Stock issued in  conjunction with acquisitions                                                                                                                           |       | $                                          | —     |   | $ | — |   | $ | 16,760 |   |

 

See accompanying notes tothe financial statements.

 

41

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**NETRATINGS, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 1: Summary of Significant Accounting Policies**

 

**NetRatings, Inc.**

 

NetRatings, Inc. (“NetRatings” or the “Company”)is a provider of Internet audience measurement and analysis in the UnitedStates and around the world. All of the Company’s products and services aredesigned to assist companies in making critical business decisions regardingtheir Internet strategies and initiatives. The Company has a diversified andglobal client base, including large and small companies in the media,technology, advertising, financial services, consumer products, retail andtravel industries. A majority of the Company’s products and services are soldon an annual subscription basis. In 1998 and 1999, the Company formed strategicrelationships with Nielsen Media Research, a provider of television audiencemeasurement and related services in the United States, and ACNielsen, a globalprovider of market research information and analysis. The segment in whichNetRatings currently operates is the market for providing media and marketresearch focused on Internet audience behavior and activity. All of the Company’srevenues are generated through the sale of products in this one segment.

 

**Basis of Presentation**

 

The accompanying consolidated financial statementsinclude the accounts of NetRatings and its wholly owned and majority ownedsubsidiaries. All significant intercompany transactions and balances areeliminated upon consolidation. NetRatings consolidates the results ofoperations and financial position of its international operations on a onemonth lag. The impact of this one month lag is not significant to NetRatings’consolidated financial results.

 

Certain reclassifications have been made to prior yearbalances to conform with current year reporting classifications.

 

**Cash and Cash Equivalents and Short-TermInvestments**

 

Cash and cash equivalents consist of highly liquidinvestments including money market accounts, commercial paper, U.S. governmentand agency securities, and corporate notes with insignificant interest-raterisk and original maturities of three months or less at date of purchase. Cashand cash equivalents are stated at fair market value, which approximates cost.

 

Short-term investments consist principally ofcorporate notes, auction rate securities, euro dollar bonds, commercial paperand U.S. government and agency securities, all of which are carried at fairmarket value. All short-term investments have maturities of less thantwenty-four months and are classified as available-for-sale. NetRatings usesthe specific identification method to compute realized gains and losses on itsshort-term investments.

 

Prior to 2004, the Company reported auction ratesecurities with an auction date of less than ninety days as cash and cash equivalents.Effective December 31, 2004, NetRatings began reporting these securitiesas short term investments resulting in a reclassification from cash and cashequivalents to short term investments of $53.3 million and $36.8 million as of December 31,2003 and 2002, respectively. Sales and purchases of these securities have beenincluded in purchases and sales of investments in the statements of cash flows.

 

Interest income was $3.2 million,$4.3 million and $8.4 million for the years ended December 31,2004, 2003 and 2002, respectively.

 

**Property and Equipment**

 

Property and equipment is stated at cost, net ofaccumulated depreciation. Property and equipment is depreciated on astraight-line basis over the estimated useful lives of the assets, generallythree to five years.

 

42

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**Impairment of Long-Lived Assets**

 

The Company’s long lived assets include goodwill andother intangible assets.  In accordancewith SFAS No. 142, goodwill and indefinite-lived intangibles are notamortized, but are reviewed at least annually for impairment.  NetRatings retains an independent appraisalfirm which annually provides a valuation of the Company’s fair value, based ona discounted cash flow analysis.  Thiscash flow analysis requires significant judgment and estimates by managementrelating to assumptions about expected future operating performance andappropriate discount rates.  Animpairment loss is recorded if the estimated future cash flows plus netproceeds expected from disposition of the asset (if any) are less than thecarrying value of the asset.  Theestimate of discounted cash flows may differ from actual cash flows due to,among other things, economic conditions, changes to our business model andchanges in operating performance.  Weperformed our annual evaluation of goodwill and intangibles as of October 1,2004 at which time no impairment was indicated. There has been no indication of impairment since October 1, 2004.

 

**Other Assets**

 

Other assets include (i) restricted cash related tothe Company’s office leases in Seattle, New York and Sydney; (ii) long-termsecurity deposits; (iii) investments in joint ventures; (iv) investments inthird-parties; and (v) other assets.

 

Investments in third parties are accounted for on acost basis. As such, an investment impairment charge is recorded when aninvestment has experienced a decline in value that is other than temporary. In2002, the Company wrote off its investment in third parties accounted for on acost basis. As such, the balance in the Company’s cost-based, long-terminvestment account was zero at December 31, 2004 and 2003.

 

**Foreign Currency Translation**

 

The Company applies Statement of Financial AccountingStandards No. 52, “Foreign Currency Translation,” with respect to itsinternational operations. All assets and liabilities are remeasured at thecurrent exchange rate at the end of the period, and revenues and expenses areremeasured at average exchange rates in effect during the period. Thetranslation gain (loss) resulting from the process of remeasuring foreigncurrency financial statements into U.S. dollars is included as a component ofother comprehensive income. Gains (losses) resulting from foreign currencytransactions were not material in 2004 and 2003.

 

**Revenue Recognition**

 

Revenue is recognized when persuasive evidence of anarrangement exists, services have been rendered, the price is fixed ordeterminable and collectibility is reasonably assured.

 

Revenue for recurring services is recognized ratablyover the term of the related contract as services are provided. Revenue fornonrecurring services is recognized in the period in which the product isdelivered. Billings rendered in advance of services being performed arerecorded as deferred revenue in the accompanying balance sheet.

 

43

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**Panel Costs**

 

Costs of establishing and maintaining the Company’spanels, including the MegaPanel, are expensed as incurred and are included incost of revenue in the accompanying statements of operations.

 

**Advertising Expense**

 

All advertising and promotion costs are expensed asincurred. Advertising and promotion costs, which are included in sales andmarketing expense, were $0.2 million, $0.1 million and $0.5 millionfor the years ended December 31, 2004, 2003 and 2002, respectively.

 

**Income Taxes**

 

NetRatings accounts for income taxes in accordancewith Statement of Financial Accounting Standards No. 109, “Accounting forIncome Taxes” (“FAS 109”), which requires the use of the liability methodin accounting for income taxes. Under FAS 109, deferred tax assets andliabilities are measured based on differences between the financial reportingand tax bases of assets and liabilities using enacted tax rates and laws thatwill be in effect when the differences are expected to reverse.  A valuation allowance is recorded when it ismore likely than not that some or all of the deferred tax asset will not berealized.

 

**Comprehensive Loss**

 

Comprehensive loss includes net loss as well as othercomprehensive income. At December 31, 2004 and 2003, NetRatings’accumulated other comprehensive income included net unrealized losses fromshort-term investments of $0.8 million and $0.1 million, respectively, and $1.9million and $1.6 million of gains on foreign currency translationadjustments, respectively.

 

**Fair Value of Financial Instruments andConcentration of Credit Risk**

 

The fair value of NetRatings’ cash and cashequivalents and short-term investments is based on quoted market prices. At December 31,2004, the fair market value, cost and net unrealized loss of NetRatings’ short-terminvestments totaled $164.4 million, $165.2 million and $0.8 million,respectively. At December 31, 2003, the fair market value, cost and netunrealized losses of NetRatings’ short-term investments totaled$160.1 million, $160.2 million and $0.1 million, respectively.NetRatings uses the specific identification method to compute realized gainsand losses on its short-term investments. For the years ended December 31,2004, 2003 and 2002, realized gains and losses were not material.

 

Financial instruments that potentially subjectNetRatings to concentrations of credit risk include cash and cash equivalents,short-term investments and trade accounts receivable. NetRatings places certainof its cash in banks that are federally insured in limited amounts and ininvestment-grade debt instruments, many of which are backed by the U.S.government or other government agencies. NetRatings conducts business withcompanies in various industries throughout the United States andinternationally. NetRatings manages credit risk on accounts receivable byperforming ongoing credit evaluations of its customers, reviewing its accountsand contracts, and by providing appropriate allowances for uncollectibleamounts. For the year ended December 31, 2004, NetRatings had bad debtwrite-offs of $0.5 million and reclassifed $0.3 million related tobad debt from deferred revenue. For the year ended December 31, 2003,NetRatings had bad debt write-offs of $0.1 million. At December 31,2004 and 2003, the allowance for doubtful accounts totaled $1.0 millionand $0.9 million, respectively.

 

**Stock-Based Compensation**

 

NetRatings accounts for stock-based awards toemployees under the intrinsic value method in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(“APB 25”) and discloses the general and pro forma financial informationrequired by SFAS 123 and SFAS 148.

 

 

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Disclosures required by SFAS 123 andSFAS 148 are as follows:

 
| **Option value information(a)** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                            |       |     |       |     |       |     |       |
| Fair value per  option(b)       |       | $        | 14.83      |     | $          | 8.50     |       | $ | 9.31 |   |
| Valuation  assumptions          |       |     |       |     |       |     |       |
| Expected option  term (years)   |       | 2.32     |       | 2.36     |       | 2.82     |       |
| Expected  volatility            |       | 60       | %          | 74       | %          | 74       | %          |
| Expected  dividend yield        |       | 0        | %          | 0        | %          | 0        | %          |
| Risk-free  interest rate        |       | 2.77     | %          | 1.31     | %          | 1.45     | %          |
|                                 |            |          |            |          |            |          |            |  |  |  |

 

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(a)                                  Weightedaverages of option grants during each period

(b)                                 Estimatedusing Black-Scholes option pricing model under the valuation assumptionsindicated

 

The Company changed its assumptions for expectedoption term and expected volatility for 2003 and 2002. The Company believesthat these valuation assumptions are more representative of the averages forthe term of the option periods than the valuation assumptions used in prioryears. These changes resulted in a decrease in expense of $0.6 million and $2.0million for the years ended December 31, 2003 and 2002, respectively.

 

For purposes of pro forma disclosures, the estimatedfair value of the options is amortized to expense over the vesting period ofthe options using the accelerated method. In addition, the 15% discount inmarket value under the Company’s Employee Stock Purchase Plan is treated ascompensation expense for pro forma purposes. The following table illustratesthe pro forma effect on consolidated net income and earnings per share of alloutstanding awards in each period (in thousands, except for earnings per sharedata):

 
| ** **                                                                                                                                 | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                                                       |       |     |       |     |       |     |       |
| Net loss, as  reported                                                                                                                     |       | $        | (17,419    | )        | $          | (25,135  | )          | $ | (38,876 | ) |
| Add: Stock-based  employee compensation expense included in reported net loss                                                              |       | —   |       | —   |       | 328      |       |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards (2003 and 2002 restated) |       | (4,699   | )          | (6,141   | )          | (6,251   | )          |
| Pro forma net  loss                                                                                                                        |       | $        | (22,118    | )        | $          | (31,276  | )          | $ | (44,799 | ) |
|                                                                                                                                       |       |     |       |     |       |     |       |
| Earnings per  share:                                                                                                                       |       |     |       |     |       |     |       |
| Basic and  diluted net loss per share, as reported                                                                                         |       | $        | (0.50      | )        | $          | (0.74    | )          | $ | (1.17 | ) |
| Pro forma basic  and diluted net loss per share                                                                                            |       | $        | (0.64      | )        | $          | (0.93    | )          | $ | (1.33 | ) |

 

The pro forma impact of compensation expense measuredunder FAS 123 on the net loss for the years ended December 31, 2004,2003 and 2002 is not representative of the effects on net income (loss) forfuture years, as future years will include the effects of additional years ofstock option grants.

 

 

**Computation of Net Loss Per Common Share**

 

NetRatings computes net loss per common share based onFinancial Accounting Standards Board Statement No. 128, “Earnings PerShare” (“FAS 128”). In accordance with FAS 128, basic net loss pershare is calculated as net loss divided by the weighted-average number ofcommon shares outstanding less shares subject to repurchase. Diluted net lossper share is computed by dividing net loss by the weighted-average number ofcommon shares outstanding and dilutive common stock equivalents outstandingduring the period. Common equivalent shares from stock options have beenexcluded from the calculation of net loss per share as their effect isanti-dilutive.

 

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The following table sets forth the calculation ofbasic and diluted weighted-average shares outstanding and net loss per share(in thousands, except per share amounts):

 
| ** **                                                                                                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                         |       |     |       |     |       |     |       |
| Net loss                                                                                                     |       | $        | (17,419    | )        | $          | (25,135  | )          | $ | (38,876 | ) |
|                                                                                                         |       |     |       |     |       |     |       |
| Weighted-average  shares of common stock outstanding                                                         |       | 34,637   |       | 33,792   |       | 33,168   |       |
| Less: weighted-average  shares of common stock subject to repurchase                                         |       | —   |       | —   |       | —   |       |
| Weighted-average  shares of common stock outstanding used in computing basic and diluted net  loss per share |       | 34,637   |       | 33,792   |       | 33,168   |       |
|                                                                                                         |       |     |       |     |       |     |       |
| Basic and  diluted net loss per common share                                                                 |       | $        | (0.50      | )        | $          | (0.74    | )          | $ | (1.17 | ) |

 

If NetRatings had reported net income, the calculationof historical diluted earnings per share would have included approximately anadditional 1.2 million, 0.2 million and 0.3 million commonequivalent shares related to outstanding stock options not included above(determined using the treasury stock method) for the years ended December 31,2004, 2003 and 2002, respectively.

 

**Use of Estimates**

 

The preparation of these financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period. On an ongoing basis, management evaluates itsestimates and judgments, including those related to the collectibility ofreceivables, the valuation of fixed assets, goodwill, intangible assets,including depreciable lives assigned, investments and income taxes; as well asthe estimates and judgments relating to the valuation of certain liabilities,including restructuring liabilities, contingencies and litigation. NetRatings'management bases its estimates and judgments about the carrying values of assetsand liabilities on historical experience and on various other factors that arebelieved to be reasonable under the circumstances. Actual results may differfrom these estimates under different assumptions or conditions.

 

**Recent Accounting Pronouncements**

 

In June 2004, the Financial Accounting StandardsBoard (FASB) ratified Emerging Issues Task Force Issue No. 03-1(EITF 03-1), “The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments.” EITF 03-1 includes new guidance forevaluating and recording impairment losses on debt and equity investments, aswell as new disclosure requirements for investments that are deemed to betemporarily impaired. Adoption of the recognition and measurement guidance ofEITF 03-1 has been temporarily deferred by the FASB, but the disclosurerequirements of EITF 03-1 are effective for the Company’s 2004consolidated financial statements for 2004. Accordingly, additional disclosuresas required by EITF 03-1 are included in Note 13 to the ConsolidatedFinancial Statements.

 

In October 2004, the FASB issued Emerging IssuesTask Force Issue No. 04-1 (EITF 04-1), “Accounting for PreexistingRelationships between the Parties to a Business Combination.” EITF 04-1includes additional disclosure requirements for business combinations betweenparties with a preexisting relationship. EITF 04-1 is effective for fiscalperiods beginning after October 13, 2004. NetRatings does not expect theadoption of EITF 04-1 to have a material impact on its consolidated financialposition, results of operations or cash flows.

 

In December 2004, the FASB issued SFASNo. 123R, “Share-Based Payment,” which requires companies to measure andrecognize compensation expense for all stock-based payments at fair value.SFAS No. 123R is effective for all

 

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interim periods beginning after June 15, 2005 and, thus, will beeffective for NetRatings beginning with the third quarter of fiscal 2005. Earlyadoption is encouraged and retroactive application of the provisions ofSFAS No. 123R to the beginning of the fiscal year that includes theeffective date is permitted, but not required. NetRatings is currentlyevaluating the impact of SFAS No. 123R on its financial position andresults of operations, which management believes will be material. SeeStock-Based Compensation above for information related to the pro forma effectson NetRatings reported net loss and net loss per share when applying the fairvalue recognition provisions of the previous SFAS No. 123, “Accounting forStock-Based Compensation,” to stock-based employee compensation.

 

**Note 2: Balance Sheet Details**

 

Details of balance sheet items are as follows:

 

The following is a summary of estimated fair value ofcash and cash equivalents and short-term investments based on quoted marketprices as of December 31, 2004 and 2003 (in thousands): 

 
| ** **                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Cash and cash  equivalents             |       | $        | 33,234     |     | $          | 49,909 |   |
| Short-term  investments:               |       |     |       |     |       |   |   |
| Auction rate  securities               |       | 49,013   |       | 54,612   |       |
| Corporate notes                        |       | 19,331   |       | 18,341   |       |
| Commercial paper                       |       | 1,992    |       | 2,001    |       |
| Euro dollar  bonds                     |       | 41,608   |       | 34,533   |       |
| U.S. government  and agency securities |       | 52,424   |       | 50,643   |       |
| Total short-term  investments          |       | 164,368  |       | 160,130  |       |
| Total                                  |       | $        | 197,602    |     | $          | 210,039 |   |

 

Property and equipment, net (in thousands): 

 
| ** **                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Computer  equipment and software          |       | $        | 15,279     |     | $          | 10,909 |   |
| Office  equipment, furniture and fixtures |       | 1,556    |       | 1,528    |       |
| Leasehold  improvements                   |       | 782      |       | 495      |       |
|                                      |       | 17,617   |       | 12,932   |       |
| Less accumulated  depreciation            |       | (11,640  | )          | (8,989   | )          |
| Property and  equipment, net              |       | $        | 5,977      |     | $          | 3,943 |   |

 

Accrued liabilities (in thousands): 

 
| ** **                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Accrued  compensation                  |       | $        | 4,846      |     | $          | 4,454 |   |
| Acquisition  related transaction costs |       | 368      |       | 2,244    |       |
| Other accrued  liabilities             |       | 3,513    |       | 4,600    |       |
| Accrued  liabilities                   |       | $        | 8,727      |     | $          | 11,298 |   |

 

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**Note 3: Acquisitions**

 

During 2002, NetRatings completed a number ofacquisitions that expanded its portfolio of products and services in the UnitedStates and abroad. These acquisitions included the acquisitions of (i) allof the assets of the AdRelevance online advertising expenditure measurementdivision of Jupiter Media Metrix Inc.; (ii) all of the assets ofDoubleClick’s @Plan unit; and (iii) selected assets of Jupiter MediaMetrix related to their European Internet audience measurement services.NetRatings also acquired from ACNielsen Corporation the remaining 80.1%interest in ACNielsen eRatings.com that the Company did not already own.

 

In the third quarter of 2002, NetRatings completed theacquisition of 52% of NetValue’s outstanding common stock. During the fourthquarter of 2002, NetRatings acquired additional shares of NetValue bringing itstotal to approximately 86% of the capital and 87.5% of the voting rights ofNetValue. In the fourth quarter of 2003, NetValue’s stockholders approved aresolution to dissolve NetValue and take steps to voluntarily liquidateNetValue’s net assets. During the fourth quarter of 2003, NetRatings acquiredthe remaining net assets of NetValue and the company was dissolved.

 

In January 2003, NetRatings acquired beneficialownership of 80% of MMXI Switzerland, a Swiss company whose business is focusedin the international Internet media and market research industries. During thesecond quarter of 2003, NetRatings acquired beneficial ownership of theremaining 20% of MMXI Switzerland.

 

In July 2003, NetRatings acquired the assets andcustomer contracts of NetCrawling S.A., the developer and marketer of LemonAd,Europe’s leading online advertising monitoring service.

 

NetRatings increased its ownership in two of its jointventures during 2003. In the second quarter of 2003, NetRatings increased itsownership in NetRatings Japan from 49% to 58%. In the fourth quarter of 2003,the Company increased its ownership in Mediametrie NetRatings, its jointventure in France, from approximately 50% to 66%.

 

In December 2003, NetRatings acquired 58% of thecommon stock of Red Sheriff Ltd., a site-centric-based Internet audiencemeasurement company. During the first half of 2004, NetRatings acquired theremaining shares of common stock in Red Sheriff thereby increasing itsownership to 100% of the company.

 

On December 1, 2004, Red Sheriff K.K., awholly-owned subsidiary of the Company, merged with and into NetRatings Japan,whereupon new shares of NetRatings Japan were issued to the Company.  As a result, Red Sheriff K.K. became awholly-owned subsidiary of NetRatings Japan. At the same time, NetRatings sold shares of NetRatings Japan toTransCosmos for a total of $0.8 million so that TransCosmos would maintain itsexisting stake in NetRatings Japan.  As aresult of these transactions, NetRatings increased its ownership of NetRatingsJapan to 56.8%. These transactions resulted in a net decrease to goodwill of$0.8 million related to the acquisition of Red Sheriff.

 

NetRatings accounts for its acquisitions under thepurchase method. The allocation of purchase price related to the acquisitionsreflects the fair value of the acquired assets and liabilities. The results ofoperations of each acquired entity are reflected in the consolidated results ofoperations beginning on their respective acquisition dates. Prior to theCompany’s majority ownership in NetRatings Japan and Mediametrie NetRatings,NetRatings recorded its equity share of these joint venture’s gains or lossesin equity in earnings (losses) of joint venture. Effective May 2003 and November 2003,respectively, NetRatings Japan’s and Mediametrie NetRatings’ financial resultsare consolidated into the Company’s financial statements.

 

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Acquisition and restructuring costs are estimatesbased on certain preliminary assumptions. The accompanying table represents theestimated purchase price allocation related to our 2003 acquisitions (inthousands):

 
| ** **                               | ** ** | **Red Sheriff** | ** ** | **All Other  Acquisitions** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|-----------------|------------|-----------------------------|------------|-----------|------------|
|                                     |       |            |       |                        |       |      |       |
| Cash paid                                |       | $               | 13,513     |                        | $          | 5,140     |       | $ | 18,653 |   |
| Note payable                             |       | —          |       | 350                         |       | 350       |       |
| Acquisition  costs                       |       | 960             |       | 550                         |       | 1,510     |       |
| Restructuring  costs (original accrual)  |       | 627             |       | 390                         |       | 1,017     |       |
| Total Purchase  Price                    |       | $               | 15,100     |                        | $          | 6,430     |       | $ | 21,530 |   |
|                                     |       |            |       |                        |       |      |       |
| Purchase Price  Allocation               |       |            |       |                        |       |      |       |
| Cash acquired                            |       | $               | 506        |                        | $          | 1,869     |       | $ | 2,375 |   |
| Tangible assets  acquired, at fair value |       | 3,233           |       | 5,362                       |       | 8,595     |       |
| Liabilities  assumed                     |       | (3,689          | )          | (6,125                      | )          | (9,814    | )          |
| Intangible  assets                       |       | 2,300           |       | —                      |       | 2,300     |       |
| Goodwill                                 |       | 12,750          |       | 5,324                       |       | 18,074    |       |
| Total Purchase  Price                    |       | $               | 15,100     |                        | $          | 6,430     |       | $ | 21,530 |   |

 

As discussed in Note 4, in 2004 the Company (i)increased its ownership in Red Sheriff; (ii) finalized the valuation of RedSheriff; (iii) merged Red Sheriff K.K. with and into NetRatings Japan; and (iv)made adjustments to the purchase price allocation related to Red Sheriff and finalizedthe purchase price allocation related to its other acquisitions completed in2003.  The net effect of these activitiesresulted in a net increase to goodwill of $8.3 million and a decrease to intangibleassets of $0.7 million.

 

Results of operations for each of the acquiredcompanies are included prospectively from the date of acquisition. Pro formaresults of operations reflecting the 2003 acquisitions have not been presentedbecause the results of operations of the acquired companies, eitherindividually or collectively, are not material to the Company’s results ofoperations.

 

The following pro forma summary of consolidatedrevenues, net loss, and net loss per share for the year ended December 31,2002 assumes that the eRatings and NetValue acquisitions occurred on January 1,2001. The impact on the consolidated results of operations related the otherentities acquired in 2002 is not significant and therefore the effects of theseother acquisitions are only reflected in this pro forma presentation for theperiods since acquisition. The consolidated results are not necessarilyindicative of the results of future operations nor of results that would haveoccurred had the acquisitions been consummated as of the beginning of theperiod presented.

 
| ** **                                             | ** ** | **Year ended  December 31, 2002**        | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                             | ** ** | **(in thousands, except  per share amounts)** | ** ** |
| Revenue                                                |       | $                                             | 36,031     |   |
| Net loss                                               |       | $                                             | (49,301    | ) |
| Net loss per  share:                                   |       |                                          |       |
| Basic and  diluted                                     |       | $                                             | (1.44      | ) |
| Shares used in  the calculation of net loss per share: |       |                                          |       |
| Basic and  diluted                                     |       | 34,183                                        |       |

 

**Note 4: Goodwill and Intangible Assets**

 

During the first half of 2004, NetRatings increasedits ownership in Red Sheriff to 100% and made adjustments to its purchaseaccounting related to Red Sheriff, resulting in additional goodwill ofapproximately $11.0 million.  In thefourth quarter of 2004, the Company finalized its valuation of Red Sheriffresulting in an increase in intangible assets of $0.7 million and a decrease togoodwill in the same amount.  The Companymade preliminary adjustments to its purchase price allocation for Red Sheriffin the fourth quarter of 2004 resulting in (i) adjustments to certain asset andliability balances existing at the acquisition dates and (ii) adjustments toacquisition related costs, both of which resulted in a net decrease to

 

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goodwill of $0.8 million.  On December 1,2004, Red Sheriff K.K. merged with and into NetRatings Japan and, at the sametime, NetRatings received $0.8 million from one of NetRatings Japan’s minorityshareholders, which was recorded as a reduction in goodwill. During 2004,NetRatings also finalized the purchase price allocation related to its otheracquisitions in 2003, resulting in (i) adjustments to certain asset andliability balances existing at the acquisition dates and (ii) adjustmentsto acquisition related costs, both of which resulted in a net decrease togoodwill of $0.4 million.

 

During 2003, NetRatings finalized the purchase priceallocation related to its acquisitions in 2002, resulting in(i) adjustments to certain asset and liability balances existing at theacquisition dates; (ii) adjustments to acquisition related costs; and(iii) adjustments to intangible assets, all of which resulted in changesto goodwill.  Also, in the fourth quarterof 2003, NetRatings received a refund of approximately $1.8 million on itspurchase price for eRatings.com related to certain liabilities existing at theacquisition date. This refund, along with the other purchase price allocationadjustments, resulted in net decreases to goodwill and intangible assets in2003 of $2.8 million and $1.0 million, respectively.

 

Goodwill and other intangible assets along with theirweighted average life, at December 31, 2004 and 2003, consisted of thefollowing (in thousands, except average life): 

 
| ** **                                     | ** ** | **December 31, 2004**  | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **Gross  carrying  amount** | ** ** | **Accumulated  amortization** | ** ** | **Net** | ** ** | **Weighted  average  life** | ** ** |
| Intangible  assets continuing to be amortized: |       |                        |       |   |   |   |   |   |   |
| Core  technologies                             |       | $                           | 5,482      |   | $ | 1,908 |   | $ | 3,574 |   | 7 |   |
| Customer  contracts                            |       | 4,940                       |       | 3,140 |   | 1,800 |   | 3 |   |
| Patents and  other                             |       | 15,682                      |       | 5,017 |   | 10,665 |   | 11 |   |
| Total                                          |       | $                           | 26,104     |   | $ | 10,065 |   | 16,039 |   |   |   |
| Goodwill                                       |       |                        |       |   |   | 74,897 |   |   |   |
| Total goodwill  and other intangible assets    |       |                        |       |   |   | $ | 90,936 |   |   |   |

 
| ** **                                     | ** ** | **December 31, 2003**  | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **Gross  carrying  amount** | ** ** | **Accumulated  amortization** | ** ** | **Net** | ** ** | **Weighted  average  life** | ** ** |
|                                           |       |                        |       |   |   |   |   |   |   |
| Intangible  assets continuing to be amortized: |       |                        |       |   |   |   |   |   |   |
| Core  technologies                             |       | $                           | 6,040      |   | $ | 1,126 |   | $ | 4,914 |   | 7 |   |
| Customer  contracts                            |       | 3,690                       |       | 2,089 |   | 1,601 |   | 2 |   |
| Patents and  other                             |       | 15,682                      |       | 3,108 |   | 12,574 |   | 11 |   |
| Total                                          |       | $                           | 25,412     |   | $ | 6,323 |   | 19,089 |   |   |   |
| Goodwill                                       |       |                        |       |   |   | 66,612 |   |   |   |
| Total goodwill  and other intangible assets    |       |                        |       |   |   | $ | 85,701 |   |   |   |

 

Based on the current amount of intangibles subject toamortization, the estimated amortization expense for each of the succeedingfive years is as follows: 2005: $2.8 million; 2006: $2.4 million;2007: $2.4 million; 2008: $1.8 million; and 2009: $1.4 million.

 

**Note 5: Restructuring and Other Expenses**

 

During the first quarter of 2002, NetRatings’management approved and initiated a restructuring plan intended to streamlineits business to focus on core products, refine its product line and consolidatespace at its Milpitas, California facility. Accordingly, NetRatings recognizeda restructuring charge of approximately $6.9 million during the firstquarter of 2002. The restructuring plan involved (i) the termination of 40employees worldwide, all of whom were terminated as of December 31, 2002;(ii) lease termination costs and other costs associated with vacatingcertain facilities and abandoning certain long-lived assets; and(iii) costs incurred for discontinuation of certain services. Also, inconnection with its acquisitions completed in 2002 and 2003, NetRatingsestablished additional restructuring liabilities of approximately

 

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$8.6 million. These restructuring plans involved (i) thetermination of 95 employees worldwide, all of whom were terminated as of December 31,2004; (ii) amounts accrued related to ongoing lease obligations forvacated properties; and (iii) costs related to contractual obligations orpayments for certain products and/or projects which were eliminated as of theacquisition dates. During 2002, $7.9 million of restructuring liabilitieshad been paid, resulting in a remaining balance of $6.6 million as of December 31,2002.

 

The Company made adjustments to the purchase priceallocation for Red Sheriff and finalized the purchase price allocations of its otheracquisitions, resulting in net decreases in restructuring liabilities ofapproximately $0.4 million and $0.6 million for the years ended December 31,2004 and 2003, respectively. These adjustments include (i) decreases inseverance related liabilities that will not be paid; (ii) adjustments toestimates relating to accruals for discontinuation of certain products orservices; and (iii) adjustments to estimates relating to idle facilitylease commitments, all of which were adjusted to goodwill.

 

During the first quarter of 2004, the Companynegotiated an amendment to the lease for its offices in Milpitas, California,which included a release from its obligations for the abandoned portion of thefacility.  This resulted in a reversal ofrestructuring expense of $0.5 million, which is included in restructuringexpenses in the accompanying statement of operations.

 

The following table summarizes activity associatedwith the restructuring plans for the years ended December 31, 2004 and2003 (in thousands):

 
| ** **                                                                    | ** ** | **Balance  December 31,  2003** | ** ** | **Additions  Related to  Acquisitions** | ** ** | **Utilized  Cash** | ** ** | **Adjustments** | ** ** | **Balance  December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|--------------------|------------|-----------------|------------|--------------------------------------|------------|
|                                                                          |       |                                 |       |                                    |       |               |       |            |       |                                 |       |
| Employee  severance benefits                                                  |       | $                                    | 144        |                                    | —     |               | $          | (144            | )          | —                               |       | — |   |
| Costs incurred  due to discontinuation of certain services and other expenses |       | 63                                   |       | —                                  |       | (63                | )          | —          |       | —                               |       |
| Lease commitments  and related write-down of property and equipment           |       | 3,184                                |       | —                                  |       | (834               | )          | $               | (926       | )                                    | $          | 1,424 |   |
| Total                                                                         |       | $                                    | 3,391      |                                    | —     |               | $          | (1,041          | )          | $                                    | (926       | ) | $ | 1,424 |   |

 
| ** **                                                                    | ** ** | **Balance  December 31,  2002** | ** ** | **Additions  Related to  Acquisitions** | ** ** | **Utilized  Cash** | ** ** | **Adjustments** | ** ** | **Balance  December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|--------------------|------------|-----------------|------------|--------------------------------------|------------|
|                                                                          |       |                                 |       |                                    |       |               |       |            |       |                                 |       |
| Employee  severance benefits                                                  |       | $                                    | 2,266      |                                    | $          | 307                |       | $               | (1,651     | )                                    | $          | (778 | ) | $ | 144 |   |
| Costs incurred  due to discontinuation of certain services and other expenses |       | 670                                  |       | 90                                      |       | (594               | )          | (103            | )          | 63                                   |       |
| Lease  commitments and related write-down of property and equipment           |       | 3,668                                |       | 620                                     |       | (1,364             | )          | 260             |       | 3,184                                |       |
| Total                                                                         |       | $                                    | 6,604      |                                    | $          | 1,017              |       | $               | (3,609     | )                                    | $          | (621 | ) | $ | 3,391 |   |

 

The long term portion of restructuring relates to idle facility leasecommitments.

 

**Note 6: Litigation Settlement Recovery**

 

During the fourth quarterof 2002, NetRatings expensed costs related to the settlement in 2002 of thepatent litigation initiated against the Company by Jupiter Media Metrix, Inc.In the second quarter of 2004, NetRatings received, net of legal fees, $1.8 millionfrom the Company's insurance company in reimbursement for these expenses.

 

**Note 7: Stockholders’ Equity**

 

**Common Stock**

 

The Company’s Board of Directors is authorized,subject to limitations prescribed by Delaware law, to issue up to200 million shares of common stock. At December 31, 2004, 37.2 millionshares of common stock were issued and

 

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35.7 million shares were outstanding.  The Company issued 1.7 million and 0.3million shares of common stock during 2004 and 2003, respectively, inconnection with the Company’s stock option plan and employee stock purchaseplan.

 

**Common Stock Repurchase/Treasury Stock**

 

In March 2002, two former executives exercisedtheir rights pursuant to stock repurchase agreements. Pursuant to theseagreements, NetRatings repurchased 1.5 million shares of NetRatings commonstock held by them. The repurchase price was based on the average closing priceof NetRatings common stock for the ten trading days preceding the request for repurchase.Accordingly, NetRatings repurchased the shares for approximately $13.75 pershare for a total aggregate repurchase price of $20.6 million.

 

**1998 Stock Option Plan**

 

In 1998, NetRatings adopted the 1998 Stock Option Plan(the “Plan”). Under the Plan, up to 1.2 million shares of NetRatings’common stock were initially reserved for issuance. An additional1.0 million, 2.0 million, 1.5 million and 2.8 million werereserved for issuance under the Plan during the years ended December 31,2003, 2001, 2000 and 1999, respectively. Options may be granted at exerciseprices of no less than 85% of the fair value of the related common stock on thedate of the grant (110% of fair value in certain instances), as determined bythe Board of Directors. Options generally vest over a four-year period and havea maximum term of ten years. In addition to the options granted pursuant to thePlan, the Company assumed a total of 26,000 options in connection with theCompany’s purchase of the remaining 80.1% interest in eRatings.

 

Information with respect to stock option activity issummarized as follows:

 
| ** **                         | ** ** | **Options Outstanding**          | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **Options Available  for Grant** | ** ** | **Number of Shares** | ** ** | **Price Per Share** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
| Balance at  December 31, 2001 |       | 2,101,000                        |       | 3,909,000 |   | $0.10 | - | $44.50 |   | $ | 11.29 |   |
| Granted                            |       | (1,961,000                       | )          | 1,961,000 |   | $5.40 | - | $15.06 |   | $ | 10.58 |   |
| Assumed from  eRatings acquisition |       | —                           |       | 26,000 |   | — |   | $106.84 |   | $ | 106.84 |   |
| Exercised                          |       | —                           |       | (373,000 | ) | $0.10 | - | $12.38 |   | $ | 3.90 |   |
| Canceled                           |       | 1,047,000                        |       | (1,047,000 | ) | $0.10 | - | $44.50 |   | $ | 13.32 |   |
| Balance at  December 31, 2002 |       | 1,187,000                        |       | 4,476,000 |   | $0.10 | - | $106.84 |   | $ | 11.66 |   |
| Authorized                         |       | 1,000,000                        |       | — |   | — |   | — |   | — |   |
| Granted                            |       | (1,692,000                       | )          | 1,692,000 |   | $5.82 | - | $11.39 |   | $ | 6.16 |   |
| Exercised                          |       | —                           |       | (232,000 | ) | $0.10 | - | $10.31 |   | $ | 4.20 |   |
| Canceled                           |       | 903,000                          |       | (903,000 | ) | $0.10 | - | $106.84 |   | $ | 11.03 |   |
| Balance at  December 31, 2003 |       | 1,398,000                        |       | 5,033,000 |   | $0.10 | - | $106.84 |   | $ | 10.00 |   |
| Authorized                         |       | —                           |       | — |   | — |   | — |   | — |   |
| Granted                            |       | (1,208,000                       | )          | 1,208,000 |   | $10.72 | - | $20.00 |   | $ | 11.29 |   |
| Exercised                          |       | —                           |       | (1,649,000 | ) | $0.10 | - | $17.13 |   | $ | 9.63 |   |
| Canceled                           |       | 481,000                          |       | (481,000 | ) | $5.40 | - | $106.84 |   | $ | 10.81 |   |
| Balance at  December 31, 2004 |       | 671,000                          |       | 4,111,000 |   | $0.10 | - | $106.84 |   | $ | 10.43 |   |
| Options  exercisable at:           |       |                             |       |   |   |   |   |   |   |   |   |
| December 31,  2002            |       |                             |       | 1,812,000 |   |   |   |   |   | $ | 10.87 |   |
| December 31,  2003            |       |                             |       | 2,023,000 |   |   |   |   |   | $ | 11.62 |   |
| December 31,  2004            |       |                             |       | 1,618,000 |   |   |   |   |   | $ | 11.09 |   |

 

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The following table summarizes information concerning optionsoutstanding and exercisable at December 31, 2004:

 
| ** **             | ** ** | **Options outstanding** | ** ** | **Options exercisable**                 | ** ** |
|------------------------|------------|-------------------------|------------|-----------------------------------------|------------|
| **Exercise Price**     | ** ** | **Number  of  Shares**  | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Term** | ** ** | **Number  of Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|                   |       |                    |       |                                    |       |   |   |   |   |   |   |
| $0.10 -  $5.40    |       | 110,000                 |       | $                                       | 2.73       |   | 5.39 |   | 82,000 |   | $ | 1.82 |   |
| $5.82 - $5.82          |       | 731,000                 |       | $                                       | 5.82       |   | 8.19 |   | 154,000 |   | $ | 5.82 |   |
| $5.84 -  $9.15    |       | 501,000                 |       | $                                       | 7.59       |   | 7.67 |   | 167,000 |   | $ | 8.06 |   |
| $9.29 -  $11.02   |       | 249,000                 |       | $                                       | 10.37      |   | 7.43 |   | 155,000 |   | $ | 10.48 |   |
| $11.05 - $11.05   |       | 1,012,000               |       | $                                       | 11.05      |   | 9.24 |   | — |   | $ | 0.00 |   |
| $11.20 -  $12.28  |       | 415,000                 |       | $                                       | 11.67      |   | 7.08 |   | 289,000 |   | $ | 11.69 |   |
| $12.30 -  $12.375 |       | 81,000                  |       | $                                       | 12.37      |   | 6.27 |   | 73,000 |   | $ | 12.375 |   |
| $12.51 -  $12.51  |       | 456,000                 |       | $                                       | 12.51      |   | 6.83 |   | 341,000 |   | $ | 12.51 |   |
| $12.60 -  $15.06  |       | 413,000                 |       | $                                       | 13.77      |   | 6.85 |   | 279,000 |   | $ | 13.72 |   |
| $15.46 - $106.84       |       | 143,000                 |       | $                                       | 24.68      |   | 7.34 |   | 78.000 |   | $ | 19.93 |   |
| $0.10 -  $106.84  |       | 4,111,000               |       | $                                       | 10.43      |   | 7.80 |   | 1,618,000 |   | $ | 11.09 |   |

 

**Shares Reserved for Future Issuance**

 

NetRatings has reserved shares of common stock forfuture issuance as of December 31, 2004 and December 31, 2003 asfollows:

 
| ** **                         | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|------------------------------------|------------|-----------|------------|-----------|------------|
| Stock options  outstanding         |       | 4,111,000 |       | 5,033,000 |       |
| Stock options  available for grant |       | 671,000   |       | 1,398,000 |       |
| Employee stock  purchase plan      |       | 250,000   |       | 128,486   |       |

 

The pro forma information, as required bySFAS 123 and SFAS 148, regarding net loss and loss per sharedetermined as if the Company had accounted for its stock options under the fairvalue method of accounting is presented in Note 1 to these financialstatements.

 

**1999 Employee Stock Purchase Plan**

 

In 1999, NetRatings’ Board of Directors adopted the1999 Employee Stock Purchase Plan effective upon the completion of NetRatings’initial public offering of its common stock. NetRatings initially reserved atotal of 0.3 million shares of common stock for issuance under the plan,which is cumulatively increased on January 1 of each year through January 1,2010 by an amount equal to the lesser of (i) 0.5 million shares,(ii) 2% of the number of shares of common stock that were issued andoutstanding on the preceding December 31, or (iii) a lesser amountdetermined by the Company’s Board of Directors. The Board of Directors approvedan increase of 212,297 shares in November 2004. Eligible employees maypurchase common stock at 85% of the lesser of the fair market value of theCompany’s common stock on the first day of the applicable offering period orthe date of purchase. All NetRatings’ employees are eligible to participate inthe Employee Stock Purchase Plan except employees who (i) normally work20 hours or less per week; (ii) normally work 5 months or lessper year; or (iii) are 5% or greater shareholders of NetRatings. Eligibleemployees may contribute from 1%-15% of their after tax compensation from eachpaycheck during each 6 month purchase period. However, no person maypurchase more than 2,500 shares on a purchase date. Furthermore, pursuant tothe Internal Revenue Code, no person may purchase stock under the Plan valuedat more than $25,000 in any calendar year.

 

**Deferred Compensation**

 

NetRatings recorded deferred stock compensationcharges of $3.9 million for the year ended December 31, 1999,representing the difference between the exercise price of stock options and thefair value of common stock as of the date of

 

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grant. There have been no additional deferred stock compensationamounts recorded through December 31, 2004. These amounts are beingamortized to operations, using the graded method, over the vesting periods ofthe individual stock options, which are generally four years.

 

As of December 31, 2002, the deferred stock-basedcompensation charges were fully amortized. For the year ended December 31, 2002, amortization expense was$0.3 million, and is included in stock-based compensation in theaccompanying statements of operations.

 

**Deferred Service Costs**

 

In 1999, NetRatings recorded a deferred chargetotaling $46.7 million representing the value of warrants issued toNielsen Media Research, which were exercised in December 1999. The valueof the warrants was determined using the Black-Scholes valuation model and wasamortized to operating expense through December 31, 2004. Amortizationexpense was $7.6 million, $9.1 million and $9.1 million in each of thethree years ended December 31, 2004, 2003 and 2002 respectively and isincluded in stock-based compensation in the accompanying statements ofoperations. As of December 31, 2004, the deferred service costs have beenfully amortized.

 

**Note 8: Joint Ventures**

 

In June 1999, NetRatings granted a license forthe use of its proprietary software to NetRatings Japan, in which it held adirect ownership interest of approximately 49%. The joint venture was formed toadapt, market, service and sell interactive media and market research data inJapan. NetRatings made a capital contribution of $1.3 million for the yearended December 31, 2001. On April 1, 2003 NetRatings increased itsownership in NetRatings Japan to 58% for an additional investment ofapproximately $1.1 million. Prior to 2003, this investment was accountedfor using the equity method and, therefore, the Company’s investment wasreduced for its pro-rata share of NetRatings Japan’s losses. Effective April 1,2003, the Company consolidates the results of operations and financial positionof NetRatings Japan in its consolidated financial statements.

 

During the third quarter of 2004, NetRatings Japansold a small ownership interest in NetRatings Japan to a third party for atotal of $0.2 million.  As a result ofthis transaction, the Company’s stockholders’ equity increased by $0.1 millionand its equity ownership in NetRatings Japan decreased from 58.2% toapproximately 56.5%.

 

On December 1, 2004, Red Sheriff K.K. merged withand into NetRatings Japan, whereupon new shares of NetRatings Japan were issuedto the Company.  As a result, Red SheriffK.K. became a wholly-owned subsidiary of NetRatings Japan.  At the same time, NetRatings sold shares ofNetRatings Japan to TransCosmos for a total of $0.8 million so that TransCosmoswould maintain its existing stake in NetRatings Japan.  As a result of these transactions, NetRatingsincreased its ownership of NetRatings Japan to 56.8%.

 

In January 2000, NetRatings established a jointventure in France, Mediametrie NetRatings, in which it held a 50% ownershipinterest. Mediametrie NetRatings is responsible for building and maintaining aFrench audience measurement panel. NetRatings made capital contributions of$0.5 million for each of the years ended December 31, 2002 and 2001,respectively. Effective November 1, 2003, NetRatings increased itsownership in Mediametrie NetRatings to 66% in exchange for the fair value ofcustomer contracts assigned to Mediametrie NetRatings in 2003 and 2002. Priorto 2003, this investment was adjusted for using the equity method and,therefore, the Company’s investment was reduced for its pro-rata share ofMediametrie NetRatings’ earnings/losses. Effective November 1, 2003, theCompany consolidates the results of operations and financial position forMediametrie NetRatings in its consolidated financial statements.

 

On May 7, 2002, NetRatings acquired a 49% stakein Ibope eRatings.com through the acquisition of ACNielsen eRatings.com. Inconnection with NetRatings acquisition of Red Sheriff in December 2004,NetRatings acquired a 50% stake in Red Sheriff Italy.  NetRatings accounts for these investmentsusing the equity method and, therefore, adjust its investments for its pro-ratashare of each joint venture’s earnings/losses.

 

NetRatings’ joint venture partners maintain Internetaudience measurement panels in the countries in which the joint ventures arelocated.  Revenue from Internet audiencemeasurement services, which can either be sold by NetRatings or the

 

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joint venture partner, is allocated between the two parties based onthe location of the customer and the location of the panel whose data is usedin the service.  NetRatings recordscommission revenue and expense related to these sales ratably over the periodof the contract in the revenue and cost of revenue lines in its statement ofoperations.

 

•                  The jointventure retains 100% of any revenue from services that the joint venture sellsto customers within their own country based on data from their panels;

 

•                  NetRatings andthe joint venture each record a 50% international panel fee from services thatNetRatings sells to customers based on data from the joint venture’s panels orservices that the joint venture sells to customers within their country basedon NetRatings’ panel data; and

 

•                  If eitherNetRatings or the joint venture sells services based on data from a combinationof the NetRatings and joint venture’s panels, the allocation of revenues isdetermined by an operating committee consisting of two representatives of eachcompany, with any decisions requiring a unanimous vote of those present, whichmust include at least one representative of each company.

 

For the years ended December 31, 2004, 2003 and2002, revenue of $0.1 million, $0.3 million and $1.7 million,respectively, was recorded related to NetRatings’ sales to its customers ofinternational data produced by the joint ventures.  Commission expense for the comparable periodswas $0.1 million, $0.2 million and $0.9 million, respectively.

 

The Company’s joint ventures pay the Company a royaltyfor the use of its technology.  Thisroyalty revenue is based on a percentage of each sale made by the Company’sequity method investees pursuant to each joint venture’s operatingagreement.  This revenue is recognizedratably over the period of the contract in the Company’s statement ofoperations.  For the years ended December 31,2004, 2003 and 2002, the Company recorded revenue of $0.1 million,$0.2 million and $1.2 million respectively, related to royalties fromthe joint ventures.

 

NetRatings also provides data hosting and supportservices to the joint ventures, including data center operations andengineering expertise.  For the yearsended December 31, 2004, 2003 and 2002, NetRatings recorded $0.1 million,$0.4 million and $1.0 million, respectively, in reimbursements fromjoint ventures related to these services and such reimbursements have beennetted against the respective expense categories in the accompanying statementsof operations.

 

The transactions between the Company and its jointventures relating to allocation of revenue, payment of a technology royalty anddata hosting and support services described in this Note 8 are included in theoperating statement of the Company’s equity method joint ventures as well.  The Company records their percentage of thejoint venture’s net profit (loss) in the net equity in earnings (losses) ofjoint ventures line in the Company’s statement of operations.

 

**Note 9: Related Party Transactions**

 

In August 1999, NetRatings entered into anoperating agreement with Nielsen Media Research. Under the terms of theoperating agreement, NetRatings paid Nielsen Media Research a 35% commissionfor selling services to certain customers. Commissions paid were$0.8 million for the year ended December 31, 2002 and are included insales and marketing expenses in the accompanying statements of operations. InMay 2002, this agreement was amended to provide that, in lieu of payingcommissions, NetRatings will pay the actual costs associated with the operationand maintenance by Nielsen Media Research of a sales force dedicated to sellingNetRatings’ products and services. This expense totaled approximately $ 0.5million for the year ended December 31, 2004 and $1.0 million foreach of the years ended December 31, 2003 and 2002.

 

NetRatings is also charged by Nielsen Media Researchfor the costs of maintaining the U.S. panels. These costs totaled $3.1 million,$4.1 million and $3.5 million for the years ended December 31,2004, 2003 and 2002, respectively, and are included in cost of revenue in theaccompanying statements of operations. The panel costs in 2002 primarily relateto the maintenance of the U.S. home panel built and recruited during 2001 andthe maintenance of the at-work panel during 2002. The panel costs in 2003included costs to maintain the home and at-work panels and the Hispanic panel. 

 

In the fourth quarter of 2003, Nielsen Media Researchstarted providing services to recruit and survey respondents for NetRatings’@Plan service. The cost incurred for these services was $2.2 million and$0.6 million for the years ended December 31, 2004 and 2003 and isincluded in cost of revenue in the accompanying statement of operations.

 

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In March 2004, NetRatings engaged Nielsen MediaResearch to provide technology hosting services for its U.S. data centeroperations. The cost incurred in 2004 for these services was $0.3 million andis included in cost of revenue in the accompanying statement of operations.

 

The company obtains its directors and officers,property, general and workers compensation insurance through VNU.  The cost incurred for these services wasapproximately $0.2 million for each of the three years ended December 31,2004, 2003 and 2002.

 

Since May 2002, ACNielsen has provided backoffice services for the Company’s international operations, other than thosepreviously operated by Red Sheriff. These services include payment of allinternational operating expenses for which NetRatings reimburses them on aquarterly basis. Fees related to these back office services were approximately$0.8 million, $1.6 million and $0.7 million for the years ended December 31,2004, 2003 and 2002, respectively. NetRatings also rents office space in ACNielsen offices for some of itsinternational sales offices.  Chargesrelated to this office space and related office expenses approximated $0.4million for each of the years ended December 31, 2004, 2003 and 2002,respectively.

 

As of December 31, 1999, Nielsen Media Researchbecame a wholly owned subsidiary of VNU N.V. As Nielsen Media Research is amajority stockholder of NetRatings, its parent company, VNU N.V., is requiredto consolidate NetRatings’ operating results with its own for financialreporting purposes. As of December 31, 2004, VNU owned, through itssubsidiaries, approximately 60% of the outstanding common stock of NetRatings.

 

As of December 31, 2004 and 2003, the Company hadamounts due from related parties in the amount of $1.2 million and $0.5million, respectively.  Due from relatedparties represents a loan made by NetRatings Japan to TransCosmos, one of its minorityshareholders. The loan receivable at December 31, 2003 was paid in full in thesecond quarter of 2004 and a subsequent loan was made in the fourth quarter of2004.

 

The following is a summary of amounts due to relatedparties as of December 31, 2004 and 2003 (in thousands):

 
| ** **                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Due to VNU and  its affiliates |       | $        | 8,599      |     | $          | 11,602 |   |
| Due to joint  venture partners |       | 418      |       | 593      |       |
| Due to related  parties        |       | $        | 9,017      |     | $          | 12,195 |   |

 

**Note 10: Commitments and Contingencies**

 

**Leases**

 

As of December 31, 2004, non-cancelable operatinglease agreements with terms in excess of one year were as follows (inthousands):

 
| **Year ending December 31:** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
|                              |       |       |       |
| 2005                              |       | $          | 2,176      |   |
| 2006                              |       | 1,853      |       |
| 2007                              |       | 1,857      |       |
| 2008                              |       | 1,424      |       |
| 2009 and  thereafter              |       | 1,195      |       |
| Total minimum  lease payments     |       | $          | 8,505      |   |

 

 

In connection with a business acquisition in 2002, theCompany recorded a liability for a facility in which there is idle space(Note 5). Rent payments related to this idle space are not included in thefuture minimum lease payments above.

 

Future minimum lease payments under non-cancelableoperating lease agreements have not been reduced by sublease rental income of$0.5 million.

 

Rent expense was $3.1 million, $1.5 millionand $1.5 million for the years ended December 31, 2004, 2003 and2002, respectively.

 

**Litigation**

 

*Securities Class Action Complaint*

 

A class action lawsuit was filed on November 6,2001 in the United States District Court for the Southern District of New Yorkon behalf of purchasers of our common stock alleging violations of federalsecurities laws. The case is now

 

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designated as In re NetRatings, Inc. Initial Public OfferingSecurities Litigation, related to In re Initial Public Offerings SecuritiesLitigation. The case is brought purportedly on behalf of all persons whopurchased the Company’s common stock from December 8, 1999 through December 6,2000. The complaint names as defendants NetRatings; two of our formerdirectors; and investment banking firms that served as underwriters for ourinitial public offering in December 1999. The Plaintiffs electronicallyserved an amended complaint on or about April 19, 2002. The amendedcomplaint alleges violations of Section 11 and 15 of the Securities Act of1933, and Section 10(b) of the Securities Exchange Act of 1934, on thegrounds that the prospectus incorporated in the registration statement for theoffering failed to disclose, among other things, that (i) the underwritershad solicited and received excessive and undisclosed commissions from certaininvestors in exchange for which the underwriters allocated to those investorsmaterial portions of the shares of our stock sold in the initial publicoffering, and (ii) the underwriters had entered into agreements withcustomers whereby the underwriters agreed to allocate shares of our stock soldin the initial public offering to those customers in exchange for which thecustomers agreed to purchase additional shares of our stock in the aftermarketat pre-determined prices. The amended complaint also alleges that false analystreports were issued following the IPO. No specific damages are claimed.

 

We are aware that similar allegations have been madein lawsuits relating to more than 300 other initial public offerings conductedin 1999 and 2000. Those cases, including our case, have been consolidated forpretrial purposes before the Honorable Judge Shira A. Scheindlin. On July 15,2002, we (as well as the other issuer defendants) filed a motion to dismiss thecomplaint. The motions were heard on November 1, 2002. In February 2003,the judge granted the motion to dismiss certain of the claims againstNetRatings and the two individual defendants and denied the motion to dismisscertain other claims against NetRatings and the two individualdefendants.  In July 2004, we and the individual defendants accepteda settlement proposal made to all of the issuer defendants. Under the terms ofthe settlement, the plaintiffs will dismiss and release all claims againstparticipating defendants in exchange for a contingent payment guaranty by theinsurance companies collectively responsible for insuring the issuers in allrelated cases, and the assignment or surrender to the plaintiffs of certainclaims the issuer defendants may have against the underwriters. Under theguaranty, the insurers will be required to pay the amount, if any, by which$1 billion exceeds the aggregate amount ultimately collected by theplaintiffs from the underwriter defendants in all the cases. The settlement issubject to approval of the Court, which cannot be assured. If the settlement isnot approved by the Court, we intend to defend the lawsuit vigorously. However,the litigation is in the preliminary stage, and we cannot predict its outcome.The litigation process is inherently uncertain. If litigation proceeds and itsoutcome is adverse to us and if we are required to pay significant monetarydamages, an adverse outcome could materially affect our results of operationsand financial position.

 

**Note 11: Industry Segment and ForeignOperations**

 

NetRatings operates in one segment for providing mediaand market research focused on Internet audience behavior and activity. Forgeographical reporting, revenues are attributed to the geographic location inwhich the customer is located. Our geographic regions include the United States(US), Europe, Middle East and Africa (EMEA), and Asia Pacific and Latin America(APLA). Long-lived assets consist primarily of property and equipment and areattributed to the geographic location in which they are located.

 

The following table sets forth revenue and propertyand equipment by geographic region:

 

| ** **               | ** ** | **For the year ended  December 31, 2004 *** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **US**                                           | ** ** | **EMEA** | ** ** | **APLA** | ** ** | **Total** | ** ** |
|                     |       |                                             |       |   |   |   |   |   |   |
| Revenue                  |       | $                                                | 28,059     |   | $ | 19,432 |   | $ | 11,803 |   | $ | 59,294 |   |
| Property and  equipment* |       | 2,534                                            |       | 1,712 |   | 1,731 |   | 5,977 |   |
|                          |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |

 

| ** **               | ** ** | **For the year ended  December 31, 2003 *** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **US**                                           | ** ** | **EMEA** | ** ** | **APLA** | ** ** | **Total** | ** ** |
|                     |       |                                             |       |   |   |   |   |   |   |
| Revenue                  |       | $                                                | 25,651     |   | $ | 12,719 |   | $ | 3,062 |   | $ | 41,432 |   |
| Property and  equipment* |       | 1,814                                            |       | 1,164 |   | 965 |   | 3,943 |   |
|                          |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |

 

57

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| ** **               | ** ** | **For the year ended  December 31, 2002 *** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **US**                                           | ** ** | **EMEA** | ** ** | **APLA** | ** ** | **Total** | ** ** |
|                     |       |                                             |       |   |   |   |   |   |   |
| Revenue                  |       | $                                                | 24,060     |   | $ | 5,159 |   | $ | 487 |   | $ | 29,706 |   |
| Property and  equipment* |       | 2,676                                            |       | 318 |   | — |   | 2,994 |   |
|                          |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |

 

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* The amounts indicated for property and equipment areas of December 31, 2004, 2003 and 2002, respectively.

 

 

**Note 12: Income Taxes**

 

No income tax expense was recorded for the years endedDecember 31, 2004, 2003 and 2002 due to net operating losses.

 

The difference between the income tax benefit and theamount computed by applying the federal statutory income tax rate to lossbefore income taxes is as follows:

 
| ** **                                    | ** ** | **2004**            | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------|------------|---------------------|------------|----------|------------|----------|------------|
| ** **                                    | ** ** | **(in  thousands)** | ** ** |
| Income tax  benefit at federal statutory rate |       | $                   | (6,097     | )        | $          | (8,819   | )          | $ | (13,607 | ) |
| Amortization of  deferred stock compensation  |       | 2,655               |       | 3,058    |       | 3,301    |       |
| Losses on joint  ventures                     |       | 5                   |       | 23       |       | 892      |       |
| Net operating  losses and other               |       | 6,510               |       | 5,866    |       | 10,118   |       |
| Stock option  deductions                      |       | (3,073              | )          | (128     | )          | (704     | )          |
| Total                                         |       | $                   | —     |     | $          | —   |       | $ | — |   |

 

Significant components of NetRatings’ deferred taxassets are as follows:

 
| ** **                                                        | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                                             |       |     |       |     |       |
| Net operating  loss carryforwards                                 |       | $        | 31,313     |     | $          | 25,056 |   |
| Tax credit  carryforwards                                         |       | 1,061    |       | 1,020    |       |
| Reserves and  accrued costs and expenses not currently deductible |       | (192     | )          | 2,068    |       |
| Asset write-offs  not currently deductible                        |       | 1,834    |       | 1,834    |       |
| Fixed assets and  intangibles                                     |       | —   |       | 804      |       |
| Other                                                             |       | —   |       | 188      |       |
|                                                              |       | 34,016   |       | 30,970   |       |
| Deferred tax  liabilities:                                        |       |     |       |     |       |
| Fixed assets and  intangibles                                     |       | 1,047    |       | —   |       |
| Total deferred  tax assets                                        |       | 32,969   |       | 30,970   |       |
| Valuation  allowance for deferred tax assets                      |       | (32,969  | )          | (30,970  | )          |
| Net deferred tax  assets                                          |       | $        | —     |     | $          | — |   |

 

FAS 109 provides for the recognition of deferredtax assets if it is more likely than not that such assets will be realized.Based upon the weight of available evidence, which includes NetRatings’historical operating performance and the reported cumulative net losses in allprior years, NetRatings has provided a full valuation allowance against its netdeferred tax assets. NetRatings will continue to evaluate the realizability ofthe deferred tax assets on a quarterly basis.

 

The net valuation allowance increased by $2.0 million,$5.8 million and $14.5 million during the years ended December 31,2004, 2003 and 2002, respectively. Approximately $7.2 million and $3.6 millionof the valuation allowance at December 31, 2004 and 2003, respectively, isattributable to stock option deductions, the benefit of which will be creditedto paid-in capital if and when realized.

 

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As of December 31, 2004, NetRatings had netoperating loss carryforwards for federal and state tax purposes ofapproximately $81.3 million and $49.9 million, respectively.NetRatings also had federal and state research and development tax creditcarryforwards of approximately $0.6 million and $0.6 million,respectively. The federal and state net operating loss and tax creditcarryforwards begin to expire in 2017 if not utilized, and the state netoperating losses begin to expire in 2007 if not utilized. The state tax creditsmay be carried forward indefinitely.

 

Utilization of the net operating loss and tax creditcarryforwards may be subject to a substantial annual limitation due to theownership change limitations provided by the Internal Revenue Code of 1986, asamended, and similar state provisions. The annual limitation may result in theexpiration of net operating loss and tax credit carryforwards beforeutilization.

 

**Note 13. Other-Than-Temporary Impairmentand Its Application to Certain Investments**

 

The gross unrealized lossesrelated to NetRatings’ portfolio of available-for-sale securities wereprimarily due to a decrease in the fair value of debt securities as a result ofan increase in interest rates during 2004. The Company hasdetermined that the gross unrealized losses on its available-for-salesecurities as of December 31, 2004 are temporary innature. NetRatings has reviewed its investment portfolio toidentify and evaluate investments that have indications of possible impairment.Factors considered in determining whether a loss is temporary include themagnitude of the decline in market value, the length of time the market valuehas been below cost (or adjusted cost), credit quality, and NetRatings’ abilityand intent to hold the securities for a period of time sufficient to allow forany anticipated recovery in market value.

 

The following table sets forth the unrealized lossesfor NetRatings investments as of December 31, 2004 (in thousands, exceptpercentage data):

 
| ** **                                        | ** ** | **In Loss Position Less  than 12 Months** | ** ** | **In Loss Position 12  Months or Longer** | ** ** | **Total In Loss Position** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|----------------------------|------------|
| **Description of Securities**                     | ** ** | **Fair Value**                            | ** ** | **Unrealized  Losses**                    | ** ** | **Fair Value**             | ** ** | **Unrealized  Losses** | ** ** | **Fair Value** | ** ** | **Unrealized  Losses** | ** ** |
| ** **                                        | ** ** | ** **                                | ** ** | ** **                                | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Commercial paper                                  | ** ** | **—**                                | ** ** | **—**                                |       | $                          | 2,000      |   | $ | (24 | ) | $ | 2,000 |   | $ | (24 | ) |
| Corporate notes                                   |       | $                                         | 12,511     |                                      | $          | (101                       | )          | 6,616 |   | (34 | ) | 19,127 |   | (135 | ) |
| Euro dollar bonds                                 |       | 28,945                                    |       | (172                                      | )          | 11,812                     |       | (86 | ) | 40,757 |   | (258 | ) |
| Government securities                             |       | 21,195                                    |       | (109                                      | )          | 31,500                     |       | (378 | ) | 52,695 |   | (487 | ) |
| Total  temporarily impaired securities            |       | $                                         | 62,651     |                                      | $          | (382                       | )          | $ | 51,928 |   | $ | (522 | ) | $ | 114,579 |   | $ | (904 | ) |
|                                              |       |                                      |       |                                      |       |                       |       |   |   |   |   |   |   |
| Securities  unrealized loss percent to fair value |       |                                      |       | 0.61                                      | %          |                       |       | 1.01 | % |   |   | 0.79 | % |

 

The following tablepresents the amounts of our financial instruments that are subject to interestrate risk by expected maturity and average interest rates as ofDecember 31, 2004:

 
| ** **                 | ** ** | **Time to maturity**                                  | ** ** |
|----------------------------|------------|-------------------------------------------------------|------------|
| ** **                 | ** ** | **One year  or less**                                 | ** ** | **One to five  years** | ** ** | **Five to ten  years** | ** ** | **Greater than  ten years** | ** ** | **Total** | ** ** |
| ** **                 | ** ** | **(in thousands, except percent data)   (unaudited)** | ** ** |
| Cash and cash  equivalents |       | $                                                     | 33,234     |   | — |   | — |   | — |   | $ | 33,234 |   |
| Average interest  rates    |       | 0.54                                                  | %          | — |   | — |   | — |   | .54 | % |
| Short term  investments    |       | $                                                     | 83,659     |   | $ | 51,913 |   | — |   | $ | 28,796 |   | $ | 164,368 |   |
| Average interest  rates    |       | 1.95                                                  | %          | 2.39 | % | — |   | 2.43 | % | 2.17 | % |
|                            |            |                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

**Note 14. Subsequent Event (Unaudited)**

 

On February 25, 2005, the Company purchased theremaining 50% of its Italian joint venture, Red Sheriff S.r.l., that it did notalready own for approximately 1.5 million Euros.

 

59

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**ITEM 9.****                         CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A.****                    CONTROLS ANDPROCEDURES**

 

**Disclosure Controls and Procedures**

 

The Company’s management, with the participation ofthe Company’s Chief Executive Officer and Chief Financial Officer, hasevaluated the effectiveness of the Company’s disclosure controls and procedures(as such term is defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the endof the period covered by this report. Based on such evaluation, the Company’sChief Executive Officer and Chief Financial Officer have concluded that, as ofthe end of such period, the Company’s disclosure controls and procedures areeffective. Notwithstanding the foregoing, a control system, no matter how welldesigned and operated, can provide only reasonable, not absolute, assurancethat it will detect or uncover failures within the Company to disclose materialinformation otherwise required to be set forth in the Company’s periodicreports.

 

**Internal Control over Financial Reporting**

 

There have not been any changes in the Company’sinternal control over financial reporting (as such term is defined inRules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourthquarter of 2004 that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

The Securities and Exchange Commission, pursuant to Section 404of the Sarbanes-Oxley Act of 2002, adopted rules requiring the Company toinclude a report of management on the Company’s internal control over financialreporting and for our independent registered public accounting firm to attestto this report beginning with this Annual Report on Form 10-K.  In late November 2004, the Securitiesand Exchange Commission issued an exemptive order providing a 45 day extension foreligible companies for the filing of these reports and attestations. Because weelected to utilize this 45 day extension, this Form 10-K does not include thesereports. These reports will be included in an amended Form 10-K expected to befiled within the deadlines prescribed in the exemptive order.

 

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**PART III**

 

Certain information required by Part III of thisAnnual Report on Form 10-K is omitted from this report because NetRatingsintends to file its definitive proxy statement pursuant to Regulation 14Anot later than 120 days after the end of the fiscal year covered by thisreport (the “Proxy Statement”) and certain information in the Proxy Statementis incorporated herein by reference.

 

**ITEM 10.****                      DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The information required by this Item is incorporatedby reference to information set forth in the Proxy Statement.

 

**ITEM 11.****                      EXECUTIVECOMPENSATION**

 

The information required by this Item is incorporatedby reference to information set forth in the Proxy Statement.

 

**ITEM 12.****                      SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED  STOCKHOLDER MATTERS**

 

The information required by this Item is incorporatedby reference to information set forth in the Proxy Statement.

 

**ITEM 13.****                      CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

The information required by this Item is incorporatedby reference to information set forth in the Proxy Statement.

 

**ITEM 14.****                      PRINCIPAL ACCOUNTINGFEES AND SERVICES**

 

The information required by this Item is incorporatedby reference to information set forth in the Proxy Statement.

 

61

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**PART IV**

 

**ITEM 15.****                      EXHIBITS ANDFINANCIAL STATEMENT SCHEDULES**

 

(a) The following documents are filed as a part ofthis report:

 

(1)                                  FinancialStatements:

 

See Index to Consolidated Financial Statements at page36 of this report.

 

(2)                                  FinancialStatement Schedules:

 

All financial statement schedules are omitted becausethey are not applicable or not required, or because the required information isincluded in the Financial Statements and Notes thereto which are includedherein.

 

(3)                                  Exhibits:

 

The exhibits listed on the accompanying Exhibit Indexare filed as part of, or are incorporated by reference into, this report.

 

62

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|   | **NETRATINGS, INC.** |
|--------|----------------------|
|   | ** **           |
|   | By:                  | /s/ Todd Sloan |
|   |                 | Todd Sloan*Executive Vice President Corporate  Development,  Chief Financial Officer and Secretary* |

 

Date: March 16, 2005

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated:

 
| **Signature**            | ** ** | **Title**                                                                                                                            | ** ** | **Date**            |
|--------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|
|                     |       |                                                                                                                                 |       |                |
| /s/ William Pulver       |       | Chief Executive Officer, President and Director  (Principal Executive Officer)                                                       |       | March 16, 2005 |
| William Pulver           |       |                                                                                                                                 |       |                |
|                     |       |                                                                                                                                 |       |                |
| /s/ Todd Sloan           |       | Executive Vice  President Corporate Development, Chief Financial Officer and Secretary  (Principal Financial and Accounting Officer) |       | March 16, 2005 |
| Todd Sloan               |       |                                                                                                                                 |       |                |
|                     |       |                                                                                                                                 |       |                |
| /s/ John Dimling         |       | Chairman of the Board                                                                                                                |       | March 16, 2005 |
| John A. Dimling          |       |                                                                                                                                 |       |                |
|                     |       |                                                                                                                                 |       |                |
| /s/ Michael P. Connors   |       | Director                                                                                                                             |       | March 16, 2005 |
| Michael P. Connors       |       |                                                                                                                                 |       |                |
|                     |       |                                                                                                                                 |       |                |
| /s/ David H. Harkness    |       | Director                                                                                                                             |       | March 16, 2005 |
| David H. Harkness        |       |                                                                                                                                 |       |                |
|                     |       |                                                                                                                                 |       |                |
| /s/Arthur F. Kingsbury   |       | Director                                                                                                                             |       | March 16, 2005 |
| Arthur F. Kingsbury      |       |                                                                                                                                 |       |                |
|                     |       |                                                                                                                                 |       |                |
| /s/ Thomas A. Mastrelli  |       | Director                                                                                                                             |       | March 16, 2005 |
| Thomas A. Mastrelli      |       |                                                                                                                                 |       |                |
|                     |       |                                                                                                                                 |       |                |
| /s/ D. Scott Mercer      |       | Director                                                                                                                             |       | March 16, 2005 |
| D. Scott Mercer          |       |                                                                                                                                 |       |                |
|                     |       |                                                                                                                                 |       |                |
| /s/ James M. O’Hara |       | Director                                                                                                                             |       | March 16, 2005 |
| James M. O’Hara     |       |                                                                                                                                 |       |                |
|                     |       |                                                                                                                                 |       |                |
| /s/ Jerrell W. Shelton   |       | Director                                                                                                                             |       | March 16, 2005 |
| Jerrell W. Shelton       |       |                                                                                                                                 |       |                |

 

63

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Exhibit  Title**                                                                                                                                                                                                        |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                      |
| 2.7(1)              |       | Form of Share Purchase Agreement between NetRatings,  Inc. and certain Red Sheriff shareholders.                                                                                                                          |
| 3.1(2)              |       | Restated Certificate of Incorporation of Registrant.                                                                                                                                                                      |
| 3.2(3)              |       | Amended and Restated By-Laws of Registrant.                                                                                                                                                                               |
| *10.1               |       | Amended and Restated 1998 Stock Plan, including form  of restricted stock agreement.                                                                                                                                      |
| *10.2(4)            |       | 1999 Employee Stock Purchase Plan.                                                                                                                                                                                        |
| *10.3               |       | Form of Director Retention Agreement.                                                                                                                                                                                     |
| *10.4(5)            |       | Employment Offer Letter with Bill Pulver dated November 1,  2001.                                                                                                                                                    |
| *10.5(6)            |       | Employment Offer Letter with Todd Sloan dated February 28,  2002.                                                                                                                                                    |
| 10.10(7)            |       | Operating Agreement between Registrant and Nielsen  Media Research dated as of August 15, 1999.                                                                                                                      |
| 10.11(8)            |       | Software License Agreement between Registrant and  Nielsen Media Research, dated as of August 15, 1999.                                                                                                              |
| 10.12(9)            |       | Panel Maintenance  Agreement between Registrant and Nielsen Media Research, dated as of August 15,  1999.                                                                                                            |
| 10.13(10)           |       | NMR Commissions Agreement by and between NetRatings,  Inc. and Nielsen Media Research, Inc., dated as of May 7, 2002.                                                                                                     |
| 10.14(11)           |       | Office Space Lease between Registrant and The Irvine  Company dated November 9, 1999 (as subsequently amended).                                                                                                      |
| 10.15(12)           |       | Services Agreement by and among NetRatings, Inc.,  ACNielsen eRatings.com and ACNielsen Corporation, dated as of May 7, 2002.                                                                                             |
| 10.16(13)           |       | Post-Closing Agreement by and among NetRatings,  Inc., ACNielsen eRatings.com and ACNielsen Corporation, dated as of May 7,  2002.                                                                                        |
| 10.17(14)           |       | Agreement of Reimbursement by and between  NetRatings, Inc. and ACNielsen Corporation, dated as of May 7, 2002.                                                                                                           |
| 10.18(15)           |       | Agreement of Reimbursement by and between  NetRatings, Inc. and VNU, Inc., dated as of May 7, 2002.                                                                                                                       |
| 10.19(16)           |       | Sub-sublease dated September 13, 2002.                                                                                                                                                                               |
| *10.20(17)          |       | Employment Offer Letter with Ron McCoy dated December 16,  2004.                                                                                                                                                     |
| 21                  |       | Subsidiaries.                                                                                                                                                                                                             |
| 23                  |       | Consent of Independent Registered Public Accounting  Firm.                                                                                                                                                                |
| 31.1                |       | Certificate of Chief Executive Officer pursuant to  Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                 |
| 31.2                |       | Certificate of Chief Financial Officer pursuant to  Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                 |
| 32.1                |       | Certificate of Chief Executive Officer pursuant to  Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2                |       | Certificate of Chief Financial Officer pursuant to  Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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*                                         Constitutesa management contact or compensatory plan required to be filed pursuant to Item15(c) of Form 10-K.

 

(1)                                  Incorporatedby reference to exhibit number 2.7 to Registrant’s Annual Report onForm 10-K for the fiscal year ended December 31, 2003.

 

(2)                                  Incorporatedby reference to exhibit number 3.1 to Registrant’s Annual Report onForm 10-K for the fiscal year ended December 31, 2003.

 

(3)                                  Incorporatedby reference to Exhibit 3.4 to Registrant’s Form S-1 RegistrationStatement (No. 333-87717), which 

 

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became effective on December 8, 1999 (the “1999Registration Statement”).

 

(4)                                  Incorporatedby reference to exhibit number 10.3 to the 1999 Registration Statement.

 

(5)                                  Incorporatedby reference to exhibit number 10.24 to Registrant’s Annual Report onForm 10-K for the fiscal year ended December 31, 2001.

 

(6)                                  Incorporatedby reference to exhibit number 10.40 to Registrant’s Quarterly Report onForm 10-Q for the fiscal period ended June 30, 2002.

 

(7)                                  Incorporatedby reference to exhibit number 10.9 to the 1999 Registration Statement.

 

(8)                                  Incorporatedby reference to exhibit number 10.16 to the 1999 Registration Statement.

 

(9)                                  Incorporatedby reference to exhibit number 10.17 to the 1999 Registration Statement.

 

(10)                            Incorporatedby reference to exhibit number 10.38 to Registrant’s Quarterly Report onForm 10-Q for the fiscal period ended March 31, 2002.

 

(11)                            Incorporatedby reference to exhibit number 10.21 to Registrant’s Annual Report onForm 10-K for the fiscal year ended December 31, 1999.

 

(12)                            Incorporatedby reference to exhibit number 10.35 to Registrant’s Quarterly Report onForm 10-Q for the fiscal period ended March 31, 2002.

 

(13)                            Incorporatedby reference to exhibit number 10.36 to Registrant’s Quarterly Report onForm 10-Q for the fiscal period ended March 31, 2002.

 

(14)                            Incorporatedby reference to exhibit number 10.37 to Registrant’s Quarterly Report onForm 10-Q for the fiscal period ended March 31, 2002.

 

(15)                            Incorporatedby reference to exhibit number 10.39 to Registrant’s Quarterly Report onForm 10-Q for the fiscal period ended March 31, 2002.

 

(16)                            Incorporatedby reference to exhibit number 10.42 to Registrant’s Quarterly Report onForm 10-Q for the fiscal period ended September 30, 2002.

 

(17)                            Incorporatedby reference to exhibit number 99.1 to Registrant’s Current Report onForm 8-K dated January 20, 2005.

 

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