** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

**ANNUAL REPORT**

**PURSUANT TO SECTIONS 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 
| **(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, 2005** |
| **OR**                                                |
| o                                                     | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934** |

**Commissionfile number: 000-27907**

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**NETRATINGS, INC.**

(Exact name of Registrant asspecified in its charter)

| **Delaware**                              | ** ** | **77-0461990**       |
|-------------------------------------------|------------|----------------------|
| (State or  other jurisdiction             |       | (I.R.S.  Employer    |
| of  incorporation of organization)        |       | 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 area code: **(212) 703-5900**

 

Securities registered pursuantto Section 12(b) of the Act:

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

Securities registered pursuantto Section 12(g) of the Act:

**CommonStock**

(Title of Class)

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Indicated by check mark if the registrant isa well-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct. Yes o No ý

 

Indicate by check mark if the registrant isnot required to file reports pursuant to Section 13 or 15(d) of theAct. Yes o No ý

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the Registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes ýNo o

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K. ý

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-accelerated filer.See definition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

 

Large accelerated filer o                                                             Acceleratedfiler ý                                          Non-acceleratedfiler o

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule12b-2 of the Exchange Act). Yes o No ý

 

The aggregate market value of the commonstock held by non-affiliates of the Registrant, based on the closing price ofthe Registrant’s Common Stock as quoted on the Nasdaq National Market on June 30,2005, was $201,776,726.

 

The number of shares of the Registrant’sCommon Stock outstanding as of February 28, 2006 was 35,048,147.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Parts of the definitive proxy statement for the Registrant’s 2006Annual Meeting of Stockholders, which is to be filed with the Commissionpursuant to Regulation 14A not later than 120 days after the end ofthe fiscal year 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 of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934, including, without limitation, statements regarding ourexpectations, beliefs, intentions or strategies regarding the future. Allforward-looking statements included in this Report are based on informationavailable to us on the date hereof, and we assume no obligation to update anysuch forward-looking statements. These statements are based on currentexpectations and assumptions and involve known and unknown risks, uncertaintiesand other factors, which may cause our actual results to differ materiallyfrom those implied by the forward-looking statements. Although we believe thatthe expectations reflected in the forward-looking statements are reasonable, wecannot guarantee future results, levels of activity, performance orachievements. Important factors that may cause actual results to differfrom expectations include those discussed elsewhere in this Report on Form 10-Kunder Item 1A, “Risk Factors.”*

 

**PART I**

 

**ITEM 1. BUSINESS**

 

**OVERVIEW**

 

We are a leading provider of Internetaudience measurement and analysis in the United States and around the world.All of our products and services are designed to assist companies in makingcritical business decisions regarding their Internet strategies and initiatives.

 

Our primary products and services includeNetView, MegaPanel, SiteCensus, AdRelevance, @Plan and Homescan Online. We alsooffer custom and analytical services to help clients better utilize andleverage our products and services to meet their specific media and marketresearch goals and objectives. NetView, which is our original product, providesin-depth measurement of audience behavior for the World Wide Web and thedigital media universe, including proprietary channels, instant messaging,media players and other online applications. MegaPanel provides increasedbreadth and depth of Internet behavior and activity for the market researchindustry, including detailed e-commerce transaction information. SiteCensusoffers extensive Web analytical services based on a Web site’s actual trafficflows and visitor behavior. AdRelevance offers comprehensive and accurateinformation on online advertising expenditures, including where, when, how andhow much companies are advertising online. @Plan is a leading resource fordemographic, lifestyle and product preferences to guide advertisers, agencies,Web publishers and others in their online marketing and media planningstrategies. Homescan Online, which is a joint product with ACNielsen, combinesACNielsen’s offline consumer retail purchasing data with our in-depth Internetaudience measurement data. Our custom and analytical services offer customizedresearch and advisory services from experienced industry experts.

 

Our products and services are currently soldin the United States and in numerous countries throughout Europe, Asia Pacificand Latin America. In France, Japan and Brazil, we have partnered with leadinglocal market research and information services companies to market and sellsome of our products and services. We have a highly diversified and globalclient base, including large and small companies in the media, technology,advertising, financial services, consumer products, retail and travelindustries. As of December 31, 2005, we had 1,615 clients.

 

In 1998 and 1999, we formed strategicrelationships with Nielsen Media Research, the leading source of televisionaudience measurement and related services in the United States, and ACNielsen,a leading global provider of market research information and analysis. Webelieve that our strategic relationships with Nielsen Media Research andACNielsen, both of which are subsidiaries of VNU N.V., provide us with a uniqueopportunity to leverage their brands, expertise and industry relationships tofacilitate the rapid acceptance and deployment of our diverse portfolio ofproducts and services. VNU N.V., through its subsidiaries, owned approximately62% of our outstanding common stock as of February 28, 2006.

 

**PRODUCTS AND SERVICES**

 

Since our founding until the second quarterof 2002, we primarily focused on selling our NetView service. Commencing in thesecond quarter of 2002, as a result of acquisitions and internal productdevelopment, we began to offer additional products and services designed tomeet specific Internet media and market research needs. These products andservices allow us to offer companies much more detailed and complex solutionsand information, and to do so in a more timely manner. In addition, theincreased amount of data that we collect enables us to expand the specializedconsulting and analytical services that companies are increasingly seeking asInternet usage and commerce continue to grow around the world. We believe thatour comprehensive portfolio of products and services, which are all sold underthe 

 

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Nielsen//NetRatings brand, leaves us well positioned to become thestandard for measuring the size, profile, activity and behavior of Internetusers around the world.

 

***NetView***

 

Our NetView service, which includessyndicated and custom reports, provides detailed Internet audience informationcollected from our high-quality, representative panels of computer and Internetusers. We currently operate NetView panels in nine locations around the worldand track a 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 to calculate theaudience duplication to accurately report the true combined audience.

 

In order to obtain a representative sample ofthe total Internet user population, our NetView panels are constructed using aprocess called random digit dialing, or RDD, which involves recruiting panelmembers by calling randomly selected telephone numbers. RDD is the cornerstoneof the Nielsen methodology, which has been successfully established as thecurrency for television audience measurement. Eligible households, namely thosewith a PC and Internet access, are recruited to participate in the panel. Thosethat agree to participate are mailed a membership packet that includes trackingsoftware and installation instructions and are given a small incentive fortheir participation. Once installed on a panelist’s computer, our trackingsoftware requires virtually no panelist intervention, and software updates areautomatic. All panelist data is automatically encrypted prior to transmissionto help ensure the privacy of panelist data. In certain international markets,we expect to supplement our NetView panels with panelists recruited throughvarious online methods, including online surveys and sweepstakes offers, inorder to obtain an even deeper understanding of Internet audience behavior anduse.

 

In connection with our panel recruitmentprocess, each panelist is required to fill out a detailed questionnaire,providing background demographic information including age, gender, householdincome, geographic location, level of education, size of household and jobclassification. To assure the statistical quality of our NetView panels,enumeration studies are conducted to determine the total size and demographicmakeup of the Internet user population and are used as the basis for ensuringthat sample behaviors are representative of the total audience population. Inorder to accurately gauge the size and shape of the rapidly changing Internetuser universe, we conduct our independent enumeration studies on a regularbasis.

 

Our proprietary activity tracking and datacollection technology gathers comprehensive and detailed information regardingcomputer and Internet user behavior, including sites and pages visited,time spent on each site, advertising exposure and effectiveness and bandwidthusage data. In addition, the NetView service is designed to offer clients themost complete view of World Wide Web and digital media usage, includingtracking of Web traffic, AOL proprietary channels, instant messagingapplications, media players, wireless content systems, Web phones, connectedgames, weather applications and shopping assistants. Our technology collectsthe same data in the same way, regardless of whether the user is accessing theInternet via a PC, a Macintosh platform or other Java-enabled Internetaccess device.

 

NetView provides customers with a variety ofcomprehensive weekly and monthly reports on computer and Internet usagebehavior. Our reports can be modified by clients, enabling them to manipulatedata easily to meet their specific information requirements. Our easy-to-useinterface provides immediate access to various levels of detailed information,allows users to create and save their own reports and enables “on-the-fly”custom queries on selected information.

 

## ***MegaPanel***

## *** ***

Our MegaPanel service is designed to addressthe expanding need for accurate Internet market research data and intelligence.The core feature of our MegaPanel service is a very large panel of computer andInternet users, representing a broad cross-section of home, work anduniversity users. Because of the panel’s size and scope, our MegaPanel serviceallows us to provide increased breadth and depth of data, integration of onlineand offline datasets and more advanced custom reporting. Currently available inthe United States, the United Kingdom, Germany and France, MegaPanel deliversdetailed information that can be used to understand in-depth consumer attitudesand behavior. Combined with comprehensive demographic and trend data, MegaPaneldemonstrates how people react and respond to companies’ products, services,brands and promotions—both on and off the Internet. We believe that ourMegaPanel service complements our NetView service in assisting clients inintegrating the Internet into their global marketing strategies.

 

Panelists for our MegaPanel service arerecruited through a variety of methods, including online survey and sweepstakesoffers, as well as through partnerships with local market research providers.As with our NetView panels, our tracking software requires virtually nopanelist intervention, and software updates are automatic. The information wecollect,

 

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which is linked to demographic profiles of Internet households, is usedto produce comprehensive syndicated and custom reports regarding Internetbehavior and activity across the Internet. Our MegaPanel service is balancedwith our NetView panels to ensure that the MegaPanel is an accurate statisticalrepresentation of the Internet population.

 

Our MegaPanel service is able toprovide clients with important analyses relating to smaller Web sites which may notbe available in NetView or our other products and services. In addition, thesize of the MegaPanel allows us to offer survey capabilities to help clientsbetter understand consumer attitudes and behavior. By allowing clients toconnect directly with visitors to their own Web site, as well as those of theircompetitors, MegaPanel surveys provide a unique and efficient way forclients to benchmark performance using survey data and behavioral datacollected by our tracking software. By administering customized surveys,focusing, for example, on areas such as brand awareness, online-offlineconsumption and customer satisfaction, we can provide a robust understanding ofthe relationship between the online and offline consumer as well as providecritical competitive intelligence.

 

The MegaPanel service includes bothsyndicated and custom offerings. Our current offerings include the following:

 

•                  *MegaView Retail:*  Ourretail service provides clients with comprehensive insight into the retaile-commerce landscape. Clients can assess total traffic to top retail sites,sales conversion rates, number of purchases and average order sizes, as well ascompare the success of customer acquisition, conversion and loyalty 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 serviceallows companies to monitor average account balances, application completionfigures and bill-pay activity, as well as to benchmark client performanceversus the industry and/or key competitors.

 

•                  *MegaView Search:*  Oursearch product reports on behavior across various search categories, includinglocal, news and shopping. 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.

 

•                  *MegaView Travel:*  Ourtravel service provides in-depth insight into the online travel market. Clientscan assess the rate at which travelers are booking flights, rental cars, hotelsand vacation packages for the top online travel sites, offering companiesunique insight into their own performance versus the industry and/or keycompetitors.

 

•                  *MegaView Local:*  Our localmarket reporting provides in depth rankings of Web site performance at thelocal market level. A valuable tool for local publishers and nationalpublishers focusing on local marketing, the local market report provides sitetraffic rankings by Designated Market Area (DMA) as well as demographicprofiles and category rankings on a local market basis.

 

***SiteCensus***

 

In April 2003, we launchedour SiteCensus service, a census-based site measurement service designed toaddress the emerging business needs of media companies, Web publishers andother online companies looking for comprehensive data and research metricsabout their own Web sites or networks. In December 2003, we acquired RedSheriff, 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 overfifteen countries around the world.

 

Panel-based research products,such as our NetView service, have historically been the standard by whichdemographics, frequency and other measurements are used for the buying andselling of online media. SiteCensus is designed to complement panel-basedresearch by measuring every visitor and providing a complete census count ofpage views. For Web sites with smaller audience sizes, SiteCensus providesfocused and detailed research analysis previously unavailable with panel-basedresearch. For larger Web sites, SiteCensus supplements panel-based reportingwith different levels of site-centric analysis, offering clients furtherinsight into their Web audience.

 

The SiteCensus service isprovided through use of a page-tagging system. When encoded in any Web site page orcomponent of Web site page, the tag provides an accurate and direct count ofevery page view, visitor and click in real-time. Page-tagging allows aclient to track their entire online audience, including traffic from wirelessand hand-held devices, Internet appliances, shared home and office computersand university PCs, as well as public terminals such as libraries and

 

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Internet cafes. Data captured from the tagsare warehoused, classified and statistically analyzed. A variety ofcomprehensive reports and metrics are available to clients through a Web-basedinterface, which can be customized to meet a client’s specific onlineobjectives.

 

In order to provide a morein-depth view of the visitors to a Web site, SiteCensus allows for theintegration of detailed demographic data obtained through online surveys. TheSiteCensus survey engine allows us to randomly survey a visitor to a Web siteand incorporate their survey responses into demographic composition reports ofa Web site’s audience. Site panels are built by randomly selecting a sample ofvisitors to the client Web site, or groups of Web sites, for the purpose ofdelivering surveys. The survey engine enforces a strict, random recruitmentprocess to help ensure that the site panel is representative of the site’saudience.

 

Our SiteCensus service iscurrently comprised of 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 toassess site performance, usage trends, content and product placement, audiencecirculation, visitor loyalty, search engine performance and visitor behavior.The data is delivered via concisely constructed reporting modules so that eachimportant process can be researched independently 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 for a single company’s site or network of sites. Market Intelligenceenables advertisers and agencies to identify the most effective sites forreaching primary and secondary demographic targets, as well as the best groupsof sites in order to optimize reach and frequency. The service also allowscompanies to identify their own demographic weaknesses within a whole categoryor against an entire market.

 

•                  *AdIntelligence:*  Thisservice provides census-based advertising measurement, thereby allowing onlineadvertisers to measure their online marketing activities. AdIntelligence, whichmeasures all types of online advertisements, enables companies to identify thebest performing advertising campaigns and delivery locations throughout amarketing plan’s execution. AdIntelligence also enables advertisers to conducteffective post-campaign analysis, including the measurement of impressions,clicks, campaign unique visitors and frequency. The AdIntelligence technology may alsobe deployed across an enterprise advertising network to provide third-party addelivery verification that can be used to report back to advertisers*.*

 

***@Plan***

 

We offer Internet media planning products andservices in the United States through our @Plan service, which we acquired in May 2002.The @Plan service offers advertisers, advertising agencies, Web publishers ande-commerce marketers detailed demographics, lifestyle, brand and productpreferences, and media consumption information to help them plan and implementsuccessful online marketing and media strategies. @Plan’s tools include @PlanAdvertising and @Plan eCommerce.

 

@Plan Advertising is a comprehensiveadvertising decision support and planning system providing deep lifestyle,brand and product preferences, as well as demographic profile informationacross a large number of advertising-supported Web sites. Internet advertisersand advertising agencies can query the system on various targets, such asdemographic and/or buying behavior groups to better understand the mostefficient and effective ways to reach those groups through the Internet. Thesystem also allows Web publishers to position their sites effectively againstcompetitive sites and to efficiently drive advertising revenue by demonstratingthe value of the site audience to advertisers or marketing partners.

 

@Plan eCommerce builds on the capabilities of@Plan Advertising with features and data specifically designed for onlineretailers and consumer brand marketers. Online retailers and consumer brandmarketers utilize the system to understand and track their competitivestrengths and weaknesses overall and against key market segments. Onlineretailers can also use this information to develop more effective andcost-efficient customer acquisition and retention strategies by understandingwhich Web sites deliver the highest concentration of their target audience. Byproviding both online and offline survey data, the @Plan eCommerce system alsoallows online retailers and consumer brand marketers to help maximizemulti-channel sales efforts by profiling online, catalog and in-store audiencesand understanding where they overlap, thereby enhancing their advertisingstrategy in both traditional and online markets.

 

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***AdRelevance***

 

We offer advertising measurement products andservices around the world through our AdRelevance service, which we acquired inApril 2002. We recently launched AdRelevance in Australia, and currentlyoffer the service in fifteen markets outside the United States. We expect thatwe will continue to launch AdRelevance in additional international markets thatare experiencing growth in online advertising.

 

AdRelevance tracks competitive onlineadvertising and advertiser data for many broadly defined categories including,but not limited to, automotive, computer hardware, computer software,telecommunications, financial services, travel, retailing and Web media. TheAdRelevance technology systematically and continuously searches commercial Websites and captures detailed data about advertising banners, promotions and richmedia. AdRelevance’s intelligent agent technology sends out millions of probesa week to provide in-depth advertising tracking information. Once captured, thedata are warehoused, classified and statistically analyzed.

 

By using the AdRelevance technology, ourcustomers can query the AdRelevance database and generate Web-based reports ondemand. This enables customers to monitor competitors’ marketing activities,plan more effective online advertising campaigns and evaluate campaigns inreal-time. Customers can gain access to up-to-date intelligence about theircompetitors’ online marketing communications programs, enabling them to quicklyand easily compare and report information by a wide range of criteria includingadvertiser, product, message, type, industry, technology and creative content.

 

***Homescan Online***

 

In November 2003, wejointly announced with ACNielsen the launch of Homescan Online, a productdesigned to improve the effectiveness of online marketing for the consumerpackaged goods (CPG) industry and Web publishers. ACNielsen’s Homescan consumerpanel records the offline purchasing behavior of thousands of panelists usingACNielsen’s proprietary in-home UPC code scanners. Homescan Online combines theoffline and online data from thousands of members of ACNielsen’s Homescanconsumer panel who have also agreed to allow us to track their Internetactivity and behavior. As a result, Homescan Online integrates consumer retailpurchasing of up to 21,000 CPG brands and online visitors to approximately1,700 Web sites, enabling CPG marketers to better understand where theirconsumers are going online and what effect their online marketing is having onoffline retail sales. The service also enables Web publishers to moreeffectively market themselves to the CPG industry by helping CPG marketersbetter target Web site audiences 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, advertising agencies and Webpublishers can develop the analyses necessary to compare online advertisingreach with delivery of other media, map advertising campaigns for specifiedtarget markets and track how effectively advertising budgets are being managed.

 

***Custom and Analytical Services***

 

As we have expanded our productofferings to more completely address the media and market research needs of ourcustomers, clients have increasingly relied on us to provide sophisticatedcustom research and analytical services. These custom research and analyticsservices are designed to help clients better utilize and leverage our serviceswith their specific research goals and objectives. While all of our syndicatedservices allow for custom applications, our investments in MegaPanel,SiteCensus and our survey capabilities have allowed for a new wave of customopportunities in the past year. Examples of the types of custom research andanalytics projects that we have conducted in recent months include thefollowing:

 

•              *Competitive Dashboards:*A leading multi-channel retailercontracted with us to integrate data from NetView, MegaPanel, surveys andcustom analysis to create a quarterly competitive dashboard that compares theirown customer satisfaction results with ten leading competitors. The informationis used to inform the strategic direction of the retailer’s onlinebusiness, and is relied on by the company’s executive management team.

 

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•              *Online Advertising Media Mix Analysis: *In conjunction with a leading online publisher and VNU, wegenerated cutting edge approaches to determining optimal levels of online mediaspend for leading CPG ad campaigns. Information from our MegaPanel andSiteCensus services were incorporated into sophisticated consumer market mixmodels, allowing for the online medium to be assessed side-by-side withtraditional media choices.

 

•              *Behavioral Driver Analysis*: Using MegaPanel and surveycapabilities, we worked with a large multimedia publisher to determine whatuser behaviors were the key drivers of engagement for their site. Results ofthis research had a direct impact on the publisher’s online content decisionsand web site architecture.

 

**STRATEGIC RELATIONSHIP WITH VNU**

 

VNU N.V. is a global leader inmarket research, providing measurement and analysis of marketplace dynamics,consumer behavior and audience measurement. We believe that our strategicrelationship with VNU and its subsidiaries, particularly Nielsen Media Researchand ACNielsen, 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, NielsenMedia Research’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 Canada usingour technology with Nielsen Media Research’s proprietary panel methodology. In March 1999,we launched our NetView service, which constituted an Internet audience panelproduct based on the Nielsen Media Research audience sampling methodology.

 

Under our agreements withNielsen Media Research, Nielsen Media Research provides for the development andmaintenance of panels in the United States that generate the data for ourNetView service. We are responsible for the management, support and ongoing developmentof the data collection and reporting system. We pay Nielsen Media Researchongoing fees for the costs of maintaining the NetView panels and costsassociated with the expansion of such panels. Nielsen Media Research alsoprovides us with certain research services in connection with our @Planservice, including telephone recruitment of survey respondents and theadministration of online surveys. In the first quarter of 2004, we completedthe re-location of our main data center facilities in San Jose, California toNielsen Media Research’s technology center in Oldsmar, Florida, where NielsenMedia Research provides us with certain technology-hosting services to supportour mission critical computing platforms, including server, network, storageand security management.

 

ACNielsen, which was foundedover 75 years ago, is a global leader in providing business information,analysis and insights to CPG companies, their brokers and retail organizations.ACNielsen also provides television audience measurement services outside of theUnited States to customers in over 100 countries. In September 1999, weestablished ACNielsen eRatings.com, a joint venture with ACNielsen, to developand maintain audience measurement panels and to market our products andservices in international markets. From the formation of the joint ventureuntil May 2002, we had a 19.9% voting interest in the venture, andACNielsen had an 80.1% voting interest in the venture. In May 2002, weacquired all of ACNielsen eRatings.com and entered into a services agreementwith ACNielsen pursuant to which ACNielsen provides us with certain back-officeservices for a period of up to five years. We are currently in the process oftransitioning these services out of ACNielsen and expect to complete the transitionby the end of 2006.

 

On March 8,2006, VNU announced that it had reached an agreement with a consortium ofprivate equity firms on a public offer for VNU’s outstanding shares.  VNU also announced that the closing of thepublic offer is conditioned upon 95% of VNU shareholders in each classtendering their shares.  Assuming thistransaction is completed, it is possible that the new owners of VNU will adopta new strategy for our company or make different decisions regarding ourdirection and policies.  For example, wecannot assure you, among other things, that VNU will continue to (i) own amajority stake in our company, (ii) provide various services to us and/or (iii)offer us the opportunity to develop joint products with other VNU entities,particularly Nielsen Media Research and ACNielsen. Likewise, it is alsopossible that the new owners of VNU will make different decisions with respectto our product investments, international expansion, use of our cash and otheroperating decisions.

 

**SALES AND MARKETING**

 

As of December 31, 2005,we had 1,615 clients. Our global client base is a diverse group of large andsmall companies in the media, technology, advertising, financial services,consumer products, retail and travel industries. The users of our products andservices at our client companies hold diverse positions, demonstrating theimportance of online media and market research to a company’s overall strategyand development. In addition to marketing and business development executives,our users include chief executive officers and presidents, and operations,strategic planning and information technology executives. No client accountedfor more than 10% of our revenues in 2005.

 

We sell our products andservices in the United States through a direct sales force. Our domestic salesrepresentatives are located at our offices in New York, New York, Milpitas,California, San Francisco, California and Seattle, Washington, and we alsomaintain local representatives in various locations throughout the UnitedStates. Internationally, we

 

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sell our products and services through adirect sales force, as well as through our subsidiary and joint venturecompanies in their respective markets. Our sales representatives receive a basesalary and are eligible for commissions based on sales goals.

 

Our primary marketingobjectives are to cross-market new products and services to our global clientsand to leverage and build upon Nielsen//NetRatings’ brand awareness throughoutour target audiences. To achieve these goals, we engage in a number ofmarketing activities, including direct e-mail campaigns, conferencepresentations, industry tradeshow participation, involvement with industryorganizations such as the Interactive Advertising Bureau, Online PublishersAssociation**,******Shop.org, Web Analytics Association,****DirectMarketing Association and Advertising Research Foundation, as well asaggressive public relations. We maintain standing arrangements for the use ofour data with key business and trade press including The Associated Press, The Wall Street Journal, CNN, BusinessWeek, USAToday, San Jose Mercury News, Hollywood Reporter, Chicago Tribune, Sports BusinessJournal, American Banker, InternetRetailer, Women’s Wear Daily and numerous other media outlets. Weprovide the media with timely insights regarding current events and identifyemerging Internet trends, generating valuable press coverage. Our analysts areregularly featured on television and radio broadcasts, including segments onCNBC, CNN and NPR.

 

**INTELLECTUAL PROPERTY**

 

We regard the protection of ourproprietary technology and information as important to our future success andability to compete effectively in our markets. We rely on a combination ofpatent, copyright, trademark and trade secret laws, as well as confidentialityagreements and licensing arrangements, to establish and protect ourintellectual property rights. The steps we have taken or will take in thefuture to establish and protect our intellectual property rights may not,however, be sufficient to protect our technology and information frominfringement or misappropriation or to deter independent development of similaror superior technologies by others. In addition, the laws of some foreign countriesmay protect our proprietary rights to a greater or lesser extent as do thelaws of the United States.

 

We seek to obtain the issuanceof patents and the registration of our trademarks and service marks in theUnited States and in selected other countries. We currently own six issuedpatents in the United States with regard to our computer use tracking andmonitoring technology (U.S. Patent No. 5,675,510; U.S. Patent No. 6,115,680;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. 6,763,386). Patents for the technology covered bythese six patents have also been issued in various foreign countries, includingJapan, Canada, Australia, Israel, New Zealand, South Korea and Mexico. We alsohave other patents and pending patent applications which relate to our proprietarytechnology, including pending patent applications for our AdRelevancetechnology. In addition, we own an undivided fifty percent ownership interestin U.S. Patent No. 6,108,637, which relates to the monitoring of computeruses, and the patents for this technology which have been issued in many otherjurisdictions.

 

In the first half of 2005, welaunched a program to enforce our intellectual property rights against variouscompanies that compete against us in the Internet technology fields. As part ofthis program, we initiated patent infringement lawsuits in 2005 and 2006against six companies (Omniture, Inc., Coremetrics, Inc.,SageMetrics, Corp., Sane Solutions, LLC, Visual Sciences, LLC and WebSideStory, Inc.)and also entered into licensing discussions with a few other companies. Ourlawsuit against Visual Sciences was settled in October 2005, and ourlawsuits against Omniture and SageMetrics were settled in 2006. Under each ofthese settlements, we have licensed certain of our patents in exchange forlicense or royalty fees payable to us. We cannot be sure that we will prevailin any of our remaining litigations, and these lawsuits could result in afinding that our patents are invalid and divert resources from the operation ofour business.

 

As part of our patentenforcement program, we have also held discussions with other companies thathave expressed an interest in signing a patent licensing arrangement with us. Weexpect to expand our patent enforcement program in 2006.

 

Others may claim that wehave misappropriated a trade secret or infringed a patent, copyright, trademarkor other proprietary right belonging to them with respect to past, current orfuture technologies. In February 2006, WebSideStory filed a patentinfringement lawsuit against us in the United States District Court for theSouthern District of California. While we believe this lawsuit is withoutmerit, defending patent infringement or other intellectual property cases,whether meritorious or not, could be time-consuming, result in additionalexpense, distract management from other tasks of operating the business and may resultin the loss of significant rights or require us to enter into royalty orlicensing agreements. Royalty or licensing agreements might not be available onterms we find acceptable or at all. As a result, any such claim could have amaterial adverse effect upon our business, results of operations and financialcondition.

 

**TECHNOLOGY AND OPERATIONS**

 

Clients can access all of ourprimary products and services via the Internet by using passwords specificallyassigned to each client. Our services are available 24 hours a day and ourproprietary data is updated regularly to provide clients with

 

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access to the most recent data.

 

In connection with our NetViewand MegaPanel services, our panel-based data collection, retrieval andprocessing systems and software have been designed utilizing well-knownindustry standards for hardware and software data architecture andinfrastructure. The architecture adheres to numerous standard-programminglanguages, including hypertext mark-up language, or HTML, Java and C++, andnetwork protocols, including hypertext transfer protocol or HTTP. In addition,we believe that our system architecture is flexible and powerful enough toallow for continued growth in our portfolio of 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 deliver the information back to ourhigh capacity measurement collection network consisting of nine fully redundantglobal data centers. The SiteCensus measurement network currently captures inexcess of 350 gigabytes worth of new measurement information from over one billiontransactions on a daily basis. In addition, the SiteCensus technology supportsa variety of different software implementations of its measurement techniques,including pure Java, Java with CGI and CGI only.

 

Our hardware systems are hostedat three professionally managed, off-site computer centers in San Jose,California, Oldsmar, Florida and Paris, France. For our SiteCensus service, ourprimary research data center is located in Melbourne, Australia, along with tenother data 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 primarycompetitive factors determining success in our markets include:

 

•                  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.

 

We believe that we compete favorably withrespect to each of these factors.

 

We face competition in the United States andabroad for each of our products and services. We face direct competition fromcompanies, such as comScore Networks, that provide panel-based Internetmeasurement services. We also directly compete with numerous providers ofsite-centric Web analytics solutions, including CoreMetrics, Omniture,WebTrends and WebSideStory. We compete less directly with the providers ofsyndicated and custom research on Internet behavior and commerce. Finally, we may faceincreased competition from individual Web sites that develop an independentmethod of measuring their own audience and from other companies that developnew or alternative audience measurement technologies.

 

We expect competition to intensify because ofthe business opportunities presented by the growth of Internet usage andInternet commerce around the world. Competition may also intensify as aresult of industry consolidation, because of technological advancements in theway to measure Internet behavior and activity or because some of ourcompetitors may be able to provide additional or complementary services.In addition, some of our current or future competitors may have longeroperating histories, larger customer bases and/or greater marketing resourcesthan we have. Increased competition may result in reduced operatingmargins, loss of market share and diminished value in our services, as well asdifferent pricing, service or marketing decisions.

 

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**EMPLOYEES**

 

As of December 31, 2005, we had 396full-time employees. Our employees in the United States are not covered by acollective bargaining agreement. Outside of the United States, we are subjectto extensive regulation with respect to our employees in various jurisdictions.We have never experienced an employment-related work stoppage and considerour employee relations to be good.

 

**AVAILABLE INFORMATION**

 

We make available on our website(http://www.netratings.com) under “About Us”_”Investor Relations”_”SEC Filings”,free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to those reports as soon asreasonably practicable after we electronically file or furnish such materialwith the Securities and Exchange Commission.

 

**ITEM 1A. RISK FACTORS**

 

An investment in our company involves a high degree of risk. You shouldcarefully consider the risks below, together with the other informationcontained in this report, before you make an investment decision with respectto our company. The risks described below are not the only ones facing ourcompany. Additional risks not presently known to us or that we deem immaterial may alsoimpair our business operations. Any of the following risks could (i) materiallyadversely affect 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 OURINCEPTION AND WE MAY BE UNABLE TO ACHIEVE PROFITABILITY**

 

Weincurred net losses of $25.1 million for the year ended December 31,2003, $17.4 million for the year ended December 31, 2004 and $8.4 millionfor the year ended December 31, 2005. As of December 31, 2005, ouraccumulated deficit was $145.3 million. We intend to continue to incursignificant expenditures as our company grows and as we expand our portfolio ofproducts and services. As a result, we will need to generate significantadditional revenue to achieve and maintain profitability. We may not beable to achieve significant revenue growth in the future. Our operating resultsfor future periods are subject to numerous uncertainties and we may notachieve sufficient revenue to become profitable.

 

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

 

We were incorporated in 1997, did not startgenerating revenue until 1998 and introduced our NetView service in 1999. Manyof our other products and services were first offered by us during the last fewyears. Accordingly, we are still in the early stages of development and haveonly a limited operating history upon which to evaluate our business. Oneshould evaluate our likelihood of financial and operational success in light ofthe risks, uncertainties, expenses, delays and difficulties associated with anearly-stage business in an evolving market, some of which may be beyondour control, including:

 

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

 

•                        the extent of the global growth in the Internet media research andmarket research markets;

 

•                        the potential inability to successfully manage any significant growthwe may achieve in the future;

 

•                        the potential inabilityto successfully integrate any acquired business, technology or service; and

 

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

 

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**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 ofnew products and services that we believe will generate interest in themarketplace and result in increased revenues in the coming years. Our financialresults during 2005 and beyond will depend in part on the success of thesenew product initiatives and our ability to generate meaningful revenues fromthem. If we fail in our efforts to market and sell these new products andservices, our financial results will be negatively affected. Furthermore, webelieve that our new products and services fill gaps in our product portfolioand that the introduction of new products will not result in decreased sales ofour existing products. If we are mistaken in our view of the marketplace, andthe introduction of these new products results in decreased sales of ourexisting portfolio, then our financial results will also be negativelyaffected.

 

**OUR QUARTERLY REVENUES MAY FLUCTUATE SIGNIFICANTLY AND BECAUSE OUREXPENSE LEVELS ARE BASED IN LARGE PART ON OUR ESTIMATES OF FUTUREREVENUES, AN UNEXPECTED SHORTFALL IN REVENUE WOULD SIGNIFICANTLY HARM OUROPERATING RESULTS**

 

Due to the evolving nature of our business and themarkets in which we compete, our future revenue is difficult to forecast.Further, our expense levels are based largely on our investment plans andestimates of future revenue. We may be unable to adjust our spending tocompensate for an unexpected shortfall in revenue. Accordingly, any significantshortfall in revenue relative to our planned expenditures in a particularquarter would harm our results of operations and could lead our stock price tofall sharply, particularly following quarters in which our operating resultsfail to meet expectations.

 

Factors that may cause fluctuations in ourrevenues or operating results on a quarterly basis include the following, someof which are beyond our 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-HIGHRENEWAL RATES TO BECOME PROFITABLE**

 

We derive a large percentage of our revenue fromannual subscriptions for our services. As our business becomes moreestablished, we expect subscription renewals and sales of additional productsand services to existing customers to account for an increasing proportion ofour revenue. Any unexpectedly low renewal rates or a reduction in the number ofproducts and services that we are able to sell to existing customers would harmour operating results and could prevent us from becoming profitable. To date,renewals have been an essential element of our revenue growth. We cannot assureyou that we will be able to achieve or sustain high renewal rates, particularlyduring an economic downturn. Additionally, because many Internet-relatedbusinesses are still in the early stages of development, consolidations in ourcustomer base or the failure of a significant number of our customers’businesses could cause a decline in renewal rates for our products andservices.

 

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

 

Our future success will depend on the continuedincrease in the use of the Internet as an advertising medium, the proliferationof e-commerce and the use of the Internet as part of multi-channelmarketing strategies. These markets and marketing techniques are fairly new andrapidly evolving, and it is not certain that the current growth trends willcontinue throughout the world.

 

The adoption of Internet advertising, particularlyby entities that have historically relied on traditional media for advertising,requires the acceptance of a new way of conducting business. These companies may findInternet advertising to be less effective than traditional advertising forpromoting their products and services. They may also be unwilling to paypremium rates for advertising that is targeted at specific types of users basedon demographic profiles or recent Internet behavior. The Internet advertisingand e-commerce markets may also be adversely affected by privacy issuessurrounding the targeting of this type of advertising or the use of personalinformation. Providers of goods and services online continue to work toward theestablishment of commerce models that are cost effective and unique, andeffectively deal with issues such as channel conflict and infrastructure costs.Growth in the use of the Internet for e-commerce may not continue at arapid rate, or the Internet may not be adopted as a medium of commerce bya broad base of customers worldwide. Because of the foregoing factors, amongothers, the market for Internet advertising and e-commerce may notcontinue to grow at significant rates. If these markets fail to develop ordevelop 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 Internetaudience measurement and analysis is rapidly evolving and highly competitive.We compete with a number of companies in the market for Internet audiencemeasurement services and analytical services, and we expect competition in thismarket 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 may beable 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 investmentsin complementary businesses, technologies, services or products if appropriateopportunities arise. Negotiating such acquisitions can be difficult, timeconsuming and expensive and our ability

 

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toclose such transactions may often be subject to approvals, such asgovernmental regulation, which are beyond our control. Consequently, we canmake no assurances that such acquisitions, once undertaken and announced, willclose.

 

Further, the process of integrating any acquiredbusiness, technology, service or product into our business may result inunforeseen operating difficulties and expenditures. Integration of an acquiredcompany may also consume significant management time and attention thatwould otherwise be available for the ongoing development of our business.Moreover, the anticipated benefits of any acquisition may not be realized.We may be unable to identify, negotiate or finance future acquisitions orinvestments successfully, or to integrate successfully any acquisitions withour current business. Future acquisitions could result in potentially dilutiveissuances of equity securities or the incurrence of debt, contingentliabilities or amortization expenses related to intangible assets, any of whichcould harm our business.

 

**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 subsidiaries Nielsen Media Research andACNielsen, has a majority stock ownership position in NetRatings, which enablesit to control the direction and policies of NetRatings, including the electionof our board of directors, amendment of our certificate of incorporation, anddecisions regarding mergers, acquisitions, consolidations and the sale of allor substantially all of our assets. This control may have the effect ofdiscouraging certain types of transactions involving a change of control.

 

Inaddition, VNU can control or influence the terms of our important commercialtransactions, including our strategic relationships with Nielsen Media Researchand ACNielsen. VNU’s representatives on our board are expected to recusethemselves from deliberations in which they have a conflict of interest.However, these directors may take actions that favor VNU’s interests overthe interests of other stockholders, as a result, for instance, of conflicts ofinterest that are not apparent at the time of such actions.

 

On March 8,2006, VNU announced that it had reached an agreement with a consortium ofprivate equity firms on a public offer for VNU’s outstanding shares.  Assuming this transaction is completed, it ispossible that the new owners of VNU will adopt a new strategy for our companyor make different decisions regarding our direction and policies.  For example, we cannot assure you, amongother things, that VNU will continue to (i) own a majority stake in ourcompany, (ii) provide various services to us and/or (iii) offer us theopportunity to develop joint products with other VNU entities, particularlyNielsen Media Research and ACNielsen. Likewise, it is also possible that thenew owners of VNU will make different decisions with respect to our productinvestments, international expansion, use of our cash and other operatingdecisions.

 

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

 

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. Inaddition, ACNielsen has granted us a license to use ACNielsen’s samplingmethodology and the “Nielsen” name outside North America in the Internetaudience measurement business. Accordingly, for a significant period of time,we expect that our business will be substantially dependent upon thesearrangements for the continued maintenance of our international Internetaudience measurement panels and for other international business operations.Any failure on the part of Nielsen Media Research to devote adequateresources to the development or maintenance of such panels, or any failure onthe part of Nielsen Media Research, ACNielsen or our other businesspartners to maintain the overall quality of these methodologies or to developalternative sampling methodologies, will harm our business. In addition,Nielsen Media Research may terminate its obligations with respect toInternet audience measurement panels in the event it no longer holds at least5% of our outstanding stock on a fully-diluted basis.

 

As notedabove, in the event that VNU is sold to a consortium of private equity firms,it is possible that the new owners of VNU will make decisions that impact ourability to rely on VNU entities for some or all of the services that we currentlyobtain from them.

 

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

 

Thestrength of the Nielsen//NetRatings brand is also closely dependent on thereputations of Nielsen Media Research, ACNielsen and other business partnersand the strength of their brands. Therefore, any negative publicity generatedby Nielsen Media Research, ACNielsen or our other business partners, whether ornot directly related to any Nielsen//NetRatings branded products or services,as well as any erosion of the strength of any of their brands, will adverselyaffect our own brand identity.

 

**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 Internetuse will involve alternative Internet access devices such as Web-enabledphones, television set-top boxes and Internet enabled gaming consoles and thatthere will eventually be a convergence of Internet content and televisionprogramming. Accordingly, in order to continue to provide information about

 

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audiencebehavior throughout all major segments of the Internet, we will be required todevelop new products and services that address these evolving technologies. We may beunsuccessful 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 marketpenetration or price stability necessary for profitability. Finally, we may notbe successful 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.

 

**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 consistsof providing television audience measurement services based on audience panelsthat it develops independent of its strategic relationship with us. ACNielsenalso derives 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 bythe Nielsen//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.

 

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

 

Webelieve that the quality, size and scope of our panels are critical to thesuccess of our business. To date, the expense of recruiting and operating ouraudience measurement panels has made up a very significant portion of the cost ofrevenue reported on our financial statements and, therefore, any increase inthis expense will likely result in a decrease in our gross margin. The costsassociated with maintaining the quality, size and scope are dependent on manyfactors some of which are beyond our control, including the cooperation rate ofpotential panel members and turnover among existing panel members, andaccordingly we cannot necessarily control these costs to match increases ordecreases in revenue. To the extent that such additional expenses are notaccompanied by increased revenue, our results of operations will be harmed.Recruiting panelists for our MegaPanel service in Europe and the United Stateshas also required significant investment and there can be no assurance that wewill be able to achieve or maintain panels of sufficient size to meet clientdemand. We have limited experience in developing Internet audience measurementpanels, and we could experience lower cooperation rates or higher turnoverrates in the future.

 

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

 

Asa result of our acquisitions in the past few years, we offer our products andservices in numerous countries around the world. Our international markets willrequire significant management attention and resources. In addition, there canbe no assurance of the continued growth of Internet usage and electroniccommerce in international markets. The international markets for audiencemeasurement services have historically been localized and difficult topenetrate, and the governmental authorities in each country have differentviews regarding the regulatory oversight of the Internet. For example, theChinese government has recently taken steps to restrict the content availableto Web users in China, and this has caused us to forecast slower growth in ourbusiness there.

 

Thesuccess of our international operations will depend 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; and

 

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

 

Even if we are successful in managing ourinternational operations, we will be subject to a number of risks inherent inengaging in international operations, including:

 

•                  changesin regulatory requirements;

 

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•                  deficienciesin the telecommunications infrastructure in some countries;

 

•                  reducedprotection for intellectual property rights in some countries;

 

•                  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 TOOUR CUSTOMERS**

 

If we furnish inaccurate information to ourcustomers, our brand may be harmed. The information that we collect andinformation in our databases may contain inaccuracies that our customers may notaccept. Any dissatisfaction by our customers with our measurement or collectionmethodologies or databases could have an adverse effect on our ability toattract new customers and retain existing customers and could ultimately harmour brand. Our customer contracts generally provide that each customer mustindemnify us for any damages arising from the misuse of data, reports oranalyses by the customer. However, we cannot be certain that our contractprovisions provide sufficient protection and, in any event, enforcing theseprotections could be very costly. Any liability that we incur or any harm toour brand that we suffer because of irregularities or inaccuracies in the datawe 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**

 

Publicconcern has increased recently regarding certain kinds of downloadable softwareknown as “spyware” and “adware.”  Thesetypes of programs are often installed on a computer without the consent of theuser or without the user’s full understanding while navigating the Internet. Concernover spyware and adware might cause users to be less inclined to downloadlegitimate 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) that claim to identify and remove spywareand 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. We actively seek to persuade the authors ofthese anti-spyware programs that our software should not be included on theirlists of spyware applications or potential spyware applications. However, tothe extent that we are not successful, or to the extent that new anti-spywareprograms classify our software as spyware or as a potential spywareapplication, our goodwill might be harmed and users of these programs mightuninstall our software. Loss of goodwill or a decrease in the size of ourpanels could increase the cost of recruiting panelists and materially adverselyaffect our ability to provide our products and services to our clients, whichin turn could cause our expected revenues to decline.

 

**TECHNOLOGICAL CHANGES MAY RESULT IN WIDESPREAD BLOCKING OR ERASINGOF COOKIES, WHICH COULD REDUCE THE AMOUNT AND VALUE OF THE INFORMATION WECOLLECT AND ADVERSELY AFFECT OUR ABILITY TO PROVIDE OUR PRODUCTS AND SERVICESTO CLIENTS**

 

Our SiteCensus technology currently uses “cookies” and “action tags” to track the behavior of Internet users. Cookiesare small files of information placed on an Internet user’s computer to collectinformation about the user’s visits to a Web site. An action tag, also known as“web beacon,” “pixel tag,” and “clear gif,” generally consists of a small string ofinvisible code that represents a graphic image request on a Web page thatcompanies place on their Web sites to allow them to analyze the general usagepatterns 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 blockour cookies by default or prompt users to delete or block our cookies. If alarge percentage of users delete or block our cookies, this could, among otherthings, reduce the amount and value of the information we collect, cause us tospend substantial money and time to change our technology, and adversely affectour ability to provide our SiteCensus service to our clients.

 

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Changes in Web browsers may also encourageusers to block our cookies or impair our ability to use cookies and action tagsfor data collection purposes. Technologies like the Platform for PrivacyPreferences (P3P) may also limit the collection of information fromcookies and action tags. If these or other technological changes areimplemented and we are unable to adapt our technology and practices adequatelyin response to these changes, then the value of our SiteCensus service will besubstantially 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, judicialand regulatory limitations on our ability to collect, maintain and useinformation about Internet users both in the United States and abroad.Restrictions could be placed upon the collection, management, aggregation anduse of information, which could require significant engineering time andresources. Several states have enacted legislation designed to protect Internetusers’ privacy by prohibiting certain kinds of downloadable software defined as“spyware.” Similar legislation has been introduced in other states and the U.S.Congress, including the Safeguard Against Privacy Invasions Act in the House ofRepresentatives and the SPYBLOCK Act in the Senate. In addition, the EuropeanUnion has adopted a directive requiring the disclosure of the use of cookiesand instructions on their removal. It is possible that this legislation orfuture legislation intended to regulate spyware could affect our ability tocollect information, which could prevent us from operating or distributing someof our products and services or which could require us to change our businesspractices. In addition, failure to comply with the law and regulatoryrequirements may result in, among other things, administrative enforcementactions and fines, class action lawsuits and civil and criminal liability.The occurrence of one or more of these events could materially harm ourbusiness, results of operation and financial condition.

 

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

 

Our future success depends in large part on ourability to attract, retain and motivate highly skilled employees in manylocations around the world. Although we provide compensation packages thatinclude competitive salaries, equity compensation, bonus incentives and otheremployee benefits, we may be unable to retain our key employees or toattract, assimilate and retain other highly qualified employees in the future.If we are unable to attract or retain key employees, our business would suffer.

 

**WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTYRIGHTS**

 

We regard our intellectual property as critical toour success. We rely on patent, trademark, copyright and trade secret laws toprotect our proprietary rights, and we seek to obtain the issuances of patentsfor our core technology and the registration of our material trademarks andservice marks in the United States and in selected other countries. Our patentapplications or trademark registrations may not be approved or, even ifapproved, could be challenged by others or invalidated through administrativeprocess or litigation.

 

In the first half of 2005, wedecided to launch a program to enforce our intellectual property rights againstvarious companies that compete against us in the Internet technology fields. Aspart of this program, we initiated patent infringement lawsuits in 2005against five companies (Omniture, Inc., Coremetrics, Inc.,SageMetrics, Corp., Sane Solutions, LLC and Visual Sciences, LLC) and alsoentered into licensing discussions with a few other companies. In February 2006,we initiated a patent infringement lawsuit against WebSideStory, Inc. Ourlawsuit against Visual Sciences was settled in 2005, and our lawsuits againstOmniture and SageMetrics were settled in 2006. We cannot be sure that we willprevail in any of the remaining litigations, or any new lawsuits that weinitiate, and any such lawsuits could result in a finding that our patents areinvalid and divert resources from the operation of our business.

 

We also cannot assure you that any othersteps we take will be sufficient to protect our intellectual property frominfringement or misappropriation. Moreover, effective intellectual propertyprotections may not be available in every country in which we offer ourproducts and services to the extent these protections are available in theUnited States.

 

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**WE MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT WOULDBE COSTLY TO RESOLVE OR MAY REQUIRE US TO MAKE CHANGES TO OUR TECHNOLOGYOR BUSINESS**

 

Third parties may, from time to time, assert claimsthat we have infringed upon their proprietary rights or that our owntrademarks, patents or other intellectual property rights are invalid. InFebruary 2006, WebSideStory, Inc. filed a patent infringement lawsuitagainst us in the United States District Court for the Southern District ofCalifornia. While we believe this lawsuit is without merit, we cannot assureyou that we will prevail in this litigation.

 

Any claims of infringement and any resultinglitigation, including the WebSideStory litigation, could subject us tosignificant liability for damages, restrict us from using our technology orfrom operating our business generally or require us to make changes to ourtechnology. Any claims of this type, with or without merit, could betime-consuming to defend, result in additional expense and divert managementattention and resources. In addition, such claims could result in limitationson our ability to use the intellectual property subject to these claims unlesswe are able to enter into royalty, licensing or other similar arrangements withthe third parties asserting these claims. Such agreements, if required, may beunavailable on terms acceptable to us, or at all. If we are unable to enterinto these types of agreements, we may be required to either ceaseoffering the subject product or change our technology underlying the applicableproduct. If a successful claim of infringement is brought against us and wefail 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.

 

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

 

Our success depends on the efficient anduninterrupted operation of our computer and communications systems. A failureof our network or data gathering procedures could impede the processing ofdata, the provision of our services and day-to-day management of our businessand could result in the corruption or loss of data.

 

The servers on which we collect and process ourpanel members’ data reside in Nielsen Media Research’s facilities in Oldsmar,Florida and at IBM Global Service facilities in Paris, France. We currentlyhave a back-up data collection facility to provide redundant network capacityin the event of a system failure. However, this back-up facility only has thecapacity to collect our Internet audience data, not process it. Accordingly,our ability to report Internet audience data in real time is dependent upon theefficient and uninterrupted operation of Nielsen Media Research’s and IBMGlobal Service’s computer and communications hardware and software systems.Despite any precautions we may take, damage from fire, floods, hurricanes,power loss, telecommunications failures, computer viruses, break-ins andsimilar events at these data centers could result in interruptions in the flowof data to our servers. In addition, any failure by these data centers toprovide our required data communications capacity could result in interruptionsin our service. In the event that any of these data centers should discontinueits services to us, we would be required to transfer our data collectionoperations to an alternative provider of server hosting services. Such atransfer could be costly and result in significant delays in our ability todeliver our products and services to our customers, which could damage ourreputation and harm our business.

 

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We intend to develop other back-up systems outsideof our primary facilities. 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 may occur.

 

**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 isincluded in the data that our software captures from a panelist’s Internet use.Our panel data are released to our clients only on an anonymous basis. However,if a person were to penetrate our network security or otherwise misappropriatesensitive data about our panel members, our reputation could be harmed or wecould be subject to claims or litigation arising from damages suffered by panelmembers as a result of such misappropriation. Under California SB 1386,companies that maintain data on California residents are required to inform individualsof any security breaches that result in their personal information being stolen.In the event that any personal information about our panelists residing inCalifornia was misappropriated, we could incur significant costs in complyingwith the disclosure requirements of California SB 1386. In addition, any suchdisclosure could harm our reputation and result in a higher rate of panelattrition.

 

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

 

The applicability to the Internet of existing lawsgoverning issues such as property ownership, libel and personal privacy isuncertain. In addition, governmental authorities in various countries may seekto further regulate the Internet with respect to issues such as user privacy,pornography, acceptable content, advertising, e-commerce, taxation and thepricing, characteristics and quality of products and services. For example,China has recently taken steps to require certain companies to restrict theirsearch engine results and other content available to Web users in China. Therefore,any new legislation regulating the Internet could inhibit the growth of theInternet and decrease the acceptance of the Internet as a communications andcommercial medium, which might harm our business. Finally, the global nature ofthe Internet could subject us to the laws of a foreign jurisdiction in anunpredictable manner.

 

**LEGISLATIVE ACTIONS REGULATORY REQUIREMENTS APPLICABLE TO PUBLICREGISTRANTS MAY CAUSE OUR GENERAL AND ADMINISTRATIVE EXPENSES TO INCREASEAND MAY IMPACT OUR RESULTS OF OPERATIONS**

 

In order to comply with the Sarbanes-Oxley Act of2002, as well as changes to Nasdaq listing standards and rules adopted bythe Securities and Exchange Commission, we were required to enhance ourinternal controls and hire additional finance personnel and to retainadditional outside legal, accounting and advisory services, all of which havecaused our general and administrative costs to increase. For example, we havehired outside consultants to assist us with our compliance with Section 404of the Sarbanes-Oxley Act of 2002, and this has resulted in additional generaland administrative expenses during 2004 and 2005. Recent changes in theaccounting rules, in particular the rules relating to accounting foremployee stock options, have increased the expenses that we report undergenerally accepted accounting principles and adversely affect our operatingresults. Additional changes in the accounting rules could cause ourfinancial results to be negatively impacted.

 

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

 

There are no contractual restrictions on the abilityof VNU, through its Nielsen Media Research or ACNielsen subsidiaries, to sellshares of our common stock, although sales in the public market will be subjectto the volume limitations of SEC Rule 144. Pursuant to these volumelimitations, a controlling stockholder may sell shares under Rule 144only if the shares to be sold, together with the shares sold during the pastthree months, do not exceed the greater of 1% of the issuer’s outstandingshares or the average weekly trading volume of the issuer’s shares during thepreceding four calendar weeks. Nielsen Media Research, ACNielsen and several ofour other stockholders have the right, under certain circumstances, to requireus to register their stock for sale to the public, with the exception of theshares issued to ACNielsen in the acquisition of eRatings. Should VNU decide tosell its stake in NetRatings, it could adversely affect our stock price.Additionally, VNU will have the ability to transfer control of NetRatings,possibly at a premium over the then-current market price. Because VNU will havethe ability to effect such a transfer of control unilaterally, otherstockholders could be denied an opportunity to participate in the transactionand receive a premium for their shares.

 

As statedabove, VNU has announced that it has reached an agreement with a consortium ofprivate equity firms on a public offer for VNU’s outstanding shares. Assumingthis transaction is completed, we cannot assure you that the new owners of VNUwill decide to retain its stake in NetRatings.

 

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**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 ofincorporation and bylaws could make more difficult the acquisition of us bymeans of a tender offer, a proxy contest or otherwise, and the removal ofincumbent officers and directors. These provisions include:

 

•                  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.

 

**ITEM 1B. UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM 2. PROPERTIES**

 

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

 

Outside of the United States, we lease officespace in various countries, including the United Kingdom, Italy, Spain, France,Germany, Australia, Japan, China, India and Hong Kong.

 

**ITEM 3. LEGAL PROCEEDINGS**

 

Information regarding legal proceedings isset forth in Note 10 of the Notes to Consolidated Financial Statementsunder the heading “Litigation”, and such information is hereby incorporated byreference.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

No matters were submitted to a vote ofsecurity holders during the fourth quarter of 2005.

 

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**PART II**

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

 

**Price Range of Common Stock**

 

Our common stock is quoted on the NasdaqNational Market under the symbol “NTRT”. The following table sets forth therange of high and low sales prices for each period indicated. The pricesappearing in the tables below reflect over the counter market quotations, whichreflect inter-dealer prices, without retail mark-up, mark-down or commissionand may not necessarily represent actual transactions. During the periodsindicated, we have not effected any stock split.

 

| ** **      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
| ** **      | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|            |       |     |       |     |       |   |   |   |   |
| First  Quarter  |       | $        | 19.08      |     | $          | 14.70 |   | $ | 13.00 |   | $ | 9.70 |   |
| Second  Quarter |       | 15.25    |       | 11.99    |       | 17.00 |   | 10.11 |   |
| Third  Quarter  |       | 15.78    |       | 12.63    |       | 17.86 |   | 12.46 |   |
| Fourth  Quarter |       | 15.50    |       | 12.10    |       | 20.76 |   | 17.49 |   |
|                 |            |          |            |          |            |  |  |  |  |  |  |  |  |

 

**Dividend Policy**

 

We have not declared or paid any cashdividends on our common stock and presently intend to retain our futureearnings, if any, to fund the development and growth of our business and,therefore, do not anticipate paying any cash dividends in the foreseeablefuture.

 

**Holders of Common Stock**

 

As of February 28, 2006, there wereapproximately 168 stockholders of record of our common stock. Because many ofour shares are held by brokers and other institutions on behalf ofstockholders, we are unable to estimate the total number of stockholdersrepresented by these record holders.

 

**Equity Compensation Plan Information**

 

Information for our equity compensation plansin effect as of December 31, 2005, 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      |       | 3,101,807                                                                                                                                            |       | $                                                                                                           | 10.39      |                                                                                                                                                                                                             | 599,000    |   |
| Equity  compensation plans not approved by security holders* |       | 7,813                                                                                                                                                |       | $                                                                                                           | 106.83     |                                                                                                                                                                                                             | —     |   |
| Total                                                        |       | 3,109,620                                                                                                                                            |       | $                                                                                                           | 10.64      |                                                                                                                                                                                                             | 599,000    |   |

 

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*  Assumed in connection with our acquisition ofeRatings in May 2002.

 

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**Issuer Purchase of Equity Securities**

 
| **Period**                                           | ** ** | **(a) Total  Number of  Shares (or Units)  Purchased** | ** ** | **(b)  Average Price  Paid Per Share  (or Unit)** | ** ** | **(c) Total Number  of Shares (or Units)  Purchased as Part  of Publicly Announced  Plans or Programs(1)** | ** ** | **(d) Maximum Number (or  Approximate Dollar Value)  of Shares (or Units) that  May Yet Be Purchased  Under the Plans or  Programs(1)** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | ** **                                                                 | ** ** | ** **                                                            | ** ** | ** **                                                                                                                                                        | ** ** | ** **                                                                                                                                                                                                         | ** ** |
| October 1, 2005 –  October 31, 2005   |       | —                                                                     |       | —                                                                |       | —                                                                                                                                                            |       | —                                                                                                                                                                                                             |       |
|                                                 |       |                                                                       |       |                                                                  |       |                                                                                                                                                              |       |                                                                                                                                                                                                               |       |
| November 1, 2005 –  November 30, 2005 |       | 428,800                                                                    |       | $13.64                                                                |       | 428,800                                                                                                                                                           |       | $19,152,840                                                                                                                                                                                                        |       |
|                                                 |       |                                                                       |       |                                                                  |       |                                                                                                                                                              |       |                                                                                                                                                                                                               |       |
| December 1, 2005 –  December 31, 2005 |       | 720,600                                                                    |       | $13.19                                                                |       | 720,600                                                                                                                                                           |       | $9,648,844                                                                                                                                                                                                         |       |
|                                                 |       |                                                                       |       |                                                                  |       |                                                                                                                                                              |       |                                                                                                                                                                                                               |       |
| Total                                                |       | 1,149,400                                                                  |       | $13.36                                                                |       | 1,149,400                                                                                                                                                         |       |                                                                                                                                                                                                               |       |

 

(1) On November 3, 2005, we announced thatour Board of Directors had authorized the repurchase of up to $25 million ofour outstanding common stock.

 

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

 

The following selected financial data shouldbe read in conjunction with “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and the consolidated financial statementsand the notes thereto included elsewhere herein:

 
| ** **                                                                                          | ** ** | **For the years ended December 31,**      | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                                          | ** ** | **(in thousands, except per share data)** | ** ** |
| **Consolidated  Statements of Operations Data:**                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |
| Revenue                                                                                             |       | $                                                                  | 68,017     |   | $ | 59,294 |   | $ | 41,432 |   | $ | 29,706 |   | $ | 23,504 |   |
| Gross profit                                                                                        |       | 45,366                                                             |       | 36,237 |   | 20,956 |   | 13,255 |   | 10,240 |   |
| Total  operating expenses                                                                           |       | 57,266                                                             |       | 56,422 |   | 50,665 |   | 53,128 |   | 37,830 |   |
| Operating  loss                                                                                     |       | (11,900                                                            | )          | (20,185 | ) | (29,709 | ) | (39,873 | ) | (27,590 | ) |
| Net loss                                                                                            |       | (8,395                                                             | )          | (17,419 | ) | (25,135 | ) | (38,876 | ) | (17,634 | ) |
| Basic and  diluted net loss per common share                                                        |       | $                                                                  | (0.23      | ) | $ | (0.50 | ) | $ | (0.74 | ) | $ | (1.17 | ) | $ | (0.54 | ) |
| Weighted  average shares outstanding used in computing basic and diluted net loss per common  share |       | 35,985                                                             |       | 34,637 |   | 33,792 |   | 33,168 |   | 32,864 |   |

 
| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                        | ** ** | **(in thousands)**    | ** ** |
| **Consolidated  Balance Sheet Data:**             |       |                  |       |   |   |   |   |   |   |   |   |
| Cash, cash  equivalents and marketable securities |       | $                     | 180,252    |   | $ | 197,602 |   | $ | 210,039 |   | $ | 241,411 |   | $ | 322,563 |   |
| Working  capital                                  |       | 136,935               |       | 131,478 |   | 144,566 |   | 213,362 |   | 304,791 |   |
| Total assets                                      |       | 300,254               |       | 314,457 |   | 314,923 |   | 331,266 |   | 341,699 |   |
| Deferred  revenue                                 |       | 12,666                |       | 11,435 |   | 10,449 |   | 10,823 |   | 7,031 |   |
| Total  stockholders’ equity                  |       | $                     | 263,398    |   | $ | 280,438 |   | $ | 274,054 |   | $ | 288,666 |   | $ | 318,468 |   |

 

In 2002, 2003 and 2005, we completed severalacquisitions which impacted the results of operations for those years andfuture years. Also in 2002, we incurred expenses related to a restructuring anda write-off of investments. In 2004, the Company received an insurance recoverysettlement and renegotiated a lease, which resulted in a release ofrestructuring expenses. In 2005, we incurred restructuring charges primarilyrelated to our European operations. See Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” for additionalinformation.

 
| **ITEM 7.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|-------------------------------------------------------------------------------------------------|

 

**Summary**

 

We are a leading provider of Internetaudience measurement and analysis in the United States and around the world.All of our products and services are designed to assist companies in makingcritical business decisions regarding their Internet strategies andinitiatives. We have a highly diversified and global client base, includinglarge and small companies in the media, technology, advertising, financialservices, consumer products, retail and travel industries. VNU N.V., throughits subsidiaries ACNielsen Corporation and Nielsen Media Research, ownedapproximately 62% of our outstanding common stock as of February 28, 2006.

 

Our revenues for the year ended December 31,2005 totaled $68.0 million, compared to $59.3 million and $41.4 million for theyears ended December 31, 2004 and December 31, 2003, respectively. Asof December 31, 2005, we had 1,615 clients, compared to 1,429 clients asof December 31, 2004 and 1,098 clients as of December 31, 2003. Theincreases in our revenues and number of clients during the last few years arethe result of both acquisitions that we have completed, as well as organicgrowth in our product portfolio. We expect our revenues and client base tocontinue to grow as (i) our newer products gain marketplace acceptance, (ii) wedevelop and sell additional products and services to new and existing clients, (iii) welaunch our products and services in new international territories, (iv) wegenerate price increases for our existing products and services and (v) weexpand our patent licensing program.

 

We have incurred operating losses and netlosses since our inception, and, as of December 31, 2005, our accumulateddeficit was $145.3 million. Since the beginning of 2002, however, we have madesignificant progress in

 

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reducing our annual operating loss and annual net loss. Our operatingloss decreased from $39.9 million in 2002 to $29.7 million in 2003, to $20.2million in 2004 and to $11.9 million in 2005. Likewise, our net loss decreasedfrom $38.9 million in 2002 to $25.1 million in 2003, to $17.4 million in 2004and to $8.4 million in 2005. Our ability to reduce our operating and netlosses, and our belief that we will make further progress in reducing suchlosses in 2006, is attributable to a number of factors. First, we expect therevenue growth we have experienced in the past few years to continue. Second, asignificant initial investment was required to launch certain of our servicesin 2003 and 2004, including our MegaPanel services, and while the ongoingexpense to operate such services will continue, we expect such expenses to beless than the initial expenses required to launch such services. In addition,because we offer syndicated panel services and are able to utilize our existingdatabases to expand our custom analytical offerings, our revenue growth doesnot require a corresponding increase in our expenses.

 

As of December 31, 2005, our cash, cashequivalents and marketable securities totaled $180.3 million, which we believeis sufficient to meet our cash needs for at least the next twelve months.

 

**Industry Trends**

 

The success of our business depends heavilyon the continued expansion of the Internet for advertising, commerce andcommunications. Internet advertising, e-commerce and the number of people usingthe Internet, particularly through the use of Internet broadband connections,have dramatically increased in recent years, and we expect this growth tocontinue in upcoming years around the world. These growth trends have made theInternet an increasingly important component of companies’ overall businessstrategies. As a result, companies conducting business online are increasinglyseeking analysis and insights to (i) define and reach their targetaudiences, (ii) measure the effectiveness of their advertising andmarketing strategies, (iii) benchmark their performance with theircompetitors and (iv) increase brand equity and commerce revenue.

 

Companies are also increasingly recognizingthat, compared with other media, the Internet allows online market participantsto obtain a unique understanding of consumer behavior. Unlike with other formsof advertising, including print, radio and television, advertisers can (i) targetadvertising in an unprecedented manner, (ii) confirm whether consumershave actually viewed advertisements (and when) and (iii) decipher whetherconsumers have taken certain actions, whether completing a purchase or visitinga 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. Webelieve that this growth will require a commensurate increase in Internet mediaand market research, and that we are particularly well-suited to address theglobal needs of online participants.

 

**Product Portfolio**

 

Our goal for the last few years has been tooffer the most comprehensive global portfolio of Internet media and marketresearch products and services. In order to reach this goal, we have focused onboth strategic acquisitions in the United States and abroad and investing innew products to meet changing marketplace needs. As a result of these efforts,we currently offer a wide range of products and services in the United Statesand in many countries throughout Europe, Asia Pacific and Latin America. Webelieve that this product portfolio and breadth of coverage will enable us tocontinue to increase our client base, increase our ability to sell multipleproducts to clients and increase the total sales to individual clients.

 

In the first half of 2002, we acquiredAdRelevance, our online advertising expenditure service, and @Plan, whichprovides demographic, lifestyle and product 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 our acquisition of NetValue S.A., an international providerof Internet audience measurement services, and the purchase from ACNielsenCorporation of the 80.1% interest in ACNielsen eRatings.com that we did notalready own. Since the beginning of 2003, we acquired LemonAd (now brandedAdRelevance), our international online advertising measurement service, and RedSheriff, a global provider of site-centric-based Internet audience measurementtools.

 

In conjunction with these strategicacquisitions, we have also devoted significant resources to internal productdevelopment. Our key new products and services include (i) MegaPanel,which includes our vertical offerings, such as MegaView Financial, MegaViewRetail, MegaView Search, MegaView Travel and MegaView Local, and (ii) HomescanOnline, a joint product with ACNielsen that combines offline consumerpurchasing data with Internet audience measurement data. We believe these newproducts and services, as well as additional MegaPanel offerings, will beimportant

 

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to our financial performance over the next few years.

 

**Revenue Overview**

 

We generate revenues primarily from the saleof our Internet media and market research products and services, which includeboth syndicated products and customized products. Syndicated products currentlyrepresent a significant majority of our total revenues, and our goal is forsyndicated products to continue to represent a significant majority of ourtotal revenues. We also generate revenues from the licensing of our patents.

 

In France, Japan and Latin America, we offermany of our services through strategic relationships with leading local marketresearch and information services companies. We currently own 56.8% ofNetRatings Japan, our Japanese subsidiary, while the remaining ownershipinterest is owned by TransCosmos, Dentsu.com and other investors. We currentlyown 66% of Mediametrie NetRatings, our French subsidiary, and the remainder isowned by Mediametrie. We currently own 49% of Ibope eRatings.com, our LatinAmerican joint venture, and the remainder is owned by Ibope. NetRatings usesthe equity method to account for its investment in Ibope eRatings.com. In eachof these locations, revenue is allocated between NetRatings and the subsidiaryor joint venture company depending on the location of the customer and thelocation of the panel whose data is used in the service. As a result of the RedSheriff acquisition, we also obtained a 50% ownership interest in an Italiancompany, Red Sheriff S.r.l., which offers site-centric-based services in Italy.On February 25, 2005, we purchased the remaining 50% of Red SheriffS.r.l., and we subsequently renamed the company NetRatings Italia S.r.l. As aresult of this acquisition, we have consolidated the operating results ofNetRatings Italia in our consolidated financial statements beginning in thesecond quarter of 2005.

 

We have experienced revenue growth in each ofthe years since we launched our first product in 1999, as demonstrated by thetable below:

 
| **Years ended December 31:** | ** ** | **Revenues (in thousands)** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|
| 2001                              |       | $                           | 23,504     |   |
| 2002                              |       | $                           | 29,706     |   |
| 2003                              |       | $                           | 41,432     |   |
| 2004                              |       | $                           | 59,294     |   |
| 2005                              |       | $                           | 68,017     |   |

 

We expect our 2006 revenues to exceed our2005 revenues, primarily as a result of sales from our new products andservices, price increases for our existing products and services and the launchof our new and existing products and services in new international territories.In addition, in the first half of 2005 we decided to launch a program toenforce our intellectual property rights against various companies that competeagainst us in the Internet technology fields. As a result of this program, we willrecognize patent licensing revenue in 2006.

 

**Critical Accounting Policies and Estimates**

 

Management’s Discussion and Analysis ofFinancial Condition and Results of Operations discuss our financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States. The preparation of these financial statementsrequires our management to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. On an ongoingbasis, our management evaluates its estimates and judgments, including thoserelated to revenue recognition, collectibility of receivables, the valuation offixed assets, goodwill, intangible assets, including depreciable livesassigned, marketable securities and income taxes, as well as the estimates andjudgments relating to the valuation of certain liabilities, includingrestructuring liabilities, service periods for stock awards with performancecriteria, and 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 estimatesunder different assumptions or conditions.

 

Our management believes the followingcritical accounting policies affect its more significant judgments andestimates used in the preparation of its financial statements:

 

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*Revenue Recognition*

 

We recognize revenue in accordance with SECStaff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”). SAB104 requires that four basic criteria must be met before revenue can berecognized: (1) persuasive evidence that an arrangement exists; (2) deliveryhas occurred or services rendered; (3) the fee is fixed and determinable;and (4) collectibility is reasonably assured. Determination of criteria (4) isbased on management’s judgment regarding the collectibility of those fees. Wesell a majority of our products and services pursuant to one-year subscriptionagreements. We recognize revenue from the sale of our subscription products andservices and our custom products and services ratably over the term of the agreement.Invoiced amounts are recorded as deferred revenue until earned. If a contract’scollectibility comes into question, revenue recognition is discontinued untilcollectibility is reasonably assured. This determination is based on management’sjudgment and could adversely affect both revenue and deferred revenue. We alsogenerate revenue from the licensing of our patents and record the revenue inaccordance with the four basic criteria of SAB 104 listed above.

 

*Accounting for Stock-Based Compensation*

 

We measure compensation expenses for our stock-basedcompensation plans using the intrinsic value method in accordance with AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees” (“APB 25”) and FASBInterpretation No. 28, “Accounting for Stock Appreciation Rightsand Other Variable Stock Option or Award Plans - an interpretation of APBOpinions No. 15 and 25”. Under theintrinsic value recognition provisions of APB No. 25, stock-basedcompensation cost is measured at the grant date based on the difference betweenthe quoted market price of the stock at the measurement date less the amount,if any, that the employee is required to pay under the award, and is recognizedas expense over the vesting period using the accelerated method.

 

*Bad Debt*

 

We manage credit risk on accounts receivableby performing ongoing credit evaluations of our customers, reviewing ouraccounts and contracts and by providing appropriate allowances foruncollectible amounts. We maintain allowances for doubtful accounts forestimated losses resulting from the inability of customers to makecontractually required payments. If the financial conditions of our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances may be required. Allowances are based onmanagement’s judgment which considers historical experience and specificknowledge of accounts that may not be collectible.

 

*Legal Contingencies*

 

We are currently involved in certain legalproceedings as described in Note 10 of our consolidated financial statements.We are required to assess the likelihood of any adverse judgments or outcomesto these matters as well as potential ranges of probable losses, in accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 5, “**Accountingfor Contingencies.”** A determination of the amountof reserves required, if any, for these contingencies are made after carefulanalysis of each individual case. Losses are recognized for legal contingencieswhen both the probability of occurrence and the loss can be reasonablyestimated. It is possible that future results of operations for any particularquarterly or annual period could be materially affected by changes in ourassumptions or the effectiveness of our strategy related to legal proceedings.

 

*Goodwill and Intangible Assets*

 

Our long lived assets include goodwill andother intangible assets. In accordance with SFAS No. 142, “Goodwill andOther Intangible Assets”, goodwill and indefinite-lived intangibles are notamortized but are reviewed at least annually for impairment. We retain anindependent appraisal firm that annually provides a valuation of our Company’sfair value, based on discounted cash flow and comparable company analyses. Thecash flow analysis requires significant judgment and estimates by managementrelating to assumptions about expected future operating performance andappropriate discount rates. An impairment loss is recorded if the estimatedfuture cash flows plus net proceeds expected from disposition of the asset (ifany) are less than the carrying value of the asset. Our estimate of discountedcash flows may differ from actual cash flows due to, among other things,economic conditions, changes to our business model and changes in operatingperformance. An impairment loss recorded in the future, if any, could have amaterial adverse impact on our financial position or results of operations.

 

We performed our annual evaluation ofgoodwill and intangibles as of October 1, 2005 at which time no impairmentwas indicated. There has been no indication of impairment since October 1,2005.

 

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*Restructuring*

 

We have engaged in, and may continue to engagein, restructuring actions and activities associated with productivityimprovement initiatives and expense reduction measures. These restructuringactions and activities require us to make estimates related to severance andother employee separation costs and the ability to generate sublease income. Weaccrue severance restructuring costs in a period provided the followingcriteria are met:  (1) management commits to a plan of terminationprior to the date of the financial statements and establishes the benefitemployees will receive; (2) the benefit arrangement is either communicatedto employees, or part of a pre-established or legally required benefit; (3) theplan of termination specifically identifies the number and job classificationsof employees to be terminated; and (4) the plan of termination will becompleted in a reasonably short period of time such that significant changesare unlikely. The amounts we have accrued represent our best estimate of theobligations we expect to incur in connection with these actions, but could besubject to change due to various factors including market conditions and theoutcome of negotiations in certain international jurisdictions. Should theactual amounts differ from our estimates, the amount of the restructuringcharges could be materially impacted.

 

*Income Taxes*

 

Estimates and judgments are required in thecalculation of certain tax liabilities and in the determination of therecoverability of deferred tax assets, which arise from net operating losses,tax carryforwards and temporary differences between the tax and financialstatement recognition of revenue and expense. SFAS No. 109, “Accountingfor Income Taxes”, also requires that the deferred tax assets be reduced by avaluation allowance if, based on the weight of available evidence, it is morelikely than not that some portion or all of the recorded deferred tax assetswill not be realized in future periods.  In addition, the calculation ofour tax liabilities involves dealing with uncertainties in the application ofcomplex tax regulations in a multitude of domestic and internationaljurisdictions. If our estimate of tax liabilities proves to be less than theultimate assessment, a charge to expenses would result.

 

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**Results of Operations**

 

The following table sets forth for the yearsindicated certain financial data as a percentage of revenue:

 
| ** **                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |     |       |
| Revenue                           |       | 100      | %          | 100      | %          | 100      | %          |
| Costs of  revenue                 |       | 33       | %          | 39       | %          | 49       | %          |
| Gross profit                      |       | 67       | %          | 61       | %          | 51       | %          |
| Operating  expenses:              |       |     |       |     |       |     |       |
| Research and  development         |       | 17       | %          | 20       | %          | 24       | %          |
| Sales and  marketing              |       | 38       | %          | 38       | %          | 41       | %          |
| General and  administrative       |       | 18       | %          | 21       | %          | 25       | %          |
| Restructuring  and other expenses |       | 2        | %          | (1       | )%         | —   |       |
| Litigation  settlement recovery   |       | —   |       | (3       | )%         | —   |       |
| Amortization  of intangibles      |       | 4        | %          | 6        | %          | 9        | %          |
| Stock-based  compensation         |       | 5        | %          | 13       | %          | 22       | %          |
| Total  operating expenses         |       | 84       | %          | 94       | %          | 122      | %          |
| Loss from  operations             |       | (17      | )%         | (33      | )%         | (72      | )%         |
| Interest  income, net             |       | 7        | %          | 5        | %          | 10       | %          |
| Loss on  joint ventures           |       | —   |       | —   |       | —   |       |
| Minority  interest                |       | (1       | )%         | —   |       | 1        | %          |
| Provision  for income taxes       |       | (1       | )%         | —   |       | —   |       |
| Net loss                          |       | (12      | )%         | (28      | )%         | (61      | )%         |

 

The following table sets forth operatingresults for each of the four quarters ended December 31, 2005 and 2004:

 
| ** **                            | ** ** | **2005**                                                                        | ** ** |
|---------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Q1**                                                                          | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| ** **                            | ** ** | **(in thousands, except per share data)  (unaudited)** | ** ** |
|                                  |       |                                                                            |       |   |   |   |   |   |   |
| Revenue                               |       | $                                                                               | 16,433     |   | $ | 17,105 |   | $ | 16,796 |   | $ | 17,683 |   |
| Gross profit                          |       | 10,865                                                                          |       | 11,087 |   | 11,278 |   | 12,136 |   |
| Loss from  operations                 |       | (2,397                                                                          | )          | (3,108 | ) | (4,741 | ) | (1,654 | ) |
| Net loss                              |       | (1,629                                                                          | )          | (2,321 | ) | (3,732 | ) | (713 | ) |
| Basic and  diluted net loss per share |       | $                                                                               | (0.05      | ) | $ | (0.06 | ) | $ | (0.10 | ) | $ | (0.02 | ) |

 
| ** **                            | ** ** | **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 | ) |

 

**Year Ended December 31, 2005 Compared toYear Ended December 31, 2004**

 

*Revenue.*We generate revenue primarily from the sale of ourInternet audience measurement products and services. We typically sell oursyndicated services pursuant to one-year subscription agreements. We alsoderive a portion of our revenue from our customized products and services andfrom licensing our patents.

 

As of December 31, 2005, 1,615 customersworldwide subscribed to our products and services. As of December 31,2004, 1,429 customers worldwide subscribed to our products and services. Theincrease of 186 customers during 2005 is the result of organic growth in ourworldwide customer base in 2005, including the addition of 41 customers in thefourth quarter of 2005. We expect our global customer base to continue toincrease in the next few quarters as we market and sell our new products andservices and expand into new geographical markets.

 

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Our global contract renewal rate was 82% forthe fourth quarter of 2005, an increase over the global contract renewal rateof 80% for the fourth quarter of 2004. Our global average sales price was $45,000for the fourth quarter of 2005, compared with $46,000 for the fourth quarter of2004. The decrease in average sales price is due to an increase in sales of ourSiteCensus service, which typically have a lower average sales price than ourother products and services. During the year ended December 31, 2005, nocustomer accounted for more than 10% of our revenue.

 

Revenue increased 15% to $68.0 millionfor the year ended December 31, 2005, compared to $59.3 million forthe year ended December 31, 2004. The increase in revenue wasprimarily organic revenue growth due to (i) new business sales of ourproducts and services, (ii) the launch of new product offerings(particularly in our MegaPanel service) and (iii) price increases forexisting products and services. The revenue for 2005 also includes ourconsolidation of the results of operations of Red Sheriff S.r.l., which weacquired on February 25, 2005 (and we subsequently renamed NetRatingsItalia S.r.l.).

 

*Cost of Revenue.*Cost of revenue consistsprimarily of expenses related to the recruitment, maintenance and support ofour Internet audience measurement panels, which are expensed as they areincurred. Cost of revenue also includes data collection costs for our productsand services and operational costs related to data centers. Accordingly, suchexpenses are not matched with any revenue or subscriptions generated in a givenperiod and are higher in periods in which we are involved in significant paneldevelopment activities.

 

Cost of revenue decreased 2% to$22.7 million, or 33% of revenue, for the year ended December 31,2005 from $23.1 million, or 39% of revenue, for year ended December 31,2004. The decrease in cost of revenue was primarily due to (i) reductionsin our international NetView and MegaPanel recruitment costs and (ii) theelimination of our Hispanic panel in the third quarter of 2004. The reductionsin costs were partially offset by (i) costs related to our data center inChina which began operations in the fourth quarter of 2004, (ii) additionaldata collection costs related to our SiteCensus product, (iii) additionalcosts related to expanding the scope of information available through ourMegaPanel product and (iv) additional costs related to certain customresearch projects. As a percentage of revenue, our cost of revenuedecreased by 6% from 2004 to 2005. This decrease is primarily due to revenuegrowth from the launch of our new products.

 

*Research and Development.*Researchand development expenses consist primarily of compensation and related costsfor personnel associated with our research and product development activities.These costs are expensed as incurred, except for costs related to internallydeveloped software, which are capitalized and subsequently depreciated when thedevelopment of the software is completed.

 

Research and development expenses decreased4% to $11.6 million, or 17% of revenue, for the year ended December 31,2005 from $12.0 million, or 20% of revenue, for the year ended December 31,2004. The net decrease was primarily due to the capitalization ofengineering costs related to internally developed software, which was partiallyoffset by the additional personnel required to work on the internally developedsoftware. During the year ended December 31, 2005, capitalizedengineering costs totaled $1.1 million.

 

*Sales and Marketing.*Salesand marketing expenses consist primarily of salaries, benefits and commissionsto our salespeople and analysts, as well as costs related to seminars,promotional materials, public relations, corporate marketing and other salesand marketing programs.

 

Sales and marketing expenses increased 13% to$25.7 million, or 38% of revenue, for the year ended December 31,2005 from $22.8 million, or 38% of revenue, for the year ended December 31,2004. The increases were primarily related to (i) an increase insales and marketing personnel due to the acquisition of the remaining shares ofNetRatings Italia S.r.l., (ii) additional personnel in our analytics areadue to the growth in the custom analytics market and (iii) additionalproduct marketing and sales personnel due to our product and businessexpansion.

 

*General and 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 and administrative expenses decreased4% to $12.1 million, or 18% of revenue, for the year ended December 31,2005 from $12.6 million, or 21% of revenue, for the year ended December 31,2004. The decrease is primarily due to international and US personnelreductions, which was partially offset by legal expenses related to a number ofpending litigations.

 

*Restructuring Expenses.*In the third quarter of 2005, managementapproved and initiated a restructuring plan primarily

 

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intendedto streamline our European operations. The restructuring plan includedrelocating engineering operations in Europe to the United States and theelimination of certain management positions. In connection with thisrestructuring plan, we recorded a charge of $1.7 million, or 2% of revenue, forseverance costs in 2005. During the first quarter of 2004, we negotiatedan amendment to the lease for our offices in Milpitas, California whichincluded a release from our obligations for the abandoned portion of thefacility, resulting in a reversal of restructuring expense of $0.5 million.

 

*Litigation Settlement Recovery.*In2002, we expensed costs related to the settlement in 2002 of a patentinfringement lawsuit initiated against us by Jupiter Media Metrix, Inc. Inthe second quarter of 2004, we received, net of legal fees, $1.8 million fromour insurance company in reimbursement for these expenses. No similar amountswere recorded in 2005.

 

*Amortization of Intangibles*.Amortization of intangible expenses decreased 26% to $2.8 million, or 4% ofrevenue, for the year ended December 31, 2005 from $3.7 million, or 6% ofrevenue, for the comparable period in 2004. The decrease was primarily due tocertain assets reaching their final amortization period during 2004 and 2005.

 

*Amortization of Stock-based Compensation*.Amortization of stock-basedcompensation in 2005 represents amortization of compensation expense related torestricted stock grants, which were issued for the first time in 2005 followinga review of our overall equity compensation strategy. Amortization of stock-based compensation in2004 represents amortization of deferred service costs related to warrantswhich Nielsen Media Research exercised in December 1999, and were fullyamortized by the end of 2004. Accordingly, no amortization costs relatedto the stock warrants exercised by Nielsen Media Research in December 1999were recorded in 2005.

 

*Equity in Earnings of Joint Ventures.*Equityin earnings from joint ventures was $0.1 million for each of the years ended December 31,2005 and 2004, primarily reflecting our equity in the earnings of our jointventure in Italy, NetRatings Italia S.r.l. At the end of the first quarter of 2005, we purchased the remaining 50%interest in NetRatings Italia S.r.l., which resulted in its results ofoperations being reported in our consolidated results rather than in equity inearnings of joint ventures. Due to losses incurred by Ibope eRatings.com, wereduced our investment in Ibope eRatings.com to zero in the first quarter of2004. In addition, we have no financial support commitments to Ibope andtherefore we do not presently recognize our share of Ibope’s net losses in ourconsolidated financial statements.

 

*Interest Income, Net.*Interestincome, net, increased 57% to $4.5 million for the year ended December 31,2005, from $2.9 million for the year ended December 31, 2004. The increase in interest income was due to anoverall higher interest yield on our investments in 2005.

 

*Minority Interest.*Minorityinterest was $(0.8) million and $(0.2) million for the years ended December 31,2005 and 2004, respectively. The minority interest for each of these periodsprimarily represents the minority share of the profits from MediametrieNetRatings and NetRatings Japan. During the year ended December 31,2004, there was a minority interest related to Red Sheriff. Red Sheriff had anegative equity balance on the date we acquired majority control of RedSheriff, and, therefore, we recognized 100% of the loss of Red Sheriff duringthe first half of 2004.

 

*Provision for Income Taxes.*Theprovision for income taxes totaled $0.3 million, or 1% of revenue, for the yearended December 31, 2005. This expense relates to taxes that are owed as aresult of earnings from certain foreign subsidiaries. No amounts were recordedin prior periods as we incurred net taxable losses in the United States andforeign locations during such prior periods.

 

*OperatingLoss and Net Loss*. Operating loss decreased 41% to$11.9 million, or 17% of revenue, for the year ended December 31,2005 from $20.2 million, or 33% of revenue, for the year ended December 31,2004. For the year ended December 31, 2005, our net loss decreased to$8.4 million, or $0.23 per share, on approximately 36.0 million weightedaverage shares outstanding, as compared with a net loss of $17.4 million,or $0.50 per share, on approximately 34.6 million weighted average sharesoutstanding, for the year ended December 31, 2004. The decreases in operating loss and net loss were primarily due to (i) increasedrevenue from organic growth and our consolidation of the results of operationsof NetRatings Italia S.r.l. (which we acquired in February 2005), (ii) decreasesin certain operating expenses and (iii) decreases in amortization ofstock-based compensation costs and amortization of intangibles. Theseimprovements to operating loss and net loss were partially offset by (i) expensesresulting from additional personnel to support our global expansion, includingSiteCensus and custom analytics work related to MegaPanel, (ii) increasedexpenses resulting from our consolidation of the results of operations ofNetRatings Italia S.r.l., (iii) the restructuring charge recorded in thethird quarter of 2005 and (iv) the litigation recovery recorded in 2004. Netloss was further reduced by an increase in interest income, which was partiallyoffset by (i) minority interest in net income of consolidated subsidiariesand (ii) the provision for income taxes.

 

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**Year Ended December 31, 2004 Compared toYear Ended December 31, 2003**

 

*Revenue.*We generate revenue primarily from the sale of ourInternet audience measurement products and services. We typically sell oursyndicated 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 customersworldwide subscribed to our products and services. As of December 31,2003, 1,098 customers worldwide subscribed to our products and services. Theincrease of 331 customers during 2004 is the result of organic growth in ourworldwide customer base in 2004, including the addition of 91 customers in thefourth quarter of 2004.

 

Our global contract renewal rate was 80% forthe fourth quarter of 2004, an increase over the global contract renewal rateof 74% for the fourth quarter of 2003. Our global average sales price was$46,000 for the fourth quarter of 2004, compared with $61,000 for the fourthquarter of 2003. The average sales price decreased due to the acquisition in December 2003of Red Sheriff’s SiteCensus customer contracts, which typically have a loweraverage selling price. During the year ended December 31, 2004, nocustomer accounted for more than 10% of our revenue.

 

Revenue increased 43% to $59.3 millionfor the year ended December 31, 2004, compared to $41.4 million forthe year ended December 31, 2003. The acquisitions we completed in 2003 contributedapproximately $10.9 million of the increase in revenue. The remaining increasein revenue was primarily organic growth due to (i) new business sales ofour products and services, (ii) the launch of new product offerings, (iii) priceincreases for existing products and services, (iv) an increase in sales ofour custom research and analytical services and (v) the impact of foreignexchange rates relating to our international revenue. The increase in revenuewas partially offset by the discontinuation of our custom panel in Germany.

 

*Cost of Revenue.*Cost of revenue consistsprimarily of expenses related to the recruitment, maintenance and support ofour Internet audience measurement panels, which are expensed as they areincurred. Cost of revenue also includes data collection costs for our productsand services and operational costs related to data centers. Accordingly, suchexpenses are not matched with any revenue or subscriptions generated in a givenperiod and are higher in periods in which we are involved in significant paneldevelopment activities.

 

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 revenue, for year ended December 31,2003. The increase in cost of revenue was due primarily to (i) theacquisitions in 2003 for which we have incurred cost of revenue expense fromtheir acquisition dates, (ii) additional costs to build our MegaPanel inthe United States in the first half of 2004 and (iii) the impact of foreignexchange rates relating to our international operations. The increase waspartially offset by (i) reductions in our NetView home and work panelrecruitment costs, (ii) reduced expenses for @Plan as a result ofretaining Nielsen Media Research to handle recruitment, (iii) reducedcosts to operate our data center in the United States and (iv) reductionsin our international MegaPanel and NetView panel costs. As a percentage ofrevenue, our cost of revenue decreased by 10% from 2003 to 2004. This decreaseis due to the fact that a large portion of the expense related to launching anew product is incurred prior to the launch of such product. Once a product islaunched, however, the cost of operating and maintaining such product isreduced and, as a result, our cost of revenue declines as a percentage ofrevenue. During 2003, we incurred significant expenses related to launching ournew products, particularly MegaPanel, and these expenses declined in 2004.

 

*Research and Development.*Researchand development expenses consist primarily of compensation and related costsfor personnel associated with our research and product development activities.These costs are expensed as incurred, except for costs related to internallydeveloped software, which are capitalized.

 

Research and development expenses increased20% 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) increasedresearch and development personnel and associated payroll expenses resultingfrom our acquisitions in 2003 and (ii) additional quality assurance andresearch and development personnel primarily related to our MegaPanel service.

 

*Sales and Marketing.*Salesand marketing expenses consist primarily of salaries, benefits and commissionsto our salespeople and analysts, as well as costs related to seminars,promotional materials, public relations, corporate marketing and other salesand marketing programs.

 

Sales and marketing expenses increased 33% to$22.8 million, or 38% of revenue, for the year ended December 31,2004 from $17.1 million, or 41% of revenue, for the year ended December 31,2003. The increase in sales and marketing

 

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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 offoreign exchange rates relating to our international operations. The increasewas partially offset by reductions in the number of personnel in our salesdepartment.

 

 *General and 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 and administrative expenses increased19% to $12.6 million, or 21% 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 administrative expenses was primarily due to (i) higherexpenses, particularly personnel costs, resulting from the acquisitionscompleted during 2003, (ii) the impact of foreign exchange rates relatingto our international operations and (iii) higher expenses related tocompliance with new corporate governance regulations, particularly Section 404of the Sarbanes-Oxley Act of 2002. The increase was partially offset by savingsin costs to support our internal information technology requirements.

 

*Restructuring Expenses.*Duringthe first quarter of 2004, we negotiated an amendment to the lease for ouroffices in Milpitas, California which included a release from our obligationsfor the abandoned portion of the facility, resulting in a reversal ofrestructuring expense of $525,000.

 

*Litigation Settlement Recovery.*Duringthe fourth quarter of 2002, we expensed costs related to the settlement in 2002of a patent infringement lawsuit initiated against us by Jupiter Media Metrix, Inc.In the second quarter of 2004, we received, net of legal fees, $1.8 millionfrom our insurance company in reimbursement for these expenses.

 

*Amortization of Intangibles*.Amortization of intangibles expense decreased 4% to $3.7 million, or 6% ofrevenue, for the year ended December 31, 2004 from $3.9 million, or 9% ofrevenue, for the comparable period in 2003. The decrease was primarily due tosome assets reaching their final amortization period during 2004. The decreasewas partially offset by additional amortization related to specificallyidentified intangibles associated with the acquisition of Red Sheriff in thefourth quarter of 2003.

 

*Amortization of Stock-based Compensation*.Stock-based compensation represents amortization of deferred service costsrelated to stock warrants which Nielsen Media 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. Thedecrease is the result of reaching the final amortization period for thedeferred service costs. As of December 31, 2004 the deferred service costswere fully amortized.

 

*Equity in Earnings of Joint Ventures.*Equityin 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 joint ventures primarilyreflected our equity in the earnings of our joint venture in Italy, Red SheriffS.r.l. (subsequently renamed NetRatings Italia S.r.l.), which was partiallyoffset by losses related to Ibope eRatings, our Latin America joint venture, inthe first quarter of 2004. As a result of the losses incurred by IbopeeRatings.com, our balance in our investment in Ibope eRatings.com was zero asof March 31, 2004, and therefore no losses were recorded after the firstquarter of 2004. In 2003, the equity in earning from joint ventures reflectedour equity in earnings (losses) related to Ibope eRatings, Mediametrie NetRatingsand NetRatings Japan through the respective dates that we obtained majorityownership of each joint venture and, accordingly, we began consolidating theirresults of operations in our consolidated financial statements.

 

*Interest Income, Net.*Interestincome, net, decreased 29% to $2.9 million for the year ended December 31,2004, from $4.1 million for the year ended December 31, 2003. The decreasein interest income was due to an overall reduction in cash and cash equivalentsas compared with the beginning of 2003 as a result of acquisitions and thefunding of our operations during 2003 and 2004. The reduction in cash in 2004was partially offset by cash received as a result of the exercise of employeestock options during the year.

 

*Minority Interest.*Minorityinterest was $(242,000) and $455,000 for the years ended December 31, 2004and 2003, respectively. During the year ended December 31, 2004, we heldmajority interests in Red Sheriff, NetRatings Japan and Mediametrie NetRatings.Red Sheriff had a negative equity balance on the date we acquired majoritycontrol of Red Sheriff and, therefore, we recognized 100% of the loss of RedSheriff during the first half of 2004. Minority interest for the year ended December 31,2003 primarily represented the minority interest in the net losses of NetValueand NetRatings Japan.

 

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*OperatingLoss and Net Loss*. Operating loss decreased 32% to$20.2 million, or 33% of revenue, for the year ended December 31,2004 from $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 millionweighted average shares outstanding, as compared with a net loss of$25.1 million, or $0.74 per share, on approximately 33.8 millionweighted average shares outstanding, for the year ended December 31, 2003.The decreases in operating loss and net loss were primarily due to (i) increasedrevenue from organic growth and our acquisitions in 2003, (ii) decreasedcost of revenue related to our NetView home and work panels and @Planrecruitment costs, (iii) decreased amortization of stock-basedcompensation, (iv) the litigation settlement recovery and (v) thereversal of restructuring expenses. These improvements to operating loss andnet loss were partially offset by (i) increases in cost of revenue andoperating expenses related to our acquisitions in 2003, (ii) additionalquality assurance and research and development personnel primarily related toour MegaPanel service, (iii) lower interest income and (iv) higherexpenses related to compliance with new corporate governance regulations,particularly Section 404 of the Sarbanes-Oxley Act of 2002.

 

**Inflation**

 

Our management currently believes that inflation has not had a materialimpact on continuing operations.

 

**Liquidityand Capital Resources**

 

At December 31, 2005, the Company’s cash, cash equivalents andmarketable securities were $180.3 million, compared with $197.6 millionat December 31, 2004.

 

Cash used in operating activities was $1.2 million in 2005, due to ournet loss of $8.4 million and cash used in working capital changes of$3.6 million, partially offset by non-cash expenses of $10.8 million.The non-cash expenses include $3.6 million for depreciation,$3.4 million for stock-based compensation, $2.8 million foramortization of intangible assets, $0.7 million related to minority interest,$0.3 million for provision for doubtful accounts, $0.1 related to utilizationof net operating loss carryforwards of companies that we acquired and $(0.1)million related to equity in earnings of joint ventures. Cash used in operatingactivities 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-cash expenses include $7.6 million forstock-based compensation, $2.8 million for depreciation, $3.7 millionfor amortization of intangible assets, $0.3 million for provision fordoubtful accounts, $0.2 million related to minority interest and $(0.1) millionrelated to equity in earnings of joint ventures. Cash used in operatingactivities 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-cash expenses included $9.1 million for stock-based compensation,$2.1 million for depreciation, $3.9 million for amortization of intangibleassets, $0.2 million for provision for doubtful accounts, $(0.4) millionrelated to minority interest and $(0.1) million related to equity in earningsof joint ventures.

 

Net cash provided by investing activitiesduring 2005 was $13.2 million, resulting from net purchases of ourshort-term investments of $19.2 million and the repayment of a loan to us froma related party in the amount of $1.2 million. These increases were partiallyoffset by acquisitions of property and equipment of $5.4 million and cash paidfor acquisitions, net of cash acquired, of $1.8 million. Net cash used ininvesting activities during 2004 was $20.6 million, resulting from cashpaid for acquisitions, net of cash acquired, of $10.1 million,acquisitions of property and equipment of $4.8 million, loans to relatedparties of $0.7 million and net purchases of our short-term investments of$5.0 million. Net cash provided by investing activities during 2003 was$16.3 million, resulting from net sales of our short-term investments of$32.2 million and a decrease in loans to related parties of$0.4 million. The increase was partially offset by cash paid foracquisitions, net of cash acquired, of $14.5 million and acquisition ofproperty and equipment of $1.8 million.

 

Net cash (used in) provided by financing activities totaled $(7.6),$16.8 million, and $1.4 million for the years ended December 31,2005, 2004 and 2003, respectively. In November 2005, we initiated a stockrepurchase program, under which we were authorized to repurchase up to$25 million of our common stock in the open market or in privatelynegotiated transactions. In 2005, we used $13.5 million to repurchase 1.0million shares of our common stock pursuant to this program. This use of cashin 2005 was partially offset by cash provided by the exercise of optionsand the purchase of stock through our stock plan and employee stock purchaseplan. In 2004 and 2003, cash was provided primarily from the exercise ofoptions and the purchase of stock through our stock plan and employee stockpurchase plan. In the first quarter of 2006, we purchased an additional 0.9million shares of stock for approximately $11.5 million.

 

32

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The following summarizes our contractual obligations as of December 31,2005 (in thousands):

 
| ** **                                                             | ** ** | **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                                                       |       | $                          | 10,498     |   | $ | 3,150 |   | $ | 5,126 |   | $ | 2,222 |   | — |   |
| Purchase Obligations*                                                  |       | 16,160                     |       | 8,709 |   | 7,162 |   | 289 |   | — |   |
| Other Long-Term Liabilities Reflected on  Our Balance Sheet Under GAAP |       | —                     |       | — |   | — |   | — |   | — |   |
| Total                                                                  |       | $                          | 26,658     |   | $ | 11,859 |   | $ | 12,288 |   | $ | 2,511 |   | — |   |

 

----

*  The expected timing of payment of thepurchase obligations set forth above, which consist primarily of panel and datacenter costs, is estimated based on current information. Timing of payments andactual amounts paid may be different depending on the time of receipt ofgoods or services or changes to agreed-upon amounts for some obligations.

 

While we have historically made additional contributions to our majorityowned subsidiaries and joint ventures, we are not contractually required tomake such contributions. In the event of a request for a capital infusion, wehave the option as to whether or not we participate in the round of funding.Should we elect not to participate, our equity position would be diluted inthat joint venture.

 

We believe that our existing balances of cash, cash equivalents andmarketable securities will be sufficient to meet our cash needs for workingcapital and capital expenditures for at least the next 12 months, althoughwe could elect to seek additional funding prior to that time.

 

**Off-BalanceSheet Arrangements**

 

We have no off-balance sheet arrangements (as defined in Item 303 ofRegulation S-K).

 

33

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

 

As of December 31, 2005, we had cash, cash equivalents andmarketable securities of $180.3 million consisting of cash and highlyliquid, short-term investments. The primary objective of our investmentactivities is to preserve capital while at the same time maximizing yieldswithout significantly increasing risk. To achieve this objective, we maintainour portfolio of cash equivalents and marketable securities in a variety ofgovernment and corporate obligations and money market funds. As of December 31,2005, our investments had a weighted-average time to maturity of approximately156 days.

 

Investments in both fixed-rate and floating-rate interest-earninginstruments carry varying degrees of interest rate risk. The fair market valueof our fixed-rate securities may be adversely impacted due to a rise ininterest rates. In general, securities with longer maturities are subject togreater interest-rate risk than those with shorter maturities. While floatingrate securities generally are subject to less interest-rate risk thanfixed-rate securities, floating-rate securities may produce less incomethan expected if interest rates decrease. Declines of interest rates over timewill reduce our interest income from our cash, cash equivalents and marketablesecurities and, accordingly, could adversely affect our net income and earningsper share. For example, if interest rates were to instantaneously increase(decrease) by 100 basis points, the fair market value of our total investmentportfolio would decrease (increase) by approximately $0.6 million.

 

The following table presents the amounts of our financial instrumentsthat are subject to interest rate risk by expected maturity and averageinterest rates as of December 31, 2005:

 
| ** **                 | ** ** | **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 |       | $                                                                        | 34,940     |   | — |   | — |   | — |   | $ | 34,940 |   |
| Average  interest rates    |       | 0.68                                                                     | %          | — |   | — |   | — |   | 0.68 | % |
| Marketable  securities     |       | $                                                                        | 62,150     |   | $ | 30,893 |   | $ | 2,207 |   | $ | 50,062 |   | $ | 145,312 |   |
| Average  interest rates    |       | 2.77                                                                     | %          | 4.18 | % | 4.25 | % | 4.38 | % | 3.65 | % |
|                            |            |                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Marketable securities with a maturity date greater than one year and ina loss position as of December 31, 2005 are reported as long-term marketablesecurities on the balance sheet. All other marketable securities are reportedas short-term marketable securities.

 

NetRatings historically adjusted its equityinvestments in Ibope eRatings.com and Red Sheriff S.r.l. based on its share ofthe net gains/losses recorded by these joint ventures. At December 31,2004, Ibope eRatings.com and Red Sheriff S.r.l. were accounted for under theequity method. As a result of the losses incurred by Ibope eRatings.com, thebalance in our investment in and our outstanding advances to Ibope eRatings.comwere zero as of March 31, 2004, and therefore no losses have been recordedsince the first quarter of 2004. We have no obligation to make additionalinvestments in Ibope eRatings.com. On February 25, 2005, we purchased theremaining 50% of Red Sheriff S.r.l. (subsequently renamed NetRatings ItaliaS.r.l.) that we did not already own thereby increasing our ownership to 100% ofthe company. This resulted in NetRatings Italia’s operating resultsbeing reported in our consolidated results rather than in equity in earnings ofjoint ventures.

 

Revenues from outside of the United States accounted for approximately53% of our total revenues in both 2005 and 2004. These international sales aretypically denominated in the local currency of the relevant country, and theinternational expenses are also primarily incurred in the local currency. Whenwe consolidate the financial results of our foreign operations, our financialresults could be positively or negatively affected depending on changes in therelevant currency exchange rates. As a result, our financial results could beadversely affected by unfavorable exchange rate fluctuations. Fluctuations incurrency exchange rates did not materially impact our net loss in 2005 or 2004.We have not entered into hedging transactions in order to mitigate the riskfrom currency fluctuations, but we might consider using currency forwardcontracts or other financial instruments commonly utilized to reduce financialmarket risk if it is determined by us that such instruments are appropriate toreduce currency risk.

 

34

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**ITEM 8. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

**NETRATINGS, INC.**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Report of Independent Registered Public Accounting Firm | 36 |
|---------------------------------------------------------|----|
| Consolidated Balance Sheets                             | 38 |
| Consolidated Statements of Operations                   | 39 |
| Consolidated Statements of Stockholders’ Equity    | 40 |
| Consolidated Statements of Cash Flows                   | 41 |
| Notes to Consolidated Financial Statements              | 42 |

 

35

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**Report of Independent Registered Public Accounting Firm**

 

The Board ofDirectors and Stockholders,

NetRatings, Inc.

 

We have audited the accompanying consolidatedbalance sheets of NetRatings, Inc. as of December 31, 2005 and 2004,and the related consolidated statements of operations, stockholders’ equity,and cash flows for each of the three years in the period ended December 31,2005. These financial statements are the responsibility of NetRatings, Inc.’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of NetRatings, Inc. at December 31,2005 and 2004, and the consolidated results of its operations and its cashflows for each of the three years in the period ended December 31, 2005,in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theeffectiveness of NetRatings Inc.’s internal control over financial reporting asof December 31, 2005, based on criteria established in InternalControl-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated March 9,2006, expressed an unqualified opinion thereon.

 

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

 

 

March 9,2006

New York, NewYork

 

36

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**Report of Independent RegisteredPublic Accounting Firm**

** **

TheBoard of Directors and Stockholders of

NetRatings, Inc.

 

We have audited management’s assessment, included inthe accompanying Management’s Annual Report on Internal Control over FinancialReporting, that NetRatings, Inc. maintained effective internal controlover financial reporting as of December 31, 2005, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (the COSO criteria).NetRatings, Inc.’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the company’s internal control over financial reporting basedon our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financialreporting was maintained in all material respects. Our audit included obtainingan understanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

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

 

In our opinion, management’s assessment thatNetRatings, Inc. maintained effective internal control over financialreporting as of December 31, 2005, is fairly stated, in all materialrespects, based on the COSO criteria. Also, in our opinion, NetRatings, Inc.maintained, in all material respects, effective internal control over financialreporting as of December 31, 2005, based on the COSO criteria**.**

 

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of NetRatings, Inc. as of December 31,2005 and 2004, and the related consolidated statements of operations,stockholders’ equity and cash flows for each of the three years ended December 31,2005 and our report dated March 9, 2006 expressed an unqualified opinionthereon.

 

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

 

 

March 9,2006

New York, NewYork

 

37

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**NETRATINGS, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands)**

 
| ** **                                                                                                                                                                   | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                                                   |       |                            |       |                            |       |
| **Current  assets:**                                                                                                                                                         |       |                            |       |                            |       |
| Cash and  cash equivalents                                                                                                                                                   |       | $                               | 34,940     |                            | $          | 33,234 |   |
| Short-term  marketable securities                                                                                                                                            |       | 116,731                         |       | 112,961                         |       |
| Accounts  receivable, net                                                                                                                                                    |       | 16,537                          |       | 13,679                          |       |
| Due from  related party                                                                                                                                                      |       | —                          |       | 1,170                           |       |
| Prepaid  expenses and other current assets                                                                                                                                   |       | 3,867                           |       | 3,106                           |       |
| Total  current assets                                                                                                                                                        |       | 172,075                         |       | 164,150                         |       |
| Long-term  marketable securities                                                                                                                                             |       | 28,581                          |       | 51,407                          |       |
| Property and  equipment, net                                                                                                                                                 |       | 7,827                           |       | 5,977                           |       |
| Intangibles,  net                                                                                                                                                            |       | 13,278                          |       | 16,039                          |       |
| Goodwill                                                                                                                                                                     |       | 76, 856                         |       | 74,897                          |       |
| Other assets                                                                                                                                                                 |       | 1,637                           |       | 1,987                           |       |
| Total assets                                                                                                                                                                 |       | $                               | 300,254    |                            | $          | 314,457 |   |
|                                                                                                                                                                         |       |                            |       |                            |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                               |       |                            |       |                            |       |
| **Current  liabilities:**                                                                                                                                                    |       |                            |       |                            |       |
| Accounts  payable                                                                                                                                                            |       | $                               | 2,914      |                            | $          | 2,868 |   |
| Accrued  liabilities                                                                                                                                                         |       | 11,436                          |       | 8,727                           |       |
| Deferred revenue                                                                                                                                                             |       | 12,666                          |       | 11,435                          |       |
| Due to  related parties                                                                                                                                                      |       | 7,086                           |       | 9,017                           |       |
| Restructuring  liabilities                                                                                                                                                   |       | 1,038                           |       | 625                             |       |
| Total  current liabilities                                                                                                                                                   |       | 35,140                          |       | 32,672                          |       |
| Restructuring  liabilities, less current portion                                                                                                                             |       | 418                             |       | 799                             |       |
| Total  liabilities                                                                                                                                                           |       | 35,558                          |       | 33,471                          |       |
| Minority  interest                                                                                                                                                           |       | 1,298                           |       | 548                             |       |
| Commitments  and contingencies                                                                                                                                               |       | —                          |       | —                          |       |
|                                                                                                                                                                         |       |                            |       |                            |       |
| **Stockholders’  equity:**                                                                                                                                              |       |                            |       |                            |       |
| Common  stock, par value $0.001:                                                                                                                                             |       |                            |       |                            |       |
| Authorized  shares: 200,000;                                                                                                                                                 |       |                            |       |                            |       |
| Issued  shares: 37,838 and 37,181 at December 31, 2005 and 2004, respectively;  outstanding shares: 35,189 and 35,681 at December 31, 2005 and 2004,  respectively |       | 38                              |       | 37                              |       |
| Additional  paid-in capital                                                                                                                                                  |       | 450,100                         |       | 436,845                         |       |
| Deferred  compensation                                                                                                                                                       |       | (3,984                          | )          | —                          |       |
| Accumulated  other comprehensive income                                                                                                                                      |       | (1,441                          | )          | 1,079                           |       |
| Treasury  stock                                                                                                                                                              |       | (36,028                         | )          | (20,631                         | )          |
| Accumulated  deficit                                                                                                                                                         |       | (145,287                        | )          | (136,892                        | )          |
| Total  stockholders’ equity                                                                                                                                             |       | 263,398                         |       | 280,438                         |       |
| Total  liabilities and stockholders’ equity                                                                                                                             |       | $                               | 300,254    |                            | $          | 314,457 |   |

 

See accompanying notes to the consolidated financial statements.

 

38

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**NETRATINGS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except per share data)**

 
| ** **                                                             | ** ** | **For the years ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue                                                                |       | $                                                             | 68,017     |   | $ | 59,294 |   | $ | 41,432 |   |
| Cost of  revenue                                                       |       | 22,651                                                        |       | 23,057 |   | 20,476 |   |
| Gross profit                                                           |       | 45,366                                                        |       | 36,237 |   | 20,956 |   |
| Operating  expenses:                                                   |       |                                                          |       |   |   |   |   |
| Research and  development                                              |       | 11,580                                                        |       | 12,029 |   | 9,998 |   |
| Sales and  marketing                                                   |       | 25,718                                                        |       | 22,801 |   | 17,125 |   |
| General and  administrative                                            |       | 12,130                                                        |       | 12,588 |   | 10,539 |   |
| Restructuring  expenses                                                |       | 1,700                                                         |       | (525 | ) | — |   |
| Litigation  settlement recovery                                        |       | —                                                        |       | (1,800 | ) | — |   |
| Amortization  of intangibles                                           |       | 2,761                                                         |       | 3,742 |   | 3,898 |   |
| Amortization  of stock-based compensation*                             |       | 3,377                                                         |       | 7,587 |   | 9,105 |   |
| Total  operating expenses                                              |       | 57,266                                                        |       | 56,422 |   | 50,665 |   |
| Loss from  operations                                                  |       | (11,900                                                       | )          | (20,185 | ) | (29,709 | ) |
| Equity in  earnings of joint ventures                                  |       | 56                                                            |       | 129 |   | 66 |   |
| Interest  income, net                                                  |       | 4,519                                                         |       | 2,879 |   | 4,053 |   |
| Minority  interest in net (income) losses of consolidated subsidiaries |       | (750                                                          | )          | (242 | ) | 455 |   |
| Net loss  before provision for income taxes                            |       | (8,075                                                        | )          | (17,419 | ) | (25,135 | ) |
| Provision  for income taxes                                            |       | (320                                                          | )          | — |   | — |   |
| Net loss                                                               |       | $                                                             | (8,395     | ) | $ | (17,419 | ) | $ | (25,135 | ) |
|                                                                   |       |                                                          |       |   |   |   |   |
| Basic and  diluted net loss per common share                           |       | $                                                             | (0.23      | ) | $ | (0.50 | ) | $ | (0.74 | ) |
|                                                                   |       |                                                          |       |   |   |   |   |
| Shares used  to compute basic and diluted net loss per common share    |       | 35,985                                                        |       | 34,637 |   | 33,792 |   |

 

----

 
| *Amortization  of stock-based compensation: |   |   |   |   |   |   |   |
|---------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Cost of  revenue                            |   | $      | 151    |   | $      | 7,587  |   | $ | 9,105 |   |
| Research and  development                   |   | 429    |   | — |   | — |   |
| Sales and  marketing                        |   | 1,381  |   | — |   | — |   |
| General and  administrative                 |   | 1,416  |   | — |   | — |   |
| Total                                       |   | $      | 3,377  |   | $      | 7,587  |   | $ | 9,105 |   |

 

See accompanying notes to the consolidated financial statements.

 

39

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**NETRATINGS, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**(inthousands)**

 
|                                                |   |                  |   |        |   |           |   | **Deferred**      |   | **Accumulated**         |    |            |   |                   |   |        |   |       |    |
|-----------------------------------------------------|--------|-----------------------|--------|-------------|--------|----------------|--------|-------------------|--------|-------------------------|---------|-----------------|--------|------------------------|--------|-------------|--------|------------|---------|
|                                                |   |                  |   |        |   | **Additional** |   | **Compensation**  |   | **Other**               |    |            |   |                   |   |        |   | **Total**  |    |
|                                                |   | **Common Stock** |   | **Paid-In** |   | **and**        |   | **Comprehensive** |   | **Treasury Stock** |    | **Accumulated** |   | **Stockholders’** |   |
|                                                |   | **Shares**            |   | **Amount**  |   | **Capital**    |   | **Other Costs**   |   | **Income (Loss)**  |    | **Shares**      |   | **Amount**             |   | **Deficit** |   | **Equity** |    |
|                                                |   |                  |   |        |   |           |   |              |   |                    |    |            |   |                   |   |        |   |       |    |
| 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     | )       |
| Change in accumulated translation adjustment        |   | —                |   | —      |   | —         |   | —            |   | 1,332                   |    | —          |   | —                 |   | —      |   | 1,332      |    |
| Comprehensive loss                                  |   |                  |   |        |   |           |   |              |   |                    |    |            |   |                   |   |        |   | (25,110    | )       |
| Issuance of common stock for employee benefit plans |   | 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       | )       |
| Change in accumulated translation adjustment        |   | —                |   | —      |   | —         |   | —            |   | 297                     |    | —          |   | —                 |   | —      |   | 297        |    |
| Comprehensive loss                                  |   |                  |   |        |   |           |   |              |   |                    |    |            |   |                   |   |        |   | (17,878    | )       |
| Issuance of common stock for employee benefit plans |   | 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        |   | —            |   | 1,079                   |    | 1,500           |   | (20,631                | )      | (136,892    | )      | 280,438    |    |
| Net loss                                            |   | —                |   | —      |   | —         |   | —            |   | —                  |    | —          |   | —                 |   | (8,395      | )      | (8,395     | )       |
| Unrealized gain from short-term investments         |   | —                |   | —      |   | —         |   | —            |   | 94                      |    | —          |   | —                 |   | —      |   | 94         |    |
| Change in accumulated translation adjustment        |   | —                |   | —      |   | —         |   | —            |   | (2,614                  | )       | —          |   | —                 |   | —      |   | (2,614     | )       |
| Comprehensive loss                                  |   |                  |   |        |   |           |   |              |   |                    |    |            |   |                   |   |        |   | (10,915    | )       |
| Issuance of common stock for employee benefit plans |   | 657                   |   | 1           |   | 5,894          |   | —            |   | —                  |    | —          |   | —                 |   | —      |   | 5,895      |    |
| Stock repurchases                                   |   | —                |   | —      |   | —         |   | —            |   | —                  |    | 1,149           |   | (15,397                | )      |        |   | (15,397    | )       |
| Deferred stock-based compensation                   |   | —                |   | —      |   | 7,361          |   | (7,361            | )      | —                  |    | —          |   | —                 |   | —      |   | —     |    |
| Amortization stock based compensation               |   | —                |   | —      |   |           |   | 3,377             |   | —                  |    | —          |   | —                 |   | —      |   | 3,377      |    |
| Balances at December 31, 2005                  |   | 37,838                |   | $           | 38     |           | $      | 450,100           |   | $                       | (3,984  | )               | $      | (1,441                 | )      | 2,649       |   | $          | (36,028 | ) | $ | (145,287 | ) | $ | 263,398 |   |

 

See accompanying notes to theconsolidated financial statements.

 

40

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**NETRATINGS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

 
| ** **                                                                                                                         | ** ** | **For the years ended  December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                                                         | ** ** | **2005**                                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| **OPERATING  ACTIVITIES**                                                                                                          |       |                                                      |       |   |   |   |   |
| Net loss                                                                                                                           |       | $                                                         | (8,395     | ) | $ | (17,419 | ) | $ | (25,135 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities, net of  effects of acquired businesses:               |       |                                                      |       |   |   |   |   |
| Depreciation                                                                                                                       |       | 3,565                                                     |       | 2,763 |   | 2,132 |   |
| Equity in  earnings of joint ventures                                                                                              |       | (56                                                       | )          | (129 | ) | (66 | ) |
| Provision  for doubtful accounts                                                                                                   |       | 301                                                       |       | 313 |   | 216 |   |
| Stock-based  compensation                                                                                                          |       | 3,377                                                     |       | 7,587 |   | 9,105 |   |
| Minority  interest                                                                                                                 |       | 750                                                       |       | 242 |   | (455 | ) |
| Amortization  of intangibles                                                                                                       |       | 2,761                                                     |       | 3,742 |   | 3,898 |   |
| Utilization  of acquired net operating loss carryforwards                                                                          |       | 107                                                       |       |   |   |   |   |
| Changes in  current assets and liabilities:                                                                                        |       |                                                      |       |   |   |   |   |
| Accounts  receivable                                                                                                               |       | (2,560                                                    | )          | (3,807 | ) | 2,880 |   |
| Prepaids,  other current assets and other assets                                                                                   |       | (287                                                      | )          | (316 | ) | 2,156 |   |
| Accounts  payable                                                                                                                  |       | 201                                                       |       | (379 | ) | (5,884 | ) |
| Accrued  liabilities                                                                                                               |       | (320                                                      | )          | (2,049 | ) | (1,282 | ) |
| Restructuring  liabilities                                                                                                         |       | 32                                                        |       | (1,566 | ) | (3,558 | ) |
| Due to/from  related parties                                                                                                       |       | (1,860                                                    | )          | (3,406 | ) | 395 |   |
| Deferred  revenue                                                                                                                  |       | 1,234                                                     |       | 987 |   | (1,545 | ) |
| Net cash  used in operating activities                                                                                             |       | (1,150                                                    | )          | (13,437 | ) | (17,143 | ) |
| **INVESTING  ACTIVITIES**                                                                                                          |       |                                                      |       |   |   |   |   |
| Acquisition  of property and equipment                                                                                             |       | (5,366                                                    | )          | (4,798 | ) | (1,775 | ) |
| Purchase of  investments                                                                                                           |       | (121,508                                                  | )          | (163,793 | ) | (379,737 | ) |
| Sale of  investments                                                                                                               |       | 76,617                                                    |       | 135,616 |   | 336,879 |   |
| Maturities  of investments                                                                                                         |       | 64,040                                                    |       | 23,185 |   | 75,032 |   |
| Loan to  related parties                                                                                                           |       | 1,170                                                     |       | (712 | ) | 376 |   |
| Acquisitions,  net of cash acquired of $215, $0 and $2,375 in 2005, 2004 and 2003,  respectively, and investment in joint ventures |       | (1,806                                                    | )          | (10,117 | ) | (14,500 | ) |
| Net cash  provided by (used in) investing activities                                                                               |       | 13,147                                                    |       | (20,619 | ) | 16,275 |   |
| **FINANCING  ACTIVITIES**                                                                                                          |       |                                                      |       |   |   |   |   |
| Proceeds  from issuance of common stock                                                                                            |       | 5,895                                                     |       | 16,549 |   | 1,393 |   |
| Proceeds  from stock issued by majority owned subsidiary                                                                           |       | —                                                    |       | 247 |   | — |   |
| Stock  repurchases                                                                                                                 |       | (13,460                                                   | )          | — |   | — |   |
| Net cash  (used in) provided by financing activities                                                                               |       | (7,565                                                    | )          | 16,796 |   | 1,393 |   |
| Effect of  exchange rate fluctuations                                                                                              |       | (2,726                                                    | )          | 585 |   | 1,584 |   |
| Net increase  (decrease) in cash and cash equivalents                                                                              |       | 1,706                                                     |       | (16,675 | ) | 2,109 |   |
| Cash and  cash equivalents at beginning of period                                                                                  |       | 33,234                                                    |       | 49,909 |   | 47,800 |   |
| Cash and  cash equivalents at end of period                                                                                        |       | $                                                         | 34,940     |   | $ | 33,234 |   | $ | 49,909 |   |
| **Supplemental  disclosure of cash flow information:**                                                                             |       |                                                      |       |   |   |   |   |
| Cash paid  for income taxes                                                                                                        |       | $                                                         | 20         |   | $ | — |   | $ | — |   |

 

See accompanying notes to theconsolidated financial statements.

 

41

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**NETRATINGS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1: Summary of Significant AccountingPolicies**

 

**NetRatings, Inc.**

 

NetRatings, Inc. (“NetRatings” or the “Company”)is a provider of Internet audience measurement and analysis in the United Statesand around the world. All of the Company’s products and services are designedto assist companies in making critical business decisions regarding theirInternet strategies and initiatives. The Company has a diversified and globalclient base, including large and small companies in the media, technology,advertising, financial services, consumer products, retail and travelindustries. A majority of the Company’s products and services are sold on anannual 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 which NetRatingscurrently operates is the market for providing media and market researchfocused on Internet audience behavior and activity. Almost all of the Company’srevenues are generated through the sale of products in this one segment.

 

**Basis of Presentation**

 

The accompanying consolidated financialstatements include the accounts of NetRatings and its wholly owned and majorityowned subsidiaries. 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 toprior year balances to conform with current year reportingclassifications. The reclassifications include reclassification of marketablesecurities with a maturity date greater than one year and in a loss position tolong-term marketable securities, and the reclassification of due from jointventures to other assets.

 

**Cash and Cash Equivalents and MarketableSecurities**

 

Cash and cash equivalents consist of highlyliquid investments including money market accounts, commercial paper, U.S.government and agency securities, and corporate notes with insignificantinterest-rate risk and original maturities of three months or less at date ofpurchase. Cash and cash equivalents are stated at fair market value, whichapproximates cost.

 

Marketable securities 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. NetRatings uses the specific identification method to computerealized gains and losses on its short-term investments.

 

Restricted cash included in other assets was$0.7 million and $0.8 million at December 31, 2005 and 2004, respectively.

 

Interest income was $5.0 million,$3.2 million and $4.3 million for the years ended December 31,2005, 2004 and 2003, respectively.

 

**Property and Equipment**

 

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

 

**CapitalizedSoftware**

 

The Company capitalizes certain internal andexternal costs incurred to acquire or create internal use software inaccordance with AICPA Statement of Position 98-1, “Accounting for the Costs ofComputer Software Developed or Obtained for Internal Use”. Capitalized softwareis included in property, plant and equipment and is depreciated whendevelopment is complete. Capitalized software costs for the years ended December 31,2005, 2004 and 2003 were $1.7 million, $0.3 million and $0.2 million,respectively.

 

**Impairment of Long-Lived Assets**

 

The Company’s long lived assets includegoodwill and other intangible assets. In accordance with Statement of FinancialAccounting Standards (“SFAS”) No 142, “Goodwill and Other Intangible Assets”,goodwill and indefinite-lived

 

42

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intangibles are not amortized, but are reviewed at least annually forimpairment. NetRatings retains an independent appraisal firm which annuallyprovides a valuation of the Company’s fair value, based on a discounted cashflow and comparable company analyses. The cash flow analysis requiressignificant judgment and estimates by management relating to assumptions aboutexpected future operating performance and appropriate 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. The estimate of discounted cash flows may differfrom actual cash flows due to, among other things, economic conditions, changesto the Company’s business model and changes in operating performance. TheCompany performed its annual evaluation of goodwill and intangibles as of October 1,2005 at which time no impairment was indicated. There has been no indication ofimpairment since October 1, 2005.

 

**Other Assets**

 

Other assets include (i) receivablesfrom joint ventures, (ii) restricted cash related to the Company’s officeleases in Seattle, New York, London and Sydney, (iii) long-term securitydeposits, (iv) investments in joint ventures and (v) other assets. Receivablesfrom joint ventures, before reserves, totaled $0.9 million at December 31,2005 and 2004.

 

**Foreign Currency Translation**

 

The Company applies SFAS No. 52, “ForeignCurrency Translation”, with respect to its international operations. All assetsand liabilities are remeasured at the current exchange rate at the end of theperiod, and revenues and expenses are remeasured at average exchange rates ineffect during the period. The translation gain (loss) resulting from theprocess of remeasuring foreign currency financial statements into U.S. dollarsis included as a component of accumulated other comprehensive income instockholders’ equity. Gains (losses) resulting from foreign currencytransactions were not material in 2005, 2004 or 2003.

 

**Revenue Recognition**

 

Revenue is recognized when (i) persuasiveevidence of an arrangement exists, (ii) services have been rendered, (iii) theprice is fixed or determinable and (iv) collectibility is reasonably assured. Revenuefrom the Company’s syndicated and custom products are recognized ratably overthe period in which the product or service is provided. Billings rendered inadvance of services being performed are recorded as deferred revenue in theaccompanying balance sheet. The Company will generate revenue in 2006 from thelicensing of its patents and record the revenue in accordance with these fourbasic criteria.

 

**Panel Costs**

 

Costs of establishing and maintaining theCompany’s panels, including the MegaPanel, are expensed as incurred and areincluded in cost of revenue in the accompanying consolidated statements ofoperations.

 

**Advertising Expense**

 

All advertising and promotion costs areexpensed as incurred. Advertising and promotion costs, which are included insales and marketing expense, were $0.4 million, $0.5 million and$0.1 million for the years ended December 31, 2005, 2004 and 2003,respectively.

 

**Income Taxes**

 

NetRatings accounts for income taxes inaccordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”),which requires the use of the liability method in accounting for income taxes.Under SFAS 109, deferred tax assets and liabilities are measured based ondifferences between the financial reporting and tax bases of assets andliabilities using enacted tax rates and laws that will be in effect when thedifferences are expected to reverse. A valuation allowance is recorded when itis more likely than not that some or all of the deferred tax asset will not berealized.

 

**Comprehensive Loss**

 

Comprehensive loss includes net loss as wellas other comprehensive income. At December 31, 2005, 2004 and 2003,NetRatings’ accumulated other comprehensive income included net unrealized lossesfrom short-term investments of $0.8 million, $0.8 million and $0.1 million,respectively, and $0.6 million, $(1.9) million and $(1.6) million oflosses (gains) on foreign currency translation adjustments, respectively.

 

43

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**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 31,2005, the fair market value, cost and net unrealized loss of NetRatings’short-term investments totaled $145.3 million, $146.1 million and$0.8 million, respectively. At December 31, 2004, the fair marketvalue, cost and net unrealized loss of NetRatings’ short-term investmentstotaled $164.4 million, $165.2 million and $0.8 million,respectively. For the years ended December 31, 2005, 2004 and 2003,realized gains and losses were not material.

 

Financial instruments that potentiallysubject NetRatings to concentrations of credit risk include cash and cashequivalents, short-term investments and trade accounts receivable. NetRatingsplaces certain of its cash in banks that are federally insured in limitedamounts and in investment-grade debt instruments, many of which are backed bythe U.S. government or other government agencies. NetRatings conducts businesswith companies 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, 2005, NetRatings had bad debtwrite-offs of $0.3 million and reclassified $0.4 million related to reservesfor other assets to other assets. For the year ended December 31, 2004,NetRatings had bad debt write-offs of $0.5 million and reclassified$0.3 million related to bad debt from deferred revenue. For the year endedDecember 31, 2003, NetRatings had bad debt write-offs of$0.1 million. At December 31, 2005 and 2004, the allowance fordoubtful accounts was $0.6 million and $1.0 million, respectively.

 

**Stock-Based Compensation**

 

NetRatings accounts for stock-based awards toemployees under the intrinsic value method in accordance with AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees” (“APB 25”), and discloses the general and pro forma financialinformation required by SFAS No. 123, “Accounting for Stock-BasedAccounting” (“SFAS 123”), and SFAS No. 148*, “***Accountingfor Stock-Based Compensation -Transition and Disclosure — an amendment of FASBStatement No. 123” (“SFAS 148”)***.*

 

Disclosures required by SFAS 123 andSFAS 148 are as follows:

 
| **Option value information(a)** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                      |       |     |       |     |       |     |       |
| Fair value  per option(b)                 |       | $        | 7.36       |     | $          | 4.34     |       | $ | 2.80 |   |
| Valuation  assumptions:                   |       |     |       |     |       |     |       |
| Expected  option term (years)             |       | 2.38     |       | 2.32     |       | 2.36     |       |
| Expected  volatility                      |       | 60       | %          | 60       | %          | 74       | %          |
| Expected  dividend yield                  |       | 0        | %          | 0        | %          | 0        | %          |
| Risk-free  interest rate                  |       | 3.38     | %          | 2.77     | %          | 1.31     | %          |
|                                           |            |          |            |          |            |          |            |  |  |  |

 

----

(a)                                  Weightedaverages of option grants during each period

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

 

For purposes of pro forma disclosures, theestimated fair value of the stock option and restricted stock awards isamortized to expense over the vesting period of the awards using theaccelerated method. In connection with the Company’s Employee Stock PurchasePlan, the 15% discount to the share price on the date of purchase or thecommencement of the purchase period, whichever is lower, and the fair value ofthe remainder of the purchase price, is treated as compensation expense for proforma purposes. The following table illustrates the pro forma effect on consolidatednet income and earnings per share of all outstanding awards in each period (inthousands, except for earnings per share data):

 

44

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| ** **                                                                                                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                              |       |     |       |     |       |     |       |
| Net loss, as  reported                                                                                            |       | $        | (8,395     | )        | $          | (17,419  | )          | $ | (25,135 | ) |
| Add:  Stock-based employee compensation expense included in reported net loss                                     |       | 3,377    |       | —   |       | —   |       |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards |       | (5,658   | )          | (4,699   | )          | (6,141   | )          |
| Pro forma  net loss                                                                                               |       | $        | (10,676    | )        | $          | (22,118  | )          | $ | (31,276 | ) |
|                                                                                                              |       |     |       |     |       |     |       |
| Earnings per  share:                                                                                              |       |     |       |     |       |     |       |
| Basic and  diluted net loss per share, as reported                                                                |       | $        | (0.23      | )        | $          | (0.50    | )          | $ | (0.74 | ) |
| Pro forma  basic and diluted net loss per share                                                                   |       | $        | (0.30      | )        | $          | (0.64    | )          | $ | (0.93 | ) |

 

The pro forma impact of compensation expensemeasured under SFAS 123 on the net loss for the years ended December 31,2005, 2004 and 2003 is not representative of the effects on net income (loss)for future years, as future years will include the effects of additional yearsof stock grants.

 

**Computation of Net Loss Per Common Share**

 

NetRatings computes net loss per common sharebased on SFAS No. 128, “Earnings Per Share” (“SFAS 128”). Inaccordance with SFAS 128, basic net loss per share is calculated as netloss divided by the weighted-average number of common shares outstanding.Diluted net loss per share is computed by dividing net loss by theweighted-average number of common shares outstanding and dilutive common stockequivalents outstanding during the period. Common equivalent shares from stockoptions have been excluded from the calculation of net loss per share as theireffect is anti-dilutive.

 

The following table sets forth thecalculation of basic and diluted weighted-average shares outstanding and netloss per share (in thousands, except per share amounts):

 
| ** **                                                                                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                         |       |     |       |     |       |     |       |
| Net loss                                                                                                     |       | $        | (8,395     | )        | $          | (17,419  | )          | $ | (25,135 | ) |
|                                                                                                         |       |     |       |     |       |     |       |
| Weighted-average  shares of common stock outstanding used in computing basic and diluted net loss  per share |       | 35,985   |       | 34,637   |       | 33,792   |       |
|                                                                                                         |       |     |       |     |       |     |       |
| Basic and  diluted net loss per common share                                                                 |       | $        | (0.23      | )        | $          | (0.50    | )          | $ | (0.74 | ) |

 

If NetRatings had reported net income, thecalculation of historical diluted earnings per share would have includedapproximately an additional 1.0 million, 1.2 million and 0.2 millioncommon equivalent shares related to outstanding stock awards not included above(determined using the treasury stock method) for the years ended December 31,2005, 2004 and 2003, respectively.

 

**Use of Estimates**

 

The preparation of these consolidatedfinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the consolidated financial statements andthe reported amounts of revenues and expenses during the reporting period. Onan ongoing basis, management evaluates its estimates and judgments, includingthose related to the revenue recognition, collectibility of receivables, thevaluation of fixed assets, goodwill, intangible assets, including depreciablelives assigned, marketable securities and income taxes, as well as theestimates and judgments relating to the valuation of certain liabilities,including restructuring liabilities, service periods for stock awards withperformance criteria, and contingencies and litigation. NetRatings’ managementbases its estimates and judgments about the carrying values of assets andliabilities 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 December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123(R), “Share-Based Payment” (“SFAS123(R)”). SFAS 123(R) revises SFAS 123 and supersedes APB 25.SFAS 123(R) requires all public

 

45

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entitiesto recognize compensation expense for all share-based payments as measured bythe fair value on the grant date over the requisite service period. The FASBrequired companies to adopt SFAS 123(R) no later than the first interim orannual period beginning after June 15, 2005.

 

The Company currently accounts for its stock-basedawards to employees in accordance with APB 25 and disclose the general and proforma financial information required by SFAS 123 and SFAS 148. Historically,the Company has used the Black-Scholes option pricing model to estimate thevalue of stock options granted to employees. SFAS 123(R) requires that allshare-based payments granted prior to the adoption date that remain unvested atthe adoption date be expensed over the remaining service period. The Companycurrently intends to adopt SFAS 123(R) using the modified-prospectivemethod, and therefore the Company will begin expensing unvested options in thefirst quarter of 2006. The Company currently estimates the impact of adoptingSFAS 123(R) for existing unvested options will be an expense ofapproximately $1.1 million for 2006.

 

In October 2005, the FASB issued FSPFAS 123(R)-2, “Practical Accommodation to the Application of Grant Date asDefined in FAS 123(R)” (“FSP 123(R)-2”). FSP 123(R)-2 providesguidance on the application of grant date as defined in SFAS 123(R). Inaccordance with this standard a grant date of an award exists if (i) theaward is a unilateral grant and (ii) the key terms and conditions of theaward are expected to be communicated to an individual recipient within arelatively short time period from the date of approval. The Company intends toadopt this standard when the Company adopts SFAS 123(R). The Company does notcurrently believe the adoption of FSP 123(R)-2 will have a material impacton the Company’s consolidated financial position, results of operations or cashflows.

 

In November 2005, the FASB issued FSPFAS 123(R)-3, “Transition Election Related to Accounting for the TaxEffects of Share-Based Payment Awards” (“FSP 123(R)-3”). FSP 123(R)-3provides an elective alternative method that establishes a computationalcomponent to arrive at the beginning balance of the accumulated paid-in capitalpool related to employee compensation and a simplified method to determine thesubsequent impact on the accumulated paid-in capital pool of employee awardsthat are fully vested and outstanding upon the adoption of SFAS 123(R). TheCompany is currently evaluating this transition method.

 

In May 2005, the FASB issued SFAS No. 154,“Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 is areplacement of APB No. 20, “Accounting Changes”, and SFAS No. 3,****“**Reporting AccountingChanges in Interim Financial Statements—an amendment of APB Opinion No. 28”***.* SFAS 154 provides guidance on the accounting for andreporting of accounting changes and error corrections. It establishesretrospective application as the required method for reporting a change inaccounting principle. SFAS 154 provides guidance for determining whetherretrospective application of a change in accounting principle is impracticableand for reporting a change when retrospective application is impracticable.SFAS 154 also addresses the reporting of a correction of an error by restatingpreviously issued financial statements. SFAS 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December 15,2005. The Company intends to adopt this pronouncement beginning in 2006 anddoes not currently believe that it will have a material impact on the Company’sconsolidated financial position, results of operations or cash flows.

 

In November 2005, the FASB issued FSPFAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairmentand Its Application to Certain Investments” (“FSP 115-1 and 124-1”), whichclarifies when an investment is considered impaired, whether the impairment isother than temporary, and the measurement of an impairment loss. It alsoincludes accounting considerations subsequent to the recognition of another-than-temporary impairment and requires certain disclosures aboutunrealized losses that have not been recognized as other-than-temporaryimpairments. FSP 115-1 and 124-1 are effective for all reporting periodsbeginning after December 15, 2005. At December 31, 2005, the Companyhad no unrealized investment losses that had been recognized asother-than-temporary impairments in the Company’s available-for-sale securities.The Company does not anticipate that the implementation of these statementswill have a significant impact on the Company’s consolidated financialposition, results of operations or cash flows.

 

46

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**Note 2: Balance Sheet Details**

 

Details of balance sheet items as of December 31,2005 and 2004 are as follows (in thousands):

 

The following is a summary of estimated fairvalue of cash and cash equivalents and available for sale investments based onquoted market prices as of December 31, 2005 and 2004:

 
| ** **                                                        | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Cash and  cash equivalents                                        |       | $          | 34,940     |       | $          | 33,234 |   |
| Available  for sale investments:                                  |       |       |       |       |       |
| Auction rate  securities                                          |       | 54,070     |       | 49,013     |       |
| Corporate  notes                                                  |       | 26,644     |       | 19,331     |       |
| Commercial  paper                                                 |       | 2,018      |       | 1,992      |       |
| Euro dollar  bonds                                                |       | 23,248     |       | 41,608     |       |
| Floating  rate bonds                                              |       | 2,008      |       | —     |       |
| U.S.  government and agency securities                            |       | 37,324     |       | 52,424     |       |
| Total  available for sale investments                             |       | 145,312    |       | 164,368    |       |
| Total cash  and cash equivalents and marketable securities        |       | $          | 180,252    |       | $          | 197,602 |   |
|                                                              |       |       |       |       |       |
| Cash and  cash equivalents and marketable securities reported as: | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and  cash equivalents                                        |       | $          | 34,940     |       | $          | 33,234 |   |
| Short-term  marketable securities                                 |       | 116,731    |       | 112,961    |       |
| Long-term  marketable securities                                  |       | 28,581     |       | 51,407     |       |
| Total cash  and cash equivalents and marketable securities        |       | $          | 180,252    |       | $          | 197,602 |   |

 

Property and equipment, net:

 
| ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
| Computer  equipment and software          |       | $          | 15,471     |       | $          | 15,279 |   |
| Office  equipment, furniture and fixtures |       | 298        |       | 1,556      |       |
| Leasehold  improvements                   |       | 990        |       | 782        |       |
|                                      |       | 16,759     |       | 17,617     |       |
| Less  accumulated depreciation            |       | (8,932     | )          | (11,640    | )          |
| Property and  equipment, net              |       | $          | 7,827      |       | $          | 5,977 |   |

 

Accrued liabilities:

 
| ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|
| Accrued  compensation                  |       | $          | 5,981      |       | $          | 4,846 |   |
| Accrual for  stock repurchases         |       | 1,937      |       | —     |       |
| Acquisition  related transaction costs |       | 362        |       | 368        |       |
| Other  accrued liabilities             |       | 3,156      |       | 3,513      |       |
| Accrued  liabilities                   |       | $          | 11,436     |       | $          | 8,727 |   |

 

Marketablesecurities with a maturity date greater than one year and in a loss position asof December 31, 2005 are reported as long-term marketable securities on thebalance sheet. All other marketable securities are reported as short-termmarketable securities.

 

**Note 3: Acquisitions**

 

In 2002 NetRatings acquired 86% of thecapital stock of NetValue, S.A. (“NetValue”), an international provider ofInternet audience measurement services. In the fourth quarter of 2003, NetValue’sstockholders approved a resolution to dissolve NetValue and take steps tovoluntarily liquidate NetValue’s net assets. During the fourth quarter of 2003,NetRatings acquired the remaining net assets of NetValue, and the company wasdissolved.

 

In January 2003, NetRatings acquiredbeneficial ownership of 80% of MMXI Switzerland, a Swiss company whose businessis focused in the international Internet media and market research industries.During the second quarter of 2003, NetRatings acquired beneficial ownership ofthe remaining 20% of MMXI Switzerland.

 

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

 

47

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NetRatings increased its ownership in two ofits joint ventures during 2003. In the second quarter of 2003, NetRatingsincreased its ownership in NetRatings Japan from 49% to 58%. In the fourthquarter of 2003, the Company increased its ownership in Mediametrie NetRatings,its joint venture in France, from 50% to 66%.

 

In December 2003, NetRatings acquired58% of the common stock of Red Sheriff Ltd., a site-centric-based Internetaudience measurement company. During the first half of 2004, NetRatingsacquired the remaining shares of common stock in Red Sheriff thereby increasingits ownership to 100% of the company.

 

During the third quarter of 2004, NetRatingsJapan sold a small ownership interest in NetRatings Japan to a third party fora total of $0.2 million. As a result of this transaction, the Company’sstockholders’ equity increased by $0.1 million, and its equity ownership inNetRatings Japan decreased from 58.2% to approximately 56.5%. On December 1,2004, Red Sheriff K.K., a wholly-owned subsidiary of the Company, merged withand into NetRatings Japan, whereupon new shares of NetRatings Japan were issuedto the Company. As a result, Red Sheriff K.K. became a wholly-owned subsidiaryof NetRatings Japan. At the same time, NetRatings sold shares of NetRatingsJapan to TransCosmos for a total of $0.8 million so that TransCosmos wouldmaintain its existing stake in NetRatings Japan. As a result of thesetransactions, NetRatings increased its ownership of NetRatings Japan to 56.8%.These transactions resulted in a net decrease to goodwill of $0.8 millionrelated to the acquisition of Red Sheriff.

 

On February 25, 2005, NetRatings acquired theremaining 50% of its Italian joint venture, Red Sheriff S.r.l., forapproximately $2.0 million in cash, resulting in an increase to goodwill ofapproximately $1.9 million. Red Sheriff S.r.l. was subsequently renamedNetRatings Italia S.r.l.

 

NetRatings accounts for its acquisitionsunder the purchase method. The allocation of purchase price related to theacquisitions reflects the fair value of the acquired assets and liabilities.The results of operations of each acquired entity are reflected in the consolidatedresults of operations beginning on their respective acquisition dates. Prior tothe Company’s majority ownership of NetRatings Italia S.r.l., NetRatings Japanand Mediametrie NetRatings, NetRatings recorded its equity share of these jointventure’s gains or losses in equity in earnings (losses) of joint venture.Effective May 2003, November 2003 and February 2005, thefinancial results of NetRatings Japan, Mediametrie NetRatings and NetRatingsItalia S.r.l., respectively, are consolidated into the Company’s consolidatedfinancial statements.

 

Results of operations for each of theacquired companies are included prospectively from the date of acquisition. Proforma results of operations reflecting the 2003-2005 acquisitions have not beenpresented because the results of operations of the acquired companies, eitherindividually or collectively, are not material to the Company’s results ofoperations.

 

**Note 4: Goodwill and Intangible Assets**

 

During the first quarter of 2005, NetRatingsfinalized the purchase price allocation related to Red Sheriff, resulting in anet increase to goodwill of approximately $0.2 million. On February 25,2005, NetRatings acquired the remaining 50% of its Italian joint venture, RedSheriff S.r.l., for approximately $2.0 million in cash, resulting in anincrease to goodwill of approximately $1.9 million. During 2005, NetRatingsused net operating loss carryforwards of acquired companies, resulting in adecrease in goodwill of $0.1 million.

 

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 the fourth quarter of 2004, the Companyfinalized its valuation of Red Sheriff resulting in an increase in intangibleassets of $0.7 million and a decrease to goodwill in the same amount. TheCompany made preliminary adjustments to its purchase price allocation for RedSheriff in the fourth quarter of 2004 resulting in (i) adjustments tocertain asset and liability balances existing at the acquisition dates and (ii) adjustmentsto acquisition related costs, both of which resulted in a net decrease togoodwill of $0.8 million. On December 1, 2004, Red Sheriff K.K. mergedwith and into NetRatings Japan and, at the same time, NetRatings received $0.8million from one of NetRatings Japan’s minority shareholders, which wasrecorded as a reduction in goodwill. During 2004, NetRatings also finalized thepurchase price allocation related to its other acquisitions in 2003, resultingin (i) adjustments to certain asset and liability balances existing at theacquisition dates and (ii) adjustments to acquisition related costs, bothof which resulted in a net decrease to goodwill of $0.4 million.

 

48

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Goodwill and other intangible assets alongwith their weighted average life, at December 31, 2005 and 2004, consistedof the following (in thousands, except weighted average life):

 
| ** **                                     | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **Gross  carrying  amount**     | ** ** | **Accumulated  amortization** | ** ** | **Net** | ** ** | **Weighted  average  life** | ** ** |
|                                           |       |                            |       |   |   |   |   |   |   |
| Intangible  assets continuing to be amortized: |       |                            |       |   |   |   |   |   |   |
| Core  technologies                             |       | $                               | 5,482      |   | $ | 2,691 |   | $ | 2,791 |   | 7 |   |
| Customer  contracts                            |       | 4,940                           |       | 3,740 |   | 1,200 |   | 3 |   |
| Patents and  other                             |       | 15,682                          |       | 6,395 |   | 9,287 |   | 11 |   |
| Total                                          |       | $                               | 26,104     |   | $ | 12,826 |   | 13,278 |   |   |   |
| Goodwill                                       |       |                            |       |   |   | 76,856 |   |   |   |
| Total  goodwill and other intangible assets    |       |                            |       |   |   | $ | 90,134 |   |   |   |

 

 
| ** **                                     | ** ** | **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 |   |   |   |

 

Based on the current amount of intangiblessubject to amortization, the estimated amortization expense for each of thesucceeding five years is as follows: 2006: $2.4 million; 2007:$2.4 million; 2008: $1.8 million; 2009: $1.4 million; and 2010:$1.1 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) leasetermination costs and other costs associated with vacating certain facilitiesand abandoning certain long-lived assets; and (iii) costs incurred fordiscontinuation of certain services. Also, in connection with its acquisitionscompleted in 2002 and 2003, NetRatings established additional restructuringliabilities of approximately $8.6 million. These restructuring plansinvolved (i) the termination of 95 employees worldwide, all of whom wereterminated as of December 31, 2004; (ii) amounts accrued related toongoing lease obligations for vacated properties; and (iii) costs relatedto contractual obligations or payments for certain products and/or projectswhich were eliminated as of the acquisition dates. During 2003, the Companymade adjustments to the purchase price allocation of the acquisitions made in2002, resulting in a net decrease to goodwill of $0.6 million. During 2002 and2003, $11.5 million of restructuring liabilities had been paid, resultingin a remaining balance of $3.4 million as of December 31, 2003.

 

During 2004, the Company made adjustments tothe purchase price allocation for Red Sheriff and finalized the purchase priceallocations of acquisitions made in 2003, resulting in net decreases inrestructuring liabilities of approximately $0.4 million. These adjustmentsinclude decreases in severance related liabilities that will not be paid andadjustments to estimates relating to idle facility lease commitments, all ofwhich 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 of restructuring expense of $0.5 million,which is included in restructuring expenses in the accompanying consolidatedstatement of operations.

 

49

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In the third quarter of 2005, NetRatings’ managementapproved and initiated a restructuring plan primarily intended to streamlineits European operations. The 2005 restructuring plan includes the terminationof 10 employees related to relocating engineering operations in Europe to theUnited States and the elimination of certain management positions, all of whichwere terminated as of December 31, 2005. As a result of the 2005 restructuringplan, the Company recorded a restructuring charge of $1.7 million forseverance costs in 2005.

 

The following tables summarize activityassociated with the restructuring plans and other severance for the years endedDecember 31, 2005, 2004 and 2003 (in thousands):

 
| ** **                                                          | ** ** | **Balance  December 31,  2004** | ** ** | **Additions** | ** ** | **Utilized  Cash** | ** ** | **Adjustments** | ** ** | **Balance  December 31,  2005** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------|------------|---------------|------------|--------------------|------------|-----------------|------------|--------------------------------------|------------|
|                                                                |       |                                 |       |          |       |               |       |            |       |                                 |       |
| Employee  severance benefits                                        |       | $                                    | —     |          | $          | 1,700              |       | $               | (1,001     | )                                    | $          | — |   | $ | 699 |   |
| Lease  commitments and related write-down of property and equipment |       | 1,424                                |       | —        |       | (667               | )          | —          |       | 757                                  |       |
| Total                                                               |       | $                                    | 1,424      |          | $          | 1,700              |       | $               | (1,668     | )                                    | $          | — |   | $ | 1,456 |   |

 

 
| ** **                                                                    | ** ** | **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 |   |
|                                                                               |            |                                      |            |                                       |            |                    |            |                 |            |                                      |            |  |  |  |  |  |

 

The long-term portion of restructuringliabilities on the consolidated balance sheet relates to idle facility leasecommitments, which are estimated to be completed by the first quarter of 2008.

 

**Note 6: Litigation Settlement Recovery**

 

In 2002, NetRatings expensed costs related tothe settlement in 2002 of a patent infringement lawsuit against the Company byJupiter Media Metrix, Inc. In the second quarter of 2004, NetRatingsreceived, net of legal fees, $1.8 million from the Company’s insurance companyin reimbursement for these costs.

 

**Note 7: Stockholders’ Equity**

 

**Common Stock**

 

The Company’s Board of Directors isauthorized, subject to limitations prescribed by Delaware law, to issue up to200 million shares of common stock. At December 31, 2005,37.8 million shares of common stock were issued and 35.2 millionshares were outstanding. The Company issued 0.7 million and 1.7 millionshares of common stock during 2005 and 2004, respectively, in connection withthe Company’s stock compensation plans.

 

**Common Stock Repurchases/Treasury Stock**

 

In March 2002, two former executivesexercised their rights pursuant to stock repurchase agreements. Pursuant tothese agreements, NetRatings repurchased 1.5 million shares of NetRatingscommon stock held by them. The repurchase price was based on the averageclosing price of NetRatings common stock for the ten trading days preceding therequest for repurchase. Accordingly, NetRatings repurchased the shares forapproximately $13.75 per share for a total aggregate repurchase price of$20.6 million.

 

On November 3, 2005, the Company announced thatits Board of Directors authorized a stock repurchase program. Under thisprogram, the Company was authorized to repurchase up to $25 million of theCompany’s common stock in the open market or in privately negotiatedtransactions. As of December 31, 2005, the Company repurchasedapproximately 1.1

 

50

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millionshares of common stock for an aggregate cost, including commissions,  of $15.4 million, or an average of $13.40 pershare. At December 31, 2005, $13.5 million of the stock repurchase waspaid in cash and $1.9  million wasincluded in accrued liabilities. During the first quarter of 2006, the Companyrepurchased an additional 0.8 million shares for an aggregate cost, includingcommissions, of $9.6 million.

 

**Stock Plan**

 

In 1998, NetRatings adopted the 1998 StockOption Plan (the “Plan”). Under the Plan, up to 1.2 million shares ofNetRatings’ common stock were initially reserved for issuance. Subsequently, anadditional 7.3 million shares of NetRatings’ common stock were reserved underthe Plan. Options may be granted at exercise prices of no less than 85% ofthe fair value of the related common stock on the date of the grant (110% offair value in certain instances), as determined by the Board of Directors.Options generally vest over a four-year period and have a maximum term of tenyears. In addition to the options granted pursuant to the Plan, the Companyassumed a total of 26,000 options in connection with the Company’s purchase in2002 of the remaining 80.1% interest in eRatings.

 

In 2005, the Company’s Board of Directors andstockholders approved the Amended and Restated 1998 Stock Plan (the “AmendedPlan”). Under the Amended Plan, the Company is authorized to issue restrictedstock (as well as other equity-based compensation) to the Company’s employeesand members of the Board of Directors. In 2005, the Company issued, net offorfeitures, approximately 492,000 shares of restricted stock with a fairmarket value at the time of issuance of approximately $7.4 million. Therestricted stock issued to members of the Board of Directors vests ratably inequal annual installments over 2 years, while the restricted stock issued tothe Company’s non-executive employees vests ratably in equal annualinstallments over 3 years. The restricted stock issued to the Company’sexecutive officers vests in its entirety on the third anniversary of the dateof grant but vesting can be accelerated if specific performance criteria areachieved. The restricted stock has voting rights until canceled. Thecompensation expense related to these restricted stock awards is amortized overthe term of the restricted stock awards using the accelerated graded vestingmethod in accordance with APB No. 25 and FASB Interpretation No. 28.

 

Information with respect to the Plan andAmended Plan activity is summarized as follows:
| ** **                         | ** ** | ** **               |
|------------------------------------|------------|--------------------------|
| ** **                         | ** ** | ** **               | ** ** | ** ** | ** ** | **Stock Options Outstanding** |
| ** **                         | ** ** | **Available  for Grant** | ** ** | **Number of  Restricted  Stock Awards** | ** ** | **Number of  Stock Options** | ** ** | **Price Per Share** | ** ** | **Weighted-Average  Exercise Price** |
| Balance at December 31,  2002 |       | 1,187,000                |   | — |   | 4,476,000 |   | $ | 0.10 | - | $ | 106.83 |   | $ | 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 | - | $ | 106.83 |   | $ | 11.03 |
| Balance at December 31,  2003 |       | 1,398,000                |   | — |   | 5,033,000 |   | $ | 0.10 | - | $ | 106.83 |   | $ | 10.00 |
| 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 | - | $ | 106.83 |   | $ | 10.81 |
| Balance at December 31,  2004 |       | 671,000                  |   | — |   | 4,111,000 |   | $ | 0.10 | - | $ | 106.83 |   | $ | 10.43 |
| Granted                            |       | (647,000                 | ) | 545,000 |   | 102,000 |   | $ | 18.25 |   | $ | 18.25 |   | $ | 18.25 |
| Exercised                          |       | —                   |   | — |   | (581,000 | ) | $ | 0.10 | - | $ | 15.68 |   | $ | 8.73 |
| Released from restriction          |       | —                   |   | (7,000 | ) | — |   | — |   | — |   | $ | — |
| Canceled                           |       | 575,000                  |   | (53,000 | ) | (522,000 | ) | $ | 5.40 | - | $ | 106.83 |   | $ | 12.66 |
| Balance at December 31,  2005 |       | 599,000                  |   | 485,000 |   | 3,110,000 |   | $ | 0.10 | - | $ | 106.83 |   | $ | 10.64 |
| Options  exercisable at:           |       |                     |   |   |   |   |   |   |   |   |   |   |
| December 31,  2003            |       |                     |   |   |   | 2,023,000 |   |   |   |   |   | $ | 11.62 |
| December 31,  2004            |       |                     |   |   |   | 1,618,000 |   |   |   |   |   | $ | 11.09 |
| December 31,  2005            |       |                     |   |   |   | 2,176,000 |   |   |   |   |   | $ | 11.19 |

 

51

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The following table summarizes informationconcerning options outstanding and exercisable at December 31, 2005:

 
| ** **             | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                 | ** ** |
|------------------------|------------|-------------------------|------------|-----------------------------------------|------------|
| **Exercise Price**     | ** ** | **Number  of  Shares**  | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Term  (in years)** | ** ** | **Number  of Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|                   |       |                    |       |                                    |       |   |   |   |   |   |   |
| $0.10 -  $5.40    |       | 62,000                  |       | $                                       | 4.37       |   | 5.55 |   | 50,000 |   | $ | 4.13 |   |
| $5.82 -  $5.82         |       | 548,000                 |       | $                                       | 5.82       |   | 7.19 |   | 273,000 |   | $ | 5.82 |   |
| $5.84 -  $9.15    |       | 343,000                 |       | $                                       | 7.44       |   | 6.65 |   | 216,000 |   | $ | 7.65 |   |
| $9.29 -  $11.02   |       | 166,000                 |       | $                                       | 10.39      |   | 6.26 |   | 137,000 |   | $ | 10.49 |   |
| $11.05 -  $11.05  |       | 684,000                 |       | $                                       | 11.05      |   | 8.24 |   | 255,000 |   | $ | 11.05 |   |
| $11.20 -  $12.08  |       | 361,000                 |       | $                                       | 11.65      |   | 6.03 |   | 339,000 |   | $ | 11.65 |   |
| $12.12 -  $12.375 |       | 89,000                  |       | $                                       | 12.32      |   | 5.67 |   | 85,000 |   | $ | 12.33 |   |
| $12.51 -  $12.51  |       | 456,000                 |       | $                                       | 12.51      |   | 5.83 |   | 456,000 |   | $ | 12.51 |   |
| $12.60 -  $15.68  |       | 327,000                 |       | $                                       | 13.87      |   | 5.88 |   | 311,000 |   | $ | 13.87 |   |
| $16.29 -  $106.83      |       | 74,000                  |       | $                                       | 30.32      |   | 6.09 |   | 54,000 |   | $ | 30.34 |   |
| $0.10 -  $106.83  |       | 3,110,000               |       | $                                       | 10.64      |   | 6.74 |   | 2,176,000 |   | $ | 11.19 |   |

 

**Shares Reserved for Future Issuance**

 

NetRatings has reserved shares of commonstock for future issuance as of December 31, 2005 and December 31,2004 as follows:

 
| ** **                                              | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|---------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Stock  options outstanding                              |       | 3,110,000 |       | 4,111,000 |       |
| Stock  options and restricted stock available for grant |       | 599,000   |       | 671,000   |       |
| Employee  stock purchase plan                           |       | 181,000   |       | 250,000   |       |

 

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-based awards under thefair value method of accounting is presented in Note 1 to theseconsolidated financial statements.

 

**1999 Employee Stock Purchase Plan**

 

In 1999, NetRatings’ Board of Directorsadopted the 1999 Employee Stock Purchase Plan effective upon the completion ofNetRatings’ initial public offering of its common stock. NetRatings initiallyreserved a total of 0.3 million shares of common stock for issuance underthe plan, which is cumulatively increased on January 1 of each yearthrough January 1, 2010 by an amount equal to the lesser of (i) 0.5 millionshares, (ii) 2% of the number of shares of common stock that were issuedand outstanding 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 may purchasecommon stock at 85% of the lesser of the fair market value of the Company’scommon stock on the first day of the applicable offering period or the date ofpurchase. All NetRatings’ employees are eligible to participate in the EmployeeStock Purchase Plan except employees who (i) normally work 20 hoursor less per week; (ii) normally work 5 months or less per year; or (iii) are5% or greater shareholders of NetRatings. Eligible employees may contributefrom 1%-15% of their after tax compensation from each paycheck during each6 month purchase period. However, no person may purchase more than2,500 shares on a purchase date. Furthermore, pursuant to the Internal RevenueCode, no person may purchase stock under the Plan valued at more than$25,000 in any calendar year. Shares issued under the employee stock purchaseplan totaled 68,656 and 90,783 in 2005 and 2004, respectively.

 

**Deferred Service Costs**

 

In 1999, NetRatings recorded a deferredcharge totaling $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 and $9.1 million for the years ended December 31, 2004 and 2003,respectively, and is included in stock-based compensation in the accompanyingconsolidated statements of operations. As of December 31, 2004, thedeferred service costs had been fully amortized.

 

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**Note 8: Joint Ventures**

 

In June 1999, NetRatings granted alicense for the use of its proprietary software to NetRatings Japan, in whichit held a direct ownership interest of approximately 49%. The joint venture wasformed to adapt, market, service and sell interactive media and market researchdata in Japan. NetRatings made a capital contribution of $1.3 million forthe year ended December 31, 2001. On April 1, 2003 NetRatingsincreased its ownership in NetRatings Japan to 58% for an additional investmentof approximately $1.1 million. Prior to 2003, this investment wasaccounted for using the equity method, and, therefore, the Company’s investmentwas reduced 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.

 

In January 2000, NetRatings establisheda joint venture in France, Mediametrie NetRatings, in which it held a 30%ownership interest. On May 7, 2002, NetRatings increased its ownership inMediametrie NetRatings to 50% as a result of the Company’s acquisition ofACNielsen eRatings.com, which held a 20% ownership interest in MediametrieNetRatings. Mediametrie NetRatings is responsible for building and maintaininga French audience measurement panel. Effective November 1, 2003,NetRatings increased its ownership in Mediametrie NetRatings to 66% in exchangefor the fair value of customer contracts assigned to Mediametrie NetRatings in2003 and 2002. Prior to 2003, this investment was accounted for using theequity method, and, therefore, the Company’s investment was reduced for itspro-rata share of Mediametrie NetRatings’ earnings/losses. Effective November 1,2003, the Company consolidates the results of operations and financial positionfor Mediametrie NetRatings in its consolidated financial statements.

 

On May 7, 2002, NetRatings acquired a49% stake in Ibope eRatings.com, its Latin America joint venture, through theacquisition of ACNielsen eRatings.com and recorded this investment using theequity method. In accordance with APB 18, the Company recorded losses to theextent of its investments and outstanding advances, thereby reducing itsinvestment in Ibope eRatings.com to zero in the first quarter of 2004. Inaddition, NetRatings has no financial support commitments to Ibope eRatings.comand therefore do not presently recognize its share of Ibope eRatings.com’s netlosses in NetRatings’ consolidated financial statements.

 

In connection with NetRatings acquisition ofRed Sheriff in December 2004, NetRatings acquired a 50% stake inNetRatings Italia S.r.l. At the end of the first quarter in 2005, theCompany purchased the remaining 50% interest in NetRatings Italia S.r.l., whichresulted in its results of operations being reported in NetRatings’consolidated results rather than in equity in earnings of joint ventures. As aresult, the Company’s sole remaining joint venture relationship is IbopeeRatings.com.

 

The transactions between the Company andIbope eRatings.com, as well as the Company’s majority owned subsidiaries priorto consolidation, involve the allocation of revenue and expense. Revenue fromInternet audience measurement services, which can either be sold by NetRatingsor the joint venture partner, is allocated between the two parties based on thelocation of the customer and the location of the panel whose data is used inthe service. NetRatings records commission revenue and expense related to thesesales ratably over the period of the contract in the revenue and cost ofrevenue lines in its statement of operations.

 

•                  Thejoint venture retains 100% of any revenue from services that the joint venturesells to customers within their own country based on data from their panels;

 

•                  NetRatingsand the joint venture each record a 50% international panel fee from servicesthat NetRatings sells to customers based on data from the joint venture’spanels or services that the joint venture sells to customers within theircountry based on NetRatings’ panel data; and

 

•                  Ifeither NetRatings or the joint venture sells services based on data from acombination of the NetRatings and joint venture’s panels, the allocation ofrevenues is determined by an operating committee consisting of two representativesof each company, with any decisions requiring a unanimous vote of thosepresent, which must include at least one representative of each company.

 

The Company’s joint ventures pay the Companya royalty for the use of its technology. This royalty revenue is based on apercentage of each sale made by the Company’s equity method investees pursuantto each joint venture’s operating agreement. This revenue is recognized ratablyover the period of the contract in the Company’s consolidated statement of operations.

 

53

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NetRatings also provides data hosting andsupport services to the joint ventures, including data center operations andengineering expertise. Reimbursements from joint ventures related to these services,and such reimbursements have been netted against the respective expensecategories in the accompanying consolidated statements of operations.

 

For the years ended December 31, 2005,2004 and 2003, the Company recorded the following transactions related to itsequity owned joint ventures:

 
| ** **                                                                                                                                                                                                                                                                                              | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                                                                                                                                                                                                              | ** ** | **(in thousands)** | ** ** |
| Revenue                                                 |       | $                  | 91         |     | $          | 73       |       | $ | 298 |   |
| Commission  expense                                                                                                                                                                                                                                                                                     |       | 58                 |       | 52       |       | 191      |       |
| Royalty  revenue                                                                                                                                                                                                                                                                                        |       | 36                 |       | 79       |       | 190      |       |
| Reimbursement  for data hosting and support services                                                                                                                                                                                                                                                    |       | 135                |       | 135      |       | 447      |       |
|                                                                                                                                                                                                                                                                                                         |            |                    |            |          |            |          |            |  |  |  |

 

The transactions between the Company and itsjoint ventures relating to allocation of revenue, payment of a technologyroyalty and data hosting and support services described in this Note 8 areincluded in the operating statement of the Company’s equity method jointventures as well. The Company records its percentage of the joint venture’s netprofit (loss) in the net equity in earnings (losses) of joint ventures line ofthe accompanying statement of operations.

 

**Note 9: Related Party Transactions**

 

In August 1999, NetRatings entered intoan operating agreement with Nielsen Media Research. Under the terms of theoperating agreement, NetRatings paid Nielsen Media Research a 35% commissionfor selling services to certain customers. In May 2002, this agreement wasamended to provide that, in lieu of paying commissions, NetRatings will pay theactual costs associated with the operation and maintenance by Nielsen MediaResearch of a sales force dedicated to selling NetRatings’ products andservices. This expense totaled approximately $0.3 million, $0.5 million, and$1.0 million for the years ended December 31, 2005, 2004 and 2003,respectively.

 

NetRatings is also charged by Nielsen MediaResearch for the costs of maintaining the U.S. home and at-work NetView panels.These costs totaled $2.5 million, $3.1 million and $4.1 million for theyears ended December 31, 2005, 2004 and 2003, respectively, and areincluded in cost of revenue in the accompanying consolidated statements ofoperations.

 

In the fourth quarter of 2003, Nielsen MediaResearch started providing services to recruit and survey respondents forNetRatings’ @Plan service. The cost incurred for these services was $2.4million, $2.2 million and $0.6 million for the years ended December 31,2005, 2004 and 2003, respectively, and is included in cost of revenue in theaccompanying consolidated statement of operations.

 

In March 2004, NetRatings engagedNielsen Media Research to provide technology hosting services for its U.S. datacenter operations. The cost incurred in 2005 and 2004 for these services was$0.6 and $0.3 million, respectively, and is included in cost of revenue in theaccompanying consolidated statement of operations.

 

As of December 31, 1999, Nielsen MediaResearch became a wholly owned subsidiary of VNU N.V. (“VNU”). As Nielsen MediaResearch is a majority stockholder of NetRatings, its parent company, VNU, isrequired to consolidate NetRatings’ operating results with its own forfinancial reporting purposes. As of December 31, 2005 and 2004, VNU owned,through its subsidiaries, approximately 60% of the outstanding common stock ofNetRatings.

 

The Company obtains its directors andofficers, property, general and workers compensation insurance through VNU. Thecost incurred for these services was approximately $0.2 million for each of thethree years ended December 31, 2005, 2004 and 2003.

 

Since May 2002, ACNielsen has providedback office services for the Company’s international operations, other thanthose previously operated by Red Sheriff. These services include payment of allinternational operating expenses for which NetRatings reimburses ACNielsen on aquarterly basis. Fees related to these back office services were approximately$0.9 million, $0.8 million and $1.6 million for the years ended December 31,2005, 2004 and 2003, respectively. The Company is currently in the process oftransitioning these services out of ACNielsen and it expects to complete thetransition by the end of 2006. NetRatings also rents office space in ACNielsenoffices for some of its international sales offices. Charges related to thisoffice space and related office expenses approximated $0.4 million for each ofthe years ended December 31, 2005, 2004 and 2003.

 

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Mediametrie is the minority shareholder ofMediametrie NetRatings. In January 2005, Mediametrie started performingcustom research services for Mediametrie NetRatings. The cost incurred forthese services was $0.4 million for the year ended December 31, 2005.

 

As of December 31, 2004, the Company wasowed $1.2 million from related parties, which represented a loan made byNetRatings Japan to TransCosmos, one of its minority shareholders. The $1.2million loan was paid in the second quarter of 2005. The loan receivable of$0.5 million from TransCosmos at December 31, 2003 was paid in full in thesecond quarter of 2004.

 

The following is a summary of amounts due torelated parties as of December 31, 2005 and 2004 (in thousands):

 
| ** **                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Due to VNU  and its affiliates |       | $        | 6,317      |     | $          | 8,599 |   |
| Due to joint  venture partners |       | 549      |       | 418      |       |
| Due to  Mediametrie            |       | 220      |       | —   |       |
| Due to  related parties        |       | $        | 7,086      |     | $          | 9,017 |   |

 

**Note 10: Commitments and Contingencies**

 

**Leases**

 

As of December 31, 2005, non-cancelableoperating lease agreements with terms in excess of one year were as follows (inthousands):

 
| **Year ending December 31:** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
|                                        |       |       |       |
| 2006                                        |       | $          | 3,150      |   |
| 2007                                        |       | 3,045      |       |
| 2008                                        |       | 2,081      |       |
| 2009                                        |       | 1,706      |       |
| 2010 and  thereafter                        |       | 516        |       |
| Total  minimum lease payments               |       | $          | 10,498     |   |

 

Future rent payments related to idle facilityspace, net of sub-lease income, of $0.8 million are included in restructuring liabilities(Note 5). Sub-lease rental payments were $0.1 million, $0 and $0, for the yearsended December 31, 2005, 2004 and 2003, respectively.

 

Rent expense was $3.1 million,$3.1 million and $1.5 million for the years ended December 31,2005, 2004 and 2003, respectively.

 

**Litigation**

 

*Securities Class Action*

 

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 designated as In re NetRatings, Inc.Initial Public Offering Securities Litigation, related to In re Initial PublicOfferings Securities Litigation. The case is brought purportedly on behalf ofall persons who purchased the Company’s common stock from December 8, 1999through December 6, 2000. The complaint names as defendants NetRatings;two of our former directors; and investment banking firms that served asunderwriters for our initial public offering in December 1999. ThePlaintiffs electronically served an amended complaint on or about April 19,2002. The amended complaint alleges violations of Section 11 and 15 of theSecurities Act of 1933, and Section 10(b) of the Securities ExchangeAct of 1934, on the grounds that the prospectus incorporated in theregistration statement for the offering failed to disclose, among other things,that (i) the underwriters had solicited and received excessive andundisclosed commissions from certain investors in exchange for which theunderwriters allocated to those investors material portions of the shares ofour stock sold in the initial public offering, and (ii) the underwritershad entered into agreements with customers whereby the underwriters agreed toallocate shares of our stock sold in the initial public offering to thosecustomers in exchange for which the customers agreed to purchase additionalshares of our stock in the aftermarket at pre-determined prices. The amendedcomplaint also alleges that false analyst reports were issued following theIPO. No specific damages are claimed.

 

Similar allegations were made in lawsuits relatingto more than 300 other initial public offerings conducted in 1999 and 2000. Thecases were consolidated for pretrial purposes before the Honorable Judge ShiraA. Scheindlin. On July 15, 2002, we (as well as the other issuerdefendants) filed a motion to dismiss the complaint. The motions were heard on

 

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November 1,2002. In February 2003, the judge granted the motion to dismiss certain ofthe claims against NetRatings and the two individual defendants and denied themotion to dismiss certain other claims against NetRatings and the twoindividual defendants. In July 2004, we and the individual defendantsaccepted a settlement proposal made to all of the issuer defendants. Under theterms of the settlement, the plaintiffs will dismiss and release all claimsagainst participating defendants in exchange for a contingent payment guarantyby the insurance companies collectively responsible for insuring the issuers inall related 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 proceedings andits outcome 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.

 

*Patent Litigation*

 

In the first half of 2005, NetRatings decidedto launch a coordinated program to enforce its intellectual property rightsagainst various companies that operate in the Web analytics, online advertisingand related Internet technology fields. The patent enforcement programcontemplates both negotiating patent licensing deals outside the litigationcontext and initiating patent infringement lawsuits where it is believed such astep is necessary to enforce our intellectual property rights. Pursuantto this patent enforcement program, in 2005 and 2006 NetRatings filed patentinfringement lawsuits against six Web analytics companies (Omniture, Inc.,Coremetrics, Inc., SageMetrics, Corp., Sane Solutions, LLC, VisualSciences, LLC and WebSideStory, Inc.). Each of the complaints filed in these lawsuits alleged that thedefendant infringes multiple patents owned or controlled by NetRatings whichrelate generally to the collection, analysis and reporting of information concerningcomputer usage activity. Each of the complaints seeks, among other things,injunctive relief enjoining further infringement of such patents as well ascompensatory and other damages. In the fourth quarter of 2005,NetRatings and Visual Sciences settled their patent infringement litigation,and in the first quarter of 2006 NetRatings settled the actions it had broughtagainst Omniture and SageMetrics. Under each of these settlements, NetRatings has licensed certain of its patentsin exchange for license or royalty fees payable to NetRatings.

 

In February 2006, WebSideStory filed a patentinfringement lawsuit against NetRatings in the United States District Court forthe Southern District of California. This lawsuit alleges that NetRatingsinfringes a patent owned by WebSideStory and is seeking unspecified monetarydamages and injunctive relief. While NetRatings believes this lawsuit iswithout merit, it cannot assure you that it will prevail in this litigation. NetRatingsalso cannot estimate the financial impact to the company in the event that itdoes not prevail in defending this lawsuit.

 

**Note 11: Industry Segment and ForeignOperations**

 

NetRatings operates in one segment forproviding media and market research focused on Internet audience behavior andactivity. For geographical reporting, revenues are attributed to the geographiclocation in which the customer is located. The Company’s geographic regionsinclude the United States (US), Europe, Middle East and Africa (EMEA), and AsiaPacific and Latin America (APLA). Long-lived assets consist primarily ofproperty and equipment and are attributed to the geographic location in whichthey are located.

 

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

 
| ** **                                                                                                                                                                                                                                                                                              | ** ** | **For the year ended  December 31, 2005 *** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                              | ** ** | **US**                                           | ** ** | **EMEA** | ** ** | **APLA** | ** ** | **Total** | ** ** |
|                                                                                                                                                                                                                                                                                                    |       |                                             |       |   |   |   |   |   |   |
| Revenue                                                 |       | $                                                | 31,734     |   | $ | 21,551 |   | $ | 14,732 |   | $ | 68,017 |   |
| Property and  equipment*                                                                                                                                                                                                                                                                                |       | 4,394                                            |       | 1,153 |   | 2,280 |   | 7,827 |   |
|                                                                                                                                                                                                                                                                                                         |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |

 

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| ** **               | ** ** | **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 |   |
|                          |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |

 

----

* The amounts indicated for property andequipment are as of December 31, 2005, 2004 and 2003, respectively.

 

**Note 12: Income Taxes**

 

No income tax expense was recorded for theyears ended December 31, 2004 and 2003. The components of the provisionfor income taxes for the year ended December 31, 2005 are as follows (inthousands):

 
| ** **           | ** ** | **2005** | ** ** |
|----------------------|------------|----------|------------|
| Current:             |       |     |       |
| Federal              |       | $        | —     |   |
| State                |       | —   |       |
| Foreign              |       | 320      |       |
|                 |       | 320      |       |
| Deferred:            |       |     |       |
| Federal              |       | —   |       |
| State                |       | —   |       |
| Foreign              |       | —   |       |
|                 |       | —   |       |
| Total tax  provision |       | $        | 320        |   |

 

The difference between the income tax benefitand the amount computed by applying the federal statutory income tax rate toloss before income taxes is as follows:

 
| ** **                                    | ** ** | **2005**           | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                    | ** ** | **(in thousands)** | ** ** |
| Income tax  benefit at federal statutory rate |       | $                  | (3,291     | )        | $          | (6,097   | )          | $ | (8,819 | ) |
| Amortization  of deferred stock compensation  |       | —             |       | 2,655    |       | 3,058    |       |
| Losses on  joint ventures                     |       | —             |       | 5        |       | 23       |       |
| Net  operating losses and other               |       | 5,064              |       | 6,510    |       | 5,866    |       |
| Stock option  deductions                      |       | (1,773             | )          | (3,073   | )          | (128     | )          |
| Foreign  taxes                                |       | 320                |       | —   |       | —   |       |
| Total                                         |       | $                  | 320        |     | $          | —   |       | $ | — |   |

 

Significant components of NetRatings’ netdeferred tax assets are as follows:

 
| ** **                                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                                             |       |     |       |     |       |
| Net  operating loss carryforwards                                 |       | $        | 33,185     |     | $          | 31,313 |   |
| Tax credit  carryforwards                                         |       | 1,061    |       | 1,061    |       |
| Reserves and  accrued costs and expenses not currently deductible |       | 2,535    |       | (192     | )          |
| Asset  write-offs not currently deductible                        |       | 1,834    |       | 1,834    |       |
|                                                              |       | 38,615   |       | 34,016   |       |
| Deferred tax  liabilities:                                        |       |     |       |     |       |
| Fixed assets  and intangibles                                     |       | (773     | )          | 1,047    |       |
| Total  deferred tax assets                                        |       | 37,842   |       | 32,969   |       |
| Valuation  allowance for deferred tax assets                      |       | (37,842  | )          | (32,969  | )          |
| Net deferred  tax assets                                          |       | $        | —     |     | $          | — |   |

 

SFAS 109 provides for the recognition ofdeferred tax assets if it is more likely than not that such assets will berealized. Based upon the weight of available evidence, which includesNetRatings’ historical operating performance and the reported cumulative netlosses in all prior years, NetRatings has provided a full valuation allowanceagainst its net deferred tax assets. NetRatings will continue to evaluate therealizability of the deferred tax assets on a quarterly basis.

 

The net valuation allowance increased by $4.9million, $2.0 million and $5.8 million during the years ended December 31,2005, 2004 and 2003, respectively. Approximately $8.9 million and$7.2 million of the valuation allowance at

 

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December 31, 2005 and 2004, respectively, is attributable to stockoption deductions, the benefit of which will be credited to paid-in capital ifand when realized.

 

As of December 31, 2005, NetRatings hadnet operating loss carryforwards for federal and state tax purposes ofapproximately $87.3 million and $45.7 million, respectively, andfederal and state research and development tax credit carryforwards ofapproximately $0.6 million. The federal and state net operating loss andtax credit carryforwards begin to expire in 2017 if not utilized, and the statenet operating losses begin to expire in 2007 if not utilized. The state taxcredits may be carried forward indefinitely.

 

Utilization of the net operating loss and taxcredit carryforwards may be subject to a substantial annual limitation dueto the ownership change limitations provided by the Internal Revenue Code of1986, as amended, and similar state provisions. The annual limitation may resultin the expiration of net operating loss and tax credit carryforwards beforeutilization.

 

**Note 13. Other-Than-Temporary Impairment and Its Application to CertainInvestments**

 

The grossunrealized losses related to NetRatings’ portfolio of available-for-salesecurities were primarily due to a decrease in the fair value of debtsecurities as a result of an increase in interest rates during2005. The Company has determined that the gross unrealizedlosses on its available-for-sale securities as of December 31, 2005 aretemporary in nature. NetRatings has reviewed its investmentportfolio to identify and evaluate investments that have indications ofpossible impairment. Factors considered in determining whether a loss istemporary include the magnitude of the decline in market value, the length oftime the market value has been below cost (or adjusted cost), credit quality,and NetRatings’ ability and intent to hold the securities for aperiod of time sufficient to allow for any anticipated recovery in marketvalue.

 

There were no unrealized gains as of December 31,2005. The following table sets forth the unrealized losses for NetRatingsinvestments as of December 31, 2005 (in thousands, except percentagedata):

 

 
| ** **                                                                                                                                                                                                                                                                                                         | ** ** | **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                                                                                                                                                                                                                                                                                                  | ** ** | $                                         | 1,995      |                                      | $          | (5                         | )     | $ | — |   | $ | — |   | $ | 1,995 |   | $ | (5 | ) |
| Corporate  notes                                                                                                                                                                                                                                                                                                   |       |                                      | 8,103      |                                      |       | (52                        | )          | 17,123 |   | (179 | ) | 25,226 |   | (231 | ) |
| Auction rate  securities                                                                                                                                                                                                                                                                                           |       | —                                    |       | —                                    |       | 999                        |       | (1 | ) | 999 |   | (1 | ) |
| Euro dollar  bonds                                                 |       | 17,287                                    |       | (124                                      | )          | 5,538                      |       | (103 | ) | 22,825 |   | (227 | ) |
| Floating  rate bonds                                                                                                                                                                                                                                                                                               |       | 2,003                                     |       | (2                                        | )          | —                     |       | — |   | 2,003 |   | (2 | ) |
| Government  securities                                                                                                                                                                                                                                                                                             |       | 32,256                                    |       | (244)                                     |       | 4,921                      |       | (78 | ) | 37,177 |   | (322 | ) |
| Total  temporarily impaired securities                                                                                                                                                                                                                                                                             |       | $                                         | 61,644     |                                      | $          | (427                       | )          | $ | 28,581 |   | $ | (361 | ) | $ | 90,225 |   | $ | (788 | ) |
|                                                                                                                                                                                                                                                                                                               |       |                                      |       |                                      |       |                       |       |   |   |   |   |   |   |
| Securities  unrealized loss percent to fair value                                                                                                                                                                                                                                                                  |       |                                      |       | 0.70                                      | %          |                       |       | 1.26 | % |   |   | 0.87 | % |
|                                                                                                                                                                                                                                                                                                                    |            |                                           |            |                                           |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

58

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There were no unrealized gains as of December 31,2004. The following table sets forth the unrealized losses for NetRatingsinvestments as of December 31, 2004 (in thousands, except percentagedata):

 
| ** **                                                                                                                                                                                                                                                                                                         | ** ** | **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                                                                                                                                                                                                                                                                                                  | ** ** | **—**                                | ** ** | **—**                                |       | $                          | 1,976      |   | $ | (24 | ) | $ | 1,976 |   | $ | (24 | ) |
| Corporate  notes                                                                                                                                                                                                                                                                                                   |       | $                                         | 12,410     |                                      | $          | (101                       | )          | 6,582 |   | (34 | ) | 18,992 |   | (135 | ) |
| Euro dollar  bonds                                                 |       | 28,773                                    |       | (172                                      | )          | 11,727                     |       | (86 | ) | 40,500 |   | (258 | ) |
| Government  securities                                                                                                                                                                                                                                                                                             |       | 21,086                                    |       | (109                                      | )          | 31,122                     |       | (378 | ) | 52,208 |   | (487 | ) |
| Total  temporarily impaired securities                                                                                                                                                                                                                                                                             |       | $                                         | 62,269     |                                      | $          | (382                       | )          | $ | 51,407 |   | $ | (522 | ) | $ | 113,676 |   | $ | (904 | ) |
|                                                                                                                                                                                                                                                                                                               |       |                                      |       |                                      |       |                       |       |   |   |   |   |   |   |
| Securities  unrealized loss percent to fair value                                                                                                                                                                                                                                                                  |       |                                      |       | 0.61                                      | %          |                       |       | 1.01 | % |   |   | 0.79 | % |

 

The followingtable presents the amounts of our financial instruments that are subject tointerest rate risk by expected maturity and average interest rates as of December 31,2005:

 
| ** **                 | ** ** | **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 |       | $                                                     | 34,940     |   | — |   | — |   | — |   | $ | 34,940 |   |
| Average  interest rates    |       | 0.68                                                  | %          | — |   | — |   | — |   | 0.68 | % |
| Short term  investments    |       | $                                                     | 62,150     |   | $ | 30,893 |   | $ | 2,207 |   | $ | 50,062 |   | $ | 145,312 |   |
| Average  interest rates    |       | 2.77                                                  | %          | 4.18 | % | 4.25 | % | 4.38 | % | 3.65 | % |
|                            |            |                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Marketablesecurities with a maturity date greater than one year and in a loss position asof December 31, 2005 are reported as long-term marketable securities on thebalance sheet. All other marketable securities are reported as short-termmarketable securities.

 

59

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| **ITEM 9.** | **CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|-------------------------------------------------------------------------------------------|

 

None.

 
| **ITEM 9A.** | **CONTROLS AND PROCEDURES** |
|--------------|-----------------------------|

 

**Disclosure Controls and Procedures**

 

The Company’s management, with theparticipation of the Company’s Chief Executive Officer and Chief FinancialOfficer, has evaluated the effectiveness of the Company’s disclosure controlsand procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of theend of 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.

 

Except as described below, there have notbeen any changes in the Company’s internal control over financial reportingduring the fourth quarter of 2005 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

As disclosed in our quarterly report on Form 10-Qfiled on November 9, 2005, the Company determined that its consolidatedfinancial results for the three and six month periods ended June 30, 2005required restatement due to errors in calculating the amount of theamortization of stock-based compensation for such periods. As a result of theseerrors, the Company determined that it had an internal control deficiency thatconstituted a “material weakness,” as defined by the Public Company AccountingOversight Board’s Auditing Standard No. 2. During the fourth quarter of2005, the Company revised its internal control over financial reporting and hasconcluded that the appropriate remedial steps to address the material weaknesshave been implemented.

 

**Internal Control over Financial Reporting**

 

MANAGEMENT’SANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Our management is responsible forestablishing and maintaining adequate internal control over financialreporting, as such term is defined in Exchange Act Rules 13a-15(f) and15d-15(f). Under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, weconducted an evaluation of the effectiveness of our internal control overfinancial reporting based on the framework in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission. Based on our evaluation under the framework in InternalControl—Integrated Framework, our management concluded that our internalcontrol over financial reporting was effective as of December 31, 2005.

 

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements.Also, projections of any evaluation of effectiveness to future periods aresubject to the risk that controls may become inadequate because of changesin conditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

 

Our independent registered public accountingfirm, Ernst & Young LLP, audited management’s assessment of theCompany’s internal control over financial reporting as stated in their report.

 

 

60

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**PART III**

 

Certain information required by Part IIIof this Annual Report on Form 10-K is omitted from this report becauseNetRatings intends to file its definitive proxy statement pursuant toRegulation 14A not later than 120 days after the end of the fiscalyear covered by this report (the “Proxy Statement”) and certain information inthe Proxy Statement is incorporated herein by reference.

 
| **ITEM 10.** | **DIRECTORS AND EXECUTIVE OFFICERS OF THE  REGISTRANT** |
|--------------|---------------------------------------------------------|

 

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

 
| **ITEM 11.** | **EXECUTIVE COMPENSATION** |
|--------------|----------------------------|

 

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

 
| **ITEM 12.** | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|--------------|----------------------------------------------------------------------------------------------------------|

 

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

 
| **ITEM 13.** | **CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS** |
|--------------|----------------------------------------------------|

 

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

 
| **ITEM 14.** | **PRINCIPAL ACCOUNTING FEES AND SERVICES** |
|--------------|--------------------------------------------|

 

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

 

61

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**PART IV**

 
| **ITEM 15.** | **EXHIBITS AND FINANCIAL STATEMENT SCHEDULES** |
|--------------|------------------------------------------------|

 

(a) The following documents are filed asa part of this report:

 

(1)                                  Financial Statements:

 

See Index to Consolidated FinancialStatements at page 35 of thisreport.

 

(2)                                  Financial StatementSchedules:

 

All financial statement schedules are omittedbecause they are not applicable or not required, or because the requiredinformation is included in the Financial Statements and Notes thereto which areincluded herein.

 

(3)                                  Exhibits:

 

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

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

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

 

Date: March 16, 2006

 

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, 2006 |
| William  Pulver           |       |                                                                                                                                 |       |                |
|                      |       |                                                                                                                                 |       |                |
| /s/ Todd  Sloan           |       | Executive  Vice President Corporate Development, Chief Financial Officer and Secretary  (Principal Financial and Accounting Officer) |       | March 16, 2006 |
| Todd Sloan                |       |                                                                                                                                 |       |                |
|                      |       |                                                                                                                                 |       |                |
| /s/ John  Dimling         |       | Chairman of the Board                                                                                                                |       | March 16, 2006 |
| John A. Dimling           |       |                                                                                                                                 |       |                |
|                      |       |                                                                                                                                 |       |                |
| /s/ David H.  Harkness    |       | Director                                                                                                                             |       | March 16, 2006 |
| David H.  Harkness        |       |                                                                                                                                 |       |                |
|                      |       |                                                                                                                                 |       |                |
| /s/Arthur F.  Kingsbury   |       | Director                                                                                                                             |       | March 16, 2006 |
| Arthur F.  Kingsbury      |       |                                                                                                                                 |       |                |
|                      |       |                                                                                                                                 |       |                |
| /s/ Thomas  A. Mastrelli  |       | Director                                                                                                                             |       | March 16, 2006 |
| Thomas A.  Mastrelli      |       |                                                                                                                                 |       |                |
|                      |       |                                                                                                                                 |       |                |
| /s/ D. Scott  Mercer      |       | Director                                                                                                                             |       | March 16, 2006 |
| D. Scott  Mercer          |       |                                                                                                                                 |       |                |
|                      |       |                                                                                                                                 |       |                |
| /s/ James M.  O’Hara |       | Director                                                                                                                             |       | March 16, 2006 |
| James M. O’Hara      |       |                                                                                                                                 |       |                |
|                      |       |                                                                                                                                 |       |                |
| /s/ Jerrell  W. Shelton   |       | Director                                                                                                                             |       | March 16, 2006 |
| Jerrell W.  Shelton       |       |                                                                                                                                 |       |                |
|                      |       |                                                                                                                                 |       |                |
| /s/ Susan D.  Whiting     |       | Director                                                                                                                             |       | March 16, 2006 |
| Susan D.  Whiting         |       |                                                                                                                                 |       |                |

 

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(4)            |       | Amended and Restated 1998 Stock Plan,  including form of restricted stock agreement.                                                                                                                                            |
| *10.2(5)            |       | 1999 Employee Stock Purchase Plan.                                                                                                                                                                                                   |
| *10.3(6)            |       | Form of Director Retention Agreement.                                                                                                                                                                                           |
| *10.4(7)            |       | Employment Offer Letter with Bill Pulver  dated November 1, 2001.                                                                                                                                                               |
| *10.5(8)            |       | Employment Offer Letter with Todd Sloan  dated February 28, 2002.                                                                                                                                                               |
| 10.10(9)            |       | Operating Agreement between Registrant and  Nielsen Media Research dated as of August 15, 1999.                                                                                                                                 |
| 10.11(10)           |       | Software License Agreement between  Registrant and Nielsen Media Research, dated as of August 15, 1999.                                                                                                                         |
| 10.12(11)           |       | Panel  Maintenance Agreement between Registrant and Nielsen Media Research, dated as  of August 15, 1999.                                                                                                                       |
| 10.13(12)           |       | NMR Commissions Agreement by and between  NetRatings, Inc. and Nielsen Media Research, Inc., dated as of May 7,  2002.                                                                                                |
| 10.14(13)           |       | Office Space Lease between Registrant and  The Irvine Company dated November 9, 1999 (as subsequently amended).                                                                                                                 |
| 10.15(14)           |       | Services Agreement by and among NetRatings, Inc.,  ACNielsen eRatings.com and ACNielsen Corporation, dated as of May 7,  2002.                                                                                             |
| 10.16(15)           |       | Post-Closing Agreement by and among  NetRatings, Inc., ACNielsen eRatings.com and ACNielsen Corporation,  dated as of May 7, 2002.                                                                                         |
| 10.17(16)           |       | Agreement of Reimbursement by and between  NetRatings, Inc. and ACNielsen Corporation, dated as of May 7,  2002.                                                                                                           |
| 10.18(17)           |       | Agreement of Reimbursement by and between  NetRatings, Inc. and VNU, Inc., dated as of May 7, 2002.                                                                                                                   |
| 10.19(18)           |       | Sub-sublease dated September 13, 2002.                                                                                                                                                                                          |
| *10.20(19)          |       | Employment Offer Letter with Forrest Didier  dated April 29, 2005.                                                                                                                                                              |
| *10.21 (20)         |       | Employment Offer Letter with John Kleine  dated August 5, 2005.                                                                                                                                                                 |
| *10.22              |       | Separation Agreement and Mutual Release, dated  January 1, 2006, between NetRatings, Inc. and George Durney.                                                                                                                    |
| *10.23              |       | Compromise Agreement, dated February 17,  2006, between NetRatings UK Limited and David Day.                                                                                                                                         |
| 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 on Form 10-Kfor the fiscal year ended December 31, 2003.

 

(2)                                  Incorporatedby reference to exhibit number 3.1 to Registrant’s Annual Report on Form 10-Kfor 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 “1999 Registration Statement”).

 

(4)                                  Incorporatedby reference to exhibit number 10.1 to Registrant’s Annual Report on Form 10-Kfor the fiscal year ended December 31, 2004.

 

(5)                                  Incorporatedby reference to exhibit number 10.2 to the 1999 Registration Statement.

 

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

 

(7)                                  Incorporatedby reference to exhibit number 10.24 to Registrant’s Annual Report on Form 10-Kfor the fiscal year ended December 31, 2001.

 

(8)                                  Incorporatedby reference to exhibit number 10.40 to Registrant’s Quarterly Report on Form 10-Qfor the fiscal period ended June 30, 2002.

 

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

 

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

 

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

 

(12)                            Incorporatedby reference to exhibit number 10.38 to Registrant’s Quarterly Report on Form 10-Qfor the fiscal period ended March 31, 2002.

 

(13)                            Incorporatedby reference to exhibit number 10.21 to Registrant’s Annual Report on Form 10-Kfor the fiscal year ended December 31, 1999.

 

(14)                            Incorporatedby reference to exhibit number 10.35 to Registrant’s Quarterly Report on Form 10-Qfor the fiscal period ended March 31, 2002.

 

(15)                            Incorporatedby reference to exhibit number 10.36 to Registrant’s Quarterly Report on Form 10-Qfor the fiscal period ended March 31, 2002.

 

(16)                            Incorporatedby reference to exhibit number 10.37 to Registrant’s Quarterly Report on Form 10-Qfor the fiscal period ended March 31, 2002.

 

(17)                            Incorporatedby reference to exhibit number 10.39 to Registrant’s Quarterly Report on Form 10-Qfor the fiscal period ended March 31, 2002.

 

(18)                            Incorporatedby reference to exhibit number 10.42 to Registrant’s Quarterly Report on Form 10-Qfor the fiscal period ended September 30, 2002.

 

(19)                            Incorporatedby reference to exhibit number 99.2 to Registrant’s Current Report on Form 8-Kdated May 5, 2005.

 

(20)                            Incorporatedby reference to exhibit number 99.1 to Registrant’s Current Report on Form 8-Kdated September 7, 2005.

 

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