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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

COMMISSION FILE NUMBER: 000-27577

HARRIS INTERACTIVE INC.

135 Corporate Woods, Rochester, NY 14623

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

     INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

     INDICATE BY CHECKMARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

     INDICATE BY CHECKMARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (as defined in Rule 12b-2 of the Exchange Act).     Yes þ          No o

     As of December 31, 2003, the aggregate market value of voting and non-voting common equity securities held by non-affiliates of the registrant was $413,082,725.

      On September 3, 2004, 57,030,050 shares of the Registrant’s Common Stock, $.001 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     The information required by Part III of this Report, to the extent not set forth herein, is incorporated by reference from the Registrant’s definitive proxy statement relating to the annual meeting of stockholders to be held in November 2004, which definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.

HARRIS INTERACTIVE INC.

FORM 10-K

FOR THE FISCAL YEAR ENDED JUNE 30, 2004

INDEX

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PART I

“Safe Harbor” Statement Under the Private Securities Litigation Reform Act of 1995

      The discussion in this Form 10-K contains forward-looking statements that involve risks and uncertainties. The statements contained in this Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on the information available to Harris Interactive on the date hereof, and Harris Interactive assumes no obligation to update any such forward-looking statement. Actual results could differ materially from the results discussed herein. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the Risk Factors section of this Form 10-K. The Risk Factors set forth in other reports or documents Harris Interactive files from time to time with the Securities and Exchange Commission should also be reviewed.

      Harris Interactive Inc. and its subsidiaries (also herein referred to as “Harris Interactive”, “we”, “our”, “us”, or the “Company”) is a leading market research, polling and consulting firm, ranking 13th among U.S. research organizations in 2003 and 15th among global research organizations in 2003 based on calendar year revenue as reported by Inside Research. Known for The Harris Poll® and for pioneering the Internet method to conduct scientifically accurate market research, we have over 45 years of experience in providing our clients with information about the views, experiences and attitudes of people worldwide.

      Since 1956, we have provided these services utilizing traditional market research and polling methodologies, such as direct mail, telephone-based surveys, mall intercepts, focus groups and in-person interviews. In September 1997, we began developing our Internet panel and building the technology infrastructure to provide online market research and polling services. In November 1997, we introduced our first Internet-based market research and polling services.

      The Company has its corporate headquarters in Rochester, New York and conducts international research through its various U.S. offices, its wholly-owned subsidiaries: London-based HI Europe (www.hieurope.com), Paris-based Novatris, S.A. and Tokyo-based Harris Interactive Japan K.K. (www.hpol.co.jp) as well as through its Global Network of local market and opinion research firms. The Company’s fiscal year ends June 30th.

      Information about the Company’s products and services, shareholder information, press releases, and SEC filings can be found on the Company’s website at www.harrisinteractive.com. We make available free of charge through our website the documents and reports we file with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information on our website (or the websites of our subsidiaries) does not constitute part of this Report on Form 10-K.

Mergers and Acquisitions

      The Company was incorporated as a Delaware corporation in 1997. Founded originally as the Gordon S. Black Corporation in 1975 the Company acquired Louis Harris and Associates in 1996 and during fiscal 1999 changed our name to Harris Interactive Inc. In addition to this acquisition the Company has achieved growth with the help of a number of additional acquisitions. In February 2001, the Company acquired the custom research division of Yankelovich Partners, Inc. headquartered in Norwalk, Connecticut. In August 2001, we acquired all of the issued and outstanding stock of Market Research Solutions Limited, a privately owned U.K. company headquartered in Oxford, England. In September 2001, the Company acquired all of the issued and outstanding stock of M&A Create Limited, a privately owned company headquartered in Tokyo, Japan. In November 2001, we acquired all of the issued and outstanding shares of common stock of Total Research Corporation, a Delaware corporation, located in Princeton, New Jersey and in March 2004, the Company acquired all of the issued and outstanding shares of Novatris, S.A., a share corporation organized and existing under the laws of France.

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Overview

      We use Internet-based and traditional methodologies to provide our worldwide customers with critical market knowledge in many industries. Our Internet-based and traditional market research and polling services include:

	•	research studies, which may involve both data collection and data analysis, conducted on specific issues for specific customers (Custom Research); and
	•	research studies, which primarily involves Internet-based data collection, conducted for other market research firms (Service Bureau Research).

      In addition, a minimal amount (generating under 5% of our revenues) of our services include research studies on issues of general interest developed and sold to numerous clients (Multi-Client Research).

      In 1997, we began developing our Internet panel and our proprietary technology infrastructure necessary to provide our clients with fast, comprehensive and accurate online market research and polling products and services. Our Internet panel presently consists of over six million individuals who have voluntarily agreed to participate in various online market research and polling studies. We believe that our Internet panel is larger than those of any of our competitors of which we are aware, including the panel sizes reported on the respective websites of the 25 largest global research organizations (as ranked for 2003 by the Honomichl report) and in the SEC filed documents of those competitors. Based upon such reported panel sizes, the number of online surveys we have completed and the amount of revenue we derive from on-line research, we believe that we are the leading Internet-based market research and polling firm in the world. We treat our revenue as Internet-based for projects with respect to which more than 50% of surveys were completed over the Internet. The percentage of our business that is Internet-based continues to grow and a majority of our revenues are now realized from Internet-based projects. The percentage of our Internet-based revenues varies from quarter to quarter, and is disclosed as part of our periodic filings.

      Historically, we provided our market research services exclusively through traditional methodologies, including direct mail, telephone surveys, mall intercepts, focus groups and in-person interviews. We believe, however, that the Internet has changed the market research and polling industry. Accordingly, we have made, and will continue to make, significant expenditures in the development of our technology platform, our Internet panel, and management and staff to continue to lead the transformation of the market research and polling industry to an Internet-based platform.

      The Company operates as one reportable business segment, and services its clients through multiple operating groups, based on industry, research methodology and/or geography.

      The Company operates telephone data collection centers in London, England, and Tokyo, Japan. These phone centers conduct interviews utilizing computer-based questionnaires. The data are immediately uploaded to the Company’s central data-processing centers. The Company also out-sources telephone data collection. These combined operations have sufficient capacity to support reasonably predictable short and long-term project needs.

      The Company maintains secure in-house data processing operations that provide rapid data management and analysis. The Company supports many platforms and file types both to exchange data and to provide clients with extensive database design and management capabilities. The Company also provides its clients with sample management services and survey data results using a variety of software applications.

      Harris Interactive and The Harris Poll are U.S. registered trademarks of Harris Interactive Inc. This Form 10-K also includes other trademarks, trade names and service marks of Harris Interactive and of other parties.

      The Company has no material debt and continues to have an increasingly strong cash position. We therefore believe that we are well positioned to fund expenditures to support our growth, whether internal or by acquisition.

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Our Market Opportunity

  General Overview

      Business is becoming more complex. Heightened competition, consolidation, globalization of product markets, accelerated product launch schedules, shortened product life and rapidly changing consumer preferences mark today’s business environment. This complexity has escalated the value of accurate and timely information needed to make critical decisions. Business covets data about the preferences, needs, buying behavior and brand awareness of existing and potential clients. Well-managed companies also need to continuously track product performance and competitive position, monitor consumer satisfaction and loyalty, measure advertising effectiveness and determine price sensitivity.

      Historically, market research has been performed using traditional data collection methodologies: telephone, mail and in-person interviews. However, these methods are becoming increasingly less effective (and less affordable) due to high data collection costs, consumer resistance to telephone inquiries, small sample sizes and the extensive time required to perform the research. Consequently, large traditional research projects can only be funded by organizations with significant resources. The Internet has dramatically changed the market research and polling industry, making it possible to survey a broad, diverse population at costs and speeds that were previously unattainable. This capacity has actually increased the amount of research being completed as much of our revenue is derived from “new” research that had never been done before.

The Internet and its Impact on the Market Research and Polling Industry

      The Internet enables hundreds of millions of people worldwide to gather and share information as well as conduct business electronically. The use of the Internet as a market research and polling tool is still in its relatively early stages, having only been practiced during the last ten years.

      Harris Interactive became one of the pioneers of Internet-based research when we began testing the Internet to conduct market research and polling in 1997. At that time, there were approximately 40 million people, or only about 16% of the U.S. population, who had Internet access. They were not representative of the general population. Harris Interactive had to perfect data weighting systems to correct for this bias. Today, a much higher percentage of the population has Internet access and the demographic composition of Internet users has become closer to the overall population. The Company has developed highly accurate weighting procedures, making the Internet a viable means to conduct market research — with significant advantages, including:

	•	Flexibility — Internet-based market research is conducted on the respondent’s schedule — not the telephone researcher’s schedule. Online questionnaires may be completed at home, work or anyplace with Internet access. Surveys can be created in multiple languages and administered around the world seven days a week, twenty-four hours a day.
	•	Versatility — Motion and still pictures, graphics, advertising copy and other visual materials can be viewed over the Internet, a feature not available with telephone sampling. The images can be combined with sound as well as protected from being stolen, printed, forwarded, copied or saved. Internet-based methodology allows questions and their sequence in surveys to be modified as panelists respond. Mail surveys, in contrast, are limited to the order and content of the printed text of the survey. Online qualitative research techniques such as chat room or bulletin board focus groups provide substantial savings in time and travel costs.
	•	Speed — In our experience, an average mail survey takes approximately six weeks from design to completion. In contrast, Internet surveys can generally be completed in two to seven days. As voicemail, caller ID, call screening answering machines, do-not-call protection, and a general aversion to telemarketing proliferate, call acceptance rates drop and telephone researchers must call more people to get the same number of completed surveys. Therefore, the speed (and cost) advantage of the Internet model actually becomes greater as the sample size increases.
	•	Value — Internet-based methodology offers significant cost benefits when compared to traditional market research methodologies. Traditional survey sample size is limited due to the high data collection costs per

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		response. Internet-based market research methods can provide larger and more robust sample sizes for the same cost, or the same sample size can be gathered at a reduced cost.
	•	Productivity — Because online panelists can read questions faster than they can listen, more questions can be asked in the same amount of time. Respondents in qualitative sessions conducted online create their own transcripts, which can be immediately reviewed and analyzed by the market researcher– versus having to create transcriptions from audiotapes.

The Harris Interactive Advantage

      We believe that Harris Interactive is the global leader in online market research. We offer our clients a broad suite of Internet-based market research and polling products. We have several competitive advantages that we believe will enable us to maintain and expand our lead position in Internet-based research. Our key competitive advantages include:

	•	Highly Satisfied and Loyal Clients. Our intensive measurement of customer satisfaction and the associated process improvements have allowed us to greatly improve the quality of services that we deliver. All of our researchers and managers are evaluated on the customer satisfaction scores that they earn from their clients, and their bonus compensation is tied to customer satisfaction levels, currently 9 on a 10 point scale.

      This high level of customer satisfaction provides us with a true competitive advantage in the marketplace by:

	•	Monitoring and then responding to changing customer needs,
	•	Increasing the loyalty of our customers, which generates a larger lifetime value earned from each client,
	•	Improving our margins by softening price sensitivity, and
	•	Decreasing our cost of sales due to the higher propensity for repeat business.

	•	A Proprietary Propensity Score Weighting System. This system ensures very accurate survey results using online data collection by correcting for data anomalies that occur due to sample bias — such as the difference in behavior between online respondents and offline respondents. We believe that no other online market research firm has an equal system to correctly weight data and project results to a larger population. As a result of two years of research, Harris Interactive originated the process of propensity scoring to balance the behavioral aspects of volunteer market research respondents to that of general populations. We began conducting parallel studies using Internet and traditional research methodologies when Internet research was not generally accepted as a valid methodology in the market research industry, and have completed over 200 studies. We have revised and continue to revise our methodologies based upon the results of such studies and our extensive experience in pioneering the technology. The accuracy of this system was proven when Harris Interactive produced forecasts of the 2000 U.S. presidential election and state-by-state forecasts (72 races in total) that were approximately 2 times as accurate as those generated through telephone polls.

      The World’s Largest Internet Panel for conducting online market research. Currently, our panel consists of over six million individuals from around the world who have been double opted-in (i.e. where the individual affirmatively reconfirms his/her intent to join the panel subsequent to his/her initial registration) and voluntarily agreed to participate in our various online research studies. We are currently adding thousands of additional names to our global panel on a daily basis. This large and diverse Internet panel enables us to:

	•	conduct a broad range of customer-specific or multi-client research studies across a wide set of industries,
	•	conduct very large surveys of the general population as well as studies of low-incidence, hard-to-find subsets,
	•	market new research products and services through co-branded alliances that we historically could not develop alone, and

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	•	sell our online data collection services to other research firms through the Harris Interactive Service Bureau, enabling us to penetrate new markets and gain additional market share where we do not have relationships or specific expertise.

	•	Specialty Panels. During the past four years, we have performed additional screening of the respondents in our main panel in order to form specialty panels or groups of people with similar, hard to find characteristics. We have developed numerous specialty panels, including Affluent, Chronic Illness, Gay, Lesbian and Bisexual, Mothers and Expectant Mothers, Physicians, Pet Companion and Technology Decision Makers. Our clients highly value our ability to rapidly perform online surveying of low incidence populations, and have even asked us to develop proprietary specialty panels exclusively for their use. Specialty panel research has become a key driver of high profit revenue growth for the Company.

      Proprietary Technology Infrastructure. A significant amount of computer software and hardware is required to conduct Internet-based market research and polling. The key elements of our technology infrastructure include:

	•	A high speed customized email system, which enables us to rapidly format, target and send over one million customized email invitations per hour;
	•	A sophisticated survey engine, which can process 240,000 five-minute incoming surveys per hour with a peak capacity of 20,000 surveys processed simultaneously;
	•	Software systems with the ability to collect data in any language supported by Microsoft, including double-byte character sets (such as the Asian languages) and right to left reading languages;
	•	An advanced survey dispatcher system, which acts like an air traffic control system to monitor, control and balance all respondent activity across all of our servers — and to ensure that no respondent will get a “sorry — the system is busy” notice. In addition, our proprietary dispatcher system gathers real-time statistics on survey starts, suspensions and completions, shutting off the surveys when the contracted completion levels have been achieved, thereby reducing cost overruns;
	•	A patented customizable multi-language registration and polling system, which allows new and existing panel members to add, delete or update their registration information online, and which recognizes each panelist’s language preference and delivers the survey in that language; and
	•	Flexible, automated real time reporting tools that allow online access to weighted survey data at any time and speed the process of data delivery to clients;
	•	Our Integrated Telephone and Internet data collection system (ICW), which permits smooth, labor-free transition between telephone and Internet modes of interviewing, with real time quota control and integration with the automated real time reporting tools; and
	•	A Fully Scalable Infrastructure that was designed with no theoretical upper limit and can easily and cheaply grow with the expansion of our business. Currently, we believe that we can double our existing capacity at a cost of less than $300,000.

      A strong brand. We believe that The Harris Poll is one of the best-known polls operating in the United States today. For over 45 years, The Harris Poll has been recognized for providing trusted information to a broad range of companies, non-profit organizations and governmental agencies. We use a variety of marketing strategies to heighten awareness of and enhance brand recognition of The Harris Poll, Harris Interactive and our Internet-based products and services.

Our Products and Services

      Our services are focused upon serving numerous vertical markets, which include, but are not limited to, pharmaceutical and health care, ecommerce, consumer packaged goods, automotive, financial services, technology, education, media and advertising, customer loyalty and public policy. By aligning all of our support functions (e.g. sales, marketing, research staff, etc.) to specific vertical markets or research methodologies, we

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      The following table summarizes our primary products and services, custom and service bureau research, as well as our multi-client research activities.

      All multi-client and service bureau research is conducted via the Internet. We deliver custom research by employing both traditional and Internet-based methodologies. We continue to work aggressively in transitioning our custom research and polling products and services to Internet-based research. During fiscal 2004, 59% of our total revenue was derived from Internet-based products, up from 46% in fiscal 2003. We continue to dedicate a significant amount of our financial and management resources to developing and marketing new products and services that use our Internet-based methodologies.

Custom Research

      For almost 50 years, we have provided custom research to a broad range of clients, ranging from business-to-business and business-to-consumer companies, to non-profit organizations and governmental agencies. This experience has served as our foundation to build the techniques used to conduct accurate Internet-based custom research. Our long history has also provided us with particular strong expertise in the following markets:

	•	healthcare,
	•	pharmaceuticals and medical devices,
	•	office equipment and technology,
	•	education and public policy,
	•	transportation,
	•	marketing communications and advertising, and
	•	public relations,
	•	customer loyalty.

      We conduct many types of custom research including customer satisfaction surveys, market share studies, new product introduction studies, brand recognition studies, reputation studies, ad concept testing and more. A custom research project has three distinct phases:

	•	survey design — Initial meetings are conducted with the client to clearly define the objectives and reasons for the study which ensures that the data collected by the research will meet the customer’s needs. Based on the requirements, we then determine the proper research procedure such as a mail, telephone or Internet survey, focus group meetings or personal interviews, identify the population to be surveyed, and design the survey questionnaire or focus group protocol.

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	•	data collection — Field data collection is conducted through computer-aided Internet or telephone interviewing, by mail or in person, or by holding focus group meetings or any combination of the above. Quality procedures assure that surveys are returned and the correct number of interviews are completed.
	•	weighting, analysis and reporting — We review the collected data for sufficiency and completeness, weight the data accordingly, and then analyze by desired demographic, business or industry characteristics. A comprehensive report that typically includes recommendations is then prepared and delivered to the client.

      Our proprietary sample design and questionnaire development techniques ensure that complete and accurate information is collected, and that this data will satisfy the specific inquiries of our clients. We have developed in-depth data collection techniques that enhance the integrity and reliability of our sample database. Our survey methodology ensures that responses are derived from the appropriate decision-makers in each category. As a result, we deliver the data that our clients need.

Service Bureau Research

      The Harris Interactive Service Bureau (HISB) conducts Internet-based data collection for other market research firms that either do not have the necessary resources to develop Internet-based market research capabilities or that have otherwise chosen not to develop such capabilities themselves. In addition to being a strong revenue source, HISB also enables us to penetrate markets or industries where we do not have current relationships or specific expertise. We also believe that HISB reduces the likelihood that those clients will invest significant financial and management resources to develop competitive Internet-based market research capabilities, and therefore serves as a barrier to entry to our competition.

      HISB clients can utilize our data collection capabilities on a long-term, continuous basis or on a project-by-project basis. During fiscal 2004, 113 market research firms used HISB, up from 100 in fiscal 2003 and 90 during fiscal 2002.

Multi-Client Research

      Multi-client research relates to those projects for which the Company performs periodic surveys to collect data that can be provided in a standard report format to multiple clients. Multi-client research is sold to a large number of customers that have an interest in a particular market segment or research application. Under such arrangements the client agrees to a set payment upon delivery of the standard report. Our multi-client products are developed on an independent or co-branded basis and are marketed by us. We collaborate with other parties that have unique experience in a particular subject or market to produce co-branded multi-client products. Co-branding arrangements relate to projects that are jointly marketed. Under such arrangements the Company recognizes its portion of the expenses and revenues related to the project on a net basis, regardless of which party does the ultimate billing to the client and regardless of any billings between the Company and the co-branded company. Co-branded products typically enable our clients to conduct research that they could not conduct without our Internet panel and technology infrastructure. By combining their expertise with our vast database and research capabilities, we are able to develop and market products that benefit both parties. Only a minimal portion of our revenue (under 5%) comes from multi-client research.

Research and Development

      The Company has not incurred expenditures for the three fiscal years ended June 30, 2004 that would be classified as research and development in accordance with accounting principles generally accepted in the United States of America under Financial Accounting Standards Board No. 2.

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Our Clients

      In fiscal 2004, approximately 35% of the Company’s revenue was derived from Fortune 500 companies. The Company served approximately 1,200 clients, derived from the following lines of business:

      In fiscal 2004, no single client accounted for more than 10% of the Company’s consolidated revenue.

Our Sales and Marketing Programs

      During fiscal 2004 the Company invested to implement a broad range of sales and marketing programs, intended to:

	•	raise awareness of the Harris Interactive, HI Europe, Novatris and Harris Interactive Japan brands,
	•	build awareness and generate leads for specific products,
	•	expand our Internet panel, and
	•	support our global network.

      Marketing activities are integrated and may contain elements of public relations, offline and online advertising and promotion, trade shows, industry event participation and speaking engagements, market research knowledge sharing conferences and direct marketing.

	•	Public Relations. Public relations have been the main driver behind the increased awareness of the Harris Interactive brand. We engage in comprehensive media relations and public relations on a full time basis, both in the United States and Europe. We regularly create and distribute, via national and international news wires, media releases for both our Company and our clients who desire to jointly release data from studies that we have conducted. During fiscal 2004, the Company created and distributed over 250 media releases, including the worldwide weekly distribution of The Harris Poll and The Harris Interactive Health Care News. Our public relations team also collaborated with our clients on over 360 joint releases of information, and responded to approximately 250 media inquiries from reporters, editors, authors and educational institutions who wanted to publish our data. The Harris Interactive name regularly appears in many media outlets including CNN; Business Week, and Time magazines; USA Today, The New York Times, The Los Angeles Times, The Chicago Tribune and The Boston Globe as well as The Economist, The Asahi Shimbun and Nikkei newspapers; UPI, AP and Reuters news wires; and the Associated Press and BBC radio networks. The Harris Poll and our Harris Interactive Health Care News are published weekly on WSJ.com, the online edition of The Wall Street Journal. BRANDWEEK magazine and The Wall Street Journal also publish our brand and reputation research on a regular basis.
	•	Trade Shows and Speaking Engagements. To further our position as a global leader in Internet-based research, Harris Interactive has participated and will continue to participate in a large number of industry

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		tradeshows, seminars and expositions. Speakers from the Company have traveled the world to share their knowledge with many prestigious organizations, including the Congress of the United States.
	•	Offline Advertising and Promotion. We use print advertising in U.S., European and Japanese business and trade publications to raise awareness of our brand name and to generate leads for individual products and services. The weekly, public release of The Harris Poll is one of our most effective offline promotional activities. The Company also publishes The Harris Interactive Health Care News, containing recent health care research on a weekly schedule. We also regularly publish a number of market specific newsletters to share our knowledge with current and potential customers.
	•	Online Advertising and Promotion. The Company has entered into numerous agreements with Internet portals, like The Wall Street Journal Online, which publishes the weekly editions of The Harris Poll and The Wall Street Journal-Harris Interactive Health Care Poll. The Company also purchases key word searches, global banner advertising and co-registration opportunities to generate leads and to recruit new members into The Harris Poll Online. Currently, these efforts are adding thousands of double-opted in panel members per day in the U.S., Canada, the United Kingdom, France, Germany, Italy, Spain and the Scandinavian countries. Other online promotions are undertaken from time to time to recruit special population segments into our panel such as senior citizens, teens, minorities, practicing physicians and information technology (IT) users.
	•	Direct Marketing. Direct marketing strategies are also used to generate leads for our specific products and services. Campaigns that incorporate dimensional mail in combination with outbound telemarketing calls conducted by the inside sales force, have yielded the greatest response. These campaigns are scheduled on a rotating basis throughout the year to support all major lines of business and to maximize the productivity of the inside sales force.
	•	Sales Force Automation. During fiscal 2004 we successfully completed the implementation of salesforce.com, a web-based, Customer Relationship Management (CRM) system for internal use. We have more than 200 worldwide employees wired into this integrated system to share customer data, manage leads and contacts as well as track sales proposals, RFP’s and contracts sold. We effectively manage all marketing campaigns, audio conferences, and web casts through this system as well as tracking sales bookings across the organization.

Our Competition

      We compete with numerous market research firms, as well as corporations and individuals that perform market research studies on an isolated basis, many of whom have market shares larger than our own. Consolidation in the industry continues to create larger and larger global firms, some with billions of dollars in annual revenue.

      Although barriers to entry for Internet-based market research are high, we expect that competition will intensify as existing market research firms continue to invest in building their online research capabilities. We will likely also face competition in the future from other traditional market research firms who move into Internet-based technologies or other companies with access to large databases of individuals with whom they can communicate on the Internet. These companies may, either alone or in alliances with other firms, attempt to penetrate this market.

      Many of our current and potential competitors have longer operating histories or significantly greater financial and marketing resources. These competitors may be able to undertake more extensive marketing campaigns for their services, adopt more aggressive pricing policies and make more attractive offers to potential employees, partners and potential customers.

      Further, our competitors and potential competitors may develop technologies that are superior to ours or that achieve greater market acceptance than our own.

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      We believe, however, that we can and will remain highly competitive due to the knowledge of our people and our ability to excel in:

	•	proprietary sample design techniques,
	•	questionnaire development,
	•	in-depth data collection, and
	•	the ability to accurately deliver data that represents the desired demographics.

      We also believe that we have additional competitive advantages such as:

	•	our expanding global footprint
	•	our scalable proprietary Internet technology platform,
	•	our brand recognition and strong reputation,
	•	our quality, and the depth and breadth of our products and services, and
	•	our high levels of customer satisfaction,
	•	our knowledge base and methodologies for the unbiased transition from traditional data collection modes to Internet interviewing.

      Having what we believe to be the largest Internet panel in the world, coupled with our related technology and expertise, gives us what we believe are the following additional competitive advantages:

	•	proven ability to project Internet-based survey results to the required audience,
	•	breadth of geographic scope enabling us to do projects with multiple country components,
	•	diversity and demographic depth enabling us to do both broad based and low incidence studies,
	•	ability to limit the frequency of requests to panelists, helping us avoid attrition from over-use.

      We believe that our ability to control and fully integrate the survey design, data collection, analysis, and reporting functions gives us an advantage over competitors who do not offer the broad range of services by enabling us to deliver a final product most closely tied to our clients’ needs. Our expertise in data collection using a variety of methods allows us to choose the most effective method for each particular project. We believe that our business model provides a balance between the ability to take advantage of the current higher margin-lower cost opportunities offered by Internet-based research and the ability, by offering both data collection and analysis to clients, to cushion the possible future impact of competitive pricing on margins achievable through Internet data collection services as competition in that area increases.

Our Intellectual Property and Other Proprietary Rights

      Our success in becoming the leader in Internet-based market research has been largely driven not only by our investment in our database but also by our proprietary software technology, research methodology, sample, balancing, data weighting and analysis techniques, and the internal processes that we developed to conduct online research. This intellectual property is essential to our continued success, and to protect it, we rely on a combination of patent, copyright, trademark and trade secret laws, plus confidentiality and license agreements. In October 2001, we received a patent for a system to conduct surveys over a network, including the Internet, to multiple respondents in multiple countries in different languages. This system only allows the respondent to participate once. It can also dynamically generate surveys from a database as well as immediately show and compare the results of the surveys. The patent will expire February 2, 2019. We also have two additional patents pending:

	•	For ConceptLoc® — a proprietary suite of online security products that protect non-animated graphics interchange format and Joint Photographic Expert Group images, prevent printing of protected images,

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		disable screen print capability, disable save, save as, drag and drop, and copy capabilities and defeat third-party capture applications; and
	•	Harris Interactive Configurator — a system to conduct “build your own” product configuration research over a network.
	•	Shelf Impactsm — a system for evaluating the impact of package design and shelf placement for store shelf products using extremely short duration image exposure.

      Our success and ability to compete substantially depend on our internally developed technologies and our trademarks. We have trademark registrations for a number of our trademarks, including Harris Interactive, HI Europe, and The Harris Poll. If we were prevented from using The Harris Poll name, our brand recognition and business would likely suffer. We would have to make substantial financial investments to rebuild our brand identity.

      Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our services are made available.

      Under the terms of our 1996 acquisition of Louis Harris and Associates, we purchased the HARRIS name including The Harris Poll, for global use except for use in Europe and the European portion of the former Soviet Union (the “Territory”). The prior owner of Louis Harris and Associates sold the HARRIS name for use in the Territory, and those rights are now owned by Taylor Nelson Sofres plc. (“TNS”). In February 2000, we entered into a trademark license agreement with TNS, which provides us with a non-transferable license to use the names HARRIS ONLINE, HARRIS POLL ONLINE, HARRIS INTERACTIVE, and HARRIS POLL INTERACTIVE within the Territory. Our use of these trademarks is permitted only in connection with market research services involving use of the Internet and with reference to the license. We may not otherwise use the HARRIS name in the Territory. The agreement prohibits TNS from using HARRIS ONLINE, HARRIS POLL ONLINE, HARRIS INTERACTIVE and HARRIS POLL INTERACTIVE, or confusingly similar marks within the Territory, and provides that TNS will not contest our use of “HPOL” within the Territory. TNS retains the right to use the HARRIS name within the Territory unless such use indicates a connection with the Internet and is confusingly similar to the marks licensed to us. TNS also retains the right to terminate the license in the event of (i) our insolvency or our breach of the agreement, (ii) the termination of separate agreements between us and TNS relating to our providing TNS with access to our panelist database, and/or (iii) a change of control or sale of substantially all of the business or assets of Harris Interactive in favor of a competitor of TNS; provided however, in the latter two cases we may purchase perpetual rights to the names.

      We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. While we attempt to ensure that the quality of our brand is maintained by these licenses, licensees may take actions that might harm the value of our proprietary rights or reputation. The steps taken by us to protect our proprietary rights may not be adequate and third parties may infringe or misappropriate our copyrights, trademarks and similar proprietary rights. In addition, other parties may assert claims of infringement of intellectual property or other proprietary rights against us.

      In addition, there can be no assurance that third parties will not independently develop functionally equivalent or superior systems, software or procedures. We believe that our systems, software and procedures and other proprietary rights do not infringe on the proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims against us in the future or that any such claim will not require us to enter into materially adverse license agreements or result in protracted and costly litigation, regardless of the merits of such claims.

Financial Information About Geographic Areas

      The Company is comprised primarily of operations in the United States, Europe and Asia. Non-U.S. market research is comprised primarily of operations in the United Kingdom, Japan and France. We operate these non-U.S. businesses on a consistent basis with our U.S. operations. We perform Internet-based market research in the United Kingdom and France using our European database and as a result also produce limited amounts of

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      The Company currently has one reportable segment. All intercompany sales and transactions have been eliminated upon consolidation.

      The Company has prepared the financial results for geographic information on a basis that is consistent with the manner in which management internally disaggregates information to assist in making internal operating decisions. The Company has allocated common expenses among these geographic regions differently that it would for stand-alone information prepared in accordance with accounting principles generally accepted in the United States of America. Geographic net income may not be consistent with measures used by other companies.

      Geographic information for the years ended June 30, 2004, 2003 and 2002 are as follows:

      During fiscal 2004, 2003 and 2002, approximately 77%, 77% and 78%, respectively, of our total consolidated revenue was derived from our U.S. operations and approximately 23%, 23% and 22%, respectively, of our total consolidated revenue was derived from our non-U.S. operations.

Backlog

      As of June 30, 2004, we had a revenue backlog of approximately $48 million, as compared to a backlog of approximately $40 million at June 30, 2003. It is estimated that substantially all of the backlog as of June 30, 2004 will be recognized during the fiscal year ending June 30, 2005.

Employees

      As of June 30, 2004, we employed a total of 771 persons on a full-time basis worldwide, 586 of which were employed in the United States. In addition, we employed 757 part-time and hourly individuals on a worldwide basis, for data gathering and processing activities, 39 of which were employed in the United States.

      None of our employees are represented by a collective bargaining agreement. We have not experienced any work stoppages. We consider our relationship with our employees to be good.

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Executive Officers of Harris Interactive

      The following table sets forth the name, age and position of each of the persons who were serving as executive officers of the Company as of September 1, 2004. These individuals have been elected by and are serving at the pleasure of our board of directors:

      The following is a brief account of the business experience of each of the above executive officers:

      Gordon S. Black, PhD. has served as Executive Chairman of the Board since January 2004. Mr. Black served as Chairman and Chief Executive Officer of Harris Interactive since he founded Gordon S. Black Corporation in July 1975. From July 1968 to June 1978, Dr. Black was a member of the faculty of the University of Rochester, where he was an Associate Professor with tenure. Dr. Black received a Ph.D. in Political Science from Stanford University and a B.A. in Political Science from Washington University.

      Robert E. Knapp began his tenure as Vice-Chairman and CEO of Harris Interactive on January 26, 2004. Previously, Knapp was EVP and Chief Strategy Officer at Gartner, Inc., a $900 million, worldwide research and advisory firm based in Stamford, CT. Knapp joined Gartner in July 2000 as Chief Marketing Officer. In 2001, he took on general management responsibility for Gartner’s worldwide business units including Research, Consulting, and Events. Prior to joining Gartner, he held various executive positions at branding and advertising firms including Siegel & Gale, BBDO and Lintas. Mr. Knapp received a B.S. in Business Administration from the University of Miami.

      Gregory T. Novak has served as President and Chief Operating Officer since April 2004. From July 2003 to March 2004 he served as President, U.S. Operations and prior to that he was Group President, Strategic Marketing Solutions and Business and Consulting since July 2001. He served as Group President, Strategic Marketing Solutions, from July 2000 to July 2001. From June 1999 through June 2000, Mr. Novak was the President of our Internet Division. From August 1996 to June 1999, Mr. Novak was Vice President/ General Manager of Lightnin America’s, a unit of GSX. Mr. Novak received an M.S. in Management from Purdue University’s Krannert Business School and a B.S. in Mechanical Engineering from the University of Pittsburgh.

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      Leonard R. Bayer has served as Executive Vice President, Chief Scientist and Chief Technology Officer, and as a director of Harris Interactive, since July 1978. From August 1976 to July 1978, Mr. Bayer worked for Practice Development Corporation where he served as Vice President of Research and Development. From September 1975 to August 1976, Mr. Bayer was a member of the faculty of the University of Rochester School of Medicine where he taught mathematical statistics. Mr. Bayer received an M.A. in Statistics, a B.S. in Astrophysics and a B.A. in Mathematics from the University of Rochester.

      Bruce A. Newman has served as our Chief Financial Officer, Secretary and Treasurer since January 1986. From July 1980 to January 1986, Mr. Newman served as Treasury Manager of The Case-Hoyt Corporation, a national printer. From July 1975 to August 1979, Mr. Newman worked for PricewaterhouseCoopers LLP. Mr. Newman received a B.S. in Accounting from the State University of New York at Albany and is a Certified Public Accountant.

      Dennis K. Bhame has served as the Executive Vice President of Human Resources since April 2000. Prior to joining our company, Mr. Bhame spent 16 years at Bausch & Lomb Inc., most recently as Vice President, Global Human Resources, Eyeware Division. He worked as a human resource professional at Burroughs Corporation and Moore Business Forms prior to joining Bausch & Lomb. Mr. Bhame holds a B.S. in Business Management from New Hampshire College.

      Peter J. Milla has served as our Executive Vice President, Chief Information Officer since September 1999. From 1985 until 1999, Mr. Milla was the Senior Vice President and Chief Information Officer at Response Analysis Corporation and following its acquisition, at Roper Starch Worldwide, where he was responsible for all information technology and data processing activities. From 1983 until 1985, Mr. Milla was on the staff of the National Opinion Research Center (NORC) at the University of Chicago and was responsible for managing the data processing activities on research projects for academic institutions and government agencies. Mr. Milla is currently a member of the Board of Directors of the Council of American Survey Research Organizations (CASRO). He also serves as chair of CASRO’s Technology Committee. Mr. Milla holds a B.A. in Sociology and M.A. in Applied Social Research from Queens College of the City University of New York.

      Arthur E. Coles has served as our Group President, Healthcare & Policy Research, since July 2000. From June 1999 to June 2000, Mr. Coles was our Executive Vice President of Marketing and Business Development. Mr. Coles was President and Chief Executive Officer of our largest subsidiary from June 1997 to June 1999. Prior to joining the Company, Mr. Coles worked for Eastman Kodak Company, where he served as Vice President of Strategic Planning for the Digital Imaging Division. Prior to this, he spent over 30 years at Xerox Corporation in a variety of general management, marketing, and operational roles. Mr. Coles received an M.B.A. from the Rochester Institute of Technology and a B.S. in Mathematics from the State University of New York at Albany.

      Theresa A. Flanagan has served as President of the Customer Loyalty Management division of Harris Interactive since November 2001. Ms. Flanagan became President of the Customer Loyalty Management division of Total Research Corporation in July 1996. She joined Total Research Corporation in 1983 and served as Senior Vice President from June 1993 to July 1996.

      Ronald B. Knight has served as Group President, Harris Interactive Service Bureau and Chief of Staff since July 2001. He served as Group President, Business and Consumer Services; Consulting & Brand Management from July 2000 until July 2001. Prior to joining the Company, Mr. Knight was the Chief Operating Officer for The Sutherland Group from September 1998 through July 2000. He is the former Vice President and Chief of Staff of Business Operations for Xerox Corporation’s Production Systems Group (PSG) where he worked for 30 years. He served as a Lieutenant in the U.S. Navy and worked as a financial analyst for General Motors prior to joining Xerox Corporation. Mr. Knight holds a B.S. in Business Administration from the University of Rochester, and an M.B.A. from the University of Rhode Island.

      George Terhanian, PhD has served as President, Harris Interactive Europe, since July 2003 and continues to serve as President of Global Internet Research. Dr. Terhanian has directed the Company’s online research activities since they began in 1997. Prior to joining the Company in 1996, Dr. Terhanian taught in elementary and

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      Minoru Aoo has served as Managing Director of Harris Interactive Japan since February 2000. He has also served as Managing Director of Adams Communications and M&A Create Limited since August 1995. From March 1987 to July 1995, Mr. Aoo worked for Dow Jones and Co. as a Managing Director/ North Asia in the International Marketing Services Department. Mr. Aoo joined Nihon Keizai Shimbun after receiving a Bachelor of Commercial Science from Keio University in Tokyo.

      James Fredrickson has served as Senior Vice President, Research Operations, since May 2002. In this role, Mr. Fredrickson is responsible for all of the firm’s operational activities associated with providing market research services in support of client studies. Mr. Fredrickson was Vice President, Harris Interactive Service Bureau from its inception in March 1999 to April 2002. From 1987 to 1999, Mr. Fredrickson served in a variety of operational roles. Mr. Fredrickson received a B.S. in Mathematics from the State University of New York at Brockport.

      Michael E. Peters has served as Senior Vice President, Global Sales since August 2004. Mr. Peters is responsible for the direction of the Company’s global sales growth. Mr. Peters joined the Company with over twenty years of consultative sales and marketing experience in technology and professional consulting organizations and was a former partner at PricewaterhouseCoopers Consulting. Mr. Peters received a B.S. in Management and Marketing from Clarkson University.

      David Vaden has served as Senior Vice President, Business Development and Internet Services since January 2002. Mr. Vaden is responsible for direction of the Company’s acquisition and alliance program, strategic planning, and global management of the Company’s Internet research panel and specialty subpanels. He served as Vice President, Finance from January 2000 to December 2001. Prior to joining the Company, Mr. Vaden served as a Manager in the Audit and Business Advisory Services division at PricewaterhouseCoopers LLP (PwC). While at PwC, Mr. Vaden was selected as one of fifty employees among thirty seven thousand personnel in the United States to participate in the PwC Scholars Program. Mr. Vaden received an M.B.A. with distinction from Columbia University Business School, a B.S. in Accounting with honors from St. John Fisher College and is a Certified Public Accountant.

      The Company’s headquarters and principal United States operating facility is located at 135 Corporate Woods, Rochester, New York, 14623, under a lease that expires in June 2010. In addition, we lease data collection centers, in which we operate telephone interviewing centers in London, England, and Tokyo, Japan, and we lease service offices to house our project staff, administrative staff and processing staff, in New York, New York, Princeton, New Jersey, Norwalk, Connecticut, Minneapolis, Minnesota, Claremont, California, London, England, Paris, France and Tokyo, Japan.

      We lease all of our facilities and believe our current facilities are adequate to meet our needs for the foreseeable future. We believe additional or alternative facilities can be leased to meet our future needs on commercially reasonable terms.

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      Information concerning each of our material properties is as follows (in thousands):

      In the normal course of business, the Company is at times subject to pending and threatened legal actions and proceedings. After reviewing pending and threatened actions and proceedings with counsel, management believes that the outcome of such actions or proceedings is not expected to have a material adverse effect on our business, financial condition or results of operations.

      No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2004.

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PART II

Market Information

      Our common stock is traded on the Nasdaq National Market system under the symbol “HPOL”. The following quotations reflect inter-dealer quotations that do not include retail markups, markdowns or commissions and may not represent actual transactions. The following table shows, for the periods indicated, the high and low bid prices per share of our common stock.

Holders

      At August 25, 2004, the Company’s common stock was held by approximately 5,400 stockholders, reflecting stockholders of record or persons holding stock through nominee or street name accounts with brokers.

Dividends

      We have never declared nor paid any cash dividends on our common stock. We currently anticipate that we will retain any future earnings for the development and operations of our business. Accordingly, we do not anticipate paying any cash dividends on our capital stock in the foreseeable future.

Changes in Securities and Use of Proceeds

      On June 30, 2004, the Company issued an aggregate of 27,266 shares of its common stock as the Company’s matching contribution under its 401(k) Plan for an aggregate consideration of $183,222, which did not constitute a sale under Section 2(3) of the Securities Act of 1933, as amended.

      On December 6, 1999, the Company completed an initial public offering of 6,670,000 shares of its common stock. Proceeds to the Company from the offering totaled approximately $85.5 million. During the period from December 6, 1999 through March 31, 2004, the Company used portions of the proceeds from its public offering as follows: (i) approximately $57.2 million of net cash used for working capital and general corporate purposes, including capital expenditures (ii) approximately $11.4 million of net cash used for the expansion of our Internet panel (iii) approximately $12.9 million of net cash used for acquisitions and (iv) $4.0 million of net cash used in connection with the repayment of short-term and long-term borrowings. As of March 31, 2004, the Company had applied all of the proceeds from its initial public offering.

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      The following selected consolidated financial data of Harris Interactive should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes to those statements and other financial information appearing elsewhere in this Form 10-K.

      The selected consolidated financial data reported above includes the financial results of the following entities which we acquired as of the dates indicated: Novatris S.A. (March 2004), Total Research Corporation (November 2001), Market Research Solutions Limited (August 2001), M&A Create Limited (August 2001) and the custom research division of Yankelovich Partners, Inc. (February 2001).

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Overview

      Harris Interactive provides market research, polling and consulting services to a broad range of companies, non-profit organizations and governmental agencies. Since 1956, we have provided these services utilizing traditional market research and polling methodologies, such as direct mail, telephone-based surveys, mall intercepts, focus groups and in-person interviews. In September 1997, we began developing our Internet panel and building the technology infrastructure to provide online market research and polling services. In November 1997, we introduced our first Internet-based market research and polling services and a majority of our revenues are now Internet-based.

      We generally perform traditional and Internet-based custom research services on a fixed fee basis in response to client-generated requests. We sell our multi-client research services on a periodic basis, typically annually. Harris Interactive Service Bureau also performs research for other market research firms on a project-by-project basis in response to requests from those firms.

Critical Accounting Policies and Estimates

      The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The most significant of these areas involving difficult or complex judgments made by management with respect to the preparation of the Company’s financial statements in fiscal 2004 include:

	•	Revenue recognition,
	•	Provision for uncollectible accounts,
	•	Valuation of intangible assets and other long-lived assets,
	•	Valuation of goodwill,
	•	Realizability of deferred tax assets, and
	•	HIPoints™ loyalty program.

      In each situation, management is required to make estimates about the effects of matters or future events that are inherently uncertain.

      Revenue under fixed fee arrangements is principally recognized on a proportional performance basis using the cost-to-cost methodology, which the Company believes is effectively equivalent to output measures. This revenue includes amounts billed to our clients to cover subcontractor costs and other direct “out-of-pocket” expenses. Losses expected to be incurred, if any, on jobs in progress are charged to income as soon as such losses are known. Revisions to estimated costs and differences between actual contract losses and estimated contract losses would affect both the timing of revenue allocated and the results of operations of the Company.

      The Company maintains provisions for uncollectible accounts and estimated losses resulting from the inability of its customers to remit payments. If the financial condition of customers were to deteriorate, thereby resulting in an inability to make payments, or if client disputes arise that delay or jeopardize payments, additional allowances may be required.

      The Company assesses the carrying value of its identifiable intangible assets and long-lived assets, excluding goodwill, whenever events or changes in circumstances indicate that the carrying amount of the underlying asset may not be recoverable. Certain factors which may occur and indicate that an impairment exists include, but are not limited to: a significant decrease in the market price of a long-lived asset; significant under-performance

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      With respect to goodwill, the Company completes an impairment test on an annual basis. In performing this annual test, the Company compares the fair value of its reporting unit with its carrying amount, including goodwill. In the event that a reporting unit’s carrying value exceeds its fair value, the Company would record an adjustment to the respective reporting unit’s goodwill for the difference between the implied fair value of goodwill and the carrying value. In addition to the annual impairment analysis, the Company also assesses the carrying value of goodwill whenever events or changes in circumstances indicate that the carrying amount of the underlying asset may not be recoverable.

      The Company has evaluated the valuation allowance and potential realization of its deferred tax assets on an ongoing basis. In the determination of the valuation allowance, the Company has considered future taxable income. As a result of the Company’s operating performance in fiscal 2003 and the more favorable near term outlook for profitability, a portion of the valuation allowance was reversed in the fourth quarter of 2003 with the resultant benefit to income and goodwill. As a result of the continued profitable operating performance in fiscal 2004 and continued outlook for profitability, the remaining U.S. valuation allowance was reversed in the fourth quarter of 2004 with the resultant benefit to income, goodwill and equity. Further financial information about income taxes is included in Note 11, “Income Taxes,” to our Audited Consolidated Financial Statements for the fiscal year ended June 30, 2004 contained in this Form 10-K. The Company continues to maintain a valuation allowance of approximately $1.9 million related to Harris Interactive Europe and Harris Interactive Japan for net operating loss carryforwards of $4.7 million and $1.3 million, respectively.

      Since July 2001, the Company has had a loyalty program (HIPoints™), whereby points are awarded to market survey respondents who register for the Company’s online panel, complete online surveys and refer others to join our online panel. The earned points, which are non-transferable, may be redeemed for gifts from a specific product folio at any time prior to expiration, which is after one year of account inactivity. The Company maintains a reserve for its obligations with respect to future redemption of outstanding points, calculated based on the expected redemption rate of the points. This expected redemption rate is estimated based on research from other loyalty and retention programs and the Company’s actual redemption rates to date. An actual redemption rate that differs from this estimated redemption rate may have a material impact on the results of operations of the Company.

Business Combinations

      On March 2, 2004 the Company acquired all of the issued and outstanding shares of capital stock of Novatris, S.A. (“Novatris”), a privately owned share corporation organized and existing under the laws of France, for a combination of cash and shares of Harris Interactive common stock. The Company and Novatris are engaged in complementary businesses in the market research and polling industry. The acquisition added one million panel members to the Company’s existing European panel. This acquisition was also expected to create opportunities for revenue growth, cost savings and other synergies. This acquisition was accounted for under the purchase method in accordance with Statement of Financial Accounting Standard No. 141 (“FAS 141”), Business Combinations, (SFAS 141) and is included in the Company’s financial statements commencing on March 2, 2004.

      On November 1, 2001 the Company acquired all of the issued and outstanding shares of common stock, par value $.001 per share, of Total Research Corporation (“Total Research”), a Delaware corporation, headquartered

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      In September 2001, the Company acquired all of the issued and outstanding stock of M&A Create Limited, a privately owned company headquartered in Tokyo, Japan, in consideration of a combination of cash and shares of Harris Interactive common stock. Additionally, in August 2001, the Company acquired all of the issued and outstanding stock of Market Research Solutions Limited, a privately owned UK company, headquartered in Oxford, England, in consideration of a combination of cash and shares of Harris Interactive common stock.

      Further financial information about Business Combinations is included in Note 3, “Business Combinations,” to our Audited Consolidated Financial Statements contained in this Form 10-K.

Restructuring and Asset Impairment Charge

      During the second quarter of fiscal 2002, the Company recorded a restructuring and asset write-down charge of $6.2 million directly related to the operational integration of Harris Interactive and Total Research. Management developed a formal plan that included a 5% reduction in Harris Interactive staff of the full-time workforce in Rochester, NY; New York, NY; Norwalk, CT and a few other outlying locations. The affected employees were mainly support staff with overlapping functions in the combined Company. Other integration actions included the closing of our telephone center located in Youngstown, OH and offices in New York, NY and Chicago, IL, which resulted in asset write-downs and a reserve for lease commitments at these locations. The plan was formally communicated to the affected employees during the second fiscal quarter of 2002. The Company realized approximately $1.1 million in non-cash savings and $1.9 million in cash savings in fiscal 2002. In fiscal 2003 the Company realized non-cash savings of approximately $2.1 million and cash savings of approximately $5.6 million. Cost savings from the plan in fiscal 2004 were consistent with those in fiscal 2003. As of June 30, 2004 all actions for the plan were completed. Further financial information about the plan is included in Note 4, “Restructuring Charges (Credits) and Asset Write-downs,” to our Audited Consolidated Financial Statements contained in this Form 10-K.

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Results of Operations

      The following table sets forth for the periods indicated our results of operations expressed as a percentage of revenue:

Fiscal 2004 as Compared to Fiscal 2003

      Revenue from services. Total fiscal 2004 revenue increased 12% to $146.0 million from $130.6 million in fiscal 2003. U.S. revenue increased $11.0 million to $112.0 million for fiscal 2004, an increase of 11% over fiscal 2003. This increase in U.S. revenue was attributable to growth in several markets, most predominantly Strategic Marketing and Business & Consumer, Health Care and the Harris Interactive Service Bureau (“HISB”). Revenue in the United Kingdom also increased $1.9 million to $24.9 million from $23.0 million, an increase of 8% over fiscal 2003. This increased revenue for the United Kingdom was a direct result of exchange rate differences that accounted for a $2.2 million increase in revenue due to the depreciation of the U.S. dollar. On a constant currency basis, United Kingdom revenue decreased $0.3 million. Revenue in Japan increased 17%, to $7.6 million for fiscal 2004, from $6.5 million for fiscal 2003. Of the increased Japan revenue, $0.6 million was as a result of exchange rate differences and the depreciation of the U.S. dollar. The remaining increase in Japan revenue was due to steady growth of Japan operations with the addition of new work coupled with the continued benefit from preexisting customers. Revenue for fiscal 2004 also includes $1.6 million in revenue from Novatris as a result of the March 2, 2004 acquisition. Thus, of the $15.5 million of increased revenue in fiscal 2004 over fiscal 2003, all but $1.6 million represented organic growth.

      Gross profit. Gross profit increased to $75.7 million, or 52% of revenue, during fiscal 2004, from $63.7 million or 49% of revenue for the prior year, primarily due to the growth in Internet-related business relative to overall revenue growth. Revenue from Internet-based services was $86.5 million, or 59% of total revenue, for fiscal 2004, compared with $60.1 million, or 46% of revenue for fiscal 2003. During fiscal 2004 the Company’s European operations began to make significant strides in the movement towards Internet-based services which in turn helped increase gross margins. European Internet-based revenues increased to $4.2 million in fiscal 2004, 16% of total European revenue, from $0.6 million in fiscal 2003 because of our continued efforts to build our European database, including the acquisition of Novatris in March of 2004. As the Company’s Internet based business model continued to mature and expand and the Company saw increased conversion of existing work to the Internet, lower margin traditional revenue decreased 15% to $59.5 million for fiscal 2004, from $70.4 million for fiscal 2003. HISB, which is 100% Internet-based, has also played a significant role in the growth of Internet revenue. HISB projects generate higher gross margins due to the fact that they are data collection only and typically do not include as much professional time as custom Internet-based research work. For fiscal 2004, HISB projects generated revenue for the Company of $10.0 million, up 26% from $7.9 million

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      Sales and marketing. Sales and marketing expenses increased to $12.0 million, or 8% of revenue, for fiscal 2004 compared with $9.5 million, or 7% of revenue, from the prior year. As a percentage of revenue, sales and marketing expenses increased one percentage point. The increase is attributable to the increased headcount for our sales force in both the United States and United Kingdom. The increased costs for sales and marketing during fiscal 2004 are in line with both the increased revenue as compared to fiscal 2003 and management’s goals to grow our sales force during fiscal 2004 and into fiscal 2005.

      General and administrative. General and administrative expenses increased to $50.2 million, or 34% of revenue, for fiscal 2004, as compared to $47.5 million or 37% of revenue for the prior year. Increases in absolute dollars are largely due to increases in incentive compensation related expenses including salaries, fringe benefits and bonuses. Such expenses for fiscal 2004 increased approximately $2.3 million compared to the prior year however remain in line with the costs necessary to support our increased volume of business. The Company’s costs for database development also increased approximately $0.6 million for fiscal 2004 compared to the prior year as the Company continues to expand its database panel in the United States and Western Europe. The increased database development costs however were offset by decreased telecommunication costs of approximately $0.5 million because of the closing of call centers in the United States and United Kingdom. Other increases in general and administrative expenses during fiscal 2004 include increased rent expense of $0.7 million, approximately $0.5 million from the addition of Novatris in March 2004, a bad debt write-off in Japan amounting to $0.5 as well as other costs related to changes in our executive officers and the consolidation of operations in the United Kingdom.

      As a percentage of revenue, general and administrative expenses decreased three percentage points as the Company has continued its cost saving efforts and stabilized operating expenses. Included within our cost saving efforts in fiscal 2004 was the decreased usage and eventual closing of our last telephone center in the United States in June of 2004 and the above mentioned consolidation of operations in the United Kingdom. Because the Company continues to maintain its major systems and assets established in prior years, overall capital expenditures continue to decline, and as a result depreciation expense has decreased $0.7 million during fiscal 2004 as compared to the prior year.

      Interest income, net. Net interest and other income totaled $0.5 million for both fiscal 2004 and fiscal 2003. Throughout fiscal 2004 the Company had more cash and marketable securities to invest, generated primarily from operations, however earnings on the increased investment balances were offset by lower interest rates. Net cash and marketable securities at June 30, 2004 was $56.6 million compared to $39.1 million at June 30, 2003.

      Income taxes. The Company recorded an income tax benefit of $16.0 million in fiscal 2004 as compared to a benefit of $3.0 in fiscal 2003. The recorded benefit during fiscal 2004 and 2003 was the result of the reversal of valuation allowances on the Company’s deferred tax assets. At the end of fiscal 2003 it was determined that it was more likely than not that we would utilize additional net operating losses in the near future, and therefore a portion of the valuation allowance was reversed in fiscal 2003. At the end of fiscal 2004, after achieving two fiscal years of net income, it became even more likely that we will utilize all of our U.S. net operating losses, and therefore the remaining U.S. valuation allowance was reversed in fiscal 2004.

Fiscal 2003 as Compared to Fiscal 2002

      Revenue from services. Total fiscal 2003 revenue increased 30%, from $100.0 million in fiscal 2002 to $130.6 million in fiscal 2003. The overall increase in revenue was primarily driven by the $22.6 million increase in U.S. revenue, or 29%, to $101.1 million for fiscal 2003. The increased U.S. revenue was partially attributable to the incremental revenue generated from the acquisition of Total Research as well as overall growth in several U.S. markets, most prominently healthcare and customer loyalty management. Additionally, excluding the Total Research acquisition, the Company recognized a modest increase in U.S. revenue related to our expanding

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      Revenue for the United Kingdom increased from the prior year by $6.6 million, or 40%, to $23.0 million in fiscal 2003. Revenue for Japan increased $1.3 million, or 26%, to $6.5 million in fiscal 2003. The increase in U.K. revenue was primarily attributable to the incremental revenue generated from the acquisition of Total Research in November 2001. Revenue from Japan increased due to the continued benefit we derived from new contracts with selected customers throughout fiscal 2003.

      Approximately $16.4 million of the increased revenue in fiscal 2003 was from true organic growth, excluding the impact of the Company’s acquisition of Total Research. Organic growth is calculated in accordance with the pro forma information provided in Note 3, “Business Combinations,” to our Audited Consolidated Financial Statements contained in this Form 10-K related to the Company’s acquisition of Total Research.

      Gross profit. Gross profit was $63.7 million, or 49% of revenue, for fiscal 2003, compared with $46.6 million, or 47% of revenue, for fiscal 2002. The improvement in gross margin percentage resulted primarily from the growth in Internet-related business relative to overall revenue growth. Revenue from Internet-based services was $60.1 million, or 46% of total revenue, in fiscal 2003, compared with $40.6 million, or 41% of revenue, for fiscal 2002. This increase in Internet revenue was due in part to the acquisition of new Internet-based projects as well as the conversion of existing, traditional work to the Internet. Additionally, through increasing the level of Internet related work, the Company has been able to use our existing panel for research in place of more expensive outsourcing and telephone costs. HISB has also played a significant role in the growth of Internet revenue. HISB projects generate higher gross margins due to the fact that they are data collection only and typically do not include as much professional time as customer Internet-based research work.

      Sales and marketing. Sales and marketing expenses in fiscal 2003 were $9.5 million, or 7% of revenue, compared with $9.7 million, or 10% of revenue, for fiscal 2002. As a percentage of revenue, sales and marketing expenses decreased three percentage points. The decrease is attributable to reductions in headcount and related expenses, reflecting the Company’s continuing efforts to reduce costs, as well as productivity improvements from the increased experience level of the Company’s sales force with Harris Interactive sales and marketing strategies. The Company has been able to maintain a consistent level of sales and marketing costs as a percentage of sales throughout the fiscal year despite increased fiscal 2003 fourth quarter expenditures for incentive compensation and severance related costs. The severance related costs were associated with reorganizing our U.K. management team and the closing of one of our four U.K. offices. The additional incentive compensation expense resulted from increased full year revenue results as compared to budget that led to increased commissions and bonuses to employees in accordance with the Company’s compensation plans. In total annual expenditures in fiscal 2003 continue to support the Company’s overall business model established in the prior year.

      General and administrative. General and administrative expenses were $47.5 million, or 37% of revenue, in fiscal 2003 compared with $46.7 million, or 47% of revenue, for fiscal 2002. The ten percentage point decrease in such expenses as a percentage of revenue reflects reductions in headcount and related expenses, rent expense and depreciation expense, and reflects the Company’s continuing efforts to reduce costs. Depreciation and equipment rental and maintenance expenses decreased by a combined $1.1 million, or 15%, to $6.3 million in fiscal 2003 primarily as a result of the fixed asset write-offs in connection with the Company’s fiscal 2002 second quarter restructuring charge which reduced the level of gross fixed assets. The 2002 restructuring plan also reduced fiscal 2003 rent expense by $0.7 million as a result of the closing of three of our telephone centers. As part of its cost savings efforts, the Company has eliminated all but two telephone centers in the United States and the United Kingdom, retaining one in each country primarily to support committed projects with longer-term, predictable needs. The balance of telephone data collection has been migrated to lower cost providers, including some in foreign countries. The cost savings from the prior year restructuring plan were partially offset by increased database development costs related to the establishment of our Western European panel as well as the continued expansion of our U.S. panel.

      Interest and other income, net. Net interest and other income totaled $0.5 million for fiscal 2003 compared with $1.3 million for fiscal 2002. The decrease was primarily attributable to the lower average

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      Income tax benefit. The Company recorded an income tax benefit of $3.0 million in fiscal 2003 as compared to a minimal expense in fiscal 2002. For financial reporting purposes, in fiscal 2003 the Company was able to utilize net operating loss carryforwards to apply against fiscal 2003 net income, resulting in substantially no current income tax expense. As described above under “Fiscal 2004 as Compared to Fiscal 2003 — Income Taxes,” the recorded benefit in 2003 was as a result of the partial reversal of the valuation allowance on the Company’s deferred tax assets. Due to operating losses in fiscal 2002 no benefit was recognized in that fiscal year.

Significant Factors Affecting Company Performance

      The primary factors driving the growth in the Company’s gross profit and net income (loss) are growth in revenue and the mix of the revenue derived from Internet versus traditional work. The Company’s model is based upon the premise that Internet work is more profitable than traditional work, due to the comparatively low data collection cost of Internet work, as illustrated by the following table. The Company believes that the table, which should be viewed as illustrative and not as an actual measure or predictor of any particular project or the Company’s projects as a whole at any given point in time, reasonably represents comparability of traditional and Internet-based projects prior to adjustment for the other factors affecting profitability described below.

      In addition to the Data Collection Costs and panel incentives, the Internet-based model has additional fixed costs associated with the development and maintenance of underlying databases and Internet technology. Such costs decrease Net Income for Internet-based work. In general, however, due to the interplay between the variable and fixed components of cost, the premise is that, as the volume and percentage of Internet-based work increases, and assuming that project professional service components and pricing are comparable and operating expenses continue to be managed in the ordinary course, Net Income as a percentage of revenue should also increase.

      As our Internet business grows and our model matures, we have continued to analyze the differential between Internet and traditional work and have learned that the variables that affect the model are becoming commensurately more complex. For example, projects that have a majority of data collection using the Internet may still have a traditional data collection component, particularly in multi-country studies involving countries for which Internet databases are not fully developed. The traditional data collection component will tend to decrease profitability. Profitability also is decreased by direct costs of outsourcing and pass-through costs applicable to particular projects. On the other hand, once fixed costs of database development and maintenance are absorbed, increases in volume and revenues have a progressively increasing impact on profitability.

      Pure internet data collection continues to have a lower variable data collection cost than traditional methods, and we continue to view the level of our Internet revenues as an important indicator of revenue sources that would not be available to the Company if it were not able to do Internet work and as an important driver of our profitability. We do not believe, however, that Internet revenue in and of itself should be used as an unqualified measure or predictor for other purposes.

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      Regarding the mix of work, for fiscal 2004, the Company’s actual Internet mix was 59% on a global basis and 73% in the United States alone. Internet and traditional revenue by geographic location for fiscal 2004, 2003 and 2002 is as follows:

      The Company considers all of the revenue from a project to be Internet-based whenever 50% or more of the surveys were completed over the Internet.

      Although the Company continues to work to convert projects to the Internet in the United States, the primary new growth opportunity is in Europe, where the ability to change the Internet mix is dependent upon the Company’s success in expanding the size of its respondent panel and increasing customer acceptance of Internet-based work. The globalization of the Internet portion of the Company’s business has commenced and we expect it to ramp up over the next several years.

      The Company’s global database of more than 6 million Internet survey respondents continues to be a critical component of its success. The Company believes that its multi-million participant U.S. database continues to be adequate to service its U.S. Internet-based business. In fiscal 2004, the Company began to conduct more Internet-based projects in Europe and continued its initiative to build a European database. To that end, it entered into various name acquisition agreements that resulted in names being added regularly to the European database. Our initiative was helped significantly with the acquisition of Novatris and its one million member European-based panel in March 2004. As of June 2004 the Company’s European database included over 1.7 million names. The Company intends to continue to expand the European panel in fiscal 2005 and beyond in order to support the growth of Internet-based research in Europe. Additionally, in both the U.S. and in Europe, the Company intends to continue efforts to enhance existing and build new specialty panels. The amount of the Company’s investments in names for its databases will continue to vary, particularly quarter by quarter, based upon factors such as panel availability, opportunities that arise for acquisition or development of panels in specialty or under-represented groups, client demand and attrition.

      Internet databases by their nature experience participant attrition. There are no standard measurement systems for such attrition, particularly in the Internet survey response field. Measurement involves complex variables. For example, determining attrition, by lack of response from a panelist for a set length of time since last contact, is not necessarily reflective of expected long-term attrition. The panelist may not have had an interest in responding regarding particular survey topics offered over a period of time but may, after an absence, respond to a later survey covering a topic of particular interest to the respondent. Moreover, panelists who receive what they perceive to be excessively frequent survey requests tend to have higher than normal rates of attrition. Thus, percentage rates of attrition may not be comparable or meaningful within the industry. When the Company first

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Liquidity and Capital Resources

      Prior to fiscal 2003 we financed our operations primarily through the $85.5 million of net proceeds generated from our December 1999 initial public offering. Consequently, cash and cash equivalents and marketable securities were $27.9 million at June 30, 2002. In fiscal 2003 the Company generated positive cash flows for the first time in recent years and as a result our cash and cash equivalents and marketable securities were $56.6 million and $39.1 million at June 30, 2004 and 2003, respectively.

      Net cash provided by operating activities was $16.4 million and $11.9 million for fiscal 2004 and fiscal 2003, respectively, as compared to net cash used in operating activities of $5.5 million for fiscal 2002. The positive cash flows in fiscal 2004 and fiscal 2003 were primarily as a result of the Company generating net income during each year as compared to the funding of net losses in fiscal 2002. The increased cash provided by operating activities in fiscal 2004 as compared to fiscal 2003 is due to the increased income before income taxes as the tax benefits reflected in net income during each period were essentially non-cash items.

      Net cash used in investing activities was $21.8 million and $3.9 million in fiscal 2004 and fiscal 2003, respectively, as compared with net cash provided by investing activities of $8.0 million for fiscal 2002. During fiscal 2004 the Company’s investing activities included the net purchase of additional marketable securities of approximately $17.6 million, cash paid in connection with the Novatris acquisition of $2.6 million and capital expenditures of $1.6 million. During fiscal 2003 the Company’s investing activities included the net purchase of additional marketable securities of approximately $1.9 million as well as capital expenditures of $2.2 million. During fiscal 2002, net proceeds from sales and maturities of marketable securities of $14.6 million were partially offset by capital expenditures of $2.8 million and the $3.8 million cash outflow for transaction related costs to acquire Total Research in November 2001. Fiscal 2003 and 2002 capital expenditures primarily supported the development of our Internet infrastructure in the U.S. The trend of increased operating cash flows in fiscal 2004 and 2003 have resulted in decreased investing cash flows during each period as the Company has elected to invest the additional idle cash in marketable securities that produce more favorable returns.

      In fiscal 2004 and 2003 the Company had net cash provided by financing activities of $5.7 million and $1.8 million, respectively. Cash flows from financing activities in fiscal 2004 were entirely due to issuances of common stock and stock option exercises. The Company received cash of $4.1 million in fiscal 2003 as a result of issuances of common stock and stock option exercises; this was offset by the repayment of $2.3 million in short and long term borrowings. Net cash used in financing activities of $1.7 million in fiscal 2002 was primarily related to the repayment of long-term debt of $2.3 million and the repurchase of 422,900 shares of common stock for $0.9 million, these cash outflows were partially offset by $1.7 million provided by the issuance of common stock and stock option exercises. At June 30, 2004 and 2003 the Company had no short-term or long-term borrowings.

      At June 30, 2004, the Company had cash and cash equivalents balances of $20.9 million, a slight increase from $20.4 at June 30, 2003. In addition to cash and cash equivalents, at June 30, 2004 the Company also had $35.7 million in marketable securities, an increase of 91% from $18.7 million at June 30, 2003. As stated above, the increase in marketable securities during fiscal 2004 is a direct result of the Company electing to invest its idle cash in securities with the potential to produce more favorable returns. A significant amount of the increased investment in marketable securities were invested in government securities which represented 66% of the total balance, as opposed to commercial paper and corporate bonds which represented 6% and 28% of marketable securities balances at June 30, 2004, respectively. At June 30, 2003, government securities, commercial paper and corporate bonds represented 22%, 13% and 65% of the marketable securities balance, respectively.

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      At June 30, 2004, the Company had, and continues to maintain, lines of credit with commercial banks providing borrowing availability up to $10.0 million, at the prime interest rate. The prime rate in effect at June 30, 2004 was 4.25%. Borrowings under these arrangements are due upon demand. There were no borrowings under these agreements at June 30, 2004 or 2003. These lines of credit are collateralized by the assets of the Company.

      The Company maintains a letter of credit for 3.1 million euro (approximately $3.8 million based on the June 30, 2004 euro conversion rate) that serves as collateral for the contingent purchase price involved in the Company’s acquisition of Novatris during the quarter ended March 31, 2004, which reduces our borrowing capacity against the $10.0 million line of credit.

      Our capital requirements depend on numerous factors, including market acceptance of our services, the resources we allocate to the continuing development of our Internet infrastructure and Internet panel, marketing and selling of our services, our promotional activities, our acquisition activities and other factors. Management anticipates continuing expenditures for property, plant and equipment and working capital requirements throughout fiscal 2005 at levels consistent with fiscal 2004.

      Regarding the Company’s ability to continue to generate revenue, the Company must constantly develop new business, both for growth and to replace non-renewed projects. Although work for no one client constitutes more than 10% of the Company’s revenue, the Company has had to, and in the future will likely have to, find significant amounts of replacement and additional revenue as customer relationships and work for continuing customers change. The Company’s ability to generate revenue is dependent not only on execution of its business plan but also on general market factors outside of its control. Many of our clients treat all or a portion of their market research expenditures as discretionary. As a result, as economic conditions decline in any of our markets, our ability to generate revenue is adversely impacted.

      Based on current plans and business conditions, we believe that our existing cash, cash equivalents and short-term investments will be sufficient to satisfy our anticipated cash requirements to support the Company’s planned operations for the foreseeable future. We cannot be certain, however, that our underlying assumed levels of revenue and expenses will be accurate. If our operating results were to fail to meet our expectations, or if accounts receivable or other assets or acquisitions were to require a greater use of cash than is currently anticipated, we could be required to seek additional funding through public or private financing or other arrangements. In such event, adequate funds may not be available when needed or may not be available on favorable terms, which could have a negative effect on our business and results of operations.

Off Balance Sheet Risk Disclosure

      The Company is not party to any off balance sheet arrangements.

Contractual Cash Obligations (in thousands)

      The Company’s consolidated contractual cash obligations and other commercial commitments as of June 30, 2004 are as follows:

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New Accounting Pronouncements

      In April 2003, the Financial Accounting Standards Board issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and hedging relationships designated after June 30, 2003, except for those provisions of SFAS No. 149 which relate to SFAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003. The Company adopted SFAS No. 149 on July 1, 2003. The adoption did not have an impact on the Company’s consolidated financial statements.

      In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability (or as an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective for the Company beginning July 1, 2003. The Company adopted SFAS No. 150 on July 1, 2003. The adoption did not have an impact on the Company’s consolidated financial statements.

      In January 2003, the FASB issued Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities.” This standard clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” which replaces FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” and addresses consolidation by business enterprises of variable interest entities (more commonly known as Special Purpose Entities or SPE’s). FIN No. 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risk among the parties involved. FIN No. 46 also enhances the disclosure requirements related to variable interest entities. The consolidation requirements of this Interpretation are effective for the first reporting period ending after March 15, 2004 for all non-special purpose entities created prior to February 1, 2003. For all entities that were created subsequent to January 31, 2003, consolidation requirements of this Interpretation were effective upon creation. The Company adopted FIN 46R on January 1, 2004. The adoption did not have a material impact on the Company’s consolidated financial statements.