HARRIS INTERACTIVE INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 000-27577
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HARRIS INTERACTIVE INC.
(Exact Name of Registrant as Specified in its Charter)

DELAWARE 16-1538028
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

135 CORPORATE WOODS, ROCHESTER, NY 14623
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(585) 272-8400

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.001 per share
(Title of Class)

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

INDICATE BY CHECKMARK IF DISCLOSURE OF DELINGUENT 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. [ ]

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

As of December 31, 2002, the aggregate market value of voting and
non-voting common equity securities held by non-affiliates of the registrant was
$92,293,526.

On September 15, 2003, 55,448,763 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 2003, 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.
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HARRIS INTERACTIVE INC.
FORM 10-K

FOR THE FISCAL YEAR ENDED JUNE 30, 2003

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.

ITEM 1. BUSINESS

Harris Interactive Inc. is a Delaware corporation that was incorporated in
1997. Harris Interactive Inc. and its subsidiaries (also herein referred to as
"Harris Interactive", "we", "our", "us", or the "Company") is a worldwide market
research and consulting firm best known for The Harris Poll(R), and for
pioneering the Internet method to conduct scientifically accurate market
research. Harris Interactive combines proprietary methodologies and technology
with expertise in predictive, custom and strategic research. The Company
conducts international research through its various U.S. offices, its
wholly-owned subsidiaries: London- based HI Europe (www.hieurope.com) 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.

On November 1, 2001 Harris Interactive acquired all of the issued and
outstanding shares of common stock, par value $.001 per share, of Total Research
Corporation, a Delaware corporation, located in Princeton, New Jersey. The
transaction was completed pursuant to the Agreement and Plan of Merger, dated as
of August 5, 2001, among the Company, Total Merger Sub Inc., a Delaware
corporation and direct, wholly owned subsidiary of the Company, and Total
Research. Total Merger Sub was merged with and into Total Research (the
"Merger"), with Total Research continuing as the surviving corporation and as a
direct, wholly owned subsidiary of the Company.

The Company has its corporate headquarters in Rochester, New York. 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.

OVERVIEW

The Company operates as one business segment, and services its clients
through six distinct operating groups:

- Business and Consumer Research,

- Health Care & Policy Research,

- Customer Loyalty Management,

- HI Europe,

- Harris Interactive Japan, and

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- Harris Interactive Service Bureau.

The operating groups conduct:

- custom research -- internet-based and traditional studies conducted on
specific issues for specific customers,

- multi-client research -- internet-based studies conducted on issues of
general interest and sold to numerous clients, and

- service bureau research -- internet-based data collection conducted for
other research firms.

In 1997, the Company embarked on its mission to develop an Internet panel
and the proprietary technology infrastructure necessary to conduct fast,
comprehensive and accurate online market research. Accordingly, we have made,
and will continue to make, significant expenditures to drive the transformation
of the market research and polling industry to an Internet-based platform. We
believe that Harris Interactive is the leading Internet-based market research
and polling firm in the world, based on the size of our Internet panel, the
number of online surveys that we have completed and the amount of revenue we
derive from online research.

The Company operates telephone data collection centers in Rochester, New
York, London, England, and Tokyo, Japan. The Company's phone centers conduct
interviews utilizing computer-based questionnaires. The data are immediately
uploaded to the Company's central data-processing center, thereby enabling more
efficient and effective analysis. The Company's phone centers have sufficient
capacity to support reasonably predictable long-term needs. The Company also
out-sources telephone data collection to support shorter-term project needs and
others that exceed the Company's internal capacity.

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.

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, 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 for the first time to survey a broad, diverse population at
costs and speeds that were previously unattainable. This capacity has actually
increased the amount of research that is being completed as much of our revenue
is "new" research that had never been done before.

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THE INTERNET AND ITS IMPACT ON THE MARKET RESEARCH AND POLLING INDUSTRY

Since its conception in the early 1960s, the Internet has enabled 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 for the last five to seven years.

Harris Interactive first 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, the demographic
composition of Internet users has become closer to the overall population and
highly accurate weighting procedures have been developed, 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
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. Consequently,

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our Company-wide client satisfaction scores (over 9.0 out of 10 in fiscal
2003) are among the best in the industry.

- 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 online data collection results 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. The accuracy of this
system was proven when Harris Interactive produced the most accurate
forecast 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 several million individuals from around
the world who have been double opted-in 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 and 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

- 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 three 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 these 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 left to right reading languages;

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- 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;

- 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;

- A SCALABLE TECHNOLOGY INFRASTRUCTURE. This infrastructure 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 and public policy. By aligning all of our support
functions (e.g. sales, marketing, research staff, etc.) to specific vertical
markets, we can effectively and efficiently deliver our services, while
providing a high level of industry expertise and consultative support.

Our three primary sources of revenue are:

- custom research

- multi-client research

- service bureau research

All multi-client and service bureau research is conducted via the Internet.
We deliver custom research by employing both traditional and Internet-based
methodologies. Currently, we are aggressively transitioning our custom research
and polling products and services to Internet-based research. During fiscal
2003, 46% of our total revenue was derived from Internet-based products, up from
41% in fiscal 2002. 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.

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The following table summarizes our products and services.

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:

- health care,

- pharmaceuticals and medical devices,

- office equipment and technology,

- education and public policy,

- transportation,

- marketing communications and advertising, and

- public relations.

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.

- 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.

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MULTI-CLIENT RESEARCH

Multi-client research is sold on a one-time or subscription basis to a
large number of customers that have an interest in a particular market segment
or research application. 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. Agreements for co-branded studies are
negotiated on a case-by-case basis, with revenue generally applied to specified
categories of expenses and any profits shared accordingly. 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.

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

Harris Interactive Service Bureau clients can utilize our data collection
capabilities on a long-term, continuous basis or on a project-by-project basis.
During fiscal 2003, 100 market research firms used HISB, up from 90 in fiscal
2002 and 74 at the end of fiscal 2001.

OUR CLIENTS

In fiscal 2003, approximately 42% of the Company's revenue was derived from
Fortune 500 companies. The Company served approximately 1,070 clients, derived
from the following lines of business:

In fiscal 2003, no single client accounted for more than 10% of the
Company's consolidated revenue.

OUR SALES AND MARKETING PROGRAMS

During fiscal 2003 the Company invested approximately $2.3 million to
implement a broad range of sales and marketing programs, intended to:

- raise awareness of the The Harris Poll, The Harris Poll Online, Harris
Interactive, HI Europe and Harris Interactive Japan brands,

- build specific product awareness,

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- generate new sales leads,

- 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. We engage in comprehensive media relations and public
relations on a full time basis. 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 2003, the Company created and
distributed over 150 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 250 joint releases of information, and responded to over 2,500 media
inquiries from reporters, editors, authors and educational institutions
who wanted to publish our data. The Harris Interactive name regularly
appears in Business Week and Time magazines, and on CNN as a research
provider for Time/CNN surveys. BRANDWEEK and The Wall Street Journal
publish our brand and reputation research on a regular basis. Public
Relations has been, and will remain, the main driver behind the rapid
increase in the overall awareness of the Harris Interactive brand.

- 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
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 Trends and
'Tudes (youth and education research), Entree (food and beverage industry
research) and @dvantage (HISB) newsletters to share knowledge with our
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. At the end of fiscal 2003, a major effort to
implement a web-based, Customer Relationship Management (CRM) system was
launched for internal use. We expect that by the end of December 2003,
more than 200 employees in the U.S. and Europe will be wired into this
integrated system to share customer data, manage leads and contacts as
well as track sales proposals, RFP's and contracts sold.

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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.

Industry analysts at Inside Research estimate that traditional market
research and polling revenue in the U.S. will grow at about 1.9% (compounded
annual growth rate, "CAGR", adjusted for inflation) in calendar year 2003, while
the Internet-based market research and polling segment of the industry will grow
at about 17% (CAGR adjusted for inflation) in calendar year 2003 -- down from
60% (CAGR adjusted for inflation) in CY2002 and 53% (CAGR adjusted for
inflation) in CY2001. Although barriers to entry 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.

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 ability to project results to the required universe,

- our large Internet panel, diverse in geographic scope and demographic
depth,

- our scalable proprietary Internet technology platform,

- our quality, and the depth and breadth of our products and services,

- our brand recognition and strong reputation,

- our values, and

- our very high levels of customer satisfaction

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, 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,

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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(TM) -- 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,
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.

Our success and ability to compete substantially depend on our internally
developed technologies and 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.

12

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

During fiscal 2003 and 2002, approximately 77% and 78%, respectively, of
our total consolidated revenue was derived from our U.S. operations and
approximately 23% and 22%, respectively, of our total consolidated revenue was
derived from our non-U.S. operations. Further financial information about the
geographic areas in which the Company operates is included in Note 8, "Business
Segment and Geographic Information," to our Audited Consolidated Financial
Statements contained in this Form 10-K.

BACKLOG

As of June 30, 2003, we had a revenue backlog of approximately $36 million,
as compared to a backlog of approximately $40 million at June 30, 2002. It is
estimated that substantially all of the backlog as of June 30, 2003 will be
recognized during the fiscal year ending June 30, 2004.

EMPLOYEES

As of June 30, 2003, we employed a total of 731 persons on a full-time
basis worldwide, 561 of which were employed in the United States. In addition,
we employed 1,003 part-time and hourly individuals on a worldwide basis, for
data gathering and processing activities, 199 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.

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
15, 2003. 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 Chairman of the Board 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. degree in Political Science from Washington University.

13

Albert Angrisani has served as President and Chief Operating Officer, and
as a director of Harris Interactive since November 2001. Mr. Angrisani was
elected to serve as President and Chief Operating Officer and as a director of
Harris Interactive pursuant to the terms of the Agreement and Plan of Merger
dated August 5, 2001 between Harris Interactive Inc., Total Research Corporation
and Total Merger Sub Inc. From July 1998 to November 2001, Mr. Angrisani served
as President and Chief Executive Officer of Total Research Corporation and as
director of Total Research Corporation from November 1994 to November 2001.
Prior to July 1998, Mr. Angrisani acted as a consultant to Total Research
Corporation, and from January 1993 to April 1998, Mr. Angrisani served as the
President of the Princeton-Potomac Management Company, a consulting and
financial services firm. Mr. Angrisani earned an A.P.C. from New York
University, an M.B.A. from Fairleigh Dickinson University and a B.A. from
Washington & Lee University.

Leonard R. Bayer has served as Executive Vice President 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. degree in Statistics, a B.S. degree in
Astrophysics and a B.A. degree 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. and M.A. from Queens College of the City University of New York.

Arthur E. Coles has served as our Group President, Health Care & 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

14

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.

Gregory T. Novak has served as President, U.S. Operations, since July 2003,
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. Mr. Novak is also a graduate of General Electric's
Nuclear Power Engineering Program and Corporate Analyst's Training and
Development Program.

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.

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 secondary schools in the United States and was an analyst for the
Inspector General's Office of the United States Department of Education. He has
also served an appointment as an American Educational Research Association
Fellow at the National Center for Educational Statistics. Dr. Terhanian received
his B.A. from Haverford College, his Masters degree from Harvard University, and
his Ph.D. from the University of Pennsylvania.

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,
David was selected as one of fifty employees among thirty seven thousand
personnel in the United States to participate in the PwC Scholars Program. David
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.

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.

ITEM 2. PROPERTIES

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 2008. In addition, we lease data collection centers, in
which we operate telephone interviewing centers in Rochester, New York, 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 and Tokyo, Japan.

15

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.

ITEM 3. LEGAL PROCEEDINGS

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.

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

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2003.

16

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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 September 15, 2003, 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

The Company issued and sold an aggregate of 414,299 shares of its common
stock to employees during the fourth quarter of fiscal 2003, upon the exercise
of options granted under the Company's 1997 stock option plan, at exercise
prices ranging from $0.35 per share to $3.70 per share, for an aggregate cash
consideration of $753,524. As to each employee of the Company who was issued the
common stock described in this paragraph, the Company relied on the exemption
from registration provided by Rule 701 under the Securities Act of 1933, as
amended. Each person was granted an option to purchase shares of the Company's
common stock pursuant to a written contract between such person and the Company,
and the Company was eligible to use Rule 701 at the time the options herein
reported as exercised were originally granted in accordance with Rule 701(b).

On June 30, 2003, the Company issued an aggregate of 33,209 shares of its
common stock as the Company's matching contribution under its 401(k) Plan for an
aggregate consideration of $214,530, which did not constitute a sale under
Section 2(3) of the Securities Act of 1933, as amended.

During the fourth quarter of fiscal 2003, the Company issued and sold an
aggregate of 134,420 shares of its common stock to individuals who exercised
options to acquire shares received in connection with their investment in Total
Research in 1998, which options were assumed by the Company as part of the
Merger. The shares were issued at an exercise price of $1.84 per share for an
aggregate cash consideration of $247,333. As to

17

each person who was issued common stock described in this paragraph, the Company
relied on an exemption from registration provided under Section 4(2) of the
Securities Act of 1933.

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 June 30, 2003, the Company used portions of the proceeds from its public
offering as follows: (i) approximately $56.2 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 $11.3 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.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

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: 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 (February 2001).

18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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.

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 subscription 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
for fiscal 2003 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(TM) 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 recognized on a proportional
performance basis based on the ratio of costs incurred to total estimated costs.
This revenue includes amounts billed to our clients to cover subcontractor costs
and other direct expenses. Provisions for estimated contract losses, if any, are
made in the period such losses are determined. Subscription revenue is
recognized upon delivery of the research results. 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, 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 relative to
historical or projected future operating results; significant changes in the
manner of the Company's use of the underlying assets or their physical
condition; and significant adverse industry or market trends. In the event that
the carrying value of an asset is determined to be unrecoverable, the Company
would record an adjustment to the respective carrying value.

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 units with each reporting unit's 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

19

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 evaluates 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 with the resultant benefit to income and goodwill. Should
the Company determine that it is more likely than not that it will realize
additional deferred tax assets in the future, an additional adjustment would be
required to reduce the existing valuation allowance, with the resultant benefit
to income, goodwill and additional paid in capital. Further financial
information about income taxes is included in Note 11, "Income Taxes," to our
Audited Consolidated Financial Statements contained in this Form 10-K.

Since July 2001, the Company has had a loyalty program (HIpoints(TM)),
whereby points are awarded to market survey respondents who register for the
Company's online panel, complete online surveys and refer others to join the
online panel. The earned points, which are non-transferable, may be redeemed for
gifts from a specific product folio. 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 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 in Princeton, New
Jersey, pursuant to the Agreement and Plan of Merger, dated as of August 5,
2001, among the Company, Total Merger Sub Inc., a Delaware corporation and
direct, wholly owned subsidiary of the Company, and Total Research. Pursuant to
the merger agreement, Total Merger Sub was merged with and into Total Research
(the "Merger"), with Total Research continuing as the surviving corporation and
as a direct, wholly owned subsidiary of the Company. Harris Interactive and
Total Research are engaged in complementary businesses in the market research
and polling industry. The acquisition has created revenue growth, cost savings
and other synergies including the ability to convert Total Research
traditional-based clients to the Internet, sell to one another's customers,
offer customers more comprehensive and diverse services, and use a combined
worldwide network. For example, the Company was able to build on Total
Research's prior relationship with a key customer to win unrelated
Internet-based work in excess of $1 million over the past year.

Upon consummation of the Merger, each outstanding share of Total Research
common stock was converted into the right to receive 1.222 shares of Harris
Interactive common stock, par value $.001 per share. An aggregate of
approximately 16,610,000 shares of common stock, with an estimated fair value of
$41.3 million, was issued to the stockholders of Total Research Corporation. The
value was determined using the average fair market value of the stock for the
range of trading days beginning August 2, 2001 and ending August 8, 2001.
Additionally, pursuant to the merger agreement, all outstanding options to
purchase shares of Total Research common stock were, upon consummation of the
Merger, fully vested and converted into an option to purchase 1.222 shares of
Harris Interactive common stock. As a result, the former option holders of Total
Research received from Harris Interactive options to purchase approximately
2,899,000 shares of Harris Interactive common stock, with an estimated fair
value of $3.6 million. The acquisition was accounted for as a purchase in
accordance with FAS 141 and is included in the Company's financial statements
commencing on November 1, 2001. The Company has recorded approximately $50.5
million in goodwill and intangibles related to the acquisition in accordance
with the provisions of SFAS 141.

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

20

Oxford, England, in consideration of a combination of cash and shares of Harris
Interactive common stock, and in February, 2001 the Company acquired all of the
assets of the custom research group of Yankelovich Partners, Inc., headquartered
in Norwalk, Connecticut.

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.

The following table summarizes activity with respect to the restructuring
and asset impairment charge for the period ended June 30, 2003:

As of June 30, 2002, all actions were completed, however cash payments for
lease commitments have been, and will continue to be, made on a longer-term
basis according to the contractually scheduled payments of such commitments and
will continue through 2005. During fiscal 2003, the Company adjusted the reserve
for restructuring charges by $997,000 for lease commitments that were no longer
required. The adjustments were due to the Company obtaining a release from its
obligations under lease obligations previously included in restructuring
charges.

The total number of employees included in the charge and ultimately
terminated was 82.

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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 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. This 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 Internet client base and Internet-based market research
services, which contributed $59.3 million in total U.S. Internet-based revenue
for fiscal 2003, as compared to $40.6 million for the prior fiscal year.

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.

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

22

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, which are
expected to continue in fiscal 2004.

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 a lower average marketable securities balance and
interest rates for fiscal 2003 compared to fiscal 2002.

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 current year net income, resulting
in substantially no current income tax expense. The recorded benefit in 2003 was
as a result of the partial reversal of the valuation allowance on the Company's
deferred tax assets. Since the deferred tax assets were substantially comprised
of net operating loss carryforwards and it was determined that it is more likely
than not that we will utilize additional net operating losses in the near
future, as required by GAAP a portion of the valuation allowance was reversed in
2003. Due to operating losses in fiscal 2002 no benefit was recognized in that
fiscal year.

FISCAL 2002 AS COMPARED TO FISCAL 2001

REVENUE FROM SERVICES. Revenue increased 67% from $60.1 million in fiscal
2001 to $100.0 million in fiscal 2002. The revenue growth was mainly due to the
acquisitions of Total Research in November of fiscal 2002, the Yankelovich
custom research group in February of fiscal 2001, and Market Research Solutions
Limited and M&A Create Limited in August of fiscal 2002. In fiscal 2002, the
Company also increased Internet-based revenue to $40.6 million, from $32.6
million in fiscal 2001. Acquiring new Internet-based revenue as well as
converting existing, traditional work to the Internet drove this 25% increase.

GROSS PROFIT. Gross profit decreased to 47% in fiscal 2002, from 49% in
fiscal 2001. The margins declined primarily because a large majority of the
revenue derived from acquisitions was generated from traditional research as
opposed to Internet-based research.

SALES AND MARKETING. Sales and marketing expenses were $9.7 million for
fiscal 2002, or 10% of revenue, compared with $8.5 million, or 14% of revenue
for fiscal 2001. The absolute dollar increase is primarily attributable to an
increase in salaries and related expenses resulting from the acquisition of
Total Research and an increase in sales commission expense. The improvement as a
percentage of revenue is attributable to the Company's continuing efforts to
reduce overall costs.

23

GENERAL AND ADMINISTRATIVE. General and administrative expenses were $46.7
million, or 47% of revenue in fiscal 2002, compared with $48.5 million, or 81%
of revenue in fiscal 2001. Similar to sales and marketing expenses, general and
administrative expenses excluding database development costs have increased in
absolute dollars due to increased personnel and related costs, including rent
and depreciation expense, resulting from the acquisition of Total Research. The
decrease as a percentage of revenue was directly attributable to continuing cost
reduction efforts including the fiscal 2002, second quarter restructuring plan.
Internet database development costs declined $7.0 million, or 95%, to $0.4
million in fiscal 2002 from $7.4 million in fiscal 2001. This decrease was
primarily due to significant expenditures to build our U.S. database in fiscal
2001, the decreased price to acquire double opt-in names for database
replenishment in fiscal 2002, the termination of our panel recruitment agreement
with during fiscal 2002, and the elimination of costs associated with The Planet
Project Global Poll conducted in November 2000.

INTEREST AND OTHER INCOME, NET. Net interest and other income totaled $1.3
million for fiscal 2002, compared with $3.7 million for fiscal 2001. The
decrease is primarily attributable to a lower average marketable securities
balance for fiscal 2002 as compared to fiscal 2001.

SIGNIFICANT FACTORS AFFECTING COMPANY PERFORMANCE

In the past, the Company has reported EBITDA (Earnings Before Interest,
Taxes, Depreciation and Amortization), which is a non-GAAP financial measure as
defined under SEC Regulation G. The Company has reported EBITDA because
management believes that EBITDA, although not a GAAP measurement, is widely
understood and is an additional tool that assists investors in evaluating
current operating performance of the business without the effect of the non-cash
depreciation and amortization expenses. Management internally monitors EBITDA to
monitor cash flow unencumbered by non-cash items. While instructive, EBITDA
should be considered in addition to, rather than as a substitute for, operating
income, net income or cash flows from operations or any other GAAP measure of
performance or liquidity.

Globally, for fiscal 2003, EBITDA was $13.3 million, or 10% of revenue,
compared to the fiscal 2002 and 2001 EBITDA losses of $9.6 million and $21.3
million, or 10% and 35% of revenue, respectively, as reconciled with the most
directly comparable financial measure calculated in accordance with GAAP within
the following table.

By comparison, a published index reports average EBITDA as a percentage of
revenue of 5.9% for the U.S. market research industry as a whole for the
calendar year ended December 31, 2002.

The primary factors driving the growth in the Company's gross profit,
EBITDA 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

24

comparatively low variable data collection cost of Internet work. The model,
which the Company believes reasonably represents comparability of traditional
and Internet-based projects, is as follows:

In addition to the Variable Data Collection Costs, 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 and
EBITDA 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
percentage of Internet 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 and EBITDA as a percentage of
revenue should also increase. Based upon the operation of the model, the Company
believes that net operating margins of its business can grow steadily over a
period of years with a potential as high as EBITDA in the range of high teens to
20%. Such growth is predicated upon the Company's global mix of Internet-based
versus traditional work, continued growth of revenue with the ability to
continue to achieve reasonable pricing, controlled growth of operating expenses,
and maintenance and continued growth of the respondent database sufficient to
support the Company's business at reasonable per-unit costs. The model 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.

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.

The Company believes that its ability to continue to sustain and grow
revenue is significantly affected by client satisfaction with completed work,
and that improved client satisfaction ratings have had and will continue to have
a positive impact on the growth of the Company's business. We have instituted
what we believe are among the most comprehensive systems to measure client
satisfaction in our industry. We use information provided by our clients to
improve the quality of our products, services, and relationships, and therefore
to improve future satisfaction levels. As the Company matured in the conversion
of its business model to the Internet, we have been able to improve client
satisfaction scores to over 9.0 out of 10.0, among the top in our industry. We
believe that such improvements have had a direct result in greater customer
loyalty and an increased rate of customer acceptance of our proposals.

Regarding the mix of work, for fiscal 2003, the Company's actual Internet
mix was 46% on a global basis and 59% in the United States alone. 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 increase customer acceptance of Internet-based work.
The globalization of the Internet portion of the Company's business has
commenced and we believe that it is expected to ramp up over the next several
years.

The Company's global database of more than 4 million Internet survey
respondents continues to be a critical component of its success. The Company
believes that its multi-million participant U.S. database, to which it is

25

adding between 3,500 and 4,000 names per day on average, continues to be
adequate to service its Internet-based business. In fiscal 2003, the Company
launched an initiative to build a European database as well. To that end, it has
entered into name acquisition agreements with a major Internet portal and
others. Names are being added regularly to the European database, which included
approximately 350,000 names as of July 2003, and the Company is now conducting
Internet-based projects in Europe. The Company intends to continue to expand the
European panel in fiscal 2004 and beyond in order to support growth of
Internet-based research in Europe and is currently adding more than 1,000 names
per day. Additionally, in both the U.S. and in Europe, the Company intends to
continue efforts to enhance existing and build new specialty panels. For
example, it has entered into joint development activities with IMS Health, Inc.
to build physician 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,
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. Thus, percentage rates of attrition may not be comparable or
meaningful within the industry. When the Company first developed its Internet
model, it expected attrition of panel members to be in the range of 20%
annually. With the Company's increased expertise gained from several years of
investment in panel management techniques, it monitors panel fatigue and
attrition in multiple ways. Its overall attrition rates by most measures,
however, are significantly less than originally anticipated.

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
$42.5 million at June 30, 2001, and $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 $39.1 at June 30, 2003.

Net cash provided by operating activities was $11.9 million for fiscal 2003
as compared to net cash used in operating activities of $5.5 million and $15.5
million for fiscal 2002 and 2001, respectively. The positive cash flow in fiscal
2003 was primarily as a result of the Company generating net income in fiscal
2003 as compared to the funding of net losses in fiscal 2002 and 2001.

Net cash used in investing activities was $3.9 million in fiscal 2003 as
compared with net cash provided by investing activities of $8.0 million and $2.1
million for fiscal 2002 and fiscal 2001, respectively. 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. During
fiscal 2001, net proceeds from sales and maturities of marketable securities of
$17.9 million were partially offset by capital expenditures of $7.6 million and
the $8.2 million cash outflow to purchase the custom research division of
Yankelovich Partners, Inc. in February 2001. Fiscal 2003, 2002 and 2001 capital
expenditures primarily supported the development of our Internet infrastructure
in the U.S.

In fiscal 2003 the Company had net cash provided by financing activities of
$1.8 million. 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. Net cash provided by

26

financing activities was $0.1 million in fiscal 2001, resulting from issuances
of common stock and stock options of $0.9 million, offset by the repurchase of
common stock of $0.8 million.

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 2004 at
levels consistent with fiscal 2003.

As of June 30, 2003 the Company had no short-term or long-term borrowings.
At June 30, 2002, the Company had short-term and long-term borrowings of $0.8
million and $1.5 million, respectively, limited to operations in the United
Kingdom and Japan. Interest rates related to the borrowings ranged from 1.8% to
3.0%. There were no restrictive covenants associated with these borrowings.

In fiscal 2003 and 2002, the Company had, and continues to maintain, a line
of credit with a commercial bank providing borrowing availability up to $5.0
million, at the prime interest rate. The prime rate in effect at June 30, 2003
was 4.0%. Borrowings under this arrangement are due upon demand. There were no
borrowings under this agreement at June 30, 2003 and June 30, 2002. The line of
credit is collateralized by the assets of the Company.

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 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.

CONTRACTUAL CASH OBLIGATIONS (IN THOUSANDS)

The Company's consolidated contractual cash obligations and other
commercial commitments as of June 30, 2003 are as follows:

- ---------------

(1) The Company's line of credit is payable upon demand under the terms of its
agreement. There were no borrowings outstanding under the line of credit at
June 30, 2003.

27

NEW ACCOUNTING PRONOUNCEMENTS

SFAS 145

In May 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements 4, 44 and 64, Amendment of FASB Statement No. 13
and Technical Corrections". SFAS No. 145 eliminates the requirement that gains
and losses from the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect.
However, an entity is not prohibited from classifying such gains and losses as
extraordinary items, so long as they meet the criteria outlined in Accounting
Principles Board Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal Occurring Events and
Transactions. SFAS No. 145 also eliminates the inconsistency between the
accounting for sale-leaseback transactions and certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
statement is effective for financial statements issued for fiscal years
beginning after May 15, 2002, with early adoption encouraged. The Company
adopted SFAS No. 145 on July 1, 2002. The adoption did not have an impact on the
Company's consolidated financial statements.

SFAS 146

In July 2002, the Financial Accounting Standards Board issued SFAS 146,
"Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. Previous accounting guidance was provided by Emerging Issues
Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". SFAS No. 146 replaces EITF Issue No. 94-3.
This standard is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company adopted SFAS No. 146 on January
1, 2003. This adoption did not have an impact on the Company's consolidated
financial statements.

SFAS 148

In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation -- Transition and Disclosure."
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company is required
to follow the prescribed format and provide the additional disclosures required
by SFAS No. 148 in its annual financial statements for the year ending June 30,
2003 and is also required to provide the disclosures in its quarterly reports
containing condensed financial statements for interim periods beginning with the
quarterly period ended March 31, 2003. The Company adopted SFAS 148 on January
1, 2003 and elects to continue to account for its stock based compensation plans
under the provisions of APB Opinion No. 25, "Accounting for Stock Issued to
Employees" as are described in Note 14 of the audited Consolidated Financial
Statements included in this Form 10-K. The adoption did not have an impact on
the Company's consolidated financial statements.

SFAS 149

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

28

does not expect the adoption of SFAS 149 to have a material impact on the
Company's consolidated financial statements.

SFAS 150

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 does not expect the adoption of SFAS No. 150
to have a material impact on the Company's consolidated financial statements.

FIN 45

In November 2002, the FASB published Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires that a guarantor
recognize a liability for the fair value of an obligation assumed under a
guarantee and also discusses additional disclosures to be made in the interim
and annual financial statements of the guarantor regarding obligations under
certain guarantees. The initial measurement and recognition requirements of FIN
45 are effective prospectively for guarantees issued or modified after December
31, 2002. The Company adopted FIN 45 on January 1, 2003. The adoption did not
have a material impact on the Company's consolidated financial statements.

FIN 46

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This standard clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," 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. This statement is effective for variable interest
entities created or in which an enterprise obtains an interest after January 31,
2003. The Company adopted FIN 46 on July 1, 2003. The adoption did not have a
material impact on the Company's consolidated financial statements.

RISK FACTORS

THE MARKET RESEARCH INDUSTRY IS VULNERABLE TO GENERAL ECONOMIC CONDITIONS.

Many of our clients treat all or a portion of their market research
expenditures as discretionary. As general economic conditions decline and our
customers seek to control variable costs, projects to be performed by the
Company may be delayed or cancelled, and new project bookings may slow. As a
result, the growth and earnings of the Company may be adversely impacted.

OUR GROWTH WILL BE ADVERSELY AFFECTED IF THE MARKETPLACE DOES NOT CONTINUE TO
CONVERT TO INTERNET-BASED MARKET RESEARCH AND POLLING.

The ongoing success of our business will depend on our ability to
continually develop and market Internet-based products and services that achieve
broad market acceptance. Our clients must continue to accept the Internet as an
attractive replacement for traditional market research methodologies, such as
direct mail, telephone-based surveys, mall intercepts, focus groups and
in-person interviews.

Since the beginning of fiscal 1998, we have spent $67.1 million and
significant management resources to develop and grow our Internet-based market
research and polling business. Some of our clients have expressed concern that
Internet users do not yet accurately reflect their applicable population, and
that any information

29

collected via the Internet will be inherently biased. If our current and
potential clients do not continue to accept our Internet-based methodologies as
reliable and unbiased, our revenues may not meet expectations or may decline,
and our business, financial condition and results of operations would likely
suffer.

WE FACE INTENSE COMPETITIVE PRESSURES AND UNCERTAINTIES WITHIN THE MARKET
RESEARCH AND POLLING INDUSTRY.

The market research and polling industry is highly fragmented and includes
competitors much larger than we are. As competitors increase their ability to
offer alternative products in the market, we may come under increasing pressures
in selling and pricing our products and services. No one customer accounts for
more than 5% of our revenues and most of our revenues are derived on a project
by project basis. We must continuously replace completed work with new projects
in order to sustain and grow our revenues. The market research industry tends to
be adversely affected by slow or depressed business conditions in the market as
a whole. We are at risk of decreased market research budgets as our customers
respond to difficult economic conditions, as well as to delays in projects both
committed and uncommitted.

IF WE ARE UNABLE TO MAINTAIN ADEQUATE SIZE AND DEMOGRAPHIC COMPOSITION OF OUR
GLOBAL INTERNET PANEL, OR IF WE ARE REQUIRED TO SPEND SUBSTANTIAL FUNDS TO DO
SO, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL SUFFER.

Our success is highly dependent on our ability to obtain and retain an
adequate number of worldwide panelists in our Internet panel and its
specialty-panels. Our ability to maintain an adequate online panel or increase
Internet revenues may be harmed if:

- a significant number of our current online panelists decide that they are
no longer willing to participate in our surveys,

- we lose a large number of online panelists from over-use, and then must
rely on a limited number of online panelists for ongoing research,

- we are unable to attract an adequate number of replacement panelists and
specialty panel members, or

- new regulatory requirements related to Internet "spam" make it
impractical for us to continue operations as currently conducted.

If the number of our active survey respondents significantly decreases, or
the demographic composition of our Internet panel narrows, our ability to
provide our clients with accurate and statistically projectable information
would likely suffer. This risk is likely to increase as our business expands.
For example, our Internet panel is surveyed for our own studies as well as for
studies conducted for other market research firms by our Harris Interactive
Service Bureau. Our business will be unable to grow and will suffer if we have
an insufficient number of panelists to respond to our surveys, or if our panel
becomes unreliable due to reduced size, or because it is not representative of
the general population.

Our online panelists are not obligated to participate in our surveys and
polls and there can be no assurance that they will continue to do so.

We believe that our HIpoints(SM), HIstakes(SM) and instant results programs
currently provide adequate incentives to encourage participation in our surveys
and to maintain the size of our Internet panel. These programs may lose their
effectiveness in the future, resulting in a reduction in size of the panel.

IF WE ARE UNABLE TO ACHIEVE THE ANTICIPATED GLOBAL GROWTH OF OUR INTERNET PANEL,
OR IF WE ARE UNABLE TO OVERCOME OTHER RISKS ASSOCIATED WITH GLOBAL OPERATIONS,
WE WILL BE UNABLE TO CONDUCT BUSINESS ON A GLOBAL LEVEL.

Key components of our strategy are extension of our Internet-based market
research and polling products and services to clients globally, expansion of our
Internet panel to include global online panelists and development of strategic
alliances globally. The following risks are inherent in doing business on a
global level:

- inability to attract a critical mass of panel members in key countries
and regions, particularly in Europe,

- export controls relating to encryption technology,

- inability to comply with or enactment of more restrictive privacy laws,

30

- changes in regulatory requirements,

- currency exchange fluctuations,

- problems in collecting accounts receivable and longer collection periods,

- potentially adverse tax consequences,

- political instability,

- Internet access restrictions, and

- anti-American sentiment or terrorist activity against American interests
abroad.

We have little or no control over these risks. We have encountered more
restrictive privacy laws in connection with our business operations in Europe,
which have inhibited our ability to develop our European Internet panel. We have
also experienced currency exchange fluctuations, the impact of which has not
been material. As we increase our global operations in the future, we may
experience some or all of these risks, which may have a material adverse effect
on our business, financial condition and results of operations.

IF WE DO NOT CONTINUE TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE WITHIN THE
MARKET RESEARCH AND POLLING INDUSTRY, WE WILL NOT BE ABLE TO SUCCESSFULLY
IMPLEMENT OUR BUSINESS PLAN.

The markets for our products and services are highly competitive. Our
current competitors also offer Internet-based and traditional market research
and polling services. We expect to face future competition from other
organizations that develop Internet-related products and services. These
companies may, either alone or in alliances with other firms, penetrate the
Internet-based market research and polling market.

Our ongoing success will depend on our continued ability to improve the
performance features and reliability of our products and services. We may
experience difficulties that could delay or prevent the successful development,
introduction or marketing of new products and services. We could also incur
substantial costs if we need to modify our services or infrastructure to adapt
to these changes.

ANY FAILURE IN THE PERFORMANCE OF OUR INTERNET-BASED TECHNOLOGY INFRASTRUCTURE
COULD HARM OUR BUSINESS.

Any system failure, including network, software or hardware failure, that
causes an interruption in our ability to communicate with our Internet panel,
collect research data, or protect visual materials included in our surveys,
could result in reduced revenue, and could impair our reputation. Our systems
and operations are vulnerable to damage or interruption from fire, earthquake,
flooding, power loss, telecommunications failure, break-ins and similar events.
One supplier of our secure off-site Web hosting facilities currently maintains
approximately one-third of our servers at one facility, and while we have
redundancy in our systems we depend upon the supplier and others to protect our
systems and operations from the events described above.

We have experienced technical difficulties and downtime of individual
components of our computer system in the past and believe that technical
difficulties and downtime may occur from time to time in the future. Although
technical difficulties and downtime have had minimal impact on our operations
during the past fiscal year, their impact may be more severe in the future. We
have no formal disaster recovery plan and our business interruption insurance
may not adequately compensate us for any losses that may occur due to failures
in our systems. In addition, our servers and software must be able to
accommodate a high volume of traffic. Any increase in demands on our servers
beyond that which we currently anticipate, will require us to fund the expansion
and modification of our network infrastructure. If we were unable to add
additional software and hardware to accommodate increased demand, unanticipated
system disruptions and slower data collection would likely result.

Our Internet panel members communicate with us using various Internet
service providers. These providers have experienced significant outages in the
past, and could experience outages, delays and other difficulties unrelated to
our systems in the future.

Major components of the Internet backbone itself could fail due to
terrorist attack, war or natural disaster.

31

While the impact of these outages in the past has been minimal, any future
system delays or failures in the Internet could adversely affect our access to
our online panelists, which could have a material adverse effect on our
business, financial condition and results of operations.

SUSTAINING OUR GROWTH MAY STRAIN OUR MANAGERIAL AND SYSTEMS RESOURCES.

We have grown rapidly and need to continue to grow in all areas of our
operations. Managing and sustaining our growth will place significant demands on
management as well as on our administrative, operational, technical and
financial systems and controls. If we are unable to manage our growth
effectively, we will not be able to successfully implement our business plan at
projected levels.

WE MUST CONTINUE TO ATTRACT AND RETAIN HIGHLY SKILLED EMPLOYEES.

Our future success will depend, in part, on our ability to continue to
attract, retain and motivate highly skilled technical, managerial, marketing,
sales and client support personnel. Competition for these personnel exists, and
we may be unable to attract, integrate or retain the proper numbers of
sufficiently qualified personnel that our business plan assumes. We have
experienced in the past, and we may experience in the future, difficulty in
hiring and retaining employees with appropriate qualifications. In the past,
competition for highly skilled employees has resulted in additional costs for
recruitment, compensation and relocation or the provision of remote access to
our facilities. To the extent that we are unable to hire and retain skilled
employees in the future, our business, financial condition and results of
operations would likely suffer.

THE LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY PERSONNEL COULD DISRUPT OUR
OPERATIONS AND RESULT IN LOSS OF REVENUES.

Our future success depends to a significant extent on the continued
services of our key technical and senior management personnel. The loss of the
services of any of these persons could seriously harm our business. Although
some of our key employees have signed non-competitive agreements, only a few of
our employees are currently bound by an employment agreement. All of our other
relationships with our officers and key employees are at will. We do not have
"key person" life insurance policies covering any of our employees other than
Gordon S. Black.

OUR SUCCESSION PLANS MAY NOT BE SUCCESSFULLY EXECUTED.

We have started our search to identify potential candidates for Chief
Executive Officer. The hiring of a new CEO would allow Gordon S. Black, the
current CEO, to move to a position as Executive Chairman and more fully
concentrate on corporate strategy, major account marketing, international
expansion. investor relations, and acquisition. If the succession plans for the
CEO and other senior executives are not successfully executed, and appropriate
replacement(s) cannot be hired, the senior management may be overtaxed and
unable to properly execute all of their duties.

OUR BUSINESS IS LARGELY DEPENDENT ON THE CONTINUED DEVELOPMENT AND WORLDWIDE
GROWTH OF THE INTERNET. THE INTERNET MAY NOT GROW, OR MAY BE UNABLE TO SUPPORT
THE DEMANDS PLACED ON IT BY THIS GROWTH.

If worldwide Internet usage does not continue to grow, we may be unable to
attract International online panelists to our Internet panel or clients for our
Internet-based market research and polling products and services. If Internet
usage does continue to grow, the Internet infrastructure may be unable to
support the demands placed on it by this growth and its performance and
reliability may decline. Varying factors could inhibit future growth or the
ability of the Internet infrastructure to adequately support the growth in
Internet usage, including:

- inadequate network infrastructure,

- security concerns,

- inconsistent quality of service, and

- unavailability of cost effective, high speed service.

32

Our Internet panel depends on Internet service providers, online service
providers and other website operators for access to the Internet and our
websites. Many websites have experienced interruptions in their service as a
result of outages and other delays occurring throughout the Internet network
infrastructure.

If worldwide Internet usage declines, or grows at a significantly slower
rate than projected, our ability to maintain our current Internet panel, expand
our global Internet panel and gather research data and information around the
world will decrease, which would likely harm our business financial condition
and results of operations.

A BREACH OF OUR INTERNET SECURITY MEASURES OR SECURITY CONCERNS COULD ADVERSELY
AFFECT OUR BUSINESS.

Internet security concerns could cause some online panelists to reduce
their participation levels, provide inaccurate responses or end their membership
in our Internet panel. This could harm our credibility with our current clients.
If our clients become dissatisfied, they may stop using our products and
services. In addition, dissatisfied and lost clients could damage our
reputation. A loss of online panelists or a loss of clients would hurt our
efforts to generate increased revenues.

A failure in our security measures could result in the misappropriation of
private data. As a result, we may be required to expend capital and other
resources to protect against the threat of such security breaches or to
alleviate problems caused by such breaches, which could have a material adverse
effect on our business, financial condition and results of operations.

FAILURE OR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT
OUR BUSINESS.

Our success and ability to compete depends substantially on our internally
developed technologies and trademarks, which we protect through a combination of
patent, copyright, trade secret and trademark laws. We have registered a number
of our trademarks, including Harris Interactive 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 expenditures to
promote and rebuild our brand identity.

Currently, we have pending trademark applications for a number of our
products and services. We also have patent applications currently pending for
our CONCEPTLOC encryption system and our system and method for conducting
product configuration research over a computer-based network. In addition, we
may apply for additional trademarks or patents in the future. Our patent or
trademark applications may not be approved, or if approved, our patents or
trademarks may be successfully challenged by others or invalidated. We cannot
guarantee that infringement or other claims will not be asserted or prosecuted
against us in the future, whether resulting from our internally developed
intellectual property or licenses or content from third parties. Any future
assertions or prosecutions could be time-consuming, result in costly litigation
and diversion of technical and management personnel or require us to pay money
damages, introduce new trademarks, develop non-infringing technology, or enter
into royalty or licensing agreements. Any of those events could substantially
increase our operating expenses and potentially reduce our expected revenues.

We generally enter into confidentiality or license agreements with parties
with whom we do business, and generally control access to, and distribution of,
our technologies, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights from unauthorized use or disclosure,
parties may attempt to disclose, obtain or use our technologies. The steps we
have taken may not prevent misappropriation of our technologies, particularly in
foreign countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States.

We also rely on off-the-shelf technologies that we license from third
parties. "Off-the-shelf" technology refers to generally commercially available
software that is not customized for a particular user. These third party
licenses may not continue to be available to us on commercially reasonable terms
or at all. The inability to use licensed technology important to our business
could require us to obtain substitute technology of lower quality or performance
standards or at a greater cost. In the future, we may seek to license additional
technology to enhance our current technology infrastructure. We cannot be
certain that any such licenses will be available on commercially reasonable
terms or at all. The loss of any of these technology licenses could result in
delays in providing our products and services until equivalent technology, if
available, is identified, licensed and integrated.

33

WE MAY BE SUBJECT TO LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT OVER THE
INTERNET.

We may be subject to claims relating to content that is published on or
downloaded from our websites. We also could be subject to liability for content
that is accessible from our website through links to other websites. We may be
accused of sending bulk unsolicited email, and have our email blocked by many
ISPs and therefore be unable to conduct online data collection.

Although we carry general liability insurance, our insurance may not cover
potential claims of this type, such as defamation or trademark infringement, or
may not be adequate to cover all costs incurred in defense of potential claims
or to indemnify us for all liability that may be imposed. In addition, any
claims of this type, with or without merit, would result in the diversion of our
financial resources and management personnel.

LIABILITY ARISING FROM THE USE OF THE PERSONAL INFORMATION OF OUR INTERNET PANEL
COULD BE COSTLY.

We could be subject to liability claims by our online panelists for any
misuse of personal information. These claims could result in costly litigation.
In addition, the Federal Trade Commission and other domestic and international
agencies have been investigating various Internet companies regarding their use
of personal information. We could incur additional costs and expenses if new
regulations regarding the use of personal information are introduced or if our
privacy practices are investigated.

CHANGES IN GOVERNMENT REGULATION OR INDUSTRY PRACTICES COULD LIMIT OUR INTERNET
ACTIVITIES OR RESULT IN ADDITIONAL COSTS OF DOING BUSINESS ON THE INTERNET.

Any new laws pertaining to the imposition of taxes on Internet access and
electronic commerce could adversely affect our business. In February 1999, the
Federal Communications Commission issued a declaratory ruling interpreting the
Telecommunications Act of 1996 to allow local exchange carriers to receive
reciprocal compensation for traffic delivered to information service providers,
particularly Internet service providers, on the basis that traffic bound for
Internet service providers is largely interstate. As a result of this ruling,
the costs of transmitting data over the Internet may increase and our business
could suffer.

As of July 2003, at least 37 U.S. state legislatures had enacted laws
regulating the distribution of unsolicited email.

In April 2003, The Controlling the Assault of Non-Solicited Pornography and
Marketing Act of 2003 (CAN-SPAM) was introduced in the U.S. senate. This bill
would require unsolicited e-mail marketing messages have a valid return address.
E-mail marketers would be required to remove customers from their mailing lists
if requested. The bill also give more legal ammunition for ISPs to take spammers
to court, allows the Federal Trade Commission (FTC) to impose fines, and gives
state attorneys general the power to bring lawsuit.

Any future legislation or regulations or the application of existing laws
and regulations to the Internet could limit our effectiveness in conducting
Internet-based market research and polling, and increase our operating expenses.
In addition, the application of existing laws to the Internet could expose us to
substantial liability for which we might not be indemnified by content providers
or other third parties. Existing laws and regulations currently address, and new
laws and regulations and industry self-regulatory initiatives are likely to
address, a variety of issues, including the following:

- email distribution,

- user privacy and expression,

- the rights and safety of children,

- intellectual property,

- information security,

- anti-competitive practices,

- the convergence of traditional channels with Internet commerce,

- taxation and pricing, and

34

- the characteristics and quality of products and services.

Those laws that do reference the Internet have limited interpretation by
the courts and their applicability and scope are not well defined, particularly
on an International basis. Any new laws or regulations relating to the Internet
could adversely affect our business.

Industry standards related to the Internet are still evolving. Moreover,
some private entities have proposed their own standards for communications with,
and use of information related to, individuals who use the Internet. Internet
service providers also have the ability to disrupt our communications with our
panel. Although we believe that we maintain the highest standards for the
recruitment of members into our database, communications with our panelists and
use of information provided by our respondents, some service providers and/or
self appointed industry regulators may not agree. As a result, our
communications with our panelists may be disrupted from time to time.

WE HAVE INCURRED LOSSES IN RECENT YEARS AND MAY INCUR THEM AGAIN.

We incurred net losses of $14.8 million in fiscal 2002, $24.0 million in
fiscal 2001 and $20.9 million in fiscal 2000. We base current and future expense
levels on our operating plans, which are based on our estimates of future
revenues. While we have been profitable for fiscal 2003, if our revenues grow at
a slower rate than we anticipate, or if our spending levels exceed our
expectations or cannot be adjusted to reflect slower revenue growth, we may not
be able to maintain profitability. Even if we remain profitable in the future,
we may be unable to maintain current profitability growth on an ongoing basis.

VARIATIONS IN OUR OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO DECLINE.

Our quarterly operating results have in the past, and may in the future,
fluctuate significantly. Our future results of operations may fall below the
expectations of public market analysts and investors. If this happens, the price
of our common stock would likely decline.

Factors that are outside of our control, and that have caused our results
to fluctuate in the past or that may affect us in the future, include:

- declines in general economic conditions or the budgets of our clients,

- a general decline in the demand for market research and polling products
and services,

- seasonal decreases in demand for market research and polling services,

- development of equal or superior products and services by our
competitors,

- technical difficulties that cause general and long-term failure of the
Internet, and

- currency fluctuations.

Factors that are partially within our control, and that have caused our
results to fluctuate in the past or that may affect us in the future, include:

- our relative mix of Internet-based and traditional market research and
polling businesses,

- technical difficulties that negatively affect our operations,

- our ability to maintain the proper critical mass and scope of our
Internet panel necessary to develop and sell new products and services
and generate expected revenues,

- our ability to recruit respondents into our sub-panels, such as our IT
Decision Makers, to conduct high-value research for our clients, and

- development of new, marketable products and services

The factors listed above may affect both our quarter-to-quarter operating
results as well as our long-term success. You should not rely on
quarter-to-quarter comparisons of our results of operations or any other trend
in our performance as an indication of our future results.

35

THE PRICE OF OUR COMMON STOCK IS LIKELY TO BE VOLATILE AND SUBJECT TO WIDE
FLUCTUATIONS.

The market prices of the securities of Internet-related companies have been
especially volatile and these securities may be overvalued. The market price of
our common stock is likely to be subject to wide fluctuations. If financial
operating results do not improve or improve at a slower rate than we anticipate,
or if operating or capital expenditures exceed our expectations and cannot be
adjusted accordingly, or if some other event adversely affects us, the market
price of our common stock would likely decline. In addition, if the market for
Internet-related stocks or the stock market in general experiences an additional
loss in investor confidence or declines again, the market price of our common
stock could fall for reasons unrelated to our business, financial condition and
results of operations. Investors might be unable to resell their shares of our
common stock at or above the purchase price. In the past, companies that have
experienced volatility in the market price of their stock have been the subjects
of securities class action litigation. If we were to become the subject of
securities class action litigation, it could result in substantial costs and a
diversion of management's attention and resources.

ANTI-TAKEOVER PROVISIONS IN OUR CHARTER COULD DELAY OR PREVENT AN ACQUISITION OF
THE COMPANY.

Our restated certificate of incorporation provides for the division of our
board of directors into three classes and provides our board of directors with
the power to issue shares of preferred stock without stockholder approval.

This preferred stock could have voting rights, including voting rights that
could be superior to that of our common stock, and the board of directors has
the power to determine these voting rights. In addition, Section 203 of the
Delaware General Corporation Law contains provisions that impose restrictions on
stockholder action to acquire our company. The effect of these provisions of our
certificate of incorporation and Delaware law provisions could discourage or
prevent third parties from seeking to obtain control of us, including
transactions in which the holders of common stock might receive a premium for
their shares over prevailing market prices.

POTENTIAL ACQUISITIONS OF, OR INVESTMENTS IN, OTHER COMPANIES MAY NOT BE
AVAILABLE AND/OR HAVE A NEGATIVE IMPACT ON OUR BUSINESS.

As part of our continued strategy to increase revenue, expand our Internet
panel, acquire additional intellectual capital and add to our portfolio of
existing products and services, we may acquire or make investments in
complementary businesses, services, products or technologies. We may be unable
to identify suitable acquisition candidates or acquire them at reasonable prices
and/or on reasonable terms.

Some material risks of acquisitions are:

- difficulties in the integration and assimilation of the operations,
technologies, products and personnel of the acquired business,

- the diversion of management's attention from other business concerns,

- the availability of favorable acquisition financing, and

- the potential loss of key employees and/or customers of any acquired
business.

Acquisitions may require the use of significant amounts of cash, resulting
in the inability to use those funds for other business purposes. Acquisitions
using our capital stock could have a dilutive effect, and could adversely affect
the market price of our common stock. Amortization of intangible assets would
reduce our earnings, which in turn could negatively influence the price of our
common stock. These difficulties could disrupt our ongoing business, distract
our management and employees and increase our expenses.

36

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has international sales and facilities in the United Kingdom
and Japan and therefore, is subject to foreign currency rate exposure. Non-U.S.
sales are denominated in the functional currencies of the country in which our
foreign subsidiaries reside. Total consolidated assets and liabilities of the
Company are translated into U.S. dollars at the exchange rates in effect as of
the balance sheet date. Income and expense items are translated at the average
exchange rate for each period presented. Accumulated net translation adjustments
are recorded in stockholders' equity. Foreign exchange transaction gains and
losses are included in the Company's results of operations, and were not
material for the periods presented. As a result of operating in foreign markets,
the Company's financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions. To the extent the
Company incurs expenses that are based on locally denominated sales volumes paid
in local currency, the exposure to foreign exchange risk is reduced. The Company
has determined that the impact of a near-term 10% appreciation or depreciation
of the U.S. dollar would have an insignificant effect on our financial position,
results of operations and cash flows. We have historically had very low exposure
to changes in foreign currency exchange rates. While the United Kingdom now
contributes significantly to our revenues, we continue to believe our exposure
to foreign currency fluctuation risk is low. Therefore the Company has not
entered into any derivative financial instruments to mitigate the exposure to
translation and transaction risk. However, this does not preclude the Company's
adoption of specific hedging strategies in the future. As we continue to expand
globally, the risk of foreign currency exchange rate fluctuation may increase.
Therefore, in the future, we will continue to assess the need to utilize
financial instruments to hedge currency exposures on an ongoing basis to
mitigate such risks.

The carrying values of financial instruments including cash and cash
equivalents, marketable securities, accounts receivable and accounts payable,
approximate fair value because of the short maturity of these instruments.

37

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.

38

REPORT OF INDEPENDENT AUDITORS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF HARRIS INTERACTIVE INC.

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Harris
Interactive Inc. (the "Company") and its subsidiaries at June 30, 2003 and June
30, 2002, and the results of their operations and their cash flows for each of
the three fiscal years in the period ended June 30, 2003, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As discussed in the Notes to the Consolidated Financial Statements, the
Company adopted Statement of Financial Accounting Standards No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets", on July 1,
2001.

/S/ PricewaterhouseCoopers LLP

Rochester, New York
July 25, 2003

39

HARRIS INTERACTIVE INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

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

40

HARRIS INTERACTIVE INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

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

41

HARRIS INTERACTIVE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

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

42

HARRIS INTERACTIVE INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(IN THOUSANDS)

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

43

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1. BUSINESS

Harris Interactive Inc. (the "Company") is a leading global market
research, polling and consulting firm, using Internet-based and traditional
methodologies to provide clients with information about the views, behaviors and
attitudes of people worldwide. Known for The Harris Poll (TM), the Company has
over 45 years experience in providing clients with market research and polling
services including custom, multi-client and service bureau research, in addition
to customer relationship management services.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the assets,
liabilities and results of operations of its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include all highly liquid investments with a
remaining maturity of three months or less at date of purchase.

MARKETABLE SECURITIES

Harris Interactive Inc. accounts for its investments in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." All investments have been
classified as available-for-sale securities as of June 30, 2003 and 2002.
Available-for-sale securities are stated at fair value, with the unrealized
gains and losses reported in other comprehensive income (loss). Realized gains
and losses on available-for-sale securities are included in interest and other
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in interest income.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, including improvements that significantly
add to productive capacity or extend useful life, are recorded at cost, while
maintenance and repairs are expensed as incurred. Depreciation is calculated on
the straight-line or accelerated methods over the estimated useful lives of the
assets, which are generally 3 to 7 years. Leasehold improvements are amortized
on the straight-line method over the estimated useful life of the assets. In
accordance with SFAS No. 144, "Accounting for the Impairment and Disposal of
Long-Lived Assets" the Company assesses property, plant and equipment, for
impairment whenever events or changes in circumstances indicate that the
carrying amounts may not be recoverable.

GOODWILL AND OTHER INTANGIBLES

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 141 ("SFAS 141"), "Business Combinations," and
Statement of Financial Accounting Standard No. 142 ("SFAS 142"), "Goodwill and
Other Intangible Assets." SFAS No. 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method of
accounting, thereby eliminating the pooling-of-interests method. Effective upon
adoption, SFAS No. 142 eliminates the requirement to amortize goodwill and
instead requires periodic testing of goodwill for impairment. If goodwill is
impaired, it will be written down to its estimated fair value. The impact of
adoption of SFAS No. 142 did not result in an adjustment to recorded goodwill.
Goodwill amortization expense was $330 in fiscal 2001. See also footnotes 16, 17
and 18.

44

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE

The Company follows the provisions of Statement of Position 98-1
"Accounting for Costs of Computer Software Developed or Obtained for Internal
Use" which accounts for the costs of computer software developed or obtained for
internal use and identifies the characteristics of internal use software. Such
amounts are included in other assets in the balance sheet and amounted to $1,485
and $1,628 at June 30, 2003 and 2002, respectively. Amortization expense related
to these costs amounted to $1,072, $913 and $678 for fiscal years 2003, 2002 and
2001, respectively.

REVENUE RECOGNITION

The Company recognizes revenue from services principally on a proportional
performance basis based on the ratio of costs incurred to total estimated costs.
Subscription revenues are recognized upon delivery of the research project.
Revenues include amounts billed to customers to cover subcontractor costs and
other direct expenses. Provision for estimated contract losses, if any, is made
in the period such losses are determined.

CONCENTRATION OF CREDIT RISK

Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of accounts receivable as well
as costs and estimated earnings in excess of billings on uncompleted contracts.
Credit losses are provided for in the financial statements and have been within
management's expectations. In fiscal 2003 and fiscal 2002, no single customer
accounted for more than 10% of the Company's consolidated revenue. For the year
ended June 30, 2001, the Company's largest customer comprised 12% of total
revenue and no other single customer comprised 10% of total revenue.

INCOME TAXES

The Company and its U.S. subsidiaries file a consolidated federal income
tax return. The Company files separate state income tax returns in certain
states and combined income tax returns in other states. The Company follows the
asset and liability approach to account for income taxes, which requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of operating loss carryforwards and temporary differences between
the carrying amounts and the tax bases of assets and liabilities. The Company
has not provided any domestic income taxes applicable to the unremitted earnings
of its foreign subsidiaries as these amounts are considered to be indefinitely
reinvested outside the U.S.

FOREIGN CURRENCY

For the Company's subsidiaries outside of the United States, the local
currency is the functional currency. In accordance with SFAS No. 52, "Foreign
Currency Translation," the financial statements of the subsidiaries are
translated into U.S. dollars as follows: assets and liabilities at year-end
exchange rates; income, expenses and cash flows at average exchange rates; and
stockholders' equity at historical exchange rates. The resulting translation
adjustment is recorded as a component of accumulated other comprehensive (loss)
income in the accompanying consolidated balance sheet.

ADVERTISING EXPENSES

Advertising expenses are expensed as incurred and are included in selling,
general and administrative expenses in the accompanying consolidated statement
of operations. Such expenses amounted to $1,021, $1,275 and $1,653, for the
years ended June 30, 2003, 2002 and 2001, respectively.

45

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

RECLASSIFICATIONS

It is the Company's policy to reclassify amounts in prior years' financial
statements to conform to the current year's presentation.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities, if
any, at the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from those
estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash and accounts receivable are valued at their carrying or redemption
amounts, which are reasonable estimates of their fair value. The fair value of
all other instruments approximates cost.

INCOME (LOSS) PER SHARE

Basic income (loss) per share amounts are computed based on the weighted
average number of shares of common stock outstanding during the year. Diluted
net income (loss) per share reflects the assumed exercise and conversion of
employee stock options that have an exercise price that is below the average
market price of the common shares for the respective periods.

RECENT ACCOUNTING PRONOUNCEMENTS

SFAS 145

In May 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements 4, 44 and 64, Amendment of FASB Statement No. 13
and Technical Corrections". SFAS No. 145 eliminates the requirement that gains
and losses from the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect.
However, an entity is not prohibited from classifying such gains and losses as
extraordinary items, so long as they meet the criteria outlined in Accounting
Principles Board Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal Occurring Events and
Transactions. SFAS No. 145 also eliminates the inconsistency between the
accounting for sale-leaseback transactions and certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
statement is effective for financial statements issued for fiscal years
beginning after May 15, 2002, with early adoption encouraged. The Company
adopted SFAS No. 145 on July 1, 2002. The adoption did not have an impact on the
Company's consolidated financial statements.

SFAS 146

In July 2002, the Financial Accounting Standards Board issued SFAS 146,
"Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. Previous accounting guidance was provided by Emerging Issues
Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". SFAS No. 146 replaces EITF Issue No. 94-3.
This

46

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

standard is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The Company adopted SFAS No. 146 on January 1, 2003.
The adoption did not have an impact on the Company's consolidated financial
statements.

SFAS 148

In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation -- Transition and Disclosure."
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company is required
to follow the prescribed format and provide the additional disclosures required
by SFAS No. 148 in its annual financial statements for the year ending June 30,
2003 and is also required to provide the disclosures in its quarterly reports
containing condensed financial statements for interim periods. The Company
adopted SFAS 148 on January 1, 2003 and elects to continue to account for its
stock based compensation plans under the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees" as are described in Note 14 of these
Audited Consolidated Financial Statements. The adoption did not have an impact
on the Company's consolidated financial statements.

SFAS 149

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 does not expect the adoption of SFAS 149 to have a material impact
on the Company's consolidated financial statements.

SFAS 150

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 does not expect the adoption of SFAS No. 150
to have a material impact on the Company's consolidated financial statements.

FIN 45

In November 2002, the FASB published Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires that a guarantor
recognize a liability for the fair value of an obligation assumed under a
guarantee and also discusses additional disclosures to be made in the interim
and annual financial statements of the guarantor regarding

47

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

obligations under certain guarantees. The initial measurement and recognition
requirements of FIN 45 are effective prospectively for guarantees issued or
modified after December 31, 2002. The Company adopted FIN 45 on January 1, 2003.
The adoption did not have an impact on the Company's consolidated financial
statements.

FIN 46

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This standard clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," and
addresses consolidation by business enterprises of variable interest entities
(more commonly known as Special Purpose Entities or SPE's). FIN 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 46 also enhances the disclosure requirements related to
variable interest entities. This statement is effective for variable interest
entities created or in which an enterprise obtains an interest after January 31,
2003. The Company adopted FIN 46 on July 1, 2003. The adoption did not have an
impact on the Company's consolidated financial statements.

3. BUSINESS COMBINATIONS

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, located in Princeton, New Jersey,
pursuant to the Agreement and Plan of Merger, dated as of August 5, 2001, among
the Company, Total Merger Sub Inc., a Delaware corporation and direct, wholly
owned subsidiary of the Company, and Total Research. Pursuant to the merger
agreement, Total Merger Sub was merged with and into Total Research (the
"Merger"), with Total Research continuing as the surviving corporation and as a
direct, wholly owned subsidiary of the Company. Harris Interactive and Total
Research are engaged in complementary businesses in the market research and
polling industry. The acquisition has created revenue growth, cost savings and
other synergies including the ability to convert Total Research
traditional-based clients to the Internet, sell to one another's customers,
offer customers more comprehensive and diverse services, and use a combined
worldwide network.

Upon consummation of the Merger, each outstanding share of Total Research
common stock was converted into the right to receive 1.222 shares of Harris
Interactive common stock, par value $.001 per share. An aggregate of
approximately 16,610,000 shares of common stock, with an estimated fair value of
$41,259, was issued to the stockholders of Total Research Corporation. The value
was determined using the average fair market value of the stock for the range of
trading days beginning August 2, 2001 and ending August 8, 2001. Additionally,
pursuant to the merger agreement, all outstanding options to purchase shares of
Total Research common stock were, upon consummation of the Merger, fully vested
and converted into an option to purchase 1.222 shares of Harris Interactive
common stock. As a result, the former option holders of Total Research received
from Harris Interactive options to purchase approximately 2,899,000 shares of
Harris Interactive common stock, with an estimated fair value of $3,609. The
acquisition was accounted for as a purchase in accordance with FAS 141 and is
included in the Company's financial statements commencing on November 1, 2001.

The Company has recorded approximately $50,521 in goodwill and intangibles
related to the acquisition in accordance with the provisions of SFAS 142 (See
Notes 16 and 17).

The pro forma information set forth below assumes the acquisition with
Total Research Corporation had occurred at the beginning of fiscal 2002, after
giving effect to adjustments for amortization of intangibles. The pro forma
information is presented for informational purposes only and is not necessarily
indicative of the results of operations that would have been achieved had the
acquisition been consummated at that time.

48

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

3. BUSINESS COMBINATIONS -- (CONTINUED)

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 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 U.K.
company, headquartered in Oxford, England, in consideration of a combination of
cash and shares of Harris Interactive common stock.

Supplemental cash flow information and non-cash investing and financing
activities are as follows:

4. RESTRUCTURING (CREDITS) CHARGES AND ASSET WRITE-DOWNS

During the second quarter of fiscal 2002, the Company recorded a
restructuring and asset write-down charge of $6,222 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.

49

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

4. RESTRUCTURING (CREDITS) CHARGES AND ASSET WRITE-DOWNS -- (CONTINUED)

The following table summarizes activity with respect to the restructuring
charges for the period ended June 30, 2003:

As of June 30, 2002, all actions were completed, however cash payments for
lease commitments will be made on a longer-term basis according to the
contractually scheduled payments of such commitments and will continue through
2005. The total number of employees included in the charge and ultimately
terminated was 82.

During fiscal 2003, the Company adjusted the reserve for restructuring
charges by $997 for lease commitments that were no longer required. The
adjustments were due to the Company obtaining a release from its obligations
under previous lease obligations.

5. MARKETABLE SECURITIES

At June 30, 2003 and 2002, marketable securities consisted of the
following:

Gross unrealized gains and losses on available-for-sale securities at June
30, 2003 were $41 and $1, respectively. Gross unrealized gains and losses on
available-for-sale securities at June 30, 2002 were $53 and $3, respectively.

The cost and fair value of available-for-sale securities at June 30, 2003
and 2002, by contractual maturity, are shown below:

50

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

5. MARKETABLE SECURITIES -- (CONTINUED)

There were no material gains or losses from sales of available-for-sale
securities during the years ended June 30, 2003 and 2002

6. CONTRACTS IN PROGRESS

Accumulated costs and estimated earnings and billings on contracts in
progress at June 30 was as follows:

Contracts in progress are included in the accompanying balance sheets under
the following captions:

7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

Depreciation expense on property, plant and equipment amounted to $4,198,
$4,421 and $4,755 in fiscal years 2003, 2002 and 2001, respectively.

The Company has several non-cancelable operating leases for office space,
vehicles and equipment. Future minimum lease payments under non-cancelable
operating leases as of June 30, 2003 are as follows:

51

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

7. PROPERTY, PLANT AND EQUIPMENT -- (CONTINUED)

Total rental expense for operating leases in 2003, 2002 and 2001 was
$5,183, $5,922 and $5,121, respectively.

8. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION

The Company identifies its segments based on the Company's geographic
locations and industries in which the Company operates. The Company currently
has one reportable segment. However, the Company is comprised of operations in
the United States, the United Kingdom and Japan. Non-U.S. market research is
comprised of operations in the United Kingdom and Japan. There were no
significant inter-segment transactions that materially affected the financial
statements and all inter-segment sales have been eliminated upon consolidation.
Geographic information for the years ended June 30, 2003, 2002 and 2001 are as
follows:

9. ACCRUED EXPENSES

Accrued expenses consisted of the following at June 30:

Other consists of accrued expenses individually less than 5% of total
current liabilities.

10. LINE OF CREDIT

The Company maintains a line of credit with a commercial bank providing
borrowing availability up to $5 million in fiscal 2003 and 2002, at the prime
rate. The prime rate in effect at June 30, 2003 was 4.0% and

52

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

10. LINE OF CREDIT -- (CONTINUED)

borrowings under this arrangement are due upon demand. There were no borrowings
outstanding under this agreement at June 30, 2003 or 2002. The line of credit is
collateralized by the assets of the Company.

At June 30, 2003 the Company had no short-term or long-term borrowings. At
June 30, 2002, the Company had short-term and long-term borrowings of $0.8
million and $1.5 million, respectively, limited to operations in the United
Kingdom and Japan. Interest rates related to the borrowings ranged from 1.8% to
3.0% with maturity dates extending to 2006. There were no restrictive covenants
associated with these borrowings.

11. INCOME TAXES

The provision for income taxes consists of:

The U.S. and foreign components of loss before income taxes are as follows:

53

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

11. INCOME TAXES -- (CONTINUED)

Deferred tax assets (liabilities) at June 30 consist of the following:

As of June 30, 2003, the Company has Federal and New York State net
operating loss carryforwards of approximately $82,822 and $80,747, respectively,
that will begin to expire in 2019. A change in ownership could create a
limitation on the amount of income that can be offset by net operating loss
carryforwards and credits.

Deferred tax assets have been recognized to the extent management believes
it is more likely than not that the asset will be realized. Changes in facts,
circumstances and projections may have an effect on the amount of the asset
recognized in future periods.

The reversal of the valuation allowance established against deferred tax
assets for temporary differences resulting from APB 16 purchase accounting is
credited directly to goodwill, rather then income tax expense, resulting in zero
net effect to the income statement. If the deferred assets underlying the
valuation allowance are recognized, $3,192 of the valuation allowance would be
credited to goodwill.

Of the June 30, 2003 valuation allowance, $5,217 was established against
deferred tax assets associated with stock option deductions. The future reversal
of this portion of the valuation allowance would be credited directly to
additional paid in capital, which would result in no tax benefit recorded in the
income statement.

The (benefit) provision for income taxes differs from the amount of income
tax determined by applying the applicable U.S. statutory federal income tax rate
to income before income taxes as follows:

54

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

12. STOCKHOLDERS' EQUITY

COMMON STOCK

In fiscal 2000, the Company amended the Certificate of Incorporation to
increase the number of authorized common stock to 100,000,000 shares. At June
30, 2003 and 2002 the Company had no outstanding Warrants.

EMPLOYEE STOCK PURCHASE PLAN

The Company registered 500,000 shares of common stock in March 2000 for
issuance under the 1999 Employee Stock Purchase Plan ("ESPP"). The ESPP provides
employees with an opportunity to purchase the Company's common stock through
payroll deductions. Under the ESPP, the Company's employees may purchase,
subject to certain restrictions, shares of common stock at the lesser of 85
percent of the fair value at either the beginning or the end of each offering
period. During fiscal years 2003, 2002 and 2001, employees purchased 99,383,
104,507 and 145,143 shares of common stock through the ESPP, respectively.

TREASURY STOCK

In December 2000, the Board of Directors approved a share repurchase
program authorizing the Company to purchase up to $5,000 of its common stock at
market prices. The amount and timing of any purchase will depend upon a number
of factors, including the price and availability of the Company's shares and
general market conditions. The Company's purchases of common stock are recorded
as "Treasury Stock" and result in a reduction of "Stockholders' Equity" unless
such shares are formally retired. As of June 30, 2003, the Company had
repurchased and retired 655,600 shares of common stock, at a cost of $1,693
under such program.

INVESTOR STOCK OPTIONS

At June 30, 2003 and 2002, the Company had outstanding options to acquire
12,220 and 244,400, respectively, shares of its common stock (not including
options under the Company's employee stock option plan, as discussed in Note 14
below), which represent options to acquire common stock of Total Research which
were assumed by the Company in connection with the Merger.

13. NET INCOME (LOSS) PER SHARE

The following table presents the shares used in computing basic and diluted
earnings per share ("EPS") for the years ended June 30, 2003, 2002 and 2001.
Unexercised stock options to purchase 564,343 shares of the Company's common
stock for the year ended June 30, 2003 at a weighted average price per share of
$8.05 were not included in the computations of diluted earnings per share
because the options exercise prices were greater than the average market price
of the Company's common stock for fiscal 2003. As a result of losses from
continuing operations, unexercised stock options to purchase 6,543,458 and
3,858,484 shares of the Company's common stock for the years ended June 30, 2002
and 2001, respectively, at weighted average prices per share of $2.67 and $3.38,
were excluded from the calculation of diluted net loss per share as the effect
would have been anti-dilutive.

55

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

13. NET INCOME (LOSS) PER SHARE -- (CONTINUED)

The following table sets forth the computation of basic and diluted net
loss per share:

14. EMPLOYEE STOCK OPTION PLAN

The Company has a nonqualified and incentive stock option plan that enables
key employees and directors of the Company to purchase shares of common stock of
the Company. The Company grants options to purchase its common stock, generally
at fair value as of the date of grant. Options generally vest over a period up
to 4 years and expire after 10 years from the date of grant.

The Company has registered 3,250,000 shares of common stock for issuance
under the 1999 long-term incentive plan. There were 1,162,766 shares available
for future grant at June 30, 2003.

Additionally, pursuant to the terms of the Merger, outstanding options to
purchase common stock of Total Research Corporation became fully vested and
exercisable to purchase an aggregate of 2,654,306 shares of the Company's common
stock on November 1, 2001. All other terms of these options continue to be
governed by the applicable Total Research option agreements.

56

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

14. EMPLOYEE STOCK OPTION PLAN -- (CONTINUED)

A summary of the status of the Company's employee stock option plan
(including Total Research options after November 1, 2001) for the years ended
June 30, 2003, 2002 and 2001 is as follows:

Employee stock options exercisable as of June 30, 2003, 2002 and 2001
amounted to 3,436,548, 4,965,355 and 2,456,572, respectively. The weighted
average exercise price of the exercisable options at June 30, 2003, 2002 and
2001 was $3.00, $2.43 and $2.50, respectively.

The following represents additional information about employee stock
options outstanding at June 30, 2003:

During fiscal 2000, 617,000 stock options were granted to employees at an
amount that was less than the fair value of the common stock as of the grant
date. Accordingly, the Company recorded $2,431 in unamortized deferred
compensation in fiscal 2000 for these options that vest over 3 to 4 years.
Compensation expense is being amortized over the vesting period and unamortized
deferred compensation has been recorded as a reduction in stockholders' equity.
No such options were granted in fiscal 2003, 2002 and 2001. During fiscal 2003,
2002 and 2001, compensation expense recognized in the consolidated statements of
operations amounted to $91, $289 and $421, respectively.

The weighted average fair market value of options granted during fiscal
2003, 2002 and 2001 was $1.37, $1.17 and $2.92, respectively. For purposes of
this disclosure, the fair value of each option grant was estimated

57

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

14. EMPLOYEE STOCK OPTION PLAN -- (CONTINUED)

on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants outstanding in 2003, 2002
and 2001.

The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees. The pro forma information below illustrates the effect on
net income (loss) and net income (loss) per share based on provisions of
Statement of Financial Accounting Standard ("FAS") No. 123, Accounting for
Stock-Based Compensation, as amended by FAS 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, issued in December 2002.

15. 401(K) PLAN

The Company established a 401(k) Plan (the "Plan") effective January 1,
1995. Eligibility to participate in the Plan, including employer matching
contributions, if any, is limited to those employees who are at least 21 years
of age and have completed one year of employment with at least 1,000 hours of
service. However, employees are eligible to contribute to the Plan upon
completion of one quarter of service.

Participants may contribute 1% to 100% of compensation up to federally
established limitations. Employer matching contributions are discretionary, and
include matching contributions and profit sharing contributions. Matching
contribution expense incurred by the Company during 2003, 2002 and 2001 was
$616, $634 and $344, respectively.

58

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

16. ACQUIRED INTANGIBLE ASSETS SUBJECT TO AMORTIZATION

17. GOODWILL

18. GOODWILL AND OTHER INTANGIBLE ASSET -- ADOPTION OF FAS 142

On July 1, 2001 the Company adopted the provisions of SFAS No. 142
"Goodwill and Other Intangible Assets." The pronouncement required an annual
impairment test in lieu of monthly amortization for goodwill. The Company
completed its transitional impairment test in accordance with FAS 142 as of
December 31, 2001, with no impairment identified. The Company completed its
annual impairment test in accordance with FAS 142 as of June 30, 2003 and 2002,
with no impairment identified.

59

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

18. GOODWILL AND OTHER INTANGIBLE ASSET -- ADOPTION OF FAS 142 -- (CONTINUED)

The following table presents prior years earnings and earnings per share as
if the provisions of FAS 142 had been applied to prior years:

19. SUPPLEMENTAL CASH FLOW INFORMATION

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid (received) during the year for:

20. UNAUDITED QUARTERLY RESULTS OF OPERATIONS

The following table presents unaudited consolidated quarterly statement of
operations data for the years ended June 30, 2003 and 2002. In management's
opinion, this information has been prepared on the same basis as the audited
consolidated financial statements and includes all adjustments, consisting only
of normal recurring adjustments necessary for the fair presentation of the
unaudited information in the periods presented. This information should be read
in conjunction with the consolidated financial statements and related notes
included under Item 8 of this report and in conjunction with other financial
information included elsewhere in this

60

HARRIS INTERACTIVE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED JUNE 30, 2003, 2002 AND 2001

20. UNAUDITED QUARTERLY RESULTS OF OPERATIONS -- (CONTINUED)

Form 10-K. The results of operations for any quarter are not necessarily
indicative of results that may be expected for any future periods.

61

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

The Company's management, with the participation of the Company's Principal
Executive Officer and Principal Financial Officer, evaluated the effectiveness
of the design and operation of Harris Interactive's disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Based on that evaluation, the Company's
Principal Executive Officer and Principal Financial Officer concluded that
Harris Interactive's disclosure controls and procedures as of June 30, 2003 (the
end of the period covered by this Report on Form 10-K) have been designed and
are functioning effectively to provide reasonable assurance that the information
required to be disclosed by Harris Interactive in reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 of Form 10-K with respect to our
directors is incorporated by reference from the information contained in the
section captioned "Election of Directors" in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on November 11, 2003
(the "Proxy Statement"), a copy of which will be filed with the Securities and
Exchange Commission before the meeting date. For information with respect to our
executive officers and significant employees, see the section captioned
"Executive Officers of Harris Interactive" in Part I of this Form 10-K. The
information required by Item 10 of Form 10-K with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference from the information contained in the section captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 of Form 10-K is incorporated by
reference from the information contained in the sections captioned "Compensation
of Executive Officers and Directors and Other Matters", "Compensation Committee
Report on Executive Compensation", and "Comparison of 43 Month Cumulative Total
Return" in the Proxy Statement.

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

The information required by Item 12 of Form 10-K is incorporated by
reference from the information contained in the sections captioned "Security
Ownership of Certain Beneficial Owners and Management" and "Equity Compensation
Plan Information" in the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Certain
Relationships and Related Transactions" in the Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 of Form 10-K is incorporated by
reference from the information contained in the section captioned "Audit Fees"
in the Proxy Statement.

62

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K

FINANCIAL STATEMENTS

The following financial statements are filed as a part of this Report under
"Item 8 -- Financial Statements and Supplementary Data":

FINANCIAL STATEMENT SCHEDULES

The following financial statement schedule is filed as a part of this
Report under Schedule II immediately preceding the signature page: Schedule
II -- Valuation and Qualifying Accounts for the three fiscal years ended June
30, 2003. All other schedules called for by Form 10-K are omitted because they
are inapplicable or the required information is shown in the financial
statements, or notes thereto, included herein.

REPORTS ON FORM 8-K

On April 23, 2003, a report on Form 8-K was furnished to the SEC pursuant
to Items 7 and 9 (Item 12) announcing the Company's earnings for the calendar
quarter ended March 31, 2003.

On May 1, 2003, a report on Form 8-K was filed with the SEC pursuant to
Item 5 announcing the participation of certain current executives of the Company
in 10b5-1 Sales plans.

On May 8, 2003, a report on Form 8-K was filed with the SEC pursuant to
Item 5 announcing the Company's receipt of a notice of demand registration
rights with respect to registration of an aggregate of 11,810,278 shares of the
common stock, par value $.001 per share, of the Company held by BVCF III, L.P.,
Brinson MAP Venture Capital Fund III Trust and Virginia Retirement System
(collectively, the "Investors"), pursuant to a Registration Agreement dated as
of July 7, 1998, as amended, between the Company and the Investors.

63

EXHIBITS

Dennis K. Bhame Arthur E. Coles
Gareth Davies James E. Fredrickson
Ronald B. Knight Peter J. Milla
Gregory T. Novak George B. Terhanian
David B. Vaden

10.30* Amendment to Employment Agreement by and between the Company
and Gordon S. Black, dated July 1, 2003 (filed herewith).
10.31* Employment Agreement by and between the Company and Leonard
R. Bayer, dated July 1, 2003 (filed herewith).
10.32* Employment Agreement by and between the Company and George
Terhanian, dated September 26, 2002 (filed herewith).
10.33* Letter Agreement of Albert A. Angrisani, effective as of
July 1, 2003 (filed herewith).
10.34* Employment Agreement by and between the Company and Theresa
Flanagan, dated January 1, 1999 (filed herewith).
21. List of Subsidiaries (filed as Exhibit 21 to Form 10-K filed
September 30, 2002 and incorporated herein by reference).
23.1 Consent of Independent Auditors (filed herewith).
23.2 Report of Independent Auditors on Financial Statement
Schedule (filed herewith).
24. Power of Attorney (included on page 69 of this Report).
31.1 Certificate of the Chief Executive Officer pursuant to 18
U.S.C. sec.1350 (Section 302 of the Sarbanes-Oxley Act of
2002) (filed herewith).
31.2 Certificate of the Chief Financial Officer pursuant to 18
U.S.C. sec.1350 (Section 302 of the Sarbanes-Oxley Act of
2002) (filed herewith).
32.1 Certificate of the Chief Executive Officer pursuant to 18
U.S.C. sec.1350 (Section 906 of the Sarbanes-Oxley Act of
2002) (filed herewith).
32.2 Certificate of the Chief Financial Officer pursuant to 18
U.S.C. sec.1350 (Section 906 of the Sarbanes-Oxley Act of
2002) (filed herewith).

- ---------------
* Denotes management contract or compensatory plan or arrangement.

66

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

(IN THOUSANDS)

67

SIGNATURE

Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized,

HARRIS INTERACTIVE INC.

September 26, 2003

By /s/ Bruce A. Newman
------------------------------------
Bruce A. Newman
Chief Financial Officer, Secretary
and Treasurer
(On Behalf of the Registrant and as
Principal
Financial and Accounting Officer)

68

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, Bruce A. Newman
and Gordon S. Black, and each of them, as his true and lawful attorneys-in-fact
and agents, each with full power of substitution, for him, and in his name,
place and stead, in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with Exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite or
necessary to be done as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their substitutes, may lawfully do or cause to be
done by virtue hereof.

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