NETRATINGS INC - 10-Q Quarterly Report

	June 30, 2002			December 31, 2001
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	87,421		$	87,483
Short-term investments		167,085			235,080
Accounts receivable, net		9,505			4,371
Due from joint ventures		622			2,877
Prepaid expenses and other current assets		231			1,088

Total current assets		264,864			330,899
Property and equipment, net		3,692			2,402
Deferred acquisition costs		—			3,565
Intangibles		24,203			—
Goodwill		41,022			—
Other assets		5,642			4,833

Total assets	$	339,423		$	341,699

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,617		$	2,834
Accrued liabilities		12,226			6,362
Deferred revenue		11,100			7,031
Capital lease obligations		48			89
Due to related parties		4,280			6,915
Restructuring liability		6,873			—

Total current liabilities		40,144			23,231

Commitments and contingencies

Stockholders’ equity:
Common stock, par value $0.001:
Authorized shares: 200,000
Issued and outstanding shares: 33,294 at June 30, 2002 and 33,154 at December 31, 2001		33			33
Additional paid-in capital		417,785			399,836
Deferred compensation and other costs		(21,314	)		(25,939	)
Accumulated deficit		(76,595	)		(55,462	)
Treasury stock		(20,630	)		—

Total stockholders’ equity		299,279			318,468

Total liabilities and stockholders’ equity	$	339,423		$	341,699

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
Revenue	$	7,283		$	6,090		$	11,596		$	12,810
Cost of revenue		3,856			3,332			6,528			6,641

Gross profit		3,427			2,758			5,068			6,169
Operating expenses:
Research and development		1,999			1,867			3,399			3,936
Sales and marketing		3,598			4,245			6,371			8,591
General and administrative		1,862			1,557			3,054			3,026
Restructuring expenses		—			—			6,969			—
Acquisition expenses		—			—			3,033			—
Amortization of intangibles		610			—			610			—
Stock-based compensation		2,552			2,384			4,872			5,092

Total operating expenses		10,621			10,053			28,308			20,645

Loss from operations		(7,194	)		(7,295	)		(23,240	)		(14,476	)
Loss from joint ventures		(1,184	)		(1,498	)		(2,111	)		(2,670	)
Interest income, net		1,888			3,805			4,218			8,741

Net loss	$	(6,490	)	$	(4,988	)	$	(21,133	)	$	(8,405	)

Basic and diluted net loss per common share	$	(0.20	)	$	(0.15	)	$	(0.65	)	$	(0.26	)

Shares used to compute basic and diluted net loss per common share		32,635			32,799			32,765			32,695

	Six Months Ended June 30,
	2002			2001
OPERATING ACTIVITIES
Net cash (used in) provided by operating activities	$	(3,892	)	$	1,361

INVESTING ACTIVITIES
Acquisition of property and equipment		(130	)		(883	)
Purchase of short term investments		(240,851	)		(384,545	)
Sale of short term investments		304,948			452,741
Acquisitions, net of cash acquired and investments in joint ventures		(41,145	)		(1,602	)

Net cash provided by investing activities		22,822			65,711

FINANCING ACTIVITIES
Proceeds from stock issuances		1,679			1,739
Stock repurchase		(20,630	)		—
Payments on capital lease obligations and notes payable		(41	)		(67	)

Net cash (used in) provided by financing activities		(18,992	)		1,672

Net (decrease) increase in cash and cash equivalents		(62	)		68,744

Cash and cash equivalents at beginning of period	$	87,483		$	47,610

Cash and cash equivalents at end of period	$	87,421		$	116,354

Supplemental non-cash disclosures:
Accrual of stock issuance costs	$	—		$	2,958

Stock issued related to acquisitions	$	15,197		$	—

The accompanying financial statements of NetRatings have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The balance sheet as of December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying financial statements should be read in conjunction with the audited financial statements and notes thereto included in NetRatings’ annual report on Form 10-K for the fiscal year ended December 31, 2001.

On May 7, 2002, NetRatings and Jupiter Media Metrix entered into a settlement agreement under which Jupiter Media Metrix agreed to dismiss with prejudice the patent infringement action it filed against NetRatings in March 2001 and NetRatings paid Jupiter Media Metrix $15 million in cash. In connection with the settlement, NetRatings also acquired from Jupiter Media Metrix its patents for computer use tracking (United States Patent Nos. 6,115,680 and 5,676,510, related patent applications and all patents issuing from such applications) and related materials and NetRatings granted to Jupiter Media Metrix a non-exclusive, assignable license to use the patented technology in its domestic Internet audience measurement business until June 30, 2005 in exchange for license fees totaling $750,000, $1.5 million, $1.75 million and $1 million, payable in 2002, 2003, 2004 and 2005, respectively. The license to Jupiter Media Metrix is terminable by Jupiter Media Metrix or NetRatings under specified conditions. Jupiter Media Metrix has informed NetRatings that it intends to terminate its license from and royalty obligations to NetRatings. Accordingly, subject to Jupiter Media Metrix’ compliance with its obligations under its license agreement with NetRatings, substantially all of the future license fees under the agreement may not become payable to NetRatings.

A class action lawsuit was filed on November 6, 2001 in the United States District Court for the Southern District of New York on behalf of purchasers of NetRatings common stock alleging violations of federal securities laws. The case is now designated as In re NetRatings, Inc. Initial Public Offering Securities Litigation, related to In re Initial Public Offerings Securities Litigation. The case is brought purportedly on behalf of all persons who purchased NetRatings’ common stock from December 8, 1999 through December 6, 2000. The complaint names as defendants NetRatings; two of its former officers or directors; and investment banking firms that served as underwriters for NetRatings’ initial public offering in December 1999. The Plaintiffs electronically served an amended complaint on or about April 19, 2002. The amended complaint alleges violations of Section 11 and 15 of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934, on the grounds that the prospectus incorporated in the registration statement for the offering failed to disclose, among other things, that (i) the underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material portions of the shares of NetRatings’ stock sold in the initial public offering, and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate shares of NetRatings’ stock sold in the initial public offering to those customers in exchange for which the customers agreed to purchase additional shares of NetRatings’ stock in the aftermarket at pre-determined prices. The amended complaint also alleges that false analyst reports were issued following the initial public offering. No specific damages are claimed.

NetRatings is aware that similar allegations have been made in lawsuits relating to more than 300 other initial public offerings conducted in 1999 and 2000. Those cases have been consolidated for pretrial purposes. On July 15, 2002, NetRatings (as well as the other issuer defendants) filed a motion to dismiss the complaint. NetRatings believes that the claims against it and its officers and directors are without merit and intends to defend them vigorously. NetRatings’ management currently believes that the resolution of this matter will not have a material adverse impact on NetRatings’ financial position. However, the litigation process is inherently uncertain, and an adverse outcome could materially affect NetRatings’ results of operations and financial position.

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
	(in thousands, except per share data)						(in thousands, except per share data)
Net loss	$	(6,490	)	$	(4,988	)	$	(21,133	)	$	(8,405	)
Weighted-average shares of common stock outstanding		32,661			32,920			32,797			32,839
Less: weighted-average shares subject to repurchase		26			121			32			144

Weighted-average shares of common stock outstanding used in computing basic and diluted net loss per share		32,635			32,799			32,765			32,695

Basic and diluted net loss per common share	$	(0.20	)	$	(0.15	)	$	(0.65	)	$	(0.26	)

As a result of the purchases and acquisitions, which occurred during the second quarter of 2002, NetRatings recorded $41.0 million in goodwill. In accordance with SFAS 142, NetRatings does not amortize the goodwill balance; however, the goodwill will now be subject to an annual impairment test. Also in connection with the purchases and acquisitions, NetRatings has recorded $24.8 million in specifically identifiable intangible assets. These assets are currently being amortized based on useful lives ranging from 1 to 13 years. The specifically identifiable intangible assets include core technologies, customer contracts, and patents and other assets.

The intangible assets have original estimated useful lives as follows: Core technologies—seven years; Customer contracts—two years; Patents and other—one to thirteen years. Based on the current amount of intangibles subject to amortization, the estimated amortization expense for each of the succeeding five years is as follows: 2002: $2.2 million; 2003: $3.2 million; 2004: $2.4 million; 2005: $1.7 million; and 2006: $1.5 million. See also Note 7—Acquisition.

The allocation of purchase price related to the aforementioned acquisitions is preliminary and does not reflect the fair value adjustments to their assets and liabilities, since those amounts have not been finalized and have been estimated at this time. The fair value of the assets and liabilities will be determined as of the date of the acquisition through independent appraisal. The accompanying table represents the estimated purchase price allocation:

	eRatings		All Other Acquisitions		Total
	(in thousands)
Cash paid		—	$	37,339	$	37,339
Stock issued	$	9,079		6,118		15,197
Acquisition costs		1,819		3,474		5,293
Restructuring costs		2,073		1,751		3,824
Net liabilities assumed		1,410		2,772		4,182

Total Purchase Price	$	14,381	$	51,454	$	65,835

Purchase Price Allocation
Intangibles	$	2,700	$	17,270	$	19,970
Goodwill		11,681		34,184		45,865

Total Purchase Price	$	14,381	$	51,454	$	65,835

During the first quarter of 2002, NetRatings’ management approved and initiated a restructuring plan intended to streamline its business to focus on core products, refine its product line, and consolidate space at its Milpitas facility. The restructuring plan has resulted in a reduction of 15% of NetRatings’ workforce. Accordingly, NetRatings recognized a restructuring charge of approximately $7.0 million during the first quarter of 2002. The restructuring plan involves the termination of 24 employees worldwide, 23 of which were terminated by the end of the first quarter. Positions were eliminated primarily in NetRatings’ executive management, engineering, and sales functions.

In connection with the acquisition of the AdRelevance division of Jupiter Media Metrix in April 2002 and the May 2002 acquisition of the @plan research product line of DoubleClick, Inc. and the 80.1% of ACNielsen eRatings.com that NetRatings did not already own, NetRatings capitalized, as acquisition related costs, an additional $3.8 million in restructuring liability during the second quarter. The restructuring plans involve the termination of 90 employees worldwide, 16 of which have been terminated during the second quarter of 2002. Positions were eliminated primarily in the executive management, engineering, and sales functions.

	Total Charges
	Q1		Q2		Paid		Non-Cash Charges		Accrual as of June 30, 2002
	(in thousands)
Employee severance benefits	$	3,737	$	2,675	$	1,277	$	1,019	$	4,116
Costs incurred due to discontinuation of certain services and other expenses		1,551		—		870		—		681
Lease commitments and related write-down of property and equipment		1,681		1,149		111		643		2,076

Totals	$	6,969	$	3,824	$	2,258	$	1,662	$	6,873

On April 9, 2002, NetRatings acquired substantially all the assets of the AdRelevance online advertising expenditure measurement division of Jupiter Media Metrix, Inc. for $8.5 million in cash. The assets acquired include the AdRelevance suite of services and related patent applications, trademarks and copyrights, associated contracts, accounts receivable balances, and related deferred revenue balances. In connection with the purchase, NetRatings named Will Hodgman, the former President of the Jupiter Media Metrix Measurement Group, as Executive Vice President of Measurement Sciences.

On May 7, 2002, NetRatings acquired from ACNielsen Corporation the remaining 80.1% interest in ACNielsen eRatings.com that NetRatings did not already own for $9.6 million in common stock. In connection with this purchase, $1.5 million in associated acquisition costs have been capitalized. The acquisition-related costs include legal and travel expenses and NetRatings’ share of costs incurred by eRatings to reduce the number of countries in which eRatings reports Internet audience measurement services. In connection with this transaction, NetRatings also entered into a services agreement with ACNielsen pursuant to which ACNielsen will provide NetRatings with marketing, panel management and back-office services and personnel for a period of five years, and amended the operating agreement between NetRatings and Nielsen Media Research (an affiliate of ACNielsen) to provide that, in lieu of paying sales commissions to Nielsen Media Research, NetRatings will pay the actual costs associated with the operation and maintenance by Nielsen Media Research of a sales force dedicated to selling NetRatings’ products and services.

The following pro forma summary of consolidated revenues, net loss and net loss per share for the six month period ended June 30, 2002 and the year ended December 31, 2001 assumes the eRatings acquisition occurred on January 1, 2002 and January 1, 2001, respectively. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of NetRatings’ financial results.

On August 9, 2002, NetRatings acquired a 52% controlling interest in NetValue, S.A., a publicly traded French company, through direct stock purchases from certain NetValue stockholders who in return received a combination of cash and shares of NetRatings common stock worth an aggregate of 2 euros per share of NetValue stock. On August 12, 2002, NetValue’s board was reconstituted to provide NetRatings with majority control of NetValue’s board, with Lennart Brag continuing to serve as chairman of NetValue. NetRatings intends to initiate shortly a tender offer to acquire the remaining outstanding shares of NetValue that it does not own already. In total, NetRatings expects to pay approximately 18.1 million euros, or $17.7 million based on recent exchange rates, for the acquisition of all the outstanding shares of NetValue inclusive of the 52% of the outstanding NetValue shares that NetRatings has already acquired.

In August 2001, the Financial Accounting Standards Board issued SFAS 144, Impairment or Disposal of Long-Lived Assets, which addresses accounting and financial reporting for the impairment or disposal of long-lived assets. SFAS 144 is effective for the Company beginning in the fiscal year ended December 31, 2002, and the Company is currently evaluating the impact, if any, that the implementation of SFAS 144 will have on its financial statements.

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ substantially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Risk Factors That May Affect Our Performance” and elsewhere in this Quarterly Report on Form 10-Q. The following discussion should be read together with our financial statements and related notes thereto included elsewhere in this Report.

We were incorporated in July 1997 to provide technology-driven Internet audience measurement information solutions for media and commerce. Our products and services enable our customers to make informed business-critical decisions regarding their Internet strategies. Our customers include leading advertising agencies, media companies, financial services institutions, e-commerce companies and traditional marketers requiring analysis of the online environment. We have formed strategic relationships with Nielsen Media Research, the leading source of television audience measurement and related services in the United States, and ACNielsen, a leading global provider of market research information and analysis. We believe that these relationships enable us to offer the most accurate and globally comprehensive Internet audience information currently available.

On April 9, 2002, we acquired substantially all the assets of the AdRelevance online advertising expenditure measurement division of Jupiter Media Metrix Inc. for $8.5 million in cash. The assets acquired include the AdRelevance suite of services and related patent applications, trademarks and copyrights, associated contracts, accounts receivable balances, and related deferred revenue balances. In connection with the purchase, we named Will Hodgman, the former President of the Jupiter Media Metrix Measurement Group, as Executive Vice President of Measurement Sciences.

On May 7, 2002, we and Jupiter Media Metrix entered into a settlement agreement under which Jupiter Media Metrix agreed to dismiss with prejudice the patent infringement action it filed against us in March 2001 and as part of the settlement agreement, we paid Jupiter Media Metrix $15 million in cash. We also acquired from Jupiter Media Metrix its patents for computer use tracking (United States Patent Nos. 6,115,680 and 5,676,510, related patent applications and all patents issuing from such applications) and related materials and we granted to Jupiter Media Metrix a non-exclusive, assignable license to use the patented technology in its domestic Internet audience measurement business until June 30, 2005 in exchange for license fees totaling $750,000, $1.5 million, $1.75 million and $1 million, payable in 2002, 2003, 2004 and 2005, respectively. The license to Jupiter Media Metrix is terminable by Jupiter Media Metrix or by us under specified conditions. Jupiter Media Metrix has informed us that it intends to terminate its license from and royalty obligations to us. Accordingly, subject to Jupiter Media Metrix’ compliance with its obligations under its license agreement with us, substantially all of the future license fees under the agreement may not become payable to us.

On August 9, 2002, we acquired a 52% interest in NetValue S.A., a French publicly traded company, through direct stock purchases from certain NetValue shareholders who in return received a combination of cash and shares of our common stock worth an aggregate of 2 euros per share of NetValue stock. On August 12, 2002, NetValue’s board was reconstituted to provide us with majority control with Lennart Brag continuing to serve as chairman of the board of directors. We intend to initiate shortly a tender offer to acquire the remaining outstanding shares of NetValue. In total, we expect to pay approximately 18.1 million euros, or $17.1 million based on recent exchange rates, for the acquisition of all the outstanding shares of NetValue, inclusive of the 52% of the outstanding NetValue shares that we already acquired.

	Second Quarter 2002			Second Quarter 2001			Year- To-Year Change		Six Month ended June 30, 2002			Six Month ended June 30, 2001			Year- To-Year Change
(amounts in thousands)
Revenue	$	7,283		$	6,090		20	%	$	11,596		$	12,810		(9	)%
Cost of revenue		3,856			3,332		(16	)%		6,528			6,641		2	%
Gross profit		3,427			2,758		24	%		5,068			6,169		(18	)%
Gross margin percentage		47	%		45	%				44	%		48	%
Research and development		1,999			1,867		(7	)%		3,399			3,936		14	%
Sales and marketing		3,598			4,245		15	%		6,371			8,591		26	%
General and administrative		1,862			1,557		(20	)%		3,054			3,026		(1	)%
Restructuring expense		—			—		—			6,969			—		(100	)%
Acquisition related expense		—			—		—			3,033			—		(100	)%
Amortization of intangibles		610			—		(100	)%		610			—		(100	)%
Stock-based compensation		2,552			2,384		(7	)%		4,872			5,092		4	%

Total operating expenses		10,621			10,053		(6	)%		28,308			20,645		(37	)%

Loss from operations		(7,194	)		(7,295	)	1	%		(23,240	)		(14,476	)	(61	)%
Loss on joint ventures		(1,184	)		(1,498	)	21	%		(2,111	)		(2,670	)	21	%
Interest income, net		1,888			3,805		(50	)%		4,218			8,741		(52	)%

Net loss	$	(6,490	)	$	(4,988	)	(30	)%	$	(21,133	)	$	(8,405	)	(151	)%

Basic and diluted net loss per common share	$	(0.20	)	$	(0.15	)	(31	)%	$	(0.65	)	$	(0.26	)	(151	)%

Shares used to compute basic and diluted net loss per common share		32,635			32,799					32,765			32,695

We generate revenue from the sale of our Internet audience measurement products and services. We primarily sell these services pursuant to one-year subscription agreements and bill our customers in advance, typically on an annual or quarterly basis. We also derive a portion of our revenue from our joint venture partners. With an annualized contract value of $28.3 million, sales of our information and analytical products and services accounted for substantially all of the revenue for each period.

Revenue increased 20% to $7.3 million for the three-month period ended June 30, 2002, compared to $6.1 million for the corresponding period in 2001. The increase was due to the acquisitions of AdRelevance, @plan, and eRatings. For the three-month period ended June 30, 2002, we had a 69% renewal rate as compared to 47% in the corresponding period in 2001. The increase in our renewal rate was primarily due to the stabilization of the internet segment following the prior year’s dot.com fall out. During the three-month period ended June 30, 2002 and 2001, no customer accounted for more than 10% of our revenue.

Revenue decreased 9% to $11.6 million for the six month period ended June 30, 2002, compared to $12.8 million for the corresponding period in 2001. The decrease was primarily due to the decline in contract sales resulting from the continued slowing economy, offset slightly by the second quarter acquisitions of AdRelevance, @plan, and eRatings. The decrease also reflects the decrease in amortization of deferred revenue associated with our customer subscriptions in accordance with our revenue policy. During the six-month period ended June 30, 2002 and 2001, no customer accounted for more than 10% of our revenue.

Cost of revenue consists primarily of expenses related to the recruitment, maintenance, and support of our U.S. Internet audience measurement panels, which are expensed as they are incurred, as well as operational costs related to our data center. Accordingly, such expenses are not matched with any revenue or subscriptions generated in a given period and are higher in periods in which we are involved in significant panel development activities. Also included in cost of revenue are the data acquisition costs related to our joint ventures, which are recognized ratably over the term of the customer’s subscription agreement, as the data is provided, and the royalty fees associated with certain data partnering agreements.

Cost of revenue increased 16% to $3.9 million, or 53% of revenue, for the three-month period ended June 30, 2002 from $3.3 million, or 55% of revenue, for the corresponding period in 2001. Cost of revenue increased due to the expansion of our data center as a result of the acquisition of AdRelevance, the addition of expenses related to the Gallup surveys associated with the @plan acquisition, and the addition of international panel expenses related to the acquisition of eRatings. The increase was offset by a reduction in strategic partner royalty expenses related to the discontinuation of AdSpectrum and eCommercepulse as well as a reduction in panel fees associated with both the U.S. home and business panel as recruiting efforts decreased and the panels entered into maintenance cycles.

Cost of revenue decreased 2% to $6.5 million, or 56% of revenue, for the six month period ended June 30, 2002, compared to $6.6 million, or 52% of revenue, for the corresponding period in 2001. Cost of revenue decreased due primarily to the reduction in strategic partner royalty expenses related to the discontinuation of AdSpectrum and eCommercepulse as well as a reduction in panel fees associated with both the U.S. home and business panel as recruiting efforts decreased and the panels entered into maintenance cycles. The decrease was partially offset by cost of revenue increases associated with our acquisitions including the expansion of our data center as a result of the acquisition of AdRelevance, the addition of expenses related to Gallup survey associated with the @plan acquisition, and the addition of international panel expenses related to the acquisition of eRatings.

Research and development expenses consist primarily of compensation and related costs for personnel associated with our research and product development activities. These costs are expensed as incurred. Sales and marketing expenses consist primarily of salaries, benefits, and commissions to our salespeople and analysts, commissions paid to Nielsen Media Research, as well as costs related to seminars, promotional materials, public relations, advertising, and other sales and marketing programs. General and administrative expenses consist primarily of salaries and related costs for executive management, finance, accounting, human resources, legal, information technology and other administrative personnel, in addition to professional fees and other general corporate expenses.

Research and development expenses increased 7%, on an absolute basis, to $2.0 million, or 27% of revenue, for the three-month period ended June 30, 2002 compared to $1.9 million, or 31% of revenue, for the corresponding period in 2001. The increase was primarily due to an increase in salary-related expenses resulting from the acquisition of AdRelevance and eRatings personnel. The increase was offset by the reduction in workforce, which occurred during the first quarter of 2002. Sales and marketing expenses decreased 15% to $3.6 million, or 49% of revenue, for the three- month period ended June 30, 2002 compared to $4.2 million, or 70% of revenue, for the corresponding period in 2001. The decrease in sales and marketing expenses was primarily due to a reduction in public relations and trade show expenses as well as a decrease in commissions paid to sales personnel associated with the decrease in customer contracts and a full quarter’s impact of the reduction in workforce which occurred during the first quarter of 2002. The decrease was slightly offset by additional personnel costs associated with the acquisition of AdRelevance, @plan, and eRatings. General and administrative expenses increased 20%, on an absolute basis, to $1.9 million, or 26% of revenue, for the three-month period ended June 30, 2002, compared to $1.6 million, or 26% of revenue, for the corresponding period in 2001. The increase was primarily related to an increase in additional personnel costs associated with the acquisition of AdRelevance, @plan, and eRatings.

Research and development expenses decreased 14% to $3.4 million, or 29% of revenue, for the six month period ended June 30, 2002, compared to $3.9 million, or 31% of revenue, for the corresponding period in 2001. The decrease was primarily due to the reduction in workforce, which occurred during the first quarter of 2002. The decrease was slightly offset by the increased research and development personnel and associated payroll expenses resulting from the second quarter acquisitions of AdRelevance and eRatings. Sales and marketing expenses decreased 26% to $6.4 million, or 55% of revenue, for the six month period ended June 30, 2002, compared to $8.6 million, or 67% of revenue, for the corresponding period in 2001. The decrease in sales and marketing expenses was primarily due to a reduction in public relations and trade show expenses as well as a decrease in commissions paid to sales personnel associated with the decrease in customer contracts and a full quarter’s impact of the reduction in workforce which occurred during the first quarter of 2002. The decrease was slightly offset by the increased sales and marketing personnel and associated payroll expenses resulting from the second quarter acquisitions of AdRelevance, @plan, and eRatings. General and administrative expenses increased 1% to $3.1 million, or 26% of revenue, for the six month period ended June 30, 2002, compared to $3.0 million, or 24% of revenue, for the corresponding period in 2001. The increase was primarily related to an increase in additional personnel costs associated with the acquisition of AdRelevance, @plan, and eRatings.

During the second quarter, we recognized amortization of intangible expenses of $0.6 million, or 8% of revenue, for the three-month period ended June 30, 2002 resulting from the amortization of the specifically identified intangibles associated with the acquisition of AdRelevance, @plan, and eRatings, and the settlement of the Jupiter Media Metrix patent infringement lawsuit. There was no corresponding amortization in 2001. Stock-based compensation expenses increased 7%, on an absolute basis, to $2.6 million, or 35% of revenue, for the three-month period ended June 30, 2002 compared to $2.4 million, or 39% of revenue, for the corresponding period in 2001. The increase in absolute dollars was due to expenses associated with the acceleration of vesting for the retiring chairman of the board.

During the six month period ended June 30, 2002, we recognized restructuring expenses of $7.0 million, or 60% of revenue, which were recorded during the first quarter of 2002, with no corresponding restructuring expense recorded during 2001. See Footnote 6 for further information on restructuring expenses. Acquisition-related expenses of $3.0 million, or 26% of revenue, for the six-month period ended June 30, 2002 were recorded during the first quarter of 2002 with no corresponding restructuring expense recorded during 2001. These expenses related to the terminated merger between NetRatings and Jupiter Media Metrix. Amortization of intangible expenses of $0.6 million, or 5% of revenue, for the six month period ended June 30, 2002 resulted from the amortization of the specifically identified intangibles associated with the acquisition of AdRelevance, @plan, and eRatings, and the settlement of the Jupiter Media Metrix patent infringement lawsuit. There was no corresponding amortization in 2001. Stock-based compensation expenses decreased 4% to $4.9 million, or 42% of revenue, for the six month period ended June 30, 2002, compared to $5.1 million, or 40% of revenue, for the corresponding period in 2001. The decrease was primarily due to the scheduled amortization of our stock-based compensation costs, offset slightly by the expenses associated with the acceleration of vesting for the retiring chairman of the board.

Loss from joint ventures decreased 21% to $1.2 million, or 16% of revenue, for the three-month period ended June 30, 2002, compared to $1.5 million, or 25% of revenue, for the corresponding period in 2001. Loss from joint ventures decreased 21% to $2.1 million, or 18% of revenue, for the six-month period ended June 30, 2002, compared to $2.7 million, or 21% of revenue, for the corresponding period in 2001. The decrease was primarily due to the reduction in eRatings net loss resulting from a 50% reduction in the number of countries in which the Nielsen//NetRatings service is offered when compared to the corresponding period in 2001. The purchase of eRatings furthered decreased the loss from joint ventures, as the loss is included in the Condensed Consolidated Statement of Operations for the three and six-month period ended June 30, 2002.

Interest income, net, decreased 50% to $1.9 million for the three-month period ended June 30, 2002 compared to $3.8 million for the corresponding period in 2001. Interest income, net, decreased 52% to $4.2 million for the six-month period ended June 30, 2002, compared to $8.7 million for the corresponding period in 2001. The decrease reflects an overall reduction in interest rates compared to the corresponding period in 2001. Further contributing to the decrease was an overall reduction in the cash and cash equivalents balances during the second quarter resulting from the acquisitions of AdRelevance, @plan, and selected international assets of Jupiter Media Metrix and related transaction costs as well as the settlement of the Jupiter Media Metrix patent infringement lawsuit. See Item 3. Quantitative and Qualitative Disclosures About Market Risk. We anticipate interest income to continue to decline as the current market conditions prevail.

As of June 30, 2002, cash and cash equivalents and short-term investments totaled $254.5 million. Net cash used in operating activities totaled $3.9 million for the six-month period ended June 30, 2002, primarily due to the continued decrease in interest income furthered slightly by the funding of operations both domestically and internationally. Operating activities provided cash of $1.4 million for the corresponding period in 2001, primarily due to interest income earned on cash and cash equivalents and short-term investments. We anticipate that cash used in operating activities will increase in future periods due to the additional operating expenses associated with the production of the AdRelevance, @plan, and eRatings services.

Net cash provided by investing activities was $22.8 million for the six-month period ended June 30, 2002. Sales of marketable securities and other investments during the period, net of proceeds and maturities, were $64.1 million, offset by acquisition and related expenditures of $41.1 million related to the acquisitions of AdRelevance, @plan, select assets from Jupiter Media Metrix related to their European Internet audience measurement services, the settlement of the Jupiter Media Metrix patent infringement lawsuit, and eRatings transaction costs. During the corresponding period in 2001, cash provided by investing activities was $65.7 million, primarily due to net sales of short-term investments of $68.2 million. Although we had no material capital expenditure commitments as of June 30, 2002, we anticipate that capital expenditures will increase during the remainder of 2002 as we implement our disaster recovery data center. We anticipate cash provided by investing activities to be further reduced by our continued investments in joint ventures and other potential strategic investments including approximately $10.0 million in connection with the purchase of NetValue and associated transaction costs.

Net cash used in financing activities totaled $19.0 million for the six-month period ended June 30, 2002. This was primarily related to $20.6 million used to repurchase 1.5 million shares of common stock from two executive officers, offset by the exercise of options, totaling $1.7 million. Net cash provided by financing activities totaled $1.7 million in the six-month period ended June 30, 2001 primarily related to the exercise of options and the purchase of stock through the employee stock purchase plan, offset by payments on our capital lease obligations. We anticipate cash provided by financing activities will increase during the next quarter due to proceeds related to the exercise of options and the employee stock purchase plan.

We believe that our existing balances of cash and cash equivalents and short-term investments will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months, although we could elect to seek additional funding prior to that time. If additional funds are raised through the issuance of equity securities, the percentage ownership of our then-current stockholders would be reduced.

An investment in our company involves a high degree of risk. You should carefully consider the risks below, together with the other information contained in this report, before you make an investment decision with respect to our company. The risks described below are not the only ones facing our company. Additional risks not presently known to us or that we deem immaterial may also impair our business operations. Any of the following risks could materially adversely affect our business, operating results and financial condition, the trading price of our common stock could decline, and could cause you to lose all or part of your investment.

We have experienced operating losses in each quarter since our inception. We incurred net losses of $17.6 million, for the year ended December 31, 2001, and $21.1 million for the six-month period ended June 30, 2002, and as of June 30, 2002, our accumulated deficit was $76.6 million. We intend to continue to make significant expenditures related to panel maintenance and operations, restructuring and further development of our technology and infrastructure. As a result, we will need to generate significant revenue to achieve and maintain profitability. We may not be able to achieve significant revenue growth in the future. Our operating results for future periods are subject to numerous uncertainties and we may not achieve sufficient revenue to become profitable.

We were incorporated in July 1997 and did not start generating revenue until the quarter ended June 30, 1998. We introduced our Nielsen//NetRatings Internet Audience Measurement service in the quarter ended June 30, 1999. Accordingly, we are still in the early stages of development and have only a limited operating history upon which to evaluate our business. One should evaluate our likelihood of financial and operational success in light of the risks, uncertainties, expenses, delays and difficulties associated with an early-stage business in an evolving market, many of which may be beyond our control, including:

Due to our limited operating history and the evolving nature of the market in which we compete, our future revenue is difficult to forecast. Further, our expense levels are based largely on our investment plans and estimates of future revenue. We may be unable to adjust our spending to compensate for an unexpected shortfall in revenue. Accordingly, any significant shortfall in revenue relative to our planned expenditures in a particular quarter would harm our results of operations and could cause our stock price to fall sharply, particularly following quarters in which our operating results fail to meet expectations.

General economic conditions, and conditions in the Internet sector in particular, have caused some of our customers to cease operations and others to reduce their spending on the products and services that we supply or to cancel their contracts. In addition, the AdRelevance business derives, and expects to continue to derive for the foreseeable future, a large portion of its revenue from the automated retrieval and delivery of online advertising data. Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions as well as budgeting and buying patterns. The overall market for advertising, including Internet advertising, has been characterized in recent quarters by increasing softness of demand, lower prices for advertisements, the reduction or cancellation of advertising contracts, an increased risk of uncollectible receivables from advertisers and the reduction of marketing and advertising budgets, especially by Internet-related companies. As a result of these reductions, advertising spending across traditional media, as well as the Internet, has decreased.

Our future success will depend in part on an increase in the use of the Internet as an advertising medium, the proliferation of e-commerce and the use of the Internet as part of multi-channel marketing strategies. These markets and marketing techniques are new and rapidly evolving, and the long term effectiveness of Internet advertising is uncertain. More recently, in the face of a slowing economy overall, there has been increased uncertainty about the demand and market acceptance for Internet advertising and e-commerce.

The adoption of Internet advertising, particularly by entities that have historically relied on traditional media for advertising, requires the acceptance of a new way of conducting business. These companies may find Internet advertising to be less effective than traditional advertising for promoting their products and services. They may also be unwilling to pay premium rates for advertising that is targeted at specific types of users based on demographic profiles or recent Internet behavior. The Internet advertising and e-commerce markets may also be adversely affected by privacy issues surrounding the targeting of this type of advertising or the use of personal information. Providers of goods and services online continue to work toward the establishment of commerce models that are cost effective and unique, and effectively deal with issues such as channel conflict and infrastructure costs. Growth in the use of the Internet for e-commerce may not continue, or the Internet may not be adopted as a medium of commerce by a broad base of customers. In addition, many current and potential publishers of content and commerce merchants on the Internet have little or no experience in generating revenue from the sale of advertising space on their Internet sites or from conducting on-line commerce transactions. Because of the foregoing factors, among others, the market for Internet advertising and e-commerce may not continue to emerge or become sustainable. If these markets fail to develop or develop more slowly than we expect, our business will suffer.

We derive substantially all of our revenue from annual subscriptions for our services. As our business becomes more established, we expect subscription renewals and sales of additional products and services to existing customers to account for an increasing proportion of our revenue. Any unexpectedly low renewal rates or a reduction in the number of products and services that we are able to sell to existing customers would harm our operating results and could prevent us from becoming profitable. To date, renewals have been an essential element of our revenue growth. We can not assure you that we will be able to achieve or sustain high renewal rates, particularly during an economic downturn. Additionally, because most Internet-related businesses are still in the early stages of development, consolidations in our customer base or the failure of a significant number of our customers’ businesses could cause a decline in renewal rates for our products and services.

We may acquire or make investments in complementary businesses, technologies, services or products if appropriate opportunities arise. Negotiating such acquisitions can be difficult, time consuming, and expensive and our ability to close such transactions may often be subject to approvals, such as governmental regulation, which are beyond our control. Consequently, we can make no assurances that such acquisitions, once undertaken and announced, will close. Further, the process of integrating any acquired business, technology, service or product into our business and operations may result in unforeseen operating difficulties and expenditures. Integration of an acquired company also may consume much of our management’s time and attention that would otherwise be available for ongoing development of our business. Moreover, the anticipated benefits of any acquisition may not be realized. Companies in which we invest may not be successful in executing their business strategies and we may be required to write-off all or part of our investment. We may be unable to identify, negotiate or finance future acquisitions or investments successfully, or to integrate successfully any acquisitions with our current business. Future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or amortization expenses related to goodwill and other intangible assets, any of which could harm our business.

On August 9, 2002, we acquired a 52% controlling interest in NetValue, S.A., a publicly traded French company listed on the Nouveau Marché of Euronext Paris S.A. We intend to commence shortly a tender offer to acquire all of the outstanding shares of NetValue that we do not already own. In France, a simple majority ownership position is not, however, sufficient to ensure the complete acquisition of a company, as may occur in the United States through the use of a merger structure. French law provides a mechanism for obtaining complete control of a company but only if we acquire 95% or greater of NetValue’s outstanding stock. Should we not be able to reach the 95% ownership threshold in NetValue, or if the complete acquisition of NetValue were delayed, we would continue to have special duties with respect to the minority stockholders of NetValue and, in conjunction with French regulations, our ability to make decisions regarding the NetValue business may be restricted. This could result in NetValue continuing as a separate entity and competing with us in France and other countries in Europe, as well as us potentially having to fund continuing losses by NetValue and thus preventing or delaying the realization of some of the anticipated synergies of the acquisition.

Even if we acquire over 95% of the outstanding stock of NetValue, we will still face challenges inherent in any acquisition, such as the integration of products and personnel and offices across Europe. Thus, should we be unable to own 95% or more of NetValue or should we reach 95% or greater ownership of NetValue but be unsuccessful in effectively integrating NetValue’s operations with our own, our international business as well as our general financial position may be materially adversely affected.

Our audience measurement data is collected from randomly-selected groups of Internet users that are generally referred to as audience measurement panels. Our at-home Internet audience measurement panel in the United States has been developed and is maintained by Nielsen Media Research as part of our strategic relationship with that company. Similarly, our Internet audience measurement panels and other sampling methodologies that we employ in geographic locations outside of the United States, Canada, France and Japan have been developed and maintained by eRatings using ACNielsen’s proprietary sampling methodology and employees made available to eRatings by ACNielsen. As part of the acquisition of eRatings by NetRatings, ACNielsen granted NetRatings a license to use ACNielsen’s sampling methodology and the “Nielsen” name outside North America in the Internet audience measurement business, and has entered into a service agreement to provide eRatings, for a period of five years following the acquisition with the services of certain dedicated marketing and panel management personnel who are employed by ACNielsen, as well as certain back office services which were provided to eRatings by ACNielsen prior to the acquisition. Accordingly, for a significant period of time, we expect that our business will be substantially dependent upon these arrangements for the continued maintenance of our international Internet audience measurement panels and for other international business operations. Any failure on the part of Nielsen Media Research, ACNielsen, or our other joint venture partners to devote adequate resources to the development or maintenance of such panels or other sampling methodologies, or to maintain the overall quality of these methodologies, will harm our business. In addition, Nielsen Media Research may terminate its obligations with respect to Internet audience measurement panels in the event it no longer holds at least 5% of our outstanding stock on a fully-diluted basis.

VNU, N.V., through its wholly-owned subsidiaries Nielsen Media Research and ACNielsen, has a majority stock ownership position in NetRatings, which enables it to control the direction and policies of NetRatings, including the election of our board of directors, amendment of our certificate of incorporation, and decisions regarding mergers, acquisitions, consolidations, and the sale of all or substantially all of our assets. This control may have the effect of discouraging certain types of transactions involving a change of control, including transactions in which the other holders of our common stock might otherwise receive a premium for their shares over the then-current market price.

During any time that VNU is a majority stockholder, it will be required to consolidate our operating results with its own for financial reporting purposes. Our business strategy will require us to continue to incur significant losses as we attempt to establish our brand by increasing our marketing efforts and establishing strategic relationships. Incurring large expenses for these purposes may conflict with the interests of VNU in maximizing its net earnings, and VNU may therefore attempt to influence our expenditures in order to limit our losses in the short term to the detriment of our long-term strategies.

In addition, VNU can control or influence the terms of our important commercial transactions, including our strategic relationships with Nielsen Media Research and ACNielsen. VNU’s representatives on our board are expected to recuse themselves from deliberations in which they have a conflict of interest. However, these directors may take actions that favor VNU’s interests over the interests of other stockholders, as a result, for instance, of conflicts of interest that are not apparent at the time of such actions. It is also possible that future actions taken by Nielsen Media Research or ACNielsen may adversely affect our other stockholders. For example, Nielsen Media Research could take actions which would increase the amount paid to it for maintenance of audience measurement panels, decrease the sales goals that it must achieve in order to prevent us from selling advertising expenditure measurement data from third parties, or take other action detrimental to our other stockholders.

The strength of the Nielsen//NetRatings brand is also closely dependent on the reputations of Nielsen Media Research, ACNielsen, and our other joint venture partners and the strength of their brands. Therefore, any negative publicity generated by Nielsen Media Research, ACNielsen, or our other joint ventures whether or not directly related to any Nielsen//NetRatings branded products or services, as well as any erosion of the strength of any of their brands, will adversely affect our own brand identity.

To date, the expense of recruiting, maintaining, and operating our audience measurement panels has made up substantially all of the cost of revenue reported on our financial statements and, therefore, any increase in this expense will likely result in a corresponding decrease in our gross margin. We believe that the quality, size and scope of our panels is critical to the success of our business. The costs associated with maintaining the quality, size and scope are dependent on many factors some of which are beyond our control, including the cooperation rate of potential panel members and turnover among existing panel members, and accordingly we cannot control these costs to match increases or decreases in revenue. To the extent that such additional expenses are not accompanied by increased revenue, our results of operations will be harmed. We have limited experience in developing Internet audience measurement panels, and we could experience lower cooperation rates or higher turnover rates in the future.

Our future success depends in large part on our ability to attract, retain and motivate highly skilled employees. We may have difficulties in retaining employees because many of our employees hold options to purchase our stock at prices significantly above the current market price for our stock. Although we provide compensation packages that include competitive salaries, stock options, bonus incentives, and other employee benefits, we may be unable to retain our key employees or to attract, assimilate and retain other highly qualified employees in the future, which would harm our business.

Through our acquisition of eRatings, selected international assets of Jupiter Media Metrix, and majority control of NetValue, we have acquired control of audience measurement data operations in countries that we have previously served only through our minority interest in eRatings. Our international markets will require significant management attention and resources. In addition, there can be no assurance of the continued growth of Internet usage in international markets. The international markets for audience measurement services have historically been localized and difficult to penetrate.

Meeting these challenges may be difficult given the circumstances we face at the present time. The operations of eRatings that we have acquired are not supported by an existing independent eRatings infrastructure. Historically, most of the back office services and employees and facilities required by eRatings have been made available to it by ACNielsen under various intercompany service agreements and arrangements. Although ACNielsen no longer owns a direct equity interest in eRatings, ACNielsen has agreed to grant NetRatings a license to use ACNielsen’s proprietary audience sampling methodology and the “Nielsen” trademark outside of North America in the Internet audience measurement business, and has entered into a services agreement to provide eRatings, for a period of five years beginning in May 2002, with the services of certain dedicated marketing and panel management personnel who are employed by ACNielsen, as well as certain back office services currently provided to eRatings by ACNielsen. Accordingly, for a significant period of time we expect that the eRatings business will be substantially dependent upon these arrangements with ACNielsen for its infrastructure, for the continued maintenance of its Internet audience measurement panels and otherwise for the operation of its business. We intend to build our own independent international infrastructure over the next five years; however, there can be no assurance that we will be successful in doing so. Although ACNielsen may agree to extend the five-year term of the arrangements, there can be no assurance that it would choose to do so. Finally, we will be required to address these challenges while at the same time integrating the operations of NetRatings and eRatings, both overseas and in the United States, and shutting down certain operations of eRatings.

We believe that an increasing proportion of Internet use will involve alternative Internet access devices such as Web-enabled phones, television set-top boxes and internet enabled gaming consoles and that there will eventually be a convergence of Internet content and television programming. Accordingly, in order to continue to provide information about audience behavior throughout all major segments of the Internet, we will be required to develop new products and services that address these evolving technologies. We may be unsuccessful in identifying new product and service opportunities or in developing or marketing new products and services in a timely or cost-effective manner. In addition, product innovations may not achieve the market penetration or price stability necessary for profitability. Finally, we may not be successful in adapting our data collection software to evolving types of Internet access devices or content. If we are unable to provide audience measurement information regarding any significant segments of Internet use, demand for our product and service offerings may suffer.

We may be forced for competitive or technical reasons to reduce prices for some of our products or services or to offer them free of charge. Such circumstances would reduce our revenue and could harm our business. Additionally, our market is still evolving, and we have little basis to assess demand for different types of products or services or to evaluate whether our products and services will be accepted by the market. If our products and services do not gain broad market acceptance, our business may fail.

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

Nielsen Media Research’s principal business consists of providing television audience measurement services based on audience panels that it develops independent of its strategic relationship with us. ACNielsen also derives a substantial portion of its revenue from television audience measurement services outside of the United States. If television and the Internet converge in the future as expected, any Internet audience information that is reported by television audience measurement services through these VNU subsidiaries may overlap with the audience information that is reported by the Nielsen//NetRatings Internet audience measurement services. In the event of such overlap, VNU’s services could begin competing with our services for the same research budgets among customers in the marketplace, and its offering of such services could conflict with its obligation to develop and maintain our Internet audience panels.

If we furnish inaccurate information to our customers, our brand may be harmed. The information in our databases, like that in any database, may contain inaccuracies that our customers may not accept. Any dissatisfaction by our customers with our measurement methodologies or databases could have an adverse effect on our ability to attract new customers and retain existing customers and could ultimately harm our brand. Our customer contracts generally provide that each customer must indemnify us for any damages arising from the use of data, reports or analyses by the customer or the performance of any consulting, analytic or other services by us. However, we cannot be certain that our contract provisions provide sufficient protection. Any liability that we incur or any harm to our brand that we suffer because of irregularities or inaccuracies in the data we supply to our customers could harm our business. To date, we have not been notified of any liability claims or customer dissatisfaction relating to such problems with our data.

Our internal computer operations are located in leased facilities in San Jose, California, in an area that is susceptible to earthquakes. We do not have a backup facility to provide redundant network capacity in the event of a system failure. Accordingly, if this location experienced a system failure, our online services would become unavailable to our customers until we were able to bring an alternative facility online, a process which could take several weeks. These systems are also vulnerable to damage from fire, floods, power loss, telecommunications failures, break-ins and similar events. For example, during 2001 we experienced a significant period of downtime in the provision of our services due to the inadvertent actions of an employee, which we could not immediately correct because we lacked a back-up system.

We intend to develop back-up systems outside of San Jose; however, as we replicate our systems at other locations, we will face a number of technical challenges, particularly with respect to database replications, which we may not be able to address successfully. Although we carry property and business interruption insurance, our coverage may not be adequate to compensate us for all losses that may occur. Our servers may also be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions.

During 2001, the western United States (and California in particular) experienced repeated episodes of diminished electrical power supply. As a result of these episodes, certain of our operations or facilities were subject to “rolling blackouts” or other unscheduled interruptions of electrical power. The prospect of such unscheduled interruptions may continue for the foreseeable future and we are unable to predict either their occurrence, duration or cessation. In addition, due to these power supply shortages, we may be subject to significantly greater power costs which may adversely affect our financial results.

The servers on which we collect panel members’ data are maintained by AboveNet at its facilities located in San Jose, California. We continually monitor our current utilization rate and the extent of our system capacity needs. We believe we are currently operating at utilization levels that do not require additional capacity. Accordingly, our ability to collect Internet audience data in real time is dependent upon the efficient and uninterrupted operation of AboveNet’s computer and communications hardware and software systems. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at AboveNet’s facility could result in interruptions in the flow of data to our servers. In addition, any failure by AboveNet to provide our required data communications capacity could result in interruptions in our service. In the past, we have experienced occasional minor interruptions in service from AboveNet, although we have never experienced a significant interruption in service due to failures at AboveNet. In the event of a delay in the delivery of data from AboveNet, or if AboveNet should discontinue its services to us, we would be required to transfer our data collection operations to an alternative provider of server hosting services. Such a transfer could result in significant delays in our ability to deliver our products and services to our customers, which could damage our reputation and harm our business. In recent quarters we have noticed a softening in the marketplace for “co-location” services such as those offered by AboveNet and its competitors and a corresponding decrease in the financial stability of many companies offering such services. If this trend continues, we could face potential interruptions or cancellation of our services and could have difficulties in establishing similar services with alternative providers.

We are currently subject to a securities class action complaint relating to our initial public offering. The plaintiffs allege that our prospectus was materially false and misleading because it failed to disclose that the underwriters required several investors who sought large allocations of stock in the offering to pay excessive underwriters’ compensation in the form of increased brokerage commissions on other trades and required investors to agree to buy shares of our stock after the offering was completed at predetermined prices as a precondition to obtaining allocations in the offering. The plaintiffs further allege that because of these purchases, our stock price after its initial public offering was artificially inflated. Similar complaints have been filed against a number of other issuers that had initial public offerings in 1999 and 2000. An adverse outcome could materially affect our results of operations and financial position.

We regard our intellectual property as critical to our success. We rely on patent, trademark, copyright and trade secret laws to protect our proprietary rights. Notwithstanding these laws, we may be unsuccessful in protecting our intellectual property rights or in obtaining patents or registered trademarks for which we apply. We have applied for a U.S. and foreign patents with respect to our BannerTrack advertising tracking technology and have recently acquired several patents and related patent applications from Jupiter Media Metrix related to our core products. We have also applied to register the NetRatings, NetRatings Insight, NetRatings Online Observer, BannerTrack and CommerceTrack trademarks in the United States and have purchased additional trademarks through our acquisitions of the AdRelevance and @Plan assets and have received notice of registration for NetRatings and NetRatings Online Observer. We have undertaken only limited actions to protect our trademarks, servicemarks or tradenames outside of the United States and we have not registered any of our copyrights. Our patent applications or trademark registrations may not be approved or, even if approved, could be challenged by others or invalidated through administrative process or litigation. If our patent applications or trademark registrations are not approved because third parties own rights to the technology we are trying to patent or the trademarks we are trying to register, our use of such technology or trademark would be restricted unless we enter into arrangements with the third-party owners, which might not be possible on commercially reasonable terms or at all.

Third parties may, from time to time, assert claims that we have infringed upon their proprietary rights or claims that our own trademarks, patents or other intellectual property rights are invalid. Such claims could adversely affect our reputation and the value of our own proprietary rights. From time to time we have been, and we expect to continue to be, subject to such claims in the ordinary course of our business, including claims of alleged infringement of patents, trademarks and other intellectual property rights of third parties. Protection of proprietary rights in Internet-related industries is inherently uncertain due to the rapidly evolving technological environment. As such, there may be numerous patent applications pending, many of which are confidential when filed, that provide for technologies similar to ours.

Any claims of infringement and any resulting litigation, should they occur, could subject us to significant liability for damages, restrict us from using our technology or from operating our business generally, or require us to make changes to our technology. Any claims of this type, with or without merit, could be time-consuming to defend, result in costly litigation, and divert management attention and resources. In addition, such claims could result in limitations on our ability to use the intellectual property subject to these claims unless we are able to enter into royalty, licensing or other similar arrangements with the third parties asserting these claims. Such agreements, if required, may be unavailable on terms acceptable to us, or at all. If we are unable to enter into these types of agreements, we may be required to either cease offering the subject product or change our technology underlying the applicable product. If a successful claim of infringement is brought against us and we fail to develop non-infringing technology or to license the infringed or similar technology on a timely basis, it could materially adversely affect our business, financial condition and results of operations.

Personal information regarding our panelists is included in the data that our software captures from a panelist’s Internet use. Our panel data are released only in an aggregated format or in a form that is not identifiable on an individual basis. However, if a person were to penetrate our network security or otherwise misappropriate sensitive data about our panel members, our reputation could be harmed or we could be subject to claims or litigation arising from damages suffered by panel members as a result of such misappropriation.

In order to comply with the newly adopted Sarbanes-Oxley Act of 2002, as well as proposed changes to listing standards by Nasdaq, and proposed accounting changes by the Securities and Exchange Commission, we may be required to increase our internal controls, hire additional personnel and additional outside legal, accounting and advisory services, all of which will cause our general and administrative costs to increase. Insurers are also likely to increase premiums as a result of the high claims rates incurred over the past year, and so our premiums for our various insurance policies, including our directors’ and officers’ insurance policies, are likely to increase. Proposed changes in the accounting rules, including legislative and other proposals to account for employee stock options as a compensation expense among others, could materially increase the expenses that we report under generally accepted accounting principles and adversely affect our operating results.

The applicability to the Internet of existing laws governing issues such as property ownership, libel and personal privacy is uncertain. In addition, governmental authorities in various countries may seek to further regulate the Internet with respect to issues such as user privacy, pornography, acceptable content, advertising, e-commerce, taxation, and the pricing, characteristics and quality of products and services. Finally, the global nature of the Internet could subject us to the laws of a foreign jurisdiction in an unpredictable manner. Any new legislation regulating the Internet could inhibit the growth of the Internet and decrease the acceptance of the Internet as a communications and commercial medium, which might harm our business.

As of June 30, 2002, we had cash and cash equivalents and short-term investments of $254.5 million consisting of cash and highly liquid, short-term investments. Declines of interest rates over time will reduce our interest income from our cash and cash equivalents and short-term investments and, accordingly, could adversely affect our net income and earnings per share. The primary objective of our investment activities is to preserve capital while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and short-term investments in a variety of government and corporate obligations and money market funds. As of December 31, 2001, our investments had a weighted-average time to maturity of approximately 230 days.

Our outstanding capital lease obligations are all fixed interest rates and therefore have minimal exposure to interest rate fluctuations. NetRatings writes down its equity investments based on its share of the net losses recorded by its joint ventures. The net losses of those entities are impacted by foreign exchange rate fluctuations. A significant fluctuation in foreign exchange rates could materially impact the joint venture losses recorded by NetRatings.

On May 7, 2002, NetRatings and Jupiter Media Metrix entered into a settlement agreement under which Jupiter Media Metrix agreed to dismiss with prejudice the patent infringement action it filed against us in March 2001 and we paid Jupiter Media Metrix $15 million in cash. We also acquired from Jupiter Media Metrix its patents for computer use tracking (United States Patent Nos. 6,115,680 and 5,676,510, related patent applications and all patents issuing from such applications) and related materials and we granted to Jupiter Media Metrix a non-exclusive, assignable license to use the patented technology in its domestic Internet audience measurement business until June 30, 2005 in exchange for license fees totaling $750,000, $1.5 million, $1.75 million and $1 million, payable in 2002, 2003, 2004 and 2005, respectively. The license to Jupiter Media Metrix is terminable by Jupiter Media Metrix or us under specified conditions. Jupiter Media Metrix has informed us that it intends to terminate its license from and royalty obligations to us. Accordingly, subject to Jupiter Media Metrix’ compliance with its obligations under its license agreement with NetRatings, substantially all of the future license fees under the agreement may not become payable to NetRatings.

A class action lawsuit was filed on November 6, 2001 in the United States District Court for the Southern District of New York on behalf of purchasers of our common stock alleging violations of federal securities laws. The case is now designated as In re NetRatings, Inc. Initial Public Offering Securities Litigation, related to In re Initial Public Offerings Securities Litigation. The case is brought purportedly on behalf of all persons who purchased the Companys’ common stock from December 8, 1999 through December 6, 2000. The complaint names as defendants NetRatings; two of our former officers or directors; and investment banking firms that served as underwriters for our initial public offering in December 1999. The Plaintiffs electronically served an amended complaint on or about April 19, 2002. The amended complaint alleges violations of Section 11 and 15 of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934, on the grounds that the prospectus incorporated in the registration statement for the offering failed to disclose, among other things, that (i) the underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material portions of the shares of our stock sold in the initial public offering, and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate shares of our stock sold in the initial public offering to those customers in exchange for which the customers agreed to purchase additional shares of our stock in the aftermarket at pre-determined prices. The amended complaint also alleges that false analyst reports were issued following the IPO. No specific damages are claimed.

We are aware that similar allegations have been made in lawsuits relating to more than 300 other initial public offerings conducted in 1999 and 2000. Those cases have been consolidated for pretrial purposes before the Honorable Judge Shira A. Scheindlin. On July 15, 2002, we (as well as the other issuer defendants) filed a motion to dismiss the complaint. We believe that the claims against us and our officers and directors are without merit and intend to defend them vigorously. Our management currently believes that the resolution of this matter will not have a material adverse impact on our financial position. However, an adverse outcome could materially affect our results of operations and financial position.

On May 6, 2002, we issued 503,048 shares of unregistered common stock to DoubleClick, Inc., in addition to paying $12 million in cash, as consideration for our acquisition of DoubleClick’s @Plan research product line. The value of the shares issued in the transaction, based on the exchange formula provided in the purchase agreement, was approximately $6.5 million. The registration statement on Form S-3 that we filed with respect to the shares held by DoubleClick was declared effective by the Securities and Exchange Commission on July 19, 2002.

On June 4, 2002, the Company held its Annual Meeting of Stockholders. At the meeting, the stockholders elected as directors D. Scott Mercer (29,784,315 affirmative votes and 203,611 withheld), James J. Geddes, Jr. (29,784,915 affirmative votes and 203,011 withheld), David H. Harkness (29,643,532 affirmative votes and 344,394 withheld), Michael P. Connors (29,175,290 affirmative votes and 812,636 withheld), Thomas A. Mastrelli (29,643,532 affirmative votes and 344,394 withheld), Arthur F. Kingsbury (29,784,715 affirmative votes and 203,211 withheld), Jeffrey Epstein (29,643,431 affirmative votes and 344,495 withheld), John A. Dimling (29,664,832 affirmative votes and 323,094 withheld) and William Pulver (29,664,832 affirmative votes and 323,094 withheld).

On August 9, 2002, we acquired a 52% controlling interest in NetValue, S.A., a publicly traded French company, through direct stock purchases from certain NetValue stockholders who in return received a combination of cash and shares of our common stock worth an aggregate of 2 euros per share of NetValue stock. We consequently issued an aggregate of 266,148 unregistered shares of common stock to certain NetValue stockholders. In connection with the transaction, we entered into a share purchase agreement and registration rights agreement with the certain NetValue stockholders, which are filed with this quarterly report on Form 10-Q as exhibits 2.10 and 4.5, respectively. We also entered into an agreement with NetValue directly that governs the treatment of outstanding NetValue options and warrants to purchase NetValue stock which is filed herewith as exhibit 2.11. In addition, we amended our Second Restated Rights Agreement originally dated as of September 22, 1999 to permit us to enter into the registration rights agreement with the certain stockholders of NetValue and this Third Addendum to the Second Restated Rights Agreement is filed herewith as exhibit 4.4.

Under the SEC rules for Item 7 of current reports on Form 8-K, we are required to file certain pro forma financial information that reflects the combined operations of NetValue and NetRatings, as well as the historical audited financial statements of NetValue. We intend to file both such pro forma financial information and the NetValue historical audited financial statements in a current report on Form 8-K that shall be filed no later than October 21, 2002, which is the first business day following the seventy-fifth calendar day after August 5, 2002.

Exhibit Number		Exhibit
2.10		Share Purchase Agreement with certain stockholders of NetValue, S.A., dated as of August 5, 2002.

2.11		Agreement with NetValue, S.A., a French stock corporation (société anonyme), dated as of August 5, 2002.

4.4		Third Amendment to the Second Restated Rights Agreement, dated as of August 5, 2002.

4.5		Registration Rights Agreement with certain stockholders of NetValue, S.A., dated as of August 5, 2002.

10.40		Employment offer letter with Todd Sloan dated February 28, 2002.

10.41		Executive Employment Agreement with William Hodgman dated April 9, 2002.

99.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Delaware		77-0461990
(State or other jurisdiction of incorporation of organization)		(I.R.S. Employer Identification No.)

890 Hillview Court Milpitas, California		95035
(Address of principal executive offices)		(Zip Code)

Part I.	FINANCIAL INFORMATION	3

Item 1.	Condensed Consolidated Financial Statements	3

	Condensed Consolidated Balance Sheets—June 30, 2002 (Unaudited) and December 31, 2001	3

	Condensed Consolidated Statements of Operations—Three and Six Months ended June 30, 2002 and 2001 (Unaudited)	4

	Condensed Consolidated Statements of Cash Flows—Six Months ended June 30, 2002 and 2001 (Unaudited)	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Part II.	OTHER INFORMATION	25

Item 1.	Legal Proceedings	25

Item 2.	Changes in Securities and Use of Proceeds	26

Item 4.	Submission of Matters to a Vote of Security Holders	26

Item 5.	Other Information	26

Item 6.	Exhibits and Reports on Form 8-K	27

	Signatures	28

	June 30, 2002 (In thousands)
	Gross carrying amount		Accumulated amortization			Net
Core technologies	$	3,590	$	(106	)	$	3,484
Customer contracts		2,100		(221	)		1,879
Patents and other		19,123		(283	)		18,840

	$	24,813	$	(610	)	$	24,203

	Year ended December 31, 2001			Six month period ended June 30, 2002
	Year ended December 31, 2001			Six month period ended June 30, 2002
	(in thousands, except per share data)
Revenue	$	30,409		$	11,344
Net loss	$	(44,717	)	$	(24,961	)
Net loss per share:
Basic and diluted	$	(1.33	)	$	(0.74	)
Shares used in the calculation of net loss per share:
Basic and diluted		33,613			33,514

NETRATINGS, INC.

By:		/s/ TODD SLOAN
		Todd Sloan *Executive Vice President of Corporate Development,* *Chief Financial Officer And Secretary* *(Principal Accounting and Financial Officer)*

By:		/s/ WILLIAM PULVER
		William Pulver *President, Chief Executive Officer and Director*

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