UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

OR

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

Commission file number: 000-27907

NETRATINGS, INC.

(Exact name of Registrant as specified in its charter)

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

120 West 45^th Street New York, New York		10036
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (212) 703-5900

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 ý No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

The number of shares of the Registrant’s Common Stock outstanding as of April 30, 2004, was 34,301,889.

NETRATINGS, INC. FORM 10-Q INDEX

Part I.		FINANCIAL INFORMATION
Item 1.		Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets - March 31, 2004 (Unaudited) and December 31, 2003
		Condensed Consolidated Statements of Operations - Three Months ended March 31, 2004 and 2003 (Unaudited)
		Condensed Consolidated Statements of Cash Flows - Three Months ended March 31, 2004 and 2003 (Unaudited)
		Notes to Condensed Consolidated Financial Statements
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosures About Market Risk
Item 4.		Controls and Procedures
Part II.		OTHER INFORMATION
Item 1.		Legal Proceedings
Item 6.		Exhibits and Reports on Form 8-K
		Signatures

PART I

FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

NETRATINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	March 31, 2004			December 31, 2003
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	109,998		$	103,221
Short-term investments	87,648			106,818
Accounts receivable, net	10,976			10,141
Due from joint ventures	627			589
Due from related parties	—			458
Prepaid expenses and other current assets	2,726			3,444

Total current assets	211,975			224,671

Property and equipment, net	4,585			3,943
Intangibles, net	17,935			19,089
Goodwill	77,627			66,612
Other assets	1,300			936

Total assets	$	313,422		$	315,251

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,706		$	3,314
Accrued liabilities	9,335			11,298
Deferred revenue	11,691			10,777
Due to related parties	16,551			12,195
Restructuring liabilities	1,119			1,711

Total current liabilities	41,402			39,295

Restructuring liabilities, less current portion	1,412			1,680

Total liabilities	42,814			40,975

Minority interest	228			222
Commitments and contingencies	—			—

Stockholders’ equity:
Common stock, par value $0.001:
Authorized shares: 200,000
Issued shares: 35,659 and 35,442 at March 31, 2004 and December 31, 2003, respectively; outstanding shares: 34,159 and 33,942 at March 31, 2004 and December 31, 2003, respectively	36			35
Additional paid-in capital	421,552			420,172
Deferred compensation and other costs	(5,311		)	(7,587		)
Accumulated other comprehensive income	697			1,538
Treasury stock	(20,631		)	(20,631		)
Accumulated deficit	(125,963		)	(119,473		)

Total stockholders’ equity	270,380			274,054

Total liabilities and stockholders’ equity	$	313,422		$	315,251

See accompanying notes to the condensed consolidated financial statements.

NETRATINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share data)

	Three Months Ended March 31,
	2004			2003

Revenue	$	13,266		$	9,021
Cost of revenue	5,904			4,208

Gross profit	7,362			4,813
Operating expenses:
Research and development	3,108			2,123
Sales and marketing	5,235			3,721
General and administrative	3,363			2,226
Restructuring and other expenses (credits)	(525		)	—
Amortization of intangibles	1,154			989
Amortization of stock-based compensation	2,276			2,277

Total operating expenses	14,611			11,336

Loss from operations	(7,249		)	(6,523		)

Equity in earnings (losses) of joint ventures	20			(50		)
Interest income, net	781			1,340
Minority interest in net (profit) loss of consolidated subsidiaries	(42		)	48

Net loss	$	(6,490	)	$	(5,185	)

Basic and diluted net loss per common share	$	(0.19	)	$	(0.15	)

Shares used to compute basic and diluted net loss per common share	34,058			33,643

See accompanying notes to the condensed consolidated financial statements.

NETRATINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

	Three Months Ended March 31,
	2004			2003
OPERATING ACTIVITIES
Net cash used in operating activities	$	(2,178	)	$	(4,531	)

INVESTING ACTIVITIES
Acquisition of property and equipment	(1,381		)	(307		)
Purchase of short term investments	(64,088		)	(77,736		)
Sale of short term investments	83,408			86,664
Acquisitions, net of cash acquired and investments in joint ventures	(10,782		)	(365		)

Net cash provided by investing activities	7,157			8,256

FINANCING ACTIVITIES
Proceeds from stock issuances	1,380			218

Effect of exchange rate fluctuations	418			674

Net increase in cash and cash equivalents	6,777			4,617
Cash and cash equivalents at beginning of period	103,221			84,569

Cash and cash equivalents at end of period	$	109,998		$	89,186

See accompanying notes to the condensed consolidated financial statements.

NETRATINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of NetRatings, Inc. (NetRatings or the Company) have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, 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 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, 2003.

The financial information included herein reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the results for the interim period. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

2. COMPREHENSIVE LOSS

The components of comprehensive loss are as follows (in thousands):

	Three Months Ended March 31,
	2004			2003
Net loss	$	(6,490	)	$	(5,185	)
Accumulated translation adjustment	(991		)	703
Unrealized gain (loss) on short-term investments	150			(282		)

Comprehensive loss	$	(7,331	)	$	(4,764	)

3. STOCKHOLDERS’ EQUITY

The calculation of basic and diluted net loss per share is as follows (in thousands, except per share data):

	Three Months Ended March 31,
	2004			2003
Net loss	$	(6,490	)	$	(5,185	)

Weighted-average shares of common stock outstanding used in computing basic and diluted net loss per share	34,058			33,643

Basic and diluted net loss per common share	$	(0.19	)	$	(0.15	)

As allowed by SFAS 123, the Company follows the disclosure requirements only of SFAS 148, but continues to account for its employee stock option plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” which results in no charge to earnings when options are issued at fair market value. Pro forma information presented below regarding net loss required under SFAS 148 has been determined as if the Company had accounted for its stock options under the fair value method of SFAS 148. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s GAAP and pro forma information follows (in thousands, except per share data):

	Three Months Ended March 31,
	2004			2003

Net loss	$	(6,490	)	$	(5,185	)
Plus: Stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects	(1,163		)	(1,576		)

Pro forma net loss	$	(7,653	)	$	(6,761	)

Basic and diluted net loss per share	$	(0.19	)	$	(0.15	)

Pro forma basic and diluted net loss per share	$	(0.22	)	$	(0.20	)

4. GOODWILL AND INTANGIBLE ASSETS

During the first quarter of 2004, NetRatings acquired additional shares of Red Sheriff Ltd. and made adjustments to its purchase accounting related to Red Sheriff, resulting in additional goodwill of $11.0 million. The valuation for Red Sheriff is preliminary, and therefore goodwill and intangible assets recorded in relation to this acquisition are estimates as of March 31, 2004.

Goodwill and other intangible assets, along with their weighted average lives as of March 31, 2004, consisted of the following (in thousands, except average life):

	Gross carrying amount		Accumulated amortization		Net		Weighted average life

Intangible assets continuing to be amortized:
Core technologies	$	6,040	$	1,342	$	4,698	7
Customer contracts	3,690		2,550		1,140		2
Patents and other	15,682		3,585		12,097		11

Total other intangible assets	$	25,412	$	7,477	$	17,935

Goodwill					$	77,627

Based on the current amount of intangibles subject to amortization, the estimated amortization expense for each of the succeeding five years is as follows: 2004: $3.8 million; 2005: $2.8 million; 2006 $1.9 million; 2007: $1.9 million; and 2008 $1.9 million. As of October 1, 2003, the Company performed its annual evaluation of goodwill and other intangibles and no impairment was indicated. The Company will reassess the carrying value of its goodwill and intangible assets each year as of October 1, unless indicators of impairment become apparent earlier.

5. RESTRUCTURING EXPENSES

Restructuring expenses have been established in connection with (i) a restructuring plan approved by management and initiated in the first quarter of 2002 and (ii) acquisitions in 2002 and 2003. Each of the restructuring plans involved (i) the termination of employees, all of whom have been terminated as of March 31, 2004; (ii) lease termination costs and other costs associated with vacating certain facilities and abandoning certain long-lived assets; and (iii) amounts accrued related to payments for certain products and/or projects which were eliminated as a result of the restructurings. During the first quarter of 2004, the Company negotiated a new lease for its offices in Milpitas, California which included a release from its obligations for the abandoned portion of the facility. This resulted in a reversal of restructuring expense of $0.5 million, which is included in restructuring and other expenses (credits) in the accompanying statement of operations.

The following table summarizes activity associated with the restructuring plans during the first quarter of 2004:

	Accrual as of December 31, 2003		Paid Q1 2004			Adjustments in Q1 2004			Accrual as of March 31, 2004

Employee severance benefits	$	144	$	(104	)	$	—		$	40

Costs incurred due to discontinuation of certain services and other expenses	63		(40		)	—			23

Lease commitments and related write-down of property and equipment	3,184		(191		)	(525		)	2,468

Totals	$	3,391	$	(335	)	$	(525	)	$	2,531

The long term portion of restructuring liabilities relates to idle facility lease commitments.

6. ACQUISITIONS

During the first quarter of 2004, NetRatings increased its equity ownership in Red Sheriff from 58% to 99.9% resulting in additional cash payments of $10.8 million. Red Sheriff had negative equity when we acquired Red Sheriff in December 2003 and, therefore, NetRatings has consolidated 100% of Red Sheriff’s results of operations from the date of acquisition.

7. INDUSTRY SEGMENT AND FOREIGN OPERATIONS

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

The following table sets forth operating results for the three months ended March 31:

			2004
	US		EMEA		APLA		Total
			(in thousands) (unaudited)
Revenue	$6,265		$4,661		$2,340		$13,266
Net loss	(3,692	)	(2,537	)	(261	)	(6,490	)
Property and equipment	2,431		1,109		1,045		4,585

			2003
	US		EMEA		APLA		Total
			(in thousands) (unaudited)
Revenue	$6,121		$2,736		$164		$9,021
Net loss	(4,425	)	(622	)	(138	)	(5,185	)
Property and equipment	2,428		421		—		2,849

8. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2003, the Staff of the SEC issued Staff Accounting Bulletin No. 104, “Revenue Recognition,” (“SAB 104”) which superseded SAB 101, “Revenue Recognition in Financial Statements.” SAB 104’s primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-

21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Additionally, SAB 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (the FAQ) issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not materially affect our revenue recognition policies, or our results of operations, financial position or cash flows.

9. CONTINGENCIES

The Company is involved in certain legal proceedings. Management currently believes that the resolution of these matters will not have a material adverse impact on NetRatings’ results of operations or financial position. See Legal Proceedings in Part II, Item 1 of this Report.

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

Forward Looking Statements

Some of the statements contained in this Form 10-Q (this “Report”) are forward-looking statements, including but not limited to those specifically identified as such, that involve risks and uncertainties. The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this Report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. These statements are based on current expectations and assumptions and involve known and unknown risks, uncertainties and other factors, which may cause our actual results to differ materially from those implied by the forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Important factors that may cause actual results to differ from expectations include those discussed elsewhere in this Report on Form 10-Q under the heading “Risk Factors That May Affect Our Performance.”

Overview

We are a leading provider of Internet audience measurement and analysis in the United States and around the world. All of our products and services are designed to assist companies in making critical business decisions regarding their Internet strategies and initiatives. We have a highly diversified and global client base, including large and small companies in the media, technology, advertising, financial services, consumer products, retail and travel industries. As of March 31, 2004, we had approximately 1,166 clients.

Prior to 2002, we were solely focused on selling our NetView product. Beginning in the first half of 2002, we began to focus on ways to expand our portfolio of products and services in the United States and abroad. At that time, we believed that with the (i) increase in advertiser support for the Internet, (ii) continued proliferation of Internet broadband connections and (iii) expanding impact of online commerce, companies would require a wide variety of media and market research data. In order to provide the most comprehensive product portfolio to address the marketplace needs, we focused on investing in new products and exploring strategic acquisitions in the United States and abroad.

During 2002 and 2003, as a result of internal product development, we introduced a number of significant new products and services that address specific marketplace needs. These new products and services include MegaPanel, WebIntercept, Homescan Online and SiteCensus. These products and services greatly expand our market research capabilities, and these products and services will be important to our performance in 2004 and beyond. In addition to the internal product development, we also began in early 2002 to focus on strategic acquisitions to enhance our product portfolio and to accelerate our growth in international markets. These acquisitions included the following:

• On April 9, 2002, we acquired substantially all the assets of the AdRelevance online advertising expenditure measurement division of Jupiter Media Metrix Inc. for $8.3 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.

• On May 6, 2002, we acquired substantially all the assets related to DoubleClick’s @Plan unit for $18.1 million in cash and stock. The assets acquired include the @Plan suite of services and related trademarks and copyrights, associated contracts, accounts receivable balances, and related deferred revenue balances.

• On May 7, 2002, we acquired, from ACNielsen Corporation, the remaining 80.1% interest in ACNielsen eRatings.com that we did not already own for $9.1 million in stock.

• Separately on May 7, 2002, we acquired selected assets from Jupiter Media Metrix related to their European Internet audience measurement services for $2 million in cash, allowing us to further expand our global customer base. We also entered into a settlement agreement with Jupiter Media Metrix under which Jupiter Media Metrix agreed to dismiss with prejudice the patent infringement action it filed against us in March 2001. As part of the settlement agreement, we paid Jupiter Media Metrix $15 million in cash and acquired from Jupiter Media Metrix its patents for computer use tracking (United States Patent Nos. 6,115,680 and 5,675,510), related patent applications and all patents issuing from such applications, and related materials.

• In August 2002, we acquired a 52% interest in NetValue S.A., an international provider of Internet audience services, through direct stock purchases from certain NetValue shareholders. In October 2002, we acquired additional shares of NetValue in a simplified all-cash take-over bid. In the fourth quarter of 2003, NetRatings acquired the remaining assets of NetValue and the company was legally dissolved. The total amount paid for NetValue was approximately $18.1 million in cash and stock.

• In January 2003, we acquired beneficial ownership of approximately 80% of MMXI Switzerland, a Swiss Internet media and market research company. In April 2003, we acquired beneficial ownership of the remaining 20% of MMXI Switzerland. The total cash paid for MMXI Switzerland was approximately $1.0 million.

• In July 2003, we acquired the assets and customer contracts of NetCrawling S.A., the developer and marketer of LemonAd, Europe’s leading online advertising monitoring service. The total cash paid for NetCrawling S.A. was approximately $0.8 million.

• In December 2003, we acquired a 58% ownership interest in Red Sheriff Ltd., a global leader in site-centric-based Internet audience measurement for approximately $13.5 million in cash. Subsequently, we purchased additional shares of Red Sheriff and, as of March 31, 2004, we owned approximately 99% of the shares of Red Sheriff. The total cash paid for the additional shares was approximately $10.8 million.

As a result of our internal efforts and our strategic acquisitions, we believe that we currently offer the most comprehensive global portfolio of media research and market research products and services. We also believe that our comprehensive portfolio and breadth of coverage will enable us to continue to increase our client base, as well as increase our renewal rates, increase our ability to sell multiple products to clients and increase the total sales to individual clients.

We currently offer our products and services in the United States and in many countries throughout Europe, Asia Pacific and Latin America. In France, Japan and Latin America, we have historically offered our NetView service through joint ventures with leading local market research and information services companies. In April 2003, we increased our ownership interest in NetRatings Japan, our Japanese joint venture, from approximately 49% to approximately 58%. The total amount paid for the additional equity in NetRatings Japan was approximately $1.1 million. The remaining ownership interest is held by TransCosmos and other investors. In November 2003, we increased our ownership interest in Mediametrie NetRatings, our French joint venture, from approximately 50% to approximately 66% in exchange for the fair value of customer contracts assigned to Mediametrie NetRatings in 2003 and 2002. The remaining ownership interest is held by Mediametrie. We used the equity method to account for these joint ventures until we obtained majority ownership of them in 2003, after which time we began to consolidate the financial results of both Mediametrie NetRatings and NetRatings Japan. As of December 31, 2003, we held a 49% ownership interest in Ibope eRatings.com, our Latin American joint venture, and the remaining ownership interest was held by Ibope. NetRatings uses the equity method to account for its investment in Ibope eRatings.com. In each of these locations, revenue is allocated between NetRatings and the subsidiary or joint venture company depending on the location of the customer and the location of the panel whose data is used in the service.

We generate revenues primarily from the sale of our Internet media research and market research products and services. Our products and services include both syndicated products and customized products. We sell a significant majority of our syndicated products and services on an annual subscription basis and bill these clients in advance, typically on an annual or quarterly basis. We recognize revenue from the sale of our syndicated products and services ratably over the term of the subscription agreement. Prepaid subscription fees are recorded as deferred revenue until earned. Revenue from customized products and services is recognized in the period in which the product or service is provided. Therefore, a significant portion of revenue recognized in any period results from

the amortization of deferred revenue balances. We also derive a portion of our revenue from royalty payments from our joint venture partners, including our joint venture in Italy through which we offer our SiteCensus service in Italy.

We have a limited operating history upon which investors may evaluate our business prospects. We have incurred net losses since our inception, and as of March 31, 2004, our accumulated deficit was $126 million. We expect to continue to invest in enhancing our products and service offerings, including investment in our MegaPanel service. As a result, we expect to continue to incur net losses for the foreseeable future.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, our management evaluates its estimates and judgments, including those related to bad debts, investments, income taxes, financing operations, contingencies and litigation. Our management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the result of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its financial statements:

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition. SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (4) is based on management’s judgment regarding the collectibility of those fees. We sell a significant majority of our products and services pursuant to one-year subscription agreements and bill our customers in advance, typically on a quarterly or annual basis. We recognize revenue from the sale of these subscription products and services ratably over the term of the subscription agreement. Prepaid subscription fees are recorded as deferred revenue until earned. If a contract’s collectibility comes into question, revenue recognition is discontinued until collectibility is reasonably assured. This determination is based on management’s judgment and could adversely affect both revenue and deferred revenue.

Bad Debt

We manage credit risk on accounts receivable by performing ongoing credit evaluations of our customers, reviewing our accounts and contracts and by providing appropriate allowances for uncollectible amounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of customers to make contractually required payments. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Allowances are based on management’s judgment which considers historical experience and specific knowledge of accounts that may not be collectible.

Legal Contingencies

We are currently involved in certain legal proceedings. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses, in accordance with FAS 5. A determination of the amount of reserves required, if any, for these contingencies are made after careful analysis of each individual case. Losses are recognized for legal contingencies when they are determined to be both probable of occurrence and the loss can be reasonably estimated. We do not believe the outcomes to these matters will have a material adverse effect on our financial position. Nonetheless, it is possible that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions or the effectiveness of our strategy related to these proceedings.

Goodwill and Intangible Assets

We recorded goodwill and intangible assets during 2004, 2003 and 2002 in connection with our acquisitions. Valuation of those assets was determined through the use of independent appraisals (excluding the Red Sheriff acquisition). Those intangible assets

not deemed to have an indefinite life are amortized over their estimated useful lives, which range from 1 to 13 years. In accordance with SFAS No. 142, goodwill and indefinite-lived intangibles are not amortized, but are reviewed at least annually for impairment. We performed our annual evaluation of goodwill and intangibles as of October 1, 2003 and no impairment was indicated. We will reassess the carrying value of goodwill and intangible assets each year as of October 1, unless indicators of impairment become apparent earlier.

Investments

We hold minority interests in companies having operations or technology in areas within or adjacent to our strategic focus. These entities are non-publicly traded companies whose value is difficult to determine. For those investments accounted for based on the cost method, we record an investment impairment charge when we believe an investment has experienced a decline in value that is other than temporary. We have written off all cost method investments. For those investments accounted for based on the equity method, we reduce or increase our investment in accordance with our equity in each joint venture’s loss or income, respectively, and record a corresponding loss or income on joint ventures in our statement of operations. The equity basis is adjusted for any additional capital contributions or commitments. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments and such amounts that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

Results of Operations

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

	Three months ended March 31,
	2004		2003

Revenue	100	%	100	%
Cost of revenue	45	%	47	%
Gross profit	55	%	53	%
Operating expenses:
Research and development	23	%	24	%
Sales and marketing	39	%	41	%
General and administrative	25	%	25	%
Restructuring and other expenses (credits)	(4	)%	—
Amortization of intangibles	9	%	10	%
Stock-based compensation	17	%	25	%
Total operating expenses	109	%	125	%
Loss from operations	(54	)%	(72	)%
Equity in earnings (losses) of joint ventures	0	%	(1	)%
Interest income, net	6	%	15	%
Minority interest in net loss of consolidated subsidiaries	0	%	1	%
Net loss	(48	)%	(57	)%

Revenue. We generate revenue primarily from the sale of our Internet audience measurement products and services. We typically sell our syndicated services pursuant to one-year subscription agreements and bill our customers in advance, usually on an annual or quarterly basis. We also derive a portion of our revenue from our customized products and services and from joint venture partners.

Revenue increased 47% to $13.3 million for the three month period ended March 31, 2004, compared to $9.0 million for the corresponding period in 2003. The increase in revenue was primarily due to (i) the acquisitions in 2003 for which we have recorded revenue from their acquisition dates; (ii) the impact of foreign exchange rates relating to our international revenues; (iii) improved renewal rates and increased contract renewal amounts; and (iv) an increase in the number of clients subscribing to our products and services since the first quarter of 2003.

As of March 31, 2004, 1,166 customers worldwide subscribed to our products and services. Our global contract renewal rate was 76% for the first quarter of 2004 (excluding Red Sheriff customers), compared with a 72% renewal rate for the first quarter of 2003. Our global average sales price was $46,000 for the first quarter of 2004, compared with $63,000 for the first quarter of 2003. The average sales price decreased due to the acquisition of Red Sheriff’s customer contracts, which typically have a lower average selling price. During the three month period ended March 31, 2004, no customer accounted for more than 10% of our revenue.

Cost of Revenue. Cost of revenue consists primarily of expenses related to the recruitment, maintenance and support of our Internet audience measurement panels, which are expensed as they are incurred. Cost of revenue also includes data collection costs for our products and services and operational costs related to our data centers. 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 as the data is provided over the term of the customer’s subscription agreement, as well as the royalty fees associated with certain data partnering agreements.

Cost of revenue increased 40% to $5.9 million, or 45% of revenue, for the three month period ended March 31, 2004 from $4.2 million, or 47% of revenue, for the three month period ended March 31, 2003. The increase in cost of revenue was due to (i) the acquisitions in 2003 for which we have incurred cost of revenue expense from their acquisition dates and (ii) the impact of foreign exchange rates relating to our international operations.

Research and Development. 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.

Research and development expenses increased 46% to $3.1 million, or 23% of revenue, for the three month period ended March 31, 2004 from $2.1 million, or 24% of revenue, for the comparable period in 2003. The increase in research and development expenses was primarily due to (i) increased research and development personnel and associated payroll expenses resulting from our acquisitions in 2003; (ii) additional engineering and research and development personnel to our Megapanel and WebIntercept products; and (iii) the impact of foreign exchange rates relating to our international operations.

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

Sales and marketing expenses increased 41% to $5.2 million, or 39% of revenue, for the three month period ended March 31, 2004 from $3.7 million, or 41% of revenue, for the comparable period in 2003. The increase in sales and marketing expenses was primarily related to (i) an increase in salary-related and travel expenses as a result of additional employees from our 2003 acquisitions; (ii) the impact of foreign exchange rates relating to our international operations; and (iii) an increase in bonus and commission expenses due to higher contract sales in the first quarter of 2004 compared to the corresponding period in 2003.

General and Administrative. 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.

General and administrative expenses increased 51% to $3.4 million, or 25% of revenue, for the three month period ended March 31, 2004 from $2.2 million, or 25% of revenue, for the comparable period in 2003. The increase in general and administrative expenses was primarily due to (i) higher payroll, travel and related expenses resulting from the acquisitions completed during 2003; (ii) the impact of foreign exchange rates relating to our international operations; and (iii) higher legal expenses resulting from legal actions initiated in 2003.

Restructuring and Other Expenses (Credits). During the first quarter of 2004, the Company negotiated a new lease for its offices in Milpitas, California which included a release from its obligations for the abandoned portion of the facility. This resulted in a reversal of restructuring expense of $0.5 million, which is included in restructuring and other expenses (credits) in the accompanying statement of operations.

Amortization of Intangibles. Amortization of intangible expenses increased 17% to $1.2 million, or 9% of revenue, for the three month period ended March 31, 2004 from $1.0 million, or 10% of revenue, for the comparable period in 2003. The increase was primarily due to the amortization of specifically identified intangibles associated with the acquisition of Red Sheriff Ltd. in the fourth quarter of 2003.

Amortization of Stock-based Compensation. Stock-based compensation represents amortization of deferred service costs related to stock warrants which Nielsen Media Research exercised in December 1999. Amortization of stock-based compensation expenses were $2.3 million, or 17% and 25% of revenue, for the three month periods ended March 31, 2004 and 2003, respectively. The decrease as a percentage of revenue was due to the scheduled amortization of our stock-based compensation costs.

Equity in Earnings (Losses) of Joint Ventures. For the three month period ended March 31, 2004, equity in earnings from joint ventures was $20,000, or 0.2% of revenue. Equity in losses from joint ventures was $50,000, or 0.6% of revenue, for the

corresponding period in 2003. The variance was primarily due to our increased ownership in Mediametrie and NetRatings Japan in 2003, which resulted in their gains and losses being reported in our consolidated results rather than in equity in earnings (losses) of joint ventures. Additionally, through the acquisition of Red Sheriff in December of 2003, the Company obtained a joint venture interest in an Italian company that provided $33,000 of income in this quarter. As a result of the losses incurred by Ibope, the Company’s balance in its investment in Ibope is zero at March 31, 2004.

Interest Income, Net. Interest income, net, decreased 42% to $0.8 million for the three month period ended March 31, 2004 from $1.3 million for the comparable period in 2003. The decrease in interest income was due to an overall reduction in cash and cash equivalents as compared with the beginning of 2003 as a result of acquisitions and funding of the operations of the Company during 2003. The decrease also reflects a reduction of interest rates in the first quarter of 2004 when compared to the corresponding period in 2003. We anticipate interest income to remain at its current level or lower as the current market conditions prevail and we use cash to fund our operations and strategic investments.

Minority Interest. During the three months ended March 31, 2004, we held majority interests in Red Sheriff, NetRatings Japan and Mediametrie. Red Sheriff had a negative equity balance on the date the Company acquired majority control of Red Sheriff and, therefore, the Company recognized 100% of the loss of Red Sheriff in the first quarter of 2004. As a result of the losses incurred by NetRatings Japan since May 2002, the Company’s minority interest in NetRatings Japan was zero at December 31, 2003. Therefore, the Company recognized 100% of the loss of NetRatings Japan in the first quarter of 2004. Minority interest in the first quarter of 2004 represents the minority share of the first quarter profit in Mediametrie. Minority interest for the corresponding period in 2003 was $48,000, representing the minority interest in the net losses of NetValue and Switzerland.

Operating Loss and Net Loss. Operating loss increased 11% to $7.2 million, or 54% of revenue, for the three months ended March 31, 2004 from $6.5 million, or 72% of revenue, for the three months ended March 31, 2003. For the three months ended March 31, 2004, our net loss increased to $6.5 million, or $0.19 per share, on approximately 34.1 million weighted average shares outstanding, as compared with a net loss of $5.2 million, or $0.15 per share, on approximately 33.6 million weighted average shares outstanding, for the three months ended March 31, 2003. The increase in operating and net loss was primarily due to (i) increased cost of revenue and operating expenses primarily due to our acquisitions in 2003; (ii) higher amortization of intangibles; and (iii) lower interest income. These were offset by: (i) an increase in overall revenues and (ii) a reversal of restructuring expenses.

Inflation

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

Liquidity and Capital Resources

As of March 31, 2004, the Company’s cash and cash equivalents and short-term investments totaled $197.6 million. Cash used in operating activities was $2.2 million for the three month period ended March 31, 2004, due to our net loss of $6.5 million and cash used in working capital changes of $0.1 million, which was partially offset by non-cash charges of $4.2 million. The non-cash expenses include $2.3 million for amortization of stock-based compensation, $1.2 million for amortization of intangible assets and $0.7 million for depreciation. Cash used in operating activities totaled $4.5 million for the three month period ended March 31, 2003, due to our net loss of $5.2 million and cash used in working capital changes of $3.1 million, which was partially offset by non-cash charges of $3.8 million. The non-cash expenses included $2.3 million for amortization of stock-based compensation, $1.0 million for amortization of intangible assets and $0.5 million for depreciation. We will continue to use cash to fund our operations.

Net cash provided by investing activities for the three month period ended March 31, 2004 was $7.1 million. This amount reflects net sales of our short-term investments of $19.3 million, which was partially offset by the acquisition of property and equipment of $1.4 million and cash paid for acquisitions of $10.8 million. During the corresponding period in 2003, net cash provided by investing activities was $8.2 million. Net sales of marketable securities and other investments during the period, net of proceeds and maturities, were $8.9 million, which was partially offset by cash paid for acquisitions, net of cash acquired, of $0.4 million and by acquisition of fixed assets of $0.3 million. We had no material capital expenditure commitments at March 31, 2004 and anticipate that capital expenditure spending in 2004 will approximate the 2003 level of spending. We expect net cash provided by investing activities to be further reduced by use of our short-term investments to support operations and potential strategic investments.

Net cash provided by financing activities totaled $1.4 million for the three month period ended March 31, 2004, reflecting stock issued as a result of the exercise of options and our employee stock purchase plan. Net cash provided by financing activities was $0.2 million for the corresponding three month period ended March 31, 2003, reflecting stock issued as a result of the exercise of options and our employee stock purchase plan.

While we have historically made additional contributions to our joint ventures in order to maintain our ownership percentage,

we are not contractually required to make such contributions. In the event of a request for capital infusion, we have the option as to whether or not we participate in the round of funding. Should we elect not to participate, our equity position would be diluted in that joint venture.

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 we choose to seek additional financing, however, we cannot be certain that it will be available when required, on favorable terms, or at all. If additional funds were raised through the issuance of equity securities, the percentage ownership of our then-current stockholders would be reduced.

Off-Balance Sheet Arrangements

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

RISK FACTORS THAT MAY AFFECT OUR PERFORMANCE

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 (i) could materially adversely affect our business, operating results and financial condition, (ii) could cause the trading price of our common stock to decline and (iii) could cause you to lose all or part of your investment.

WE HAVE INCURRED LOSSES SINCE OUR INCEPTION AND WE MAY BE UNABLE TO ACHIEVE PROFITABILITY

We have experienced operating losses in each quarter since our inception. We incurred net losses of $38.9 million for the year ended December 31, 2002, $25.1 million for the year ended December 31, 2003 and $6.5 million for the quarter ended March 31, 2004. As of March 31, 2004, our accumulated deficit was $126 million. We intend to continue to make significant expenditures as our company grows and as we expand our portfolio of products and services. 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 HAVE A LIMITED OPERATING HISTORY IN THE EVOLVING MARKET FOR INTERNET AUDIENCE MEASUREMENT

We were incorporated in July 1997 and did not start generating revenue until the quarter ended September 30, 1998. We introduced our NetView service in the quarter ended September 30, 1999. Many of our other products and services were first offered by us during 2002 and 2003. 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:

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

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

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

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

• the risks associated with operating a business in numerous international markets.

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

During 2003, we launched a number of new products and services that we believe will generate interest in the marketplace and result in increased revenues during 2004 and beyond. Our financial results during 2004 will depend in part on the success of these new product initiatives and our ability to generate meaningful revenues from them. If we fail in our efforts to market and sell these new products and services, our financial results will be negatively affected. Furthermore, we believe that our new products and services fill gaps in our product portfolio and that the introduction of new products will not result in decreased sales of our existing products. If we are mistaken in our view of the marketplace, and the introduction of these new products results in decreased sales of our existing portfolio, then our financial results will also be negatively affected.

OUR QUARTERLY REVENUES MAY FLUCTUATE SIGNIFICANTLY AND BECAUSE OUR EXPENSE LEVELS ARE BASED IN LARGE PART ON OUR ESTIMATES OF FUTURE REVENUES, AN UNEXPECTED SHORTFALL IN REVENUE WOULD SIGNIFICANTLY HARM OUR OPERATING RESULTS AND COULD LEAD TO REDUCED PRICES FOR OUR STOCK

Due to our limited operating history and the evolving nature of the markets 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 lead our stock price to fall sharply, particularly following quarters in which our operating results fail to meet expectations.

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

• the amount and timing of operating costs and capital expenditures related to the expansion of our business;

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

• the impact on our renewal rates caused by the failure of any of our current customers, our customers budgetary constraints or a perceived lack of need for our services;

• changes in demand for our products and services due to the announcement or introduction of new products and services or the cancellation of existing products and services by us or our competitors;

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

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

• technical difficulties or service interruptions that significantly harm our ability to deliver our products and services on schedule.

WE HAVE LIMITED ABILITY TO FORECAST THE RATE AT WHICH SUBSCRIPTIONS FOR OUR SERVICES MAY BE RENEWED, AND WE MAY NOT ACHIEVE SUFFICIENTLY-HIGH RENEWAL RATES TO BECOME PROFITABLE

We derive a large percentage 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 cannot assure you that we will be able to achieve or sustain high renewal rates, particularly during an economic downturn. Additionally, because many 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.

IF THE INTERNET ADVERTISING AND ELECTRONIC COMMERCE MARKETS DEVELOP MORE SLOWLY THAN WE EXPECT, OUR BUSINESS WILL SUFFER

Our future success will depend 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 fairly new and rapidly evolving, and it is not certain that the current trends will continue.

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. Because of the foregoing factors, among others, the market for Internet advertising and e-commerce may not continue to grow or grow at significant rates. If these markets fail to develop or develop more slowly than we expect, our business will suffer.

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

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

We believe that the principal competitive factors in our market are:

• the ability to provide high-quality, accurate and reliable data regarding Internet audience behavior and activity in a timely manner;

• the breadth and depth of the product and services offered and their flexibility and ease of use;

• the availability of data across various geographic areas;

• the ability to offer high-quality analytical services based on the Internet audience measurement information;

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

• the prices that are charged for the products and services, as well as the general economic conditions.

Some of our competitors may be able to:

• devote greater resources to marketing and promotional campaigns;

• adopt more aggressive pricing policies; or

• devote more resources to technology and systems development.

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

IF WE FAIL TO SUCCESSFULLY CLOSE AND INTEGRATE ACQUISITIONS, INCLUDING OUR RECENT ACQUISITION OF RED SHERIFF, OUR BUSINESS WILL SUFFER

We may continue to 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 may result in unforeseen operating difficulties and expenditures. Integration of an acquired company, including Red Sheriff which was based in Australia, may also consume significant management time and attention that would otherwise be available for the ongoing development of our business. Moreover, the anticipated benefits of any acquisition may not be realized. For example, we cannot be certain that we will be successful in meeting the goals and financial objectives that we have developed for the Red Sheriff business. 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 intangible assets, any of which could harm our business.

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

The data for our NetView service is collected from randomly-selected panels of Internet users. Our NetView 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. In addition, ACNielsen has granted us 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 us with the services of certain dedicated marketing and panel management personnel who are employed by

ACNielsen, as well as specific back office services. 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 business 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, CONTROLS A MAJORITY OF OUR OUTSTANDING STOCK AND ITS REPRESENTATIVES CONSTITUTE A MAJORITY OF OUR BOARD OF DIRECTORS

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.

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.

OUR BRAND IS DEPENDENT ON THE REPUTATIONS OF THIRD PARTIES OVER WHICH WE HAVE NO CONTROL

The strength of the Nielsen//NetRatings brand is also closely dependent on the reputations of Nielsen Media Research, ACNielsen and other business partners and the strength of their brands. Therefore, any negative publicity generated by Nielsen Media Research, ACNielsen or our other business partners, 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.

OUR COSTS TO DEVELOP AND MAINTAIN ACCURATE INTERNET AUDIENCE MEASUREMENT PANELS, INCLUDING PANELS FOR OUR MEGAPANEL SERVICE, ARE SIGNIFICANT AND MAY INCREASE

We believe that the quality, size and scope of our panels is critical to the success of our business. To date, the expense of recruiting and operating our audience measurement panels has made up a very significant portion of the cost of revenue reported on our financial statements and, therefore, any increase in this expense will likely result in a decrease in our gross margin. 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 necessarily 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. Recruiting panelists for our MegaPanel service in Europe and the United States has also required significant investment and there can be no assurance that we will be able to achieve or maintain panels of sufficient size to meet client demand. 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 INTERNATIONAL OPERATIONS POSE UNIQUE RISKS THAT MAY DIVERT OUR MANAGEMENT’S ATTENTION AND RESOURCES

As a result of our acquisitions in 2002 and 2003, we are now operating Internet audience measurement businesses in countries that we did not previously operate in or where 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 and electronic commerce in international markets. The international markets for audience measurement services have historically been localized and difficult to penetrate.

The success of our international operations will depend on our ability to:

• effectively select the appropriate countries to serve;

• recruit and maintain panels that are representative of a geographic area;

• control costs and effectively manage foreign operations;

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

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

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

• changes in regulatory requirements;

• deficiencies in the telecommunications infrastructure in some countries;

• reduced protection for intellectual property rights in some countries;

• more rigorous levels of privacy protection in some countries;

• potentially adverse tax consequences;

• economic and political instability; and

• fluctuations in currency exchange rates.

WE MAY NOT BE SUCCESSFUL IN THE DEVELOPMENT OR INTRODUCTION OF NEW PRODUCTS AND SERVICES TO KEEP UP WITH THE PROLIFERATION OF ALTERNATIVE INTERNET ACCESS DEVICES AND TECHNOLOGIES RELATED TO THE EXPECTED CONVERGENCE OF THE INTERNET AND TELEVISION

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 products and services may suffer.

WE MAY NOT BE ABLE TO RECRUIT OR RETAIN QUALIFIED PERSONNEL

Our future success depends in large part on our ability to attract, retain and motivate highly skilled employees in many locations around the world. 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. If we are unable to attract or retain key employees, our business would suffer.

THE AUDIENCE MEASUREMENT SERVICES OFFERED BY NIELSEN MEDIA RESEARCH OR ACNIELSEN MAY EVENTUALLY HAVE FEATURES THAT OVERLAP WITH FEATURES OF OUR INTERNET AUDIENCE MEASUREMENT SERVICES AS A RESULT OF CONVERGENCE OF TELEVISION AND THE INTERNET

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.

OUR BUSINESS MAY BE HARMED IF WE SUPPLY INACCURATE INFORMATION TO OUR CUSTOMERS

If we furnish inaccurate information to our customers, our brand may be harmed. The information that we collect and information in our databases may contain inaccuracies that our customers may not accept. Any dissatisfaction by our customers with our measurement or collection 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 and, in any event, enforcing these protections could be very costly. 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.

SYSTEM FAILURES OR DELAYS IN THE OPERATION OF OUR COMPUTER AND COMMUNICATIONS SYSTEMS MAY HARM OUR BUSINESS

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

We have recently moved the servers on which we collect our panel members’ data from our leased facilities in San Jose, California to Nielsen Media Research’s facilities in Oldsmar, Florida. We currently do not have a backup facility to provide redundant network capacity in the event of a system failure. Accordingly, our ability to collect Internet audience data in real time is dependent upon the efficient and uninterrupted operation of Nielsen Media Research’s computer and communications hardware and software systems. Despite any precautions we may take, damage from fire, floods, hurricanes, power loss, telecommunications failures, computer viruses, break-ins and similar events at Nielsen Media Research’s computer facility could result in interruptions in the flow of data to our servers. In addition, any failure by Nielsen Media Research’s computer to provide our required data communications capacity could result in interruptions in our service. In the event of a delay in the delivery of data from Nielsen Media Research, or if Nielsen Media Research 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.

We intend to develop back-up systems outside of Nielsen Media Research’s facilities in Oldsmar, Florida. 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.

PRIVACY CONCERNS COULD LEAD TO LEGISLATIVE, REGULATORY AND OTHER LIMITATIONS THAT COULD AFFECT OUR ABILITY TO COLLECT AND USE INFORMATION ABOUT INTERNET USERS, IMPAIR OUR ABILITY TO PROVIDE OUR PRODUCTS AND SERVICES TO CLIENTS AND EXPOSE US TO LIABILITY

Privacy concerns could lead to legislative, judicial and regulatory limitations on our ability to collect, maintain and use information about Internet users both in the United States and abroad. Restrictions could be placed upon the collection, management, aggregation and use of information, which could require significant reengineering time and resources. We could be prohibited from collecting or disseminating certain types of information, which could in turn materially adversely affect our ability to provide our products and services to our clients. Failure to comply with the law and regulatory requirements may result in, among other things, administrative enforcement actions and fines, class action lawsuits and civil and criminal liability. The occurrence of one or more of these events could materially harm our business, results of operation, and financial condition.

WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS

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, and we seek to obtain the issuances of patents for our core technology and the registration of our material trademarks and service marks in the United States and in selected other countries. We cannot assure you, however, that the steps we have taken will be sufficient to protect our intellectual property from infringement or misappropriation. Moreover, effective intellectual property protections may not be available in every country in which we offer our products and services to the extent these protections are available in the United States. 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.

WE MAY FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT WOULD BE COSTLY TO RESOLVE OR MAY REQUIRE US TO MAKE CHANGES TO OUR TECHNOLOGY OR BUSINESS

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 may in the future 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.

ANY MISAPPROPRIATION OF PERSONAL INFORMATION ABOUT OUR PANELISTS THAT IS STORED ON OUR COMPUTERS COULD HARM OUR REPUTATION OR EXPOSE US TO CLAIMS ARISING FROM DAMAGES SUFFERED BY THOSE PANELISTS

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 on an anonymous 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.

GOVERNMENTAL REGULATION OF THE INTERNET MIGHT HARM OUR BUSINESS

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. Therefore, 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. Finally, the global nature of the Internet could subject us to the laws of a foreign jurisdiction in an unpredictable manner.

LEGISLATIVE ACTIONS, HIGHER INSURANCE COSTS AND REGULATORY REQUIREMENTS APPLICABLE TO PUBLIC REGISTRANTS ARE LIKELY TO CAUSE OUR GENERAL AND ADMINISTRATIVE EXPENSES TO INCREASE AND IMPACT OUR FUTURE FINANCIAL POSITION AND RESULTS OF OPERATIONS

In order to comply with the newly adopted Sarbanes-Oxley Act of 2002, as well as changes to Nasdaq listing standards and rules adopted by the Securities and Exchange Commission, we may be required to increase our internal controls and hire additional personnel and additional outside legal, accounting and advisory services, all of which will cause our general and administrative costs to increase. Insurers may also increase premiums, and so our premiums for our various insurance policies, including our directors’ and officers’ insurance policies, may increase. 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. In addition, any such changes may impact the amount of stock options we grant to our employees, which may affect our ability to recruit or retain key employees.

WE ARE SUBJECT TO PENDING LEGAL PROCEEDINGS

We are currently subject to a securities class action 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. While the issuer defendants have been engaged in settlement negotiations with the plaintiffs, there is no assurance that a settlement will be reached with the plaintiffs. An adverse outcome could materially affect our results of operations and financial position.

A SALE BY VNU OF ITS STAKE IN NETRATINGS COULD ADVERSELY AFFECT OUR STOCK PRICE

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.

DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE OR PREVENT A POTENTIAL TAKEOVER OF OUR COMPANY THAT MIGHT OTHERWISE RESULT IN OUR STOCKHOLDERS RECEIVING A PREMIUM OVER THE MARKET PRICE OF THEIR SHARES

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

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

• the authorization in the certificate of incorporation of undesignated preferred stock, which could be issued without stockholder approval in a manner designed to prevent or discourage a takeover; and

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of March 31, 2004, we had cash and cash equivalents and short-term investments of $197.6 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 March 31, 2004, our investments had a weighted-average time to maturity of approximately 188 days.

Item 4. Controls and Procedures

Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange

Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

Internal Control Over Financial Reporting There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Securities Class Action Complaint

A class action lawsuit was filed on November 6, 2001 in the United States District Court for the Southern District of New 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 Company’s common stock from December 8, 1999 through December 6, 2000. The complaint names as defendants NetRatings; two of our former 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, including our case, 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. The motions were heard on November 1, 2002. In February 2003, the judge granted the motion to dismiss certain of the claims against NetRatings and the two individual defendants and denied the motion to dismiss certain other claims against NetRatings and the two individual defendants. We believe that the remaining claims against us and our former directors are without merit and intend to defend them vigorously. The issuer defendants and the plaintiffs have been engaged in settlement negotiations and it is possible that the issuer defendants and the plaintiffs will reach a settlement. However, there can be no assurance that a settlement will be reached in this matter. 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, cash flows and financial position.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit Number		Exhibit

31.1		Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certificate of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certificate of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

On February 26, 2004, we furnished a Report on Form 8-K pursuant to Items 7 and 12 of such form regarding our announcement of the Company’s financial results for the fourth quarter and year ended December 31, 2003. Subsequent to the end of the first quarter of 2004, on May 6, 2004, we furnished a report on Form 8-K pursuant to Items 7 and 12 of such form regarding our announcement of the Company’s financial results for the first quarter of 2004.

SIGNATURES

Pursuant to the requirements of 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.

Date: May 10, 2004
	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