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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

OR

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NUMBER 000-50562

MARKETWATCH, INC.

(Formerly MarketWatch.com, Inc.)

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

825 Battery Street, San Francisco, California 94111

(Address of Principal Executive Offices)

Registrant’s Telephone Number, Including Area Code: (415) 733-0500

Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    YES  x    NO  ¨

Indication by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act):    YES  ¨    NO  x

The number of shares of the registrant’s Common Stock outstanding as of August 2, 2004 was 25,137,098.

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MARKETWATCH, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2004

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Part I — FINANCIAL INFORMATION

ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MarketWatch, Inc.

Condensed Consolidated Balance Sheets

(in thousands)

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

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MarketWatch, Inc.

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per share data)

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

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MarketWatch, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

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

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MarketWatch, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 - Organization and Nature of Business

The Company

MarketWatch, Inc. (the “Company”), a leading multi-media publisher of business and financial news and provider of information and analytical tools, was formed on October 29, 1997 in the state of Delaware as a limited liability company and was jointly owned by Data Broadcasting Corporation (“DBC”), now known as Interactive Data Corporation (“IDC”), and CBS Broadcasting Inc. (“CBS”), with each member owning a 50% interest in the Company. In January 1999, the Company reorganized as a corporation and completed an initial public offering of 3,162,500 shares of common stock. After the initial public offering, CBS and IDC each owned approximately 38% of the Company. In January 2001, an affiliate of Pearson plc (“Pearson”) acquired IDC’s 34.1% stake in the Company. On January 16, 2004, the Company completed the acquisition of Pinnacor Inc. (“Pinnacor”), formerly known as ScreamingMedia, a provider of information services and analytical applications to financial services companies and global corporations. After the acquisition, CBS and Pearson each owned approximately 24% of the Company. On August 4, 2004, the Company changed its name from MarketWatch.com, Inc. to MarketWatch, Inc.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The results of operations for the three and six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004 or for any future period. The balance sheet at December 31, 2003 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. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. During the first six months ended June 30, 2004 the Company re-classified certain liabilities previously disclosed as short term liabilities and liabilities previously disclosed in accounts payable into other liabilities and accrued expenses, respectively. Prior periods have been adjusted to be comparable with the current period presentation.

Note 2 - Stock-Based Compensation

The Company accounts for its stock-based employee compensation agreements in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations, and has adopted the disclosure-only alternative of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an Amendment of FASB Statement No. 123.” In accounting for stock-based transactions with non-employees, the Company records compensation expense in accordance with SFAS No. 123 and Emerging Issues Task Force 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

The following table illustrates the effect on income (loss) and earnings per share if the Company had applied the fair-value recognition provisions of SFAS No. 123 to stock-based employee compensation. The estimated fair value of each Company option is calculated using the Black-Scholes option-pricing model.

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The Company calculated the fair value compensation expense associated with its stock-based employee compensation plans using the Black-Scholes model. The following weighted average assumptions were used related to option grants:

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes with respect to the subjective assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.

Because additional stock options are expected to be granted each year, the above pro forma disclosures are not representative of pro forma effects on reported financial results for future periods.

Note 3 - Net Income (Loss) Per Share

The Company computes net income (loss) per share in accordance with Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS No. 128”). Under the provisions of SFAS No. 128, basic net income (loss) per common share (“Basic EPS”) is computed by dividing net income (loss) by the weighted average number of common shares

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outstanding. Diluted net loss per common share (“Diluted EPS”) is computed by dividing net loss by the weighted average number of common shares then outstanding and diluted net income per share is computed by dividing net income by the weighted average number of common shares and dilutive common share equivalents.

Common equivalent shares of 2,037,440 and 2,250,653 were included in the computation of diluted net income per share for the three and six months ended June 30, 2004, respectively, and were related to shares issuable upon the exercise of stock options. Diluted loss per share for the three and six-month periods ended June 30, 2003 was based only on the weighted-average number of shares outstanding during the periods, and excluded common stock equivalents, as the inclusion of any common share equivalents would have been anti-dilutive.

Note 4 – Acquisitions

On January 16, 2004, the Company completed the acquisition of Pinnacor Inc. Under the terms of the agreement, a new company (“Holdco”) with two wholly-owned subsidiaries, Pine Merger Sub, Inc. (“Pine Merger Sub”) and Maple Merger Sub, Inc. (“Maple Merger Sub”), were formed to combine the businesses of the Company and Pinnacor. Each Company stockholder received one share of Holdco common stock for each share of the Company common stock held by such stockholder. Each Pinnacor stockholder received either $2.42 in cash or 0.2659 of a share of Holdco common stock for each share of Pinnacor common stock held by such stockholder, subject to proration. Upon closing of the acquisition, Maple Merger Sub merged with and into MarketWatch, which was the surviving corporation, and Pine Merger Sub merged with and into Pinnacor, which was the surviving corporation. MarketWatch and Pinnacor became a wholly-owned subsidiary of Holdco, which was renamed “MarketWatch.com, Inc.” MarketWatch, one of Holdco’s operating subsidiaries after the merger, was renamed “MarketWatch Media, Inc.” and Pinnacor, the other Holdco operating subsidiary after the merger, continued to be named “Pinnacor Inc.” Shortly after the acquisition, each of MarketWatch Media, Inc. and Pinnacor Inc. merged into MarketWatch.com, Inc. On August 4, 2004, the Company changed its name from MarketWatch.com, Inc. to MarketWatch, Inc.

The purchase price of $107.7 million was determined as follows (in thousands):

The fair value of the common stock was determined based on 6,141,435 shares of the Company common stock issued and priced using the average market price of the common stock over the five-day period surrounding the date the acquisition was announced in July 2003. The fair value of the Company’s stock options and warrants issued was determined using the Black-Scholes option-pricing model.

The preliminary allocation of the purchase price to the assets acquired and liabilities assumed based on their estimated fair values was as follows (in thousands):

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The assets will be amortized over a period of years shown on the following table:

A preliminary estimate of $65.4 million has been allocated to goodwill and adjustments made to goodwill at June 30, 2004 increased the balance to $65.6 million (See Note 5). Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired, and is not deductible for tax purposes. Goodwill will not be amortized and will be tested for impairment, at least annually. The purchase price allocation for Pinnacor is subject to revision as more detailed analysis is completed and additional information on the fair value of Pinnacor’s assets and liabilities becomes available. Any change in the fair value of the net assets of Pinnacor will change the amount of the purchase price allocable to goodwill.

The following attributes of the combination of the two businesses were considered significant factors to the establishment of the purchase price, resulting in the recognition of goodwill:

The following unaudited pro forma information presents a summary of the results of operations of the Company assuming the acquisition of Pinnacor occurred on January 1, 2004 and 2003, respectively (in thousands, except per share amounts):

Note 5 – Goodwill and Intangible Assets

Intangible Assets

Intangible assets consisted of the following (in thousands):

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The fair value underlying the $300,000 assigned to acquired in-process research and development (“IPR&D”) in the Pinnacor acquisition was expensed immediately during the quarter ended March 31, 2004 and was determined by identifying the research projects in areas which technological feasibility had not been established and there was no alternative future use. Intangibles for developed technology and acquired customer base are being amortized over a period of 4 to 7 years, respectively. The amortization expense related to identifiable intangible assets is expected to be $1.9 million for the year ending December 31, 2004 and $1.7 million, $1.7 million, $1.6 million and $578,000 for the years ending December 31, 2005, 2006, 2007 and 2008, respectively.

Goodwill

Goodwill consisted of the following (in thousands):

The increase in goodwill at June 30, 2004 was due to the acquisition of Pinnacor on January 16, 2004 (See Note 4). The goodwill adjustments were primarily related to the recognition of additional liabilities, offset by an increase in the value of a marketable security, both as a result of the Pinnacor acquisition.

Note 6 - Related Party Transactions

Under its license agreement with CBS, the Company expensed $561,000 and $797,000 for the three months ended June 30, 2004 and 2003, respectively, and $1.0 million and $1.2 million for the six months ended June 30, 2004 and 2003, respectively, related to the licensing of CBS news content and trademarks. In addition, the Company recorded advertising expenses of $0 and $11,000 at rate card value for the three months ended June 30, 2004 and 2003, respectively, and $0 and $56,000 for the six months ended June 30 2004 and 2003, respectively, for in-kind advertising and promotion provided by CBS. Rental payments to CBS for leasing of certain facilities were $381,000 and $320,000 for the three months ended June 30, 2004 and 2003, respectively, and $622,000 and $629,000 for the six months ended June 30, 2004 and 2003, respectively.

Licensing revenues from FT.com and Financial Times, subsidiaries of Pearson, were $484,000 and $367,000 for the three months ended June 30, 2004 and 2003, respectively, and $801,000 and $794,000 for the six months ended June 30, 2004 and 2003, respectively. The Company recognized costs to IDC of $173,000 and $158,000 for the three months ended June 30, 2004 and 2003, respectively, and $348,000 and $397,000 for the six months ended June 30, 2004 and 2003, respectively, for data feeds. In March 2003, IDC purchased Comstock, Inc. and the Company expensed $543,000 for the three months ended June 30, 2004 and $919,000 for the six months ended June 30, 2004 for data feeds from Comstock, Inc. Direct charges for subscription revenues for certain IDC data feeds were $6,000 and $10,000 for the three months ended June 30, 2004 and 2003, respectively, and $13,000 and $22,000 for the six months ended June 30, 2004 and 2003, respectively. In addition, the Company recognized revenues of $716,000 and $621,000 for the three months ended June 30, 2004 and 2003, respectively, and $1.3 million and $1.2 million for the six months ended June 30, 2004 and 2003, respectively, from television and radio programming on CBS stations. The Company recognized costs to CBS of $342,000 for the three months ended June 30, 2004 and 2003 and $683,000 and $586,000 for the six months ended June 30, 2004 and 2003, respectively, for production of television and radio programming.

At June 30, 2004 and December 31, 2003, $12,000 and $453,000, respectively, were included in accounts receivable for radio and television revenue due from CBS. In addition, $5,000 and $11,000, respectively, were included in the Company’s accounts receivable related to licensing and subscription revenues due from IDC, and $178,000 and $92,000, respectively, were included in the Company’s accounts receivable related to licensing revenues due from FT.com and Financial Times, subsidiaries of Pearson. At June 30, 2004 and December 31, 2003, the Company had a liability of $828,000 and $972,000, respectively, recorded for CBS royalty fees, a liability of $333,000 and $266,000, respectively, owed to CBS for television production and facilities costs, and a liability of $378,000 and $203,000, respectively, to IDC and Comstock, Inc. for data feeds.

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Note 7 – Segment Reporting

The Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for reporting information about operating segments in a company’s financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company operates in one segment.

Note 8 – Restatement

The Company has restated its consolidated statements of operations and cash flows for the three months ended March 31, 2004 and 2003, three and six months ended June 30, 2003 and three and nine months ended September 30, 2003 and its consolidated balance sheets as of March 31, 2004 and 2003, June 30, 2003 and September 30, 2003. The restatement reflects the adoption of a corrected method in which the Company calculates its quarterly CBS royalty expenses by recognizing royalty expenses based on the estimated effective annual royalty rate, which requires management to estimate the annual gross revenues subject to the CBS royalty fees and excluded revenues not subject to the CBS royalty fees, and apply the derived effective annual royalty rate to all revenues in each of the quarters within a fiscal year. Historically, the Company recognized CBS royalty expenses in the quarter in which it became obligated to pay such expenses based on the specified royalty rate applied to the relevant revenue of that quarter. The restatements have an effect on the Company’s cost of net revenues, gross profits, net income (loss) and earnings (loss) per share for the restated quarterly periods.

The restatement has no impact on the Company’s 2003 annual operating results, cash flow or royalty due to CBS as the restatement relates only to the timing of the accruals of the CBS royalty expenses among the quarters within the 2003 fiscal year.

The following table presents the impact of the restatement adjustments on net income (loss) for the three months ended March 31, 2004 and 2003:

The following table presents the impact of the restatement adjustments on net loss for the three and six months ended June 30, 2003:

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The following table presents the impact of the restatement adjustments on net income for the three and nine months ended September 30, 2003:

Note 9 – Litigation and Asserted Claims

In 2001, several plaintiffs filed class action lawsuits in federal court against the Company, certain of its current and former officers and directors and its underwriters in connection with its January 1999 initial public offering. The complaints generally assert claims under the Securities Act, the Exchange Act and rules promulgated by the Securities and Exchange Commission. The complaints seek class action certification, unspecified damages in an amount to be determined at trial, and costs associated with the litigation, including attorneys’ fees. The action against the Company is being coordinated with approximately three hundred other nearly identical actions filed against other companies. On June 25, 2003, a committee of the Company’s board of directors approved a Memorandum of Understanding (“MOU”) and related agreements that set forth the terms of a settlement between the Company, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. It is anticipated that any potential financial obligation of the Company to plaintiffs pursuant to the terms of the MOU and related agreements will be covered by existing insurance. Therefore, the Company does not expect that the settlement will involve any payment by the Company. The MOU and related agreements are subject to a number of contingencies, including the negotiation of a settlement agreement and its approval by the Court.

On July 24, 2003, a shareholder class action lawsuit was filed against Pinnacor, Pinnacor’s then-current directors, a then-current Pinnacor officer, and the Company in the Delaware Court of Chancery. The lawsuit alleged that Pinnacor’s directors breached their fiduciary duties in proceeding with the acquisition by agreeing to an inadequate proposed purchase price and alleged that the Company aided and abetted these breaches of fiduciary duty in some unspecified way. The parties reached a settlement and have executed a settlement agreement which is pending court approval. The settlement provides, among other things, that the action will be dismissed with prejudice and that all defendants will be released from liability, in recognition of certain additional disclosures contained in the proxy solicitation material distributed to Pinnacor stockholders. The settlement also provides for a payment to plaintiff’s counsel of $300,000 in attorneys’ fees and up to $15,000 in actual costs. The Company has accrued costs associated with this matter.

On June 7, 2002, an action was commenced against Pinnacor alleging a breach of contract claim against Pinnacor and, as amended, sought damages in the amount of $290,280. On February 7, 2003, Pinnacor filed counterclaims against the plaintiff for breach of contract, breach of warranty and misrepresentation. Motions for summary judgment were filed early 2003. These motions are still pending. No estimate can be made of the possible loss or possible range of loss associated with the resolution of this matter. As a result, no losses have been accrued in the Company’s financial statements as of June 30, 2004.

On September 8, 2003, an action was commenced in the Supreme Court of the State of New York against Pinnacor and several unnamed defendants. The lawsuit alleged a breach of contract claim and a fraudulent conveyance claim. In April 2004, the Company served upon the parties its cross motion for summary judgment seeking dismissal of the complaint with prejudice. In May 2004, the Company was served with plaintiff’s cross motion seeking dismissal of the action in its entirety, without prejudice, or alternatively, additional time to respond to defendants’ summary judgment motions. The parties have reached a settlement of the action. The settlement is subject to execution of a final settlement agreement. The settlement provides, among other things, that the action will be dismissed with prejudice, all defendants will be released from liability and the Company has no financial obligation to the plaintiff.

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In addition, the Company from time to time is subject to legal proceedings and claims in the ordinary course of business. The Company is not currently aware of any other legal proceedings or claims that will have a material adverse effect on its financial position or results of operations.

Note 10 – Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities”, which was amended by FIN 46R issued in December 2003. This interpretation of Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements” establishes accounting guidance for consolidation of a variable interest entity (“VIE”), formerly referred to as special purpose entities. FIN 46 provides guidance for determining when an entity should consolidate a VIE. The Company has never formed a VIE, and, therefore, FIN 46 is not applicable.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains 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 future strategies that are signified by the words “expects”, “anticipates”, “intends”, “believes”, or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, prospective investors should carefully consider the information set forth below under the caption “Factors That May Affect Our Operating Results” in addition to the other information set forth herein. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

Overview

Since our formation, we have operated as a multi-media provider of financial news and information, with services including news articles, feature columns, financial programming and analytic tools, such as stock quotes and charting. On August 4, 2004, we changed our name from MarketWatch.com, Inc. to MarketWatch, Inc.

We generate our net revenues from three primary sources: the sale of advertising on our Web sites, broadcast properties and membership center; the license of our content; and our newsletter and other subscription products. We operate in one segment.

Online advertising revenues, which account for a significant portion of our total revenues, are derived from the sale of advertisements and sponsorships on our Web sites. We believe advertising on our Web properties will continue to be a significant revenue opportunity. We believe our Web sites attract the type of users desirable to advertisers and our products offer advertisers a strong, consistent brand with the opportunity to target their campaigns on the site of their choice or run a campaign across all our Web sites. In the second half of calendar 2003 and the first six months of 2004, with the improvement in the U.S. economy and the movement of some traditional advertisers onto the Internet, our advertising sales have improved. A recent study by eMarketer, an aggregator of market research, indicates that online advertising spending in the United States is estimated to grow 13% in 2004. We believe we are positioned to take advantage of the increased interest of advertisers in the Web. However, advertising spending is particularly sensitive to economic and market conditions, as evidenced by the softening in our advertising revenues during the uncertain times in the U.S. economy the last several years. In addition, there continues to be a level of uncertainty by advertisers as to whether the Internet is a viable advertising vehicle for branding. As a result, we may not be able to grow or sustain our advertising sales, which would impact our ability to be cash flow positive and generate net income.

Licensing revenues, which account for a significant portion of our total revenues, consist of revenues earned from the licensing of our content and tools. In January 2004, we acquired Pinnacor, Inc, an outsource provider of information and analytical applications to financial services companies and global corporations. With the acquisition of Pinnacor, we believe we have positioned ourselves to be a leading provider of online business news and financial applications and a more effective competitor in a rapidly changing and competitive environment. We also expect the addition of Pinnacor’s technological expertise and staff will improve our ability to develop and bring new products and services to market. However, we also face the challenges of integrating Pinnacor successfully and correcting the disruption to sales momentum caused by the uncertainties created by the six-month delay between signing of the acquisition agreement and closing of the transaction. In addition, we have incurred declines in licensing sales in recent years as a substantial portion of our licensing revenue is

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derived from financial services companies, which have been adversely affected by economic downturns. We could continue to experience a decline in licensing revenues if we fail to integrate Pinnacor successfully or do not diversify our client base, both of which would adversely impact our ability to be cash flow positive and generate net income.

Subscription revenue is derived from customer subscriptions to our newsletters and third-party online services. Our subscriptions services were launched in April 2002 with the acquisition of the Hulbert Digest. Our subscription products also include the Retirement Weekly, The Technical Indicator and Herb Greenberg’s RealityCheck newsletters and Hulbert Interactive, an online investment screener. We expect our subscription revenue to remain relatively insignificant for the foreseeable future. We have recently implemented a new e-commerce system that we believe will enable us to develop and launch a variety of subscription products. As subscriptions are a relatively new service for us, we may not be able to develop products marketable to our users or launch them in a timely manner, both of which would cause a decline in revenues and adversely affect our financial results and cash flow.

We currently have several agreements with our principal stockholders, including a license agreement with CBS Broadcasting Inc., or CBS, whereby it licenses its trademark and certain news content to us for royalties approximating 8% of all of our net revenues other than revenue attributable to Pearson plc and specified other revenue, including revenue attributable to Pinnacor for the twelve months period prior to the acquisition. The license agreement expires in October 2005. As of June 30, 2004, CBS and an affiliate of Pearson plc collectively hold approximately 45% of our outstanding common stock.

On April 1, 2004, we announced the signing of an agreement with Thomson Financial in which we agreed to produce an exclusive real-time financial newswire service for distribution by Thomson Financial and its affiliates. As part of the agreement, Thomson Financial will pay us fees for our production and editorial support for the term of the agreement. Beginning on the first anniversary date of the signing of the agreement, we will share in the profits of the news service after Thomson Financial’s recovery of specified marketing and distribution costs. The build-up of our editorial and production infrastructure is expected to take up to nine months, with the service to launch by December 31, 2004. As this service is new, we may incur unforeseen operational difficulties and delays. Also, our arrangement with Thomson Financial is unproven; we cannot assure you that we will succeed in generating significant revenues from this arrangement.

Our ability to generate significant revenue or obtain profitability in the future is uncertain. Further, in view of the rapidly evolving nature of our business, we may have difficulty accurately forecasting our revenues. Therefore, we believe that period-to-period comparisons of our financial results are not necessarily meaningful and you should not rely upon them as an indication of our future performance. To date, we have incurred substantial costs to create, introduce and enhance our services, to develop content, to build brand awareness and to grow our business. Although we achieved net income in fiscal 2003 and the second quarter of 2004 and were cash flow positive and generated cash flow for the twelve months ended December 31, 2003 and six months ended June 30, 2004, we may not generate net income or positive cash flow for fiscal 2004 or any particular fiscal quarter. We may also incur additional costs and expenses related to content creation, technology, marketing or acquisitions of businesses and technologies to respond to changes in our rapidly changing industry. These costs could have an adverse effect on our future financial condition or operating results.

Restatement

We restated our consolidated statements of operations and cash flows for the three months ended March 31,2004 and 2003, three and six months ended June 30, 2003 and three and nine months ended September 30, 2003 and our consolidated balance sheets as of March 31, 2004 and 2003, June 30, 2003 and September 30, 2003. The restatement reflects the adoption of a corrected method in which we calculate our quarterly CBS royalty expenses by recognizing royalty expenses based on the estimated effective annual royalty rate, which requires management to estimate the annual gross revenues subject to the CBS royalty fees and excluded revenues not subject to the CBS royalty fees, and apply the derived effective annual royalty rate to all revenues in each of the quarters within a fiscal year. Historically, we recognized CBS royalty expenses in the quarter in which it became obligated to pay such expenses based on the specified royalty rate applied to the relevant revenue of that quarter. The restatement has an effect on our cost of net revenues, gross profits, net income (loss) and earnings (loss) per share for the restated quarterly periods. Note 8 to the condensed consolidated financial statements in Item 1 of Part I of this report provides a summary of the restatements for the relevant quarterly periods.

This restatement has no impact on our 2003 annual operating results, cash flow or royalty due to CBS as the restatement relates to the timing of the accrual of the CBS royalty expenses among the quarters within the 2003 fiscal year.

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Results of Operations

Net Revenues

Net revenues are derived from the sale of advertising on our Web sites, advertising revenue from sponsored links, advertising revenues from our television and radio broadcasts, other premium products and fees from our membership center, licensing of our content, and subscription sales of our newsletters.

Net revenues of $20.2 million in the three months ended June 30, 2004 increased $9.1 million, or 82%, from $11.1 million in the same period last year. Total net revenues of $38.0 million in the six months ended June 30, 2004 increased $15.8 million, or 71%, from $22.2 million in the same period last year. Advertising revenue of $8.0 million for the three months ended June 30, 2004 increased $2.6 million, or 48%, from $5.4 million for the three months ended June 30, 2003. Advertising revenue of $15.7 million for the six months ended June 30, 2004 increased $5.1 million, or 48%, from $10.6 for the six months ended June 30, 2003. For the three and six month periods ended June 30, 2004, the increase in advertising revenue, as compared to prior year, was primarily the result of a 14% increase in the number of advertisers on our Web sites and a 33% increase in the average revenue per advertiser.

Licensing revenue of $11.7 million for the three months ended June 30, 2004 increased $6.4 million, or 121%, from $5.3 million for the three months ended June 30, 2003. Licensing revenue of $21.5 million for the six months ended June 30, 2004 increased $10.5 million, or 95%, from $11.0 million for the six months ended June 30, 2003. For the three and six month periods ended June 30, 2004, the increase in licensing revenue, as compared to prior year, was primarily the result of the Pinnacor acquisition, which accounted for 91% and 101% respectively of the increase. In addition, licensing fees received under an agreement with one customer accounted for 11% and 7% of the increase for the three and six month periods ended June 30, 2004, respectively. Excluding the licensing revenue from one customer and the Pinnacor licensing revenue, license revenue for the three and six months ended June 30, 2004 decreased by 3% and 9%, respectively, primarily due to a slight erosion in the existing licensing customer base as a result of a consolidation of the financial services industry.

Subscription revenue of $476,000 in the three months ended June 30, 2004 increased $117,000, or 33%, from $359,000 in the same period last year. Subscription revenue of $873,000 in the six months ended June 30, 2004 increased $191,000, or 28%, from $682,000 in the same period last year. The increase in subscription revenue, as compared to prior year, was primarily due to the launch of The Technical Indicator subscription product in July 2003 and the Retirement Weekly subscription product in October 2003, which represented 96% and 105% of the total increase for the three and six month periods ended June 30, 2004, respectively.

Substantially all of our advertising customers purchase advertising under short-term contracts. Customers have ceased advertising on short notice without penalty. Our advertising revenues would be adversely affected if we were unable to renew advertising contracts with existing customers or obtain new customers. We expect to continue to derive a significant amount of our future net revenues from selling advertisements. The market for Web advertising is intensely competitive, therefore advertising rates could be subject to additional pricing pressure in the future. If we are forced to reduce our advertising rates or we experience lower CPMs (cost per thousand page views) across our Web sites for any reason, future advertising revenues could be adversely affected.

Licensing revenues depend on customer contract renewals and could decrease further if customers choose to renew for lesser amounts, terminate early or forego renewal, or we do not obtain new customers. A significant amount of our licensing revenue is earned from brokerages and financial services companies, which have experienced hardship due to the recent economic downturns. The amount of licensing revenues depends, in part, on the number of users these customers have each month. If the number of users were to decrease, our licensing revenue would decrease. The growth of our licensing revenues could also be limited as there are a limited number of brokerages and financial services companies to license our content. In addition, certain license contracts guarantee the performance of our Web sites. If our sites do not perform as guaranteed, licensing revenue would be adversely affected.

Cost of Net Revenues

Cost of net revenues primarily consists of news staff compensation, royalties payable to CBS and content providers, bandwidth costs associated with serving pages on our Web properties and licensing clients, fees paid for data, Web site infrastructure costs, costs of serving ads, exchange fees for communication lines, amortization of purchased technology and costs related to subscriptions, including printing and mailing costs.

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Cost of net revenues increased by 40% to $6.0 million for the three months ended June 30, 2004 from $4.3 million for the three months ended June 30, 2003 and increased 36% to $11.7 million for the six months ended June 30, 2004 from $8.6 million for the six months ended June 30, 2003. Of the aggregate increase in cost of net revenues for the three and six month periods, 64% and 69%, respectively, of the increase was attributable to additional data production fees, primilarily due to the additional feeds to serve the contracts purchased in the Pinnacor acquisition. Employee costs for news and operations attributed to 15% and 17% of the increase for the three and six months ended June 30, 2004, respectively, primarily resulting from an increase in headcount due to the Pinnacor acquisition and Thomson Financial agreement. In addition, 16% of the increase for the three and six month periods was due to additional amortization expense relating to the developed technology purchased in the acquisition of Pinnacor. As a percentage of net revenues, cost of net revenues were 30% and 39% for the three months ended June 30, 2004 and 2003, respectively and 31% and 39% for the six months ended June 30, 2004 and 2003, respectively.

Product Development

Product development expenses primarily consist of fees paid for data, compensation and benefits for Web site developers, designers and engineers to maintain the sites and software engineers and expenses for contract programmers and developers.

Product development expenses increased by 150% to $4.5 million for the three months ended June 30, 2004 from $1.8 million for the three months ended June 30, 2003 and increased 150% to $9.0 million for the six months ended June 30, 2004 from $3.6 million for the six months ended June 30, 2003. Of the aggregate increase in product development expenses for the three and six month periods ended June 30, 2004, 64% of the increase was attributable to higher compensation expense and overhead costs primarily due to an increase in product development related headcount due to the Pinnacor acquisition, and 32% of the increase was attributable to an increase in data feeds, also as a result of the Pinnacor acquisition. As a percentage of net revenues, product development expenses were 22% and 16% for the three months ended June 30, 2004 and 2003, respectively and 24% and 16% for the six months ended June 30, 2004 and 2003, respectively.

General and Administrative

General and administrative expenses primarily consist of compensation and benefits for finance, business development and administrative personnel, public company expenses, professional fees, corporate depreciation charges and charges for bad debt.

General and administrative expenses increased by 50% to $4.2 million for the three months ended June 30, 2004 from $2.8 million for the three months ended June 30, 2003 and increased 49% to $8.5 million for the six months ended June 30, 2004 from $5.7 million for the six months ended June 30, 2003. The aggregate increase in general and administrative expenses for the three months ended June 30, 2004 was primarily attributable to a 26% increase in compensation expense and overhead costs due to additional headcount as a result of the Pinnacor acquisition, a 17% increase in bad debt expenses resulting from the newly acquired Pinnacor accounts, 10% increase in legal fees primarily related to legal costs associated with the SEC investigation of a former employee and recently negotiated Thomson Agreement, and a 14% increase in taxes primarily due to the increased presence in New York and higher asset valuation due to the acquisition of Pinnacor. In addition, an increase in professional fees attributed to 23% of the aggregate increase primarily related to consulting fees associated with the implementation of Section 404 of the Sarbanes-Oxley Act of 2002 and an increase in audit fees from the addition of Pinnacor activities. The aggregate increase in general and administrative expenses for the six months ended June 30, 2004 was primarily attributable to a 25% increase in compensation expense and overhead costs, an 18% increase in taxes, a 17% increase in professional fees and a 16% increase in legal fees. As a percentage of net revenues, general and administrative costs were 21% and 25% for the three months ended June 30, 2004 and 2003, respectively and 22% and 26% for the six months ended June 30, 2004 and 2003, respectively.

Sales and Marketing

Sales and marketing expenses primarily consist of online and offline advertisements, promotional materials and compensation, benefits and sales commissions to our direct sales force and marketing personnel.

Sales and marketing expenses increased 60% to $4.0 million for the three months ended June 30, 2004 from $2.5 million for the three months ended June 30, 2003 and increased 57% to $7.7 million for the six months ended June 30, 2004 from $4.9 million for the six months ended June 30, 2003. Of the aggregate increase in sales and marketing expenses for the three and six months ended June 30, 2004, 81% and 79%, respectively, of the increase was attributable to higher compensation expense and overhead costs primarily due to an increase in commissions for higher advertising sales, and an increase in headcount and an increase in commissions for licensing sales as a result of the Pinnacor acquisition. In addition, there was an increase in

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marketing costs which attributed to 8% of the aggregate increase for the six months ended June 30, 2004. As a percentage of net revenues, sales and marketing expenses were 20% and 22% for the three months ended June 30, 2004 and 2003, respectively and 20% and 22% for the six months ended June 20, 3004 and 2003, respectively.

Amortization of Acquired Intangibles

Amortization of acquired intangibles was $414,000 and $0 for the three months ended June 30, 2004 and 2003, respectively, and $1.0 million and $0 for the six months ended June 30, 2004 and 2003, respectively, of which $267,000 and $480,000 was expensed to cost of revenues for the three and six months ended June 30, 2004, respectively. In January 2004, we assigned $300,000 to acquired in-process research and development in the Pinnacor acquisition and determined that technological feasibility had not been established and there was no alternative future use. We expensed the value of the acquired in-process research and development of $300,000 at the time of acquisition.

Interest Income, net of expense

Interest income, net of expense, decreased 39% to $83,000 for the three months ended June 30, 2004 from $135,000 for the three months ended June 30, 2003 and decreased 22% to $209,000 for the six months ended June 30, 2004 from $269,000 for the six months ended June 30, 2003. The decrease was primarily due to interest paid on our capital leases, which were acquired in the Pinnacor acquisition as well as a decrease in cash due to the Pinnacor acquisition.

Liquidity and Capital Resources

Since our inception in October 1997, we have funded our operations primarily from cash contributed and advanced by IDC and CBS, revenues from advertising, licensing and subscription sales and the proceeds from our initial public offering. Our cash and cash equivalents totaled $52.3 million at June 30, 2004, compared to $48.1 million at December 31, 2003.

Cash provided by operating activities was $2.1 million for the six months ended June 30, 2004, primarily due to net income of $798,000 and an adjustment for the effect of non-cash charges for depreciation and amortization of $2.6 million, an increase in accounts payable and accrued expenses of $3.5 million and an increase in deferred revenue of $2.4 million, offset by an increase in accounts receivable and prepaid expenses of $7.4 million. The increase in accounts receivable, prepaid expenses, accounts payable and accrued expenses and deferred revenue as compared to the same period last year was primarily due to the increased level of activity after the acquisition of Pinnacor. In addition, deferred revenue increased due to a $3.1 million nonrefundable payment received from Thomson Financial. The increase in depreciation and amortization was primarily due to the amortization of intangibles, which were acquired in the Pinnacor acquisition.

Cash provided by operating activities was $2.8 million for the six months ended June 30, 2003, primarily due to a net loss of $376,000 and an increase in prepaid expenses and accounts receivable of $528,000, offset by an adjustment for the effect of non-cash charges for depreciation and amortization of $2.0 million, an increase in accounts payable and accrued expenses of $1.1 million and an increase in deferred revenue of $505,000.

Cash used in investing activities was $6.7 million for the six months ended June 30, 2004 and consisted of net cash paid for the acquisition of Pinnacor and capital expenditures for purchases of computer hardware, computer software and leasehold improvements related to leased facilities.

Cash used in investing activities was $631,000 for the six months ended June 30, 2003 and consisted of capital expenditures for purchases of computer hardware and software.

Cash provided by financing activities was $8.7 million for the six months ended June 30, 2004 and reflected proceeds from the sale of common stock through our employee stock purchase plan in February 2004 and stock option exercises during the six-month period aggregating $9.2 million, offset by $428,000 in principal payments under capital lease obligations assumed in the Pinnacor acquisition.

Cash provided by financing activities was $881,000 for the six months ended June 30, 2003 and primarily reflected proceeds from the sale of common stock through the employee stock purchase plan in February 2003 and stock option exercises during the six-month period.

We believe our current cash position will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next 12 months. We may need to raise funds sooner if we acquire any additional businesses, products or technologies. If additional funds were raised through the issuance of equity securities, the percentage ownership

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of our then-current stockholders would be reduced. However, if CBS and/or Pearson elect to maintain their percentage interest pursuant to the exercise of their participation rights under their stockholders’ agreement with us, then CBS and/or Pearson would not necessarily suffer a reduction in their respective ownership. Furthermore, such equity securities may have rights, preferences or privileges senior to those of our common stock.

Contractual Obligations and Commercial Commitments

We incur various contractual obligations and commercial commitments in our normal course of business. Such obligations and commitments consisted of the following as of June 30, 2004.

Operating lease obligations – We have various operating leases covering facilities in San Francisco, California; Minneapolis, Minnesota; New York, New York; Washington DC; Los Angeles, California; Chicago, Illinois; Boston, Massachusetts; Dallas, Texas; Coralville, Iowa; and London.

Net operating lease commitments as of June 30, 2004 can be summarized as follows (in thousands):

As of June 30, 2004, principal payments required on our capital lease obligations are $322,000 and $170,000 for the years ended December 31, 2004 and 2005, respectively.

Commercial commitments – As of June 30, 2004, we are committed to pay $202,000 to AOL through December 31, 2004.

Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities”, which was amended by FIN 46R issued in December 2003. This interpretation of Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements” establishes accounting guidance for consolidation of a variable interest entity (“VIE”), formerly referred to as special purpose entities. FIN 46 provides guidance for determining when an entity should consolidate a VIE. The Company has never formed a VIE, and, therefore, FIN 46 is not applicable.

Factors that May Affect Our Operating Results

We may fail to realize the anticipated benefits of our acquisition of Pinnacor if we do not successfully implement our integration strategy.

Our failure to meet the challenges involved in successfully integrating our operations with Pinnacor’s operations or otherwise to realize any of the anticipated benefits of the acquisition, including cost savings, could seriously harm the results of our operations. Integrating Pinnacor’s operations is a complex, time-consuming and expensive process that, without proper planning and implementation, could cause significant disruptions. The successful integration of Pinnacor’s operations involves a number of risks, many of which are outside of our control:

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To realize the anticipated benefits of the acquisition, management must implement a business plan that will:

Our management may not succeed in minimizing the risks associated with integrating Pinnacor’s business or executing its integration goals. We cannot assure you that any cost savings, greater economies of scale and other operational efficiencies, as well as revenue enhancement opportunities anticipated from the acquisition, will occur. For example, during the six- month period between signing and closing of the acquisition, the Pinnacor business slowed significantly because its customers held off signing or upgrading contracts until completion of the acquisition. The revenue contribution from Pinnacor to our organic licensing business also was much smaller than anticipated. In addition, our operating expenses increased due to the increased headcount, expanded operations and expenses and charges related to the acquisition. To the extent that our expenses increase but revenues do not, there are unanticipated expenses relating to the integration process, or there are significant costs associated with presently unknown liabilities, our business, operating results and financial condition may be materially and adversely affected. Failure to successfully integrate Pinnacor’s business also may adversely affect the trading price of our stock.

We may fail to realize the anticipated benefits of our service production agreement with Thomson Financial.

Our failure to meet the challenges involved in successfully developing a real-time financial newswire service with Thomson Financial or otherwise to realize any of the anticipated benefits of the relationship, could adversely affect our results of operations. Developing the real-time newswire service for Thomson is a complex, time-consuming and expensive process that, without proper planning and implementation, could cause significant disruptions to our business. The successful development of the newswire service involves a number of risks, many of which are outside of our control:

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To realize the anticipated benefits of the relationship with Thomson Financial, management must implement a business plan that will:

Our management may not succeed in minimizing the risks associated with developing the financial newswire service with Thomson which could adversely affect our results of operations.

We may experience potential fluctuations in our quarterly operating results, face unpredictability of future revenue and incur losses in the future.

Our quarterly operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. These factors include:

Although, we generated net income for the year ended December 31, 2003 and second quarter of 2004 and were cash flow positive for the twelve months ended December 31, 2003 and 2002 and six months ended June 30, 2004, you should not rely on the results for prior periods as an indication of future performance. In particular, the uncertainty related to the extent and speed of recovery of the advertising market, and the additional operating expenses and other charges we may incur in connection with the Pinnacor acquisition, we may not be cash flow positive or generate net income for future periods.

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Over time, our revenues have come from a mix of advertising, content licensing and subscription service fees. Excluding the licensing revenue derived from the Pinnacor acquisition, licensing revenue declined in the quarter ended June 30, 2004 as compared to the same period in 2003 primarily due to difficult market conditions faced by companies in the financial services industry. We expect our quarterly revenues and operating results to be particularly affected by changes in the level of our advertising and licensing revenue for each quarter. Our operating expenses are based on our current expectations of our future revenues and are relatively fixed in the short term. In addition, our operating expenses have increased in the short term as a result of our integration of Pinnacor’s operations. If we have lower revenues than we expect, we may not be able to quickly reduce our spending in response. We also may, from time to time, make certain pricing, service or marketing decisions that adversely affect our revenues in a given quarterly or annual period. Any shortfall in our revenues would have a direct impact on our operating results for a particular quarter and these fluctuations could affect the market price of our common stock in a manner unrelated to our long-term operating performance.

We depend on advertising revenues to grow our business and maintain profitability, and if advertising revenues were to decline, our results of operations and business would be harmed.

Revenues from advertising are important to our business. In the past few years there was a significant softening in demand for advertising services due to decreased spending on Web advertising by companies and general uncertainty about the economy. In addition, threats of conflict or military action involving the United States disrupted businesses, which curbed spending by companies or otherwise, slowed down economic recovery. In the latter quarters of 2003 and the first quarters of 2004, web advertising expenditures began to show widespread signs of recovery. However, continued uncertainty about the extent and speed of recovery of the Web advertising market could harm our company’s business.

A portion of our online advertising revenue comes from financial services companies that were adversely affected by the market downturns over the last several years, which resulted in these companies spending less for online advertising or going out of business. Furthermore, some of the existing brokerage and financial services companies and customers that we target have merged, and additional mergers may occur in the future, which would further reduce the number of our existing and potential customers. If we do not diversify our advertiser base and continue to attract advertisers from other industries, our business could be adversely affected. Moreover, diversification of our advertising base may require that we adapt to different requirements and expectations that new advertisers may have with respect to advertising programs that could result in our incurrence of significant marketing, sales, development and other expenses that may depress our earnings.

In addition, sales of advertisements occur under short-term contracts, which are difficult to forecast accurately. Advertisers generally have the right to cancel an advertising campaign on short notice without penalty. However, a portion of our expense levels is fixed over the short term. We may not be able to adjust spending quickly enough to compensate for any unexpected revenue shortfall. Accordingly, the cancellation or deferral of advertising agreements could have a material adverse effect on our financial results.

Changes in current advertising pricing models could seriously harm our operating results.

No standard has been widely accepted to measure the effectiveness of Web advertising, so different pricing models are used to sell advertising on the Web. It is difficult to predict which, if any, will emerge as the industry standard. This makes it difficult to project our future advertising rates and revenues. For example, advertising rates based on the number of “click throughs,” or user requests for additional information made by clicking on the advertisement, instead of rates based solely on the number of impressions, or times an advertisement is displayed, could adversely affect our revenues.

The growth of our advertising business depends on the acceptance of the Web as an effective advertising medium.

Generally, we compete with traditional advertising media, such as print, radio and television, for a share of advertisers’ total advertising budgets. Our advertising business would fail to expand or our advertising revenue would decrease if the Web were not perceived as an effective advertising medium. Also, advertisers that have traditionally relied upon other advertising media may be reluctant to advertise on the Web, especially given the general uncertainty in the economy. Advertisers that already have invested substantial resources in other advertising methods may be reluctant to adopt a new advertising strategy and may find it more difficult to measure the effectiveness of Web advertising. In addition, our advertising revenues could be adversely affected if we were unable to adapt to new forms of Web advertising or if “filter” software programs that limit

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or prevent advertising from being delivered to a Web user’s computer are widely adopted and limit the commercial viability of Web advertising. Therefore, advertising revenues would be adversely affected if our Web sites are not perceived to offer desirable opportunities for online advertising.

We may be susceptible to third-party software programs that serve pop-up advertisements on our Web sites.

Third-party software programs are increasingly used to deliver selected advertisements based on Web sites visited by a user. These advertisements usually are in the form of pop-up ads that are often based on the content the user is viewing at a particular time. Often this software is downloaded onto the user’s computer without the user’s knowledge, understanding or consent, as the software often comes bundled with other applications that the user downloads, such as file-sharing software or media players. The software can then track the user’s Web surfing habits and display content, such as pop-up ads, that most users do not realize are not connected to the Web site they are then viewing. The pop-up ads may compete with the advertising, services and products that we may sell on our Web sites, potentially infringe third-party intellectual property rights, and could lead to confusion for our customers as the pop-up software deceives the user as to the origin of the advertisement. Also, our customers may blame us for defects in the services and products promoted by the pop-up ads or for fraud perpetrated against them in connection with such pop-up ads, either of which could damage our reputation or result in the incurrence of significant damages by us. If the prevalence of such forms of software continues to increase and no restrictions are placed on their usage, our business may be harmed.

We depend on licensing revenues to grow our business and maintain profitability, and if licensing revenues were to decline, our business could be harmed.

Revenues from the licensing of our content, applications and tools to customers are important to our business. Licensing revenues depend on new customer contracts and customer contract renewals, and could decrease if we do not generate new licensing business or existing customers renew for lesser amounts, terminate early or forego renewal. For example, excluding the licensing revenue derived from the Pinnacor acquisition, our licensing revenue declined in the quarter ended June 30, 2004 as compared to the same period in 2003, primarily due to an erosion in the existing licensing customer base as a result of the difficult market conditions faced by our primary licensing customers, companies in the financial services industry. Our ability to retain existing customers and attract new customers depends on our ability to develop new products and services and market acceptance of such products and services, neither of which may occur. Furthermore, as we derive a significant percentage of our licensing revenue from specific market segments such as brokerages, financial services companies, banks and asset management providers, consolidation in these market segments have in the past caused, and could in the future cause, us to have a reduced number of existing and potential customers. If we do not diversify our client base and continue to attract customers from other industries, our business could be adversely affected.

Furthermore, we receive a portion of the data incorporated in our licensing products from third parties, some of which are competitors. For example, we receive data from Dow Jones. If they or others perceive us as a competitor, they may discontinue providing services to us. Also, some of our third-party data providers have restrictions on access to and use of their data, which may make our licensing of products incorporating such data less attractive to our existing and potential customers which in turn may adversely affect our licensing revenue.

We are in a highly competitive industry and some of our competitors may be more successful in attracting and retaining customers.

The market for Internet services and products is relatively new, intensely competitive and rapidly changing. The number of Web sites on the Internet competing for consumers’ attention and spending has proliferated and we expect that competition will continue to intensify.

We compete, directly and indirectly, for advertisers, viewers, members, licensing customers and content providers with the following categories of companies:

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We anticipate that the number of direct and indirect competitors will increase in the future. We also expect consolidation among our current competitors, potentially increasing their size and viability. Many of our existing competitors, as well as a number of potential new competitors, have longer operating histories in the Web market, greater name and brand recognition, a larger customer base, higher amounts of user traffic and significantly greater financial, technical and marketing resources. Such competitors may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies, make more attractive offers to potential employees, marketing and distribution partners, advertisers and content providers and may be able to respond more quickly to new or emerging technologies and changes in Web user requirements.

Further, we cannot assure you that our competitors will not develop products and services that are equal or superior to, or that achieve greater market acceptance than, our offerings. Increased competition could also result in price reductions for our advertising or licensed content and tools, reduced margins, operating losses or loss of market share, any of which would materially adversely affect our business, results of operations and financial condition.

If we cannot continue to develop and market new and enhanced products and services that achieve market acceptance in a timely manner, our revenues may suffer.

We believe that our Web sites will be more attractive to advertisers if we develop a larger audience comprised of demographically favorable users which depends substantially on the introduction of enhanced products and services. For example, it is our goal to launch one new subscription product each quarter. If the subscription products or other services we introduce are not favorably received, we may not attract new users and our current users may not continue to access our Web sites or use our services as frequently, which would make us less attractive to advertisers. New users could also choose competitive Web sites or services over ours. Moreover, if our new services do not achieve sufficient market acceptance and generate the anticipated revenues, we would not be able to recoup the costs of developing, marketing and maintaining such services.

We may also experience difficulties that could delay or prevent us from introducing new services. Furthermore, these services may contain errors that are discovered after the services are introduced. We may need to significantly modify the design of these services on our Web sites to correct these errors. Our business could be adversely affected if we experience difficulties in introducing new services or if users do not accept these new services.

If we do not effectively manage the transition from existing products and services to new products and services, our revenues may suffer.

If we do not make an effective transition from existing products and services to new products and services, our revenues may be seriously affected. Transition from current products and services to new products and services can be difficult due to delays in product and service development, variations in product and service costs, delays in customer purchases of existing

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products or services in anticipation of new product or service introductions and customer demand for the new products and services. Our difficulties may be compounded by the Pinnacor acquisition, which requires us to integrate products and services offered by Pinnacor with ours, while at the same time migrate to new products and services to attract additional customers.

Our revenues and gross margins also may suffer due to the timing of product or service introductions by our competitors, particularly when a product has a short life cycle or a competitor introduces a new product just before our own product introduction.

If we were to experience delays in new product or service introductions, or inaccurately estimate the market effects of new product or service introductions by our competitors, future demand for our products and services and our revenues may be adversely affected.

Undetected errors or failures found in new products and services may result in loss of or delay in market acceptance of our products and services, which could seriously harm our business.

Our products may contain undetected software errors or failures when first introduced or as new versions are released. Despite testing by us and by our customers, errors may not be found in new products until after delivery to our customers. Similarly, we may experience difficulties that could delay or prevent us from introducing new services. These new services may contain errors that are discovered only after the services are introduced. We may need to significantly modify the design of the products or implementation of the services to correct these errors. Our business could be adversely affected if undetected errors cause our user and customer base to reject the new products and services.

In addition, the products and services that we acquired from Pinnacor may have undetected errors not currently known to us. Our unfamiliarity with Pinnacor’s products and services may cause delays in, or prevent us from, fixing the problems should they arise and thereby impede our efforts to re-engage Pinnacor’s customers during the integration process.

We depend on key personnel who may not continue to work for the company.

We believe that our future success will depend in part on our continued ability to attract, integrate, retain and motivate highly qualified sales, technical, editorial and managerial personnel, and on the continued service of our senior management. Although we have employment agreements with some of our key executives, none of them will be bound by an employment agreement that prevents them from terminating their employment with us, at any time, for any reason. If we cannot successfully attract, retain and motivate a sufficient number of qualified personnel, it may harm our ability to successfully conduct our business in the future.

Our business will be adversely affected if we do not develop and maintain an effective sales force.

We depend on our sales force to sell advertising on our Web sites and license our content. This involves a number of risks including:

If we are unable to attract and retain an appropriate sales force, our revenue may fail to increase or may decline.

Several large stockholders beneficially own a substantial amount of our common stock, and acting together have substantial control over the management of our company.

As of June 30, 2004, CBS and Pearson collectively beneficially own approximately 45% of our outstanding common stock, and together with General Atlantic Partners 69, L.P. and their affiliates, collectively own approximately 52% of our

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outstanding common stock. As a result of their ownership, they collectively will be able to control all matters requiring stockholder approval, should they act together, including the election of directors, amendments to our charter documents and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying or preventing a change in control of us even if such a change of control may be beneficial to our stockholders. In addition, each of CBS and Pearson has two representatives on our board of directors, and General Atlantic Partners has one representative, and pursuant to contractual rights granted to them, each of CBS and Pearson has the right to nominate one additional representative to our board. The interests of our directors and significant stockholders may differ from yours and they may not necessarily act in accordance with your interests.

We depend on CBS for a number of services and other rights, and our business would be materially adversely affected if CBS were to terminate its strategic relationship with us.

We have a license agreement with CBS to use the CBS name and logo, as well as CBS Television Network news content in connection with the operation of the CBS.MarketWatch.com Web site. This license agreement will expire on October 29, 2005 and CBS has no obligation to renew it. Also, under specific circumstances, CBS may terminate the license agreement earlier. If we were not able to renew our license agreement with CBS or if CBS were to terminate the license agreement earlier than October 29, 2005, we would need to change the name of the CBS.MarketWatch.com Web site and devote substantial resources toward building a new brand name for the Web site. Regardless of such expenditures, we may not be able to continue to attract a sufficient amount of user traffic and advertisers to our Web sites without the CBS name and logo or promotion from CBS.

Furthermore, we are subject to a number of restrictions in consideration for the license grant and the provision of news content from CBS. For example, CBS can require us to remove any content on our Web sites that CBS determines conflicts with, interferes with or is detrimental to its reputation or business or that CBS deems inappropriate. We are also required to conform to CBS’s guidelines for the use of its trademarks. CBS has the right to approve all materials, such as marketing materials, that include any CBS trademarks. CBS also has control over the visual and editorial presentation of television news content provided by CBS on our Web sites. Because of these restrictions, we may be limited in performing our desired marketing and branding activities using the CBS trademark, and if we fail to comply with CBS’s restrictions, CBS may terminate the license agreement.

The interests of CBS and Pearson could conflict with the interests of our other stockholders and, given their substantial stock ownership in the Company, we may not be able to resolve any future conflict with either of them on terms favorable to us.

CBS and Pearson may experience conflicts of interest in their business dealings with us with respect to decisions involving business opportunities and other similar matters. For example:

The occurrence of any of the above actions could adversely affect our business. For example, these sites or services supported by CBS or Pearson could compete with us or CBS and Pearson might promote these other sites or services more actively than they promote our Web sites and services.

The successful operation of our business depends upon the supply of critical elements from other companies and any interruption in that supply could cause service interruptions or reduce the quality of our product and service offerings.

We depend on multiple information providers, such as Comtex, FT Interactive Data, Dow Jones and Thomson Financial Corporation, to provide information and data feeds on a timely basis. Our Web sites could experience disruptions or

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interruptions in service due to the failure or delay in the transmission or receipt of this information by our information providers which would be beyond our control. In addition, our customers depend on Internet service providers, online service providers and other Web site operators for access to our Web sites. We have experienced outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems in the future. These occurrences could diminish Web users’ experience or even result in users perceiving our Web sites as not functioning properly and therefore result in the loss of these users to other Web sites or sources to obtain their business, financial and other news and information.

Furthermore, we incorporate the data we receive from third parties, such as Dow Jones, into our licensing products. If such third party data providers or others perceive us as a competitor, they may discontinue providing services to us. Also, some of our third party data providers have restrictions on access to and use of these data, which may make our licensing products incorporating such data less attractive to our existing and potential customers, which in turn may adversely affect our licensing revenue.

We depend on the continued growth in use of the Web, particularly for financial news and information, as well as in the continued performance and reliability of the Web.

Because we expect to depend significantly on advertising revenue for the foreseeable future, our business depends on businesses and consumers continuing to increase their use of the Web for obtaining news and financial information as well as for conducting commercial transactions. Our advertising revenue and therefore our business would be adversely affected if Web usage does not continue to grow. Web usage may be inhibited for a number of reasons, such as:

In the event Web usage grows, the Internet infrastructure may not be able to support the demands placed on it by this growth or its performance and reliability may decline. Web sites have experienced interruptions in their service as a result of outages and other delays occurring throughout the Internet network infrastructure. If these outages or delays frequently occur in the future, Web usage in general and usage of our Web sites in particular, could grow more slowly or decline.

We depend on our strategic relationships with other Web sites.

We depend on establishing and maintaining distribution relationships with high-traffic Web sites for a portion of our traffic. There is intense competition for placements on these sites, and we may not be able to enter into such relationships on commercially reasonable terms, if at all. Even if we enter into distribution relationships with these Web sites, they themselves may not attract a significant number of users and therefore, our Web sites may not receive the desired traffic from these relationships. Moreover, we may have to pay significant fees to establish or maintain these types of relationships.

Occasionally, we enter into agreements with advertisers, content providers or other high-traffic Web sites that require us to exclusively feature these parties in certain sections of our Web sites. Existing and future exclusivity arrangements may prevent us from entering into other content agreements, advertising or sponsorship arrangements or other strategic relationships. Many companies we may pursue for a strategic relationship also offer competing services. As a result, these competitors may be reluctant to enter into strategic relationships with us. Our business could be adversely affected if we do not establish and maintain additional strategic relationships on commercially reasonable terms or if any of our strategic relationships do not result in increased use of our Web sites.

We depend on third-party software to track and measure the delivery of advertisements and it could be difficult to replace these services.

It is important to our advertisers that we accurately measure the demographics of our user base and the delivery of advertisements on our Web sites. We depend on third-party software to provide these measurement services. If the third-party is unable to provide these services in the future, we would be required to perform them ourselves or obtain them from

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another provider. This could cause us to incur additional costs or cause interruptions in our business during the time we are replacing these services. We have implemented and are implementing additional systems designed to record demographic data on our users. If we are not successful in developing these systems, we may not be able to accurately evaluate the demographic characteristics of our users. As a result, companies may not advertise on our Web sites or may pay less for advertising if they do not perceive our measurements or measurements made by third parties to be reliable.

We depend upon the stability and success of the financial markets.

The target customers for some of our products include a range of financial services organizations, including investment advisors, brokerage firms and banks. The success of many of our customers is intrinsically linked to the financial markets. We believe that demand for our products could be disproportionately affected by fluctuations, disruptions, instability or downturns in the financial markets that may cause customers or potential customers to exit the industry or delay, cancel or reduce any planned expenditures for our products. In addition, a slowdown in the formation of new financial services organizations could cause a decline in demand for our products. The uncertainty about the extent and speed of recovery of the financial markets could negatively impact the demand for our products, which could have a materially adverse effect on our business and results of operations.

Acquisitions and strategic investments may result in increased expenses, difficulties in integrating target companies and diversion of management’s attention.

We anticipate that from time to time we may review one or more acquisitions or strategic investments or other opportunities to expand our range of technology, services and products and to gain access to new markets. Growth through acquisitions or strategic investments entails many risks, including the following:

If realized, any of these risks could have a material adverse effect on our business, financial condition and operating results. Also, the issuance of new equity or debt securities to pay for acquisitions would dilute the holdings of existing stockholders.

Protecting our intellectual property rights may be costly and difficult.

We rely primarily on a combination of copyrights, trademarks, trade secret laws, our user policy and content license agreement and user agreement restrictions on disclosure and use to protect our intellectual property, such as our content, copyrights, trademarks and trade secrets. We also enter into confidentiality agreements with our employees and consultants, and seek to control access to and distribution of our proprietary information. We have several trademark registrations in the United States, a trademark in certain European jurisdictions and pending applications in the United States and in certain foreign jurisdictions. The protective steps we have taken may be ineffective. Despite these precautions, it may be possible for a third-party to copy or otherwise obtain, misappropriate, infringe and use the content on our Web sites or our other intellectual property without authorization. We may be unable to detect the unauthorized us of, or take appropriate steps to protect, or enforce our intellectual property rights. A failure to adequately protect our intellectual property could seriously harm our operating results, financial condition and business, including brand the value of our proprietary content and our ability to compete effectively. In addition, we may need to engage in litigation in order to enforce our intellectual property rights in the future or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of management and other resources, either of which could have an adverse effect on our business, operating results and financial condition.

We may be subject to intellectual property infringement claims, relating to third party technology that would be costly to defend and may limit our ability to use certain technologies in the future.

We license certain technology, data and content from third parties. In these license agreements, the licensors generally agree to defend, indemnify and hold us harmless from any claim by a third-party that the licensed technology or content infringes

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any third party’s intellectual property rights. However, we cannot assure you that the outcome of any litigation between such licensors and a third-party or between us and a third-party will not lead to royalty obligations for which we are not indemnified or for which such indemnification is insufficient or unavailable from the licensors, or that we will be able to obtain any additional license on commercially reasonable terms, if at all. The loss of or inability to obtain or maintain any of these technology or content licenses could result in delays in the introduction of new services until equivalent technology or content, if available, is identified, licensed and integrated.

Our content license arrangements may subject it to intellectual property infringement and indemnification claims that would be costly to defend.

In our content license agreements, we generally agree to defend, indemnify and hold our licensees harmless from any claim by a third party that the licensed content infringes any third party’s intellectual property rights. Infringement or other claims may be asserted or prosecuted against us and/or our clients in the future whether resulting from our internally developed intellectual property or technology or content licensed from third parties. Any future assertions or prosecutions could materially adversely affect our business, results of operations or financial condition. Any such claims, whether they are with or without merit, could be time-consuming, result in costly litigation and divert the attention of technical personnel and management or require us to introduce new content, technology or trademarks, develop non-infringing technology or content or enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on acceptable terms, if at all.

In the event of a successful claim of infringement against us and our failure or inability to introduce new technology or content, develop non-infringing technology or content or license the infringed or similar technology or content on a timely basis, our business, results of operations or financial condition could be materially adversely affected.

We may be subject to liability for financial information included in our online services.