NETRATINGS INC, 10-Q, 2000-11-14

NETRATINGS INC
10-Q, 2000-11-14
BUSINESS SERVICES, NEC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

FORM 10-Q

(MARK ONE)

/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR

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

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 000-27907

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

NETRATINGS, INC.

(Exact name of Registrant as specified in its charter)

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

890 HILLVIEW COURT
MILPITAS, CALIFORNIA
(Address of principal executive 95035
offices) (Zip Code)

Registrant's telephone number, including area code: (408) 957-0699

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

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

Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date:

THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK OUTSTANDING AS OF
NOVEMBER 10, 2000, WAS 32,614,648.

================================================================================

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NETRATINGS, INC.

FORM 10-Q INDEX

Part I. FINANCIAL INFORMATION

Item 1. Condensed Financial Statements
Condensed Balance Sheets--September 30, 2000 (Unaudited) and
December 31, 1999......................................... 3
Condensed Statements of Operations--Three and Nine months
ended September 30, 2000 and 1999 (Unaudited)............. 4
Condensed Statements of Cash Flows--Nine months ended
September 30, 2000 and 1999 (Unaudited)................... 5
Notes to Condensed Financial Statements..................... 6

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 9

Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 27

Part II. OTHER INFORMATION

Item 1. Legal Proceedings........................................... 27
Item 2. Changes in Securities and Use of Proceeds................... 28
Item 4. Submission of Matters to a Vote of Security Holders.........
Item 6. Exhibits and Reports on Form 8-K............................ 28

Signatures.................................................. 28
Index to Exhibits........................................... 29

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PART I

ITEM 1. FINANCIAL STATEMENTS

NETRATINGS, INC.
CONDENSED BALANCE SHEETS
($ IN THOUSANDS)

SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $100,457 $319,325
Short-term investments.................................... $232,942 12,931
Accounts receivable, net.................................. 4,243 2,550
Prepaid expenses and other current assets................. 3,067 885
-------- --------
Total current assets.................................... 340,709 335,691
Property and equipment, net................................. 2,833 916
Other assets................................................ 3,792 192
-------- --------
$347,334 $336,799
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,111 $ 1,646
Accrued liabilities....................................... 7,204 1,393
Deferred revenue.......................................... 9,868 3,444
Notes payable and capital lease obligations,
current portion......................................... 152 253
Amounts due to Nielsen Media Research..................... 3,090 1,537
-------- --------
Total current liabilities............................... 21,425 8,273
Notes payable and capital lease obligations,
long-term portion....................................... 106 265
Commitments and contingencies...............................

STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, par value $0.001:
Authorized shares: 86,851,000
Issued and outstanding shares: 32,118,000 at
December 31, 1999 and 32,586,770 at Sept. 30, 2000.... $ 33 $ 32
Additional paid-in capital................................ 399,234 398,485
Deferred compensation and other costs..................... (38,289) (46,574)
Notes receivable from stockholder......................... -- (128)
Accumulated other comprehensive loss...................... (40) (28)
Accumulated deficit....................................... (35,135) (23,526)
-------- --------
Total stockholders' equity.............................. 325,803 328,261
-------- --------
$347,334 $336,799
======== ========

</TABLE>

See accompanying notes to condensed financial statements.

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NETRATINGS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
($ IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ----------

<S> <C> <C> <C> <C>
Revenue....................................... $ 6,005 $ 844 $ 13,803 $ 1,486
Cost of revenue............................... 3,370 2,113 9,471 4,269
--------- --------- --------- ----------
Gross profit (loss)........................... 2,635 (1,269) 4,332 (2,783)

Operating expenses:
Research and development.................... 1,623 683 4,684 1,806
Sales and marketing......................... 4,977 1,186 13,145 2,559
General and administrative.................. 1,352 661 3,466 1,170
Stock-based compensation.................... 2,566 1,188 8,151 2,327
--------- --------- --------- ----------
Total operating expenses.................. 10,518 3,718 29,446 7,862
--------- --------- --------- ----------
Loss from operations.......................... (7,883) (4,987) (25,114) (10,645)
Loss from joint ventures...................... (1,267) -- (2,179) --
Interest income (expense), net................ 5,455 97 15,684 (25)
--------- --------- --------- ----------
Net loss...................................... $(3,695) $(4,890) $(11,609) $(10,670)
========= ========= ========= ==========
Basic and diluted net loss per common share... $ (0.11) $ (1.75) $ (0.36) $ (4.55)
========= ========= ========= ==========
Shares used to compute basic and diluted net
loss per common share......................... 32,171 2,790 31,825 2,344
========= ========= ========= ==========
Pro forma basic and diluted net loss per
common share.................................. $ (0.11) $ (.94) $ (0.36) $ (3.39)
========= ========= ========= ==========
Shares used to compute pro forma basic and
diluted net loss per common share............. 32,171 5,231 31,825 3,152
========= ========= ========= ==========

</TABLE>

See accompanying notes to the condensed financial statements.

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NETRATINGS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
($ IN THOUSANDS)

NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
--------- -------
<S> <C> <C>
OPERATING ACTIVITIES

Net cash provided by (used in) operating activities......... $ 7,254 $(5,455)
--------- -------
INVESTING ACTIVITIES
Acquisition of property and equipment..................... (2,623) (328)
Increase in other assets.. ............................... (4,229) --
Purchase of short term investments........................ (761,060) --
Sale of short term investments............................ 541,037 --
--------- -------
Net cash used in investing activities....................... (226,875) (328)
--------- -------

FINANCING ACTIVITIES
Proceeds from exercise of options......................... 885 31
Proceeds from convertible notes payable to Nielsen Media
Research........................................... -- 1,000
Proceeds from equipment financing......................... -- 410
Proceeds from shareholder note receivable................. 128 --
Principal payments on capital lease obligations
and notes payable.................................. (260) (99)
Proceeds from issuance of preferred stock................. -- 31,748
--------- -------
Net cash provided by financing activities................... 753 33,090
--------- -------
Net (decrease) increase in cash and cash equivalents...... (218,868) 27,307
Cash and cash equivalents at beginning of period............ $ 319,325 1,343
--------- -------
Cash and cash equivalents at end of period.................. $ 100,457 $28,650
========= =======

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Property and equipment acquired under capital lease
obligations............................................. $ -- $ 123
========= =======

</TABLE>

See accompanying notes to the condensed financial statements.

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NETRATINGS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying financial statements of NetRatings have been prepared
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The balance sheet at December 31, 1999 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The accompanying financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in NetRatings' annual report on Form 10-K for the fiscal year ended
December 31, 1999.

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 such periods are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000 or for any
future period.

2. RECENT PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB No. 101B to defer the effective date of
implementation of SAB No. 101 until the fourth quarter of fiscal year 2000. The
Company does not expect the adoption of SAB 101 to have a material effect on its
financial position or results of operations.

In June 1998, the SEC issued FASB Statement(SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The effective date of
implementation of SFAS No. 133 was deferred until the fourth quarter of fiscal
year 2000. The Company does not expect the adoption of SFAS No. 133 to have a
material effect on its financial position or results of operations.

3. LITIGATION

On November 4, 1999, PaineWebber Incorporated, "PaineWebber," filed a
lawsuit against the Company in the Supreme Court of the State of New York for
the County of New York. The suit involves an agreement entered into in May 1999
in which the Company engaged PaineWebber to act as its financial advisor with
respect to a potential strategic transaction. The specific transaction for which
PaineWebber was engaged was not consummated. However, the lawsuit alleges that
the Company has breached its obligations under the agreement by failing to pay
PaineWebber a fee based upon the Company's subsequent sale of equity securities

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to Nielsen Media Research and by failing to retain PaineWebber as a managing
underwriter for the Company's initial public offering.

On June 28, 2000 the court ruled in the Company's favor in connection with
its motion to dismiss PaineWebber's claims that the Company improperly failed to
retain PaineWebber as a managing underwriter in the Company's initial public
offering but granted PaineWebber's motion for summary judgment as to its
liability on the claim that the Company failed to pay PaineWebber a fee based
upon the Company's sale of equity securities to Nielsen Media Research.

Both parties have filed Notices of Appeal in connection with the above
rulings. At the same time, the case is proceeding to a hearing as to the amount
of damages which the Company will be required to pay PaineWebber. Although the
complaint originally sought damages in the aggregate amount of not less than
$1.9 million on all claims and reimbursement for PaineWebber's attorneys' fees
relating to the dispute, PaineWebber has increased its assessment of its alleged
damages relating to the claims for which it has received summary judgment to
approximately $3.4 million (plus interest). The Company intends to continue to
vigorously dispute PaineWebber's damage analysis.

Based on the above, the Company expects to incur substantial additional
legal fees and expenses in connection with the litigation, and it may also
result in the diversion of its internal resources. As a result, the Company's
defense of this litigation, regardless of its eventual outcome, will likely be
costly and time consuming and at this time it is unable to predict its final
outcome. However, an adverse outcome could materially affect the Company's
results of operations and financial position.

4. LOSS ON JOINT VENTURES

Loss from joint ventures represents an accrual for future capital
contributions to the Company's ACNielsen eRatings joint venture as well as the
write down of certain joint venture investments for the Company's pro rata share
of its losses incurred in accordance with Accounting Principles Board Opinion
No. 18; "The Equity Method of Accounting for Investments in Common Stock."

5. COMPREHENSIVE LOSS

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

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
2000 1999 2000 1999
-------- -------- --------- --------

<S> <C> <C> <C> <C>
Net loss.............................. $(3,695) $(4,890) $(11,609) $(10,670)
Unrealized gain(loss) on short-term
investments......................... 408 -- (12) --
-------- -------- --------- --------
Comprehensive loss.................... $(3,287) $(4,890) $(11,621) $(10,670)
======== ======== ========= ========

</TABLE>

6. NET LOSS PER SHARE OF COMMON STOCK

The calculation of historical and pro forma basic and diluted net loss per
share is as follows:

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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
(in thousands, except per share data) 2000 1999 2000 1999
-------- -------- -------- ---------

<S> <C> <C> <C> <C>
HISTORICAL:
Net loss................................ $(3,695) $(4,890) $(11,609) $(10,670)
Weighted-average shares of common
stock outstanding..................... 32,483 3,746 32,292 3,495
Less: weighted-average shares subject
to repurchase..................... 312 957 467 1,151
Weighted-average shares of common
stock outstanding used in computing
basic and diluted net loss per share.. 32,171 2,790 31,825 2,344
Basic and diluted net loss per common
share......... ....................... $ (0.11) $ (1.75) $ (0.36) $ (4.55)

PRO FORMA:
Net Loss................................ $(3,695) $(4,890) $(11,609) $(10,670)
Weighted-average shares of common stock
outstanding used in computing basic
and diluted net loss per common
share................................. 32,171 2,790 31,825 2,344
Adjustment to reflect the effect of the
assumed conversion of preferred stock
from the date of issuance............. -- 2,441 -- 808
Weighted average shares used in computing
pro forma basic and diluted net loss
per common share...................... 32,171 5,231 31,825 3,152
Pro forma basic and diluted net loss per
common share.......................... $ (0.11) $ (.94) $ (0.36) $ (3.39)

</TABLE>

<PAGE>

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 THE
COMPANY'S 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 THE COMPANY ON THE DATE HEREOF, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN ANY SUCH
FORWARD-LOOKING STATEMENTS. IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH BELOW UNDER THE
CAPTION "FACTORS THAT MAY AFFECT OUR PERFORMANCE" SET FORTH HEREIN. THE COMPANY
CAUTIONS INVESTORS THAT ITS BUSINESS AND FINANCIAL PERFORMANCE ARE SUBJECT TO
SUBSTANTIAL RISKS AND UNCERTAINTIES. IN ADDITION, REPORTED RESULTS SHOULD NOT BE
CONSIDERED AN INDICATION OF FUTURE PERFORMANCE. THE FOLLOWING DISCUSSION SHOULD
BE READ TOGETHER WITH OUR FINANCIAL STATEMENTS AND RELATED NOTES THERETO
INCLUDED ELSEWHERE IN THIS REPORT ON FORM 10-Q.

OVERVIEW

We were incorporated in July 1997 to provide Internet audience measurement
information and analysis. From our founding through the launch of our initial
NetRatings service offering in March 1998, we were primarily engaged in research
activities, developing our initial products and services, raising capital, and
building our business infrastructure. Our initial service offering utilized a
Web-based panel selection methodology, a relatively small audience panel, and an
early version of our data collection software. In October 1998, we established
our strategic relationship with Nielsen Media Research. Through this
relationship, we began developing an expanded Internet audience panel based on
the Nielsen Media Research audience sampling methodology and enhanced versions
of our software. In March 1999 we launched our Nielsen//NetRatings brand of
product and service offerings in the United States and in June 2000 we began
providing data based on our Canadian panel.

In June 1999, we commenced our international expansion efforts by
establishing a joint venture, NetRatings Japan. In March, 2000 we invested
approximately $1.2 million in NetRatings Japan. As of September 30, 2000 we held
a 26% direct ownership interest in NetRatings Japan. NetRatings Japan is
responsible for building and maintaining a Japanese audience measurement panel
and introducing our products and services to the Japanese market. In March 2000
NetRatings Japan began providing data based on the Japanese audience measurement
panel.

In September 1999, we entered into a joint venture with ACNielsen to
develop and maintain Internet audience measurement panels and to market products
and services under the Nielsen//NetRatings brand in other key international
markets. Through the joint venture, ACNielsen eRatings, in which we held a 19.9%
ownership interest as of September 30, 2000, we have developed and released data
for Internet audience measurement panels in

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Australia, Ireland, New Zealand, Singapore, Hong Kong, Sweden, Norway,
Finland, Denmark, Germany, Brazil, Italy and the United Kingdom. Panels are
now under development in Spain, South Korea, Taiwan and the Netherlands, and
it is anticipated that these services will be rolled out before the end of
this year. As part of this joint venture, ACNielsen is responsible for the
costs related to the initial development of panels outside of the United
States, Canada, France, and Japan.

In January 2000, we established a joint venture in France, Mediametrie
eRatings.com, in which we held a 30% ownership interest as of September 30,
2000. Mediametrie eRatings.com is responsible for building and maintaining a
French audience measurement panel and introducing our products and services to
the French market. In September 2000, Mediametrie eRatings.com began providing
data based on the French audience measurement panel.

Through our strategic relationships and our joint ventures, we now provide
the Nielsen//NetRatings service in seventeen countries and panel development has
commenced in an additional four countries.

We generate revenue from the sale of our Internet audience measurement
products and services. Through September 30, 2000, our information and
analytical products and services, which include our Audience Measurement
services, E-Commerce Strategies service, Internet Investment Strategies
service, Internet Media Strategies service, Internet Advertising Strategies
service, International Audience Measurement service, and Local Market service
have accounted for substantially all of our revenue. We primarily sell these
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 our information and analytical products
and services ratably over the term of the subscription agreement. Prepaid
subscription fees are recorded as deferred revenue until earned. We also
derive a small portion of our revenue from the sale of custom research
services. Revenue from these custom services is recognized in the period in
which the service is provided. We sell our products and services to customers
in a wide range of industries. Our customer base for the Nielsen//NetRatings
service has increased from over 255 customers worldwide as of December 31,
1999 to more than 680 customers worldwide as of September 30, 2000.

Cost of revenue consists primarily of expenses related to the recruitment
and maintenance of our US and Canadian audience measurement panels and they are
expensed as incurred. Accordingly, such expenses are not directly related to
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 due to our joint
ventures recognized ratably over the term of the subscription agreement,
consistent with our revenue policy. We believe that the continued development
and enhancement of audience panels is essential to the long-term expansion of
our business. We expect that costs of revenue will increase in future periods as
we continue to develop and enhance our audience measurement panels and add
additional panel infrastructure to support the growth of our services.

Research and development expenses consist primarily of compensation and
related costs for personnel associated with our product development
activities. These costs are expensed as incurred. We believe that continued
investment in product development is critical to achieving our strategic
objectives. We also anticipate that additional development resources will be
required to support the international activities of our joint ventures as
well as planned expansion of our services. Accordingly, we expect that
research and development expenses will increase in absolute dollars in

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future periods.

Sales and marketing expenses consist primarily of salaries, benefits and
commissions to our salespeople and analysts, commissions paid to Nielsen Media
Research, as well as costs related to seminars, promotional materials, public
relations, advertising, and other sales and marketing programs. We intend to
expand our sales force in conjunction with our domestic expansion and to support
our international joint ventures. We also intend to increase our marketing
activities to enhance the awareness of the Nielsen//NetRatings brand and our
products and services. We therefore expect that sales and marketing expenses
will increase in future periods.

General and administrative expenses consist primarily of salaries and
related costs for executive, finance, accounting, and other administrative
personnel, in addition to professional fees, provisions for doubtful accounts,
and other general corporate expenses. We expect that general and administrative
expenses will increase in absolute dollars in the future as we add personnel and
information systems to support expanding operations, incur additional costs
related to the growth of our business and the reporting requirements of a public
company.

In connection with the grant of certain stock options to employees, we
recorded non-cash stock-based compensation charges of $3.9 million as of the
year ended December 31, 1999, representing the difference between the exercise
price of these options and the fair value of our common stock as of the date of
grant. These amounts are being amortized over the respective vesting periods of
the options using a graded vesting method. Simultaneously with the Series C
Preferred Stock financing in August 1999, we entered into additional agreements
with Nielsen Media Research governing our strategic relationship with it. We
also issued two warrants to Nielsen Media Research, with respect to which we
recorded non-cash stock-based compensation charges of $46.7 million for the year
ended December 31, 1999 representing the Black-Scholes value of these warrants.
These charges are being amortized over five years. We have not recorded any
additional non-cash stock-based compensation charges through the period ended
September 30, 2000. We recognized non-cash amortization of these stock
compensation charges of $5.3 million for the year ended December 31, 1999 and
$8.2 million for the nine months ended September 30, 2000.

Loss from joint ventures represents an accrual for future capital
contributions to our ACNielsen eRatings joint venture as well as the write
down of certain joint venture investments for our pro rata share of their
losses incurred in accordance with Accounting Principles Board Opinion No.
18; "The Equity Method of Accounting for Investments in Common Stock." We
expect the losses related to joint ventures will increase in future periods
as we commence services in additional countries and expand our international
operations.

Interest income consists primarily of interest earned from our cash and
cash equivalents and short-term investments' balances. Interest expense relates
to the interest charges incurred in connection with our credit facilities as
well as the interest charges associated with our accrual for future capital
contributions to our ACNielsen eRatings joint venture.

We have a limited operating history upon which investors may evaluate our
business and prospects. We incurred net losses of $17.9 million for the year
ended December 31, 1999, and $11.6 million for the nine months ended September

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30, 2000. Our accumulated deficit at September 30, 2000 was $35.1 million. We
intend to invest heavily to expand our audience measurement panels, strengthen
our direct sales force, enhance our product and service offerings, and develop
the infrastructure requirements necessary to grow the Company. As a result, we
expect to continue to incur net losses for the foreseeable future. In view of
the rapidly evolving nature of our business and our limited operating history,
we believe that period-to-period comparisons of our operating results are not
necessarily meaningful and should not be relied upon as an indication of our
future performance. SEE "FACTORS THAT MAY AFFECT OUR PERFORMANCE--WE HAVE
INCURRED LOSSES SINCE INCEPTION AND WE MAY BE UNABLE TO ACHIEVE PROFITABILITY."

RESULTS OF OPERATIONS

THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE AND
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999

REVENUE. Revenue was $6.0 million and $13.8 million for the three month and
nine month periods ended September 30, 2000, respectively, which represent
increases of 611% and 829% when compared with the corresponding periods in 1999.
Sales of our information and analytical products and services accounted for
substantially all of the revenue for each of the three month and nine month
periods ended September 30, 1999 and 2000. The increase in revenue was primarily
due to the introduction of our Nielsen//NetRatings service in March 1999 and
additional product and service offerings that resulted in a substantial increase
in the number of our customers. For the three month and nine month period ended
September 30, 2000, our audience measurement service comprised 72% and 71% of
our revenue, respectively, compared to 87% and 90% in the corresponding periods
in 1999; our suite of analytical services accounted for 20% and 19% of the
revenue, respectively, compared to 13% and 10% in the corresponding periods in
1999; and the revenue from joint venture contracts and international royalties
accounted for the remaining 8% and 10% respectively with no international
revenue for the corresponding periods in 1999. During the three and nine month
periods ended September 30, 2000 and 1999, no customer accounted for more than
10% of our revenue.

COST OF REVENUE. Cost of revenue increased 59% to $3.4 million, or 56%
of revenue for the three month period ended September 30, 2000 compared to
$2.1 million, or 250% of revenue for the corresponding period in 1999. For
the nine month period ended September 30, 2000, cost of revenue increased
122% to $9.5 million, or 69% of revenue compared to $4.3 million, or 287% of
revenue, for the corresponding period in 1999. The increases primarily
reflected costs incurred in 2000 relating to the development of the
Nielsen//NetRatings measurement panels in the United States and Canada,
production support of our Nielsen//NetRatings on-line services, at-work
audience measurement panel, as well as the amortization of the data
acquisition costs due to our joint ventures recognized ratably over the term
of the subscription agreement.

RESEARCH AND DEVELOPMENT. Research and development expenses increased 138%
to $1.6 million, or 27% of revenue for the three month period ended September
30, 2000 compared to $683,000, or 81% of revenue for the corresponding period in
1999. For the nine month period ended September 30, 2000, research and
development expenses increased 159% to $4.7 million, or 34% of revenue compared
to $1.8 million, or 122% of revenue, for the corresponding period in 1999. The

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increases were primarily due to the two fold increase in the number of
employees and other payroll related expenses offset partially by billbacks to
our international joint ventures for engineering services performed on their
behalf.

SALES AND MARKETING. Sales and marketing expenses increased 320% to $5.0
million, or 83% of revenue for the three month period ended September 30,
2000 compared to $1.2 million or 141% of revenue for the corresponding period
in 1999. For the nine month period ended September 30, 2000, sales and
marketing expenses increased 414% to $13.1 million, or 95% of revenue
compared to $2.6 million, or 172% of revenue, for the corresponding period in
1999. The increases in absolute dollars continue to be primarily attributable
to the three fold increase in the number of sales, analytical services, and
marketing employees and the increase in costs to promote our enhanced product
and service through promotional materials, public relations and trade shows.

GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 105% to $1.4 million, or 23% of revenue for the three month period
ended September 30, 2000 compared to $661,000, or 78% of revenue for the
corresponding period in 1999. For the nine month period ended September 30,
2000, general and administrative expenses increased 196% to $3.5 million, or
25% of revenue compared to $1.2 million or 79% of revenue, for the
corresponding period in 1999. This increase in absolute dollars was primarily
related to a four fold increase in the number of administrative personnel to
support our expanded operations, expansion of our facilities, recurring and
non-recurring professional fees and an increase in the provision for doubtful
accounts.

STOCK-BASED COMPENSATION. Stock based compensation expenses increased 116%
to $2.6 million for the three month period ended September 30, 2000 compared to
$1.2 million for the corresponding period in 1999. For the nine month period
ended September 30, 2000, stock based compensation expenses increased 250% to
$8.2 million compared to $2.3 million for the corresponding period in 1999. The
increases primarily related to the grant of certain stock option to employees in
1999 as well as the issuance of warrants to Nielsen Media Research in 1999.

LOSS FROM JOINT VENTURES. Loss from joint ventures for the three month and
nine month periods ended September 30, 2000 was $1.3 million and $2.2 million
respectively. We did not record any losses related to our joint ventures in the
corresponding period in 1999 as the related joint ventures were not operational.

INTEREST INCOME (EXPENSE), NET. Interest income, net, increased to $5.5
million for the three month period ended September 30, 2000 from $97,000 net
interest income for the corresponding period in 1999. For the nine month period
ended September 30, 2000, interest income, net increased to $15.7 million from
$25,000 of net interest expense for the corresponding period in 1999. Net
interest income increased due to the addition of cash and cash equivalents and
short-term investments resulting from our initial public offering and private
placement transaction with Nielsen Media Research. See further discussion of
these transactions in "Liquidity and Capital Resources."

NET LOSS. For the three month period ended September 30, 2000, our net
loss decreased to $3.7 million, or a loss of $0.11 per share on approximately
32.2 million shares outstanding, as compared to a net loss of $4.9 million,
or a loss of $0.94 per share on approximately 5.2 million

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shares outstanding for the corresponding period in 1999. For the nine month
period ended September 30, 2000, the net loss increased to $11.6 million, or
a loss of $0.36 per share on approximately 31.8 million shares outstanding,
as compared to a net loss of $10.7 million, or a loss of $3.39 per share on
approximately 3.2 million shares outstanding for the corresponding period in
1999. This increase is primarily due to an increase in revenue recorded and a
reduction in cost of revenue as a percentage of revenue, offset by the
continued expansion of the Company, the accrued losses on joint venture
activity, and the amortization of stock-based compensation. The Company
discloses its net loss as adjusted, which excludes the amortization of
non-cash stock-based compensation and the losses associated with investments
in joint ventures. The as adjusted net income (loss) for the three month and
nine month period ended September 30, 2000 was $138,000 income, or breakeven
earnings per share, and $1.3 million loss, or a loss of $0.04 per share,
respectively, compared to $3.7 million, or a loss of $0.71 per share, and
$8.3 million, or a loss of $2.65 per share, for the corresponding periods in
1999. Note that shares outstanding for the three and nine month period ending
September 30, 1999 assume the conversion of all preferred stock to common
stock as if the conversion occurred at the beginning of the period or at the
date of issuance, if later. All preferred stock was converted to common stock
in conjunction with the IPO on December 8, 1999.

LIQUIDITY AND CAPITAL RESOURCES

We invest excess cash predominately in debt instruments that are highly
liquid, of high quality investment grade, and have maturities of less than one
year with the intent to make such funds readily available. Cash and cash
equivalents and short-term investments as of December 31, 1999 was $332.2
million and resulted primarily from our initial public offering in December
1999, which generated net proceeds of $71.1 million, as well as a private
placement in December 1999 with Nielsen Media Research, which resulted in net
cash proceeds of $235.8 million. The private placement included the exercise of
warrants by Nielsen Media Research as well as the purchase of 10,040,000 shares
of our common stock at the initial public offering price of $17.00 per share.
Cash and cash equivalents and short-term investments as of September 30, 2000
increased $1.1 million to $333.4 million as compared to December 31, 1999.

Cash used in investment activities was $226.9 million for the nine month
period ended September 30, 2000. Purchases, net of proceeds and maturities, of
marketable securities and other investments during the period were $220.0
million and capital expenditures totaled $2.6 million. Capital expenditures have
generally been comprised of purchases of computer hardware and software as well
as leasehold improvements related to facilities, and are expected to increase in
future periods. Cash used in investment activities was $328,000 for the nine
month period ended September 30, 1999. All of such amounts related to capital
expenditures for computer hardware and software. Although we had no material
capital expenditure commitments at September 30, 2000 we anticipate that capital
expenditures will increase significantly during the remainder of 2000 and 2001
due to the anticipated growth in operations, infrastructure, and personnel both
domestically and internationally.

For the nine month period ended September 30, 2000, cash provided by
financing activities was $753,000 as compared to $33.1 million provided by
financing activities in the comparable period in 1999. The cash provided by
financing during 2000 related primarily to the proceeds received from the
exercise of options and a payment received on a shareholder note receivable,

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offset by the principal payments related to our capital lease obligations. The
cash provided by financing during 1999 related primarily to proceeds from the
issuance of preferred stock and proceeds from convertible notes payable to
Nielsen Media Research, offset by principal payments related to our capital
lease obligations. We have a total $1.2 million equipment line of credit with
Venture Lending & Leasing. Funds borrowed under the line of credit are secured
by our tangible assets and bear interest at an annual rate of 8%. As of
September 30, 2000 we had utilized approximately $500,000 under the line of
credit. In addition, we have a $1 million commercial line of credit with
Heritage Bank of Commerce. Borrowings under this line are secured by our
business assets other than those securing our equipment loans and bear interest
at the bank's prime interest rate, which was 9.50% as of September 30, 2000. Our
credit agreement with Heritage Bank contains certain financial covenants,
including minimum liquidity at or above $5 million, tangible net worth of $10
million, and debt to tangible net worth ratio of 1-to-1. As of September 30,
2000, we were in compliance with all of these covenants and had no outstanding
balances on the credit facilities with Heritage Bank of Commerce.

We believe that our existing balances of cash and cash equivalents and our
available credit facilities 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. We could
require additional capital prior to the end of this period if, for example, we
were to experience greater than expected losses from operations or if we were to
pursue one or more business acquisitions or investments. If we do require
additional financing, however, we cannot be certain that it will be available
when required, on favorable terms, or at all. If we are not successful in
raising additional capital as required, our business could be harmed. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of our then-current stockholders would be reduced.

FACTORS THAT MAY AFFECT OUR PERFORMANCE

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

We have experienced operating losses in each quarter since inception. We
incurred net losses of $17.9 million for the year ended December 31, 1999, $11.6
million for the nine months ended September 30, 2000, and as of September 30,
2000, our accumulated deficit was $35.1 million. We intend to make significant
expenditures related to panel development and maintenance, marketing, hiring of
additional personnel, and further development of our technology and
infrastructure. As a result, we will need to generate significant revenue to
achieve and maintain profitability. Although our revenue has grown in recent
periods, 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 June 30, 1998. We introduced our Nielsen//NetRatings
Internet Audience Measurement service in the quarter ended June 30, 1999.
Accordingly, we are still in the early stages of development and have only a
limited operating history upon which to evaluate our business. One should
evaluate our likelihood of financial and operational success in light of the

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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 for Internet audience
measurement;

- our potential inability to successfully manage any significant growth
we achieve in the future;

- our potential inability to develop our brand; and

- the risks associated with our international expansion.

FLUCTUATIONS IN OUR QUARTERLY REVENUES AND OPERATING RESULTS MIGHT LEAD TO
REDUCED PRICES FOR OUR STOCK

Due to our limited operating history and the evolving nature of the market
in which we compete, our future revenue is difficult to forecast. Factors that
may cause fluctuations in our revenues or operating results on a quarterly basis
include the following, many 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 at home and at work 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;

- changes in demand for our products and services due to the
announcement or introduction of new 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.

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

Our expense levels are based largely on our investment plans and estimates
of future revenue. We may be unable to adjust our spending to compensate for an
unexpected shortfall in revenue. Accordingly, any significant shortfall in
revenue relative to our planned expenditures in a particular quarter would harm
our results of operations and could cause our stock price to fall sharply,
particularly following quarters in which our operating results fail to meet the
expectations of securities analysts or investors.

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

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The market for Internet audience measurement and analysis is new,
rapidly evolving and becoming increasingly competitive. Our principal
competitor is Jupiter Media Metrix. Competition in Internet audience
measurement is also offered by PCData, Inc. and NetValue. We are not aware of
any other significant competitors in this market, although we expect
competition to intensify in the future. With respect to the provision of
analytical services, we also compete with companies such as Forrester
Research, Gartner Group and IDC Corporation that provide Internet market
research and industry analysis based on data derived from surveys.

We believe that the market for Internet audience measurement services will
eventually gravitate toward a uniform standard, based on data collected by a
single service provider, that will allow companies to make meaningful decisions
regarding online advertising. We therefore believe that one leading provider is
likely to emerge in the market for Internet audience measurement services.
Jupiter Media Metrix has provided Internet audience measurement services since
1995 and, as the "first mover" in this market, has a head start in becoming the
industry standard for such services.

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

- the development of independent, reliable measurement panels based on a
proven high-quality sampling methodology that are representative of
the entire target audience;

- the timeliness of reported results;

- the breadth and depth of measurement services offered and their
flexibility and ease of use;

- the ability to offer products and services in the most markets
worldwide; and

- pricing.

Most of our competitors have longer operating histories, larger customer
bases, greater brand recognition, and significantly greater marketing resources
than we have. In addition, 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.

WE ARE DEPENDENT ON NIELSEN MEDIA RESEARCH FOR THE DEVELOPMENT AND MAINTENANCE
OF PANELS OF INTERNET USERS IN THE UNITED STATES AND CANADA AND ON ACNIELSEN AND
OUR OTHER JOINT VENTURE PARTNERS FOR THE DEVELOPMENT AND MAINTENANCE OF SUCH
PANELS IN INTERNATIONAL MARKETS

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Our audience measurement data is collected from randomly-selected groups
of Internet users that are generally referred to as audience measurement
panels. Our at-home Internet audience measurement panels in the United States
and Canada have been developed by, and continue to be maintained by, Nielsen
Media Research as part of our strategic relationship with that company.
Similarly, our Internet audience measurement panels and other sampling
methodologies which we intend to employ in geographic locations outside of
the United States, Canada, France, Latin America and Japan will be developed
and maintained by ACNielsen as part of our joint venture with that company.
Any failure on the part of Nielsen Media Research, ACNielsen, or our other
joint venture partners to devote adequate resources to the development or
maintenance of such panels or other sampling methodologies, or to maintain
the overall quality of these methodologies, will harm our business. In
addition, Nielsen Media Research may terminate its obligations with respect
to Internet audience measurement panels in the event it no longer holds at
least 5% of our outstanding stock on a fully-diluted basis.

NIELSEN MEDIA RESEARCH CONTROLS A MAJORITY OF OUR OUTSTANDING STOCK AND ITS
REPRESENTATIVES CONSTITUTE A MAJORITY OF OUR BOARD OF DIRECTORS

Nielsen Media Research's majority stock ownership position and its control
of a majority of our board enable 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, consolidations,
and the sale of all or substantially all of our assets. This control may have
the effect of discouraging certain types of transactions involving a change of
control, including transactions in which the other holders of our common stock
might otherwise receive a premium for their shares over the then current market
price.

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

In addition, Nielsen Media Research, through its majority positions, can
control or influence the terms of our important commercial transactions,
including our strategic relationship with it. We expect Nielsen Media Research's
representatives on our board to recuse themselves from deliberations in which
they have a clear conflict of interest. These directors may take actions that
favor Nielsen's interests over our own, as a result, for instance, of conflicts
of interest that are not apparent at the time of such actions. It is also
possible that future actions taken by Nielsen Media Research may adversely
affect our other stockholders. For example Nielsen Media Research could take
actions which would increase the number of our customers for whom it is entitled
to receive sales commissions, increase the amount paid to it for maintenance of
audience measurement panels, decrease the sales goals that it must achieve in
order to prevent us from selling advertising expenditure measurement data
from third parties, or take other action detrimental to our other
stockholders.

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WE CANNOT 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 substantially all of our revenue from annual subscriptions for
our services. As our business becomes more established, we expect subscription
renewals to account for an increasing proportion of our revenue. Any
unexpectedly-low renewal rates would harm our operating results and could
prevent us from becoming profitable. To date, high renewal rates have been an
essential element of our revenue growth. However, we can not assure you that we
will continue to experience high renewal rates. Additionally, because most
Internet-related businesses are still in the early stages of development,
consolidations in our customer base or the failure of a significant number of
our customers could cause a decline in renewal rates for our products and
services.

WE MAY NOT BE SUCCESSFUL IN DEVELOPING OUR BRAND, WHICH COULD PREVENT US FROM
REMAINING COMPETITIVE

We believe that our future success will depend on our ability to maintain
and strengthen the Nielsen//NetRatings brand, which will depend, in turn,
largely on the success of our marketing efforts and our ability to provide our
customers with high-quality products. To promote the Nielsen//NetRatings brand,
we intend to increase our marketing expenses, and we may incur other types of
expenses in order to create and maintain brand loyalty among our clients.
However, we cannot assure you that our efforts will succeed in maintaining and
strengthening our brand. If we fail to successfully promote and maintain our
brand, or incur excessive expenses attempting to promote and maintain our brand,
our business will be harmed.

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

COSTS TO DEVELOP AND MAINTAIN ACCURATE AUDIENCE MEASUREMENT PANELS ARE
SIGNIFICANT AND MAY INCREASE

The expense of recruiting and maintaining our audience measurement panels
comprises a large portion of the cost of revenue reported on our financial
statements and, therefore, any increase in this expense will likely result in a
corresponding decrease in our gross margin. We believe that the expansion of the
number of our panels as well as the size and scope of our panels is critical to
the success of our business. This expansion is likely to increase our expenses
for recruiting and maintaining our panels. These costs are dependent on many
factors beyond our control, including the cooperation rate of potential panel
members and turnover among existing panel members, and accordingly we cannot
control these costs to match increases or decreases in revenue. To the extent
that such additional expenses are not accompanied by increased revenue, our
results of operations will be harmed. We have limited

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experience in developing Internet panels, and we could experience lower
cooperation rates or higher turnover rates in the future.

WE MAY NOT BE ABLE TO RECRUIT OR RETAIN QUALIFIED PERSONNEL

Our future success depends on our ability to attract, retain and motivate
highly skilled employees. Competition for employees in Internet-related
industries, particularly management, technical, sales and marketing personnel,
is intense. Although we provide compensation packages that include stock
options, cash incentives, and other employee benefits, and although we have
experienced no significant turnover to date, we may be unable to retain our key
employees or to attract, assimilate and retain other highly qualified employees
in the future, which would harm our business.

OUR PLANNED INTERNATIONAL EXPANSION COULD FAIL

Our current strategy includes expansion of our services to measure Internet
audiences outside of those countries we currently serve. Through our joint
ventures, we have developed and released data from audience measurement panels
in Australia, Ireland, New Zealand, Singapore, Hong Kong, Sweden, Norway,
Finland, Denmark, Germany, Brazil, Italy, Japan, France and the United Kingdom.
We are currently developing panels in Spain, South Korea, Taiwan, and the
Netherlands. Our expansion into international markets will require management
attention and resources. In addition, there can be no assurance of the continued
growth of Internet usage in international markets. The international markets for
audience measurement services have historically been localized and difficult to
penetrate. The success of our international expansion will depend on our ability
to:

- recruit and maintain at-home and at-work panels that are
representative of a geographic area;

- control costs and effectively manage foreign operations; and

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

In addition, if we are successful in establishing our international
operations, we will be subject to a number of inherent risks, 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.

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THE SUCCESS OF OUR INTERNATIONAL EXPANSION WILL BE LARGELY DEPENDENT ON THE
EFFORTS OF ACNIELSEN AND OUR WORKING RELATIONSHIP WITH ACNIELSEN

The challenges we face in expanding internationally require skills and
expertise in foreign countries that we do not currently have. To enable us to
expand globally in a rapid timeframe, we have entered into a joint venture
with ACNielsen, which controls 80.1% of the joint venture. ACNielsen has
agreed to fund all of the venture's panel development costs in the countries
initially targeted by the joint venture, which will be determined by an
operating committee consisting of two representatives of NetRatings and two
representatives of the joint venture corporation. After this initial stage,
however, we will likely be required to either contribute additional capital
to the joint venture or to allow ACNielsen to make such capital contributions
unilaterally with resulting dilution of our ownership interest in the
venture. Furthermore, if we encounter significant problems in our working
relationship with ACNielsen, or if our joint venture is ineffectively
managed, our international expansion is likely to fail.

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

BECAUSE THE INTERNET AUDIENCE MEASUREMENT INDUSTRY IS IN ITS INFANCY, THE
PRICING AND ACCEPTANCE OF OUR PRODUCTS AND SERVICES IS UNCERTAIN

We may be forced for competitive or technical reasons to reduce prices for
some of our products or services or to offer them free of charge. Such
circumstances would reduce our revenue and could harm our business.
Additionally, our market is still evolving, and we have little basis to assess
demand for different types of products or services or to evaluate whether our
products and services will be accepted by the market. If our

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products and services do not gain broad market acceptance, our business may
fail.

THE ACCEPTANCE AND EFFECTIVENESS OF INTERNET ADVERTISING AND ELECTRONIC
COMMERCE IS UNCERTAIN, AND IF THESE MARKETS FAIL TO DEVELOP OR DEVELOP MORE
SLOWLY THAN WE EXPECT, OUR BUSINESS WILL SUFFER

Our future success will depend in part on an increase in the use of the
Internet as an advertising medium and the proliferation of e-commerce. These
markets are new and rapidly evolving, and the effectiveness of Internet
advertising is uncertain. As a result, there is considerable uncertainty
about the demand and market acceptance for Internet advertising and
e-commerce. Many of our current or potential customers have little or no
experience using the Internet for advertising or commerce purposes. 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, unique,
and effectively deal with issues such as channel conflict and infrastructure
costs. Rapid growth in the use of the Internet for e-commerce may not
continue or the Internet may not be adopted as a medium of commerce by a
broad base of customers. In addition, most current and potential publishers
of content and commerce merchants on the Internet have little or no
experience in generating revenue from the sale of advertising space on their
Internet sites or from conducting on line commerce transactions. Because of
the foregoing factors, among others, the market for Internet advertising and
e-commerce may not continue to emerge or become sustainable. If these markets
fail to develop or develop more slowly than we expect, our business will
suffer.

A SALE BY NIELSEN MEDIA RESEARCH OF ITS STAKE IN NETRATINGS COULD ADVERSELY
AFFECT OUR STOCK PRICE

There are no contractual restrictions on the ability of Nielsen Media
Research 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 and several of our other
stockholders have the right, under certain circumstances, to require us to
register their stock for sale on the public market. Should Nielsen Media
Research decide to sell its stake in NetRatings, it could adversely affect our
stock price. Additionally, as a majority stockholder, Nielsen Media Research
will have the ability to transfer control of NetRatings, possibly at a premium
over the then-current market price. Because Nielsen Media Research will have the
ability to effect such a transfer of control unilaterally, other stockholders
could be denied an opportunity to participate in the transaction and receive a
premium for their shares.

NIELSEN MEDIA RESEARCH'S AUDIENCE MEASUREMENT SERVICES 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. If television and

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the Internet converge in the future as expected, any Internet audience
information that is reported by Nielsen Media Research's television audience
measurement services may overlap with the audience information that is reported
by the Nielsen//NetRatings Internet audience measurement services. In the event
of such overlap, Nielsen Media Research'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 in our databases, like that in any database, may contain
inaccuracies that our customers may not accept. Any dissatisfaction by our
customers with our measurement methodologies or databases could have an adverse
effect on our ability to attract new customers and retain existing customers and
could ultimately harm our brand. Our customer contracts generally provide that
each customer must indemnify us for any damages arising from the use of data,
reports or analyses by the customer or the performance of any consulting,
analytic or other services by us. However, we cannot be certain that our
contract provisions provide sufficient protection. Any liability that we incur
or any harm to our brand that we suffer because of irregularities or
inaccuracies in the data we supply to our customers could harm our business. To
date, we have not been notified of any liability claims or customer
dissatisfaction relating to such problems with our data.

OUR BUSINESS COULD SUFFER IF WE LOSE THE SERVICES OF ANY OF OUR EXECUTIVE
OFFICERS

Our future success depends to a significant extent on the continued service
of our executive officers. The loss of the services of any of our executive
officers could harm our business. We have no employment agreements with any of
our key personnel, and should we enter into such agreements in the future, they
may be ineffective in preventing a key employee from leaving our company

SYSTEM FAILURES OR DELAYS MAY HARM OUR BUSINESS, AND OUR FACILITIES AND
INTERNAL COMPUTER OPERATIONS ARE VULNERABLE TO NATURAL DISASTERS AND OTHER
UNEXPECTED LOSSES

Our success depends on the efficient and uninterrupted operation of our
computer and communications systems. A failure of our network 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. To date, we have not
experienced any significant system failures.

Our internal computer operations are located in leased facilities in San
Jose, California, in an area that is susceptible to earthquakes. We do not have
a backup facility to provide redundant network capacity in the event of a system
failure. Accordingly, if this location experienced a system failure, our online
services would become unavailable to our customers until we were able to bring
an alternative facility online, a process which could take several weeks. These
systems are also vulnerable to damage from fire, floods, power loss,
telecommunications failures, break-ins and similar events. We intend to develop
back-up systems outside of San Jose, however, as we replicate our systems at
other locations, we will face a number of technical challenges, particularly
with

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respect to database replications, which we may not be able to address
successfully. Although we carry property and business interruption insurance,
our coverage may not be adequate to compensate us for all losses that may occur.
Our servers may also be vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions.

A DELAY OR DISCONTINUATION OF OUR SERVER HOSTING SERVICE COULD HARM OUR
BUSINESS

The servers on which we collect panel members' data are maintained by
AboveNet at its facilities located in San Jose, California. AboveNet continually
monitors our current utilization rate and the extent of our system capacity
needs. We believe we are currently operating at utilization levels that do not
require additional capacity. Accordingly, our ability to collect Internet
audience data in real time is dependent upon the efficient and uninterrupted
operation of AboveNet's computer and communications hardware and software
systems. Despite any precautions we may take, the occurrence of a natural
disaster or other unanticipated problems at AboveNet's facility could result in
interruptions in the flow of data to our servers. In addition, any failure by
AboveNet to provide our required data communications capacity could result in
interruptions in our service. In the event of a delay in the delivery of data
from AboveNet, or if AboveNet should discontinue its services to us, we would be
required to transfer our data collection operations to an alternative provider
of server hosting services. Such a transfer could result in significant delays
in our ability to deliver our products and services to our customers, which
could damage our reputation and harm our business.

WE ARE SUBJECT TO A PENDING LEGAL PROCEEDING

On November 4, 1999, PaineWebber Incorporated, "PaineWebber," filed a
lawsuit against us in the Supreme Court of the State of New York for the County
of New York. The suit involves an agreement entered into in May 1999 in which we
engaged PaineWebber to act as our financial advisor with respect to a potential
strategic transaction. The specific transaction for which PaineWebber was
engaged was not consummated. However, the lawsuit alleges that we have breached
our obligations under the agreement by failing to pay PaineWebber a fee based
upon our subsequent sale of equity securities to Nielsen Media Research and by
failing to retain PaineWebber as a managing underwriter for our initial public
offering.

On June 28, 2000 the court ruled in our favor in connection with our motion
to dismiss PaineWebber's claims that we improperly failed to retain PaineWebber
as a managing underwriter in our initial public offering but granted
PaineWebber's motion for summary judgment as to our liability on the claim that
we failed to pay PaineWebber a fee based upon our sale of equity securities to
Nielsen Media Research.

Both parties have filed Notices of Appeal in connection with the above
rulings. At the same time, the case is proceeding to a hearing as to the amount
of damages which we will be required to pay PaineWebber. Although the complaint
originally sought damages in the aggregate amount of not less than $1.9 million
on all claims and reimbursement for PaineWebber's attorneys' fees relating to
the dispute, PaineWebber has increased its assessment of its alleged damages
relating to the claims for which it has received summary judgment to
approximately $3.4 million (plus interest). We intend to continue to vigorously
dispute PaineWebber's damage analysis.

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Based on the above, we expect to incur substantial additional legal fees
and expenses in connection with the litigation, and it may also result in the
diversion of our internal resources. As a result, our defense of this
litigation, regardless of its eventual outcome, will likely be costly and time
consuming and at this time we are unable to predict its final outcome. However,
an adverse outcome could materially affect our results of operations and
financial position.

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. Notwithstanding these laws, we may be unsuccessful in protecting our
intellectual property rights or in obtaining patents or registered trademarks
for which we apply. We have applied for U.S. patents with respect to our
BannerTrack advertising tracking technology. We have applied to register the
NetRatings, NetRatings Insight, NetRatings Online Observer, BannerTrack and
CommerceTrack trademarks in the United States. We have undertaken only limited
actions to protect our trademarks, servicemarks or tradenames outside of the
United States and we have not registered our copyrights. Our patent applications
or trademark registrations may not be approved or, even if approved, could be
challenged by others or invalidated through administrative process or
litigation. If our patent applications or trademark registrations are not
approved because third parties own rights to the technology we are trying to
patent or the trademarks we are trying to register, our use of such technology
or trademark would be restricted unless we enter into arrangements with the
third-party owners, which might not be possible on commercially reasonable terms
or at all.

WE MIGHT FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT MIGHT BE COSTLY
TO RESOLVE

We may from time to time be subject to claims of infringement of other
parties' proprietary rights or claims that our own trademarks, patents or other
intellectual property rights are invalid. To date, we have not been subject to
any such claims. However, any claims of this type, with or without merit, could
be time-consuming to defend, result in costly litigation, divert management
attention and resources or require us to enter into royalty or license
agreements. License agreements may not be available on reasonable terms, if at
all, and the assertion or prosecution of any infringement claims could
significantly harm our business.

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 in an aggregated format or in a form that is not identifiable on
an individual basis. However, if a person were to penetrate our network security
or otherwise misappropriate sensitive data about our panel members, our
reputation could be harmed or we could be subject to claims or litigation
arising from damages suffered by panel members as a result of such
misappropriation.

ANY ACQUISITIONS OR EQUITY INVESTMENTS THAT WE UNDERTAKE COULD BE DIFFICULT
TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR HARM OUR
OPERATING RESULTS

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We may acquire or make additional equity investments in complementary
businesses, technologies, services or products if appropriate opportunities
arise. The process of integrating any acquired business, technology, service or
product into our business and operations may result in unforeseen operating
difficulties and expenditures. Integration of an acquired company also may
consume much of our management's time and attention that would otherwise be
available for ongoing development of our business. Moreover, the anticipated
benefits of any acquisition may not be realized. We may be unable to identify,
negotiate or finance future acquisitions successfully, or to integrate
successfully any acquisitions with our current business. Future acquisitions
could result in potentially dilutive issuances of equity securities or the
incurrence of debt, contingent liabilities or amortization expenses related to
goodwill and other intangible assets, any of which could harm our business.

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, e-commerce, taxation, and the pricing, characteristics and quality of
products and services. Finally, the global nature of the Internet could subject
us to the laws of a foreign jurisdiction in an unpredictable manner. Any new
legislation regulating the Internet could inhibit the growth of the Internet and
decrease the acceptance of the Internet as a communications and commercial
medium, which might harm our business.

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

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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 antitakeover provisions
contained in our certificate of incorporation and bylaws.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

As of September 30, 2000, we had cash and cash equivalents and
short-term investments of $333.4 million consisting of cash and highly
liquid, short-term investments. Our short-term investments will decline by an
immaterial amount if market interest rates increase, and therefore, our
exposure to interest rate changes has been immaterial. Declines of interest
rates over time will, however, 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. Our outstanding capital lease
obligations are all fixed interest rates and therefore have minimal exposure
to interest rate fluctuations.

PART II

ITEM 1. LEGAL PROCEEDINGS

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regardless of its eventual outcome, will likely be costly and time consuming and
at this time we are unable to predict its final outcome. However, an adverse
outcome could materially affect our results of operations and financial
position.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

USE OF PROCEEDS OF INITIAL PUBLIC OFFERING

The effective date of the our first registration statement, filed on Form
S-1 under the Securities Act of 1933 (No. 333-87717) relating to the our initial
public offering of our common stock, was December 8, 1999. A total of 4,600,000
shares of our common stock were sold at a price of $17.00 per share, for an
aggregate offering price of $78,200,000 to an underwriting syndicate led by
Lehman Brothers, Banc of America Securities, LLC, CIBC World Markets, and C.E.
Unterberg, Towbin. The offering commenced on December 8, 1999. The initial
public offering resulted in net proceeds of $71.1 million after deducting $5.0
million in underwriting discounts and offering expenses of $1.6 million. From
the time of receipt through September 30, 2000, we did not use any of the
proceeds from such offering and all such proceeds are included with cash, cash
equivalents and short-term investments. None of the proceeds were used to make
payments, either direct or indirect, to directors or officers of NetRatings or
their associates, or, 10% stockholders or affiliates of NetRatings.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

27.1 Financial Data Schedule

(b) Reports on Form 8-K

On July 14, 2000, we filed a report on Form 8-K, pursuant to Item 5 of such
Form, regarding developments in our lawsuit with PaineWebber Incorporated.

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 on November 14, 2000.

NETRATINGS INC.

By: /s/ JACK R. LAZAR
------------------------------
Jack R. Lazar
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND SECRETARY
(PRINCIPAL ACCOUNTING AND
FINANCIAL OFFICER)

By: /s/ DAVID J. TOTH
------------------------------
David J. Toth
CHIEF EXECUTIVE OFFICER,
PRESIDENT, AND DIRECTOR

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EXHIBIT INDEX

27.1 Financial Data Schedule