NETRATINGS INC, 10-Q, 2000-08-14

NETRATINGS INC
10-Q, 2000-08-14
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 JUNE 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
AUGUST 10, 2000, WAS 32,484,874.

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NETRATINGS, INC.

FORM 10-Q INDEX
<TABLE>
<S> <C> <C>
Part I. FINANCIAL INFORMATION

Item 1. Condensed Financial Statements
Condensed Balance Sheets--June 30, 2000 (Unaudited) and
December 31, 1999......................................... 3
Condensed Statements of Operations--Three and Six months
ended June 30, 2000 and 1999 (Unaudited).................. 4
Condensed Statements of Cash Flows--Six months ended
June 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................................. 8

Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 22

Part II. OTHER INFORMATION

Item 1. Legal Proceedings........................................... 23
Item 2. Changes in Securities and Use of Proceeds................... 23
Item 4. Submission of Matters to a Vote of Security Holders......... 23
Item 6. Exhibits and Reports on Form 8-K............................ 23

Signatures.................................................. 24
Index to Exhibits........................................... 25
</TABLE>

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PART I

ITEM 1. FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $166,084 $319,325
Short-term investments.................................... 166,929 12,931
Accounts receivable, net.................................. 5,324 2,550
Prepaid expenses and other current assets................. 3,684 885
-------- --------
Total current assets.................................... 342,021 335,691
Property and equipment, net................................. 2,889 916
Other assets................................................ 1,215 192
-------- --------
$346,125 $336,799
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,941 $ 1,646
Accrued liabilities....................................... 5,082 1,393
Deferred revenue.......................................... 10,078 3,444
Notes payable and capital lease obligations,
current portion......................................... 171 253
Amounts due to Nielsen Media Research..................... 3,176 1,537
-------- --------
Total current liabilities............................... 20,448 8,273
Notes payable and capital lease obligations,
long-term portion....................................... 119 265
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 32,265,419 at June 30, 2000.... $ 32 $ 32
Additional paid-in capital................................ 398,452 398,485
Deferred compensation and other costs..................... (40,910) (46,574)
Notes receivable from stockholder......................... (128) (128)
Accumulated other comprehensive loss...................... (448) (28)
Accumulated deficit....................................... (31,440) (23,526)
-------- --------
Total stockholders' equity.............................. 325,558 328,261
-------- --------
$346,125 $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)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue....................................... $ 4,697 $ 476 $ 7,798 $ 642
Cost of revenue............................... 3,143 1,125 6,101 2,156
-------- -------- -------- --------
Gross profit (loss)........................... 1,554 (649) 1,697 (1,514)

Operating expenses:
Research and development.................... 1,539 695 3,061 1,123
Sales and marketing......................... 4,308 883 8,168 1,373
General and administrative.................. 1,194 253 2,114 509
Stock-based compensation.................... 2,706 1,068 5,585 1,139
-------- -------- -------- --------
Total operating expenses.................. 9,747 2,899 18,928 4,144
-------- -------- -------- --------
Loss from operations.......................... (8,193) (3,548) (17,231) (5,658)
Loss from joint ventures...................... (912) -- (912) --
Interest income (expense), net................ 5,236 (55) 10,229 (122)
-------- -------- -------- --------
Net loss...................................... $(3,869) $(3,603) $(7,914) $(5,780)
======= ======= ======= =======
Basic and diluted net loss per common share... $ (0.12) $ (1.80) $ (0.25) $ (3.07)
======= ======= ======= =======
Shares used to compute basic and diluted net
loss per common share......................... 31,731 2,000 31,653 1,883
======= ======= ======= =======
Pro forma basic and diluted net loss per
common share.................................. $ (0.12) $ (1.61) $ (0.25) $ (2.73)
======= ======= ======= =======
Shares used to compute pro forma basic and
diluted net loss per common share............. 31,731 2,238 31,653 2,121
======= ======= ======= =======
</TABLE>

See accompanying notes to the condensed financial statements.

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

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES

Net cash provided by (used in) operating activities......... $ 4,046 $(1,652)
-------- -------
INVESTING ACTIVITIES
Acquisition of property and equipment..................... (2,370) (241)
Investment in joint venture............................... (1,229) --
Loss on investment in joint venture....................... 912 --
Purchase of short term investments........................ (597,016) --
Sale of short term investments............................ 442,598 --
-------- -------
Net cash used in investing activities....................... (157,105) (241)
-------- -------
FINANCING ACTIVITIES
Proceeds from exercise of options......................... 46 6
Proceeds from convertible notes payable to Nielsen Media
Research........................................... -- 1,000

Proceeds from equipment financing......................... -- 258
Principal payments on capital lease obligations
and notes payable.................................. (228) (36)
-------- -------
Net cash (used in) provided by financing activities......... (182) 1,228
-------- -------
Net decrease in cash and cash equivalents................. (153,241) (665)
Cash and cash equivalents at beginning of period............ 319,325 1,343
-------- -------
Cash and cash equivalents at end of period.................. $166,084 $ 678
======== =======

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.

3. LITIGATION

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.

Unless either party appeals the ruling, the case will next proceed to a
trial or inquist 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, in
recent communications, PaineWebber has increased its assessment of its
alleged damages relating to the claims for which it has received summary
judgment to approximately $2.9 million. We intend to continue to vigorously
dispute PaineWebber's damage analysis. We have not yet determined whether or
not we will appeal the court's summary judgment ruling, nor do we know
whether PaineWebber will appeal the ruling in our favor on our motion to
dismiss.

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Regardless of our decision regarding appeal of the ruling, 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.

4. LOSS ON JOINT VENTURES

5. COMPREHENSIVE LOSS

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss.............................. $(3,869) $(3,603) $(7,914) $(5,780)
Unrealized loss on short-term
investments......................... (167) -- (420) --
-------- -------- -------- --------
Comprehensive loss.................... $(4,036) $(3,603) $(8,334) $(5,780)
======== ======== ======== ========
</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:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
(in thousands, except per share data) 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
HISTORICAL:
Net loss................................ $(3,869) $(3,603) $(7,914) $(5,780)
Weighted-average shares of common
stock outstanding..................... 32,252 3,151 32,197 3,132
Less: weighted-average shares subject
to repurchase..................... 521 1,151 544 1,249
Weighted-average shares of common
stock outstanding used in computing
basic and diluted net loss per share.. 31,731 2,000 31,653 1,883
Basic and diluted net loss per common
share......... ....................... $ (0.12) $ (1.80) $ (0.25) $ (3.07)

PRO FORMA
Net Loss................................ $(3,869) $(3,603) $(7,914) $(5,780)
Weighted-average shares of common stock
outstanding used in computing basic
and diluted net loss per common
share................................. 31,731 2,000 31,653 1,883
Adjustment to reflect the effect of the
assumed conversion of preferred stock
from the date of issuance............. -- 238 -- 238
Weighted average shares used in computing
pro forma basic and diluted net loss
per common share...................... 31,731 2,238 31,653 2,121
Pro forma basic and diluted net loss per
common share.......................... $ (0.12) $ (1.61) $ (0.25) $ (2.73)
</TABLE>

7
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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 June 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 June 30, 2000, we have
developed and released data for Internet audience measurement panels in
Australia, Ireland, New Zealand, Singapore, and the United Kingdom. We have
developed panels in Italy, Norway, Sweden, Finland and Denmark and are
developing panels in Germany, Hong Kong and Brazil. 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, Latin
America, 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 June 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.

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

We generate revenue from the sale of our Internet audience measurement
products and services. Through June 30, 2000, our information and analytical
products and services, which include our Audience Measurement service,
E-Commerce Strategies service, Internet Investment Strategies service, Internet
Media Strategies service, International Audience Measurement Service, Local
Market service, have accounted for

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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 has increased from over 425 customers worldwide as of
March 31, 2000 to more than 570 customers worldwide as of June 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 subsciption 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 analytical services. Accordingly, we expect
that research and development expenses will increase in absolute dollars in
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 significantly 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

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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
June 30, 2000. We recognized non-cash amortization of these stock
compensation charges of $5.3 million for the year ended December 31, 1999 and
$5.6 million for the six months ended June 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 significantly 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 primarily to the interest charges incurred in connection with our
credit facilities.

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 $7.9 million for the six months ended June 30,
2000. Our accumulated deficit at June 30, 2000 was $31.4 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 SIX MONTH PERIODS ENDED JUNE 30, 2000 COMPARED TO THREE AND
SIX MONTH PERIODS ENDED JUNE 30, 1999

REVENUE. Revenue was $4.7 million and $7.8 million for the three month
and six month periods ended June 30, 2000, respectively, which represent
increases of 888% and 1,115% 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 six month periods ended June 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
six month period ended June 30, 2000, our audience measurement service
("AMS") comprised 71% and 70% of our revenue, respectively, compared to 92%
and 93% in the corresponding periods in 1999; our suite of analytical
services accounted for 20% in both periods compared to 8% and 7% in the
corresponding periods in 1999; and the revenue from joint venture contracts
and international royalties accounted for the remaining 9% and 10%
respectively with no international revenue for the corresponding periods in
1999. During the three and six month periods ended June 30, 2000 and 1999, no
customer accounted for more than 10% of our revenue.

COST OF REVENUE. Cost of revenue increased 179% to $3.1 million, or 67%
of revenue for the three month period ended June 30, 2000 compared to $1.1
million, or 236% of revenue for the corresponding period in 1999. For the six
month period ended June 30, 2000, cost of revenue increased 183% to $6.1
million, or 78% of revenue compared to $2.2 million, or 336% 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 and production support of our Nielsen//NetRatings on-line
services,

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<PAGE>

at-work audience measurement panel, and the Canadian at-home audience
measurement panel and data collection activities related to domestic and
Canadian panels.

RESEARCH AND DEVELOPMENT. Research and development expenses increased
121% to $1.5 million, or 33% of revenue for the three month period ended June
30, 2000 compared to $695,000, or 146% of revenue for the corresponding
period in 1999. For the six month period ended June 30, 2000, research and
development expenses increased 173% to $3.1 million, or 39% of revenue
compared to $1.1 million, or 175% of revenue, for the corresponding period in
1999. The increases were primarily due to equipment costs and a three fold
increase in the number of employees.

SALES AND MARKETING. Sales and marketing expenses increased 388% to $4.3
million, or 92% of revenue for the three month period ended June 30, 2000
compared to $883,000, or 186% of revenue for the corresponding period in
1999. For the six month period ended June 30, 2000, sales and marketing
expenses increased 495% to $8.2 million, or 105% of revenue compared to $1.4
million, or 214% of revenue, for the corresponding period in 1999. The
increases were primarily attributable to commissions related to a significant
increase in sales, an increase in the number of sales and marketing
employees, and our marketing effort to build the Nielsen//NetRatings brand
and enhance the awareness of our products and services.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
372% to $1.2 million, or 25% of revenue for the three month period ended June
30, 2000 compared to $253,000, or 53% of revenue for the corresponding period
in 1999. For the six month period ended June 30, 2000, general and
administrative expenses increased 315% to $2.1 million, or 27% of revenue
compared to $509,000, or 79% of revenue, for the corresponding period in
1999. This increase 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
154% to $2.7 million for the three month period ended June 30, 2000 compared
to $1.1 million for the corresponding period in 1999. For the six month
period ended June 30, 2000, stock based compensation expenses increased 390%
to $5.6 million compared to $1.1 million for the corresponding period in
1999. The increases primarily related to the grant of certain stock option to
employees as well as the issuance of warrants to Nielsen Media Research.

LOSS FROM JOINT VENTURES. Loss from joint ventures for the three month
and six month periods ended June 30, 2000 was $912,000. 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 $5.2
million for the three month period ended June 30, 2000 from $55,000 net
interest expense for the corresponding period in 1999. For the six month
period ended June 30, 2000, interest income, net increased to $10.2 million
from $122,000 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 June 30, 2000, our as adjusted
net loss, which excludes the amortization of non-cash stock-based
compensation, decreased to $1.2 million, or a loss of $0.04 per share on
approximately 31.7 million shares outstanding, as compared to a net loss of
$2.5 million, or a loss of $1.13 per share on approximately 2.2 million
shares outstanding for the corresponding period in 1999. For the six month
period ended June 30, 2000, the as adjusted net loss decreased to $2.3
million, or a loss of $.07 per share on approximately 31.7 million shares
outstanding, as compared to a net loss of $4.6 million, or a loss of $2.19
per share on approximately 2.1 million shares outstanding for the
corresponding period in 1999.

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This decrease 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 and the accrued losses on joint venture
activity. Including the amortization of non-cash stock-based compensation,
the net loss for the three month and six month period ended June 30, 2000 was
$3.9 million, or a loss of $0.12 per share, and $7.9 million, or a loss of
$0.25 per share, respectively, compared to $3.6 million, or a loss of $1.61
per share, and $5.8 million, or a loss of $2.73 per share, for the
corresponding periods in 1999. This increase was primarily due to the
amortization of the stock based compensation. Shares outstanding assume the
conversion of all preferred stock as if the conversion occurred at the
beginning of the period or at date of issuance, if later.

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 $235.9 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 June 30,
2000 increased $0.8 million to $333.0 million as compared to December 31, 1999.

Cash used in investment activities was $157.1 million for the six month
period ended June 30, 2000. Purchases, net of proceeds and maturities, of
marketable securities and other investments during the period were $597.0
million and capital expenditures totaled $2.4 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 $241,000
for the six month period ended June 30, 1999. All of such amounts related to
capital expenditures for computer hardware and software. Although we had no
material capital expenditure commitments at June 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 six month period ended June 30, 2000 cash used in financing
activities was $182,000 as compared to $1.2 million provided by financing
activities in the comparable period in 1999. The cash used in financing
during 2000 related primarily to the repayment of our notes payable and the
principal payments related to our capital lease obligations offset by cash
provided by the exercise of options. The cash provided by financing during
1999 related primarily to proceeds from the issuance of convertible notes
payable to Nielsen Media Research and proceeds from our equipment financing,
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 June 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 June 30, 2000. We also have a $350,000
line of credit with Heritage Bank of Commerce to fund equipment purchases.
Any advances under this equipment line mature 36 months following funding and
bear interest at the bank's prime rate. 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 June 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

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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,
$7.9 million for the six months ended June 30, 2000, and as of June 30, 2000,
our accumulated deficit was $31.4 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
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;

- 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

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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

The market for Internet audience measurement and analysis is new, rapidly
evolving and becoming increasingly competitive. In the market for Internet
audience measurement services, our principal competitor is 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 compete with companies
such as Forrester Research, Gartner Group and Jupiter Communications 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. 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 provide quality analytical services derived from Internet
audience measurement information;

- the ability to offer products and services in international markets; 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:

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- 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

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 will 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

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from third parties, or take other action detrimental to our other
stockholders.

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
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.

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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, Japan, and the United
Kingdom. We have developed panels in France, Italy, Norway, Sweden, Finland,
and Denmark, and are currently developing panels in Germany, Hong Kong, and
Brazil. 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.

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 may 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. Moreover, because all of the initial countries to be targeted by the
joint venture have not yet been determined by the operating committee, we
cannot predict what proportion of overall panel development costs we will be
required to contribute. Accordingly, we could be subject to unanticipated
costs or dilution of our ownership interest as a result of actions by the
operating committee to limit the countries that are part of the initial
roll-out of the joint venture's operations. 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.

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

THE ACCEPTANCE AND EFFECTIVENESS OF INTERNET ADVERTISING IS UNCERTAIN, AND IF
THE MARKET FOR INTERNET ADVERTISING FAILS TO DEVELOP OR DEVELOPS 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. The Internet advertising market is 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. Many of our current or potential
customers have little or no experience using the Internet for advertising
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 market may also be adversely affected by privacy issues
surrounding the targeting of this type of advertising. In addition, most
current and potential publishers of content on the Internet have little or no
experience in generating revenue from the sale of advertising space on their
Internet sites. Because of the foregoing factors, among others, the market
for Internet advertising may not continue to emerge or become sustainable. If
the market for Internet advertising fails to develop or develops 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

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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
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,

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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 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 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.

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,

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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

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.

DEMAND FOR OUR PRODUCTS AND SERVICES MIGHT DECREASE IF GROWTH IN THE USE OF
THE INTERNET OR E-COMMERCE DECLINES

Our future success depends in part upon the continued growth in the use of
the Internet and e-commerce. Rapid growth in the use of the Internet and
e-commerce is a recent phenomenon and may not continue, or the Internet may not
be adopted as a medium of commerce by a broad base of consumers. If the Internet
does not continue to grow,

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or if e-commerce is not adopted as a medium of commerce by a broad base of
consumers, our business may not grow or may grow at a slower rate.

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
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 June 30, 2000, we had cash and cash equivalents and short-term
investments of $333.0 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. Our outstanding capital lease
obligations are all fixed interest rates and therefore have minimal exposure
to interest rate fluctuations.

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PART II

ITEM 1. LEGAL PROCEEDINGS

Unless either party appeals the ruling, the case will next proceed to a trial
or inquist 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, in
recent communications, PaineWebber has increased its assessment of its
alleged damages relating to the claims for which it has received summary
judgment to approximately $2.9 million. We intend to continue to vigorously
dispute PaineWebber's damage analysis. We have not yet determined whether or
not we will appeal the court's summary judgment ruling, nor do we know
whether PaineWebber will appeal the ruling in our favor on our motion to
dismiss.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

RECENT SALES OF UNREGISTERED SECURITIES

During the three months ended June 30, 2000, NetRatings issued an
aggregate of 42,029 shares of unregistered common stock pursuant to stock
option exercises under its 1998 Stock Plan for an aggregate purchase price of
$19,535. During the same period, NetRatings issued 80,317 shares of
unregistered common stock pursuant to the exercise of certain warrants
pursuant to the "cashless" exercise provisions of such warrants. The number
of shares issued pursuant to the exercise of the warrants represent the net
amount of the shares underlying the warrants less that number of shares whose
value on the date of exercise equaled the exercise price of the shares on the
date of exercise. If exercised for cash, the shares issued pursuant to the
warrants would have had an exercise price of $90,426. The issuance of shares
pursuant to the stock option exercises were deemed exempt from registration
under the Securities Act in reliance on Rule 701 promulgated thereunder as
transactions pursuant to compensatory benefit plans and contracts related to
compensation and the shares issued pursuant to the warrant exercises were
deemed exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act as transactions by an issuer not involving
a public offering.

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

On May 25, 2000, the Company held its Annual Meeting of Stockholders. At
the meeting, the stockholders elected as directors David J. Toth, David A.
Norman, Jack T. Serfass, James J. Geddess, Jr., David H. Harkness, Michael P.
Connors, Thomas A. Mastrelli, Gerald S. Hobbs, Daniel O'Shea, John A. Dimling
and Charles E. Leonard (each with 29,338,504 affirmative votes; 71,864 votes
were withheld as to each of directors Toth, O'Shea, Leonard, Norman, Connors,
Geddes, and Dimling and 172,764 votes were withheld as to directors Harkness,
Mastrelli, and Hobbs).

The stockholders also approved an amendment to the Company's 1998 Stock
Plan to increase the number of shares reserved for issuance thereunder by
1,500,000 shares and to limit the maximum number of shares which can be
granted to any employee during any fiscal year to 500,000 (with 28,155,462
shares voting for, 1,215,906 against, and 43,000 abstaining).

The stockholders also ratified the appointment of Ernst & Young LLP as
the independent auditors for the Company for the year ending December 31,
2000 (with 29,406,778 shares voting for, 440 against, and 3,150 abstaining).

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.

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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 August 11,
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