NETRATINGS INC, 10-Q, 2000-05-11

NETRATINGS INC
10-Q, 2000-05-11
BUSINESS SERVICES, NEC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

FORM 10-Q

(MARK ONE)

<TABLE>
<C> <S>
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR

<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 000-27907

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NETRATINGS, INC.

(Exact name of Registrant as specified in its charter)

<TABLE>
<S> <C>
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)
</TABLE>

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

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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 MAY
10, 2000, WAS 32,222,517.

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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--March 31, 2000 (Unaudited) and
December 31, 1999......................................... 3
Condensed Statements of Operations--Three months ended
March 31, 2000 and 1999 (Unaudited)....................... 4
Condensed Statements of Cash Flows--Three months ended
March 31, 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...................................................... 21

Part II. OTHER INFORMATION

Item 1. Legal Proceedings........................................... 22
Item 2. Changes in Securities and Use of Proceeds................... 22
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>
MARCH 31, DECEMBER 31,
2000 1999
----------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $128,342 $319,325
Short-term investments.................................... 202,283 12,931
Accounts receivable, net.................................. 5,007 2,550
Prepaid expenses and other current assets................. 1,812 885
-------- --------
Total current assets.................................... 337,444 335,691
Property and equipment, net................................. 1,664 916
Other assets................................................ 1,360 192
-------- --------
$340,468 $336,799
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,254 $ 1,646
Accrued liabilities....................................... 2,668 1,393
Deferred revenue.......................................... 6,996 3,444
Notes payable and capital lease obligations,
current portion......................................... 168 253
Amounts due to Nielsen Media Research..................... 2,381 1,537
-------- --------
Total current liabilities............................... 13,467 8,273
Notes payable and capital lease obligations,
long-term portion....................................... 138 265
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 32,220,174 at March 31, 2000.... $ 32 $ 32
Additional paid-in capital................................ 398,508 398,485
Deferred compensation and other costs..................... (43,696) (46,574)
Notes receivable from stockholder......................... (128) (128)
Accumulated other comprehensive loss...................... (282) (28)
Accumulated deficit....................................... (27,571) (23,526)
-------- --------
Total stockholders' equity.............................. 326,863 328,261
-------- --------
$340,468 $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
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Revenue..................................................... $ 3,101 $ 166
Cost of revenue............................................. 2,958 1,031
------- -------
Gross profit (loss)......................................... 143 (865)

Operating expenses:
Research and development.................................. 1,522 428
Sales and marketing....................................... 3,860 490
General and administrative................................ 920 256
Stock-based compensation.................................. 2,879 71
------- -------
Total operating expenses................................ 9,181 1,245
------- -------
Loss from operations........................................ (9,038) (2,110)
Interest income (expense), net.............................. 4,993 (67)
------- -------
Net loss.................................................... $(4,045) $(2,177)
======= =======

Basic and diluted net loss per common share................. $ (0.13) $ (1.23)
======= =======

Shares used to compute basic and diluted net loss per common
share....................................................... 31,576 1,767
======= =======

Pro forma basic and diluted net loss per common share....... $ (0.13) $ (1.09)
======= =======

Shares used to compute pro forma basic and diluted
net loss per common share................................ 31,576 2,005
======= =======
</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>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash provided by (used in) operating activities......... $ 926 $(1,153)
-------- -------
INVESTING ACTIVITIES
Acquisition of property and equipment..................... (898) (287)
Investment in joint venture............................... (1,215) --
Purchase of short term investments........................ (428,666) --
Sale of short term investments............................ 239,060 --
-------- -------
Net cash used in investing activities....................... (191,719) (287)
-------- -------
FINANCING ACTIVITIES
Net cash (used in) provided by financing activities......... (190) 497
-------- -------
Net decrease in cash and cash equivalents................. (190,983) (943)
Cash and cash equivalents at beginning of period............ 319,325 1,343
-------- -------
Cash and cash equivalents at end of period.................. $128,342 $ 400
======== =======

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 statement 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. 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 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 financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
period. Operating results for the three-month period ended March 31, 2000 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.

2. LITIGATION

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 this offering. The complaint
seeks damages in the aggregate amount of not less than $1.9 million and
reimbursement for PaineWebber's attorneys' fees relating to the dispute. At this
stage of the litigation, we have filed a partial answer and a partial motion to
dismiss the complaint. PaineWebber has filed a motion for summary judgment as to
liability on all of its claims and we have filed a Memorandum of Law in
opposition to this motion. We believe, based on consultation with our counsel,
that we have substantial defenses to PaineWebber's claims, and we intend to
defend the lawsuit vigorously. We expect to incur substantial 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. The litigation is in the preliminary stage, and we are unable to
predict its final outcome. However, an adverse outcome could materially affect
our results of operations and financial position.

3. COMPREHENSIVE INCOME

The components of comprehensive loss, net of related tax, are as follows ($
in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
Net loss.................................................... $(4,045) $(2,177)
Unrealized loss on short-term investments................... (253) --
------- -------
Comprehensive loss.......................................... $(4,298) $(2,177)
======= =======
</TABLE>

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4. 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
MARCH 31,
--------------------------
(in thousands, except per share data) 2000 1999
----------- ------------
<S> <C> <C>
HISTORICAL:
Net loss.................................................... $(4,045) $(2,177)
Weighted-average shares of common stock outstanding......... 32,144 3,113
Less: weighted-average shares subject to repurchase......... 567 1,346
Weighted-average shares of common stock outstanding used in
computing basic and diluted net loss per share............ 31,577 1,767
Basic and diluted net loss per common share................. $ (0.13) $ (1.23)

PRO FORMA
Net Loss.................................................... $(4,045) $(2,177)
Weighted-average shares used in computing basic and diluted
net loss per common share................................. 31,576 1,767
Adjustment to reflect the effect of the assumed conversion
of preferred stock from the date of issuance.............. -- 238
Weighted average shares used in computing pro forma basic
and diluted net loss per common share..................... 31,576 2,005
Pro forma basic and diluted net loss per common share....... $ (0.13) $ (1.09)

</TABLE>

<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER SUBSTANTIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY
FACTORS, INCLUDING THOSE SET FORTH UNDER "FACTORS THAT MAY AFFECT OUR
PERFORMANCE" AND ELSEWHERE IN THIS REPORT ON FORM 10-Q. THE FOLLOWING DISCUSSION
SHOULD BE READ TOGETHER WITH OUR FINANCIAL STATEMENTS AND RELATED NOTES THERETO
INCLUDED ELSEWHERE IN THIS REPORT 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.

In June 1999, we commenced our international expansion efforts by
establishing a joint venture, NetRatings Japan KK. In March, 2000 we invested
approximately $1.2 million in NetRatings Japan KK. As of March 31, 2000 we held
a 26.4% direct ownership interest in NetRatings Japan KK. NetRatings Japan KK is
responsible for building and maintaining a Japanese audience measurement panel
and introducing our products and services to the Japanese market.

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 March 31, 2000, we have
developed Internet audience measurement panels based in Australia, Ireland,
New Zealand, Singapore, and the United Kingdom and currently plan to
establish audience panels in Austria, Brazil, Denmark, Finland, Germany,
Italy, Norway, Sweden, and Switzerland by the end of 2000. As part of this
joint venture, ACNielsen is responsible for the costs related to the
development of panels outside of the United States and Canada.

In January 2000, we established a joint venture in France, Mediametrie
eRatings.com, in which we held a 30% ownership interest as of March 31, 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. The joint venture plans to introduce Nielsen//NetRatings branded
products and services to the French market in the second quarter of 2000

We generate revenue from the sale of our Internet audience measurement
products and services. Through March 31, 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, 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 has
increased from 255 customers as of December 31, 1999 to more than 425 customers
worldwide as of March 31, 2000.

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Cost of revenue consists primarily of expenses related to the recruitment
and maintenance of our audience measurement panels and they are expensed as
incurred. Accordingly, cost of revenue is not directly related to revenue or
subscriptions generated in a given period and is higher in periods in which
we are involved in significant panel development activities. We believe that
the continued development and enhancement of audience panels is essential to
the long-term expansion of our business. We are currently working with
Nielsen Media Research to expand the scope and size of our existing panel of
domestic at-home Internet users from approximately 43,000 at March 31, 2000
to approximately 50,000 by December 31, 2000. In addition, we have developed
a domestic panel of at-work users which consisted of approximately 8,000
users at March 31, 2000 and is projected to increase to approximately 10,000
members by December 31, 2000. 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
planned international activities of our joint ventures. 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, commissions paid to Nielsen Media Research
and our international joint ventures, 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 assume the reporting requirements of
a public company.

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 anticipate the interest income will increase substantially in
2000 as compared to 1999 due to the increase in cash and cash equivalents and
short term investments resulting from the completion of our initial public
offering and private placement transaction in December 1999.

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. We have not recorded any additional non-cash stock-based compensation
charges during any period following our initial public offering. 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. We
have not recorded any additional non-cash stock-based compensation charges as of
the three months ended March 31, 2000.

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These charges are being amortized over five years. We recognized non-cash
amortization of these stock compensation charges of $5.3 million for the year
ended December 31, 1999 and $2.9 million for the three months ended March 31,
2000.

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 $4.0 million for the three months ended March 31,
2000. Our accumulated deficit at March 31, 2000 was $27.6 million. We intend to
invest heavily to expand our audience 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

REVENUE. Revenue increased 1,768% from $166,000 for the three months ended
March 31, 1999 to $3.1 million for the three months ended March 31, 2000. Sales
of our information and analytical products and services accounted for
substantially all of the revenue for each of the three months ended March 31,
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 months ended March 31, 2000, our audience measurement
service ("AMS") comprised 67% of our revenue, our suite of analytical services
accounted for 21%, and international royalties related to the sale of our AMS
Services by our ACNielsen eRatings joint venture accounted for the remaining
12%. During the three months ended March 31, 2000, no customer accounted for
more than 10% of our revenue.

COST OF REVENUE. Cost of revenue increased 187% from $1.0 million, or 621%
of revenue for the three months ended March 31, 1999 to $3.0 million, or 95% of
revenue for the three months ended March 31, 2000. This increase primarily
reflected costs incurred in 2000 relating to the development of both the
Nielsen//NetRatings domestic home audience measurement panel, which has
increased from 9,000 members at March 31, 1999 to 43,000 at March 31, 2000, the
development costs related to the creation of our domestic work panel which
currently consists of approximately 8,000 members and initial costs related to
the development of our Canadian home audience measurement panel.

RESEARCH AND DEVELOPMENT. Research and development expenses increased 256%
from $428,000, or 258% of revenue for the three months ended March 31, 1999 to
$1.5 million, or 49% of revenue for the three months ended March 31, 2000. The
increase was primarily due to a four-fold increase in the number of employees
engaged in research and development.

SALES AND MARKETING. Sales and marketing expenses increased 688% from
$490,000, or 295% of revenue for the three months ended March 31, 1999 to $3.9
million, or 124% of revenue for the three months ended March 31, 2000. This
increase was primarily attributable to sales commissions related to a
significant increase in revenue, a five-fold increase in the number of direct
sales and marketing employees and increased costs related to the promotion of
our products and services.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
259% from $256,000, or 154% of revenues for the three months ended March 31,
1999 to $920,000, or 30% of revenues for the three months ended March 31, 2000.
This increase was primarily related to an increase in the number of
administrative personnel to support our expanded operations, expansion of our
facilities, and non-recurring legal fees. The decrease in general and
administrative costs as a percentage of revenue was due primarily to revenue
increasing at a greater rate than expenses.

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INTEREST INCOME (EXPENSE), NET. Interest income (expense), net, increased
from $67,000 of net interest expense for the three months ended March 31, 1999
to $5.0 million of net interest income for the three months ended March 31,
2000. Net interest income increased due to the addition of $331 million in 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. Net loss increased 86% from $2.2 million, or 1,311% of revenue
for the three months ended March 31, 1999 to $4.0 million, or 130% of revenue
for the three months ended March 31, 2000. This increase was primarily due to
an increase in stock based compensation expenses. Excluding these non-cash
stock based compensation charges, net loss for the three months ended March
31, 2000 decreased 45% as compared to the same period in the previous year.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents and short-term investments increased from $400,000
at March 31, 1999 to $330.6 million at March 31, 2000, an increase of $330.2
million. The increase is primarily a result of 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.

Investing activities used cash of $287,000 in the three months ended
March 31, 1999 due to capital expenditures. Our investing activities used
cash of $192 million in the three months ended March 31, 2000 due to capital
expenditures of $898,000, investments in an international joint venture of
$1.2 million, and net purchases of short-term investments of $190 million.
Although we had no material capital expenditure commitments at March 31, 2000
we anticipate that capital expenditures will increase significantly during
the remainder of 2000 due to the anticipated growth in operations,
infrastructure, and personnel both domestically and internationally.

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 all of
our tangible assets and bear interest at an annual rate of 8%. As of March 31,
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 8.75% as of March 31, 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 March 31, 2000, we were in compliance with all of these
covenants. As of March 31, 2000, we 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

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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,
$4.0 million for the three months ended March 31, 2000, and as of March 31,
2000, our accumulated deficit was $27.6 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 March 31, 1998. We introduced our Nielsen//NetRatings Internet
audience measurement service in the quarter ended March 31, 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
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

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- 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. in
the United States. Internationally, we face competition from NetValue, a French
company which began providing audience measurement services in Europe and has
announced that it will soon begin providing such services in the United States.
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 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:

- devote greater resources to marketing and promotional campaigns;

- adopt more aggressive pricing policies; or

- devote more resources to technology and systems development.

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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 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, 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 or ACNielsen 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.

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

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revenue. Any unexpectedly-low renewal rates would harm our operating results and
could prevent us from becoming profitable. Because of our limited operating
history, our historical renewal rates are not meaningful, and accordingly, we
have no historical basis for projecting the rate at which our customers will
renew their subscriptions and initial renewal results are based on a limited
number of customers. 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 and ACNielsen and the strength of
their brands. Therefore, any negative publicity generated by Nielsen Media
Research or ACNielsen, whether or not directly related to any Nielsen//
NetRatings branded products or services, as well as any erosion of the strength
of either 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 substantially all of the cost of revenue reported on our financial
statements and, therefore, any increase in this expense will 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.

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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 the United States and Canada. Through our joint venture with
ACNielsen, we have developed audience measurement panels in Australia, Ireland,
New Zealand, Singapore, and the United Kingdom and we plan to develop panels in
Austria, Brazil, Denmark, Finland, France, Germany, Italy, Norway, Sweden, and
Switzerland by the end of 2000. 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,

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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.

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. 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.

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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 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, who currently consist of David J. Toth, Charles L.
("Tim") Meadows, Simon Chen, Jack R. Lazar and Frank Sammann. 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

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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 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 past, we have experienced occasional minor
interruptions in service from AboveNet, although we have never experienced a
significant interruption in 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.
The complaint seeks damages in the aggregate amount of not less than $1.9
million and reimbursement for PaineWebber's attorneys' fees relating to the
dispute. At this stage of the litigation, we have filed a partial answer and a
partial motion to dismiss the complaint. PaineWebber has filed a motion for
summary judgment as to liability on all of its claims and we have filed a
Memorandum of Law in opposition to this motion. We intend to defend the lawsuit
vigorously. We expect to incur substantial 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.

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The litigation is in the preliminary stage, and 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

We may acquire or make 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.

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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, 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 March 31, 2000, we had cash and cash equivalents and short-term
investments of $330.6 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 notes payable and 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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

RECENT SALES OF UNREGISTERED SECURITIES

During the three months ended March 31, 2000, NetRatings issued an aggregate
of 101,665 shares of common stock pursuant to stock option exercises under its
1998 Stock Plan for an aggregate purchase price of $21,916.50. Such issuances
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.

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 March 31, 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.

22
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<S> <C>
(a) Exhibits

27.1 Financial Data Schedule

(b) Reports on Form 8-K

On January 5, 2000, we filed a report on Form 8-K, pursuant
to Items 1 and 7 of such Form, regarding a change in control
of the Company resulting from the acquisition of our Common
Stock by Nielsen Media Research.
</TABLE>

<PAGE>
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 May , 2000.

<TABLE>
<S> <C> <C>
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
</TABLE>

<PAGE>
EXHIBIT INDEX

27.1 Financial Data Schedule

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 128,342
<SECURITIES> 202,283
<RECEIVABLES> 5,442
<ALLOWANCES> (435)
<INVENTORY> 0
<CURRENT-ASSETS> 337,444
<PP&E> 2,376
<DEPRECIATION> (712)
<TOTAL-ASSETS> 340,468
<CURRENT-LIABILITIES> 13,467
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 326,831
<TOTAL-LIABILITY-AND-EQUITY> 340,468
<SALES> 3,101
<TOTAL-REVENUES> 3,101
<CGS> 2,958
<TOTAL-COSTS> 2,958
<OTHER-EXPENSES> 9,181
<LOSS-PROVISION> 55
<INTEREST-EXPENSE> 23
<INCOME-PRETAX> (4,045)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,045)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,045)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)

</TABLE>