SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2008

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

For the transition period from                      to                     

comScore, Inc.

Delaware		54-1955550
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)
11950 Democracy Drive, Suite 600
Reston, VA		20190
(Address of principal executive offices)		(Zip Code)

     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 þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 12, 2008, there were 29,094,919 shares of the registrant’s common stock outstanding.

 

 

comScore, Inc.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION			4
Item 1. Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosure about Market Risk			41
Item 4. Controls and Procedures			42
PART II. OTHER INFORMATION			43
Item 1. Legal Proceedings			43
Item 1A. Risk Factors			43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			68
Item 3. Defaults Upon Senior Securities			70
Item 4. Submission of Matters to a Vote of Security Holders			70
Item 5. Other Information			70
Item 6. Exhibits			70
SIGNATURES			71
EXHIBIT INDEX			72

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

     This Quarterly Report on Form 10-Q, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosure About Market Risk” under Items 2 and 3, respectively, of Part I of this report, and the sections entitled “Legal Proceedings,” “Risk Factors,” and “Unregistered Sales of Equity Securities and Use of Proceeds” under Items 1, 1A and 2, respectively, of Part II of this report, may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may relate to, but are not limited to, expectations of future operating results or financial performance, capital expenditures, introduction of new products, regulatory compliance, plans for growth and future operations, acquisitions of new operations, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. These risks and other factors include, but are not limited to, those listed under the section entitled “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential,” “continue,” “seek” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events and/or results may differ materially.

     We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC, we do not plan to publicly update or revise any forward-looking statements, whether as a result of any new information, future events or otherwise, other than through the filing of periodic reports in accordance with the Securities Exchange Act of 1934, as amended. Investors and potential investors should not place undue reliance on our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of any of the events described in the “Risk Factors” section and elsewhere in this Quarterly Report on Form 10-Q could harm our business, prospects, operating results and financial condition. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

COMSCORE, INC.

CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2008				2007
		(Unaudited)
		(In thousands, except share and per
		share data)
Assets
Current assets:
Cash and cash equivalents		$	39,891			$	68,368
Short-term investments			27,713				28,449
Accounts receivable, net of allowances of $516 and $234, respectively			25,006				23,446
Prepaid expenses and other current assets			2,456				1,620
Restricted cash			—				1,385
Deferred tax asset			773				176
Total current assets			95,839				123,444
Long-term investments			6,411				7,924
Property and equipment, net			17,298				6,867
Other non-current assets			144				168
Long-term deferred tax asset			3,446				7,888
Intangible assets, net			9,702				17
Goodwill			42,686				1,364
Total assets		$	175,526			$	147,672
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	1,021			$	1,140
Accrued expenses			9,482				6,838
Deferred revenues			40,485				33,045
Deferred rent			957				154
Capital lease obligations			1,062				900
Total current liabilities			53,007				42,077
Capital lease obligations, long-term			252				977
Deferred rent, long-term			8,709				181
Deferred revenues, long-term			47				—
Total liabilities			62,015				43,235
Commitments and contingencies
Common stock subject to put; no shares and 135,635 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively			—				1,815
Stockholders’ equity:
Preferred stock, $0.001 par value per share; 5,000,000 shares authorized at September 30, 2008 and December 31, 2007; no shares issued or outstanding at September 30, 2008 and December 31, 2007			—				—
Common stock, $0.001 par value per share; 100,000,000 shares authorized at September 30, 2008 and December 31, 2007; 28,907,591 and 27,960,573 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively			29				28
Treasury stock, 159,549 and 24,677 shares at cost at September 30, 2008 and December 31, 2007, respectively			(1,238	)			—
Additional paid-in capital			190,729				183,433
Accumulated other comprehensive income			14				1
Accumulated deficit			(76,023	)			(80,840	)
Total stockholders’ equity			113,511				102,622
Total liabilities and stockholders’ equity		$	175,526			$	147,672

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

COMSCORE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(Unaudited)
		(In thousands, except share and per share data)
Revenues		$	30,661			$	22,389			$	85,781			$	61,879
Cost of revenues (excludes amortization of intangible assets resulting from acquisitions shown below) (1)			9,412				5,942				24,286				17,330
Selling and marketing (1)			10,659				7,390				29,120				20,524
Research and development (1)			4,131				3,018				10,838				8,387
General and administrative (1)			4,266				3,059				12,596				7,994
Amortization of intangible assets resulting from acquisitions			346				211				475				797
Total expenses from operations			28,814				19,620				77,315				55,032
Income from operations			1,847				2,769				8,466				6,847
Interest income, net			267				1,180				1,578				1,421
Gain (loss) from foreign currency			123				(111	)			(18	)			(321	)
Impairment of marketable securities			(455	)			—				(841	)			—
Revaluation of preferred stock warrant liabilities			—				82				—				(1,195	)
Income before income taxes			1,782				3,920				9,185				6,752
Provision for income taxes			(1,207	)			(129	)			(4,368	)			(181	)
Net income			575				3,791				4,817				6,571
Accretion of redeemable preferred stock			—				(21	)			—				(1,829	)
Net income available to common stockholders		$	575			$	3,770			$	4,817			$	4,742
Net income available to common stockholders per common share:
Basic		$	0.02			$	0.13			$	0.17			$	0.29
Diluted		$	0.02			$	0.12			$	0.16			$	0.25
Weighted-average number of shares used in per share calculation — common stock:
Basic			28,878,494				27,248,379				28,576,651				12,211,143
Diluted			30,389,519				29,545,321				30,215,920				14,326,891
Net income available to common stockholders per common share subject to put:
Basic		$	—			$	0.19			$	0.17			$	0.55
Diluted		$	—			$	0.18			$	0.16			$	0.51
Weighted-average number of shares used in per share calculation — common share subject to put:
Basic			—				347,635				46,037				347,635
Diluted			—				347,635				46,037				347,635

Cost of revenues		$	265			$	76			$	610			$	145
Selling and marketing			797				298				1,823				509
Research and development			225				67				507				128
General and administrative			617				264				1,697				501
Comprehensive income:
Net income		$	575			$	3,791			$	4,817			$	6,571
Other comprehensive income:
Foreign currency cumulative translation adjustment			(207	)			168				(256	)			271
Unrealized gain (loss) on marketable securities			371				8				270				8
Total comprehensive income		$	739			$	3,967			$	4,831			$	6,850

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

COMSCORE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months Ended September 30,
		2008				2007
		(Unaudited)
		(In thousands)
Operating activities:
Net Income		$	4,817			$	6,571
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			3,596				2,770
Amortization of intangible assets resulting from acquisitions			472				797
Provision for bad debts and sales allowances			379				81
Stock based compensation			4,642				1,283
Deferred rent			(70	)			—
Revaluation of preferred stock warrant liability			—				1,195
Amortization of deferred finance costs			—				7
Deferred tax provision (benefit)			3,845				(58	)
Impairment of marketable securities			841				—
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable			(518	)			(5,096	)
Prepaid expenses and other current assets			(298	)			(381	)
Other non-current assets			105				218
Accounts Payable, accrued expenses and other liabilities			(1,558	)			1,431
Deferred revenues			2,618				5,830
Deferred rent			9,366				—
Net cash provided by operating activities			28,237				14,648
Investing activities:
Acquisition, net of cash acquired			(44,543	)			—
Recovery (payment) of restricted cash			1,385				(268	)
Purchase of investments			(71,844	)			(37,976	)
Sales and maturities of investments			73,522				21,400
Purchases of property and equipment			(13,587	)			(2,702	)
Net cash used in investing activities			(55,067	)			(19,546	)
Financing activities:
Proceeds from exercise of common stock options and warrants			879				780
Proceeds from the issuance of common stock, net of offering costs			—				73,116
Repurchase of common stock			(1,238	)			—
Principal payments on capital lease obligations			(669	)			(1,896	)
Net cash (used in) provided by financing activities			(1,028	)			72,000
Effect of the exchange rate changes on cash			(619	)			484
Net (decrease) increase in cash and cash equivalents			(28,477	)			67,586
Cash and cash equivalents at beginning of period			68,368				5,032
Cash and cash equivalents at end of period		$	39,891			$	72,618
Supplemental cash flow disclosures:
Accretion of preferred stock		$	—			$	1,829

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

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

     comScore, Inc. (the “Company”), a Delaware corporation incorporated in August 1999, provides a digital marketing intelligence platform that helps customers make better-informed business decisions and implement more effective digital business strategies. The Company’s products and solutions offer customers insights into consumer behavior, including objective, detailed information regarding usage of their online properties and those of their competitors, coupled with information on consumer demographic characteristics, attitudes, lifestyles and offline behavior.

     The Company’s digital marketing intelligence platform is comprised of proprietary databases and a computational infrastructure that measures, analyzes and reports on digital activity. The foundation of the platform is data collected from a panel of more than two million Internet users worldwide who have granted to the Company explicit permission to confidentially measure their Internet usage patterns, online and certain offline buying behavior and other activities. By applying advanced statistical methodologies to the panel data, the Company projects consumers’ online behavior for the total online population and a wide variety of user categories.

     On July 2, 2007, the Company completed its initial public offering (the “IPO”) of common stock in which the Company issued and sold 5,000,000 shares of its common stock at an issuance price of $16.50 per share. In addition, selling stockholders, including officers and directors of the Company or entities affiliated therewith, sold an aggregate of 1,095,000 shares of common stock, which amount included the exercise of the underwriters’ over-allotment option in the IPO. The Company raised a total of $82,500,000 in gross proceeds from the IPO, or approximately $73,116,000 in net proceeds after deducting underwriting discounts and commissions of $5,775,000 and offering costs of $3,609,000. The Company did not receive any proceeds from the sale of shares in the IPO by the selling stockholders. Upon the closing of the IPO, all shares of convertible preferred stock then outstanding automatically converted into 17,257,362 shares of common stock, and all preferred stock warrants converted into common stock warrants.

     In connection with the IPO, the Company’s Board of Directors and stockholders approved a 1-for-5 reverse stock split of the then outstanding common stock and convertible preferred stock effective June 21, 2007. All share and per share amounts contained in these consolidated financial statements have been retroactively adjusted to reflect the reverse stock split.

     On May 28, 2008, the Company acquired the outstanding stock of M:Metrics, Inc., a provider of marketing and media intelligence for the mobile medium in the United States and internationally, to expand its abilities to provide its customers a more robust solution for the mobile medium.

2. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

     The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated upon consolidation. The Company consolidates investments where it has a controlling financial interest as defined by Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements, as amended by Statement of Financial Accounting Standards (SFAS) No. 94, Consolidation of all Majority-Owned Subsidiaries. The usual condition for controlling financial interest is ownership of a majority of the voting interest and, therefore, as a general rule, ownership, directly or indirectly, of more than 50% of the outstanding voting shares is a condition indicating consolidation. For investments in variable interest entities, as defined by Financial Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of Variable Interest Entities, the Company would consolidate when it is determined to be the primary beneficiary of a variable interest entity. The Company does not have any variable interest entities.

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Unaudited Interim Financial Information

     The condensed consolidated financial statements included in this quarterly report on Form 10-Q have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures contained in this quarterly report comply with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, for a quarterly report on Form 10-Q and are adequate to make the information presented not misleading. The condensed consolidated financial statements included herein, reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed March 11, 2008 with the Securities and Exchange Commission. The results of operations for the three and nine months ended September 30, 2008 are not necessarily indicative of the results to be anticipated for the entire year ending December 31, 2008 or thereafter. All references to September 30, 2008 and 2007 or to the three and nine months ended September 30, 2008 and 2007 in the notes to the consolidated financial statements are unaudited.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Fair Value Measurements

     As of January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS No. 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1 — observable inputs such as quoted prices in active markets; Level 2 — inputs other than the quoted prices in active markets that are observable either directly or indirectly; Level 3 — unobservable inputs of which there is little or no market data, which require the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures its marketable securities at fair value and determines the appropriate classification level for each reporting period. The Company is required to use significant judgments to make this determination.

     The Company’s investment instruments are classified within Level 1 or Level 3 of the fair value hierarchy. Level 1 investment instruments are valued using quoted market prices or broker or dealer quotations. Level 3 instruments are valued using a discounted cash flow model that takes into consideration the securities coupon rate, the financial condition of the issuers and the bond insurers, the expected date liquidity will be restored, as well as an applied illiquidity discount. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities. Such instruments are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued based on significant unobservable inputs include certain illiquid auction rate securities. Such instruments are generally classified within Level 3 of the fair value hierarchy (see Note 4).

Cash and Cash Equivalents, Investments, and Restricted Cash

     Cash and cash equivalents consist of highly liquid investments with an original maturity of three months or less as of the balance sheet date. Cash and cash equivalents consist primarily of bank deposit accounts, certificates of deposit and U.S. treasury bills.

     Investments, which consist principally of U.S. treasury notes and auction rate securities, are stated at fair market value. These securities are accounted for as available-for-sale securities in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Realized gains and losses on available-for-sale securities are included in interest income. Declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in impairment of marketable securities. Interest and dividends on securities classified as available-for-sale are included in interest income. The Company uses the specific identification method to compute realized gains and losses on its investments.

     The Company periodically evaluates whether any declines in the fair value of investments are other-than-temporary. This evaluation consists of a review of several factors, including but not limited to: the length of time and extent that a security has been in an unrealized loss position; the near-term prospects for recovery of the market value of a security; and the intent and ability of the Company to hold the security until the market value recovers. Declines in value below cost for investments where it is considered probable that all contractual terms of the investment will be satisfied, due primarily to changes in market demand, and not because of increased credit risk, and where the Company intends and has the ability to hold the investment for a period of time sufficient to allow a market recovery, are not assumed to be other-than-temporary.

     Interest income on investments was $295,000 and $1.3 million for the three months ended September 30, 2008 and 2007, respectively, and $1.7 million for the nine months ended September 30, 2008 and 2007.

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Accounts Receivable

     Accounts receivable are recorded at the invoiced amount and are non-interest bearing. The Company generally grants uncollateralized credit terms to its customers and maintains an allowance for doubtful accounts to reserve for potentially uncollectible receivables. Allowances are based on management’s judgment, which considers historical experience and specific knowledge of accounts where collectibility may not be probable. The Company makes provisions based on historical bad debt experience, a specific review of all significant outstanding invoices and an assessment of general economic conditions. If the financial condition of a customer deteriorates, resulting in an impairment of its ability to make payments, additional allowances may be required.

Property and Equipment

     Property and equipment is stated at cost, net of accumulated depreciation. Property and equipment is depreciated on a straight-line basis over the estimated useful lives of the assets, ranging from three to five years. Assets under capital leases are recorded at their net present value at the inception of the lease and are included in the appropriate asset category. Assets under capital leases and leasehold improvements are amortized over the shorter of the related lease terms or their useful lives. Replacements and major improvements are capitalized, while maintenance and repairs are charged to expense as incurred. Amortization of assets under capital leases is included within the expense category on the Statement of Operations in which the asset is deployed.

Goodwill and Intangible Assets

     Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed when other businesses are acquired. The allocation of the purchase price to intangible assets and goodwill involves the extensive use of management’s estimates and assumptions, and the result of the allocation process can have a significant impact on future operating results. The Company estimates the fair value of identifiable intangible assets acquired using several different valuation approaches, including the replacement cost, income and market approaches. The replacement cost approach is based on determining the discrete cost of replacing or reproducing a specific asset. The income approach converts the anticipated economic benefits that the Company assumes will be realized from a given asset into value. Under this approach, value is measured as the present value of anticipated future net cash flows generated by an asset. The market approach compares the acquired asset to similar assets that have been sold.

     Intangible assets with finite lives are amortized using the straight-line method over the following useful lives:

		Useful Lives
		(Years)
Acquired methodologies/technology			5 to 7
Customer relationships			7
Panel			7
Intellectual property			10

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Impairment of Long-Lived Assets

     Long-lived assets, including property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be evaluated pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). Pursuant to SFAS 144, impairment is determined by comparing the carrying value of these long-lived assets to an estimate of the future undiscounted cash flows expected to result from the use of the assets and eventual disposition. In the event an impairment exists, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset, which is generally determined by using quoted market prices or valuation techniques such as the discounted present value of expected future cash flows, appraisals, or other pricing models as appropriate. There were no impairment charges recognized during the three and nine months ended September 30, 2008 and 2007. In the event that there are changes in the planned use of the Company’s long-term assets or its expected future undiscounted cash flows are reduced significantly, the Company’s assessment of its ability to recover the carrying value of these assets could change.

Foreign Currency Translation

     The Company applies SFAS No. 52, Foreign Currency Translation, with respect to its international operations. The functional currency of the Company’s foreign subsidiaries is the local currency. All assets and liabilities are translated at the current exchange rate as of the end of the period, and revenues and expenses are translated at average exchange rates in effect during the period. The gain or loss resulting from the process of translating foreign currency financial statements into U.S. dollars is included as a component of other comprehensive income. The Company incurred a foreign currency transaction gain of $123,000 for the three months ended September 30, 2008 and a loss of $111,000 for the three months ended September 30, 2007. For the nine months ended September 30, 2008 and 2007, the Company incurred foreign currency transaction losses of $18,000 and $321,000, respectively. These losses primarily related to U.S. Dollar and Euro denominated transactions within the Company’s foreign subsidiaries.

Revenue Recognition

     The Company recognizes revenues in accordance with Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition (“SAB 104”). SAB 104 requires that four basic criteria must be met prior to revenue recognition: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or the services have been rendered, (iii) the fee is fixed or determinable and (iv) collection of the resulting receivable is reasonably assured.

     The Company generates revenues by providing access to the Company’s online database or delivering information obtained from the database, usually in the form of periodic reports. Revenues are typically recognized on a straight-line basis over the period in which access to data or reports are provided, which generally ranges from three to 24 months.

     Revenues are also generated through survey services under contracts ranging in term from two months to one year. Survey services consist of survey and questionnaire design with subsequent data collection, analysis and reporting. Revenues are recognized on a straight-line basis over the estimated data collection period once the survey or questionnaire has been delivered. Any change in the estimated data collection period results in an adjustment to revenues recognized in future periods.

     Certain of the Company’s arrangements contain multiple elements, consisting of the various services the Company offers. Multiple element arrangements typically consist of a subscription to the Company’s online database combined with customized services. These arrangements are accounted for in accordance with Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. The Company has determined that there is not objective and reliable evidence of fair value for any of its services and, therefore, accounts for all elements in multiple elements arrangements as a single unit of accounting. Access to data under the subscription element is generally provided shortly after the execution of the contract. However, the initial delivery of customized services generally occurs subsequent to contract execution. The Company recognizes the entire arrangement fee over the performance period of the last deliverable. As a result, the total arrangement fee is recognized on a straight-line basis over the period beginning with the commencement of the last customized service delivered.

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

     Generally, contracts are non-refundable and non-cancelable. In the event a portion of a contract is refundable, revenue recognition is delayed until the refund provisions lapse. A limited number of customers have the right to cancel their contracts by providing a written notice of cancellation. In the event that a customer cancels its contract, the customer is not entitled to a refund for prior services, and will be charged for costs incurred plus services performed up to the cancellation date.

     Advance payments are recorded as deferred revenues until services are delivered or obligations are met and revenue can be recognized. Deferred revenues represent the excess of amounts invoiced over amounts recognized as revenues.

Stock-Based Compensation

     The Company accounts for share-based compensation expense in accordance with SFAS No. 123 (revised 2005), Share-Based Payment (“SFAS 123R”). SFAS 123R requires the measurement and recognition of compensation expense for share-based awards based on the estimated fair value on the date of the grant. The Company estimates the fair value of each option award on the date of the grant using the Black-Scholes option-pricing model. This model is affected by the Company’s stock price as well as estimates regarding a number of variables including expected stock price volatility over the term of the award and projected employee stock option exercise behaviors. The fair value of the restricted stock awards is determined based on the quoted market price of the Company’s common stock on the grant date. For stock-based awards subject to graded vesting, the Company has utilized the straight-line ratable method for allocating compensation cost by period. In accordance with SFAS 123R, the Company recorded stock-based compensation expense of $1.9 million and $705,000 for the three months ended September 30, 2008 and 2007, respectively, and $4.6 million and $1.3 million for the nine months ended September 30, 2008 and 2007, respectively.

Income Taxes

     Income taxes are accounted for using the liability method in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred income taxes are provided for temporary differences in recognizing certain income, expense and credit items for financial reporting purposes and tax reporting purposes. Such deferred income taxes primarily relate to the difference between the tax bases of assets and liabilities and their financial reporting amounts. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized.

     FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, clarifies the accounting for income taxes by prescribing that a company should use a more-likely-than not recognition threshold based on the technical merits of the tax position taken. Tax provisions that meet the more-likely-than-not recognition threshold should be measured as the largest amount of tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition, and explicitly excludes income taxes from the scope of SFAS No. 5, Accounting for Contingencies. As of September 30, 2008 and December 31, 2007, the Company had unrecognized tax benefits of $71,000 on a tax effected basis, all of which would affect the Company’s tax rate if recognized.

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

Earnings Per Share

     The Company computes earnings per share in accordance with the provisions of SFAS No. 128, Earnings Per Share (“SFAS 128”). The Company has issued shares of common stock in connection with business acquisitions that give the holders the right to require the Company to repurchase the shares at a fixed price at a specified future date (“Common Stock Subject to Put”). The difference between the fair value of the shares of Common Stock Subject to Put on the issuance date and the price at which the Company may be required to repurchase those shares is being accreted over the period from issuance to the first date at which the Company could be required to repurchase the shares as a dividend to the holders. EITF Topic D-98, Classification and Measurement of Redeemable Securities (“EITF D-98”) states that when a common shareholder has a contractual right to receive, at share redemption, an amount that is other than fair value, such shareholder has received, in substance, a preferential distribution. Under SFAS 128, entities with capital structures that include classes of common stock with different dividend rates are required to apply the two-class method of calculating earnings per share. Accordingly, the Company calculates earnings per share for its common stock and its Common Stock Subject to Put using a method akin to the two-class method under SFAS 128.

     In addition, the Company’s series of convertible redeemable preferred stock that were outstanding until their automatic conversion upon the completion of the IPO on July 2, 2007 were considered participating securities as they were entitled to an 8% noncumulative preferential dividend before any dividends could be paid to common stockholders. The Company includes its participating preferred stock in the computation of earnings per share using the two-class method in accordance with EITF 03-06, Participating Securities and the Two — Class Method under FASB Statement No. 128 (“EITF 03-06”).

     The two-class computation method for each period allocates the undistributed earnings or losses to each participating security based on their respective rights to receive dividends. In addition to undistributed earnings or losses, the accretion to their redemption or put prices is also allocated to the Common Stock Subject to Put and the convertible redeemable preferred stock. Prior to conversion of the redeemable preferred stock, in periods of undistributed losses, all losses were allocated to common stock in accordance with EITF 03-06 as the holders of Common Stock Subject to Put and participating preferred stock were not required to fund losses nor were their redemption or put prices reduced as a result of losses incurred. In periods of undistributed income, income was first allocated to the participating preferred stock for their preferential dividend, $7.1 million per annum as of July 2, 2007, the date of the conversion of the Company’s participating preferred stock upon the closing of its IPO. Any undistributed earnings remaining were then allocated to holders of common stock, Common Stock Subject to Put and preferred stock (assuming conversion) on a pro rata basis. The total earnings or losses allocated to each class of common stock were then divided by the weighted-average number of shares outstanding for each class of common stock to determine basic earnings per share. EITF 03-06 does not require the presentation of basic and diluted earnings per share for securities other than common stock; therefore, earnings per share is only computed for the Company’s common stock.

     Diluted earnings per share for common stock reflects the potential dilution that could result if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted earnings per share assumes the exercise of stock options and warrants using the treasury stock method. For the period prior to conversion, diluted earnings per share does not assume the conversion of the Company’s convertible preferred stock using the if-converted method as the result is anti-dilutive. No potentially dilutive securities are convertible or exercisable into shares of Common Stock Subject to Put.

     The following is a summary of common stock equivalents for the securities outstanding during the respective periods that have been excluded from the earnings per share calculations as their impact was anti-dilutive.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(Unaudited)
Stock options and restricted stock units			93,141				—				52,432				2,739
Convertible preferred stock warrants			—				—				—				—
Common stock warrants			2,000				2,000				2,000				2,000
Convertible preferred stock			—				—				—				11,504,908

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

     The following table sets forth the computation of basic and diluted EPS:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
		(Unaudited)
		(In thousands, except share and per share data)
Calculation of basic and diluted net income per share — two class method:
Net Income		$	575			$	3,791			$	4,817			$	6,571
Accretion of redeemable preferred stock			—				(21	)			—				(1,829	)
Accretion of common stock subject to put			—				(22	)			—				(90	)
Undistributed earnings			575				3,748				4,817				4,652
Allocation of undistributed earnings:
Common stock			575				3,626				4,817				3,626
Preferred stock			—				122				—				1,026
Total allocated earnings		$	575			$	3,748			$	4,817			$	4,652
Net income attributable to common stockholders per common share:
Basic		$	0.02			$	0.13			$	0.17			$	0.29
Diluted		$	0.02			$	0.12			$	0.16			$	0.25
Weighted average shares outstanding — common stock:
Basic			28,878,494				27,248,379				28,576,651				12,211,143
Diluted			30,389,519				29,545,321				30,215,920				14,326,891
Net income attributable to common stockholders per common share subject to put:
Basic		$	—			$	0.19			$	0.17			$	0.55
Diluted		$	—			$	0.18			$	0.16			$	0.51
Weighted average shares outstanding — common stock subject to put
Basic			—				347,635				46,037				347,635
Diluted			—				347,635				46,037				347,635

Recent Pronouncements

     In October 2008, the FASB issued FSP No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (“FSP No. 157-3”). FSP No. 157-3 clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The provisions of FSP No. 157-3 were effective upon issuance and for financial statements not yet reported. The adoption of FSP No. 157-3 did not have a material impact on our consolidated financial statements.

     In December 2007, the SEC staff issued Staff Accounting Bulletin No. 110 (“SAB 110”), which expresses the views of the SEC staff regarding the use of a “simplified” method in developing an estimate of expected term of “plain vanilla” share options in accordance with SFAS 123R. The use of the “simplified” method, which was first described in Staff Accounting Bulletin No. 107, was scheduled to expire on December 31, 2007. SAB 110 extends the use of the “simplified” method for “plain vanilla” awards in certain situations. The SEC staff does not expect the “simplified” method to be used when sufficient information regarding exercise behavior, such as historical exercise data or exercise information from external sources, becomes available. SAB 110 is effective January 1, 2008. The adoption of SAB 110 did not have a material impact on our consolidated results of operations or financial position.

     In December 2007, the FASB issued SFAS No. 141 (revised), Business Combinations (“SFAS 141(R)”), which is intended to improve reporting by creating greater consistency in the accounting and financial reporting of business combinations. SFAS 141(R) requires that the acquiring entity in a business combination recognize all (and only) the assets and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose to investors and other users all of the information that they need to evaluate and understand the nature and financial effect of the business combination. In addition, SFAS 141(R) modifies the accounting for transaction and restructuring costs. SFAS 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51 (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of the consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact of adopting the provisions of SFAS No. 160 on its consolidated results of operations and financial position.

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), to permit all entities to choose to elect, at specified election dates, to measure eligible financial instruments and certain other items at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize upfront costs and fees related to those items in earnings as incurred and not deferred. If elected, SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 159 on January 1, 2008; however, the Company has not expanded its eligible items subject to the fair value option under SFAS No.159.

3. Acquisition

     On May 28, 2008, comScore completed its merger with M:Metrics, Inc. (“M:Metrics”), a provider of marketing and media intelligence for the mobile medium in the United States and internationally, pursuant to the Agreement and Plan of Merger dated May 28, 2008, (the “Merger”). The total preliminary purchase price of $46.0 million is comprised of $44.3 million in cash consideration, $1.2 million in expenses paid on M:Metrics’ behalf and the estimated acquisition related transaction costs of approximately $459,000. Acquisition-related transaction costs include legal and accounting fees, and other external costs directly related to the Merger. In connection with the Merger, the Company exchanged the unvested options for M:Metrics common stock for options for the purchase of 51,908 shares of comScore common stock. In addition, $5.0 million of comScore restricted common stock was reserved for issuance pursuant to the Merger and $4.72 million was issued to certain former M:Metrics employees that continued as employees of comScore as of June 30, 2008. The estimated fair value of these options and restricted stock will be recognized as compensation expense for post merger services. The Company has included the financial results of M: Metrics in its consolidated financial statements since the date of acquisition.

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

     The Company believes the Merger with M:Metrics supports the Company’s long-term strategic direction and that the demands in the digital marketing intelligence industry continue to accelerate at a rapid pace as advertising moves to new digital mediums. In evaluating the acquisition of M:Metrics, the Company focused primarily on the business’s revenues and customer base, the strategic fit of the business’s product line with the Company’s existing product offerings, and opportunities for cost reductions and other synergies, rather than on the business’s tangible or intangible assets, such as its property and equipment. As a result, the fair value of the acquired assets corresponds to a relatively smaller portion of the acquisition price, with the Company recording a substantial amount of goodwill associated with the acquisition.

     The Merger was accounted for under the purchase method of accounting in accordance with SFAS No. 141, Business Combinations (“SFAS 141”). Assets acquired and liabilities assumed were recorded at their estimated fair values as of May 28, 2008. Under the purchase method of accounting, the total estimated purchase price is allocated to M:Metrics net tangible and intangible assets based on their estimated fair values as of May 28, 2008, the effective date of the Merger. The preliminary estimated purchase price as shown in the table below was based on management’s preliminary valuation, which was based on estimates and assumptions that are subject to change. We may continue to adjust the preliminary purchase price allocation after obtaining more information about assets and liabilities assumed. The preliminary purchase price is allocated as follows (in thousands):

Cash and cash equivalents		$	1,554
Accounts receivable			2,080
Prepaid expenses and other current assets			245
Property and equipment			464
Other long term assets			85
Accounts payable			(865	)
Other accrued liabilities			(3,428	)
Deferred revenue			(5,473	)
Other long-term liabilities			(145	)
Net tangible liabilities to be acquired			(5,483	)
Definite-lived intangible assets acquired			10,160
Goodwill			41,322
Total estimated purchase price		$	45,999

     Included in the preliminary purchase price allocation are $6.3 million of deferred tax assets and $3.7 million in deferred tax liabilities, offset by a full valuation allowance of $2.6 million.

     Of the total estimated purchase price, a preliminary estimate of $5.5 million has been allocated to net tangible liabilities to be acquired, and $10.2 million has been allocated to definite-lived intangible assets acquired. Definite-lived intangible assets of $10.2 million consist of the value assigned to M:Metrics customer relationships of $3.2 million, intellectual property $2.6 million, developed and core technology of $2.5 million and panel $1.9 million. The useful lives range from five to ten years (see Note 2). Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net tangible and intangible assets acquired. Goodwill is not deductible for tax purposes.

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

     In connection with the preliminary purchase price allocation, the estimated fair value of the deferred revenue assumed from M:Metrics in connection with the Merger was determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs relating to fulfilling the assumed contractual obligations plus a market profit margin. The present value of the sum of the costs and operating profit approximates the amount that the Company would be required to pay a third party to assume the obligations. The estimated costs to fulfill the obligation were based on the historical direct costs related to providing the services.

     The unaudited financial information provided below summarizes the combined results of operations of comScore and M:Metrics on a pro forma basis, as though the companies had been combined as of the beginning of the periods presented. The pro forma financial information is presented for informational purposes only and does not purport to be indicative of the Company’s financial position or results of operations, which would actually have been obtained had such transaction been completed as of the date or for the periods presented, or of the financial position or results of operations that may be obtained in the future. The pro forma financial information for all periods includes adjustments to include amortization expense from acquired intangibles, adjustments to interest income, the elimination of depreciation from acquired internally developed software and related tax effects.

     The unaudited historical financial information of comScore for the periods beginning after May 28, 2008 includes the results of the consolidated companies. The unaudited pro forma financial information for the nine months ended September 30, 2008 combines the historical results for comScore for the nine months ended September 30, 2008 and the historical results for M:Metrics for the five months ended May 28, 2008. The unaudited pro forma financial information for the three and nine months ended September 30, 2007 combines the historical results for comScore for the three and nine months ended September 30, 2007 and the historical results for M:Metrics for the same period.

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
		(Unaudited)
		(In thousands, except per share data)
Revenues		$	30,661			$	24,816			$	90,568			$	68,472
Net income (loss)		$	575			$	397			$	1,547			$	(4,100	)
Basic income (loss) per share to common stockholders		$	0.02			$	0.01			$	0.05			$	(0.34	)
Diluted income (loss) per share to common stockholders		$	0.02			$	0.01			$	0.05			$	(0.29	)

4. Investments and Fair Value Measurements

     As of September 30, 2008, the Company had $4.3 million invested in auction rate securities, all of which are classified as long-term investments on its consolidated balance sheet. As of December 31, 2007, the Company had $30.3 million invested in auction rate securities, of which $25.4 million were classified as current, short-term investments and $4.9 million were classified as long-term investments on its consolidated balance sheet.

     Auction rate securities are generally long-term debt instruments that provide liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined calendar intervals, generally every 28 days. This mechanism typically allows existing investors to rollover their holdings and to continue to own their respective securities or liquidate their holdings by selling their securities at par value. The Company generally invests in these securities for short periods of time as part of its investment policy. However, the recent uncertainties in the credit markets have prevented the Company and other investors from liquidating holdings of certain auction rate securities in recent auctions because the amount of securities submitted for sale has exceeded the amount of purchase orders. Accordingly, the Company continues to hold these long-term securities and is due interest at a higher rate than similar securities for which auctions have cleared. As of December 31, 2007, these investments were fully backed by AAA rated bonds and insured against loss of principal and interest by bond insurers. However, certain bond insurers are experiencing financial difficulties and have either had their credit ratings downgraded or have been placed on watch. As of September 30, 2008, all auction rate investments continue to have at least a minimum A rating with Standard & Poor’s and Moody’s ratings agencies. As of September 30, 2008 and December 31, 2007, five auction rate securities with a par value of $5.1 million had failed their most recent auction and are considered illiquid. These securities were valued using a discounted cash flow model that takes into consideration the securities coupon rate, the financial condition of the issuers and the bond insurers, the expected date liquidity will be restored, as well as an applied illiquidity discount.

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

     The Company is uncertain as to when the liquidity issues relating to these investments will improve. Accordingly, the Company classified these securities as non-current as of September 30, 2008 and December 31, 2007.

     For the three and nine months ended September 30, 2008, the Company determined that unrealized losses of $455,000 and $841,000, respectively, represented other-than temporary impairments based on its analysis and has recorded those unrealized losses in earnings. As of September 30, 2008, the Company has determined that the unrealized losses on all its auction rate securities represent other-than temporary impairments. As of December 31, 2007, based on the Company’s ability and intent to hold these investments until an anticipated recovery of the fair value, the Company did not consider these investments to be other-than temporarily impaired and included the unrealized losses in equity. The unrealized losses at December 31, 2007 on the investments were due primarily to changes in market conditions and overall lack of demand for auction rate securities. Subsequently, if the credit ratings of the issuer, the bond insurers or the collateral continue to deteriorate, the Company may further adjust the carrying value of these investments.

     Marketable securities, which are classified as available-for-sale, are summarized below as of September 30, 2008 and December 31, 2007.

		Purchased				Gross				Gross				Aggregate				Classification on Balance Sheet
		Amortized				Unrealized				Unrealized				Fair				Short-Term				Long-Term
		Cost				Gain				Loss				Value				Investments				Investments
		(Unaudited)
		(In thousands)
As of September 30, 2008:
U.S. treasury bills		$	4,466			$	12			$	—			$	4,478			$	4,478			$	—
U.S. treasury notes			25,311				76				—				25,387				23,235				2,152
Auction rate securities			4,259				—				—				4,259				—				4,259
		$	34,036			$	88			$	—			$	34,124			$	27,713			$	6,411

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

		Purchased				Gross				Gross				Aggregate				Classification on Balance Sheet
		Amortized				Unrealized				Unrealized				Fair				Short-Term				Long-Term
		Cost				Gain				Loss				Value				Investments				Investments
		(In thousands)
As of December 31, 2007:
U.S. government debt securities		$	6,005			$	38			$	—			$	6,043			$	2,999			$	3,044
Auction rate securities			30,550				—				(220	)			30,330				25,450				4,880
		$	36,555			$	38			$	(220	)		$	36,373			$	28,449			$	7,924

     There were no gross unrealized losses related to available-for-sale securities as of September 30, 2008. The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2007:

		Less Than 12 months								More Than 12 months								Total
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Loss				Value				Loss				Value				Loss
		(In thousands)
As of December 31, 2007:
Auction rate securities		$	30,330			$	(220	)		$	—			$	—			$	30,330			$	(220	)
		$	30,330			$	(220	)		$	—			$	—			$	30,330			$	(220	)

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

     The fair value hierarchy of the Company’s marketable securities at fair value as of September 30, 2008 is as follows:

						Fair Value Measurements at
						Reporting Date Using
						Quoted
						Prices
						in
						Active
						Markets				Significant
						for				Other				Significant
						Identical				Observable				Unobservable
		September 30,				Assets				Inputs				Inputs
		2008				(Level 1)				(Level 2)				(Level 3)
		(Unaudited)
		(In thousands)
Assets:
U.S. treasury bills		$	4,478			$	4,478			$	—			$	—
U.S. treasury notes			25,387				25,387				—				—
Auction rate securities			4,259				—				—				4,259
Total		$	34,124			$	29,865			$	—			$	4,259

     The following table provides a reconciliation of the beginning and ending balances for the major classes of assets measured at fair value using significant unobservable inputs (Level 3):

		Short-term				Long-term
		Investments				Investments
		(Unaudited)
		(In thousands)
Balance on January 1, 2008		$	—			$	4,880
Transfers in and/or (out) of Level 3			—				2,350
Total losses unrealized included in earnings			—				(841	)
Total losses included in other comprehensive income at December 31, 2007			—				220
Settlements			—				(2,350	)
Balance on September 30, 2008		$	—			$	4,259

     For the three and nine months ended September 30, 2008, an unrealized loss of $455,000 and $841,000 related to Level 3 assets held at September 30, 2008 was included in earnings.

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

5. Goodwill and Intangible Assets

     The carrying amounts of goodwill and intangible assets are as follows:

		September 30,				December 31,
		2008				2007
		(Unaudited)
		(In thousands)
Goodwill		$	42,686			$	1,364
Intangible assets consists of the following:
Trademarks and brands		$	—			$	662
Non-compete agreements			—				326
Customer relationships			3,200				3,467
Acquired methodologies/technology			2,500				688
Intellectual property			2,600				—
Panel			1,860				—
Total intangible assets			10,160				5,143
Accumulated amortization			(458	)			(5,126	)
Intangible assets, net		$	9,702			$	17

     Amortization expense related to intangibles was approximately $346,000 and $211,000 for the three months ended September 30, 2008 and 2007, respectively, and $475,000 and $797,000 for the nine months ended September 30, 2008 and 2007, respectively.

     During the three and nine months ended September 30, 2008, $5.1 million of fully-amortized intangible assets were written off.

6. Property and Equipment

     Property and equipment, including equipment under capital lease obligations, consists of the following:

		September 30,				December
		2008				31, 2007
		(Unaudited)
		(In thousands)
Computer equipment		$	14,136			$	16,050
Computer software			3,122				2,529
Office equipment and furniture			3,298				1,408
Leasehold improvements			8,861				1,070
			29,417				21,057
Less: accumulated depreciation and amortization			(12,119	)			(14,190	)
		$	17,298			$	6,867

     During the three and nine months ended September 30, 2008, the Company capitalized $1.5 and $9.4 million, respectively, of leasehold improvements, furniture and fixtures and office equipment associated with landlord allowances received in connection with its Reston, Chicago and San Francisco office leases (see Note 7).

     During the three and nine months ended September 30, 2008, $402,000 and $5.6 million, respectively, of fully-depreciated assets were written off.

     For the three months ended September 30, 2008 and 2007, total depreciation expense was $1.4 million and $928,000, respectively, and $3.6 million and $2.8 million for the nine months ended September 30, 2008 and 2007, respectively.

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

7. Commitments and Contingencies

Leases

     In September 2008, the Company agreed with a landlord for the early termination of the acquired M:Metrics San Francisco office lease. In connection with this termination the Company paid $165,000. This amount is included in operating expenses for the three and nine months ended September 30, 2008.

     In June 2008, the Company entered into a 10 year lease with a new landlord for approximately 16,674 square feet of new office space for its San Francisco office. The base rent in the first year is approximately $676,000 and escalates 3% per annum over the lease term. The Company consolidated the comScore and M:Metrics San Francisco offices and moved into this new integrated office in September 2008. In connection with this lease, the Company recorded $1.5 million of deferred rent and capitalized assets as a result of landlord allowances. The deferred rent will be applied to rent expense recognized by the Company over the lease term.

     In December 2007, the Company entered into a 10 year lease with a new landlord for approximately 62,000 square feet of new office space for their corporate headquarters. The Company moved its corporate headquarters in June 2008. In connection with this lease, the Company recorded $5.3 million of deferred rent and capitalized assets as a result of landlord allowances and abatements. The deferred rent will be applied to rent expense recognized by the Company over the lease term.

     In August 2007, the Company entered into a 10 year lease with a new landlord for approximately 28,000 square feet of new office space for its Chicago office. The Company moved its Chicago office in March 2008. In connection with this lease, the landlord provided $2.5 million in tenant allowances which the Company recorded as deferred rent and capitalized assets. The deferred rent will be applied to rent expense recognized by the Company over the lease term.

     For the three months ended September 30, 2008 and 2007, total rent expense was $1.1 million and $526,000, respectively, and $2.8 million and $1.8 million for the nine months ended September 30, 2008 and 2007, respectively.

Contingencies

     On March 6, 2008, the Company opened a $5.0 million revolving line of credit with an interest rate equal to the BBA LIBOR rate plus an applicable margin based upon the funded debt to unrestricted EBITDA ratio. This line of credit is available through March 6, 2009. As of September 30, 2008, no amounts were borrowed against the line of credit. The agreement contains no restrictive covenants.

     As of September 30, 2008, the Company is required to maintain letters of credit in the amount of approximately $4.4 million as additional security deposit pertaining to operating leases. These letters of credit may be reduced periodically provided the Company meets the conditional criteria of each related lease agreement. During the three and nine months ended September 30, 2008, one letter of credit was reduced by approximately $90,000. As of December 31, 2007, certain letters of credit were collateralized by $1.4 million in certificates of deposit which were included in Restricted Cash in the Consolidated Balance Sheets. During the nine months ended September 30, 2008, the security deposits were collateralized by the line of credit, reducing availability under the facility, and the restrictions were removed from the $1.4 million of certificates of deposit, which were reclassified to cash and cash equivalents.

     The Company has no material claims as of September 30, 2008, but is from time to time exposed to unasserted potential claims encountered in the normal course of business. Although the outcome of any legal proceedings cannot be predicted with certainty, management believes that the final resolution of these matters will not materially affect the Company’s consolidated financial position or results of operations

8. Income Taxes

     As of September 30, 2008 and December 31, 2007, the Company had a valuation allowance of $26.4 million and $21.3 million, respectively, against certain deferred tax assets, which consisted principally of net operating loss carryforwards. Prior to December 31, 2007, management believed that, based on a number of factors, the available objective evidence created sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance was required. As of December 31, 2007, the Company concluded that it was more likely than not that a portion of its deferred tax assets would be utilized in subsequent years and that a reduction in the deferred tax asset valuation allowance was necessary. In determining the amount of deferred tax assets to recognize, the Company considered its history of profitability, the history of its industry, the overall amount of the deferred tax assets and the timeframe over which it would take to utilize the deferred tax assets prior to their expiration. Given the relatively limited history of profitability and the fact that the online marketing industry is a young and developing industry, the Company concluded that it was appropriate to consider future taxable income (exclusive of reversing temporary differences and carryforwards) for a limited period of one year into the future. As a result, the Company reversed a portion of its valuation allowance and recognized a net deferred tax asset of $8.1 million as of December 31, 2007.

     As of September 30, 2008, the Company has concluded that there were no events during the three months ended September 30, 2008 that would result in a revaluation of its valuation allowance against deferred tax assets but management will continue to evaluate its valuation allowance position on a regular basis. To the extent that the Company determines that all or a portion of its valuation allowance is no longer necessary, the Company will recognize an income tax benefit in the period such determination is made for the reversal of the valuation allowance. It is expected that any such reduction of the Company’s valuation allowance would have a material impact on the Company’s results from operations.

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

     The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate for each of its legal entities in accordance with the interim reporting requirements of SFAS No. 109, “Accounting for Income Taxes,” APB Opinion No. 28, “Interim Financial Reporting,” and FASB Interpretation No. 18 “Accounting for Income Taxes in Interim Periods — an interpretation of APB Opinion No. 28.” Accordingly, the Company has estimated its annual effective tax rate for the full year and applied that rate to its income before taxes in determining its tax expense for the nine months ended September 30, 2008. During the three and nine months ended September 30, 2008 the Company recorded an income tax provision of $1.2 million and $4.4, respectively. The tax provision for the three and nine months ended September 30, 2008 was due primarily to current taxes of $318,000 and $522,000, respectively, and the utilization of the Company’s U.S. deferred tax assets of $889,000 and $4.0 million, offset by a discrete release of the valuation allowance of $111,000 associated with a foreign entity in the first quarter of 2008. The current taxes for the three months ended September 30, 2008, increased due to a change in California tax law suspending the deduction for net operating losses carried forward from prior taxable years. The deferred tax expense is negatively impacted by current year net losses incurred by certain M:Metrics international subsidiaries for which the full benefit is not realized by other comScore subsidiaries. During the three months and nine months ended September 30, 2007, the Company recorded an income tax provision of $129,000 and $181,000, respectively. The tax provision for the three and nine months ended September 30, 2007 is comprised of an income tax expense of $148,000 and $239,000, respectively, reflecting our alternative minimum tax and is partly offset by a decrease of $19,000 and $58,000, respectively, in the deferred tax liability associated with a temporary difference related to certain acquired intangible assets.

     As of September 30, 2008 and December 31, 2007, the Company had $71,000 of unrecognized tax benefit liabilities. The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. For income tax returns filed by the Company, the Company is no longer subject to U.S. federal, state and local tax examinations by tax authorities for years before 2003, although carryforward tax attributes that were generated prior to 2003 may still be adjusted upon examination by tax authorities if they either have been or will be utilized.

     The Company recognizes accrued interest related to unrecognized tax benefits in the tax expense account. Penalties, if incurred, would also be recognized as a component of income tax expense. As of September 30, 2008 and December 31, 2007, the amount of accrued interest expense on unrecognized tax benefits was not material.

     The exercise of stock options during the first nine months of 2008 and 2007 generated an income tax deduction equal to the excess of the fair market value over the exercise price. In accordance with SFAS 123R, the Company will not recognize a deferred tax asset with respect to the excess stock compensation deductions until those deductions actually reduce its income tax liability. As such, the Company has not recorded a deferred tax asset related to the net operating losses resulting from the exercise of these stock options in the accompanying financial statements. At such time as the Company utilizes these net operating losses to reduce income tax payable, the tax benefit will be recorded as an increase in additional paid-in capital.

9. Stockholders’ Equity

1999 Stock Option Plan and 2007 Equity Incentive Plan

     Prior to the effective date of the registration statement for the Company’s IPO on June 26, 2007, eligible employees and non-employees were granted options to purchase shares of the Company’s common stock, restricted stock or restricted stock units pursuant to the Company’s 1999 Stock Plan (the “1999 Plan”). Upon the effective date of the registration statement of the Company’s IPO, the Company ceased using the 1999 Plan for the issuance of new equity awards. Upon the closing of the Company’s IPO on July 2, 2007, the Company established its 2007 Equity Incentive Plan (the “2007 Plan” and together with the 1999 Plan, the “Plans”). The 1999 Plan will continue to govern the terms and conditions of outstanding awards granted thereunder. The Plans provide for the issuance of a maximum of 5.4 million shares of common stock. In addition, the 2007 Plan provides for annual increases in the number of shares available for issuance thereunder on the first day of each fiscal year beginning with the 2008 fiscal year, equal to the lesser of : (i) 4% of the outstanding shares of our common stock on the last day of the immediately preceding fiscal year; (ii) 1,800,000 shares; or (iii) such other amount as the Company’s board of directors may determine. The exercise price is determined by the Board of Directors, which is generally equal to fair value for incentive stock options and is determined on a per-grant basis for nonqualified options. The vesting period of options granted under the Plans is determined by the Board of Directors, generally ratably over a four-year period. The options expire 10 years from the date of the grant. Effective January 1, 2008, the shares available for grant increased 1,118,422 pursuant to the automatic share reserve increase provision under the Plans. As of September 30, 2008, 2,321,810 shares were available for grant under the 2007 Plan.

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

     During the three and nine months ended September 30, 2008, 51,908 stock options were granted. The following are the weighted-average assumptions used in valuing the stock options granted during the three and nine months ended September 30, 2008 and a discussion of the Company’s assumptions.

		Three and Nine
		Months
		Ended September 30,
		2008
Dividend yield			0.00	%
Expected volatility			60.00	%
Risk-free interest rate			2.93	%
Expected life of options (in years)			4.00

     Dividend yield — The Company has never declared or paid dividends on its common stock and has no plans to pay dividends in the foreseeable future.

     Expected volatility — Volatility is a measure of the amount by which a financial variable such as a share price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses a weighted-average volatility based on 75% of the average historical stock volatilities of similar entities and 25% of the Company’s actual historical volatility since the IPO.

     Risk-free interest rate — This is the average U.S. Treasury rate with a term that most closely resembles the expected life of the option on the date the option was granted.

     Expected life of the options — This is the period of time that the options granted are expected to remain outstanding. This estimate is derived based on an analysis of the Company’s historical exercise data combined with expected future exercise patterns based on several factors including the strike price in relation to the current and expected stock price, the minimum vest period and the remaining contractual period.

     A summary of the Plans is presented below:

										Weighted
										Average
						Weighted-				Remaining				Aggregate
						Average				Contractual				Intrinsic
		Number of				Exercise				Term				Value (in
		Shares				Price				(in years)				thousands)
Options outstanding at December 31, 2007			2,039,434			$	2.01
Options granted			51,908			$	6.24
Options exercised			401,543			$	2.06							$	7,927
Options forfeited			23,685			$	5.54
Options expired			457			$	7.23
Options outstanding at September 30, 2008			1,665,657			$	2.07				5.94			$	25,910
Options exercisable at September 30, 2008			1,408,422			$	1.34				5.62			$	22,937

     The aggregate intrinsic value for options outstanding and exercisable is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of the Company’s common stock at September 30, 2008. The aggregate intrinsic value of stock option awards exercised was determined at the date of the option exercise. As of September 30, 2008, total unrecognized compensation expense related to non-vested stock options granted prior to that date is estimated at $1.1 million, which the Company expects to recognize over a weighted average period of approximately 1.00 years. Total unrecognized compensation expense is estimated and may be increased or decreased in future periods for subsequent grants or forfeitures.

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

     The Company’s nonvested stock awards are comprised of restricted stock and restricted stock units. The Company has a right of repurchase on such shares that lapse at a rate of twenty-five percent (25%) of the total shares awarded at each successive anniversary of the initial award date, provided that the employee continues to provide services to the Company. In the event that an employee terminates their employment with the Company, any shares that remain unvested and consequently subject to the right of repurchase shall be automatically reacquired by the Company at the original cash purchase price paid by the employee, if any. For the nine months ended September 30, 2008, 97,309 forfeited shares of restricted stock have been repurchased by the Company at no cost. A summary of the status for nonvested stock awards as of September 30, 2008 is presented as follows:

										Total Number				Weighted
						Restricted				of Shares				Average
		Restricted				Stock				Underlying				Grant-Date Fair
Nonvested Stock Awards		Stock				Units				Awards				Value
Nonvested at December 31, 2007			771,783				63,727				835,510			$	14.08
Granted			523,667				63,794				587,461				23.79
Vested			188,070				17,041				205,111				13.57
Forfeited			72,632				13,607				86,239				20.52
Nonvested at September 30, 2008			1,034,748				96,873				1,131,621			$	18.72

     The aggregate intrinsic value for all non-vested shares of restricted common stock and restricted stock units outstanding as of September 30, 2008 was $20.0 million. The weighted average remaining contractual life for all non-vested shares of restricted common stock and restricted stock units as of September 30, 2008 was 2.96 years.

     We granted nonvested stock awards at no cost to recipients during the nine months ended September 30, 2008. As of September 30, 2008, total unrecognized compensation expense related to non-vested restricted stock and restricted stock units was $18.2 million, which the Company expects to recognize over a weighted average period of approximately 2.03 years. Total unrecognized compensation expense may be increased or decreased in future periods for subsequent grants or forfeitures.

     Of the 205,111 shares of the Company’s restricted stock and restricted stock units vesting during the nine months ended September 30, 2008, the Company repurchased 62,240 shares at an aggregate purchase price of approximately $1.2 million pursuant to the stockholder’s right under the Plans to elect to use common stock to satisfy tax withholding obligations.

Shares Reserved for Issuance

     At September 30, 2008, the Company had reserved for future issuance the following shares of common stock upon the exercise of options and warrants:

Common stock available for future issuances under the Plans			2,321,810
Common stock available for outstanding options and restricted stock units			1,762,530
Common stock warrants			26,375
			4,110,715

COMSCORE, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (continued)

10. Geographic Information

     The Company attributes revenues to customers based on the location of the customer. The composition of the Company’s sales to unaffiliated customers between those in the United States and those in other locations for the three and nine months ended September 30, 2008 and 2007 is set forth below:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
						(Unaudited)
						(In thousands)
United States		$	26,052			$	19,912			$	73,829			$	55,271
Canada			1,628				1,189				4,522				3,152
United Kingdom/Other			2,981				1,288				7,430				3,456
Total Revenues		$	30,661			$	22,389			$	85,781			$	61,879

     The composition of the Company’s property and equipment between those in the United States and those in other countries as of the end of each period is set forth below:

		September 30,				December 31,
		2008				2007
		(Unaudited)
		(In thousands)
United States		$	17,041			$	6,527
Canada			99				183
United Kingdom/Other			158				157
Total		$	17,298			$	6,867

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

     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Risk factors” and elsewhere in this document. See also “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this Quarterly Report on Form 10-Q.

Overview

          We provide a leading digital marketing intelligence platform that helps our customers make better-informed business decisions and implement more effective digital business strategies. Our products and solutions offer our customers deep insights into consumer behavior, including objective, detailed information regarding usage of their online properties and those of their competitors, coupled with information on consumer demographic characteristics, attitudes, lifestyles and offline behavior.

     Our digital marketing intelligence platform is comprised of proprietary databases and a computational infrastructure that measures, analyzes and reports on digital activity. The foundation of our platform is data collected from our comScore panel of more than two million Internet users worldwide who have granted us explicit permission to confidentially measure their Internet usage patterns, online and certain offline buying behavior and other activities. By applying advanced statistical methodologies to our panel data, we project consumers’ online behavior for the total online population and a wide variety of user categories.

     We deliver our digital marketing intelligence through our comScore Media Metrix product family, through our comScore Marketing Solutions products and since May 2008 through our M:Metrics products suite. Media Metrix delivers digital media intelligence by providing an independent, third-party measurement of the size, behavior and characteristics of Web site and online advertising network audiences among home, work and university Internet users as well as insight into the effectiveness of online advertising. Our Marketing Solutions products combine the proprietary information gathered from the comScore panel with the vertical industry expertise of comScore analysts to deliver digital marketing intelligence, including the measurement of online advertising effectiveness, customized for specific industries. We typically deliver our Media Metrix products electronically in the form of weekly, monthly or quarterly reports. Customers can access current and historical Media Metrix data and analyze these data anytime online. Our M:Metrics products suite connects mobile consumer behavior, content merchandising, and device capabilities to provide comprehensive mobile market intelligence. Customers can access our M:Metrics data sets and reports anytime online. Our Marketing Solutions products are typically delivered on a monthly, quarterly or ad hoc basis through electronic reports and analyses.

     Our company was founded in August 1999. By 2000, we had established a panel of Internet users and began delivering digital marketing intelligence products that measured online browsing and buying behavior to our first customers. We also introduced netScore, our initial syndicated Internet audience measurement product. We accelerated our introduction of new products in 2003 with the launch of Plan Metrix (formerly AiM 2.0), qSearch, the Campaign R/F (Reach and Frequency) analysis system and product offerings that measure online activity at the local market level. By 2004, we had built a global panel of over two million Internet users. In that year, in cooperation with Arbitron, we launched a service that provides ratings of online radio audiences. In 2005, we expanded our presence in Europe by opening an office in London. In 2006, we continued to expand our measurement capabilities with the launch of World Metrix, a product that provides worldwide data on digital media usage, and Video Metrix, our product that measures the audience for streaming online video. In 2007, we completed our initial public offering, resulting in the sale and issuance by us of 5,000,000 shares of our common stock, and we also launched ten new products during that year, including Campaign Metrix, qSearch 2.0, Ad Metrix, Segment Metrix and comScore Marketer. During the first quarter of 2008, we launched Ad Metrix-Advertiser View, a tool for agencies and publishers designed to support their media buying and selling activities and supply their competitive intelligence needs. In April 2008, we launched the second generation of our media planning product, Plan Metrix, and increased the frequency of reporting from semi-annual to a monthly cycle. In October 2008, we launched Extended Web Measurement which allows the tracking of distributed web content across third party sites, such as video, music, gaming applications, widgets and social media. It enables publishers to report audience reach and characteristics of their various advertising sales packages providing them with the ability to market those packages more effectively.

     We have complemented our internal development initiatives with select acquisitions. On June 6, 2002, we acquired certain Media Metrix assets from Jupiter Media Metrix, Inc. Through this acquisition, we acquired certain Internet audience measurement services that report details of Web site usage and visitor demographics. On July 28, 2004, we acquired the outstanding stock of Denaro and Associates, Inc, otherwise known as Q2 Brand Intelligence, Inc. or Q2, to improve our ability to provide our customers more robust survey research integrated with our underlying digital marketing intelligence platform. On January 4, 2005, we acquired the assets and assumed certain liabilities of SurveySite Inc., or SurveySite. Through this acquisition, we acquired proprietary Internet-based data-collection technologies and increased our customer penetration and revenues in the survey business. On May 28, 2008, we acquired the outstanding stock of M:Metrics, Inc. to expand our abilities to provide our customers a more robust solution for the mobile medium. The total cost of the acquisition of M:Metrics was approximately $46.0 million, consisting of cash and transaction fees.

     Our total revenues have grown to $87.2 million during the fiscal year ending December 31, 2007 and $85.8 million for the first three quarters of 2008 from $15.4 million during the fiscal year ended January 31, 2003. By comparison, our total expenses from operations have grown to $76.5 million for the year ended 2007 and $77.3 million for the first three quarters of 2008 from $35.2 million during the fiscal year ended January 31, 2003. The growth in our revenues has been primarily the result of:

	•		increased sales to existing customers, as a result of our efforts to deepen our relationships with these clients by increasing their awareness of, and confidence in, the value of our digital marketing intelligence platform;
	•		growth in our customer base through the addition of new customers;
	•		increases in the prices of our products and services;
	•		the sales of new products to existing and new customers;
	•		growth in sales outside of the U.S. as a result of entering into new international markets; and
	•		growth from the acquisition of M:Metrics

     As of September 30, 2008, we had 1,136 customers, compared to 334 as of January 31, 2003. We sell most of our products through our direct sales force. We established an inside sales force dedicated to selling comScore Marketer, which was launched in the fourth quarter of 2007.

          As a result of the recent global financial crisis in the credit markets, softness in the housing markets, difficulties in the financial services sector and continuing economic uncertainties, the direction and relative strength of the U.S. and global economies have become increasingly uncertain. We have noted indications in the nine months ended September 30, 2008, that a limited number of our current and potential customers have delayed or reduced renewals of existing subscriptions and purchases of new or additional services and products. Further, certain of our existing customers have exited the market due to industry consolidation and bankruptcy in connection with these challenging economic conditions. Despite this economic downturn, we continued to add net new customers during the third quarter of 2008, and our existing customers renewed their subscriptions at a rate of over 90% based on dollars renewed in the three months ended September 30, 2008. However, if these adverse economic conditions continue or further deteriorate, our operating results could be adversely affected.

Our Revenues

     We derive our revenues primarily from the fees that we charge for subscription-based products and customized projects. We define subscription-based revenues as revenues that we generate from products that we deliver to a customer on a recurring basis. We define project revenues as revenues that we generate from customized projects that are performed for a specific customer on a non-recurring basis. We market our subscription-based products, customized projects and survey services within the comScore Media Metrix product family and through comScore Marketing Solutions.

     A significant characteristic of our business model is our large percentage of subscription-based contracts. Subscription-based revenues accounted for 78% of our total revenues in 2004 and decreased to 70% of total revenues in 2005 primarily due to the acquisition of SurveySite. Subscription-based revenue increased to 75% of total revenues in 2006, to 79% of total revenues in 2007 and to 83% during the nine months ended September 30, 2008.

     Many of our customers who initially purchased a customized project have subsequently purchased one of our subscription-based products. Similarly, many of our subscription-based customers have subsequently purchased additional customized projects.

     Historically, we have generated most of our revenues from the sale and delivery of our products to companies and organizations located within the United States. We intend to expand our international revenues by selling our products and deploying our direct sales force model in additional international markets in the future. For the year ended December 31, 2007, our international revenues were $10.1 million, an increase of $4.4 million, or 76% over international revenues of $5.7 million for the fiscal year ended December 31, 2006. For the nine months ended September 30, 2008, our international revenues were $12.0 million, an increase of $5.3 million or 81% over international revenues of $6.6 million for the nine months ended September 30, 2007. International revenues comprised approximately 9%, 12% and 14% of our total revenues for the fiscal years ended December 31, 2006 and 2007 and the nine months ended September 30, 2008, respectively.

     We anticipate that revenues from our U.S. customers will continue to constitute the substantial majority of our revenues, but we expect that revenues from customers outside of the U.S. will increase as a percentage of total revenues as we build greater international recognition of our brand and expand our sales operations globally.

     Recently, the value of the U.S. Dollar has appreciated significantly against the British Pound, the Euro, the Canadian Dollar and other local currencies of international customers. As the U.S. Dollar appreciates relative to the local currencies of our international customers, the price of our products and projects correspondingly increase and could result in reductions in sales or renewals, longer sales cycles, difficulties in collection of accounts receivable and increased price competition, any of which could adversely affect our operating results.

Subscription Revenues

          We generate a significant proportion of our subscription-based revenues from our Media Metrix product family and since May 2008 our M:Metrics products suite. Products within the Media Metrix family include Media Metrix 2.0, Plan Metrix, World Metrix and Video Metrix. Additionally, we recently launched Ad Metrix and comScore Marketer in the second half of 2007. These product offerings provide subscribers with intelligence on digital media usage, audience characteristics, audience demographics and online and offline purchasing behavior. Customers who subscribe to our Media Metrix and M:Metrics products are provided with login IDs to our Web site, have access to our database and can generate reports at any time.

          We also generate subscription-based revenues from certain reports and analyses provided through comScore Marketing Solutions, if that work is procured by customers for at least a nine month period and the customer enters into an agreement to continue or extend the work. Through our Marketing Solutions products, we deliver digital marketing intelligence relating to specific industries, such as automotive, consumer packaged goods, entertainment, financial services, media, pharmaceutical, retail, technology, telecommunications and travel. This marketing intelligence leverages our global consumer panel and extensive database to deliver information unique to a particular customer’s needs on a recurring schedule, as well as on a continual-access basis. Our Marketing Solutions customer agreements typically include a fixed fee with an initial term of at least one year. We also provide these products on a non-subscription basis as described under “Project Revenues” below.

          In addition, we generate subscription-based revenues from survey products that we sell to our customers. In conducting our surveys, we generally use our global Internet user panel. After questionnaires are distributed to the panel members and completed, we compile their responses and then deliver our findings to the customer, who also has ongoing access to the survey response data as they are compiled and updated over time. These data include responses and information collected from the actual survey questionnaire and can also include behavioral information that we passively collect from our panelists. If a customer contractually commits to having a survey conducted on a recurring basis, we classify the revenues generated from such survey products as subscription-based revenues. Our contracts for survey services typically include a fixed fee with terms that range from two months to one year.

Project Revenues

     We generate project revenues by providing customized information reports to our customers on a nonrecurring basis through comScore Marketing Solutions. For example, a customer in the media industry might request a custom report that profiles the behavior of the customer’s active online users and contrasts their market share and loyalty with similar metrics for a competitor’s online user base. If this customer continues to request the report beyond an initial project term of at least nine months and enters into an agreement to purchase the report on a recurring basis, we begin to classify these future revenues as subscription-based.

Critical Accounting Policies and Estimates

     Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and the accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. While our significant accounting policies are described in more detail in the notes to our consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2007, we believe the following accounting policies to be the most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

          We recognize revenues in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104). SAB 104 requires that four basic criteria must be met prior to revenue recognition: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or the services have been rendered, (iii) the fee is fixed or determinable, and (iv) collection of the resulting receivable is reasonably assured.

          We generate revenues by providing access to our online database or delivering information obtained from our database, usually in the form of periodic reports. Revenues are typically recognized on a straight-line basis over the period in which access to data or reports are provided, which generally ranges from three to 24 months.

          We also generate revenues through survey services under contracts ranging in term from two months to one year. Our survey services consist of survey and questionnaire design with subsequent data collection, analysis and reporting. We recognize revenues on a straight-line basis over the estimated data collection period once the survey or questionnaire design has been delivered. Any change in the estimated data collection period results in an adjustment to revenues recognized in future periods.

          Certain of our arrangements contain multiple elements, consisting of the various services we offer. Multiple element arrangements typically consist of a subscription to our online database combined with customized services. These arrangements are accounted for in accordance with Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. We have determined that there is not objective and reliable evidence of fair value for any of our services and, therefore, account for all elements in multiple elements arrangements as a single unit of accounting. Access to data under the subscription element is generally provided shortly after the execution of the contract. However, the initial delivery of customized services generally occurs subsequent to contract execution. We recognize the entire arrangement fee over the performance period of the last deliverable. As a result, the total arrangement fee is recognized on a straight-line basis over the period beginning with the commencement of the last customized service delivered.

          Generally, our contracts are non-refundable and non-cancelable. In the event a portion of a contract is refundable, revenue recognition is delayed until the refund provisions lapse. A limited number of customers have the right to cancel their contracts by providing us with written notice of cancellation. In the event that a customer cancels its contract, it is not entitled to a refund for prior services, and it will be charged for costs incurred plus services performed up to the cancellation date.

          Advance payments are recorded as deferred revenues until services are delivered or obligations are met and revenue can be recognized. Deferred revenues represent the excess of amounts invoiced over amounts recognized as revenues.

Allowance for Doubtful Accounts

     We manage credit risk on accounts receivable by performing credit evaluations of our customers on a selective basis, by reviewing our accounts and contracts and by providing appropriate allowances for uncollectible amounts. Allowances are based on management’s judgment, which considers historical experience and specific knowledge of accounts that may not be collectible. We make provisions based on our historical bad debt experience, a specific review of all significant outstanding invoices and an assessment of general economic conditions. If the financial condition of a customer deteriorates, resulting in an impairment of its ability to make payments, additional allowances may be required.

Goodwill and intangible assets

     Goodwill represents the excess of the purchase price over the fair value of identifiable assets acquired and liabilities assumed when other businesses are acquired. The allocation of the purchase price to intangible assets and goodwill involves the extensive use of management’s estimates and assumptions, and the result of the allocation process can have a significant impact on future operating results. We estimate the fair value of identifiable intangible assets acquired using several different valuation approaches, including the replacement cost, income and market approaches. The replacement cost approach is based on determining the discrete cost of replacing or reproducing a specific asset. The income approach converts the anticipated economic benefits that we assume will be realized from a given asset into value. Under this approach, value is measured as the present value of anticipated future net cash flows generated by an asset. The market approach compares the acquired asset to similar assets that have been sold.

     Under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), intangible assets with finite lives are amortized over their useful lives while goodwill is not amortized but is evaluated for potential impairment at least annually by comparing the fair value of a reporting unit to its carrying value, including goodwill recorded by the reporting unit. If the carrying value exceeds the fair value, impairment is measured by comparing the derived fair value of the goodwill to its carrying value, and any impairment determined is recorded in the current period. In accordance with SFAS 142, all of our goodwill is associated with one reporting unit. Accordingly, on an annual basis we perform the impairment assessment for goodwill required under SFAS 142 at the enterprise level. We completed our annual impairment analysis as of October 1st for 2007 and determined that there was no impairment of goodwill. There have been no indicators of impairment since the October 1, 2007 test through September 30, 2008.

     Intangible assets with finite lives are amortized using the straight-line method over the following useful lives:

		Useful Lives
		(Years)
Acquired methodologies/technology			5 to 7
Customer relationships			7
Panel			7
Intellectual property			10

Income Taxes

          Our tax provision for interim periods is determined using an estimate of our annual effective tax rate for each of our legal entities in accordance with the interim reporting requirements of SFAS No. 109, Accounting for Income Taxes, APB Opinion No. 28, Interim Financial Reporting , and FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods — an interpretation of APB Opinion No. 28 . Accordingly, we have estimated our annual effective tax rate for the full year and applied that rate to our income before taxes in determining our tax expense for the nine months ended September 30, 2008. During the three and nine months ended September 30, 2008, we recognized income tax provisions of $1.2 million and $4.4 million, respectively, compared to an income tax provision of $129,000 and $181,000 in the same periods of 2007. The tax provisions for the three and nine months ended September 30, 2008 were due primarily to current taxes of $318,000 and $522,000, respectively, and the utilization of U.S. deferred tax assets of $889,000 and $4.0 million, respectively, offset by a discrete release of the valuation allowance of $111,000 associated with a foreign entity in the nine months ended September 30, 2008. The tax provisions for the three and nine months ended September 30, 2007 were comprised of income tax expense of $148,000 and $239,000, respectively, reflecting our U.S. alternative minimum tax and was partly offset by a decrease of $19,000 and $58,000, respectively, in the deferred tax liability associated with a temporary difference related to certain acquired intangible assets. The utilization of our U.S. deferred tax assets for the three and nine months ended September 30, 2007 were entirely offset by corresponding release of valuation allowance.

     As of September 30, 2008 and December 31, 2007 we had $71,000 of unrecognized tax benefit liabilities. We file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. We are not subject to U.S. federal, state and local tax examinations by tax authorities for years before 2003, although carryforward tax attributes that were generated prior to 2003 may still be adjusted upon examination by tax authorities if they either have been or will be utilized.

     We recognize accrued interest related to unrecognized tax benefits in the tax expense account. Penalties, if incurred, would also be recognized as a component of income tax expense. As of September 30, 2008 and December 31, 2007, the amount of accrued interest expense on unrecognized tax benefits was not material.

     As of September 30, 2008 and December 31, 2007, we had a valuation allowance of $26.4 million and $21.3 million, respectively, against certain deferred tax assets, which consisted principally of net operating loss carryforwards. Prior to December 31, 2007, management believed that, based on a number of factors, the available objective evidence created sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance was required. As of December 31, 2007, we concluded that it is more likely than not that a portion of its deferred tax assets would be utilized in subsequent years and that a reduction in the deferred tax asset valuation allowance was necessary. In determining the amount of deferred tax assets to recognize, we considered its history of profitability, the history of its industry, the overall amount of the deferred tax assets and the timeframe over which it would take to utilize the deferred tax assets prior to their expiration. Given the relatively limited history of profitability and the fact that the online marketing industry is a young and developing industry, we concluded that it was appropriate to consider future taxable income (exclusive of reversing temporary differences and carryforwards) for a limited period of one year into the future. As a result, we reversed a portion of our valuation allowance and recognized a net deferred tax asset of $8.1 million as of December 31, 2007. In 2008, we have recognized a deferred tax provision as we utilized the deferred tax asset recognized at December 31, 2007.

     As of September 30, 2008, we concluded that there were no events during the quarter that would result in a revaluation of our valuation allowance against deferred tax assets, and we will continue to evaluate our valuation allowance position on a regular basis. To the extent that we determine that all or a portion of our valuation allowance is no longer necessary, we will recognize an income tax benefit in the period such determination is made for the reversal of the valuation allowance. It is expected that any such reduction of our valuation allowance would have a material impact on our results from operations.

     The exercise of stock options during 2008 and 2007 generated an income tax deduction equal to the excess of the fair market value over the exercise price. In accordance with SFAS No. 123R, Share Based Compensation (“SFAS No. 123R”), we will not recognize a deferred tax asset with respect to the excess stock compensation deductions until those deductions actually reduce our income tax liability. As such, we have not recorded a deferred tax asset related to the net operating losses resulting from the exercise of these stock options in the accompanying financial statements. At such time as we utilize these net operating losses to reduce income tax payable, the tax benefit will be recorded as an increase in additional paid in capital.

     FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109 (“FIN 48”), clarifies the accounting for income taxes by prescribing that a company should use a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax provisions that meet the more-likely-than-not recognition threshold should be measured as the largest amount of tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the financial statements. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition, and explicitly excludes income taxes from the scope of SFAS No. 5, Accounting for Contingencies. As of September 30, 2008 and December 31, 2007, we had unrecognized tax benefits of $71,000 on a tax- effected basis.

Stock-Based Compensation

     We account for share-based compensation expense in accordance with SFAS No. 123 (revised 2005), Share-Based Payment (“SFAS 123R”). SFAS 123R requires the measurement and recognition of compensation expense for share-based awards based on estimated fair values on the date of grant. We estimate the fair value of each option award on the date of grant using the Black-Scholes option-pricing model. This model is affected by our stock price as well as estimates regarding a number of variables including expected stock price volatility over the term of the award and projected employee stock option exercise behaviors. For stock-based awards subject to graded vesting, we utilize the straight-line ratable method for allocating compensation cost by period.

     Other key variables in the Black-Scholes option-pricing model include the expected volatility of our common stock price, the expected term of the award and the risk-free interest rate. In addition, under SFAS 123R, we are required to estimate forfeitures of unvested awards when recognizing compensation expense. If factors change and we employ different assumptions in the application of SFAS 123R in future periods, the compensation expense we record may differ significantly from what we have previously recorded.

     At September 30, 2008, total estimated unrecognized compensation expense related to unvested stock-based awards granted prior to that date was $19.3 million, which is expected to be recognized over a weighted-average period of 1.97 years.

     We expect stock-based compensation expense to increase in absolute dollars as a result of the adoption of SFAS 123R as options that were granted at the beginning of 2006 and beyond vest. Beginning in 2007, we made use of restricted stock awards and restricted stock units and reduced our use of stock options as a form of stock-based compensation. The actual amount of stock-based compensation expense we record in any fiscal period will depend on a number of factors, including the number of shares subject to the stock options issued, the fair value of our common stock at the time of issuance and the expected volatility of our stock price over time.

Fair Value Measurements

     As of January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS No. 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: Level 1 — observable inputs such as quoted prices in active markets; Level 2 — inputs other than the quoted prices in active markets that are observable either directly or indirectly; Level 3 — unobservable inputs of which there is little or no market data, which require us to develop our own assumptions. This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, we measure our marketable securities at fair value and determine the appropriate classification level for each reporting period. We are required to use significant judgments to make this determination.

     Our investment instruments are classified within Level 1 or Level 3 of the fair value hierarchy. Level 1 investment instruments are valued using quoted market prices or broker or dealer quotations. Level 3 instruments are valued using a discounted cash flow model that takes into consideration the securities coupon rate, the financial condition of the issuers and the bond insurers, the expected date liquidity will be restored, as well as an applied illiquidity discount. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities. Such instruments are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued based on significant unobservable inputs include certain illiquid auction rate securities. Such instruments are generally classified within Level 3 of the fair value hierarchy.

Seasonality

     Historically, a slightly higher percentage of our customers have renewed their subscription products with us toward the end of the fourth quarter. While we execute projects for our customers throughout the year, we have historically experienced a slight upturn in our project-based business in the fourth quarter. We have historically had seasonally high costs in the first half of our fiscal year associated with higher payroll taxes, vacation accruals and a ramp up of hiring in our sales force and technology groups to support our anticipated revenue growth.

Results of Operations

     The following table sets forth selected consolidated statements of operations data as a percentage of total revenues for each of the periods indicated.

		Three Months Ended September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
						(Unaudited)
						(In thousands)
Revenues			100.0	%			100.0	%			100.0	%			100.0	%
Cost of revenues			30.7				26.5				28.3				28.0
Selling and marketing			34.8				33.0				34.0				33.2
Research and development			13.5				13.5				12.6				13.6
General and administrative			13.9				13.7				14.7				12.9
Amortization			1.1				0.9				0.6				1.3
Total expenses from operations			94.0				87.6				90.2				89.0
Income from operations			6.0				12.4				9.8				11.0
Interest income, net			0.9				5.3				1.9				2.3
Loss from foreign currency			0.4				(0.5	)			—				(0.5	)
Impairment of marketable securities			(1.5	)			—				(1.0	)			—
Revaluation of preferred stock warrant liabilities			—				0.4				—				(1.9	)
Income before income taxes			5.8				17.6				10.7				10.9
Provision for income taxes			(3.9	)			(0.6	)			(5.0	)			(0.3	)
Net income			1.9				17.0				5.7				10.6
Accretion of redeemable preferred stock			—				—				—				(3.0	)
Net income attributable to common stockholders			1.9	%			17.0	%			5.7	%			7.6	%

Revenues

		Three Months Ended September 30,								Change								Nine Months Ended September 30,								Change
		2008				2007				$				%				2008				2007				$				%
														(Unaudited)
														(In thousands)
Revenues		$	30,661			$	22,389			$	8,272				37	%		$	85,781			$	61,879			$	23,902				39	%