UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 1-1969

ARBITRON INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		52-0278528 (I.R.S. Employer Identification No.)

(Address of principal executive offices) (Zip Code)
(410) 312-8000
(Registrant’s telephone number, including area 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o 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.

Large Accelerated Filer o		Accelerated Filer þ		Non-Accelerated Filer o		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

     The registrant had 26,939,833 shares of common stock, par value $0.50 per share, outstanding as of October 29, 2010.

 

 

ARBITRON INC.

INDEX

		Page No.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets — September 30, 2010, and December 31, 2009			4
Consolidated Statements of Income — Three Months Ended September 30, 2010, and 2009			5
Consolidated Statements of Income — Nine Months Ended September 30, 2010, and 2009			6
Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2010, and 2009			7
Notes to Consolidated Financial Statements — September 30, 2010			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			37
Item 4. Controls and Procedures			37
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			38
Item 1A. Risk Factors			39
Item 5. Other Information			39
Item 6. Exhibits			40
Signature			41

     Arbitron owns or has the rights to various trademarks, trade names or service marks used in its radio audience measurement business and subsidiaries, including the following: the Arbitron name and logo, Arbitrends^SM, RetailDirect^®, RADAR^®, Tapscan^TM, Tapscan WorldWide^TM, LocalMotion^®, Maximi$er^®, Maximi$er^® Plus, Arbitron PD Advantage^®, SmartPlus^®, Arbitron Portable People Meter^TM, PPM^TM, Arbitron PPM^®, PPM 360™, Marketing Resources Plus^®, MRP^SM, PrintPlus^®, MapMAKER Direct^SM, Media Professional^SM, Media Professional Plus^SM, Qualitap^SM and Schedule-It^SM.

     The trademarks Windows^® and Media Rating Council^® are the registered trademarks of others.

     We routinely post important information on our website at www.arbitron.com. Information contained on our website is not part of this quarterly report.

ARBITRON INC.
Consolidated Balance Sheets
(In thousands, except par value data)

		September 30,				December 31,
		2010				2009
		(Unaudited)				(Audited)
Assets
Current assets
Cash and cash equivalents		$	6,305			$	8,217
Trade accounts receivable, net of allowance for doubtful accounts of $4,471 as of September 30, 2010, and $4,708 as of December 31, 2009			60,000				52,607
Prepaid expenses and other current assets			6,339				9,373
Deferred tax assets			5,446				4,982
Total current assets			78,090				75,179
Equity and other investments			12,490				16,938
Property and equipment, net			70,510				67,903
Goodwill, net			38,895				38,500
Other intangibles, net			6,557				809
Noncurrent deferred tax assets			990				4,130
Other noncurrent assets			671				370
Total assets		$	208,203			$	203,829
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		$	10,783			$	14,463
Accrued expenses and other current liabilities			15,801				28,305
Deferred revenue			43,304				43,148
Total current liabilities			69,888				85,916
Long-term debt			58,000				68,000
Other noncurrent liabilities			20,314				19,338
Total liabilities			148,202				173,254
Commitments and contingencies			—				—
Stockholders’ equity
Preferred stock, $100.00 par value, 750 shares authorized, no shares issued			—				—
Common stock, $0.50 par value, 500,000 shares authorized, 32,338 shares issued as of September 30, 2010, and December 31, 2009			16,169				16,169
Net distributions to parent prior to March 30, 2001 spin-off			(239,042	)			(239,042	)
Retained earnings subsequent to spin-off			295,660				267,305
Common stock held in treasury, 5,420 shares as of September 30, 2010, and 5,750 shares as of December 31, 2009			(2,710	)			(2,875	)
Accumulated other comprehensive loss			(10,076	)			(10,982	)
Total stockholders’ equity			60,001				30,575
Total liabilities and stockholders’ equity		$	208,203			$	203,829

See accompanying notes to consolidated financial statements.

ARBITRON INC.
Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)

		Three Months Ended
		September 30,
		2010				2009
Revenue		$	99,470			$	98,123
Costs and expenses
Cost of revenue			50,384				44,454
Selling, general and administrative			18,137				16,908
Research and development			10,088				10,385
Restructuring and reorganization			—				1,718
Total costs and expenses			78,609				73,465
Operating income			20,861				24,658
Equity in net loss of affiliate			(2,639	)			(1,948	)
Income before interest and income tax expense			18,222				22,710
Interest income			4				11
Interest expense			226				365
Income before income tax expense			18,000				22,356
Income tax expense			6,672				8,637
Net income		$	11,328			$	13,719
Income per weighted-average common share
Basic		$	0.42			$	0.52
Diluted		$	0.42			$	0.51
Weighted-average common shares used in calculations
Basic			26,834				26,515
Potentially dilutive securities			263				173
Diluted			27,097				26,688
Dividends declared per common share outstanding		$	0.10			$	0.10

See accompanying notes to consolidated financial statements.

ARBITRON INC.
Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)

		Nine Months Ended
		September 30,
		2010				2009
Revenue		$	283,705			$	283,411
Costs and expenses
Cost of revenue			153,041				139,745
Selling, general and administrative			54,927				54,683
Research and development			29,069				30,275
Restructuring and reorganization			—				10,074
Total costs and expenses			237,037				234,777
Operating income			46,668				48,634
Equity in net income of affiliate			472				633
Income before interest and income tax expense			47,140				49,267
Interest income			10				44
Interest expense			745				1,063
Income before income tax expense			46,405				48,248
Income tax expense			17,530				18,692
Net income		$	28,875			$	29,556
Income per weighted-average common share
Basic		$	1.08			$	1.12
Diluted		$	1.07			$	1.11
Weighted-average common shares used in calculations
Basic			26,693				26,478
Potentially dilutive securities			339				151
Diluted			27,032				26,629
Dividends declared per common share outstanding		$	0.30			$	0.30

See accompanying notes to consolidated financial statements.

ARBITRON INC.
Consolidated Statements of Cash Flows
(In thousands and unaudited)

		Nine Months Ended September 30,
		2010				2009
Cash flows from operating activities
Net income		$	28,875			$	29,556
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization of property and equipment			19,787				16,759
Amortization of intangible assets			537				106
Loss on asset disposals and impairments			2,074				1,618
Loss on retirement plan lump-sum settlements			1,222				1,781
Reduced tax benefits on share-based awards			(178	)			(1,639	)
Deferred income taxes			1,784				1,362
Equity in net income of affiliate			(472	)			(633	)
Distributions from affiliate			6,700				8,400
Bad debt expense			405				999
Non-cash share-based compensation			4,710				7,500
Changes in operating assets and liabilities
Trade accounts receivable			(7,798	)			(1,000	)
Prepaid expenses and other assets			2,540				395
Accounts payable			(767	)			(6,495	)
Accrued expenses and other current liabilities			(13,953	)			(10,249	)
Deferred revenue			156				(8,785	)
Other noncurrent liabilities			1,492				(288	)
Net cash provided by operating activities			47,114				39,387
Cash flows from investing activities
Additions to property and equipment			(23,174	)			(25,475	)
Payments for asset acquisitions			(2,500	)			—
Purchases of equity and other investments			(1,780	)			(3,400	)
License of other intangible assets			(4,500	)			—
Net cash used in investing activities			(31,954	)			(28,875	)
Cash flows from financing activities
Proceeds from stock option exercises and stock purchase plan			4,733				1,045
Dividends paid to stockholders			(7,981	)			(7,933	)
Decrease in bank overdraft payables			(3,833	)			—
Borrowings under Credit Facility			10,000				33,000
Payments under Credit Facility			(20,000	)			(33,000	)
Net cash used in financing activities			(17,081	)			(6,888	)
Effect of exchange rate changes on cash and cash equivalents			9				25
Net change in cash and cash equivalents			(1,912	)			3,649
Cash and cash equivalents at beginning of period			8,217				8,658
Cash and cash equivalents at end of period		$	6,305			$	12,307

See accompanying notes to consolidated financial statements.

ARBITRON INC.
Notes to Consolidated Financial Statements
September 30, 2010
(unaudited)

1. Basis of Presentation and Consolidation

Presentation

     The accompanying unaudited consolidated financial statements of Arbitron Inc. (the “Company” or “Arbitron”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included and are of a normal recurring nature. The consolidated balance sheet as of December 31, 2009 was audited at that date, but all of the information and notes as of December 31, 2009 required by U.S. generally accepted accounting principles have not been included in this Form 10-Q. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Consolidation

     The consolidated financial statements of the Company for the three- and nine-month periods ended September 30, 2010, reflect the consolidated financial position, results of operations and cash flows of the Company and its subsidiaries: Arbitron Holdings Inc., Astro West LLC, Ceridian Infotech (India) Private Limited, Arbitron International, LLC and Arbitron Technology Services India Private Limited. All significant intercompany balances have been eliminated in consolidation. Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to the current period’s presentation.

2. Long-Term Debt

     On December 20, 2006, the Company entered into an agreement with a consortium of lenders to provide up to $150.0 million of financing to the Company through a five-year, unsecured revolving credit facility (the “Credit Facility”), expiring on December 20, 2011. The agreement contains an expansion feature for the Company to increase the total financing available under the Credit Facility by up to $50.0 million to an aggregate of $200.0 million. Such increased financing would be provided by one or more existing Credit Facility lending institutions, subject to the approval of the lending banks, and/or in combination with one or more new lending institutions, subject to the approval of the Credit Facility’s administrative agent. As of September 30, 2010, and December 31, 2009, the outstanding borrowings under the Credit Facility were $58.0 million and $68.0 million, respectively.

     Interest paid during the nine-month periods ended September 30, 2010, and 2009, was $0.7 million and $1.1 million, respectively.

3. Stockholders’ Equity

     Changes in stockholders’ equity for the nine-month period ended September 30, 2010, were as follows (in thousands):

														Net Distributions
														to Parent				Retained				Accumulated
														Prior to				Earnings				Other				Total
		Shares				Common				Treasury				March 30, 2001				Subsequent				Comprehensive				Stockholders’
		Outstanding				Stock				Stock				Spin-off				to Spin-off				Loss				Equity
Balance as of December 31, 2009			26,588			$	16,169			$	(2,875	)		$	(239,042	)		$	267,305			$	(10,982	)		$	30,575
Net income			—				—				—				—				28,875				—				28,875
Common stock issued from treasury stock			330				—				165				—				2,962				—				3,127
Reduced tax benefits from share-based awards			—				—				—				—				(178	)			—				(178	)
Non-cash share-based compensation			—				—				—				—				4,710				—				4,710
Dividends declared			—				—				—				—				(8,014	)			—				(8,014	)
Other comprehensive income			—				—				—				—				—				906				906
Balance as of September 30, 2010			26,918			$	16,169			$	(2,710	)		$	(239,042	)		$	295,660			$	(10,076	)		$	60,001

     A quarterly cash dividend of $0.10 per common share was paid to stockholders on October 1, 2010.

4. Net Income per Weighted-Average Common Share

     The computations of basic and diluted net income per weighted-average common share for the three and nine-month periods ended September 30, 2010, and 2009, are based on the Company’s weighted-average shares of common stock and potentially dilutive securities outstanding.

     Potentially dilutive securities are calculated in accordance with the treasury stock method, which assumes that the proceeds from the exercise of all stock options are used to repurchase the Company’s common stock at the average market price for the period. As of September 30, 2010, and 2009, there were options to purchase 2,248,119 and 3,018,742 shares, respectively, of the Company’s common stock outstanding, of which options to purchase 1,530,410 and 2,660,352 shares of the Company’s common stock, respectively, were excluded from the computation of diluted net income per weighted-average common share for the quarters ended September 30, 2010, and 2009, respectively, either because the options’ exercise prices were greater than the average market price of the Company’s common shares or assumed repurchases from proceeds from the options’ exercise were potentially antidilutive.

5. Comprehensive Income and Accumulated Other Comprehensive Loss

     The Company’s comprehensive income is comprised of net income, changes in foreign currency translation adjustments, and changes in retirement liabilities, net of tax expense. The components of comprehensive income were as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Net income		$	11,328			$	13,719			$	28,875			$	29,556
Other comprehensive income:
Change in foreign currency translation adjustment			75				6				(152	)			(38	)
Change in retirement liabilities, net of tax expense of $121, and $2,519 for the three months ended September 30, 2010, and 2009, respectively; and a tax expense of $680, and $2,814 for the nine months ended September 30, 2010, and 2009, respectively.			189				3,858				1,058				4,307
Other comprehensive income			264				3,864				906				4,269
Comprehensive income		$	11,592			$	17,583			$	29,781			$	33,825

The components of accumulated other comprehensive loss were as follows (in thousands):

		September 30,				December 31,
		2010				2009
Foreign currency translation adjustment		$	(462	)		$	(310	)
Retirement plan liabilities, net of taxes			(9,614	)			(10,672	)
Accumulated other comprehensive loss		$	(10,076	)		$	(10,982	)

6. Prepaids and Other Current Assets

     Prepaids and other current assets as of September 30, 2010, and December 31, 2009, consist of the following (in thousands):

		September 30, 2010				December 31, 2009
Survey participant incentives and prepaid postage		$	2,176			$	2,172
Other			2,757				2,810
Prepaid Scarborough royalty			1,015				—
Insurance recovery receivables			391				4,391
Prepaids and other current assets		$	6,339			$	9,373

     During 2008, the Company became involved in two securities law civil actions and a governmental interaction primarily related to the commercialization of our Portable People Meter™ (PPM™) service, which the management of the Company believes are covered by the Company’s Directors and Officers insurance policy. As of September 30, 2010, and December 31, 2009, the Company incurred to date $9.1 million and $8.8 million, respectively, in legal fees and costs in defense of its positions related thereto.

     The Company reported $0.4 million and $2.1 million in estimated gross insurance recoveries as reductions to selling, general and administrative expense during the nine-month periods ended September 30, 2010, and 2009, respectively. These reductions offset the $0.3 million and $2.4 million in related legal fees recorded during the nine-month periods ended September 30, 2010, and 2009, respectively. As of September 30, 2010, the Company has received $5.6 million in insurance reimbursements related to these legal actions and estimates that an additional $0.4 million of the aggregate costs and expenses are probable for recovery under its Director and Officer insurance policy.

     During 2009 and 2008, the Company incurred $2.7 million in business interruption losses and damages as a result of Hurricane Ike. As of September 30, 2010, approximately $1.6 million in insurance reimbursements were received. No subsequent insurance reimbursements are expected to be received.

7. Equity and Other Investments

     The Company’s equity and other investments consisted of the following (in thousands):

		September 30, 2010				December 31, 2009
Scarborough		$	7,310			$	13,538
TRA preferred stock			5,180				3,400
Equity and other investments		$	12,490			$	16,938

     The Company’s 49.5% investment in Scarborough Research (“Scarborough”), a Delaware general partnership, is accounted for using the equity method of accounting. On May 24, 2010, the Company paid $1.8 million to increase its investment in the preferred stock of TRA Global, Inc., a Delaware corporation (“TRA”). The Company’s TRA investment is accounted for using the cost method of accounting. See Note 15 Financial Instruments for further information regarding the Company’s TRA investment as of September 30, 2010.

     The following table shows the investment activity and balances for each of the Company’s investments and in total for the three- and nine-month periods ended September 30, 2010, and 2009:

		Summary of Investment Activity (in thousands)
		Three Months Ended												Three Months Ended
		September 30, 2010												September 30, 2009
		Scarborough				TRA				Total				Scarborough				TRA				Total
Beginning balance		$	11,999			$	5,180			$	17,179			$	12,082			$	3,400			$	15,482
Investment loss			(2,639	)			—				(2,639	)			(1,948	)			—				(1,948	)
Distributions from investee			(2,050	)			—				(2,050	)			(3,000	)			—				(3,000	)
Ending balance at September 30		$	7,310			$	5,180			$	12,490			$	7,134			$	3,400			$	10,534

		Nine Months Ended												Nine Months Ended
		September 30, 2010												September 30, 2009
		Scarborough				TRA				Total				Scarborough				TRA				Total
Beginning balance		$	13,538			$	3,400			$	16,938			$	14,901			$	—			$	14,901
Investment income			472				—				472				633				—				633
Distributions from investee			(6,700	)			—				(6,700	)			(8,400	)			—				(8,400	)
Cash investments			—				1,780				1,780				—				3,400				3,400
Ending balance at September 30		$	7,310			$	5,180			$	12,490			$	7,134			$	3,400			$	10,534

8. Acquisitions

     During the three-month period ended March 31, 2010, the Company entered into a licensing arrangement with Digimarc Corporation (“Digimarc”) to receive a non-exclusive, worldwide and irrevocable license to a substantial portion of Digimarc’s domestic and international patent portfolio. The Company paid $4.5 million for this other intangible asset, which is being amortized over 7.0 years.

     On June 15, 2010, Astro West LLC, a wholly owned subsidiary of the Company, completed the purchase of the technology portfolio, patents, and trade name from Integrated Media Measurement, Inc., now doing business as Audience Measurement Technologies, Inc. The Company paid $2.5 million for the acquisition of these assets, which included $1.8 million in other intangible assets, $0.3 million in computer equipment, and $0.4 million of goodwill. The acquired other intangible assets are being amortized over 5.0 years.

9. Contingencies

     The Company is involved in a number of governmental interactions primarily related to the commercialization of our PPM service. A contingent loss in the amount of $0.5 million for these claims is recorded within accrued expenses and other current liabilities on the Company’s consolidated balance sheet as of September 30, 2010, and December 31, 2009.

10. Restructuring and Reorganization Initiative

     During the first quarter of 2009, the Company implemented a restructuring, reorganization and expense reduction plan (the “Plan”). The Plan included reducing the Company’s full-time workforce by approximately 10 percent. The Company incurred $10.0 million of restructuring charges during 2009, related principally to severance, termination benefits, outplacement support, retirement plan settlement charges and certain other expenses that were incurred as part of the Plan. No additional charges are expected to be incurred in 2010.

     The following table presents additional information regarding the restructuring and reorganization activity for the three- and nine-month periods ended September 30, 2010, and 2009 (in thousands):

		For the Three				For the Three
		Months Ended				Months Ended
		September 30,				September 30,
Restructuring and Reorganization		2010				2009
Beginning liability		$	12			$	2,634
Costs incurred and charged to expense			—				1,718
Costs paid during the period			(12	)			(1,464	)
Less: non-cash charges			—				(1,781	)
Ending liability as of September 30		$	—			$	1,107

		For the Nine				For the Nine
		Months Ended				Months Ended
		September 30,				September 30,
Restructuring and Reorganization		2010				2009
Beginning liability		$	482			$	—
Costs incurred and charged to expense			—				10,074
Costs paid during the period			(482	)			(7,186	)
Less: non-cash charges			—				(1,781	)
Ending liability as of September 30		$	—			$	1,107

     The ending restructuring and reorganization liability balance as of December 31, 2009 is recorded within accrued expenses and other current liabilities on the Company’s consolidated balance sheet.

11. Retirement Plans

     Certain of the Company’s United States employees participate in a defined-benefit pension plan that closed to new participants effective January 1, 1995. The Company subsidizes healthcare benefits for eligible retired employees who participate in the pension plan and were hired before January 1, 1992. The Company sponsored two nonqualified, unfunded supplemental retirement plans during the nine month-periods ended September 30, 2010 and 2009. However, one of the supplemental retirement plans terminated during the third quarter of 2010.

     The components of periodic benefit costs for the defined-benefit pension, postretirement and supplemental retirement plans were as follows (in thousands):

		Defined-Benefit								Postretirement								Supplemental
		Pension Plan								Plan								Retirement Plans
		Three Months								Three Months								Three Months
		Ended September 30,								Ended September 30,								Ended September 30,
		2010				2009				2010				2009				2010				2009
Service cost		$	183			$	148			$	9			$	12			$	4			$	24
Interest cost			470				432				22				23				42				77
Expected return on plan assets			(520	)			(476	)			—				—				—				—
Amortization of prior service cost (credit)			—				6				—				—				—				(4	)
Amortization of net loss			263				247				9				11				38				101
Net periodic benefit cost		$	396			$	357			$	40			$	46			$	84			$	198
Settlement and curtailment loss		$	—			$	1,499			$	—			$	—			$	10			$	267

		Defined-Benefit								Postretirement								Supplemental
		Pension Plan								Plan								Retirement Plans
		Nine Months								Nine Months								Nine Months
		Ended September 30,								Ended September 30,								Ended September 30,
		2010				2009				2010				2009				2010				2009
Service cost		$	548			$	592			$	28			$	37			$	12			$	70
Interest cost			1,412				1,385				67				69				151				239
Expected return on plan assets			(1,588	)			(1,629	)			—				—				—				—
Amortization of prior service cost (credit)			—				17				—				—				—				(12	)
Amortization of net loss			789				744				27				32				110				323
Net periodic benefit cost		$	1,161			$	1,109			$	122			$	138			$	273			$	620
Settlement and curtailment loss		$	—			$	1,499			$	—			$	—			$	1,222			$	282

     During the nine-month period ended September 30, 2010, the Company recognized a $1.2 million settlement loss as a result of a lump sum distribution paid to a supplemental retirement plan participant which exceeded the service and interest components incurred for that plan. During the nine-month period ended September 30, 2009, the Company recognized settlement and curtailment charges of $1.8 million related to certain employee terminations under the Company’s 2009 restructuring and reorganization initiative.

     The Company contributed $4.4 million to its retirement plans during the nine month period ended September 30, 2010. The Company does not expect to make further employer contributions to its retirement plans for the remainder of 2010.

12. Taxes

     The effective tax rate decreased to 37.8% for the nine months ended September 30, 2010, from 38.7% for the nine months ended September 30, 2009, primarily to reflect the increased benefit of certain permanent deductions.

     During 2010, the Company’s net unrecognized tax benefits for certain tax contingencies decreased from $2.2 million as of December 31, 2009, to $2.0 million as of September 30, 2010. If recognized, the $2.0 million in unrecognized tax benefits would reduce the Company’s effective tax rate in future periods.

     Income taxes paid for the nine months ended September 30, 2010 and 2009, were $19.4 million and $17.0 million, respectively.

13. Share-Based Compensation

     The following table sets forth information with regard to the income statement recognition of share-based compensation (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Cost of revenue		$	115			$	226			$	294			$	308
Selling, general and administrative			1,398				2,601				4,206				7,105
Research and development			96				47				210				87
Share-based compensation		$	1,609			$	2,874			$	4,710			$	7,500

     There was no capitalized share-based compensation cost recorded during the nine-month periods ended September 30, 2010, and 2009.

     The Company’s policy for issuing shares upon option exercise, or vesting of its share awards and/or conversion of deferred stock units under all of the Company’s stock incentive plans is to issue new shares of common stock, unless treasury stock is available at the time of exercise or conversion.

Stock Options

     Stock options awarded to employees under the 1999 and 2001 Stock Incentive Plans and the 2008 Equity Compensation Plan (referred to herein collectively as the “SIPs”) generally vest annually over a three-year period, have a 10-year term and have an exercise price of not less than the fair market value of the Company’s common stock at the date of grant. Stock options granted to continuing directors under the SIPs generally vest on the date of grant, are generally exercisable six months after the date of grant, have a 10-year term and an exercise price not less than the fair market value of the Company’s common stock at the date of grant. For stock options granted prior to 2010, the Company’s stock option agreements generally provide for accelerated vesting if there is a change in control of the Company. Effective for stock options granted after 2009, the Company’s stock option agreements provide for accelerated vesting if (i) there is a change in control of the Company and (ii) the participant’s employment terminates during the 24-month period following the effective date of the change in control for one of the reasons specified in the stock option agreement.

     The Company uses historical data to estimate future option exercises and employee terminations in order to determine the expected term of the stock option. Identified groups of optionholders that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of stock options granted represents the period of time that such stock options are expected to be outstanding. The expected term can vary for

certain groups of optionholders exhibiting different behavior. The risk-free rate for periods within the contractual life of the stock option is based on the U.S. Treasury strip bond yield curve in effect at the time of grant. Expected volatilities are based on the historical volatility of the Company’s common stock. The fair value of each stock option granted to employees and nonemployee directors during the nine-month periods ended September 30, 2010, and 2009, was estimated on the date of grant using a Black-Scholes stock option valuation model.

     For the three-month period ended September 30, 2010, there were no options granted. For the three-month period ended September 30, 2009, the number of stock options granted was 301,260 and the weighted-average exercise price for those stock options granted was $16.50.

     For the nine-month periods ended September 30, 2010, and 2009, the number of stock options granted was 288,544 and 1,621,553, respectively, and the weighted-average exercise price for those stock options granted was $22.84 and $18.37, respectively.

     As of September 30, 2010, there was $3.0 million in total unrecognized compensation cost related to stock options granted under the SIPs. This aggregate unrecognized cost is expected to be recognized over a weighted-average period of 1.9 years. The weighted-average exercise price and weighted-average remaining contractual term for outstanding stock options as of September 30, 2010, were $31.78 and 6.21 years, respectively, and as of September 30, 2009, $28.25 and 7.83 years, respectively.

Nonvested Stock Awards

     Service awards. The Company’s nonvested service awards vest over four or five years on either a monthly or annual basis. Compensation expense is recognized on a straight-line basis using the fair market value of the Company’s common stock on the date of grant as the nonvested service awards vest. For those awards granted prior to 2010, the Company’s nonvested service awards generally provide for accelerated vesting if there is a change in control of the Company. Effective for nonvested service awards granted after 2009, the Company’s awards provide for accelerated vesting if (i) there is a change in control of the Company and (ii) the participant’s employment terminates during the 24-month period following the effective date of the change in control for one of the reasons specified in the restricted stock unit agreement.

     As of September 30, 2010, there was $3.0 million of total unrecognized compensation cost related to nonvested service awards granted under the SIPs. This aggregate unrecognized cost for nonvested service awards is expected to be recognized over a weighted-average period of 2.3 years. Additional information for the three and nine-month periods ended September 30, 2010, and 2009, is noted in the following table (dollars in thousands, except per share data):

		Three Months				Three Months				Nine Months				Nine Months
		Ended				Ended				Ended				Ended
		September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009
Number of nonvested service award shares granted			—				30,084				—				340,533
Weighted average grant- date fair value per share			—			$	16.50				—			$	18.37
Fair value of service award shares vested		$	248			$	44			$	2,438			$	825

     Performance awards. During the nine-month period ended September 30, 2010, the Company granted nonvested performance awards, which (i) were issued at the fair market value of the Company’s common stock on

the date of grant, (ii) will expire without vesting if the performance measure is not satisfied by the first anniversary date of the grant, and (iii) will, if the performance measure is satisfied, vest in four equal annual installments beginning on the first anniversary date of the grant. The Company’s nonvested performance awards provide for accelerated vesting if (i) there is a change in control of the Company and (ii) the participant’s employment terminates during the 24-month period following the effective date of the change in control for one of the reasons specified in the performance-based restricted stock unit agreement.

     Compensation expense is recognized using the fair market value of the Company’s common stock on the date of grant as the nonvested performance awards vest and under the assumption that the performance goal will be achieved. If such goal is not met, no compensation cost is recognized and any previously recognized compensation cost is reversed.

     As of September 30, 2010, there was $1.6 million of total unrecognized compensation cost related to nonvested performance awards granted under the SIPs. This aggregate unrecognized cost is expected to be recognized over a weighted-average period of 3.5 years. During the three-month period ended September 30, 2010, no shares of nonvested performance awards were granted. During the nine-month period ended September 30, 2010, 91,553 shares of nonvested performance awards were granted at a weighted average grant-date fair value per share of $25.76. No such performance awards were granted during 2009. No shares of performance awards have vested as of September 30, 2010.

Deferred Stock Units

     Service award grant to CEOs. A deferred stock unit service award was issued by the Company at the fair market value of the Company’s stock on the date of grant, and vests annually over a four-year period on each anniversary date of the date of grant. The deferred stock unit award is convertible, into shares of the Company’s common stock, following the holder’s termination of employment. The Company’s deferred stock unit service award provides for accelerated vesting upon termination without cause or retirement as defined in the CEO’s employment agreement. The deferred stock unit service awards that were issued by the Company to a former CEO vested on December 31, 2009 and were converted into shares of the Company’s common stock in July 2010.

     As of September 30, 2010, there was $1.0 million of total unrecognized compensation cost related to this deferred stock unit service award. This aggregate unrecognized cost is expected to be recognized over a weighted-average period of 1.3 years.

     Performance award grant to CEO. During the nine-month period ended September 30, 2010, the Company granted a deferred stock unit performance award which (i) was issued at the fair market value of the Company’s common stock on the date of grant, (ii) will expire without vesting if the performance measure is not satisfied by the first anniversary date of the grant, (iii) will, if the performance measure is satisfied, vest in four equal annual installments beginning on the first anniversary date of the grant, and (iv) provides for accelerated vesting upon termination without cause or retirement as defined in the CEO’s employment agreement. This deferred stock unit performance award is convertible to shares of the Company’s common stock, subsequent to termination of employment.

     As of September 30, 2010, there was $0.3 million of total unrecognized compensation cost related to the deferred stock unit performance award granted under the SIPs to the Company’s CEO. This aggregate unrecognized cost is expected to be recognized over a weighted-average period of 1.3 years.

     Awards for service on Board of Directors (“Board”). Deferred stock units (“DSU”) granted for retainer fees and meeting attendance fees that the individual Board members elect to receive in the form of DSUs rather than cash vest immediately upon grant, are convertible to shares of common stock subsequent to their termination of service as a director, and are issued at the fair market value of the Company’s stock upon the date of grant. Initial grants issued to new directors vest annually over three years. Beginning in 2010, the annual grant to nonemployee directors consisted of a DSU grant, which vest annually in three equal installments over a three-year period. As of September 30, 2010, there was $0.8 million of total unrecognized compensation cost related to deferred stock units

granted under the SIPs to nonemployee directors. This aggregate unrecognized cost is expected to be recognized over a weighted-average period of 2.7 years.

     Other deferred stock unit information for the three- and nine-month periods ended September 30, 2010, and 2009, is noted in the following table (dollars in thousands, except per share data):

		Three Months				Three Months				Nine Months				Nine Months
		Ended				Ended				Ended				Ended
		September 30,				September 30,				September 30,				September 30,
		2010				2009				2010				2009
Service DSU award granted to CEOs			—				—				60,144				21,667
Performance DSU award granted to CEO			—				—				23,004				—
DSU awards granted for Board service and dividend equivalents			5,901				3,286				37,577				13,253
Fair value of DSU shares vested		$	39			$	68			$	115			$	221

14. Concentration Risk

     Arbitron is a leading media and marketing information services firm, primarily serving radio, cable television, advertising agencies, advertisers, retailers, out-of-home media, online media and, through the Company’s Scarborough joint venture with The Nielsen Company, broadcast television and print media.

     The Company’s quantitative radio audience ratings revenue and related software licensing revenue accounted for the following percentages, in the aggregate, of total Company revenue:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Quantitative radio audience estimates and related software licensing			97	%			97	%			93	%			93	%

     The Company had one customer that individually represented 19% of its annual revenue for the year ended December 31, 2009. The Company had two customers that individually represented 23% and 16% of its total accounts receivable as of September 30, 2010, and one customer that individually represented 24% of its total accounts receivable as of December 31, 2009. The Company has historically experienced a high level of contract renewals.

15. Financial Instruments

     The Company believes that the fair market value of the TRA investment approximates the carrying value of $5.2 million and $3.4 million as of September 30, 2010 and December 31, 2009, respectively. On May 24, 2010, the Company paid approximately $1.8 million to purchase additional shares of preferred stock of TRA. Fair values of accounts receivable and accounts payable approximate carrying values due to their short-term nature. Due to the floating rate nature of the Company’s revolving obligation under its Credit Facility, the fair values of $58.0 million and $68.0 million in outstanding borrowings as of September 30, 2010, and December 31, 2009, respectively, approximate their carrying amounts.

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

          The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto in this Quarterly Report on Form 10-Q.

          This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements regarding Arbitron Inc. and its subsidiaries (“we,” “our,” “Arbitron,” or the “Company”) in this document that are not historical in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “likely,” “expects,” “intends,” “anticipates,” “estimates,” “believes,” “plans,” or comparable terminology, are forward-looking statements based on current expectations about future events, which we have derived from information currently available to us. These forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results to differ materially from results implied by such forward-looking statements. These risks and uncertainties include, in no particular order, whether we will be able to:

	•		successfully maintain and promote industry usage of our services, a critical mass of broadcaster encoding, and the proper understanding of our audience measurement services and methodologies in light of governmental actions, including investigation, regulation, legislation or litigation, customer or industry group activism, or adverse community or public relations efforts;
	•		complete the Media Rating Council, Inc. (“MRC”) audits of our local market Arbitron PPM ratings services in a timely manner and successfully obtain and/or maintain MRC accreditation for our audience measurement services;
	•		successfully commercialize our PPM service;
	•		design, recruit and maintain PPM panels that appropriately balance research quality, panel size, and operational cost;
	•		absorb costs related to legal proceedings and governmental entity interactions and avoid any related fines, limitations, or conditions on our business activities, including, without limitation, by meeting or exceeding our commitments and agreements with various governmental entities;
	•		successfully develop, implement and fund initiatives designed to increase sample quality in our PPM and Diary-based ratings services;
	•		successfully manage the impact on costs of data collection due to lower respondent cooperation in surveys, consumer trends, including a trend toward increasing incidence of cell phone households, privacy concerns, technology changes, and/or government regulations;
	•		provide appropriate levels of operational capacity and funding to support the more costly identification and recruitment of younger demographics into our panels and samples;
	•		successfully manage the impact on our business of the recent economic downturn generally, and in the advertising market, in particular, including, without limitation, the insolvency of any of our customers or the impact of such downturn on our customers’ ability to fulfill their payment obligations to us;
	•		compete with companies that may have financial, marketing, sales, technical, or other advantages over us;
	•		effectively respond to rapidly changing technological needs of our customer base, including creating proprietary technology and systems to support our cell phone sampling plans, and new customer services that meet these needs in a timely manner;

	•		successfully execute our business strategies, including evaluating and, where appropriate, entering into potential acquisition, joint-venture or other material third-party agreements;
	•		effectively manage the impact, if any, of any further ownership shifts in the radio and advertising agency industries;
	•		successfully develop and implement technology solutions to encode and/or measure new forms of media content and delivery, and advertising in an increasingly competitive environment;
	•		successfully develop, implement, and launch our cross-platform initiatives; and
	•		renew contracts with key customers.

          There are a number of additional important factors that could cause actual events or our actual results to differ materially from those indicated by such forward-looking statements, including, without limitation, the factors set forth in “ITEM 1A. RISK FACTORS” in our Annual Report on Form 10-K for the year ended December 31, 2009, and elsewhere, and any subsequent periodic or current reports filed by us with the Securities and Exchange Commission (the “SEC”).

          In addition, any forward-looking statements represent our expectations only as of the day we filed this Quarterly Report with the SEC and should not be relied upon as representing our expectations as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations change.

Overview

          We are a leading media and marketing information services firm primarily serving radio, advertising agencies, cable and broadcast television, advertisers, retailers, out-of-home media, online media and, through our Scarborough Research joint venture with The Nielsen Company (“Nielsen”), broadcast television and print media. We currently provide four main services:

	•		measuring and estimating radio audiences in local markets in the United States;
	•		measuring and estimating radio audiences of network radio programs and commercials;
	•		providing software used for accessing and analyzing our media audience and marketing information data; and
	•		providing consumer, shopping, and media usage information services.

          Historically, our quantitative radio audience measurement business and related software have accounted for a substantial majority of our revenue. For both of the nine-month periods ended September 30, 2010, and 2009, our quantitative radio audience measurement business and related software accounted for approximately 93 percent of our revenue. We expect that for the year ending December 31, 2010, our quantitative radio audience measurement business and related software licensing will account for approximately 90 percent of our revenue.

          Quarterly fluctuations in these percentages are reflective of the seasonal delivery schedule of our quantitative radio audience measurement business and our Scarborough revenues. For further information regarding seasonality trends, see “Seasonality.”

          While we expect that our quantitative radio audience measurement business and related software licensing will continue to account for the majority of our revenue for the foreseeable future, we are actively seeking opportunities to diversify our revenue base by, among other things, leveraging the investment we have made in our PPM technology and exploring applications of the technology to both enhance and extend beyond our domestic radio audience measurement business.

          We are in the process of executing our previously announced plan to commercialize progressively our PPM ratings service in the largest United States radio markets, which we currently anticipate will result in commercialization of the service in 48 local markets by the end of 2010 (collectively, the “PPM Markets”). According to our analysis of BIA’s 2010 Investing in Radio Market Report, those broadcasters with whom we have entered into multi-year PPM agreements account for most of the total radio advertising dollars in the PPM Markets. These agreements generally provide for a higher fee for PPM-based ratings than we charge for Diary-based ratings. As a result, we expect that the percentage of our revenues derived from our radio ratings and related software is likely to increase as we commercialize the PPM service.

          We expect growth in revenue for 2010 due to the full year impact of revenue recognized for the 33 markets in which we commercialized the PPM service prior to 2010, as well as the partial year impact of revenue recognized for the ten markets in which we commercialized the PPM service during the third quarter of 2010, and the five markets in which we plan to commercialize the PPM service during the fourth quarter of 2010. However, the impact of those revenues recognized at the higher PPM rates was partially offset by a decrease in the revenue we received from customers that were subscribers in 2009 but either did not subscribe or reduced their level of subscribed services in 2010. For the three and nine months ended September 30, 2010, there was a $2.7 million and an $11.2 million aggregate decrease, respectively, in the revenue we received from customers, including Univision, that were subscribers to our services in the three and nine months ended September 30, 2009, respectively, but either did not subscribe or reduced their level of subscribed services in the comparable periods of 2010. In addition, we do not expect to recognize the full revenue impact of the launch of the PPM service in each PPM Market during the first year after commercialization of the service in that market because our customer contracts generally provide for phased-in pricing toward the higher PPM service rate over time. During the three months ended September 30, 2010, we recognized revenue based on the delivery of both the final quarterly Diary ratings and the initial monthly PPM ratings for the ten PPM Markets in which we commercialized the PPM service during the period. See “— PPM Trends and Initiatives” below. We expect that our revenue will continue to increase during the fourth quarter of 2010 as we continue to deliver audience estimates in these new PPM Markets and continue to recognize revenue at the higher PPM rates, as well as the incremental revenue we expect to receive from the five PPM Markets in which we are scheduled to commercialize the PPM service during the period.

          We incur expenses to build the PPM panel in each PPM Market in the months before we commercialize the service in that market. These costs are incremental to the costs associated with our Diary-based ratings service. However, we recognize PPM revenue at the higher PPM rates only when we deliver audience estimates using the PPM service. We did not commercialize the PPM service in any new markets during the first half of 2010. During the first nine months of 2010, we incurred expenses related to the ten markets in which we commercialized the PPM service during the third quarter, as well as the five markets in which we plan to commercialize the PPM service during the fourth quarter of 2010. Our results of operations for the nine months ended September 30, 2010 were negatively impacted to the extent such panel expenses were incurred in advance of PPM revenues.

          Due to the impact of the recent economic downturn on anticipated sales of discretionary services and renewals of agreements to provide ratings services, as well as the high penetration of our current services in the radio broadcasting business, we expect that our future annual organic rate of revenue growth from our quantitative Diary-based radio ratings services will be slower than historical trends.

          We continue to operate in a highly challenging business environment. Our future performance will be impacted by our ability to address a variety of challenges and opportunities in the markets and industries we serve. Such challenges and opportunities include our ability to continue to maintain and improve the quality of our radio ratings services, and manage increased costs for data collection, arising from, among other things, our programs and efforts designed to recruit and retain increased numbers of persons aged 18-34 into our panels and diary service, which persons are more difficult and expensive for us to recruit than are persons from other demographic groups. Some of our goals include continuing to use commercially reasonable efforts to obtain and/or maintain MRC accreditation of certain of our radio ratings services, and developing and implementing effective and efficient technological solutions to measure cross-platform media and advertising.

          Protecting and supporting our existing customer base, and ensuring our services are competitive from a price, quality, and service perspective are critical components to these overall goals, although there can be no guarantee that we will be successful in our efforts.

PPM Trends and Initiatives

          Commercialization. We currently utilize our PPM ratings service to produce statistical radio audience estimates in 43 United States local markets. We are in the process of commercializing the PPM ratings service in the remaining PPM Markets. During the three months ended September 30, 2010, we commercialized the PPM service in ten United States local markets, specifically Charlotte-Gastonia Rock Hill; Orlando; Columbus, OH; Milwaukee-Racine; Austin; Indianapolis; Providence-Warwick-Pawtucket; Norfolk-Virginia Beach-Newport News; Raleigh-Durham; and Nashville. We intend to commercialize the PPM service in the remaining five local markets during the fourth quarter of 2010. We may continue to update the timing of commercialization and the composition of the PPM Markets from time to time. If the pace of the commercialization of our PPM ratings service is modified, revenue increases that we expect to receive related to the service would also be impacted.

          Commercialization and operation of our PPM ratings service has required and will continue to require a substantial financial investment. We believe our cash generated from operations, as well as access to our existing credit facility, is sufficient to fund such requirements. As we have previously disclosed, our ongoing efforts to support the commercialization and operation of our PPM ratings service have had a material negative impact on our results of operations.

          MRC Accreditation. As of the date we filed this Quarterly Report on Form 10-Q with the SEC, the quarter-hour-based radio ratings data produced by the PPM ratings service in three local markets, Houston-Galveston, Riverside-San Bernardino, and Minneapolis-St. Paul (the “Accredited Markets”), are accredited by the MRC. We have applied to the MRC for accreditation of the ratings produced by the PPM service in each of the other currently commercialized PPM Markets, but the data produced by the service remains unaccredited in each of the PPM Markets other than the Accredited Markets.

          Quality Improvement Initiatives. As we have commercialized the PPM ratings service, we have experienced and expect to continue to experience challenges and opportunities for improvement in the operation of the PPM ratings service similar to those we face in our Diary-based service, including several of the challenges related to sample proportionality and cooperation rates described in the Diary Trends and Initiatives section below. We expect to continue to implement additional measures to address these challenges and opportunities. We have announced a series of commitments and enhancements to our PPM ratings service that we intend to implement over the next several years. We believe these steps reflect our commitment to ongoing improvement and our responsiveness to feedback from several governmental and customer entities. We believe these commitments and enhancements, which we refer to, collectively, as our continuous improvement initiatives, are consistent with our ongoing efforts to obtain and maintain MRC accreditation and to generally improve all of our radio ratings services. We expect that our continuous improvement initiatives will likely require expenditures that may be material in the aggregate.

          Recent Developments In Recruitment. On April 22, 2010, we announced that we would add targeted in-person recruitment to our multi-faceted PPM panelist recruitment approach that had previously included mailings and phone calls. In-person recruitment can benefit all broadcasters as it targets population segments that are more likely to be reachable only by cell phone — including youths and minorities. We also announced that we will use address-based sampling to select landline households to further improve geographic proportionality.

          We began implementation of this enhanced recruitment approach in July with targeted in-person recruiting. We are in the process of deploying in-person recruiting in the high density Black and Hispanic areas across approximately half of all PPM Markets in which we expect to commercialize the PPM service by year-end 2010. We

expect in-person recruiting in those markets to be fully deployed by year-end 2010; with implementation of address-based sampling and the addition of targeted in-person recruiting across all geographies of all PPM Markets expected by the end of 2011.

Diary Trends and Initiatives

          MRC Accreditation. For information regarding the status of MRC accreditation of our Diary radio ratings service, see “Item 1. Business— Media Rating Council Accreditation” in our Annual Report on Form 10-K for the year ended December 31, 2009.

          Quality Improvement Initiatives. The rate at which we are effective in obtaining consent from consumers to participate in our research is one important measure of the quality of the sample for our statistical surveys. Another measure often employed by users of our data to assess quality in our ratings is sample proportionality, which refers to how well the distribution of the sample for any individual survey compares to the distribution of the population in the local market. We strive to achieve representative samples. It has become increasingly difficult and more costly for us to obtain consent from persons to participate in our surveys. We seek to achieve a level of both sample proportionality and cooperation rates sufficient to maintain confidence in our ratings, the support of the industry, and accreditation by the MRC.

          Overall cooperation rates for all types of survey research have declined over the past several decades, and Arbitron has been adversely impacted by this industry trend. We have worked to address this decline through several initiatives, including our continuous improvement initiatives and various other survey incentive programs. If cooperation rates continue to decline or the costs of recruitment initiatives overall or for particular demographic groups significantly increase, our radio audience measurement business could be adversely affected. We believe that additional expenditures will be required in the future to research and test new measures associated with improving response rates and sample proportionality. We continue to research and test new measures to address these sample quality challenges.

          In recent years, our ability to deliver sample proportionality that matches the demographic composition of younger demographic groups has declined, caused in part by the trend among some households to disconnect their landline telephones, effectively removing these households from the landline telephone based portion of our sample frame. We have increased our sample target for cell phone households in Diary markets from an average of 10 percent, as achieved in the Spring 2009 survey through Fall 2009 surveys, to an average of 15 percent across all Diary markets as of Spring 2010. In addition, effective with the Spring 2010 survey, we expanded our cell phone household sampling to include households that rarely or never answer their landlines. As a result of this expanded definition, we expect the incidence of cell phone households in our sample to increase by up to two percent on average across all markets by year-end 2010.

          It is more expensive for us to recruit cell phone households. Because we intend to continue to increase the number of cell phone households in our samples, we believe this quality improvement initiative will significantly increase our costs. We currently anticipate that the total cost of cell phone household recruitment for the PPM and Diary services will be approximately $12.0 million in 2010, which is an increase of approximately $1.5 million over 2009.

General Economic Conditions

          Our customers derive most of their revenue from transactions involving the sale or purchase of advertising. During recent challenging economic times, advertisers have reduced advertising expenditures, impacting advertising agencies and media. Although there are signs of improving economic conditions for the radio industry, advertising agencies and media companies have been and may continue to be less likely to purchase our services, which has and could continue to adversely impact our business, financial position, and operating results.

          Since September 2008, we have experienced an increase in the average number of days our sales have been outstanding before we have received payment as compared to prior periods, which has resulted in an increase in trade accounts receivable as compared to historical trends. Our accounts receivable remained at this elevated level throughout 2009, as well as throughout the first nine months of 2010. If the economic downturn expands or is sustained for an extended period into the future, it may lead to a further increase in collection cycles for accounts receivable or insolvency of our customers, increased incidences of customers’ inability to pay their accounts, and an increase in our provision for doubtful accounts.

          We depend on a limited number of key customers for our ratings services and related software. For example, in 2009, Clear Channel represented 19 percent of our total revenue. Because many of our largest customers own and operate radio stations in markets that we expect to transition to PPM measurement, we expect that our dependence on our largest customers will continue for the foreseeable future. Additionally, although fewer customer contracts expire in 2010 as compared to historical standards, if one or more key customers do not renew all or part of their contracts as they expire, we could experience a significant decrease in our operating results.

Legal Expenses

          Since the fourth quarter of 2008, we have incurred $9.1 million in aggregate legal costs and expenses in connection with two securities law civil actions and a governmental interaction, relating primarily to the commercialization of our PPM ratings service. For additional information regarding the Company’s material legal matters, see “Item 1. — Legal Proceedings.” As of September 30, 2010, we have received $5.6 million in insurance reimbursements related to these legal actions and estimate that an additional $0.4 million of the aggregate costs and expenses are probable for recovery under our Director and Officer insurance policy. We are also involved in other legal matters for which we do not expect that the legal costs and expenses will be recoverable through insurance. We can provide no assurance that we will not continue to incur legal costs and expenses at comparable or higher levels in the future. For further information regarding these legal costs, see “— Critical Accounting Policies and Estimates.”

Critical Accounting Policies and Estimates

          Critical accounting policies and estimates are those that are both important to the presentation of our financial position or results of operations, and require our most difficult, complex or subjective judgments.

          Software development costs. We capitalize software development costs with respect to significant internal use software initiatives or enhancements from the time that the preliminary project stage is completed and management considers it probable that the software will be used to perform the function intended, until the time the software is placed in service for its intended use. Once the software is placed in service, the capitalized costs are amortized over periods of three to five years. We perform an assessment quarterly to determine if it is probable that all capitalized software will be used to perform its intended function. If an impairment exists, the software cost is written down to estimated fair value. As of September 30, 2010, and December 31, 2009, our capitalized software developed for internal use had carrying amounts of $24.4 million and $23.9 million, respectively, including $13.1 million and $13.7 million, respectively, of software related to the PPM service.

          Deferred income taxes. We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year and for deferred tax assets and liabilities for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. We must make assumptions, judgments and estimates to determine the current provision for income taxes and also deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Our assumptions, judgments, and estimates relative to the current provision for income taxes take into account current tax laws, interpretation of current tax laws and possible outcomes of current and future audits conducted by domestic and foreign tax authorities. Changes in tax law or interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in the consolidated financial statements. Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account forecasts of the amount and nature of future taxable income. Actual operating results and the underlying amount and nature of income in future years could render current assumptions, judgments and

estimates of recoverable net deferred tax assets inaccurate. We believe it is more likely than not that we will realize the benefits of these deferred tax assets. Any of the assumptions, judgments and estimates mentioned above could cause actual income tax obligations to differ from estimates, thus impacting our financial position and results of operations.

          We include, in our tax calculation methodology, an assessment of the uncertainty in income taxes by establishing recognition thresholds for our tax positions. Inherent in our calculation are critical judgments by management related to the determination of the basis for our tax positions. For further information regarding our unrecognized tax benefits, see Note 12 in the Notes to Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

          Insurance Receivables. Since the fourth quarter of 2008, we have incurred $9.1 million in aggregate legal costs and expenses in connection with two securities law civil actions and a governmental interaction, relating primarily to the commercialization of our PPM ratings service. As of September 30, 2010, we have received $5.6 million in insurance reimbursements related to these legal actions and estimate that an additional $0.4 million of the aggregate costs and expenses are probable for recovery under our Director and Officer insurance policy. These amounts are included in our prepaid expenses and other current assets on our balance sheet.

Results of Operations

Comparison of the Three Months Ended September 30, 2010 to the Three Months Ended September 30, 2009

     The following table sets forth information with respect to our consolidated statements of income:

Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(Unaudited)

		Three Months Ended								Increase								Percentage of
		September 30,								(Decrease)								Revenue
		2010				2009				Dollars				Percent				2010				2009
Revenue		$	99,470			$	98,123			$	1,347				1.4	%			100.0	%			100.0	%
Costs and expenses
Cost of revenue			50,384				44,454				5,930				13.3	%			50.7	%			45.3	%
Selling, general and administrative			18,137				16,908				1,229				7.3	%			18.2	%			17.2	%
Research and development			10,088				10,385				(297	)			(2.9	%)			10.1	%			10.6	%
Restructuring and reorganization			—				1,718				(1,718	)			(100.0	%)			0.0	%			1.8	%
Total costs and expenses			78,609				73,465				5,144				7.0	%			79.0	%			74.9	%
Operating income			20,861				24,658				(3,797	)			(15.4	%)			21.0	%			25.1	%
Equity in net loss of affiliate			(2,639	)			(1,948	)			(691	)			35.5	%			(2.7	%)			(2.0	%)
Income before interest and tax expense			18,222				22,710				(4,488	)			(19.8	%)			18.3	%			23.1	%
Interest income			4				11				(7	)			(63.6	%)			0.0	%			0.0	%
Interest expense			226				365				(139	)			(38.1	%)			0.2	%			0.4	%
Income before income tax expense			18,000				22,356				(4,356	)			(19.5	%)			18.1	%			22.8	%
Income tax expense			6,672				8,637				(1,965	)			(22.8	%)			6.7	%			8.8	%
Net income		$	11,328			$	13,719			$	(2,391	)			(17.4	%)			11.4	%			14.0	%
Income per weighted average common share
Basic		$	0.42			$	0.52			$	(0.10	)			(19.2	%)
Diluted		$	0.42			$	0.51			$	(0.09	)			(17.6	%)
Cash dividends declared per common share		$	0.10			$	0.10			$	—				—

Certain percentage amounts may not total due to rounding.

Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(Unaudited)

		Three Months Ended								Increase
		September 30,								(Decrease)
		2010				2009				Dollars				Percent
Other data:
EBIT (1)		$	18,222			$	22,710			$	(4,488	)			(19.8	%)
EBITDA (1)		$	25,351			$	28,694			$	(3,343	)			(11.7	%)
EBIT and EBITDA Reconciliation (1)
Net income		$	11,328			$	13,719			$	(2,391	)			(17.4	%)
Income tax expense			6,672				8,637				(1,965	)			(22.8	%)
Interest (income)			(4	)			(11	)			7				(63.6	%)
Interest expense			226				365				(139	)			(38.1	%)
EBIT (1)			18,222				22,710				(4,488	)			(19.8	%)
Depreciation and amortization			7,129				5,984				1,145				19.1	%
EBITDA (1)		$	25,351			$	28,694			$	(3,343	)			(11.7	%)

          Revenue. Revenue increased by 1.4% or $1.3 million for the three months ended September 30, 2010, as compared to the same period in 2009. Revenue increased, in particular, by $13.8 million due primarily to the impact of the eight PPM Markets commercialized during the fourth quarter of 2009 and price escalators in all PPM commercialized markets. Included in the above increase in revenue related to our PPM service is a $0.2 million increase from $2.1 million related to pre-currency revenue incurred for five PPM Markets commercialized during the third quarter of 2009 to $2.3 million in pre-currency revenue for the ten smaller PPM Markets commercialized during the third quarter of 2010.

          This increase in revenue was substantially offset by a $13.1 million decrease related to the transition from our Diary-based ratings service. Included in the above fluctuations in revenue for our PPM and Diary-based ratings services is a $2.7 million aggregate decrease in revenue received from customers, including Univision, that were subscribers in 2009 but have either not subscribed or have reduced their level of subscribed services in 2010.

          Cost of Revenue. Cost of revenue increased by 13.3% or $5.9 million for the three months ended September 30, 2010, as compared to the same period in 2009. Cost of revenue increased primarily due to $4.1 million of increased PPM service related costs incurred to build and manage PPM panels for the 43 PPM Markets commercialized as of September 30, 2010, as well as the five PPM Markets expected to be commercialized in the fourth quarter of 2010, as compared to the 25 PPM Markets commercialized as of September 30, 2009 and the eight PPM Markets that commercialized in the fourth quarter of 2009.

          Selling, General, and Administrative. Selling, general, and administrative increased by 7.3% or $1.2 million for the three months ended September 30, 2010, as compared to the same period in 2009. Selling, general, and administrative increased primarily due to $1.2 million in employee realignment charges incurred during the third quarter of 2010, and an $0.8 million increase in total legal costs, net of anticipated insurance recoveries. These increases were partially offset by a $1.2 million decrease in non-cash share-based compensation.

          Restructuring and Reorganization. During 2009, we reduced our workforce by approximately 10 percent of our full-time employees. No restructuring expenses were incurred during the three months ended September 30,

2010. During the three months ended September 30, 2009, we incurred a $1.7 million pre-tax non-cash settlement loss related to the aggregate of lump sum distribution elections made by a number of pension plan participants, who were terminated as part of the restructuring.

          EBIT and EBITDA. We believe that presenting EBIT and EBITDA, both non-GAAP financial measures, as supplemental information helps investors, analysts and others, if they so choose, in understanding and evaluating our operating performance in some of the same ways that we do because EBIT and EBITDA exclude certain items that are not directly related to our core operating performance. We reference these non-GAAP financial measures in assessing current performance and making decisions about internal budgets, resource allocation and financial goals. EBIT is calculated by deducting interest income from net income and adding back interest expense and income tax expense to net income. EBITDA is calculated by deducting interest income from net income and adding back interest expense, income tax expense, and depreciation and amortization to net income. EBIT and EBITDA should not be considered substitutes either for net income, as indicators of our operating performance, or for cash flow, as measures of our liquidity. In addition, because EBIT and EBITDA may not be calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies.

          EBIT decreased by 19.8% or $4.5 million for the three months ended September 30, 2010, as compared to the same period in 2009, primarily due to an increase in net costs associated with the PPM service transition and executive realignment charges incurred during the third quarter of 2010, partially offset by the prior year incurrence of restructuring and reorganization costs as previously mentioned. EBITDA decreased by 11.7% or $3.3 million, which is smaller than the decrease in EBIT, because this non-GAAP financial measure excludes depreciation and amortization, which for the three months ended September 30, 2010, increased by $1.1 million, as compared to the same period in 2009.

Comparison of the Nine Months Ended September 30, 2010 to the Nine Months Ended September 30, 2009

     The following table sets forth information with respect to our consolidated statements of income:

Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(Unaudited)

		Nine Months Ended								Increase								Percentage of
		September 30,								(Decrease)								Revenue
		2010				2009				Dollars				Percent				2010				2009
Revenue		$	283,705			$	283,411			$	294				0.1	%			100.0	%			100.0	%
Costs and expenses
Cost of revenue			153,041				139,745				13,296				9.5	%			53.9	%			49.3	%
Selling, general and administrative			54,927				54,683				244				0.4	%			19.4	%			19.3	%
Research and development			29,069				30,275				(1,206	)			(4.0	%)			10.2	%			10.7	%
Restructuring and reorganization			—				10,074				(10,074	)			(100.0	%)			0.0	%			3.6	%
Total costs and expenses			237,037				234,777				2,260				1.0	%			83.6	%			82.8	%
Operating income			46,668				48,634				(1,966	)			(4.0	%)			16.4	%			17.2	%
Equity in net income of affiliate			472				633				(161	)			(25.4	%)			0.2	%			0.2	%
Income before interest and tax expense			47,140				49,267				(2,127	)			(4.3	%)			16.6	%			17.4	%
Interest income			10				44				(34	)			(77.3	%)			0.0	%			0.0	%
Interest expense			745				1,063				(318	)			(29.9	%)			0.3	%			0.4	%
Income before income tax expense			46,405				48,248				(1,843	)			(3.8	%)			16.4	%			17.0	%
Income tax expense			17,530				18,692				(1,162	)			(6.2	%)			6.2	%			6.6	%
Net income		$	28,875			$	29,556			$	(681	)			(2.3	%)			10.2	%			10.4	%
Income per weighted average common share
Basic		$	1.08			$	1.12			$	(0.04	)			(3.6	%)
Diluted		$	1.07			$	1.11			$	(0.04	)			(3.6	%)
Cash dividends declared per common share		$	0.30			$	0.30			$	—				—