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UNITED STATES

Form 10-K

Commission file number: 1-1969

Arbitron Inc.

142 West 57th Street

(Address of principal executive offices) (Zip Code)

(212) 887-1300

Securities registered under Section 12(b) of the Act:

Securities registered under Section 12(g) of the act:

      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, and (2) has been subject to such filing requirements for the past 90 days. Yes x     No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K or any amendment to this Form 10-K.  x

      Indicate by check mark whether the registrant is an accelerated filer (as defined in the Exchange Act Rule 12b-2). Yes x     No o

      The aggregate market value of the registrant’s voting stock as of June 28, 2002, the last business day of the registrant’s most recently completed second fiscal quarter, (based upon the closing sale price of Arbitron’s common stock as reported by the New York Stock Exchange), excluding outstanding shares beneficially owned by executive officers and directors of Arbitron, was approximately, $917,900,000.

      Common stock, par value $0.50 per share, outstanding as of March 13, 2003 — 29,650,222 shares

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      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, RetailDirect®, RADAR®, Tapscan®, Tapscan WorldWide®, LocalMotion®, Maximi$er®, Maximi$er® Plus, Arbitron PD Advantage®, Arbitron Portable People Meter™, Arbitron MeasureCast Ratings™, MapMAKER Direct^SM, Media Professional^SM, Media Professional Plus^SM, QualiTAP^SM, MediaMaster^SM, Prospector^SM, and Schedule It^SM.

      The trademark Windows® referred to in this Annual Report on Form 10-K is the registered trademark of others.

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DOCUMENTS INCORPORATED BY REFERENCE

      Part III incorporates certain information by reference from the registrant’s definitive proxy statement for the 2003 annual meeting of shareholders, which proxy statement will be filed no later than 120 days after the close of the registrant’s fiscal year ended December 31, 2002.

FORWARD-LOOKING STATEMENTS

      This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements regarding Arbitron in this document that are not historical in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “likely,” “expects,” “anticipates,” “estimates,” “believes” or “plans,” or comparable terminology, are forward-looking statements based on current expectations about future events, which Arbitron has derived from information currently available to it. These forward-looking statements involve known and unknown risks and uncertainties that may cause our results to be materially different from results implied in such forward-looking statements. These risks and uncertainties include whether we will be able to:

	•	renew contracts with large customers as they expire;
	•	successfully execute our business strategies, including timely implementation of our Portable People Meter and our MeasureCast Ratings services, as well as expansion of international operations;
	•	effectively manage the impact of further consolidation in the radio industry;
	•	keep up with rapidly changing technological needs of our customer base, including creating new products and services that meet these needs; and
	•	successfully manage the impact on our business of any economic downturn generally and in the advertising market in particular, and the impact on costs of data collection due to privacy concerns.

      Additional important factors known to Arbitron that could cause forward-looking statements to turn out to be incorrect are identified and discussed from time to time in Arbitron’s filings with the Securities and Exchange Commission, including in particular the risk factors discussed under the caption “ITEM 1. BUSINESS – Business Risks” in this Annual Report on Form 10-K.

      The forward-looking statements contained in this document speak only as of the date hereof, and Arbitron undertakes no obligation to correct or update any forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I

ITEM 1.     BUSINESS

      Arbitron Inc., a Delaware corporation, was formerly known as Ceridian Corporation (“Ceridian”). Ceridian was formed in 1957; however, its predecessors began operating in 1912. Arbitron’s audience research business commenced in 1949. Arbitron’s principal executive offices are located at 142 West 57th Street, New York, New York 10019, and the telephone number is (212) 887-1300.

      Prior to March 30, 2001, Ceridian was a publicly traded company whose principal lines of business were the human resource service businesses, the Comdata business, which provided transaction processing and regulatory compliance services for the transportation industry, and the radio audience measurement business.

      On March 30, 2001, Ceridian completed a reverse spin-off, which is referred to as the “spin-off.” In connection with the spin-off, the assets and liabilities associated with the human resource service businesses and Comdata subsidiaries were transferred to a newly formed company named “New Ceridian.” The radio audience measurement business stayed with Ceridian. Ceridian then distributed the stock of New Ceridian to all of Ceridian’s existing stockholders. As a result, New Ceridian is now a separate publicly traded corporation. In connection with the spin-off, Ceridian changed its name to Arbitron Inc. and effected a one-for-five reverse stock split, and New Ceridian changed its name to Ceridian Corporation. Because of the relative significance of the businesses transferred to New Ceridian, New Ceridian was considered the accounting successor to Ceridian for financial reporting purposes.

      The terms “Arbitron” or the “Company” as used in this document refer to Arbitron Inc. and its subsidiaries.

Overview

      Arbitron is an international media and marketing research firm primarily serving radio, cable, advertising agencies, advertisers and through its Scarborough joint venture, broadcast television and print media. Arbitron currently has four main businesses:

	•	measuring radio audiences in local markets in the United States and Mexico;
	•	providing application software used for accessing and analyzing media audience and marketing information data;
	•	measuring national radio audiences and the audience size of network radio programs and commercials; and
	•	providing consumer and media usage information services to the radio, cable, advertising agencies, advertisers, broadcast television, outdoor and out of home media, magazine, newspaper and online industries.

      Arbitron provides radio audience measurement and related services in the United States to radio stations, advertising agencies and advertisers. Arbitron estimates the size and demographics of audiences of radio stations in local markets in the United States and reports these estimates and related data to its customers. This information is used for advertising transactions in the radio industry. Radio stations use Arbitron’s data to price and sell advertising time, and advertising agencies and advertisers use Arbitron’s data in purchasing advertising time. Arbitron also measures three markets in Mexico: Mexico City, Guadalajara and Monterrey.

      Arbitron also provides software applications that give its customers access to Arbitron’s estimates resident in its proprietary database and that enable them to more effectively analyze and understand that information for sales, management and programming purposes.

      In 2001, Arbitron acquired all of the assets and assumed certain liabilities of the radio network audience measurement service business of Statistical Research, Inc. (“SRI”), known as Radios All Dimension Audience Research (“RADAR”). Arbitron’s RADAR service measures national radio audiences and the audience size of network radio programs and commercials.

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      In addition to its core radio ratings service which provides primarily quantitative data, such as how many people are listening, Arbitron also provides qualitative data on listeners, viewers and readers that contain detailed socioeconomic information and information on what the respondents buy, where they shop and what forms of media they use. Arbitron provides these qualitative measurements of consumer demographics, retail behavior and media usage in local markets throughout the United States. Arbitron Cable provides qualitative audience information to the advertising sales organizations of local cable companies. Arbitron Outdoor provides these qualitative measurements to outdoor and out of home media sales organizations.

      Through its Continental Research subsidiary, Arbitron provides media, advertising, financial, telecommunications and Internet research services in the United Kingdom and elsewhere in Europe.

      Arbitron’s quantitative radio audience measurement business and related software sales have historically accounted for a substantial majority of its revenue. The radio audience measurement service and related software sales represented approximately 87 percent of Arbitron’s total 2002 revenue. Arbitron’s revenue from domestic sources and international sources was 96 percent and four percent, respectively, for the year ended December 31, 2002.

Industry Background and Markets

      Since 1965, Arbitron has delivered reliable and timely radio audience information collected from a representative sample of radio listeners to the radio industry. The presence of credible audience estimates in the radio industry has permitted radio stations to price and sell advertising time, and advertising agencies and advertisers to purchase advertising time. The Arbitron ratings have also become a valuable tool for use in radio programming, distribution and scheduling decisions.

      In recent years, significant consolidation of radio station ownership has occurred in the United States. Consolidation has tended to intensify competition for advertising dollars both within the radio industry and between radio and other forms of media. At the same time, audiences have become more fragmented as a result of greatly increased programming choices and entertainment and media options. As a result, advertisers have increasingly sought to tailor their advertising strategies to target specific demographic groups through specific media. The audience information needs of radio broadcasters, advertising agencies and advertisers have correspondingly become more complex. Increased competition and more complex information requirements have heightened the need of radio broadcasters for improved information management systems and more sophisticated means to analyze this information. In addition, there is a demand for quality radio audience information internationally from global advertisers, United States broadcasters who have acquired broadcasting interests in other countries and an increasing number of private commercial broadcasters in other countries.

      As the importance of reaching niche audiences with targeted marketing strategies increases, broadcasters, publishers, advertising agencies and advertisers increasingly require that information regarding exposure to advertising be provided on a more individualized basis and that this information be coupled with more detailed information regarding lifestyles and purchasing behavior. The need for purchase data information may create opportunities for innovative approaches to satisfy these information needs.

      Arbitron provides cable companies with qualitative audience information and software programs concerning consumer demographics and retail behavior of cable audiences.

      Outdoor and out of home media advertising companies have indicated a need for demographic audience information to increase their revenues. According to Outdoor Advertising Association of America, Inc., in 2002 advertisers spent $5.2 billion on outdoor and out of home media advertising in the United States. In response to this need, Arbitron provides qualitative audience information and software programs that help show advertisers that outdoor and out of home advertising is an effective way to reach the people who purchase advertisers’ products and services. In addition, Arbitron has been working with the Outdoor Advertising Association of America to test methodologies to provide the industry with its first ever audience ratings service.

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      In recent years, the Internet has presented radio stations and other broadcasters with a new media outlet and advertisers with an opportunity to target prospective consumers. Since 1998, Arbitron has conducted large scale national analyses of consumer interest and utilization of internet broadcasts. These studies, which are conducted every six months, have demonstrated a significant growth in the usage of internet broadcasts by the American consumer. Arbitron believes these studies validate the acceptance of internet broadcasting thereby indicating a need for audience measurement of this new media. In November 2002, Arbitron purchased a license, exclusive in the United States, Canada and Mexico, to an internet audio audience measurement system, along with other related assets from MeasureCast, Inc. Arbitron’s MeasureCast Ratings service is designed to meet the industry need for credible audience measurement.

Radio Audience Measurement Services

      Collection of Listener Data through Diary Methodology. Arbitron uses listener diaries to gather radio listening data from sample households in 286 U.S. local markets for which it currently provides radio ratings. Participants in Arbitron surveys are selected at random by telephone number. When participants (known as “diarykeepers”) agree to take part in a survey, they are mailed a small pocket-sized diary and asked to record their listening in it over the course of a seven-day period. Participants are asked to report in their diary what station(s) they are listening to, when they are listening and where they are listening, such as home, car, work or other place. Although survey periods are 12 weeks long, no one keeps a diary for more than seven days. Each diarykeeper receives a diary, instructions for filling it out and a small cash incentive. The incentive varies according to markets, and the range is generally $1.00 to $6.00 for each diarykeeper in the household and up to $10.00 in certain incentive programs for returned diaries. Diarykeepers mail the diaries to Arbitron’s operations center in Columbia, Maryland where Arbitron conducts a series of quality control checks, enters the information into its database and produces periodic audience measurement estimates. Arbitron processes more than 1.4 million diaries every year to produce its audience listening estimates. All markets are measured at least twice each year, and major markets are measured four times per year. Arbitron’s proprietary data regarding radio audience size and demographics is then provided to customers through multi-year license agreements.

      One of the challenges in measuring radio listening is to ensure that the composition of survey respondents is representative of the market being measured. Arbitron strives to achieve representative samples. For example, if eight percent of a given market is composed of women aged 18 to 34, Arbitron works to ensure that eight percent of the diarykeepers in the sample are women aged 18 to 34. Therefore, each diarykeeper’s listening should effectively represent not only the diarykeeper’s personal listening, but the listening of the demographic segment in the market overall. In striving to achieve representative samples, Arbitron provides enhanced incentives to certain demographic segments to encourage participation. In markets with high concentrations of Hispanic households, Arbitron also uses Spanish-language materials and interviewers to reach Spanish-speaking households.

      Arbitron has invested heavily in quality improvements for its radio audience measurement service. Since the early 1990’s, Arbitron has implemented programs designed to:

	•	encourage higher survey response rates;
	•	increase sample by up to 70 percent in a majority of surveyed markets;
	•	improve the sample representation of young men;
	•	maintain proportional representation of African Americans and Hispanics;
	•	increase survey frequency so that all markets are measured at least twice each year (spring and fall) and major markets are measured four times per year (spring, summer, fall and winter);
	•	add consumer socio-economic questions to its standard diary in large markets;
	•	add consumer and retail questions to its standard radio diary in small markets; and
	•	allow smaller markets to further increase their sample.

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      Portable People Meter. In response to a growing demand to develop a more efficient method of recording listening and other data, Arbitron has developed a Portable People Meter system capable of measuring radio, television, cable, internet broadcasts and satellite radio and television audiences. The Portable People Meter is a pager-sized device that is worn or carried by a survey participant throughout the day. It automatically detects inaudible codes that radio, broadcast television, cable, Internet and satellite radio and television providers embed in the audio portion of their programming using encoders provided by Arbitron. These proprietary codes identify the media that a participant is exposed to throughout the day without the person having to engage in manual recording activities. At the end of each day, the meter is placed into a base station that recharges the device and sends the collected codes to Arbitron for tabulation.

      There are several advantages of the Portable People Meter system. It is simple and easy for respondents to use. It requires no button pushing, which disrupts media use, no recall and no effort to identify and write down channels or radio stations tuned to. The Portable People Meter is able to passively detect exposure to encoded media by identifying each source through unique identification codes.

      During 1999, Arbitron tested the Portable People Meter in Manchester, England. The testing indicated that the Portable People Meter technology operated as intended and that survey participants carried the Portable People Meter with them to a degree that was satisfactory for the test. The test also indicated that television audience estimates made using the Portable People Meter were comparable to existing United Kingdom television audience measurements. Comparisons of radio audience estimates were inconclusive.

      In October 2000, Arbitron began a U.S. market trial of the Portable People Meter. The initial deployment used 200-300 survey participants in the Wilmington, Delaware radio market. The Wilmington test measured media usage for radio, broadcast television and cable at the aggregate level. The audience measurement data were reasonable for each media. The Portable People Meter technology operated within expectations and the survey participants were able to install equipment themselves and carried the Portable People Meter with them to a satisfactory degree. In the fourth quarter of 2001, Arbitron began the second phase of its U.S. trial in the Philadelphia television market. A panel of approximately 1,500 people was deployed in the first quarter of 2002. Arbitron began releasing prototype audience estimates at the radio and television station and cable network levels in 2002 along with a software application to use in analyzing the estimates.

      Arbitron entered into an agreement on May 31, 2000 with Nielsen Media Research, Inc., a provider of U.S. television and cable audience measurement services, under which Arbitron granted Nielsen Media Research an option to join Arbitron in the potential commercial deployment of the Portable People Meter in the United States. In the event Nielsen Media Research exercises the option, the parties would form a joint venture to commercially deploy and operate the business of utilizing the Portable People Meter for the collection of listening and viewing audience data. Recognizing that the successful commercial deployment of the Portable People Meter is uncertain and risky, at the present time, Arbitron believes that a joint venture with Nielsen Media Research creates a significantly greater likelihood of successful commercial deployment than other alternatives.

      Arbitron and Nielsen Media Research, Inc. would each be licensed to use the data generated by the jointly-deployed Portable People Meter in their respective media measurement services. The division of revenues from Internet data remains to be negotiated by the parties. The costs, expenses and capital expenditures for operating a joint venture would be shared by Arbitron and Nielsen Media Research based on the degree to which use of the Portable People Meter displaces costs at each company. Arbitron would receive a royalty from Nielsen Media Research.

      Arbitron retains the right under the option agreement at any time to license, test and/or implement a commercial deployment of the Portable People Meter and the technology contained in the Portable People Meter outside of the United States. In the event Nielsen Media Research exercises its option to form the joint venture in the United States, Nielsen Media Research also has the option to purchase from Arbitron, at fair value, a portion of Arbitron’s interest in all audience measurement business activities arising out of the commercial deployment of the Portable People Meter and the technology contained in the Portable People Meter outside of the United States.

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      In response to the requests of both our customers and Nielsen Media Research, Arbitron has delayed the commercialization timetable for the Portable People Meter, as well as the timing for the possible formation of a joint venture with Nielsen Media Research for the commercial deployment of the Portable People Meter in the United States. The Company continues to discuss the possible formation of a Portable People Meter joint venture with Nielsen Media Research. In the first quarter of 2003, Arbitron and Nielsen Media Research entered into an agreement to expand their relationship to include a number of research initiatives that will be supported in part by increasing the financial involvement and commitment of resources from Nielsen Media Research. During 2003, Arbitron and Nielsen Media Research expect to continue research on the Portable People Meter, including a major response rate test and a test using both Nielsen Media Research meters and Portable People Meters in the same homes. After the conclusion of the Winter 2003 radio survey and the March 2003 television survey, Arbitron will no longer use the current Philadelphia panel to produce regular releases of prototype radio and television audience ratings.

      In addition to the proposed joint venture with Nielsen Media Research, Arbitron will begin testing additional marketing research applications of the Portable People Meter technology in 2003. One application to be tested is to use the Portable People Meter as the collection tool for a national marketing oriented panel designed to correlate advertising with sales. The objective is to provide multi-media exposure data combined with single source sales data to produce a measure of advertising effectiveness.

      Arbitron has also entered into agreements with a number of international media information services companies to either commercially use or evaluate for possible commercial use the Arbitron Portable People Meter or the Arbitron encoding technology.

      Radio Market Report and Other Reports. Arbitron’s listening estimates are provided in a number of different reports that are published and licensed to its customers. The cornerstone of Arbitron’s radio audience measurement services is the Radio Market Report, which is available in all local markets for which Arbitron currently provides radio ratings. The Radio Market Report provides audience estimates for those stations in a market which meet Arbitron’s minimum reporting standards. The estimates cover a wide variety of demographics and dayparts, which are time periods for which audience estimates are reported. Each Radio Market Report contains more than 100,000 estimates to help radio stations, advertising agencies and advertisers understand who is listening to the radio, which stations they are listening to and the time and location of the listening.

      In addition to the Radio Market Report, Arbitron provides additional services, such as its Radio County Coverage Reports, Hispanic Radio Market Reports and Black Radio Market Reports. Radio County Coverage is an annual study that is published each spring and provides radio audience estimates for every county in the continental United States, plus metropolitan counties in Alaska and Hawaii. Radio County Coverage Reports are available by the county, by the state or for the whole country. Hispanic Radio Market Reports are available by tape access and are issued twice a year. Information is collected from bilingual diaries placed in Hispanic homes. Black Radio Market Reports provide radio listening estimates for African American audiences. Data is available by tape access either once or twice a year, depending on the market.

      RADAR. The RADAR service provides a measurement of national radio audiences and the audience size of network radio programs and commercials. The audience measurements are provided for a wide variety of demographics and dayparts for total radio listening and for 33 separate radio networks.

      Network audience estimates are created by merging the radio listening of selected survey respondents with the actual times that network programs and commercials are aired on each affiliated station. RADAR estimates are delivered through Arbitron’s PC 2010 software application, which includes a suite of products for sophisticated analysis of network audiences. This service is provided to radio networks and advertising agencies and network radio advertisers.

      During 2002, Arbitron began phasing its diary survey methodology into the RADAR service by selecting a probability sample of diaries from its local market service. Previously, RADAR estimates were based on telephone interviewing using a 12-month, 12,000-person telephone survey together with the industry-standard commercial clearance system. Each RADAR report in 2002 was comprised of an increasing proportion of

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Software Applications

      In addition to its reports, Arbitron licenses software applications that provide access to Arbitron estimates resident in its proprietary database. These applications enable customers to more effectively analyze and understand that information for sales, management and programming purposes. Arbitron plans to develop applications which will enable customers to link the estimates in Arbitron’s database with information from other databases (such as product purchasing behavior). These services would enable customers to further refine sales strategies and compete more effectively for advertising dollars.

      Arbitron’s Tapscan family of software solutions, which Arbitron acquired in 1998 from Tapscan, Incorporated, are used by many radio stations, advertising agencies and advertisers. The Tapscan software is one of the advertising industry’s leading radio analysis applications. It can help to create colorful charts and graphs that make complicated information more usable to potential advertisers. Other features include prebuy research including frequency-based tables, cost-per-point analysis, hour-by-hour and trending, use of respondent-level radio data, automatic scheduling and goal tracking, instant access to station format and contact information. Another Tapscan service, QualiTAP, is also made available under a licensing arrangement with Tapscan, Incorporated to television and cable outlets in the United States.

      Arbitron offers other key software applications to its radio clients, including Maximi$er and Maximi$er Plus, which are services for radio stations, and Media Professional and Media Professional Plus, which are services for advertising agencies and advertisers. These software applications offer respondent-level database access, which allows radio stations, advertising agencies and advertisers to customize survey areas, dayparts, demographics and time periods to support targeted marketing strategies. The Maximi$er service includes a Windows-based application that accesses a market’s entire radio diary database on a client’s personal computer. Radio stations use the Maximi$er service to produce information about their station and programming not available in Arbitron’s published Radio Market Reports. The Maximi$er Plus service, which was released in October 2002, allows radio stations to access Arbitron’s National Regional Database (“NRD”) to analyze ratings information for customer defined groupings of stations in multiple markets and counties. The Media Professional service is designed to help advertising agencies and advertisers plan and buy radio advertising time quickly, accurately and easily. The easy-to-use software integrates radio planning and buying into one comprehensive research and media buying tool. It allows advertising agencies and advertisers to uncover key areas critical to the buying process, including determining the most effective media target, understanding market trends, and identifying potential new business. The Media Professional Plus service, which was released in October 2002, allows advertising agencies and advertisers to access Arbitron’s NRD to create custom geographies and trade areas using radio Metro, DMA and/or county information. Media Professional Plus also provides the data on a specific trading area’s cost per point needed to help advertising agencies and advertisers place more efficient media buys. The MapMAKER Direct service analyzes where the radio audience lives and works to provide detailed maps and reports. Program directors can use this service to better understand their listeners and better target their promotional efforts. Arbitron’s PD Advantage service offers radio station program directors the ability to create a variety of reports that help analyze the market, the audience and the competition.

Local Market Consumer Information Services

      In its core radio ratings service Arbitron provides primarily quantitative data, such as how many people are listening. Arbitron also provides qualitative data, such as consumer and media usage information, to radio stations, cable companies, television stations, outdoor and out of home media, magazine and newspaper publishers, advertising agencies and advertisers. The qualitative data on listeners, viewers and readers provides more detailed socioeconomic information and information on what respondent’s buy, where they shop and what forms of media they use. Arbitron provides these measurements of consumer demographics, retail behavior and media usage in 260 local markets throughout the United States.

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      Arbitron provides four qualitative services tailored to fit a customer’s specific market size and marketing requirements:

	•	Scarborough Report, which is offered in larger markets;
	•	RetailDirect, which is available in medium markets; and
	•	Qualitative Diary Service and LocalMotion, which are offered in smaller markets.

      Each service profiles a market, the consumers and the media choices in terms of key characteristics. These four services cover the major retail and media usage categories. Arbitron provides training and support services that help its customers understand and use the local market consumer information Arbitron provides them.

      Scarborough Report. The Scarborough service is provided through a joint venture between Arbitron and SRDS, Inc., a subsidiary of VNU, Inc. Arbitron’s interest in Scarborough changed on March 1, 2003 from 50.5 percent to 49.5 percent. Partnership voting rights and earnings continue to be divided equally between Arbitron and SRDS, Inc. The Scarborough service provides detailed information about media usage, retail and shopping habits, demographics and lifestyles in 75 large United States markets, utilizing a sample of consumers in the relevant markets. Scarborough data features more than 500 retail and lifestyle characteristics, which can help radio stations, television stations, cable companies, advertising agencies and advertisers, newspaper and magazine publishers and outdoor and out of home media companies provide an in-depth profile of their consumers. Examples of Scarborough categories include retail shopping (e.g., major stores shopped or purchases during the past 30 days), auto purchases (e.g., plan to buy new auto or truck), leisure activities (e.g., attended sporting event) and personal activities (e.g., golfing). Media information includes broadcast and cable television viewing, radio listenership, newspaper readership by section, magazine readership and yellow pages usage. This information is provided twice each year to newspapers and magazines, radio and television broadcasters, cable companies, outdoor and out of home media, advertising agencies and advertisers in the form of the Scarborough Report. Arbitron is the exclusive marketer of the Scarborough Report to radio broadcasters, cable companies and outdoor and out of home media. Arbitron also markets the Scarborough Report to advertising agencies and advertisers on a shared basis with Scarborough. Scarborough markets the Scarborough Report to newspapers and magazines and online service providers. Nielsen Media Research, Inc., a subsidiary of VNU, Inc., markets the Scarborough report to television broadcasters.

      RetailDirect. Arbitron’s RetailDirect service is a locally oriented, purchase data and media usage research service provided in 24 mid-sized United States markets. This service, which utilizes diaries and telephone surveys, provides a profile of the audience in terms of local media, retail and consumer preferences so that local radio and television broadcasters, outdoor and out of home media, and cable companies have information to help them develop targeted sales and programming strategies. Retail categories include automotive, audio-video, furniture and appliances, soft drinks and beer, fast food, department stores, grocery stores, banks and hospitals. Media usage categories include local radio, broadcast television, cable networks, outdoor and out of home media, newspapers, yellow pages and advertising circulars.

      Qualitative Diary Service. Arbitron’s Qualitative Diary Service collects consumer and media usage information from Arbitron radio diarykeepers in 161 smaller United States markets. The same people who report their radio listenership in the market also answer over 20 product and service questions. Consumer behavior information is collected for key local market retail categories, such as automotive sales, grocery, fast food, furniture and bedding stores, beer, soft drinks and banking. The Qualitative Diary Service also collects information about other media, such as television news viewership, cable television viewing, outdoor and out of home media exposure and newspaper readership. The qualitative service for cable companies, known as LocalMotion, is available in 161 markets. This service provides detailed information about demographics, retail and shopping habits and lifestyles of cable subscribers. Offering personal viewing information on 15 different cable networks, LocalMotion provides information, such as what percentages of a retailer’s customers and prospects have cable television, what cable networks its customers are watching and other socioeconomic data.

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Arbitron Cable Services

      Arbitron has expanded its local market consumer information services to media other than radio, including cable television. Feedback from Arbitron’s cable customers suggests that the cable industry is in need of improved local measurement systems because current quantitative measurement methods, such as diaries and television meter-based measurement systems, have not provided adequate depth of demographic information on the audiences of cable networks. Without solid measures of demographic audiences at the local market level, cable may not be achieving its full potential of local and national advertising revenues. In response to this need, Arbitron Cable provides cable companies with qualitative audience information and software programs concerning consumer demographics and retail behavior of cable audiences.

      Arbitron believes that its Portable People Meter technology is well suited for the cable industry. Arbitron expects that its Portable People Meter will provide a reliable, accepted local audience measurement service for the cable industry. Arbitron also envisions that the Portable People Meter data could be linked to consumer/client databases to optimize cable campaigns to enhance local/national spot sales efforts; validate audiences of national cable networks, regional sports and entertainment channels and local origination channels; provide valuable insights into local audience size and demographics of cable networks; deliver targeted schedule recommendations for cross-channel promotional campaigns; maximize the promotional and advertising sales power of local cable channels; and provide in-depth information on the electronic media usage of cable subscribers for media planning. If a joint venture with Nielsen Media Research is formed, it is anticipated that Nielsen Media Research would be licensed to use the Portable People Meter data to provide audience measurement services to cable companies in the United States.

Arbitron Outdoor Services

      Arbitron has also expanded its local market consumer information services to outdoor and out of home media advertising companies. Arbitron has conducted an extensive analysis of the needs of advertising agencies and advertisers as they relate to outdoor and out of home media and identified the importance of having demographics about the audiences to outdoor and out of home media. While outdoor and out of home advertising has long provided advertisers with traffic counts for specific billboards, no age and gender audience information exists. As such, Arbitron has partnered with the Outdoor Advertising Association of America to test methodologies to create an outdoor ratings service. Arbitron is also marketing its qualitative audience measurement services on consumer shopping and buying information to outdoor and out of home media companies. Arbitron seeks to use the expertise and resources from its many years of radio audience measurement to assist outdoor and out of home media and its advertisers to identify and measure its audiences.

Arbitron MeasureCast Ratings

      In November 2002, Arbitron purchased a license, exclusive in the United States, Canada and Mexico, to an internet audio audience measurement system, along with other related assets from MeasureCast, Inc. Arbitron’s MeasureCast Ratings service measures the audiences of audio, as well as the audio portion of video content on the Internet, commonly known as “internet broadcasts”. According to an Arbitron study regarding consumer interest and utilization of internet broadcasts, as of January 2003, approximately 103 million Americans have experienced Internet audio, as well as the audio portion of video, and approximately 47 million Americans, or 20 percent of all consumers, are listening and watching internet broadcasts in a typical month. Arbitron’s MeasureCast Ratings service is designed to help internet broadcasters “monetize” their Internet business models by enabling them to demonstrate the size and value of their online audience to advertising agencies and advertisers who require independent and credible audience measurement information to justify their advertising expenditures and to make informed media planning and buying decisions.

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International Operations

          Continental Research

      Through its Continental Research subsidiary, Arbitron provides media, advertising, financial, telecommunications and Internet research services in the United Kingdom and elsewhere in Europe.

      Media. Continental Research’s media clients cover the full spectrum of traditional and new media, with particular strength in the television and radio markets. Its media services include measuring audiences, evaluating existing services and building forecasting models.

      Advertising. Continental Research evaluates every stage of the advertising process: from strategy development, creative development, pre-campaign testing, pre- and post-advertising and tracking, and on-air coincidental studies, to analysis of those responding to the campaign, and consumers who purchased the advertised products.

      Financial. Continental Research’s experience in business to business financial research ranges from new product development to market measurement to advertising tracking. When conducting financial research and other business and consumer studies, Continental Research uses The Million Plus Panel, which comprises a pool of approximately 3.7 million United Kingdom residents and holds up to 3,000 demographic, lifestyle and purchasing details for each resident.

      Telecommunications and Internet. Continental Research’s telecommunications and Internet projects have ranged from local area markets to multi-national markets and have examined pricing, promotion, billing, product differentiation, advertising effectiveness, distribution systems, customer satisfaction, market estimation and new product development research.

          Mexico

      Arbitron began collecting radio measurement and qualitative information for the Mexico City market in 2001 and the Guadalajara and Monterrey markets in 2002.

      The Arbitron syndicated radio audience measurement service provides audience estimates covering a wide variety of demographics and dayparts for Mexico City, Guadalajara and Monterrey. This service also provides qualitative information concerning consumer and media usage in Mexico.

      Arbitron is considering expanding its syndicated radio ratings service to other markets in Mexico.

          Other International Operations

      Arbitron has entered into commercial agreements with a number of international media information services companies in which the companies have been granted a license to use Arbitron’s encoding technology in their audience measurement services. Taylor Nelson Sofres Plc., a United Kingdom company, Intomart, bv, a Netherlands company, and N.V. Audimetrie, a Belgium company, have licenses to use Arbitron’s encoding technology in set-top audience measurement meters. Arbitron has also entered into a commercial license with Taylor Nelson Sofres, Plc to use Arbitron’s Portable People Meter technology in Belgium. BBM Bureau of Measurement (“BBM”), a Canadian audience measurement service, has a license to use Arbitron’s Portable People Meter audience measurement technology in its service. BBM announced in 2002 its intent to use the Portable People Meter to measure French speaking television audiences in the City of Montreal and the Province of Quebec. Arbitron has also entered into an evaluation service agreement with IBOPE Pesquisa De Midia, Ltda, a Brazilian company, to evaluate Arbitron’s Portable People Meter technology and Arbitron’s encoding technology for possible use in set-top meters in Brazil, Argentina, Mexico, Colombia and Chile. Arbitron has also entered into an evaluation license agreement with Radio Joint Audience Research Limited (“RAJAR”), a United Kingdom company, to evaluate Arbitron’s Portable People Meter technology in England, Wales, Scotland and Northern Ireland. Arbitron has also entered into an evaluation license agreement with Mediametrie, a French company, to evaluate Arbitron’s Portable People Meter technology in France.

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Strategy

      Arbitron’s objectives are to grow its radio audience measurement business and to expand its audience measurement services to a broader range of media types, including broadcast television, cable, outdoor and out of home media, satellite radio and television and internet broadcasts. Key elements of Arbitron’s strategy to pursue these objectives include:

	•	Continue to invest in quality improvements in its radio audience measurement services and in new software-based information applications. Additionally, Arbitron believes that a growth opportunity exists in the advertiser market and intends to seek to expand its customer base of advertisers by developing and marketing new information services designed to assist corporate advertisers in implementing targeted marketing strategies. Arbitron is considering the expansion of its radio audience measurement service in Mexico and Latin America.
	•	Build on Arbitron’s experience in the radio audience measurement industry and its new Portable People Meter technology to expand into measurement services for other types of media. Arbitron’s MeasureCast Ratings service measures the audiences of internet audio, as well as the audio portion of internet video. Arbitron is testing methodologies to measure outdoor and out of home media advertising. Arbitron intends to enter into agreements with third parties to assist with the marketing, technical and financial aspects of expanding into measurement services for other types of media.
	•	Develop and commercialize the next generation data collection and processing technique. Arbitron’s businesses require sophisticated data collection and processing systems, software and other technology. The collection of Arbitron’s survey respondent information is dependent on individuals keeping track of their listening, viewing and reading activities in diaries. The technology underlying the media measurement industry is undergoing rapid change, and Arbitron will need to continue to develop its data collection, processing and software systems to accommodate these changes. The development of Arbitron’s Portable People Meter is in response to a growing demand for higher quality and more efficient methods for measuring audiences. Eventually, Arbitron intends to develop an integrated measurement service that will measure all media from a single source, enabling media buyers to make multi-media decisions in an integrated fashion.
	•	Expand international licensing of Portable People Meter technology. Arbitron continues to explore opportunities that would expand the licensing of its Portable People Meter technology internationally into selected international regions, such as Western Europe, Latin America and the Asia/ Pacific regions. Arbitron believes there is a demand for quality audience information internationally from global advertisers, from United States broadcasters who have acquired broadcasting interests in other countries and from an increasing number of private commercial broadcasters in other countries. International advertising markets operate similarly to the United States advertising market. Multi-national advertising agencies and advertisers tend to set the standards for measurement around the world, and often the lead has come from the United States.
	•	Provide multi-media exposure data combined with single source sales data to produce a measure of advertising effectiveness. Arbitron will begin testing additional marketing research applications of the Portable People Meter technology in 2003. One application to be tested is to use the Portable People Meter as the collection tool for a national marketing oriented panel designed to correlate advertising with sales.

Customers, Sales and Marketing

      Arbitron’s customers are primarily radio stations, cable companies, advertising agencies and corporate advertisers. As of December 31, 2002, Arbitron provided its radio audience measurement and related services to approximately 4,000 radio stations and 2,200 advertising agencies and advertisers nationwide under contracts that generally vary in length from one to seven years. In recent years, a small number of enterprises have greatly expanded their holdings of United States radio broadcasters, and this consolidation of ownership is continuing. As a result of consolidation of United States radio broadcasters, Clear Channel Communica-

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      Through Arbitron’s Portable People Meter technology and its MeasureCast Ratings service, Arbitron is seeking to expand its constituency beyond traditional broadcasters, such as radio stations, to new media, such as cable television, satellite radio and television, and internet audio, as well as the audio portion of internet video. As of December 31, 2002, Arbitron provided its qualitative measurement and related services to 145 local cable systems and 32 outdoor and out of home media companies.

      Arbitron markets its products and services in the United States through a direct sales force that consisted of 87 sales account representatives and 26 trainers as of December 31, 2002 operating through offices in seven cities around the United States.

      Arbitron has entered into a number of agreements with third parties to assist in marketing and selling its products and services in the United States. For example, Marketron International distributes, on an exclusive basis, Arbitron’s QualiTAP software to the television and cable industries in the United States.

      Arbitron supports its sales and marketing efforts through the following:

	•	Gathering and publishing studies, which are available for no charge on Arbitron’s website, on emerging trends in the radio, internet broadcasting and other media industries as well as the media habits of radio listeners and television, cable and Internet viewers;
	•	Advertising in a number of key industry publications, including Inside Radio, Radio and Records, MediaWeek, Broadcasting and Cable, and Multichannel News;
	•	Conducting direct marketing programs directed toward radio stations, cable companies, advertising agencies and corporate advertisers;
	•	Promoting Arbitron and the industries Arbitron serves through a public relations program aimed at the trade press of the broadcasting, outdoor and out of home media, Internet, advertising and marketing industries as well as select local and national consumer and business press;
	•	Participating in key industry forums and interest groups, such as the Advertising Research Foundation, The American Association of Advertising Agencies, National Association of Broadcasters, Radio Advertising Bureau, European Society for Opinion Marketing Research, The Television Bureau of Advertising, Cable Advertising Bureau, Women in Cable Television, Cable & Telecommunications Association for Marketing and the Outdoor Advertising Association of America as well as Internet roundtables and many state and local advertising and broadcaster associations;
	•	Maintaining a significant presence at major industry conventions, such as those sponsored by the National Association of Broadcasters and the Radio Advertising Bureau; and
	•	Being a founding member of the Radio Advertising Effectiveness Lab, an industry not-for-profit providing information about the effectiveness of radio advertising.

      Internationally, Arbitron markets its services through approximately 15 research executives operating through Continental Research’s office in the United Kingdom.

      Arbitron has also expanded its international sales and marketing efforts based in the United States to other countries, such as Western Europe, Latin America and the Asia/ Pacific regions.

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Competition

      Arbitron believes that the principal competitive factors in its markets are the credibility and reliability of its audience research, the ability to provide quality analytical services for use with the audience information and the end user experience with services and price.

      Arbitron is a leader in the radio audience measurement business. Arbitron competes in some small markets in the radio audience measurement business with Eastlan Resources. In Mexico, Arbitron competes in the radio audience measurement business with IBOPE Mexico and INRA International Research Mexico. Arbitron is also aware of at least two companies, The Pretesting Company and Telecontrol AG (a division of GfK), that are in the process of developing technologies that may compete with Arbitron’s Portable People Meter.

      Arbitron competes with a large number of other providers of applications software, qualitative data and proprietary qualitative studies used by broadcasters, cable companies, advertising agencies, advertisers, outdoor and out of home media companies. These competitors include AirWare RSS, Marketing Resources Plus (a division of VNU), Strata Marketing Inc. and Telmar Information Services Corp. in the area of applications software, and The Media Audit (a division of International Demographics, Inc.), Mediamark Research Inc. (a NOP World company, a wholly-owned subsidiary of United Business Media plc) and Simmons Research Bureau in the area of qualitative data.

      Arbitron also competes with a number of companies in the internet audience measurement industry, namely comScore Media Metrix, Inc. (a division of comScore Networks, Inc.) and Nielsen NetRatings, Inc. The market for internet broadcast ratings and internet audience measurement is new and evolving.

      Arbitron expects that its outdoor ratings service, if created, could compete with a potential outdoor ratings system that Nielsen Media Research announced it is testing.

      Arbitron’s Continental Research subsidiary operates in a highly competitive custom research market in Europe.

Intellectual Property

      Arbitron relies on a combination of patents, copyrights, trademarks, service marks and trade secret laws, license agreements and other contractual restrictions to establish and protect its proprietary rights in its products and services. As of December 31, 2002 in the United States, Arbitron had been granted 24 patents and has 16 patent applications pending. Internationally, Arbitron had been granted 127 patents and has 89 patent applications pending. Arbitron’s patents primarily relate to its data collection and processing systems and software and its Portable People Meter.

      Arbitron’s audience listening estimates are original works of authorship and are copyrightable under the federal copyright laws in the United States. The Radio Market Report is published either quarterly or semi-annually, depending on the Arbitron market surveyed, while the Radio County Coverage Report is published annually. Arbitron seeks copyright registration for each Radio Market Report and for each Radio County Coverage Report published in the United States. Arbitron also seeks copyright protection for its proprietary software and for databases comprising the Radio Market Report and other services containing its audience estimates and respondent level data. Prior to the publication of the printed Arbitron reports and release of the software containing the respondent level data, Arbitron registers its databases under the United States federal copyright laws. Arbitron’s proprietary data regarding audience size and demographics is provided to customers through multi-year license agreements.

      A number of Arbitron’s services are marketed under United States federally registered trademarks that are helpful in creating recognition in the marketplace. Some of Arbitron’s registered trademarks and service marks include: the Arbitron name and logo, Maximi$er, RetailDirect and RADAR. Arbitron has a pending trademark application for Arbitron PPM. Arbitron also has a number of common law trademarks, including Media Professional, QualiTAP, MediaMaster and Prospector. Arbitron has registered its name as a trademark

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      The laws of some countries might not protect Arbitron’s intellectual property rights to the same extent as the laws of the United States. Effective patent, copyright, trademark and trade secret protection may not be available in every country in which Arbitron markets or licenses its products and services.

      Arbitron believes its success depends primarily on the innovative skills, technical competence, customer service and marketing abilities of its personnel. Arbitron enters into confidentiality and assignment of inventions agreements with substantially all of its employees and enters into non-disclosure agreements with its suppliers and customers to limit access to and disclosure of its proprietary information.

      Arbitron must guard against the unauthorized use or misappropriation of its audience estimates, databases and technology by third parties. There can be no assurance that the copyright laws and other statutory and contractual arrangements Arbitron currently depends upon will provide it sufficient protection to prevent the use or misappropriation of its audience estimates, databases and technology. The failure to protect Arbitron’s proprietary information and intellectual property rights, and in particular, its audience estimates and databases, could severely harm Arbitron’s business.

      In addition, claims by third parties that Arbitron’s current or future products or services infringe upon their intellectual property rights may harm Arbitron’s business. Intellectual property litigation is complex and expensive, and the outcome of this litigation is difficult to predict. Arbitron has in the past been involved in litigation relating to the enforcement of its copyrights covering its radio listening estimates. Although Arbitron has generally been successful in these cases, there can be no assurance that the copyright laws and other statutory and contractual arrangements Arbitron currently depends upon will provide it sufficient protection to prevent the use or misappropriation of its audience estimates, databases and technology in the future. Any future litigation, regardless of outcome, may result in substantial expense to Arbitron and significant diversion of its management and technical personnel. Any adverse determination in any litigation may subject Arbitron to significant liabilities to third parties, require Arbitron to license disputed rights from other parties, if licenses to these rights could be obtained, or require Arbitron to cease using the technology.

Research and Development

      Arbitron’s research and development activities have related primarily to the design and development of its data collection and processing systems, its software applications, its Portable People Meter and its internet broadcasting services. Arbitron expects that it will continue to spend money on research and development activities over the next several years, particularly in light of the rapid technological changes affecting its business. The majority of the investment effort and spending will be dedicated to improving the quality and efficiency of Arbitron’s data collection and processing systems, developing new software applications that will assist Arbitron’s customers in realizing the full potential of Arbitron’s audience measurement services, developing Arbitron’s Portable People Meter technology and its internet broadcast audience measurement technology, and developing a single source service that will be able to measure audience and other information from a number of different forms of media. As of December 31, 2002, Arbitron employed approximately 200 people dedicated to research and development. Total research and development expenditures during fiscal years 2002, 2001 and 2000 totaled $24.7 million, $24.1 million and $14.0 million, respectively.

Governmental Regulation

      Arbitron’s Portable People Meter has been certified to meet Federal Communications Commission requirements relating to emissions standards and standards for modem connectivity. Additionally, all Portable People Meter equipment has been certified to meet the safety standards of Underwriter’s Laboratories (commonly referred to as UL) as well as Canadian and European safety standards.

      Arbitron’s media research activities are regulated by the United States Federal Trade Commission in accordance with a Decision and Order issued in 1962 to CEIR, Inc., a predecessor company. This order originally arose in connection with the television ratings business and Arbitron believes that today it applies to

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      Arbitron’s Radio Market Report Service is accredited by and subject to the review of the Media Rating Council (“MRC”). The MRC is an industry organization created to assure high ethical and operational standards in audience measurement research. Arbitron’s Radio Market Report Service has been accredited by the MRC since 1968. As of Fall 2002, Arbitron’s Maximi$er and Media Professional software and the Custom Survey Area Report (“CSAR”) services have been accredited by the MRC. To merit continued accreditation of its services, Arbitron must: (1) adhere to the MRC’s Minimum Standards for Media Rating Research; (2) supply full information to the MRC regarding details of its operations; (3) conduct its media measurement services substantially in accordance with representations to its subscribers and the MRC; and (4) submit to, and pay the cost of, thorough annual audits of accredited Arbitron services by certified public accounting firms engaged by the MRC.

Employees

      As of December 31, 2002, Arbitron employed approximately 792 people on a full-time basis and 306 people on a part-time basis in the United States and approximately 33 people on a full-time basis and 348 people on a part-time basis internationally. None of Arbitron’s employees are covered by a collective bargaining agreement. Arbitron believes its employee relations are good.

Business Risks

      Arbitron’s business, financial condition and operating results are dependent on the performance of its radio audience measurement business.

      Arbitron’s quantitative radio audience measurement service and related software sales represented approximately 87 percent of Arbitron’s total revenue for 2002. Even if Arbitron continues to license its Portable People Meter technology internationally and its MeasureCast Ratings service, Arbitron expects that sales of its radio audience measurement service and related software will continue to represent a substantial portion of Arbitron’s revenue for the foreseeable future. Any factors adversely affecting the pricing of, demand for or market acceptance of Arbitron’s radio audience measurement service and related software, such as competition, technological change or consolidation in the radio industry, could significantly harm Arbitron’s business, financial condition and operating results.

      Technological change may render Arbitron’s products and services obsolete.

      Arbitron expects that the market for its products and services will be characterized by rapidly changing technology, evolving industry standards, frequent new product and service announcements and enhancements and changing customer demands. The introduction of new products and services embodying new technologies and the emergence of new industry standards could render existing products and services obsolete and/or challenge current accepted levels of precision of data measurement. In addition, advertising supported media may be challenged by new technologies that could have an effect on the advertising industry, Arbitron’s

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      Consolidation in the radio broadcasting industry has led to Arbitron’s increasing dependence on key customers. The loss of a key customer would significantly reduce Arbitron’s revenue.

      The continuing consolidation in the radio broadcasting industry has led to Arbitron’s increasing dependence on a limited number of key customers. The loss of a key customer would significantly reduce Arbitron’s revenue. In 2002, Clear Channel Communications, Inc. and Infinity Broadcasting Corp., represented approximately 21 percent and 11 percent, respectively, of Arbitron’s revenue. Arbitron’s agreements with these customers are not exclusive and contain no renewal obligations.

      Certain contracts with Infinity Broadcasting, which collectively accounted for nine percent of Arbitron’s revenue in 2001, expired at the end of 2001. In July 2002, Arbitron entered into an extension of the radio ratings license agreement with Infinity Broadcasting, which ends on March 31, 2003, and gives their stations access to Arbitron’s quarterly radio ratings up to the release of the Spring 2003 radio survey and other ancillary services up to June 30, 2003. In addition, in July 2002, Arbitron also entered into an extension of the radio ratings license agreement with ABC Radio, for contracts that accounted for less than three percent of Arbitron’s revenue in 2001, which gives their stations access to Arbitron’s quarterly radio ratings up to the release of the Spring 2003 radio survey. These extensions with Infinity Broadcasting and ABC Radio are for significantly shorter terms than the typical four or five year agreements generally entered into between Arbitron and its customers. Additionally, future contracts with other customers may be of a shorter than normal term until more Portable People Meter data analysis is available and the Portable People Meter rollout plan is established. Arbitron cannot give any assurances that it could replace the revenue that would be lost if a key customer failed to renew its agreement with Arbitron. The loss of a key customer would materially harm Arbitron’s business, financial condition and operating results.

      Consolidation in the radio broadcasting industry may put pressure on the pricing of Arbitron’s radio audience measurement service and related software sales, thereby leading to decreased earnings.

      Consolidation in the radio broadcasting industry could put pressure on the pricing of Arbitron’s radio audience measurement service and related software sales, from which Arbitron derives a substantial majority of its total revenue. Arbitron prices its radio audience measurement service and related software applications on a per radio station, per service or product basis, negotiating licenses and pricing with the owner of each radio station or group of radio stations. Consolidation in the radio broadcasting industry could have the effect that the greater the number of radio stations owned and the greater the number of services and applications purchased by a radio station owner, the more likely the owner is to seek price concessions from Arbitron. While Arbitron has experienced some success in offsetting the revenue impact of any pricing pressure through effective negotiations and by providing radio audience measurement services and additional software applications and other services to additional stations within a radio group, there can be no assurance as to the degree to which Arbitron will be able to continue to do so, which could have a material adverse effect on its business, financial condition and operating results.

      Arbitron’s agreements with its customers are not exclusive and contain no renewal obligations.

      Arbitron’s customers are not prohibited from entering into agreements with any other competing service provider, and once the term of the agreement (usually one to seven years) expires, there is no automatic renewal feature in the contract. Because the Arbitron Radio Market Report is delivered on a quarterly or semi-annual basis, it is common for Arbitron’s customer contracts to expire before renewal negotiations are concluded. Therefore, there may be significant uncertainty as to whether a particular customer will renew its

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      Arbitron expects to invest in the continued development and commercialization of its Portable People Meter technology and its MeasureCast Ratings service, neither of which may be successfully developed nor commercialized. The diversion of Arbitron’s resources to these technologies could adversely affect Arbitron’s operating results.

      Arbitron expects to continue to invest in the development of its Portable People Meter, which is a technology that measures radio, television, cable, internet broadcasts and satellite radio and television audiences. Arbitron also expects to invest in its MeasureCast Ratings service that measures the audiences of internet audio, as well as the audio portion of internet video. Advertising on internet broadcasts may not develop to be significant enough for the market to sustain a ratings service. The Portable People Meter technology and the MeasureCast Ratings service may not be successfully developed or commercialized. The diversion of Arbitron’s resources to the development and commercialization of the Portable People Meter service and the MeasureCast Ratings service may adversely affect Arbitron’s operating results.

      In addition, clients may not support Arbitron’s conversion to a Portable People Meter based audience measurement service, which may include refusing to encode their broadcasts and not agreeing to any increases in license fees.

      Nielsen Media Research, Inc. may decide not to exercise its option to join Arbitron and share in the potential deployment of the Portable People Meter on a nationwide basis, which could adversely affect the commercial success of the Portable People Meter and could adversely affect the future growth of Arbitron’s business.

      On May 31, 2000, Arbitron entered into an agreement with Nielsen Media Research, Inc., a provider of United States television and cable audience measurement services, under which Arbitron granted Nielsen Media Research an option to join Arbitron in the potential commercial deployment of the Portable People Meter in the United States. In response to the requests of both our customers and Nielsen Media Research, Arbitron has delayed the commercialization timetable for Portable People Meter, as well as the timing for the possible formation of a joint venture with Nielsen Media Research for the commercial deployment of the Portable People Meter in the United States. The Company continues to discuss the possible formation of a Portable People Meter joint venture with Nielsen Media Research. In the first quarter of 2003, Arbitron and Nielsen Media Research entered into an agreement to expand their relationship to include a number of research initiatives that will be supported in part by increasing the financial involvement and commitment of resources from Nielsen Media Research. During 2003, Arbitron and Nielsen Media Research expect to perform a major response rate test and continue research on the Portable People Meter. A decision by Nielsen Media Research not to exercise this option could delay the introduction of the Portable People Meter in which case Arbitron would need to revise its plans and assumptions relating to the timing of a Portable People Meter rollout. While Arbitron has other strategies to commercialize the Portable People Meter technology without a joint venture with Nielsen Media Research, the failure to form a joint venture could adversely affect the future growth of Arbitron’s business.

      The success of Arbitron’s radio audience measurement business depends on diarykeepers who record their listening habits in diaries and return these diaries to Arbitron. The failure of Arbitron to recruit participants and to collect these diaries would severely harm Arbitron’s business.

      Arbitron uses listener diaries to gather radio listening data from sample households in the United States local markets for which it currently provides radio ratings. A representative sample of the population in each local market is randomly selected for each survey. This sample is recruited by telephone to keep a diary of their radio usage for one week. Participants are asked to designate in their diary what station(s) they are listening to, when they are listening and where they are listening, such as home, car, work or other place. To encourage their participation in the survey, Arbitron gives diarykeepers a modest cash incentive. Arbitron processes more than 1.4 million diaries every year to produce audience listening estimates. It is increasingly

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      In addition, there is an increasing concern among the American public regarding privacy issues which has prompted the introduction of legislation regarding privacy matters. If federal and/or state laws requiring telemarketers to comply with an individual’s do-not-call request are extended to include survey research, Arbitron’s ability to recruit participants for its surveys could be adversely affected, which would seriously harm Arbitron’s business, financial condition and operating results.

      Performance royalties and license fees imposed on internet broadcasters may have an adverse affect on the market for internet broadcast audience measurement services.

      Royalties and licensing fees may make broadcasting music over the Internet expensive and impractical for commercialization, thereby reducing the market for internet broadcast audience measurement services.

      Arbitron’s success will depend on its ability to protect its intellectual property rights.

      Arbitron believes that the success of its business will depend, in part, on:

	•	obtaining patent protection for its technology, products and services, in particular its Portable People Meter;
	•	defending its patents once obtained;
	•	preserving its trade secrets;
	•	defending its copyrights for its data services and audience estimates; and
	•	operating without infringing upon patents and proprietary rights held by third parties.

      Arbitron relies on a combination of contractual provisions, confidentiality procedures and patent, copyright, trademark, service mark and trade secret laws to protect the proprietary aspects of its technology, data and estimates. These legal measures afford only limited protection and competitors may gain access to Arbitron’s intellectual property and proprietary information. Litigation may be necessary to enforce Arbitron’s intellectual property rights, to protect its trade secrets and to determine the validity and scope of Arbitron’s proprietary rights. Arbitron has in the past been involved in litigation relating to the enforcement of its copyrights covering its radio listening estimates. Although Arbitron has generally been successful in these cases, there can be no assurance that the copyright laws and other statutory and contractual arrangements Arbitron currently depends upon will provide it sufficient protection in the future to prevent the use or misappropriation of its audience estimates, databases and technology. Any future litigation, regardless of outcome, could result in substantial expense and diversion of resources with no assurance of success and could seriously harm Arbitron’s business, financial condition and operating results.

      One of Arbitron’s strategies is to expand its international operations, which involve unique risks and, if unsuccessful, may impede the growth of Arbitron’s business.

      Arbitron continues to explore opportunities that would facilitate licensing its Portable People Meter technology into selected international markets, such as the United Kingdom, Western Europe, Latin America and the Asia/ Pacific regions. Arbitron believes that there is a market for use of the Portable People Meter technology internationally because international advertising markets operate similarly to the United States advertising markets. Multi-national advertising agencies and advertisers tend to set the standards for measurement around the world, and historically the lead has come from the United States.

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      International operations are subject to various additional risks which could adversely affect Arbitron’s business, including:

	•	costs of customizing services for foreign customers;
	•	difficulties in managing and staffing international operations;
	•	reduced protection for intellectual property rights in some countries;
	•	longer sales and payment cycles;
	•	the burdens of complying with a wide variety of foreign laws;
	•	exposure to local economic conditions;
	•	exposure to local political conditions, including the risks of an outbreak of war, the escalation of hostilities, acts of terrorism and seizure of assets by a foreign government; and
	•	exposure to foreign currency exchange rate fluctuation.

      Audience estimates are used as the basis for advertising transactions when they achieve credibility and trust in the eyes of the media marketplace. In some countries, there is little trust in existing measurement services due to the perception of tampering and fraud in the current ratings systems. In expanding its international scope, potential tampering and fraud by broadcasters or other third parties with Arbitron’s methodology is also a potential risk.

      In countries where there has not been an historical practice of using audience measurement information in the buying and selling of advertising time, it may be difficult for Arbitron to maintain subscribers as the market transitions to using Arbitron’s audience measurement service as the basis for conducting advertising transactions.

      Arbitron is dependent on its proprietary software systems for data collection and processing.

      Arbitron’s success in collecting and processing data for its media information services is dependent on the ability of its proprietary software systems to support current and future business requirements. The current systems do not have the capability to accommodate additional product enhancements requested by Arbitron clients. Arbitron has begun a major effort to reengineer its processing software and its client software. Significant delays in the planned delivery of these systems and/or inadequate performance of the systems once they are completed could harm Arbitron’s business, financial condition and operating results.

      Criticism of the Arbitron audience measurement service by various interest groups could adversely affect Arbitron’s business.

      Due to the high profile nature of the Arbitron service in the media and marketing information service industry, Arbitron could become the target of criticism by various interest groups. Although Arbitron strives to be fair, reasonable and impartial in the production of its audience measurement service, criticism of Arbitron by interest groups could adversely affect Arbitron’s business (e.g., stock price).

      Arbitron’s future growth and success will depend on its ability to successfully compete with companies that may have greater financial, marketing, distribution, technical and other resources than Arbitron.

      Arbitron competes in some small markets in the radio audience measurement business with Eastlan Resources. In Mexico, Arbitron competes in the radio audience measurement business with IBOPE Mexico and INRA International Research Mexico. Arbitron is also aware of at least two companies, The Pretesting Company and Telecontrol AG (a division of GfK), that are in the process of developing technologies that may compete with Arbitron’s Portable People Meter. Furthermore, certain companies are developing narrow applications of technology to measure niche audiences of radio and outdoor and out of home media.

      Arbitron competes with a large number of other providers of applications software, qualitative data and proprietary qualitative studies used by broadcasters, cable companies, advertising agencies, advertisers, outdoor and out of home media companies. These competitors include AirWare RSS, Marketing Resources

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      Arbitron also competes with a number of companies in the internet audience measurement industry, namely comScore Media Metrix, Inc. (a division of comScore Networks, Inc.) and Nielsen NetRatings, Inc. The market for internet broadcast ratings and internet audience measurement is new and evolving.

      Arbitron believes that its future growth and success will be dependent on its ability to successfully compete with other companies that provide similar services in the same markets, some of which have greater financial, marketing, technical and other resources, and its ability to design, develop and commercialize new products and services that address the industry needs for more efficient methods of data collection and processing and broader media measurement techniques. Arbitron cannot assure it will be able to compete successfully and the failure to do so could have a material adverse affect on Arbitron’s business, financial condition and operating results.

      An economic downturn generally and in the advertising industry in particular could adversely impact Arbitron’s revenue.

      Arbitron’s clients derive most of their revenue from the sale or purchase of advertising. During challenging economic times, advertisers may reduce advertising expenditures impacting advertising agencies and media. As a result, advertising agencies and media may be less likely to purchase Arbitron’s media information services.

      The RADAR service revenue is concentrated among a small number of customers. The loss of one or more customers could harm Arbitron’s business and operating results.

      The RADAR service revenue comes substantially from five key customers. The contracts for these customers have been renewed in 2002 for terms of three to four years. The loss of one or more of these key customers could adversely affect Arbitron’s business and operating results.

      Arbitron may need to enter into agreements with third parties to assist with the marketing, technical and financial aspects of expanding its services for other types of media. Arbitron’s inability to enter into agreements with third parties could adversely affect the growth of Arbitron’s business.

      In order for Arbitron to build on its experience in the radio audience measurement industry and expand into measurement for other types of media, Arbitron may need to enter into agreements with third parties. These third parties could provide the marketing, technical and financial aspects that Arbitron requires in order to be able to expand into other types of media. Arbitron’s inability to enter into these agreements with third parties, when necessary, could adversely affect Arbitron’s growth and business.

      Long-term disruptions in the mail, telecommunication infrastructure and air service could adversely affect Arbitron’s business.

      Arbitron’s business is dependent on the use of the mail, telecommunication infrastructure and air service. Long-term disruptions in these services caused by events such as the outbreak of war, the escalation of hostilities, and/or acts of terrorism (particularly involving cities in which Arbitron has offices, including Columbia, Maryland which is in proximity to Washington, D.C. and government agencies) could affect Arbitron’s business, financial condition and operating results.

          Risk Factors Relating to Arbitron’s Indebtedness

      Arbitron historically has not incurred debt independently. In connection with the spin-off, however, Arbitron entered into two financing facilities. As of December 31, 2002, Arbitron had $165.0 million of indebtedness outstanding; $115.0 million of this debt is through a revolving credit facility that matures on March 30, 2006, and the remaining $50.0 million of debt is in senior secured notes that mature on January 31, 2008. The unused portion of the credit facility was $70.1 million as of December 31, 2002, however, it will be

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      Arbitron’s borrowings contain non-investment grade financial terms, covenants and operating restrictions that increase its cost of financing its business, restrict its financial flexibility and could adversely impact its ability to conduct its business. These include:

	•	the grant of security interests in most of the assets of Arbitron and its subsidiaries;
	•	the guarantees of Arbitron’s debt by Arbitron’s subsidiaries;
	•	the requirement of Arbitron to maintain certain leverage and coverage ratios; and
	•	the ability of Arbitron to buy and sell assets, incur additional indebtedness, grant or incur liens on its assets, repay senior indebtedness, pay cash dividends, make certain investments or acquisitions, repurchase or redeem capital stock and engage in certain mergers or consolidations.

These restrictions could hinder Arbitron’s ability to finance its future operations or capital needs or make acquisitions that otherwise may be important to the operation of Arbitron’s business. In addition, Arbitron’s ability to comply with these financial requirements and other restrictions may be affected by events beyond its control, and its inability to comply with them could result in a default under the credit facility or other debt instruments.

      If a default occurs under the borrowings, either because Arbitron is unable to generate sufficient cash flow to service the debt or because Arbitron fails to comply with one or more of the restrictive covenants, the lenders under the credit facility and the holder of its notes could elect to declare all of the outstanding borrowings, as well as accrued interest and fees, to be due and payable and require Arbitron to apply all of its available cash to repay those borrowings. The lenders under Arbitron’s secured senior notes and secured credit facility could also proceed against the lenders’ collateral, which includes a first priority lien on substantially all of the assets of Arbitron and its domestic subsidiaries and a pledge of the capital stock of all of its domestic subsidiaries and of 65 percent of the capital stock of its foreign subsidiaries. In addition, a default may result in higher rates of interest and the inability to obtain additional capital.

      Arbitron has, as required under its borrowings, entered into an interest rate swap to hedge the market risk associated with changing interest rates related to borrowing under its bank credit facility. Risks associated with this hedging strategy include, but are not limited to:

	•	the counterparties to these instruments may be unable to perform;
	•	Arbitron may be required to pay a lump-sum termination amount upon the occurrence of specified events of default under this swap instrument;
	•	Arbitron may be unable to take full advantage of a decrease in market interest rates; and
	•	Arbitron’s hedge positions may not precisely align with its actual borrowing exposure.

      Furthermore, an increase in market interest rates combined with the loss of benefits of the related hedging agreement, would increase Arbitron’s interest expense that could have an adverse effect on Arbitron’s cash flows. Future decreases in interest rates would result in Arbitron’s interest expense being higher than it would have been compared to the floating rate debt underlying Arbitron’s hedging agreement, and could result in Arbitron making payments to terminate this agreement.

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          Risk Factors Relating to Owning Arbitron’s Common Stock

      Variability of quarterly operating results may cause Arbitron’s stock price to decrease or fluctuate.

      The market price of Arbitron’s common stock may decrease or fluctuate because, among other factors, Arbitron’s revenue, gross profit, operating income and net income or net loss may vary substantially from quarter to quarter. Many factors may contribute to fluctuations in Arbitron’s operating results, including:

	•	changes in pricing policies by Arbitron or its competitors;
	•	increases in investment in the Portable People Meter or the MeasureCast Ratings service;
	•	introduction and acceptance of new products and services by Arbitron or its competitors;
	•	the market for qualified personnel and the timing and acquisition of new businesses;
	•	the efficiency with which employees are utilized;
	•	the effectiveness of Arbitron’s disaster recovery plan;
	•	cancellation or delay of contract renewals by customers or potential customers;
	•	changes in technology and Arbitron’s successful utilization of technology;
	•	economic conditions as they relate to Arbitron’s industry and customers;
	•	ability to enter into third party agreements for data and service;
	•	Nielsen Media Research not exercising its option to join Arbitron in the potential commercial deployment of the Portable People Meter;
	•	potential long-term disruptions in mail, telecommunication infrastructure and/or air service; and
	•	the outbreak of war, the escalation of hostilities, and/or acts of terrorism that could occur in cities in which Arbitron has offices, including Columbia, Maryland which is in proximity to Washington, D.C. and government agencies.

      It may be difficult for a third party to acquire Arbitron, which could depress the stock price of Arbitron.

      Delaware corporate law and Arbitron’s Amended and Restated Certificate of Incorporation and Bylaws contain provisions that could have the effect of delaying, deferring or preventing a change in control of Arbitron or its management that stockholders may consider favorable or beneficial. These provisions could discourage proxy contests and make it more difficult for stockholders to elect directors not nominated by Arbitron’s board of directors and take other corporate actions. These provisions could also limit the price that investors might be willing to pay in the future for shares of Arbitron’s common stock. These provisions include:

	•	a stockholders’ rights plan, which likely will limit, through November 21, 2012, the ability of a third party to acquire a substantial amount of Arbitron’s common stock without prior approval by the Board of Directors;
	•	restriction from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder under Section 203 of the Delaware General Corporation Law;
	•	authorization to issue “blank check” preferred stock, which is preferred stock that can be created and issued by the board of directors without prior stockholder approval, with rights senior to common stockholders;
	•	advance notice requirements for the submission by stockholders of nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting; and
	•	a supermajority vote of 80 percent of the stockholders to exercise the stockholders’ right to amend the Bylaws.

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      Arbitron’s Amended and Restated Certificate of Incorporation also contains the following provisions:

	•	a supermajority vote of two-thirds of the stockholders to approve some mergers and other business combinations; and
	•	restriction from engaging in a “business combination” with a “controlling person” unless either a modified supermajority vote is received or the business combination will result in the termination of ownership of all shares of Arbitron’s common stock and the receipt of consideration equal to at least “fair market value.”

Available Information

      Arbitron’s website address is www.arbitron.com and interested persons may obtain copies of filings Arbitron has made with the Securities and Exchange Commission through a hyperlink at this site to a third party Securities and Exchange Commission Filings website free of charge. Also included on Arbitron’s website are its Corporate Governance Policies and Guidelines, the Audit Committee Charter, the Nominating and Board Governance Committee Charter and the Compensation and Human Resources Committee Charter.

ITEM 2.     PROPERTIES

      Arbitron’s primary locations are in Columbia, Maryland and its headquarters located at 142 West 57th Street, New York, New York. Arbitron’s New York City office serves as its home base for sales and marketing, while its research, technology and operations are located in its Columbia, Maryland facility. In addition, Arbitron has five regional sales offices located in the metropolitan areas of Atlanta, Georgia; Washington, D.C./ Baltimore, Maryland; Chicago, Illinois; Dallas, Texas and Los Angeles, California. Arbitron’s RADAR operations are located primarily in Cranford, New Jersey. Arbitron’s Tapscan operations are located primarily in Birmingham, Alabama, and its Continental Research subsidiary is located in London, England. Arbitron conducts all of its operations in leased facilities. Most of these leases contain renewal options and require payments for taxes, insurance and maintenance in addition to base rental payments. Arbitron believes that its facilities are adequate for their intended purposes, are adequately maintained and are reasonably necessary for current and anticipated business purposes.

ITEM 3.     LEGAL PROCEEDINGS

      Arbitron and its subsidiaries are involved from time to time in a number of judicial and administrative proceedings considered normal in the nature of their current and past operations, including employment-related disputes, contract disputes, government proceedings, customer disputes and tort claims. In some proceedings, the claimant seeks damages as well as other relief, which, if granted, would require substantial expenditures on the part of Arbitron. Some of these matters raise difficult and complex factual and legal issues, and are subject to many uncertainties, including, but not limited to, the facts and circumstances of each particular action, and the jurisdiction, forum and law under which each action is proceeding. Because of this complexity, final disposition of some of these proceedings may not occur for several years. As such, Arbitron is not always able to estimate the amount of its possible future liabilities. There can be no certainty that Arbitron may not ultimately incur charges in excess of presently or future established accruals or insurance coverage. Although occasional adverse decisions (or settlements) may occur, it is the opinion of management that the final disposition of these proceedings will not, considering the merits of the claims, have a material adverse effect on Arbitron’s financial position or results of operations.

      Pursuant to the terms of the Distribution Agreement entered into in connection with the spin-off, New Ceridian has agreed to indemnify Arbitron for liabilities relating to some of the litigation in which Ceridian or its subsidiaries were involved. To the extent that New Ceridian is unable for any reason to indemnify Arbitron for the liabilities resulting from such litigation, Arbitron will be solely liable as the legal successor to Ceridian.

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

      No matters were submitted to a vote of Arbitron’s stockholders during the fourth quarter of 2002.

PART II

      Arbitron’s common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “ARB.” As of March 13, 2003, there were 29,650,222 shares outstanding and approximately 8,200 shareholders of record of Arbitron common stock.

      The following table sets forth the high and low sale prices of Ceridian and Arbitron common stock as reported on the NYSE Composite Tape for each quarterly period for the past two years ending December 31, 2002. Ceridian’s prices are reflected in the first quarter of 2001 and Arbitron’s prices are reflected in the three remaining quarters of 2001 and all four quarters of 2002. The Ceridian prices reflect the market value of Ceridian stock during the period in which both the human resource services division, human resource services and Comdata subsidiaries and radio audience measurement business were included within Ceridian (i.e., before the spin-off), and therefore is not indicative of the past or future performance of Arbitron stock following the spin-off.

      During the periods presented, neither Ceridian nor Arbitron paid any dividends on its common stock. Arbitron’s credit facility restricts the payment of cash dividends on its common stock through March 2003.

      The transfer agent and registrar for the Arbitron common stock is The Bank of New York.

ITEM 6.     SELECTED FINANCIAL DATA

      The selected financial data set forth below should be read together with the information under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Arbitron’s consolidated financial statements and related notes included in this Form 10-K. This financial data is not necessarily indicative of the results of operations or financial position that would have occurred if Arbitron had been a separate, independent company during the periods presented in which Arbitron was a division of Ceridian Corporation, nor is it indicative of its future performance. Arbitron was a division of Ceridian Corporation prior to March 30, 2001.

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      The Company’s statements of income for the years ended December 31, 2002, 2001 and 2000 and balance sheet data as of December 31, 2002 and 2001 set forth below are derived from audited consolidated financial statements included elsewhere in this Form 10-K. The statements of income data for the years ended December 31, 1999 and 1998, and balance sheet data as of December 31, 2000, 1999 and 1998 are derived from audited consolidated financial statements of Arbitron not included in this Form 10-K.

(1)	For the year ended December 31, 2001, the computations of pro forma net income per weighted average common share are based upon Ceridian’s weighted average common shares and potentially dilutive securities outstanding through March 31, 2001, adjusted for the one-for-five reverse stock split, and Arbitron’s weighted average common shares and potentially dilutive securities for the remainder of the year. For the years ended December 31, 2000, 1999 and 1998, the pro forma net income per weighted average common share computations are based upon Ceridian’s weighted average common shares and potentially dilutive securities, adjusted for the one-for-five reverse stock split.
(2)	The diluted pro forma weighted average common shares assumes that all of Ceridian’s historical dilutive securities were converted into Arbitron securities for the three months ended March 31, 2001, and for the years ended December 31, 2000, 1999 and 1998.

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      The following discussion should be read in conjunction with Arbitron’s consolidated financial statements and the notes thereto that follow in this Form 10-K.

Overview

      Arbitron Inc. was formerly known as Ceridian Corporation (“Ceridian”). Prior to March 31, 2001, Ceridian was a publicly traded company, the principal lines of business of which were the human resource service businesses, the Comdata business, which provided transaction processing and regulatory compliance services for the transportation industry, and the radio audience measurement business.

      On March 30, 2001, Ceridian completed a reverse spin-off, which is referred to as the “spin-off.” In connection with the spin-off, the assets and liabilities associated with the human resource service businesses and Comdata subsidiaries were transferred to a newly formed company named “New Ceridian.” The radio audience measurement business stayed with Ceridian. Ceridian then distributed the stock of New Ceridian to all of Ceridian’s existing stockholders. As a result, New Ceridian is now a separate publicly traded corporation. In connection with the spin-off, Ceridian changed its name to Arbitron Inc. and effected a one-for-five reverse stock split, and New Ceridian changed its name to Ceridian Corporation. Because of the relative significance of the businesses transferred to New Ceridian, New Ceridian was considered the accounting successor to Ceridian for financial reporting purposes.

      The terms “Arbitron” or the “Company” as used in this document shall include Arbitron Inc. and its subsidiaries.

      The consolidated financial statements of Arbitron reflect the consolidated financial position, results of operations and cash flows of Arbitron Inc. and its subsidiaries: Arbitron Holdings Inc., Ceridian Infotech (India) Private Limited, CSW Research Limited and Euro Fieldwork Limited. The financial information included in this Form 10-K includes expenses related to certain centralized services provided by Ceridian during the periods presented prior to the spin-off. The expenses for these services were allocated to Arbitron based on utilization of specific services or, where an estimate could not be determined, based on Arbitron’s revenues in proportion to Ceridian’s total revenues. Management believes these allocation methods provided a rational basis for allocation. However, the costs of these services and benefits charged to Arbitron are not necessarily indicative of the costs that would have been incurred if Arbitron had performed these services as a separate entity.

      Arbitron’s radio audience measurement business has generally accounted for a substantial majority of its revenue. In recent years, significant consolidation of radio station ownership has tended to intensify competition within the radio industry and between radio and other forms of media for advertising dollars. At the same time, audiences have become more fragmented as a result of the greatly increased programming choices and entertainment and media options. Consequently, the increased competition together with the desire for more complex information have driven demand by radio broadcasters, advertising agencies and advertisers for Arbitron’s audience measurement information. In addition, although radio industry consolidation has led to the increased concentration of Arbitron’s customer base, it has also contributed to an increase in the number of stations subscribing for the ratings service as well as increases in sales of Arbitron’s analytical software applications and other services.

      Certain contracts with Infinity Broadcasting, which collectively accounted for nine percent of Arbitron’s revenue in 2001, expired at the end of 2001 and renewal negotiations commenced during the fourth quarter of 2001. In July 2002, Arbitron entered into an extension of the radio ratings license agreement with Infinity Broadcasting, which ends on March 31, 2003, and gives their stations access to Arbitron’s quarterly radio ratings up to the release of the Spring 2003 radio survey as well as access to additional services currently provided. In addition, in July 2002, Arbitron also entered into an extension of the radio ratings license agreement with ABC Radio, for contracts that accounted for less than three percent of Arbitron’s revenue in 2001, which gives their stations access to Arbitron’s quarterly radio ratings up to the release of the Spring 2003

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      On May 31, 2000, Arbitron entered into an agreement with Nielsen Media Research, Inc., a provider of United States television and cable audience measurement services, under which Arbitron granted Nielsen Media Research an option to join Arbitron in the potential commercial deployment of the Portable People Meter in the United States. In the event Nielsen Media Research exercises the option, the parties would form a joint venture to commercially deploy and operate the business of utilizing the Portable People Meter for the collection of respondent listening and viewing audience data. Recognizing that the successful commercial deployment of the Portable People Meter is uncertain and risky, at the present time, Arbitron believes that a joint venture with Nielsen Media Research would create a significantly greater likelihood of successful commercial deployment than other alternatives.

      Arbitron and Nielsen Media Research would each be licensed to use the data generated by the jointly-deployed Portable People Meter in their respective media measurement services. The division of revenues from Internet data remains to be negotiated by the parties. The costs, expenses and capital expenditures for operating a joint venture would be shared by Arbitron and Nielsen Media Research based on the degree to which use of the Portable People Meter displaces costs at each company. Arbitron would receive a royalty from Nielsen Media Research.

      In response to the requests of both our customers and Nielsen Media Research, Arbitron has delayed the commercialization timetable for PPM, as well as the timing for the possible formation of a joint venture for the commercial deployment of the Portable People Meter in the United States. The Company continues to discuss the possible formation of a PPM joint venture with Nielsen Media Research. In the first quarter of 2003, Arbitron and Nielsen Media Research entered into an agreement to expand their relationship to include a number of research initiatives that will be supported in part by increasing the financial involvement and commitment of resources from Nielsen Media Research. During 2003, Arbitron and Nielsen Media Research expect to perform a major response rate test and continue research on the Portable People Meter. After the conclusion of the Winter 2003 radio survey and the March 2003 television survey, Arbitron will no longer use the current Philadelphia panel to produce regular releases of prototype radio and television audience ratings.

      In addition to the proposed joint venture with Nielsen Media Research, Arbitron will begin testing additional marketing research applications of the Portable People Meter technology in 2003. One application to be tested is to use the Portable People Meter as the collection tool for a national marketing oriented panel designed to correlate advertising with sales. The objective is to provide multi-media exposure data combined with single source sales data to produce a measure of advertising effectiveness.

Critical Accounting Policies and Estimates

      Critical accounting policies and estimates are those that are both important to the presentation of our financial condition and results of operations and require management’s most difficult, complex or subjective judgments. The Company’s most critical accounting policy relates to the capitalization and recovery of software development costs.

      The Company capitalizes software development costs with respect to major product initiatives or enhancements, which are incurred during the period from the time of technological feasibility until the time that the software is ready for use. To the extent that software is being developed for use by customers or to support data collection activities, the Company also considers the recovery of such costs through future revenue streams in its decision to capitalize software development costs. Once the software is placed in service, the capitalized costs are generally amortized over periods of three to five years. If events or changes in

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Results of Operations

     Comparison of Year Ended December 31, 2002 to Year Ended December 31, 2001

      The following table sets forth information with respect to the consolidated statements of income of Arbitron for the years ended December 31, 2002 and 2001.

Consolidated Statements of Income

      Revenue. Revenue increased 9.8% to $249.8 million in 2002 from $227.5 million in 2001. The increase is partly due to having RADAR for a full year in 2002. On July 2, 2001 Arbitron acquired the RADAR business. RADAR revenue for the first six months of 2002 was $4.5 million. There was no comparable revenue for the

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      Cost of Revenue. Cost of revenue increased 11.2% to $91.8 million in 2002 from $82.6 million in 2001 and increased as a percentage of revenue to 36.8% in 2002 from 36.3% in 2001. The dollar increase is mainly attributed to increases in diary and data collection costs ($2.4 million), Scarborough royalties ($3.0 million), PPM costs ($2.0 million), computer center costs ($0.9 million) and research costs ($0.6 million).

      Selling, General and Administrative. Selling, general and administrative expenses increased 7.1% to $53.1 million in 2002 from $49.6 million in 2001 but decreased as a percentage of revenue to 21.2% in 2002 from 21.8% in 2001. The increase is partly due to having RADAR for a full year in 2002. RADAR expenses increased by $0.5 million in 2002. The remaining dollar increase is mainly attributed to increases in marketing expenses related to PPM ($1.5 million), higher U.S. Media (Arbitron’s core quantitative, qualitative and software application services) administrative expenses ($0.9 million), increases in U.S. Media selling expenses ($1.6 million) and an increase in amortization of other intangible assets ($0.3 million). The U.S. Media administrative and selling expense increases are mainly attributable to higher employee related expenses. These increases were offset by the elimination of goodwill amortization, in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which was $1.7 million in 2001.

      Research and Development. Research and development expenses increased 2.5% to $24.7 million in 2002 from $24.1 million in 2001 but decreased as a percentage of revenue to 9.9% in 2002 from 10.6% in 2001. The increase in expenses is partly due to having RADAR for a full year in 2002. RADAR expenses increased by $0.6 million in 2002. U.S. Media expenses increased by $1.6 million which were offset by a decrease in internet broadcast services expenses of $1.6 million. The Company decreased its spending related to internet broadcast services due to the slower than anticipated growth of the internet broadcasting market.

      Operating Income. Operating income increased 12.4% to $80.1 million in 2002 from $71.3 million in 2001. Operating margin increased to 32.1% in 2002 from 31.3% in 2001.

      Equity in Net Income of Affiliate. Equity in net income of affiliate increased to income of $5.6 million in 2002 from $4.3 million in 2001. The increase is attributed to the growth in revenue and net income of Scarborough.

      Interest Expense. Interest expense increased 4.3% to $16.8 million for the year ended December 31, 2002 from $16.1 million for the same period in 2001. The increase is the result of having debt outstanding for a full year in 2002 compared to approximately nine months in 2001, partially offset by a lower average debt principal balance in 2002.

      Income Tax Expense. Arbitron’s effective tax rate was 38.5% and 39.5% in 2002 and 2001, respectively. The 1.0% decrease in the Company’s effective income tax rate resulted from the discontinuance of goodwill amortization in accordance with SFAS No. 142, Goodwill and Other Intangible Assets, and a change in certain state tax apportionment factors following the spin-off from Ceridian.

      Net Income. Net income increased 17.3% to $42.8 million in 2002 from $36.5 million in 2001.

      Pro Forma Net Income per Weighted Average Common Share. The computations of pro forma basic and diluted net income per weighted average common share for the year ended December 31, 2001 are based upon Ceridian’s weighted average shares of common stock and potentially dilutive securities outstanding through March 31, 2001, adjusted for the one-for-five reverse stock split, and Arbitron’s weighted average shares of common stock and potentially dilutive securities outstanding for the remainder of the year.

      EBITDA. EBITDA increased 11.8% to $90.1 million in 2002 from $80.6 million in 2001. Arbitron has presented EBITDA as supplemental information that management of Arbitron believes may be useful to some investors in evaluating Arbitron because it is widely used as a measure to evaluate a company’s operating performance before interest expense, as well as to evaluate its operating cash flow. EBITDA is calculated by adding back net interest expense, income tax expense, depreciation and amortization on property and

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     Comparison of Year Ended December 31, 2001 to Year Ended December 31, 2000

      The following table sets forth information with respect to the consolidated statements of income of Arbitron for the years ended December 31, 2001 and 2000.

Consolidated Statements of Income