UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2006

Or

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

For the transition period from                      to                     

ARBITRON INC.

(Exact name of registrant as specified in its charter)

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

142 West 57^th Street
New York, New York 10019
(Address of principal executive offices) (Zip Code)
(212) 887-1300
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

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

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

     The registrant had 29,255,427 shares of common stock, par value $0.50 per share, outstanding as of July 31, 2006.

 

 

ARBITRON INC.

INDEX

		Page No.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets — June 30, 2006 and December 31, 2005			4
Consolidated Statements of Income — Three Months Ended June 30, 2006 and 2005			5
Consolidated Statements of Income — Six Months Ended June 30, 2006 and 2005			6
Consolidated Statements of Cash Flows — Six Months Ended June 30, 2006 and 2005			7
Notes to Consolidated Financial Statements — June 30, 2006			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			32
PART II — OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 4. Submission of Matters to a Vote of Security Holders			33
Item 6. Exhibits			34
Signature			35

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

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

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

		June 30,				December 31,
		2006				2005
		(unaudited)				(audited)
Assets
Current assets
Cash and cash equivalents		$	21,307			$	40,848
Receivables from brokers			—				30,000
Short-term investments			49,950				52,560
Trade accounts receivable, net of allowance for doubtful accounts of $1,324 at June 30, 2006 and $1,165 at December 31, 2005			28,371				27,708
Deferred tax assets			5,093				5,703
Inventories			4,516				442
Prepaid expenses and other current assets			3,665				3,665
Total current assets			112,902				160,926
Investment in affiliate			11,687				12,959
Property and equipment, net of accumulated depreciation of $26,135 at June 30, 2006 and $22,816 at December 31, 2005			36,030				30,875
Goodwill, net			40,558				40,558
Other intangibles, net			2,676				3,578
Noncurrent deferred tax assets			769				911
Other noncurrent assets			897				1,073
Total assets		$	205,519			$	250,880
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		$	7,284			$	8,605
Accrued expenses and other current liabilities			25,260				31,123
Deferred revenue			64,343				62,434
Total current liabilities			96,887				102,162
Noncurrent liabilities
Long-term debt			50,000				50,000
Other noncurrent liabilities			7,104				6,364
Total liabilities			153,991				158,526
Stockholders’ equity
Common stock, $0.50 par value, authorized 500,000 shares, issued 32,338 shares at June 30, 2006 and December 31, 2005			16,169				16,169
Additional paid-in capital			35,364				94,908
Accumulated earnings (net distributions to Ceridian in excess of accumulated earnings) prior to spin-off			(242,870	)			(242,870	)
Retained earnings subsequent to spin-off			247,682				228,211
Common stock held in treasury, 3,090 shares at June 30, 2006 and 1,294 shares at December 31, 2005			(1,545	)			(647	)
Accumulated other comprehensive loss			(3,272	)			(3,417	)
Total stockholders’ equity			51,528				92,354
Total liabilities and stockholders’ equity		$	205,519			$	250,880

See notes to consolidated financial statements.

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

		Three Months Ended
		June 30,
		2006				2005
Revenue		$	74,165			$	69,816
Costs and expenses
Cost of revenue			36,684				29,869
Selling, general and administrative			20,557				16,909
Research and development			10,031				8,658
Total costs and expenses			67,272				55,436
Operating income			6,893				14,380
Equity in net income of affiliate			5,053				4,234
Income before interest and income tax expense			11,946				18,614
Interest income			829				819
Interest expense			937				1,016
Income before income tax expense			11,838				18,417
Income tax expense			4,478				3,022
Net income		$	7,360			$	15,395
Net income per weighted-average common share
Basic		$	0.25			$	0.49
Diluted		$	0.24			$	0.48
Dividends declared per common share		$	0.10			$	0.10
Weighted-average common shares used in calculations
Basic			29,945				31,457
Potentially dilutive securities			205				369
Diluted			30,150				31,826

See notes to consolidated financial statements.

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

		Six Months Ended
		June 30,
		2006				2005
Revenue		$	159,253			$	149,011
Costs and expenses
Cost of revenue			60,939				50,286
Selling, general and administrative			40,013				32,863
Research and development			20,012				16,696
Total costs and expenses			120,964				99,845
Operating income			38,289				49,166
Equity in net income of affiliate			2,678				2,144
Income before interest and income tax expense			40,967				51,310
Interest income			1,816				1,428
Interest expense			1,880				2,067
Income before income tax expense			40,903				50,671
Income tax expense			15,357				15,440
Net income		$	25,546			$	35,231
Net income per weighted-average common share
Basic		$	0.84			$	1.13
Diluted		$	0.83			$	1.11
Dividends declared per common share		$	0.20			$	0.20
Weighted-average common shares used in calculations
Basic			30,500				31,300
Potentially dilutive securities			235				378
Diluted			30,735				31,678

See notes to consolidated financial statements.

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

		Six Months Ended
		June 30,
		2006				2005
Cash flows from operating activities
Net income		$	25,546			$	35,231
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment			3,455				2,013
Other amortization			902				785
Asset impairment charges			638				—
Loss on asset disposals			177				154
Deferred income taxes			663				1,276
Equity in net income of affiliate			(2,678	)			(2,144	)
Distributions from affiliate			3,950				4,350
Bad debt expense			470				246
Excess tax benefit from stock option exercises			—				4,054
Non-cash share-based compensation			3,775				196
Changes in operating assets and liabilities, excluding effects of business acquisitions
Trade accounts receivable			(965	)			123
Inventories			(4,074	)			28
Prepaid expenses and other assets			(131	)			(601	)
Accounts payable			(966	)			415
Accrued expenses and other current liabilities			(7,269	)			(12,378	)
Deferred revenue			1,884				2,993
Other noncurrent liabilities			740				1,026
Net cash provided by operating activities			26,117				37,767
Cash flows from investing activities
Additions to property and equipment			(9,846	)			(4,821	)
Purchases of short-term investments			(276,565	)			—
Sale of short-term investments			309,175				—
Net cash provided by (used in) investing activities			22,764				(4,821	)
Cash flows from financing activities
Proceeds from stock option exercises and stock purchase plan			5,396				19,585
Excess tax benefit from stock option exercises			722				—
Dividends paid to stockholders			(6,208	)			(3,123	)
Stock repurchases			(68,529	)			—
Net cash (used in) provided by financing activities			(68,619	)			16,462
Effect of exchange rate changes on cash			197				(190	)
Net (decrease) increase in cash and cash equivalents			(19,541	)			49,218
Cash and cash equivalents at beginning of period			40,848				86,901
Cash and cash equivalents at end of period		$	21,307			$	136,119

See notes to consolidated financial statements.

ARBITRON INC.
Notes to Consolidated Financial Statements
June 30, 2006
(unaudited)

1. Basis of Presentation and Consolidation

Presentation

     The accompanying unaudited consolidated financial statements of Arbitron Inc. (the “Company” or “Arbitron”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included and are of a normal recurring nature. Certain amounts in the financial statements for prior periods have been reclassified to conform to the current period’s presentation. The consolidated balance sheet as of December 31, 2005, was audited at that date, but all of the information and footnotes as of December 31, 2005, required by U.S. generally accepted accounting principles, have not been included in this Form 10-Q. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Consolidation

     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., Audience Research Bureau S.A. de C.V., Ceridian Infotech (India) Private Limited, CSW Research Limited, Euro Fieldwork Limited, and Arbitron International, LLC. All significant intercompany balances have been eliminated in consolidation.

2. Pro Forma Disclosures of Share-Based Payments

     During the six months ended June 30, 2005, the Company applied the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including Financial Accounting Standards Board (“FASB”) Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25, to account for its fixed-plan stock options. Under this method, compensation expense was recorded on the date of option grant only if the current market price of the underlying stock exceeded the exercise price of the options. In the case of issuances of stock awards, compensation expense was recorded based upon the quoted market value of shares of common stock on the date of grant. Any resulting compensation expense was recognized ratably over the vesting period. Statement of Financial Accounting Standards (“SFAS”) No. 123 (“SFAS No. 123”), Accounting for Stock-Based Compensation (as amended by SFAS No. 148, Accounting for Stock-Based Compensation–Transitions and Disclosures), established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company adopted only the disclosure requirements of SFAS No. 123 for fiscal reporting periods through December 31, 2005. Effective January 1, 2006, the Company adopted SFAS No. 123R, Share-Based Payments Revised. See Note 13 for the additional disclosures required by SFAS No. 123R for the fair-value-based method of accounting.

     The following table illustrates the effect on net income and net income per share if the fair-value-based method had been applied to all outstanding and unvested awards during the three and six months ended June 30, 2005, (dollars in thousands, except per share data):

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2005				2005
Net income, as reported		$	15,395			$	35,231
Add: Stock-based compensation expense, net of tax			62				121
Less: Stock-based compensation expense determined under fair value method, net of tax			1,796				2,828
Pro forma net income		$	13,661			$	32,524
Basic net income per weighted-average common share, as reported		$	0.49			$	1.13
Pro forma basic net income per weighted-average common share		$	0.43			$	1.04
Diluted net income per weighted-average common share, as reported		$	0.48			$	1.11
Pro forma diluted net income per weighted- average common share		$	0.43			$	1.03
Options granted to employees and directors			59,466				554,932
Weighted-average exercise price		$	41.03			$	40.90
Weighted-average fair value		$	13.52			$	13.72
Weighted-average assumptions:
Expected lives in years			6.5				6.5
Expected volatility			28.5	%			28.6	%
Expected dividend rate			1.0	%			1.0	%
Risk-free interest rate			3.78	%			3.86	%

3. New Accounting Pronouncements

     Effective January 1, 2006, the Company adopted SFAS No. 123R, Share-Based Payments Revised. See Note 13 for the additional disclosures required by SFAS No. 123R.

     In July 2006, the FASB issued FASB Interpretation (“FIN”) 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its financial statements, the impact of a tax position, if it is not more-likely-than–not that such position will be sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the Company’s 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings for that year. The management of the Company is currently evaluating the impact of adopting FIN 48 to the Company’s financial statements.

4. Long-Term Debt

     Long-term debt consisted of senior-secured fixed-rate notes in the amount of $50.0 million as of June 30, 2006, and December 31, 2005. The notes bear interest at a fixed rate of 9.96% and mature on January 31, 2008. The fair values of the senior-secured notes as of June 30, 2006, and December 31, 2005, were $51.0 million and $51.8 million, respectively, and were estimated using a cash flow valuation model and

available market data for securities with similar maturity dates. The senior-secured notes agreement contains certain financial covenants and also contains a make-whole provision that applies in the event of early prepayment of principal. The senior-secured notes limit, among other things, the Company’s ability to incur additional indebtedness, grant or incur liens on its assets, pay cash dividends, make investments or acquisitions, repurchase or redeem capital stock and engage in certain mergers or consolidations. The Company has been in compliance with its covenants under the senior-secured notes agreement since the inception of all borrowings.

     If a default occurs under the terms of Arbitron’s senior-secured notes, the lenders could 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% 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 financing. Under the terms of the senior-secured notes, all of the Company’s subsidiaries guarantee the senior-secured notes. Interest paid for each of the three and six month periods ended June 30, 2006, and 2005 was approximately $1.2 million and $2.5 million, respectively. Non-cash amortization of deferred financing costs classified as interest expense during the three months ended June 30, 2006, and 2005 was $0.1 million and less than $0.1 million, respectively. Non-cash amortization of deferred financing costs classified as interest expense during each of the six month periods ended June 30, 2006, and 2005 was $0.1 million.

5. Stockholders’ Equity

     Changes in stockholders’ equity for the six months ended June 30, 2006, were as follows (in thousands):

																		Net Distributions
																		to Ceridian				Retained								Total
														Additional				in Excess of				Earnings				Accumulated				Stock-
		Shares				Common				Treasury				Paid-In				Accumulated				Subsequent				Other Compre-				holders
		Outstanding				Stock				Stock				Capital				Earnings				to Spin-off				hensive Loss				Equity
Balance as of December 31, 2005			31,044			$	16,169			$	(647	)		$	94,908			$	(242,870	)		$	228,211			$	(3,417	)		$	92,354
Net income			—				—				—				—				—				25,546				—				25,546
Common stock issued			196				—				98				4,963				—				—				—				5,061
Stock repurchased			(1,992	)			—				(996	)			(69,004	)			—				—				—				(70,000	)
Tax benefit from stock option exercises			—				—				—				722				—				—				—				722
Non-cash compensation			—				—				—				3,775				—				—				—				3,775
Dividends declared			—				—				—				—				—				(6,075	)			—				(6,075	)
Other comprehensive loss			—				—				—				—				—				—				145				145
Balance as of June 30, 2006			29,248			$	16,169			$	(1,545	)		$	35,364			$	(242,870	)		$	247,682			$	(3,272	)		$	51,528

A quarterly cash dividend of $0.10 per common share was paid to stockholders on July 3, 2006.

6. Short-term Investments

     Short-term investments as of June 30, 2006, and December 31, 2005, consisted of $50.0 million and $52.6 million, respectively, in municipal and other government-issued variable rate demand notes and auction-rate securities recorded by the Company at fair value. In addition, the Company recorded a $30.0 million receivable from brokers on unsettled trades as of December 31, 2005. All of the Company’s short-term investment assets are classified as available-for-sale securities in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.

     For the three and six months ended June 30, 2006, gross purchases of available-for-sale securities were $54.1 million and $276.6 million, respectively, and gross proceeds from sales of available-for-sale securities were $92.6 million and $309.2 million for the three and six months ended June 30, 2006, respectively. There were no purchases or sales of short-term investments during the three and six months ended June 30, 2005.

7. Inventories

     Inventories as of June 30, 2006, and December 31, 2005, consisted of $4.5 million and $0.4 million, respectively, of Portable People Meter (“PPM”) equipment held for resale to international licensees of PPM. The inventory is accounted for on a first-in, first-out (FIFO) basis.

8. Net Income Per Weighted-Average Common Share

     The computations of basic and diluted net income per weighted-average common share for the three and six months ended June 30, 2006 and 2005 are based on Arbitron’s weighted-average shares of common stock and potentially dilutive securities outstanding.

     Potentially dilutive securities are calculated in accordance with the treasury stock method, which assumes that the proceeds from the exercise of stock options are used to repurchase the Company’s common stock at the average market price for the period. At June 30, 2006, there were options to purchase 2,514,252 shares of the Company’s common stock outstanding, of which, options to purchase 1,427,187 shares of the Company’s common stock were excluded from the computation of diluted net income per weighted-average common share, either because the options’ exercise prices were greater than the average market price of the Company’s common shares or assumed repurchases from proceeds from the options’ exercise were potentially antidilutive.

     On January 24, 2006, the Company announced that its Board of Directors authorized a program to repurchase up to $70.0 million of its outstanding common stock through either periodic open-market or private transactions at then-prevailing market prices through December 31, 2006. As of June 30, 2006, the Company completed the program by repurchasing 1,991,944 shares for an aggregate purchase price of $70.0 million.

9. Contingencies

     The Company is involved, from time to time, in litigation and proceedings arising out of the ordinary course of business. Legal costs for services rendered in the course of these proceedings are charged to expense as they are incurred.

     During 2005, the Pennsylvania Department of Revenue concluded a sales tax audit and notified the Company of an assessment of $3.6 million, including outstanding sales tax and accumulated interest since 2001. Since 2005, the assessment has increased due to additional interest incurred to $3.8 million as of June 30, 2006.

     Currently, the Company is in the appeals process with the Commonwealth of Pennsylvania, and is continuing to contest the assessment in its entirety. Consistent with the findings of a previous Pennsylvania sales tax audit, the Company contends that it continues to provide nontaxable services to its Pennsylvania customers and intends to vigorously defend this position during the appeals process. Although the Company anticipates a successful outcome, it cannot guarantee that a favorable settlement will occur. Given the nature of this uncertainty, no loss has been recognized as of June 30, 2006.

10. Comprehensive Income and Accumulated Other Comprehensive Loss

     The Company’s comprehensive income comprises net income and foreign currency translation adjustments, net of tax (expense) benefits. The components of comprehensive income were as follows (in thousands) :

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Net income		$	7,360			$	15,395			$	25,546			$	35,231
Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax expense of $76 and $89 for the three and six month periods in 2006 and tax benefit of $53 and $71 for the three and six month periods in 2005, respectively.			123				(119	)			145				(149	)
Other comprehensive income (loss)			123				(119	)			145				(149	)
Comprehensive income		$	7,483			$	15,276			$	25,691			$	35,082

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

		June 30,				December 31,
		2006				2005
Foreign currency translation adjustment		$	222			$	77
Additional minimum pension liability			(3,494	)			(3,494	)
Accumulated other comprehensive loss		$	(3,272	)		$	(3,417	)

11. Retirement Plans

     Certain of Arbitron’s United States employees participate in a defined-benefit pension plan that closed to new participants effective January 1, 1995. Arbitron subsidizes health care benefits for eligible retired employees who participate in the pension plan and were hired before January 1, 1992.

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

		Defined-Benefit								Postretirement
		Pension Plan								Plan
		Three Months								Three Months
		Ended June 30,								Ended June 30,
		2006				2005				2006				2005
Service cost		$	242			$	202			$	8			$	10
Interest cost			413				387				17				20
Expected return on plan assets			(494	)			(410	)			—				—
Amortization of prior service cost			5				6				—				—
Amortization of net loss			180				140				5				8
Net periodic benefit cost		$	346			$	325			$	30			$	38

		Defined-Benefit								Postretirement
		Pension Plan								Plan
		Six Months								Six Months
		Ended June 30,								Ended June 30,
		2006				2005				2006				2005
Service cost		$	483			$	405			$	17			$	20
Interest cost			826				775				33				40
Expected return on plan assets			(988	)			(820	)			—
Amortization of prior service cost			11				11				—				—
Amortization of net loss			359				279				10				15
Net periodic benefit cost		$	691			$	650			$	60			$	75

Arbitron estimates that it will contribute $2.0 million in 2006 to the defined-benefit pension plan.

12. Taxes

     The effective tax rate was reduced from 37.75% for the year ended December 31, 2005 to 37.2% for the six months ended June 30, 2006, to reflect the impact of increased tax-exempt interest income. During the second quarter 2005, Arbitron recognized a reversal of certain liabilities for tax contingencies related to prior periods. The net benefit of the reversal was $3.9 million. Income taxes paid for the six months ended June 30, 2006, and 2005 was $15.0 million and $13.8 million, respectively.

13. Share-Based Compensation

     The following table sets forth information with regard to the financial statement impact of adopting SFAS No. 123R, effective January 1, 2006, (dollars in thousands):

		Three Months Ended				Six Months Ended
		June 30, 2006				June 30, 2006
Cost of revenue		$	182			$	313
Selling, general and administrative			1,958				3,066
Research and development			126				224
Operating income (loss)			(2,266	)			(3,603	)
Income (loss) before income tax expense			(2,266	)			(3,603	)
Net income (loss)		$	(1,398	)		$	(2,223	)
Basic earnings per weighted-average common share		$	(0.05	)		$	(0.07	)
Diluted earnings per weighted-average common share		$	(0.05	)		$	(0.07	)
Net cash used by operating activities		$	(263	)		$	(722	)
Net cash provided by financing activities		$	263			$	722

     The share-based compensation expense charged against operating income for the Company’s share-based compensation plans was approximately $3.8 million for the six months ended June 30, 2006, consisting of $3.3 million, $0.3 million, and $0.2 million, for selling, general and administrative expense, cost of revenue, and research and development, respectively. The Company’s share-based compensation expense was approximately $2.4 million for the three months ended June 30, 2006, consisting of $2.1 million, $0.2 million, and $0.1 million, for selling, general and administrative expense, cost of revenue, and research and development, respectively. The share-based compensation expense for the three and six months ended June 30, 2006, included $0.1 million of expense related to deferred stock units granted to nonemployee directors, which were historically required to be expensed prior to the implementation of SFAS No. 123R. Share-based compensation expense for the three and six months ended June 30, 2005 was $0.1 million and $0.2 million, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $0.9 million and $1.4 million for the three and six months ended June 30, 2006, respectively. There was no capitalized share-based compensation cost incurred as of June 30, 2006.

     The Company has two stock incentive plans (“SIPs”) from which awards of stock options, nonvested share awards and performance unit awards are granted to eligible participants: the 1999 SIP, which was approved by the Company’s stockholders, and the 2001 SIP, which was not approved by the Company’s stockholders. The Company’s 1999 and 2001 SIPs permit the grants of share-based awards, including stock options and nonvested share awards, for up to 5,204,009 shares of common stock. The Company believes that such awards align the interests of its employees with those of its shareholders. Eligible participants in the 1999 and 2001 SIPs include all employees of the Company and any nonemployee director, consultant, and independent contractor of the Company. The Company’s policy for issuing shares upon option exercise or conversion of its nonvested share awards and deferred stock units is to issue new shares of common stock, unless treasury stock is available at the time of exercise or conversion.

     In some cases the vesting of share-based awards is accelerated due to an employee’s retirement. Prior to the adoption of SFAS No. 123R, the amount disclosed for the Company’s pro forma compensation expense did not include an acceleration of expense recognition for retirement eligible employees. For share-based arrangements granted subsequent to the adoption of SFAS No. 123R, the Company accelerates expense recognition if retirement eligibility affects the vesting of the award. If the accelerated pro forma expense recognition had occurred prior to January 1, 2006, the share-based compensation expense for the three and six months ended June 30, 2006, would have been lower by $0.3 million and $0.6 million, respectively.

Stock Options

     Stock options awarded to employees under the 1999 and 2001 SIPs generally vest annually over a three-year period, have five-year or 10-year terms and have an exercise price not less than the fair market value of the underlying stock at the date of grant. Stock options granted to directors under the 1999 SIP generally vest upon the date of grant, are generally exercisable in six months, have 10-year terms and have an exercise price not less than the fair market value of the underlying stock at the date of grant. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the SIPs).

     The Company uses historical data to estimate option exercise and employee termination in order to determine the expected term of the option; identified groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted represents the period of time that such options are expected to be outstanding. The expected term can vary for certain groups of employees exhibiting different behavior. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury strip bond yield curve in effect at the time of grant. Expected volatilities are based on the historical volatility of the Company’s common stock. The fair value of each option granted during the three and six months ended June 30, 2006, is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table.

		Three Months Ended				Six Months Ended
		June 30, 2006				June 30, 2006
Expected volatility		27.34%				27.33%
Expected dividends		1.00%				1.00%
Expected term (in years)		5.25 - 6.00				5.25 - 6.00
Risk-free rate		4.96 - 5.07%				4.37 - 5.07%

     The weighted-average risk-free rate for options granted during the three and six months ended June 30, 2006 was 4.99% and 4.70%, respectively. The weighted-average expected term for options granted during the three and six months ended June 30, 2006 was 5.52 years and 5.74 years, respectively.

     A summary of option activity under the SIPs as of June 30, 2006, and changes during the six months then ended, is presented below:

										Weighted-
										Average
						Weighted-				Remaining				Aggregate
						Average				Contractual				Intrinsic Value
Options		Shares				Exercise Price				Term (Years)				($000)
Outstanding at January 1, 2006			2,416,733			$	34.97
Granted			299,113				39.51
Exercised			(174,514	)			25.64
Forfeited or expired			(27,080	)			29.06
Outstanding at June 30, 2006			2,514,252			$	36.22				5.98			$	7,259
Vested or expected to vest at June 30, 2006			2,508,502			$	36.21				5.97			$	7,259
Exercisable at June 30, 2006			1,752,100			$	34.73				4.73			$	7,210

     The weighted-average grant-date fair value of options granted during the six months ended June 30, 2006 and 2005 was $12.56 and $13.72, respectively. The weighted-average grant-date fair value of options granted during the three months ended June 30, 2006 and 2005 was $12.73 and $13.52, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2006 and 2005 was $1.9 million and $10.6 million, respectively. The total intrinsic value of options exercised during the three months ended June 30, 2006, and 2005 was $0.7 million and $3.7 million, respectively.

     As of June 30, 2006, there was $5.3 million of total unrecognized compensation cost related to options granted under the SIPs. Cash received from option exercises for the six months ended June 30, 2006, and 2005 was $4.8 million and $19.0 million, respectively. The tax benefit realized for the tax deductions from option exercises totaled $0.7 million and $4.1 million for the six months ended June 30, 2006 and 2005, respectively.

Nonvested Share Awards

     A summary of the status of the Company’s nonvested share awards as of June 30, 2006, and changes during the six months ended June 30, 2006, is presented below:

						Weighted-Average
						Grant-Date Fair
Nonvested Share Awards		Shares				Value
Outstanding at January 1, 2006			14,250			$	40.90
Granted			79,482				38.88
Vested			(1,500	)			40.90
Forfeited			—				—
Nonvested at June 30, 2006			92,232			$	39.16
Expected to vest at June 30, 2006			92,232			$	39.16

     As of June 30, 2006, there was $3.3 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the SIPs. Nonvested share awards generally vest over four or five years. The aggregate cost of nonvested share-based awards is expected to be recognized over a weighted-average period of 3.69 years. The total fair value of share awards vested during the three and six month periods ended June 30, 2006, was less than $0.1 million and $0.1 million, respectively.

Deferred Stock Units

     A summary of the status of the Company’s deferred stock units as of June 30, 2006, and changes during the six months ended June 30, 2006, is presented below:

						Weighted-Average
						Grant-Date Fair
Nonvested Deferred Stock Units		Shares				Value
Outstanding at January 1, 2006			—				—
Granted			22,101				38.77
Vested			(3,915	)			35.92
Forfeited			—				—
Nonvested at June 30, 2006			18,186			$	38.88
Vested at June 30, 2006			16,000			$	38.92
Expected to vest at June 30, 2006			18,186			$	38.88

     As of June 30, 2006, the total unrecognized compensation cost related to deferred stock units granted under the SIPs to employees and non-employee directors was $0.7 million and $0, respectively. Deferred stock units granted to employees vest over a three-year period and are convertible to shares of common stock, subsequent to their termination of employment. Deferred stock units granted to non-employee directors vest immediately upon grant, are convertible to shares of common stock subsequent to their termination of service as a director, and are issued at the fair market value of the Company’s stock upon the date of grant. The aggregate cost of deferred stock units granted to employees is expected to be recognized over a three-year period beginning January 1, 2007. The total fair value of deferred stock units granted to non-employee directors and vested during the six months ended June 30, 2006 was $0.1 million.

Employee Stock Purchase Plan

     The Company’s compensatory Employee Stock Purchase Plan (“ESPP”) provides for the issuance of up to 600,000 shares of newly issued or treasury common stock of Arbitron. The purchase price of the stock to ESPP participants is 85% of the lesser of the fair market value on either the first day or the last day of the applicable three-month offering period. The total amount of compensation expense recognized for ESPP share-based arrangements was approximately $0.1 million for the three and six months ended June 30, 2006. The number of ESPP shares granted during the three and six months ended June 30, 2006, was 10,268 and 19,746 shares, respectively.

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

     The following discussion should be read in conjunction with Arbitron’s consolidated financial statements and the notes related to those consolidated financial statements contained elsewhere in this Form 10-Q.

Forward-Looking Statements

     This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements regarding Arbitron Inc. and its subsidiaries (“we,” “Arbitron” or the “Company”) in this document that are not historical in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “likely,” “expects,” “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 all or part of contracts with large customers as they expire;
	•		successfully execute our business strategies, including implementation of our Portable People Meter (PPMSM) services and to execute potential joint-venture or third-party agreements;
	•		effectively manage the impact of any further consolidation in the radio and advertising agency industries;
	•		keep up with rapidly changing technological needs of our customer base, including creating new proprietary software systems and new customer products and services that meet these needs in a timely manner;
	•		successfully manage the impact on our business of any economic downturn generally and in the advertising market in particular;
	•		successfully manage the impact on costs of data collection due to lower respondent cooperation in surveys, privacy concerns, consumer trends, technology changes and/or government regulations; and
	•		successfully develop and implement technical devices to measure multi-media and advertising in an increasingly competitive environment.

     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 1A. RISK FACTORS” in Arbitron’s Annual Report on Form 10-K for the year ended December 31, 2005.

     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.

Overview

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

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

Portable People Meter

     For several years, Arbitron has pursued a strategy of evolving its data collection business from diaries, which are completed by hand and returned by mail from respondents, to portable electronic measurement devices, which passively provide measurement services without additional manual effort by respondents beyond carrying or wearing the meter. This strategy has been pursued to improve quality by taking advantage of new technological capabilities and to address the vast increase in media delivery vehicles, both inside and outside of the home. Arbitron has developed a Portable People Meter (“PPM”) system capable of measuring radio, broadcast television, cable television, Internet broadcasts, satellite radio and television audiences, and retail store video and audio broadcasts.

     In May 2000, Arbitron entered into an agreement with Nielsen Media Research, Inc. (“Nielsen Media Research”), 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 PPM for audience measurement in the United States, for both the television and radio industries, and the costs of such commercialization would be shared with Nielsen Media Research. On March 1, 2006, Arbitron announced that Nielsen Media Research, Inc. did not exercise its option and the option was terminated.

     Arbitron currently is concentrating its efforts on previously announced plans to create a PPM ratings service for radio, as well as develop services for broadcast television and the cable television industry. On March 14, 2006, Arbitron announced that it would begin the rollout of the PPM system as its radio ratings service in the top 50 markets in the United States. Under its current rollout schedule, PPM is expected to be introduced into the top 10 radio markets by the fall of 2008, and into all of the top 50 radio markets two to three years thereafter. Pending accreditation by the Media Rating Council (“MRC”), Houston is expected to become the first radio market to be electronically measured before the end of 2006. Arbitron is committed to pursuing continued MRC accreditation of the PPM service as additional markets are rolled out.

     On May 18, 2006, Arbitron announced that CBS Radio, which is one of the largest major-market operators in the United States and in 2005 represented approximately nine percent of Arbitron’s revenue, had entered into a seven-year agreement for PPM radio ratings when the new audience ratings technology is deployed in the 35 CBS Radio markets encompassed in Arbitron’s previously announced PPM rollout plan. In addition to CBS Radio, 10 other radio broadcasters have recently signed long-term contracts to use PPM, if Arbitron deploys the PPM service.

     To date, Arbitron has signed contracts with a number of national and regional advertising agencies to use radio audience estimates based on the PPM, if Arbitron deploys the PPM service. These agencies account for more than 90% of the national advertising dollars spent on radio advertising.

Arbitron believes this is a significant start in an effort to gain a critical mass of industry support for deploying the PPM as a local market radio ratings system.

     Although additional milestones remain and there is the possibility that commercialization of the PPM could be delayed, or that a competitor might preempt PPM commercialization entirely, Arbitron continues to believe that the PPM service represents a significant enhancement to and a viable replacement for its diary-based ratings service and is an essential component of the Company’s future growth.

     As Arbitron has previously disclosed, commercialization of the PPM will require a substantial financial investment. While the Company has preserved some of its cash and short-term investments in anticipation of such requirements, the expenditures likely to be incurred in connection with such commercialization are significant. The Company currently estimates that the aggregate capital expenditure associated with PPM commercialization for audience ratings measurement will be approximately $25.0 million for the first two to three years of commercialization. Arbitron also anticipates that, over the same period, its results of operations will be negatively impacted as a result of the rollout of this PPM service, which impact likely will be material. Ultimately, the Company believes that, while commercialization of PPM for the radio ratings service will have a near-term negative impact on the Company’s results of operations, its operating margins can be restored to historical levels by the end of the rollout period, although there can be no assurance that this will be the case.

     The amount of capital required for deployment of the PPM and the impact of the rollout on the Company’s results of operations will be greatly affected by the speed with which the radio industry requests PPM technology and the timing of the rollout. If the radio industry is slow to accept PPM, as opposed to the use of diaries or some other competing alternative, then it will take longer to roll out the commercialization of the PPM, and the costs associated with that deployment will be delayed. On the other hand, if the radio industry asks for electronic measurement sooner rather than later, Arbitron’s capital needs will intensify, and the near-term negative impact on the Company’s results of operations will be more significant.

     In June 2005, Clear Channel Communications, Inc. (“Clear Channel”), which is the largest owner of radio stations in the United States and represented approximately 19 percent of Arbitron’s revenue in 2005, announced that it was issuing a Request for Proposals to create a “state-of-the-art” radio ratings system to replace the current diary measurement system to which it subscribes. This process is ongoing. Clear Channel has organized a cross-industry evaluation team to review the proposals and this team has identified Arbitron as one of the few companies to move forward to the next level of review.

Portable People Meter – National Marketing Panel (“Project Apollo”)

     Arbitron began testing additional marketing research applications of the PPM technology in 2003. One application that Arbitron began testing was the use of the PPM as the media collection tool for a national marketing-oriented panel designed to correlate advertising with shopping behavior and sales. The objective is to provide multimedia exposure data combined with sales data from a single source to produce a measure of advertising effectiveness for advertisers, agencies and broadcasters.

     In September 2004, Arbitron announced that Arbitron and VNU, Inc. (“VNU”) agreed to jointly explore the development of a new national marketing research service, called “Project Apollo,” that collects multimedia and purchase information from a common sample of consumers. In April 2005, Arbitron and VNU entered into a cost-sharing agreement to share costs and capital expenditures associated with the development and deployment of the pilot panel. Although this contract has expired, Arbitron and VNU have agreed to continue sharing costs and capital expenditures while they negotiate the terms of a formal joint venture for this service. In January 2006, Arbitron announced that a test panel of more than 5,000 households and 11,000 people had been installed as part of the demonstration of the national marketing research service. Six advertisers, including Procter and Gamble, which in the aggregate spend more than $6.2 billion on advertising on measured media, are collaborating with Arbitron and VNU to help ensure that the service properly addresses the needs of marketers. These companies have signed, or are expected to sign, an agreement to receive Project Apollo pilot panel data.

     The national marketing research service is a new service, for which market acceptance is not yet known. This service would require substantial additional expenditures if it ultimately proves to be a viable commercial service. During the six months ended June 30, 2006, the Company incurred approximately $2.8 million of incremental expenditures relating to the national marketing pilot as compared to the same period of 2005. If a decision is made to commercialize this service, substantial additional expenditures would be incurred in the next few years.

     Since the pilot program for the PPM national marketing service is in progress and customer response is preliminary, it is not yet possible to provide a meaningful assessment of future costs associated with a potential commercialization of this service. However, the same general cost pattern would apply as with the PPM ratings service–substantial costs would have to be incurred in advance of revenues, which would result in a negative impact on results of operations in the first two to three years of commercialization, which impact likely would be material.

Portable People Meter – International

     Arbitron has entered into commercial agreements with a number of international media information services companies pursuant to which the companies have been granted a license to use Arbitron’s PPM encoding technology in their audience measurement services in specific countries outside the United States. Use of the PPM continues to make progress internationally. On March 24, 2006, Arbitron announced that TNS Inc. (“TNS”), a PPM licensee, signed a five-year contract with the Kazakhstan television Joint Industry Committee to provide trading currency television audience measurement using Arbitron’s PPM system. TNS and the Steadman Group also announced plans to provide industry audience measurement for radio, television, and print to Kenya.

     On May 18, 2006, Arbitron announced that RAJAR (Radio Joint Audience Research Limited), the industry radio ratings consortium for the United Kingdom, in combination with BARB (Broadcaster’s Audience Research Board), the joint industry committee responsible for television audience measurement in the United Kingdom, have selected Arbitron’s PPM system for an electronic radio and television audience measurement demonstration panel in London, a market of more than six million persons. This two-year panel will operate in parallel to the current ratings systems in the United Kingdom and the data will be analyzed separately.

     These international licenses are not currently a material part of Arbitron’s business.

Significant Concentrations

     Arbitron’s quantitative radio audience measurement business and related software sales accounted for approximately 78% and 87% of its revenue for the three and six months ended June 30, 2006, respectively. The Company expects that for the year ended December 31, 2006, Arbitron’s quantitative radio audience measurement business and related software sales will account for approximately 85% of its revenue, which is consistent with historic annual trends. Quarterly fluctuations in this percentage are reflective of the seasonal delivery schedule of our radio audience measurement business. Consolidation in the radio broadcasting industry has led to Arbitron’s dependence on a limited number of key customers.

     In 2005, Clear Channel and CBS Radio, formerly known as Infinity Broadcasting Corp., represented approximately 19 percent and nine percent, respectively, of Arbitron’s revenue. Arbitron’s agreements with these customers are not exclusive and contain no renewal obligations. Arbitron currently has license agreements with Clear Channel to provide radio ratings and software services for Clear Channel’s radio stations and networks through the Company’s Fall 2008 survey.

     In May 2006, Arbitron announced that the Company has entered into a license agreement with CBS Radio to provide diary-based services and PPM radio ratings, when the new audience ratings technology is deployed, through the Company’s Winter 2014 survey.

     Arbitron cannot give any assurances that it could replace the revenue that would be lost if a key customer failed to renew all or part of its agreements with Arbitron. The loss of a key customer would materially impact Arbitron’s business, financial position and operating results.

Response Rates and Sample Proportionality

     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 listening for one week. Participants are asked to designate in their diary the station(s) to which they are listening, 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 its audience listening estimates. It is increasingly difficult and more costly to obtain consent from the phone sample to participate in the surveys. Arbitron must achieve response rates sufficient to maintain confidence in its ratings, the support of the industry and accreditation by the MRC. Response rates are a quality measure of survey performance and an important factor impacting costs associated with data collection. Overall response rates have declined over the past several years. If response rates continue to decline further, Arbitron’s radio audience measurement business could be adversely affected. Arbitron has committed extensive efforts and resources to address the decline of response rates.

     A measure often used by clients to assess quality in Arbitron’s surveys is proportionality, which refers to how well the distribution of the sample for any individual survey matches the distribution of the population in the market. In recent years, Arbitron’s ability to deliver good proportionality in its surveys among younger demographic groups has deteriorated, caused in part by the trend among some households to disconnect their landline phones, effectively removing these households from the Arbitron sample frame. Arbitron has conducted a number of research tests over the past two years addressing this issue, including calling cellular phones to place diaries. The Company expects to phase in cellular-phone-only households into the Arbitron sample frame beginning in 2008.

     In March 2006, Arbitron announced a comprehensive set of initiatives to bolster response rates and improve sample proportionality for young men in the Company’s diary-based markets. These initiatives include providing for substantial increases in cash incentives and other survey treatments. We continue to research and test new measures to address these sample quality challenges.

Small Market Initiatives

     In May 2005, Arbitron announced a program designed to increase the stability of radio audience estimates in certain small markets by applying a quarterly rolling-sample approach to surveys covering 110 small markets. The goal of this program is to provide quality enhancements for our service in certain small markets and increase the reliability of reported data by reducing the fluctuations in audience estimates from measurement period to measurement period. By combining the quarterly measurement of the related surveys, the sample size for analyzing audience demographics for these small markets will be increased without any increased cost to our customers. The first phase of this program was successfully implemented during the Fall 2005 survey, with all affected reports issued during the three months ended March 31, 2006. The result of these enhancements was a 40 — 50% reduction in ratings share variation. The second phase is scheduled to begin with the release of the Spring 2008 radio survey results.

Stock Repurchase

     On January 24, 2006, Arbitron announced that its Board of Directors authorized a program to repurchase up to $70.0 million of its outstanding common stock through either periodic open-market or private transactions at then-prevailing market prices through December 31, 2006.

As of June 30, 2006, the program was completed with 1,991,944 shares being repurchased for an aggregate purchase price of $70.0 million.

New Accounting Pronouncement

     Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R (“SFAS No. 123R”), Share-Based Payments Revised. See Notes 2 and 13 in the Notes to the Consolidated Financial Statements for the additional disclosures required by SFAS No. 123R.

     In July 2006, the FASB issued FASB Interpretation (“FIN”) FIN 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the Company’s 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings of that year. The management of the Company is currently evaluating the impact of adopting FIN 48 to the Company’s financial statements.

Critical Accounting Policies and Estimates

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

     The Company capitalizes software development costs with respect to significant internal-use software initiatives or enhancements in accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The costs are capitalized from the time that the preliminary project stage is completed and management considers it probable that the software will be used to perform the function intended until the time the software is placed in service for its intended use. Once the software is placed in service, the capitalized costs are amortized over periods of three to five years. Management performs an assessment quarterly to determine if it is probable that all capitalized software will be used to perform its intended function. If an impairment exists, the software cost is written down to estimated fair value. During the six months ended June 30, 2006, Arbitron recorded an impairment charge of $0.6 million for internally developed PPM software associated with the Nielsen Media Research election not to join Arbitron in the commercial deployment of PPM. As of June 30, 2006, and December 31, 2005, the Company’s capitalized software developed for internal use had carrying amounts of $17.7 million and $15.2 million, respectively, including $6.9 million and $6.7 million, respectively, of software related to the PPM.

     Arbitron uses the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year and for deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Management must make assumptions, judgments and estimates to determine the current provision for income taxes and also deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Assumptions, judgments, and estimates relative to the current provision for income taxes take into account current tax laws, interpretation of current tax laws and possible outcomes of current and future audits conducted by domestic and foreign tax authorities. Changes in tax law or interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in the consolidated financial statements. Assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and nature of future taxable income. Actual operating results and the underlying amount and nature of income in future years could render current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause actual income tax obligations to differ from estimates, thus impacting Arbitron’s financial position and results of operations.

Results of Operations

Comparison of the Three Months Ended June 30, 2006 to the Three Months Ended June 30, 2005

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

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

		Three Months Ended								Increase								Percentage of
		June 30,								(Decrease)								Revenue
		2006				2005				Dollars				Percent				2006				2005
Revenue		$	74,165			$	69,816			$	4,349				6.2	%			100.0	%			100.0	%
Costs and expenses
Cost of revenue			36,684				29,869				6,815				22.8	%			49.5	%			42.8	%
Selling, general and administrative			20,557				16,909				3,648				21.6	%			27.7	%			24.2	%
Research and development			10,031				8,658				1,373				15.9	%			13.5	%			12.4	%
Total costs and expenses			67,272				55,436				11,836				21.4	%			90.7	%			79.4	%
Operating income			6,893				14,380				(7,487	)			(52.1	%)			9.3	%			20.6	%
Equity in net income of affiliate			5,053				4,234				819				19.3	%			6.8	%			6.1	%
Income before interest and income tax expense			11,946				18,614				(6,668	)			(35.8	%)			16.1	%			26.7	%
Interest income			829				819				10				1.2	%			1.1	%			1.2	%
Interest expense			937				1,016				(79	)			(7.8	%)			1.3	%			1.5	%
Income before income tax expense			11,838				18,417				(6,579	)			(35.7	%)			16.0	%			26.4	%
Income tax expense			4,478				3,022				1,456				48.2	%			6.0	%			4.3	%
Net income		$	7,360			$	15,395			$	(8,035	)			(52.2	%)			10.0	%			22.1	%
Net income per weighted-average common share
Basic		$	0.25			$	0.49			$	(0.24	)			(49.0	%)
Diluted		$	0.24			$	0.48			$	(0.24	)			(50.0	%)
Dividends declared per share		$	0.10			$	0.10			$	—
Other data:
EBIT (1)		$	11,946			$	18,614			$	(6,668	)			(35.8	%)
EBITDA (1)		$	14,215			$	20,002			$	(5,787	)			(28.9	%)
EBIT and EBITDA Reconciliation (1)
Net income		$	7,360			$	15,395			$	(8,035	)
Income tax expense			4,478				3,022				1,456
Interest income			(829	)			(819	)			10
Interest expense			937				1,016				(79	)
EBIT (1)			11,946				18,614				(6,668	)
Depreciation and amortization			2,269				1,388				881
EBITDA (1)		$	14,215			$	20,002			$	(5,787	)

     The following table sets forth information with regard to share-based compensation expense recognized under SFAS No. 123R and APB 25 for the three months ended June 30, 2006, and June 30, 2005, respectively:

Supplementary Information: Share-Based Compensation

		Three Months Ended
		June 30,
		2006				2005				Change
Cost of revenue		$	182			$	—				182
Selling, general and administrative			2,047				100				1,947
Research and development			126				—				126
Total costs and expenses			2,355				100				2,255
Operating income (loss)			(2,355	)			(100	)			(2,255	)
Income tax benefit			902				39				863
Net income (loss)		$	(1,453	)		$	(62	)		$	(1,392	)
Net income (loss) per weighted-average common share
Basic		$	(0.05	)		$	(0.00	)		$	(0.05	)
Diluted		$	(0.05	)		$	(0.00	)		$	(0.05	)

     Revenue. Revenue increased 6.2% to $74.2 million for the three months ended June 30, 2006, from $69.8 million for the same period in 2005, due significantly to a $2.4 million increase in Scarborough revenue, which resulted from a 16 market increase in the number of delivered Scarborough markets for the three months ended June 30, 2006, as compared to the same period of 2005. The remainder of the increase in revenues was primarily due to increased revenue from the licensing of analytical software applications.

     Cost of Revenue. Cost of revenue increased by 22.8% to $36.7 million for the three months ended June 30, 2006, from $29.9 million for the same period in 2005, and as a percentage of revenue to 49.5% in 2006 from 42.8% in 2005. The increase in cost of revenue was primarily attributable to a $4.1 million increase in Arbitron’s core quantitative and qualitative and software application services, which includes a $2.2 million increase in royalties and a $2.0 million increase in data collection costs. The increase in royalties resulted primarily from a 16 market increase in delivered Scarborough markets for the three months ended June 30, 2006 as compared to the same period of 2005. Increased spending of $1.7 million related to the Project Apollo pilot panel for the national marketing research service also contributed to the overall increase in cost of revenue.

     Selling, General and Administrative. Selling, general and administrative expenses increased 21.6% to $20.6 million for the three months ended June 30, 2006, from $16.9 million for the same period in 2005, and increased as a percentage of revenue to 27.7% in 2006 from 24.2% in 2005. The adoption of SFAS No. 123R, effective January 1, 2006, resulted in approximately $1.9 million of additional compensation expense related to the Company’s share-based awards. In addition, approximately $1.6 million of the increase in selling, general and administrative expenses was due to an increase in Arbitron’s core quantitative, qualitative and software application services, including a $0.4 million increase in marketing costs associated with the strategic development of our ratings business.

     Research and Development. Research and development expenses increased 15.9% to approximately $10.0 million during the three months ended June 30, 2006, from $8.7 million for the same period in 2005, and increased as a percentage of revenue to 13.5% in 2006 from 12.4% in 2005. Increased spending resulted from the Company’s continued development of the next generation of client software, and applications and infrastructure to support PPM and the diary-based service. The Company expects that its research and development expenses will increase in the future as a result of the strategic development of our ratings business.

     Operating Income. Operating income decreased 52.1% to $6.9 million for the three months ended June 30, 2006, from $14.4 million for the same period in 2005. Operating margin percentage decreased to 9.3% in 2006 from 20.6% in 2005. Operating margins for the year ended December 31, 2006, will be negatively impacted due to higher costs related to the national marketing service and the PPM ratings service, as well as continued expensing related to the Company’s share-based awards.

     Equity in Net Income of Affiliate. Equity in net income of affiliate (relating to the Company’s Scarborough joint venture) increased 19.3% to $5.1 million for the three months ended June 30, 2006, from $4.2 million for the same period in 2005. The increase in equity in net income of affiliate was primarily related to the timing of 16 delivered markets mentioned previously.

     Interest Income. Interest income was relatively flat for the three months ended June 30, 2006, as compared to the same period of 2005.

     Interest Expense. Interest expense decreased by 7.8% to $0.9 million for the three months ended June 30, 2006 from approximately $1.0 million for the same period in 2005, due to increased capitalization of interest incurred in association with higher balances of internally developed software.

     Income Tax Expense. The effective tax rate was reduced from 37.5%, which excludes the impact of the $3.9 million tax benefit recognized for certain tax contingencies during the three months ended June 30, 2005, to 37.2% for the three months ended June 30, 2006, to reflect the impact of increased tax-exempt interest income.

     Net Income. Net income decreased 52.2% to $7.4 million for the three months ended June 30, 2006, from $15.4 million for the same period in 2005, due primarily to $1.4 million in additional share-based compensation expense, net of tax, and increased expenses related to Project Apollo and the strategic development of our ratings business. The Company also expects that higher costs in the remainder of 2006 related to the deployment of Project Apollo will continue to adversely impact annual net income. The Company also expects that significant increases in PPM ratings expenses will be incurred to support future large-scale PPM commercialization efforts.

     EBIT and EBITDA. Arbitron has presented EBIT and EBITDA, both non-GAAP financial measures, as supplemental information that management of Arbitron believes is useful to investors to evaluate the Company’s results because they exclude certain items that are not directly related to the Company’s core operating performance. EBIT is calculated by adding back net interest expense and income tax expense to net income. EBITDA is calculated by adding back net interest expense, income tax expense, depreciation and amortization to net income. EBIT and EBITDA should not be considered substitutes either for net income, as indicators of Arbitron’s operating performance, or for cash flow, as measures of Arbitron’s liquidity. In addition, because EBIT and EBITDA may not be calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies. EBIT decreased by 35.8% to $11.9 million, and EBITDA decreased by 28.9% to $14.2 million for the three months ended June 30, 2006, from $18.6 million and $20.0 million, respectively, for the same period in 2005.

Comparison of the Six Months Ended June 30, 2006 to the Six Months Ended June 30, 2005

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

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

		Six Months Ended								Increase								Percentage of
		June 30,								(Decrease)								Revenue
		2006				2005				Dollars				Percent				2006				2005
Revenue		$	159,253			$	149,011			$	10,242				6.9	%			100.0	%			100.0	%
Costs and expenses
Cost of revenue			60,939				50,286				10,653				21.2	%			38.3	%			33.7	%
Selling, general and administrative			40,013				32,863				7,150				21.8	%			25.1	%			22.1	%
Research and development			20,012				16,696				3,316				19.9	%			12.6	%			11.2	%
Total costs and expenses			120,964				99,845				21,119				21.2	%			76.0	%			67.0	%
Operating income			38,289				49,166				(10,877	)			(22.1	%)			24.0	%			33.0	%
Equity in net income of affiliate			2,678				2,144				534				24.9	%			1.7	%			1.4	%
Income before interest and income tax expense			40,967				51,310				(10,343	)			(20.2	%)			25.7	%			34.4	%
Interest income			1,816				1,428				388				27.2	%			1.1	%			1.0	%
Interest expense			1,880				2,067				(187	)			(9.0	%)			1.2	%			1.4	%
Income before income tax expense			40,903				50,671				(9,768	)			(19.3	%)			25.7	%			34.0	%
Income tax expense			15,357				15,440				(83	)			(0.5	%)			9.6	%			10.4	%
Net income		$	25,546			$	35,231			$	(9,685	)			(27.5	%)			16.1	%			23.6	%
Net income per weighted-average common share
Basic		$	0.84			$	1.13			$	(0.29	)			(25.7	%)
Diluted		$	0.83			$	1.11			$	(0.28	)			(25.2	%)
Dividends declared per share		$	0.20			$	0.20			$	—
Other data:
EBIT (1)		$	40,967			$	51,310			$	(10,343	)			(20.2	%)
EBITDA (1)		$	45,324			$	54,108			$	(8,784	)			(16.2	%)
EBIT and EBITDA Reconciliation (1)
Net income		$	25,546			$	35,231			$	(9,685	)
Income tax expense			15,357				15,440				(83	)
Interest income			(1,816	)			(1,428	)			388
Interest expense			1,880				2,067				(187	)
EBIT (1)			40,967				51,310				(10,343	)
Depreciation and amortization			4,357				2,798				1,559
EBITDA (1)		$	45,324			$	54,108			$	(8,784	)