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, 2007

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		(I.R.S. Employer Identification No.)
incorporation or organization)

142 West 57^th Street
New York, New York 10019-3000
(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 29,835,206 shares of common stock, par value $0.50 per share, outstanding as of July 30, 2007.

 

 

ARBITRON INC.

INDEX

		Page No.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets – June 30, 2007 and December 31, 2006			4
Consolidated Statements of Income – Three Months Ended June 30, 2007 and 2006			5
Consolidated Statements of Income – Six Months Ended June 30, 2007 and 2006			6
Consolidated Statements of Cash Flows – Six Months Ended June 30, 2007 and 2006			7
Notes to Consolidated Financial Statements – June 30, 2007			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
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 5. Other Information			34
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 WorldWi de^®, LocalMotion^®, Maximi$er^®, Maximi$er^® Plus, Arbitron PD Advantage^®, SmartPlus^®, Arbitron Portable People Meter^TM, Marketing Resources Plus^®, MRP^SM, PrintPlus^TM, MapMAKER Direct^SM, Media Professional^®, 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 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

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

		June 30,				December 31,
		2007				2006
		(unaudited)				(audited)
Assets
Current assets
Cash and cash equivalents		$	32,409			$	33,640
Short-term investments			38,850				27,625
Trade accounts receivable, net of allowance for doubtful accounts of $1,784 at June 30, 2007 and $1,419 at December 31, 2006			32,267				33,296
Inventory			2,265				3,793
Prepaid expenses and other current assets			5,270				4,167
Deferred tax assets			2,771				3,024
Total current assets			113,832				105,545
Investment in affiliates			13,908				13,907
Property and equipment, net of accumulated depreciation of $31,725 at June 30, 2007 and $29,120 at December 31, 2006			42,291				41,470
Goodwill, net			40,558				40,558
Other intangibles, net			1,570				2,029
Noncurrent deferred tax assets			5,934				5,913
Other noncurrent assets			766				898
Total assets		$	218,859			$	210,320
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		$	9,590			$	9,972
Accrued expenses and other current liabilities			17,542				33,258
Deferred revenue			66,495				66,875
Total current liabilities			93,627				110,105
Noncurrent liabilities			11,485				10,959
Total liabilities			105,112				121,064
Stockholders’ equity
Preferred stock, $100.00 par value, 750 shares authorized, no shares issued			—				—
Common stock, $0.50 par value, authorized 500,000 shares, issued 32,338 shares at June 30, 2007 and December 31, 2006			16,169				16,169
Additional paid-in capital			64,333				53,598
Accumulated earnings (net distributions to Ceridian in excess of accumulated earnings) prior to spin-off			(239,042	)			(239,042	)
Retained earnings subsequent to spin-off			280,153				266,905
Common stock held in treasury, 2,326 shares at June 30, 2007 and 2,646 shares on December 31, 2006			(1,163	)			(1,323	)
Accumulated other comprehensive loss			(6,703	)			(7,051	)
Total stockholders’ equity			113,747				89,256
Total liabilities and stockholders’ equity		$	218,859			$	210,320

See accompanying notes to consolidated financial statements.

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

		Three Months Ended
		June 30,
		2007				2006
Revenue		$	79,047			$	74,165
Costs and expenses
Cost of revenue			46,468				36,684
Selling, general and administrative			20,461				20,557
Research and development			11,830				10,031
Total costs and expenses			78,759				67,272
Operating income			288				6,893
Equity in net income of affiliates			5,089				5,053
Income before interest and income tax expense			5,377				11,946
Interest income			670				829
Interest expense			96				937
Income before income tax expense			5,951				11,838
Income tax expense			2,163				4,478
Net income		$	3,788			$	7,360
Net income per weighted-average common share
Basic		$	0.13			$	0.25
Diluted		$	0.13			$	0.24
Dividends declared per common share		$	0.10			$	0.10
Weighted-average common shares used in calculations
Basic			29,955				29,945
Potentially dilutive securities			309				125
Diluted			30,264				30,070

See accompanying notes to consolidated financial statements.

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

		Six Months Ended
		June 30,
		2007				2006
Revenue		$	170,824			$	159,253
Costs and expenses
Cost of revenue			78,718				60,939
Selling, general and administrative			40,818				40,013
Research and development			22,567				20,012
Total costs and expenses			142,103				120,964
Operating income			28,721				38,289
Equity in net income of affiliates			1,333				2,678
Income before interest and income tax expense			30,054				40,967
Interest income			1,251				1,816
Interest expense			191				1,880
Income before income tax expense			31,114				40,903
Income tax expense			11,831				15,357
Net income		$	19,283			$	25,546
Net income per weighted-average common share
Basic		$	0.65			$	0.84
Diluted		$	0.64			$	0.83
Dividends declared per common share		$	0.20			$	0.20
Weighted-average common shares used in calculations
Basic			29,852				30,500
Potentially dilutive securities			271				152
Diluted			30,123				30,652

See accompanying notes to consolidated financial statements.

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

		Six Months Ended
		June 30
		2007				2006
Cash flows from operating activities
Net income		$	19,283			$	25,546
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization of property and equipment			4,933				3,455
Amortization of intangible assets			459				902
Loss on asset disposals			191				177
Asset impairment charges			—				638
Deferred income taxes			18				663
Equity in net income of affiliates			(1,333	)			(2,678	)
Distributions from affiliates			4,500				3,950
Bad debt expense			505				470
Non-cash share-based compensation			3,473				3,775
Changes in operating assets and liabilities
Trade accounts receivable			448				(965	)
Prepaid expenses and other assets			(863	)			(131	)
Inventory			1,528				(4,074	)
Accounts payable			372				(966	)
Accrued expense and other current liabilities			(15,285	)			(7,269	)
Deferred revenue			542				1,884
Other noncurrent liabilities			976				740
Net cash provided by operating activities			19,747				26,117
Cash flows from investing activities
Additions to property and equipment			(10,314	)			(9,846	)
Investment in affiliates			(954	)			—
Purchases of short-term investments			(140,195	)			(276,565	)
Proceeds from sales of short-term investments			128,970				309,175
Net cash (used in) provided by investing activities			(22,493	)			22,764
Cash flows from financing activities
Proceeds from stock option exercises and stock purchase plan			11,118				5,396
Stock repurchases			(5,175	)			(68,529	)
Tax benefits realized from share-based awards			1,483				722
Dividends paid to stockholders			(5,994	)			(6,208	)
Net cash provided by (used in) financing activities			1,432				(68,619	)
Effect of exchange rate changes on cash and cash equivalents			83				197
Net decrease in cash and cash equivalents			(1,231	)			(19,541	)
Cash and cash equivalents at beginning of year			33,640				40,848
Cash and cash equivalents at end of year		$	32,409			$	21,307

See accompanying notes to consolidated financial statements.

ARBITRON INC.
Notes to Consolidated Financial Statements
June 30, 2007
(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, 2006 was audited at that date, but all of the information and footnotes as of December 31, 2006 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, 2006.

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. New Accounting Pronouncements

          In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), an interpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. The Company adopted FIN 48, effective January 1, 2007. The impact of applying FIN 48 to the Company’s consolidated financial statements was immaterial. For further disclosure, see Note 12-Taxes.

          Effective December 31, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (“SFAS No. 158”). Arbitron currently measures plan assets and benefit obligations as of September 30 each year. In accordance with the provisions of SFAS No. 158, the measurement date will be required to be as of the date of the Company’s fiscal year-end statement of financial position effective for fiscal years ending after December 15, 2008.

          In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The management of the Company is evaluating the impact of SFAS No. 157, but does not currently expect the adoption of SFAS No. 157, effective January 1, 2008, to have a material impact on the Company’s consolidated financial statements.

          In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), which permits companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The management of the Company is evaluating the potential impact of SFAS No. 159 on the Company’s consolidated financial statements.

3.

Long-term Debt

          On October 18, 2006, the Company prepaid its outstanding senior-secured notes obligation using $50.0 million of its available cash and short-term investments. Under the original terms of the note agreement, the notes carried a fixed interest rate of 9.96% and a maturity date of January 31, 2008.

          On December 20, 2006, the Company entered into an agreement with a consortium of lenders to provide up to $150.0 million of financing to the Company through a five-year, unsecured revolving credit facility (the “2006 Credit Facility”). The agreement contains an expansion feature for the Company to increase the financing available under the 2006 Credit Facility up to $200.0 million. As of June 30, 2007, no borrowings had been made under the 2006 Credit Facility. As of June 30, 2007, and December 31, 2006, the Company was in compliance with the terms of its 2006 Credit Facility.

          Although the Company had no borrowings under the 2006 Credit Facility as of June 30, 2007, if a default occurs on future 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 could elect to declare all of the then outstanding borrowings, as well as accrued interest and fees, to be immediately due and payable. In addition, a default could result in the application of higher rates of interest on any amounts due.

          Interest paid during each of the six-month periods ended June 30, 2007, and 2006 was approximately $0.1 million and $1.2 million, respectively. Noncash amortization of deferred financing costs classified as interest expense during the three month periods ended June 30, 2007, and 2006, were each less than $0.1 million. Noncash amortization of deferred financing costs classified as interest expense during the six-month periods ended June 30, 2007 and 2006, was less than $0.1 million and $0.1 million, respectively.

4.

Stockholders’ Equity

          Changes in stockholders’ equity for the six months ended June 30, 2007, 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, 2006			29,692			$	16,169			$	(1,323	)		$	53,598			$	(239,042	)		$	266,905			$	(7,051	)		$	89,256
Net income			—				—				—				—				—				19,283				—				19,283
Common stock issued			427				—				213				10,901				—				—				—				11,114
Stock repurchased			(107	)			—				(53	)			(5,122	)			—				—				—				(5,175	)
Excess tax benefit from stock option exercises			—				—				—				1,483				—				—				—				1,483
Non-cash compensation			—				—				—				3,473				—				—				—				3,473
Dividends declared			—				—				—				—				—				(6,035	)			—				(6,035	)
Other comprehensive income			—				—				—				—				—				—				348				348
Balance as of June 30, 2007			30,012			$	16,169			$	(1,163	)		$	64,333			$	(239,042	)		$	280,153			$	(6,703	)		$	113,747

          A quarterly cash dividend of $0.10 per common share was paid to stockholders on July 2, 2007.

5.

Short-term Investments

          Short-term investments as of June 30, 2007, and December 31, 2006, consisted of $38.9 million and $27.6 million, respectively, in municipal and other government-issued variable-rate demand notes and auction-rate securities recorded by the Company at fair value. 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 months ended June 30, 2007 and 2006, gross purchases of available-for-sale securities were $47.0 million and $54.1 million, respectively, and gross proceeds from sales of available-for-sale securities were $47.5 million and $92.6 million for the three months ended June 30, 2007 and 2006, respectively.

          For the six months ended June 30, 2007 and 2006, gross purchases of available-for-sale securities were $140.2 million and $276.6 million, respectively, and gross proceeds from sales of available-for-sale securities were $129.0 million and $309.2 million for the six months ended June 30, 2007 and 2006, respectively.

6.

Inventory

          Inventory as of June 30, 2007, and December 31, 2006, consisted of $2.3 million and $3.8 million, respectively, of Portable People Meter^TM equipment held for resale to international licensees of the PPM^TM service. The inventory is accounted for on a first-in, first-out (FIFO) basis.

7.

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, 2007 and 2006, 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 all stock options are used to repurchase the Company’s common stock at the average market price for the period. As of June 30, 2007, and 2006, there were options to purchase 1,929,584 and 2,514,252 shares of the Company’s common stock outstanding, of which options to purchase 13,291 and 1,427,187 shares of the Company’s common stock, respectively, 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. The Company elected to use the short-cut method of determining its initial hypothetical tax benefit windfall pool and, in accordance with provisions under SFAS No. 123R, Share Based Payment, (“SFAS No. 123R”) the assumed proceeds associated with the entire amount of tax benefits for share-based awards granted prior to SFAS No. 123R adoption were used in the diluted shares computation. For share-based awards granted subsequent to the January 1, 2006 SFAS No. 123R adoption date, the assumed proceeds for the related excess tax benefits were used in the diluted shares computation.

          On November 16, 2006, Arbitron announced that its Board of Directors had authorized a program to repurchase up to $100.0 million of its outstanding common stock through either periodic open-market or private transactions at then-prevailing market prices over a period of two years through December 31, 2008. As of June 30, 2007, 106,600 shares of the Company’s common stock were repurchased under this program for $5.2 million.

8.

Contingencies

          The Company is involved, from time to time, in litigation and proceedings arising in 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 of the Company 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 to $3.9 million as of June 30, 2007.

          Currently, the Company continues to contest the assessment in its entirety. Consistent with the findings of a previous Pennsylvania sales tax audit of the Company, 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. The Commonwealth of Pennsylvania has denied the Company’s administrative appeals, and the dispute was submitted to the Commonwealth Court of Pennsylvania for consideration. Currently, the Company is discussing settlement options with the Office of Attorney General in an effort to avoid protracted litigation and the related costs and has offered to settle the disputed matter. As of June 30, 2007, the Office of Attorney General has not yet responded to the Company’s offer.

          Given the nature of this uncertainty, and the pending settlement offer, $0.5 million was recognized during the quarter ended June 30, 2007, in accordance with FAS No. 5 “Accounting for Contingencies.”

9.

Comprehensive Income and Accumulated Other Comprehensive Loss

          The Company’s comprehensive income is comprised of net income, changes in foreign currency translation adjustments, and changes in defined benefit plan liabilities, 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,
		2007				2006				2007				2006
Net income		$	3,788			$	7,360			$	19,283			$	25,546
Other comprehensive income:
Change in foreign currency translation adjustment, net of tax expense of $35 and $76 for the three months ended June 30, 2007 and 2006, respectively; and $43 and $89 for the six months ended June 30, 2007 and 2006, respectively			56				123				68				145
Change in defined benefit plan liabilities, net of tax expense of $175 and $171 for the three and six months ended June 30, 2007, respectively			276				—				280				—
Other comprehensive income			332				123				348				145
Comprehensive income		$	4,120			$	7,483			$	19,631			$	25,691

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

		June 30,				December 31,
		2007				2006
Foreign currency translation adjustment		$	408			$	340
Defined benefit plan liabilities			(7,111	)			(7,391	)
Accumulated other comprehensive loss		$	(6,703	)		$	(7,051	)

      Effective December 31, 2006, the Company adopted Statement of Financial Acounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132 (R) (“SFAS No. 158”). The provisions of SFAS No. 158 require that the funded status of the Company’s pension plans and the benefit obligations of the Company’s post-retirement benefit plans be recognized in the Company’s balance sheet. Appropriate adjustments were made to various assets and liabilities as of December 31, 2006, with an offsetting after-tax effect of $7.1 million recorded as a component of other comprehensive income rather than as an adjustment to the ending balance of accumulated other comprehensive income.

      Excluding the impact of the adoption of SFAS No. 158, total other comprehensive income for the year ended December 31, 2006 was $54.1 million after-tax, compared with the reported other comprehensive income of $47.0 million after-tax. The presentation of other comprehensive income for the year ended December 31, 2006 will be revised to exclude the impact of the adoption of SFAS No. 158 in the Company’s Annual Report on Form 10-K for the year ending December 31, 2007.

10.

Investment in Affiliates

          Investment in affiliates consists of the Company’s 49.5% interest in Scarborough Research (“Scarborough”), a syndicated, qualitative local market research partnership, and the Company’s 50.0% interest in Project Apollo LLC ( “Project Apollo”), a national marketing panel service pilot jointly owned by the Company and Nielsen Media Research. On February 1, 2007, the Company announced the formation of Project Apollo. Project Apollo’s objective is to test a proposed service that would provide multimedia exposure data combined with sales data from a single source to produce a measure of advertising effectiveness. The following table shows the investment activity for each of the Company’s affiliates and in total for 2007: (Note: Scarborough was the only affiliate owned by the Company during 2006.)

Summary of Investment Activity in Affiliates (in thousands)

		Three Months Ended June 30, 2007												Six Months Ended June 30, 2007
						Project												Project
		Scarborough				Apollo				Total				Scarborough				Apollo				Total
Beginning Balance		$	7,929			$	1,086			$	9,015			$	13,907			$	—			$	13,907
Proportionate share of income(loss)			5,763				(674	)			5,089				3,135				(1,802	)			1,333
Distributions from affiliates			(1,150	)			—				(1,150	)			(4,500	)			—				(4,500	)
Non-cash investments in affiliates			—				—				—				—				2,214				2,214
Cash investments in affiliates			—				954				954				—				954				954
Ending Balance at June 30, 2007		$	12,542			$	1,366			$	13,908			$	12,542			$	1,366			$	13,908

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 healthcare benefits for eligible retired employees who participate in the pension plan and were hired before January 1, 1992. Arbitron also sponsors two nonqualified, unfunded supplemental retirement plans.

          In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, (“SFAS No. 158”) which required the Company to recognize the underfunded status of its defined-benefit plans as a liability on the balance sheet as of December 31, 2006, and to recognize any changes in that funded status through comprehensive income. Arbitron currently measures plan assets and benefit obligations as of September 30 each year. Effective for fiscal years ending after December 15, 2008, the measurement date, in accordance with the provisions of SFAS No. 158, will be required to be as of the date of the Company’s fiscal year-end statement of financial position.

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

		Defined-Benefit								Postretirement								Supplemental
		Pension Plan								Plan								Retirement Plans
		Three Months								Three Months								Three Months
		Ended June 30,								Ended June 30,								Ended June 30,
		2007				2006				2007				2006				2007				2006
Service cost		$	218			$	242			$	9			$	8			$	32			$	7
Interest cost			445				413				21				17				52				40
Expected return on plan assets			(552	)			(494	)			—				—				—				—
Amortization of prior service cost			5				5				—				—				(5	)			(5	)
Amortization of net loss			166				180				11				5				48				30
Net periodic benefit cost		$	282			$	346			$	41			$	30			$	127			$	72

		Defined-Benefit								Postretirement								Supplemental
		Pension Plan								Plan								Retirement Plans
		Six Months								Six Months								Six Months
		Ended June 30,								Ended June 30,								Ended June 30,
		2007				2006				2007				2006				2007				2006
Service cost		$	435			$	483			$	18			$	17			$	65			$	43
Interest cost			890				826				42				33				105				81
Expected return on plan assets			(1,103	)			(988	)			—				—				—				—
Amortization of prior service cost			11				11				—				—				(11	)			(11	)
Amortization of net loss			331				359				23				10				96				64
Net periodic benefit cost		$	564			$	691			$	83			$	60			$	255			$	177

          Arbitron estimates that it will contribute $2.4 million in 2007 to these defined-benefit plans.

12. Taxes

          On January 1, 2007, Arbitron adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. In applying FIN 48, the Company assessed all material positions taken on income tax returns for years through December 31, 2006, that are still subject to examination by relevant taxing authorities. As of the date of adoption, the Company’s unrecognized tax benefits totaled $0.7 million. If recognized, the $0.7 million would reduce the Company’s effective tax rate in future periods.

          The Company files numerous income tax returns, primarily in the United States, including federal, state, and local jurisdictions, and certain foreign jurisdictions. Tax years ended December 31, 2003 through December 31, 2006, remain open for assessment by the Internal Revenue Service. Generally, the Company is not subject to state, local, or foreign examination for years prior to 2002. However, tax years 1989 through 2001 remain open for assessment for certain state taxing jurisdictions where net operating loss (“NOL”) carryforwards were utilized on the income tax returns since 2002. The Company accrues potential interest and penalties and recognizes income tax expense where, under relevant tax law, interest and penalties would be assessed if the uncertain tax position ultimately were not sustained.

          Management determined it is reasonably possible that certain unrecognized tax benefits as of the date of adoption will decrease during the subsequent 12 months due to the expiration of statutes limitations and due to the settlement of certain state audit examinations. The estimated decrease in these unrecognized federal tax benefits and the estimated decrease in unrecognized tax benefits from various states are both immaterial.

          Income taxes paid for the six months ended June 30, 2007 and 2006, were $12.7 million and $15.0 million, respectively.

13. Share-Based Compensation

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

		Three Months				Three Months				Six Months				Six Months
		Ended June 30,				Ended June 30,				Ended June 30,				Ended June 30,
		2007				2006				2007				2006
Cost of revenue		$	182			$	182			$	316			$	313
Selling, general and administrative			1,852				2,047				2,941				3,238
Research and development			139				126				216				224
Share-based compensation		$	2,173			$	2,355			$	3,473			$	3,775

     There was no capitalized share-based compensation cost incurred during the three and six-month periods ended June 30, 2007, and 2006.

     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-month periods ended June 30, 2007, would have been lower by $0.1 million and $0.3 million, respectively, and for the same periods of 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 Stock Incentive Plans (each individual plan referred to herein as a “SIP,” and collectively as the “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 after the date of grant, 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 of the Company (as defined in the SIPs).

     The Company uses historical data to estimate option exercises and employee terminations in order to determine the expected term of the option; identified groups of optionholders 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 optionholders 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 to employees and nonemployee directors during the six months ended June 30, 2007, was estimated on the date of grant using a Black-Scholes option valuation model. Those assumptions along with other data regarding the Company’s stock options for the three and six months ended June 30, 2007, and 2006, are noted in the following table:

Assumptions for options		Three Months		Three Months		Six Months		Six Months
granted to employees and		Ended June 30,		Ended June 30,		Ended June 30,		Ended June 30,
nonemployee directors		2007		2006		2007		2006
Expected volatility		24.95 - 26.24%		27.22 - 27.35%		24.95 - 26.52%		27.22 - 27.35%
Expected dividends		1.00%		1.00%		1.00%		1.00%
Expected term (in years)		5.75 - 6.25		5.25 - 6.00		5.75 - 6.25		5.25 - 6.00
Risk-free rate		4.62 - 4.91%		4.96 - 5.07%		4.56 - 4.91%		4.37 - 5.07%
Weighted-average volatility		25.39%		27.34%		25.45%		27.33%
Weighted-average term (in years)		5.92		5.52		5.91		5.74
Weighted-average risk-free rate		4.62%		4.99%		4.62%		4.70%
Weighted-average grant date fair value		$14.82		$12.73		$14.79		$12.56

		Three Months				Three Months				Six Months				Six Months
		Ended June 30,				Ended June 30,				Ended June 30,				Ended June 30,
Other data		2007				2006				2007				2006
Options granted			151,291				158,522				158,610				299,113
Weighted average exercise price for options granted		$	48.26			$	40.09			$	48.15			$	39.51

     As of June 30, 2007, there was $2.5 million of total unrecognized compensation cost related to options granted under the SIPs. This aggregate unrecognized cost is expected to be recognized over a weighted-average period of 1.9 years. The weighted-average exercise price and weighted-average remaining contractual term for outstanding stock options as of June 30, 2007, was $38.04 and 6.57 years, respectively. The total intrinsic value of options exercised during the three months ended June 30, 2007, and 2006, was $2.7 million and $0.7 million, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2007, and 2006, was $4.1 million and $1.9 million, respectively.

Nonvested Share Awards

     The Company’s nonvested share awards generally vest over four or five years on either a monthly or annual basis. Compensation expense is recognized on a straight-line basis using the market price on the date of grant as the awards vest. For the six months ended June 30, 2007, and 2006, the number of nonvested share awards granted was 113,233 and 79,482 shares, respectively, and the weighted-average grant date fair value was $46.33 and $38.88, respectively. The total fair value of share awards vested during the six months ended June 30, 2007, and 2006, was $0.6 million and $0.1 million, respectively. For the three months ended June 30, 2007, the number of nonvested share awards granted was 10,933 shares and the weighted average grant date fair value was $48.25. There were no nonvested share awards granted during the three months ended June 30, 2006. The total fair value of share awards vested during the three months ended June 30, 2007, and 2006, was $0.1 million and less than $0.1 million, respectively. As of June 30, 2007, there was $7.3 million of total unrecognized compensation cost related to nonvested share awards granted under the SIPs. This aggregate unrecognized cost for nonvested share awards is expected to be recognized over a weighted-average period of 3.1 years.

Deferred Stock Units

     Deferred stock units granted to employees vest annually over a three-year period and are convertible to shares of common stock, subsequent to their termination of employment. Deferred stock units granted to nonemployee directors vest immediately upon grant and are convertible into shares of common stock subsequent to the directors’ termination of service. For the six months ended June 30, 2007, the number of deferred stock units granted to employee and nonemployee directors was 21,667 and 2,384 shares, respectively. For the six months ended June 30, 2006, the number of deferred stock units granted to employee and nonemployee directors was 18,186 and 3,915 shares, respectively. The total fair value of deferred stock units that vested during the six months ended June 30, 2007, and 2006, was $0.1 million and $0.1 million, respectively. As of June 30, 2007, the total unrecognized compensation cost related to deferred stock units granted under the SIPs was $1.5 million. The aggregate unrecognized cost as of June 30, 2007, is expected to be recognized over a weighted-average period of 2.5 years.

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 $0.1 million for each of the three-month periods ended June 30, 2007, and 2006, respectively. The number of ESPP shares issued during the three months ended June 30, 2007, and 2006, was 9,095 and 10,268 shares, respectively. The total amount of compensation expense recognized for ESPP share-based arrangements was $0.2 million and $0.1 million for the six-month periods ended June 30, 2007, and 2006, respectively. The number of ESPP shares issued during the six months ended June 30, 2007, and 2006, was 17,377 and 19,746 shares, respectively.

14. Concentration of Credit Risk

     Arbitron’s quantitative radio audience measurement service and related software sales, which are primarily provided to radio broadcasters, accounted for approximately 76% and 78% of the Company’s revenue for the three months ended June 30, 2007, and 2006, and 86% and 87% for the six months ended June 30, 2007 and 2006, respectively. Arbitron had one customer that individually represented 19% of its revenue for the year ended December 31, 2006. Arbitron routinely assesses the financial strength of its customers and has experienced only nominal losses on its trade accounts receivable.

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 thereto in this Quarterly Report on 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,” “our,” “Arbitron” or the “Company”) in this document that are not historical in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “likely,” “expects,” “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, in no particular order, whether we will be able to:

	•		successfully implement the rollout of our Portable People MeterTM service;
	•		renew contracts with large customers as they expire;
	•		successfully execute our business strategies, including entering into potential acquisition, joint-venture or other material third-party agreements;
	•		effectively manage the impact of any further ownership shifts in the radio and advertising agency industries;
	•		respond to 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;
	•		successfully develop and implement technology solutions to measure multi-media and advertising in an increasingly competitive environment; and
	•		successfully obtain and/or maintain Media Rating Council® accreditation for our audience measurement services.

     Additional important factors known to Arbitron that could cause actual results to differ materially from our forward-looking statements 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, 2006.

     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 information services firm primarily serving radio, cable television, advertising agencies, advertisers, out-of-home media, online media and, through its Scarborough Research joint venture with The Nielsen Company, broadcast television and print media.

     Arbitron currently provides four main services:

	•		measuring radio audiences in local markets in the United States;
	•		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, out-of-home media, online industries and, through its Scarborough Research joint venture with The Nielsen Company, broadcast television and print media.

Known Trends That Management Considers Material

     Significant Concentrations. Historically, the Company’s quantitative radio measurement services and related software have accounted for a substantial majority of its total revenues. Consolidation in the radio broadcasting industry has led to a concentration of ownership of radio stations and, consequently, Arbitron’s dependence on a limited number of key customers for such services and related software has increased. For the year ended December 31, 2006, Clear Channel Communications, Inc. (“Clear Channel”) and CBS Radio Inc. (“CBS Radio”) represented approximately 19 percent and nine percent, respectively, of Arbitron’s total revenue. The Company’s agreements with these customers are not exclusive and do not contain automatic renewal obligations.

     On June 26, 2007 Arbitron entered into a new multi-year agreement with Clear Channel to provide PPM radio ratings and other related services to Clear Channel’s 268 radio stations located in the 46 markets in which Clear Channel operates out of the 50 markets identified in the Company’s previously announced PPM roll-out plan (we refer to the 46 markets in which Clear Channel operates that are included in the PPM roll-out plan, collectively, as the “Clear Channel PPM Markets”). Pursuant to the terms of the agreement, Arbitron will provide Clear Channel with PPM ratings services, as and when the new audience ratings technology is deployed in the Clear Channel PPM Markets. Until such time as the PPM ratings technology is deployed in a particular market, the Company will continue to provide Clear Channel with its diary-based ratings services in that market. As the PPM ratings technology is deployed in a particular market, the diary-based ratings agreement will lapse and the new agreement will become applicable to such market. The new agreement also extends the diary-based ratings agreement in the Clear Channel PPM Markets that do not enter into PPM pre-currency prior to December 31, 2008 until such time as the PPM service is commercialized in those markets, but not later than December 31, 2011. The existing agreement between the Company and Clear Channel for diary-based ratings in markets outside of the Clear Channel PPM Markets is not amended by the new agreement and is currently scheduled to expire December 31, 2008.

     On February 9, 2007, The Media Audit/Ipsos announced that they will receive funding from a number of broadcasters, including Clear Channel, to test their competing electronic ratings system in the Houston market.

     In May 2006, Arbitron announced that it had entered into a license agreement with CBS Radio to provide diary-based services and PPM radio ratings to all of its stations, as the new ratings technology is deployed, through the first quarter of 2014.

     Arbitron’s quantitative radio audience measurement business and related software sales accounted for approximately 76% and 86% of its revenue for the three and six months ended June 30, 2007, respectively. The Company expects that for the year ended December 31, 2007, 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 the Company’s radio audience measurement business.

     Electronic Measurement Initiatives. Arbitron has begun execution of its plan to progressively roll out its PPM ratings service to the top 50 radio markets by the end of 2010. Measurement by the PPM service began in pilot mode in Houston in June 2005. In January 2007, the Houston methodology was accredited by the Media Rating Council (“MRC”). In July 2007, the PPM service replaced the diary-based service in Houston.

     A PPM panel was installed in Philadelphia beginning in August 2006. The Philadelphia PPM radio measurement data have been audited by the MRC. On the basis of the completion of this audit, the sharing of the audit results with the MRC’s audit committee, and the completion of a two-month precurrency period for training and electronic measurement transition, the PPM service in Philadelphia replaced the diary service in April 2007. The Philadelphia PPM data are not yet accredited — the process of obtaining accreditation continues. Commercialization of the remaining top 50 radio markets by the end of 2010 is currently on schedule with Arbitron’s previously announced rollout plan.

     Currently, approximately 26,000 panelists have been installed worldwide for PPM-supported services, including the PPM radio ratings service, and through the Project Apollo LLC (“Project Apollo”), a jointly owned limited liability company with Nielsen Media Research, Inc. to explore the feasibility of the commercialization of a national marketing service panel.

     Commercialization of the PPM radio rating service and exploration of other strategic applications of the PPM technology, including the national marketing panel service, will require a substantial financial investment. Arbitron believes that during the PPM rollout period its costs and expenses will increase and substantial capital expenditures will be required. In addition, the management of Arbitron expects that, if the decision to commercialize the national market panel service is made, Arbitron’s expenses will increase as a result of continued deployment costs associated with the national marketing panel service and the strategic development of its electronic ratings business.

     Arbitron believes that, while commercialization of the PPM ratings service and other strategic applications of the PPM technology will have a near-term negative impact on its results of operations, which impact likely will be material, its operating margins can be restored through the completion of the PPM transition process in the top 50 radio markets, although there can be no assurance that this will be the case.

     Arbitron announced in April 2007 that broadcasters in Iceland have selected the PPM system as the audience measurement currency system for both radio and television, making Iceland the first country to use the PPM system’s multimedia measurement capabilities. The six-year contract was awarded to the Reykjavik-based research and consulting firm Capacent, supported by TNS Norway, through a competitive request for proposals for electronic audience measurement. Arbitron announced in June 2007 that the radio industry in Denmark selected the PPM system as its electronic audience measurement system. The five-year contract was awarded to TNS Gallup, an international licensee of the PPM technology. Beginning January 2008, a national panel of 750 Danish consumers will be equipped with the PPM device to collect overnight radio-listening data. Danish broadcasters will use the PPM data for commercial sales and program planning.

     One of Arbitron’s key corporate strategy objectives is to expand its information services to a broader range of media types, including broadcast television, cable, out-of-home media, satellite radio and television, Internet broadcasts and mobile media. On July 23, 2007, the MRC accredited the average-quarter-hour, time-period television ratings data produced by the PPM ratings service in Houston. The PPM service in Houston is the first accredited portable meter service, collecting data on radio, local television and cable use from one sample of consumers, at home and away from home.

Response Rates and Sample Proportionality

     Arbitron must achieve response rates sufficient to maintain confidence in its ratings, the support of the industry and accreditation by the Media Rating Council. Consistent with general industry trends, overall response rates have declined over the past several years, and it has become increasingly difficult and more costly for the Company to obtain consent from persons to participate in its surveys.

     Another 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 survey samples of young adults that match the percentage of this demographic group in the total population 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. As consumers adopt modes of telecommunication other than telephone landlines, such as mobile phones and cable or Internet calling, it is becoming increasingly difficult for Arbitron to reach and recruit participants. Recruiting mobile phone-only households will lead to increased costs.

     Arbitron has committed extensive efforts and resources to address the decline of response rates and to maintain sample proportionality, including a comprehensive set of initiatives to bolster response rates and improve sample proportionality among African-American, Hispanic, and young male respondents in Arbitron’s diary-based markets. These initiatives include providing for substantial increases in cash incentives and other survey treatments. The most significant response rate initiatives in 2007 include the completion of the rollout of the 2006 response rate and proportionality action plan and the opening of a third Arbitron owned and operated participant interviewing center during the first quarter of 2007. Arbitron’s experience is that the internal interviewing centers outperform the outsourced calling center vendors that they replace. Management believes that significant additional expenditures will be required in the future with respect to response rates and sample proportionality.

     As the PPM service is rolled out, Arbitron’s management expects to incur similar challenges in the operation of an electronic measurement service, as are faced in the Company’s diary-based service; including those challenges related to response rate and sample proportionality. Arbitron also expects that additional measures to address these challenges will be implemented and require expenditures incremental to those required for its diary-based service.

Pennsylvania Sales Tax Assessment

     During 2005, the Pennsylvania Department of Revenue concluded a sales tax audit of the Company 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 to $3.9 million as of June 30, 2007.

     Currently, the Company continues to contest the assessment in its entirety. Consistent with the findings of a previous Pennsylvania sales tax audit of the Company, 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. The Commonwealth of Pennsylvania has denied the Company’s administrative appeals, and the dispute was submitted to the Commonwealth Court of Pennsylvania for consideration. Currently, the Company is discussing settlement options with the Office of Attorney General in an effort to avoid protracted litigation and the related costs and has offered to settle the disputed matter. The Office of Attorney General has not yet responded to the Company’s offer.

     Given the nature of this uncertainty, and the pending settlement offer, $0.5 million was recognized during the quarter ended June 30, 2007, in accordance with FAS No. 5 “Accounting for Contingencies.”

New Accounting Pronouncements

     In July 2006, the FASB issued FASB Interpretation (“FIN”) 48, Accounting for Uncertainty in Income Taxes (“FIN 48"), an interpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold that a tax position is required to meet before being recognized in the financial statements. The Company adopted FIN 48, effective January 1, 2007. The impact of applying FIN 48 to the Company’s consolidated financial statements was immaterial.

     Effective December 31, 2006, the Company adopted SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (“SFAS No. 158”). Arbitron currently measures plan assets and benefit obligations as of September 30 each year. In accordance with the provisions of SFAS No. 158, the measurement date will be required to be as of the date of the Company’s fiscal year-end statement of financial position effective for fiscal years ending after December 15, 2008.

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The management of the Company is evaluating the impact of SFAS No. 157, but does not currently expect the adoption of SFAS No. 157, effective January 1, 2008, to have a material impact on the Company’s consolidated financial statements.

     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), which permits companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The management of the Company is evaluating the potential impact of SFAS No. 159 on the consolidated financial statements.

Critical Accounting Policies and Estimates

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

     Arbitron 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. As of June 30, 2007, and December 31, 2006, Arbitron’s capitalized software developed for internal use had carrying amounts of $19.9 million and $19.3 million, respectively, including $9.3 million and $9.0 million, respectively, of software related to the PPM system.

     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, interpretations 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 forecasts of the amount and nature of future taxable income. Actual operating results and the underlying amount and nature of income in future years could render current assumptions, judgments and estimates of recoverable net deferred 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, 2007 to the Three Months Ended June 30, 2006

     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)
(unaudited)

		Three Months Ended								Increase								Percentage of
		June 30,								(Decrease)								Revenue
		2007				2006				Dollars				Percent				2007				2006
Revenue		$	79,047			$	74,165			$	4,882				6.6	%			100.0	%			100.0	%
Costs and expenses
Cost of revenue			46,468				36,684				9,784				26.7	%			58.8	%			49.5	%
Selling, general and administrative			20,461				20,557				(96	)			(0.5	%)			25.9	%			27.7	%
Research and development			11,830				10,031				1,799				17.9	%			15.0	%			13.5	%
Total costs and expenses			78,759				67,272				11,487				17.1	%			99.6	%			90.7	%
Operating income			288				6,893				(6,605	)			(95.8	%)			0.4	%			9.3	%
Equity in net income of affiliates			5,089				5,053				36				0.7	%			6.4	%			6.8	%
Income before interest and income tax expense			5,377				11,946				(6,569	)			(55.0	%)			6.8	%			16.1	%
Interest income			670				829				(159	)			(19.2	%)			0.8	%			1.1	%
Interest expense			96				937				(841	)			(89.8	%)			0.1	%			1.3	%
Income before income tax expense			5,951				11,838				(5,887	)			(49.7	%)			7.5	%			16.0	%
Income tax expense			2,163				4,478				(2,315	)			(51.7	%)			2.7	%			6.0	%
Net income		$	3,788			$	7,360			$	(3,572	)			(48.5	%)			4.8	%			10.0	%
Net income per weighted-average common share
Basic		$	0.13			$	0.25			$	(0.12	)			(48.0	%)
Diluted		$	0.13			$	0.24			$	(0.11	)			(45.8	%)
Cash dividends declared per common share		$	0.10			$	0.10			$	—
Other data:
EBIT (1)		$	5,377			$	11,946			$	(6,569	)			(55.0	%)
EBITDA (1)		$	8,094			$	14,215			$	(6,121	)			(43.1	%)
EBIT and EBITDA Reconciliation (1)
Net income		$	3,788			$	7,360			$	(3,572	)
Income tax expense			2,163				4,478				(2,315	)
Interest income			(670	)			(829	)			(159	)
Interest expense			96				937				(841	)
EBIT (1)			5,377				11,946				(6,569	)
Depreciation and amortization			2,717				2,269				448
EBITDA (1)		$	8,094			$	14,215			$	(6,121	)

     Revenue. Revenue increased 6.6% for the three months ended June 30, 2007, as compared to the same period in 2006, due primarily to $5.2 million of increases related to the ratings subscriber base, contract renewals, and price escalations in multiyear customer contracts for Arbitron’s quantitative data license revenue, partially offset by a $0.4 million decrease in PPM International revenues.

     Cost of Revenue. Cost of revenue increased by 26.7% for the three months ended June 30, 2007, as compared to the same period in 2006. The increase in cost of revenue was primarily attributable to an $11.6 million increase in Arbitron’s quantitative, qualitative and software application services, which was comprised substantially of a $4.1 million increase in PPM rollout costs largely associated with the management and recruitment of the PPM panels for the Philadelphia, New York, Los Angeles, and Chicago markets; a $2.0 million increase in expenses associated with PPM ratings costs that were classified as research and development in 2006 and as cost of revenue in 2007; a $1.8 million increase in diary data collection and processing costs; a $1.2 million increase associated with response rate initiatives; a $1.4 million increase in royalties, substantially associated with our Scarborough affiliate; and a $0.7 million increase due to operating costs associated with the opening of a third participant interviewing center during the first quarter of 2007. These increases were partially offset by a $1.6 million decrease in Project Apollo costs, which, due to the formation of Project Apollo in February 2007, are now being expensed directly by the affiliate. Arbitron records its share of the net operating results of the affiliate through the equity in net income of affiliates line of the Company’s consolidated income statement. The management of Arbitron expects that Arbitron’s cost of revenue will continue to increase in the future as a result of its efforts to commercialize the PPM ratings service and support the rollout of this service over the next two to three years.

     Selling, General and Administrative. Selling, general and administrative expenses decreased slightly by 0.5% for the three months ended June 30, 2007, as compared to the same period in 2006. The decrease in selling, general and administrative expenses was due primarily to a $1.0 million decrease associated with lower incentive plan expenses and a $0.8 million decrease in sales and marketing costs resulting from cost saving initiatives related to the Company’s sales force, which were substantially offset by a $0.6 million increase in expenses for merger and acquisition advisory services incurred during the three months ended June 30, 2007, a $0.5 million increase related to the accrual of estimated settlement costs associated with a Pennsylvania sales tax assessment, and a $0.3 million increase in expenses and amortization related to the Company’s accounts receivable and contract management system that was implemented during June 2006.

     Research and Development. Research and development expenses increased 17.9% during the three months ended June 30, 2007, as compared to the same period in 2006. The increase in research and development expenses resulted primarily from a $1.5 million increase in expenses associated with Arbitron’s continued development of the next generation of its client software, a $1.1 million increase related to applications and infrastructure to support the PPM service, and a $0.7 million increase in expenses in support of the Company’s diary ratings service, substantially offset by a $2.0 million decrease in expenses associated with PPM ratings costs that were classified as research and development in 2006 and as cost of revenue in 2007.

     Equity in net income of affiliates. Equity in net income of affiliates (relating collectively to Arbitron’s Scarborough joint venture and jointly-owned Project Apollo) remained flat for the three months ended June 30, 2007, as compared to the same period in 2006. The formalization of Project Apollo occurred during February 2007. The purpose of Project Apollo is to complete the development and testing of the Project Apollo marketing research service and the expansion of the pilot panel to a full national service if the test results meet expectations and generate marketplace support. Arbitron’s increase in its share of Scarborough’s net income of $0.7 million was offset by a $0.7 million share of the Project Apollo loss for the three months ended June 30, 2007, as compared to the same period of 2006. Arbitron expects that its equity in net income of affiliates will continue to be adversely impacted due to the costs incurred during the testing of the national marketing research service. If the decision is made to commercialize the national marketing panel service, there will be significant costs incurred to increase the size of the panel to a commercial level. These cost increases will be incurred in advance of receiving expected revenue from the service.

     Interest Income. Interest income decreased 19.2% during the three months ended June 30, 2007, as compared to the same period in 2006 due to lower average cash and short-term investment balances.

     Interest Expense. Interest expense decreased 89.8% for the three months ended June 30, 2007, as compared to the same period in 2006, due to Arbitron’s prepayment of its $50.0 million senior-secured notes obligation on October 18, 2006.

     Income Tax Expense. The income tax rate for the three months ended June 30, 2007 was 36.3% as compared to 37.8% for the same period of 2006. The effective tax rate, excluding certain immaterial discrete items, was increased from 37.2% for the six months ended June 30, 2006 to 37.7% for the six months ended June 30, 2007, to reflect the increase in certain nondeductible expenses.

     Net Income. Net income decreased 48.5% for the three months ended June 30, 2007, as compared to the same period in 2006, due primarily to planned expenses required to build Arbitron’s PPM panels for the Philadelphia and New York markets, and to support the strategic development of Arbitron’s PPM ratings business.

     EBIT and EBITDA. Arbitron’s management believes that presenting EBIT and EBITDA, both non-GAAP financial measures, as supplemental information helps investors, analysts, and others, if they so choose, in understanding and evaluating Arbitron’s operating performance in some of the same manners that management does because EBIT and EBITDA exclude certain items that are not directly related to Arbitron’s core operating performance. Arbitron’s management references these non-GAAP financial measures in assessing current performance and making decisions about internal budgets, resource allocation and financial goals. EBIT is calculated by deducting net interest income from net income and adding back income tax expense to net income. EBITDA is calculated by deducting net interest income from net income and adding back income tax expense, and depreciation and amortization to net income. EBIT and EBITDA should not be considered substitutes either for net income, as indicators of 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 55.0% and EBITDA decreased 43.1% for the three months ended June 30, 2007, as compared to the same period in 2006, due primarily to planned expenses required to build Arbitron’s PPM panels for the Philadelphia and New York markets, and to support the strategic development of Arbitron’s PPM ratings business.

Comparison of the Six Months Ended June 30, 2007 to the Six Months Ended June 30, 2006

     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)
(unaudited)

		Six Months Ended								Increase								Percentage of
		June 30,								(Decrease)								Revenue
		2007				2006				Dollars				Percent				2007				2006
Revenue		$	170,824			$	159,253			$	11,571				7.3	%			100.0	%			100.0	%
Costs and expenses
Cost of revenue			78,718				60,939				17,779				29.2	%			46.1	%			38.3	%
Selling, general and administrative			40,818				40,013				805				2.0	%			23.9	%			25.1	%
Research and development			22,567				20,012				2,555				12.8	%			13.2	%			12.6	%
Total costs and expenses			142,103				120,964				21,139				17.5	%			83.2	%			76.0	%
Operating income			28,721				38,289				(9,568	)			(25.0	%)			16.8	%			24.0	%
Equity in net income of affiliates			1,333				2,678				(1,345	)			(50.2	%)			0.8	%			1.7	%
Income before interest and income tax expense			30,054				40,967				(10,913	)			(26.6	%)			17.6	%			25.7	%
Interest income			1,251				1,816				(565	)			(31.1	%)			0.7	%			1.1	%
Interest expense			191				1,880				(1,689	)			(89.8	%)			0.1	%			1.2	%
Income before income tax expense			31,114				40,903				(9,789	)			(23.9	%)			18.2	%			25.7	%
Income tax expense			11,831				15,357				(3,526	)			(23.0	%)			6.9	%			9.6	%
Net income		$	19,283			$	25,546			$	(6,263	)			(24.5	%)			11.3	%			16.1	%
Net income per weighted-average common share
Basic		$	0.65			$	0.84			$	(0.19	)			(22.6	%)
Diluted		$	0.64			$	0.83			$	(0.19	)			(22.9	%)
Cash dividends declared per common share		$	0.20			$	0.20			$	—
Other data:
EBIT (1)		$	30,054			$	40,967			$	(10,913	)			(26.6	%)
EBITDA (1)		$	35,447			$	45,324			$	(9,877	)			(21.8	%)
EBIT and EBITDA Reconciliation (1)
Net income		$	19,283			$	25,546			$	(6,263	)
Income tax expense			11,831				15,357				(3,526	)
Interest income			(1,251	)			(1,816	)			(565	)
Interest expense			191				1,880				(1,689	)
EBIT (1)			30,054				40,967				(10,913	)
Depreciation and amortization			5,393				4,357				1,036
EBITDA (1)		$	35,447			$	45,324			$	(9,877	)

     Revenue. Revenue increased 7.3% for the six months ended June 30, 2007, as compared to the same period in 2006, due primarily to $10.4 million of increases related to the ratings subscriber base, contract renewals, and price escalations in multiyear customer contracts for Arbitron’s quantitative data license revenue, a $0.9 million increase in Continental Research revenue, and a $0.4 million increase in PPM International revenue.

     Cost of Revenue. Cost of revenue increased by 29.2% for the six months ended June 30, 2007, as compared to the same period in 2006. The increase in cost of revenue was primarily attributable to an $19.3 million increase in Arbitron’s quantitative, qualitative and software application services, which was comprised substantially of a $6.8 million increase in PPM rollout costs largely associated with the management and recruitment of the PPM panels for the Philadelphia, New York, Los Angeles, and Chicago markets; a $3.7 million increase in expenses associated with PPM ratings costs that were classified as research and development in 2006 and as cost of revenue in 2007; a $2.4 million increase in diary data collection and processing costs; a $2.2 million increase associated with response rate initiatives; a $1.5 million increase due to operating costs associated with the opening of a third participant interviewing center during the first quarter of 2007; a $0.9 million increase associated with computer center costs and a $1.3 million increase in royalties, substantially associated with our Scarborough affiliate. These increases were partially offset by a $2.6 million decrease in Project Apollo costs, which, due to the formation of Project Apollo in February 2007, are now being expensed directly by the affiliate. Arbitron records its share of the net operating results of the affiliate through the equity in net income of affiliates line of the Company’s consolidated income statement. The management of Arbitron expects that Arbitron’s cost of revenue will continue to increase in the future as a result of its efforts to commercialize the PPM ratings service and support the rollout of this service over the next two to three years.

     Selling, General and Administrative. Selling, general and administrative expenses increased by 2.0% for the six months ended June 30, 2007, as compared to the same period in 2006. The increase in selling, general and administrative expenses was due primarily to a $1.2 million increase in expenses for merger and acquisition advisory services incurred during the six months ended June 30, 2007; a $0.9 million increase in expenses and amortization related to the Company’s accounts receivable and contract management system that was implemented during June 2006, and a $0.5 million increase related to the accrual of estimated settlement costs associated with a Pennsylvania sales tax assessment; substantially offset by a $1.0 million decrease associated with lower incentive plan expenses and a $0.9 million decrease in sales and marketing costs resulting from cost saving initiatives related to the Company’s sales force.

     Research and Development. Research and development expenses increased 12.8% during the six months ended June 30, 2007, as compared to the same period in 2006. The increase in research and development expenses resulted primarily from a $2.6 million increase in expenses associated with Arbitron’s continued development of the next generation of its client software, a $2.1 million increase related to applications and infrastructure to support the PPM service, and a $1.5 million increase associated with various U.S. Media Service development costs. These increases were substantially offset by a $3.7 million decrease in expenses associated with PPM ratings costs that were classified as research and development in 2006 and as cost of revenue in 2007.

     Equity in net income of affiliates. Equity in net income of affiliates (relating collectively to Arbitron’s Scarborough joint venture and jointly-owned Project Apollo) decreased 50.2% for the six months ended June 30, 2007, as compared to the same period in 2006. The formalization of Project Apollo occurred during February 2007. The purpose of Project Apollo is to complete the development and testing of the Project Apollo marketing research service and the expansion of the pilot panel to a full national service if the test results meet expectations and generate marketplace support. Arbitron’s $1.8 million share of the Project Apollo loss for the six months ended June 30, 2007, is the primary cause of the $1.3 million decrease in the equity in net income of affiliates for the six months ended June 30, 2007, as compared to the same period of 2006. Arbitron expects that its equity in net income of affiliates will continue to be adversely impacted due to the costs incurred during the testing of the national marketing research service. If the decision is made to commercialize the national marketing panel service, there will be significant costs incurred to increase the size of the panel to a commercial level. These cost increases will be incurred in advance of receiving expected revenue from the service.

     Interest Income. Interest income decreased 31.1% during the six months ended June 30, 2007, as compared to the same period in 2006 due to lower average cash and short-term investment balances, which were partially offset by higher interest rates.

     Interest Expense. Interest expense decreased 89.8% for the six months ended June 30, 2007, as compared to the same period in 2006, due to Arbitron’s prepayment of its $50.0 million senior-secured notes obligation on October 18, 2006.