United Online (UNTD) 10-Q 2007 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period Ended June 30, 2007
	Or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                         to

Commission file number 000-33367

UNITED ONLINE, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	77-0575839
(State or other Jurisdiction of	(I.R.S Employer Identification No.)
Incorporation or Organization)
21301 Burbank Boulevard,
Woodland Hills, California	91367
(Address of Principal Executive Office)	(Zip Code)

(818) 287-3000

(Registrant’s Telephone Number, Including Area Code)

Not applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 x  No o

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

Large accelerated filer x 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 x

There were 67,487,317 shares of the registrant’s common stock outstanding at July 31, 2007.

INDEX

PART I.		FINANCIAL INFORMATION
	Item 1.	Unaudited Condensed Consolidated Balance Sheets at June 30, 2007 and December 31, 2006	3
		Unaudited Condensed Consolidated Statements of Operations for the Quarters and Six Months Ended June 30, 2007 and 2006	4
		Unaudited Condensed Consolidated Statements of Comprehensive Income for the Quarters and Six Months Ended June 30, 2007 and 2006	5
		Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended June 30, 2007	6
		Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006	7
		Notes to the Unaudited Condensed Consolidated Financial Statements	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	34
	Item 4.	Controls and Procedures	35
PART II.		OTHER INFORMATION
	Item 1.	Legal Proceedings	36
	Item 1A.	Risk Factors	37
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
	Item 6.	Exhibits	49
SIGNATURES			51

In this document, “United Online,” the “Company,” “we,” “us” and “our” collectively refer to United Online, Inc. and its wholly-owned subsidiaries.

This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 based on our current expectations, estimates and projections about our operations, industry, financial condition and liquidity. Statements containing words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “may,” “will” or similar expressions constitute forward-looking statements. These forward-looking statements include, but are not limited to, statements about the markets in which we compete, our pay accounts, our product and service offerings, the advertising market, operating expenses, operating efficiencies, revenues, capital requirements, tax payments and our cash position. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The section entitled “Risk Factors” in this Quarterly Report on Form 10-Q and our other filings with the SEC set forth some of the important risk factors that may affect our business, financial position, results of operations and cash flows. Statements indicating factors that we believe may impact our results are not intended to be exclusive. We undertake no obligation to revise or update publicly any forward-looking statements, other than as required by law.

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PART I—FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

UNITED ONLINE, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

	June 30, 2007				December 31, 2006
Assets
Current assets:
Cash and cash equivalents		$	19,698			$	19,252
Short-term investments		171,703				143,110
Accounts receivable, net of allowance for doubtful accounts of $2,244 and $1,324 at June 30, 2007 and December 31, 2006, respectively		30,259				32,226
Deferred tax assets, net		10,102				11,705
Other current assets		16,055				13,426
Total current assets		247,817				219,719
Property and equipment, net		36,803				34,296
Deferred tax assets, net		60,966				59,655
Goodwill		132,712				133,018
Intangible assets, net		46,967				53,653
Other assets		4,373				2,678
Total assets		$	529,638			$	503,019
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	43,523			$	36,550
Accrued liabilities		27,711				39,547
Member redemption liability		18,126				15,835
Deferred revenue		61,207				53,121
Current portion of capital leases		17				17
Total current liabilities		150,584				145,070
Member redemption liability		4,691				4,154
Deferred revenue		4,432				3,227
Capital leases		5				13
Other liabilities		4,765				3,589
Total liabilities		164,477				156,053
Commitments and contingencies (see Note 9)
Stockholders’ equity:
Common stock		7				7
Additional paid-in capital		428,280				439,383
Accumulated other comprehensive loss		(183		)		(245		)
Accumulated deficit		(62,943		)		(92,179		)
Total stockholders’ equity		365,161				346,966
Total liabilities and stockholders’ equity		$	529,638			$	503,019

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

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UNITED ONLINE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

	Quarter Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Revenues	$	131,417		$	134,900		$	261,268		$	262,232
Operating expenses:
Cost of Revenues (including stock-based compensation, see Note 4)	30,409			31,146			59,656			61,036
Sales and marketing (including stock-based compensation, see Note 4)	42,712			46,137			88,737			89,556
Product development (including stock-based compensation, see Note 4)	13,065			13,385			26,536			26,201
General and administrative (including stock-based compensation, see Note 4)	16,900			17,422			32,389			33,668
Amortization of intangible assets	3,204			4,552			6,699			8,941
Restructuring charges	394			—			394			—
Total operating expenses	106,684			112,642			214,411			219,402
Operating income	24,733			22,258			46,857			42,830
Interest and other income, net	1,881			1,354			3,581			3,070
Interest expense	(372		)	(411		)	(732		)	(2,127		)
Income before income taxes	26,242			23,201			49,706			43,773
Provision for income taxes	10,034			11,616			20,470			20,537
Income before cumulative effect of accounting change	16,208			11,585			29,236			23,236
Cumulative effect of accounting change, net of tax	—			—			—			1,041
Net income	$	16,208		$	11,585		$	29,236		$	24,277
Basic net income per share:
Income before cumulative effect of accounting change	$	0.24		$	0.18		$	0.44		$	0.37
Cumulative effect of accounting change, net of tax	—			—			—			0.01
Basic net income per share	$	0.24		$	0.18		$	0.44		$	0.38
Diluted net income per share:
Income before cumulative effect of accounting change	$	0.23		$	0.18		$	0.43		$	0.36
Cumulative effect of accounting change, net of tax	—			—			—			0.01
Diluted net income per share	$	0.23		$	0.18		$	0.43		$	0.37
Shares used to calculate basic net income per share	66,685			63,782			66,159			63,150
Shares used to calculate diluted net income per share	69,351			65,955			68,719			65,425

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

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UNITED ONLINE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

	Quarter Ended June 30,					Six Months Ended June 30,
	2007			2006		2007			2006
Net income	$	16,208		$	11,585	$	29,236		$	24,277
Unrealized gain on short-term investments, net of tax of $6 and $48 for the quarter and six months ended June 30, 2007, respectively, and $28 and $23 for the quarter and six months ended June 30, 2006, respectively	9			42		73			26
Unrealized loss on derivative, net of tax of $(60) for the six months ended June 30, 2006	—			—		—			(83		)
Foreign currency translation	(13		)	9		(11		)	37
Comprehensive income	$	16,204		$	11,636	$	29,298		$	24,257

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

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UNITED ONLINE, INC.

UNAUDITED CONDENDSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

										Accumulated
						Additional				Other								Total
	Common Stock					Paid-In				Comprehensive				Accumulated				Stockholders’
	Shares		Amount			Capital				Income				Deficit				Equity
Balance at January 1, 2007	65,805			$	7		$	439,383			$	(245	)		$	(92,179	)		$	346,966
Exercises of stock options	897			—			6,837				—				—				6,837
Issuance of common stock through employee stock purchase plan	419			—			3,485				—				—				3,485
Vesting of restricted stock units	466			—			—				—				—				—
Repurchases of restricted stock	(125	)		—			—				—				—				—
Repurchases of common stock	—			—			(3,782		)		—				—				(3,782		)
Dividends paid on shares outstanding and restricted stock units	—			—			(28,174		)		—				—				(28,174		)
Stock-based compensation	—			—			6,821				—				—				6,821
Unrealized gain on short-term investments, net of tax	—			—			—				73				—				73
Foreign currency translation	—			—			—				(11		)		—				(11		)
Tax benefits from stock options	—			—			3,710				—				—				3,710
Net income	—			—			—				—				29,236				29,236
Balance at June 30, 2007	67,462			$	7		$	428,280			$	(183	)		$	(62,943	)		$	365,161

Theaccompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

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UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Six Months Ended June 30,
	2007			2006
Cash flows from operating activities:
Net income	$	29,236		$	24,277
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	16,678			18,993
Stock-based compensation	6,821			10,833
Provision for doubtful accounts	1,093			146
Deferred taxes	550			806
Tax benefits from stock options	3,710			3,570
Excess tax benefits from stock-based compensation	(2,533		)	(2,583		)
Cumulative effect of accounting change, net of tax	—			(1,041		)
Other	508			2,315
Changes in operating assets and liabilities (excluding the effects of acquisitions):
Accounts receivable	873			1,771
Other assets	(4,324		)	1,498
Accounts payable and accrued liabilities	(3,616		)	(9,355		)
Member redemption liability	2,829			870
Deferred revenue	9,292			876
Other liabilities	(71		)	(88		)
Net cash provided by operating activities	61,046			52,888
Cash flows from investing activities:
Purchases of property and equipment	(12,563		)	(13,953		)
Purchases of rights, patents and trademarks	—			(509		)
Purchases of short-term investments	(164,505		)	(180,309		)
Proceeds from maturities and sales of short-term investments	135,581			198,321
Cash paid for acquisitions, net of cash acquired	—			(60,528		)
Proceeds from sales of assets, net	21			—
Net cash used for investing activities	(41,466		)	(56,978		)
Cash flows from financing activities:
Payments on term loan	—			(54,209		)
Payments on capital leases	(8		)	(146		)
Proceeds from employee stock purchase plan	3,485			2,965
Proceeds from exercises of stock options	6,837			5,037
Repurchases of common stock	(3,782		)	(1,957		)
Payments for dividends	(28,174		)	(26,242		)
Excess tax benefits from stock-based compensation	2,533			2,583
Net cash used for financing activities	(19,109		)	(71,969		)
Effect of exchange rate changes on cash and cash equivalents	(25		)	24
Change in cash and cash equivalents	446			(76,035		)
Cash and cash equivalents, beginning of period	19,252			100,397
Cash and cash equivalents, end of period	$	19,698		$	24,362

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

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UNITED ONLINE, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

Description of Business

United Online, Inc. (“United Online” or the “Company”) is a leading provider of consumer Internet and media services through a number of brands, including Classmates, MyPoints, NetZero and Juno. The Company’s primary Content & Media services are social networking and online loyalty marketing. The Company’s primary Communications services are Internet access and email. On a combined basis, the Company’s Web properties attract a significant number of Internet users each month and the Company offers marketers a broad array of Internet advertising services as well as online market research and measurement services.

Basis of Presentation

The accompanying consolidated financial statements for the quarters and six months ended June 30, 2007 and 2006, which include United Online and its wholly-owned subsidiaries, are unaudited except for the balance sheet information at December 31, 2006, which is derived from the audited consolidated financial statements filed on March 1, 2007 with the Securities and Exchange Commission (“SEC”) in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The Company’s interim financial statements have been prepared in accordance with GAAP including those for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X issued by the SEC. Accordingly, they do not include all of the information and note disclosures required by GAAP for complete financial statements. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for any future periods.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2006 included in the Company’s Annual Report on Form 10-K filed on March 1, 2007 with the SEC.

Recent Accounting Pronouncements

Accounting for Uncertainty in Income Taxes

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income tax positions. This Interpretation requires that the Company recognize, in the consolidated financial statements, the impact of a tax position that is more

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likely than not to be sustained upon examination based on the technical merits of the position. The provisions of FIN 48 were effective for the Company beginning in the March 2007 quarter, with any cumulative effect of a change in accounting principle recorded as an adjustment to opening retained earnings. The implementation of FIN 48 did not have a material impact on the Company’s financial position, results of operations or cash flows.

Fair Value Measurements

In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, Fair Value Measurements, which clarifies the definition of 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 and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 will be effective for the Company on January 1, 2008. The Company is currently evaluating the impact of adopting SFAS No. 157 on its financial position, results of operations and cash flows.

Fair Value Option

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities 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 will be effective for the Company on January 1, 2008. The Company is currently evaluating the impact of adopting SFAS No. 159 on its financial position, results of operations and cash flows.

2.   BALANCE SHEET COMPONENTS

Short-Term Investments

Short-term investments consist of the following (in thousands):

	June 30, 2007
	Amortized Cost		Gross Unrealized Gains			Gross Unrealized Losses				Estimated Fair Value
U.S. corporate notes	$	—		$	—		$	—		$	—
Government agencies	171,794			42			(133		)	171,703
Total	$	171,794		$	42		$	(133	)	$	171,703

	December 31, 2006
	Amortized Cost		Gross Unrealized Gains			Gross Unrealized Losses				Estimated Fair Value
U.S. corporate notes	$	2,500		$	—		$	—		$	2,500
Government agencies	140,822			15			(227		)	140,610
Total	$	143,322		$	15		$	(227	)	$	143,110

Gross unrealized gains and losses are presented net of tax in accumulated other comprehensive income on the consolidated balance sheets. The Company had no material realized gains or losses from the sale of short-term investments in the quarters and six months ended June 30, 2007 and 2006.

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The following table summarizes the fair value and gross unrealized losses on the Company’s short-term investments, aggregated by type of investment instrument and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2007 and December 31, 2006 (in thousands):

	June 30, 2007
	Less than 12 Months						12 Months or Greater						Total
	Fair Value		Gross Unrealized Losses				Fair Value		Gross Unrealized Losses				Fair Value		Gross Unrealized Losses
U.S. corporate notes	$	—		$	—		$	—		$	—		$	—		$	—
Government agencies	43,134			(26		)	39,488			(107		)	82,622			(133		)
Total	$	43,134		$	(26	)	$	39,488		$	(107	)	$	82,622		$	(133	)

	December 31, 2006
	Less than 12 Months						12 Months or Greater						Total
	Fair Value		Gross Unrealized Losses				Fair Value		Gross Unrealized Losses				Fair Value		Gross Unrealized Losses
U.S. corporate notes	$	—		$	—		$	—		$	—		$	—		$	—
Government agencies	21,432			(5		)	22,568			(222		)	44,000			(227		)
Total	$	21,432		$	(5	)	$	22,568		$	(222	)	$	44,000		$	(227	)

The Company’s investment portfolio consists of both corporate and government securities, including auction rate securities, that have a maximum maturity of four years. Auction rate securities have long-term underlying maturities, typically 20 to 30 years, but have interest rates that are reset every 7, 28 or 35 days, at which time the securities can typically be purchased or sold, creating a highly liquid market. The Company’s investment policy permits investments in auction rate securities with a maximum reset date of one year. The Company’s intent is not to hold these securities to maturity, but rather to use the interest rate reset feature to provide liquidity as necessary. The Company’s investment in auction rate securities provides higher yields than money market and other cash equivalent investments. The longer the duration of securities in the investment portfolio, the more susceptible they are to changes in market interest rates and bond yields. As yields increase, those securities purchased with a lower yield-at-cost show a mark-to-market unrealized loss. All unrealized losses are due to changes in interest rates and bond yields.

Maturities of short-term investments were as follows (in thousands):

	June 30, 2007				December 31, 2006
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Maturing within 1 year	$	55,973	$	55,957	$	24,502	$	24,499
Maturing between 1 year and 4 years	39,791		39,720		34,930		34,781
Maturing after 4 years	76,030		76,026		83,890		83,830
Total	$	171,794	$	171,703	$	143,322	$	143,110

Accounts Receivable

At June 30, 2007, two customers comprised approximately 15% and 11% of the consolidated accounts receivable balance. At December 31, 2006, one customer comprised approximately 13% of the consolidated accounts receivable balance. For the quarters and six months ended June 30, 2007 and 2006, the Company did not have any individual customers that comprised more than 10% of total revenues.

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Other Current Assets

Other current assets consist of the following (in thousands):

	June 30,		December 31,
	2007		2006
Prepaid expenses	$	10,140		$	8,696
Inventory	2,254			2,644
Interest receivable	2,030			1,379
Other	1,631			707
Total	$	16,055		$	13,426

Goodwill and Intangible Assets

The change in goodwill for the six months ended June 30, 2007 was as follows (in thousands):

Balance at December 31, 2006	$	133,018
Reduction of acquired deferred tax assets	(306		)
Balance at June 30, 2007	$	132,712

The adjustment to goodwill was primarily due to an increase in deferred tax assets for tax benefits associated with expense deductions and a reduction in deferred tax liabilities due to an adjustment in the state income tax rate expected to apply to future reversals of acquired book/tax basis differences.

Intangible assets consist of the following (in thousands):

	June 30, 2007
	Cost		Accumulated Amortization				Net
Pay accounts and free accounts	$	107,916		$	(81,170	)	$	26,746
Trademarks and trade names	25,786			(8,182		)	17,604
Advertising contracts and related relationships	7,229			(6,678		)	551
Software and technology	5,340			(5,077		)	263
Patents, domain names and other	4,597			(2,794		)	1,803
Total	$	150,868		$	(103,901	)	$	46,967

	December 31, 2006
	Cost		Accumulated Amortization				Net
Pay accounts and free accounts	$	107,903		$	(76,810	)	$	31,093
Trademarks and trade names	25,786			(6,839		)	18,947
Advertising contracts and related relationships	7,229			(6,130		)	1,099
Software and technology	5,340			(4,859		)	481
Patents, domain names and other	4,595			(2,562		)	2,033
Total	$	150,853		$	(97,200	)	$	53,653

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Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

	June 30, 2007		December 31, 2006
Employee compensation and related expenses	$	17,582		$	27,061
Current income taxes payable	7,034			9,305
Other	3,095			3,181
Total	$	27,711		$	39,547

3.   STOCKHOLDERS’ EQUITY

Common Stock Repurchases

The Company’s Board of Directors authorized a common stock repurchase program that allows the Company to repurchase shares of its common stock through open market or privately negotiated transactions based on prevailing market conditions and other factors through December 31, 2007. At June 30, 2007, the Company had repurchased $139.2 million of its common stock under the program, leaving $60.8 million remaining under the program.

Shares withheld from restricted stock units (“RSUs”) awarded to employees upon vesting to pay applicable withholding taxes on their behalf are considered common stock repurchases, but are not counted as purchases against the Board-approved repurchase program. Upon vesting, the Company currently does not collect the applicable withholding taxes for RSUs from employees. Instead, the Company automatically withholds, from the RSUs that vest, the portion of those shares with a fair market value equal to the amount of the withholding taxes due. The Company then pays the applicable withholding taxes in cash, which is accounted for as a repurchase of common stock. In the six months ended June 30, 2007 and 2006, approximately 265,000 shares and 155,000 shares, respectively, were withheld from RSUs that vested in order to pay the applicable employee withholding taxes.

Dividends

Dividends are paid on common shares and RSUs outstanding as of the record date.

In February and April 2007, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share of common stock. The dividends were paid on February 28, 2007 and May 31, 2007 and totaled $13.7 million and $14.4 million, respectively. In July 2007, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share of common stock. The record date for the dividend is August 14, 2007, and the dividend will be paid on August 31, 2007.

The payment of future dividends is discretionary and will be subject to determination by the Board of Directors each quarter following its review of the Company’s financial performance. Dividends have been declared and paid out of the Company’s surplus, as defined and computed in accordance with the General Corporation Law of the State of Delaware.

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4.STOCK-BASED COMPENSATION

The following table summarizes the stock-based compensation that has been included in the following captions for each of the periods presented (in thousands):

	Quarter Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Operating expenses:
Cost of revenues	$	254	$	256	$	448	$	493
Sales and marketing	943		1,072		1,835		2,016
Product development	1,211		1,645		2,456		3,111
General and administrative	366		2,891		2,082		5,213
Total stock-based compensation	$	2,774	$	5,864	$	6,821	$	10,833
Tax benefit recognized	$	1,158	$	1,115	$	2,036	$	2,171

General and administrative stock-based compensation includes a $2.5 million benefit for the quarter and six months ended June 30, 2007 as a result of equity award forfeitures related to the resignation of a former executive.

Restricted Stock

In June 2007, 125,000 of the outstanding restricted shares of the Company’s common stock were cancelled. At June 30, 2007, 350,000 restricted shares of common stock were outstanding. The restricted shares vest entirely at the end of a four-year vesting period in January 2008.

5.INCOME TAXES

For the quarter and six months ended June 30, 2007, the Company recorded a tax provision of $10.0 million and $20.5 million, respectively on pre-tax income of $26.2 million and $49.7 million, respectively, resulting in a year-to-date effective tax rate of 41.2%. For the quarter and six months ended June 30, 2006, the Company recorded a tax provision of $11.6 million and $20.5 million, respectively, on pre-tax income of $23.2 million and $43.8 million, respectively, resulting in a year-to-date effective tax rate of 46.9%. The effective tax rates differ from the statutory rate primarily due to (1) stock-based compensation that is limited under Section 162(m) of the Internal Revenue Code, (2) foreign losses, the benefit of which is not currently recognizable due to uncertainty regarding realization, (3) employee stock purchase plan compensation, the benefit of which is not currently recognized under SFAS No. 123R, but which benefit is currently recognized upon disqualified disposition, (4) the benefit of federal tax exempt interest income and (5) the re-measurement of certain deferred tax assets in New York.

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefits. At the adoption date of January 1, 2007, the Company had $4.8 million of unrecognized tax benefits, all of which would affect the Company’s effective tax rate if recognized. At June 30, 2007, the Company had $5.1 million of unrecognized tax benefits.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. At June 30, 2007, the Company had $1.1 million of accrued interest related to uncertain tax positions included in income taxes payable. At the adoption date of January 1, 2007, the Company had $0.9 million of accrued interest related to uncertain tax positions included in income taxes payable.

The tax years 2003 through 2006 remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company is not currently under examination in any jurisdiction where

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the Company files tax returns. The Company has, however, been contacted by a state tax authority in connection with its intention to begin an examination for the tax years ended December 31, 2004 and 2005. At June 30, 2007, as a result of the expiration of statute of limitations for specific jurisdictions, the Company’s liability for unrecognized tax benefits for the related tax positions will be reduced by approximately $0.1 million over the next twelve months.

6.NET INCOME PER SHARE

The following table sets forth the computation of basic and diluted net income per share for the quarters and six months ended June 30, 2007 and 2006 (in thousands, except per share amounts):

	Quarter Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Numerator:
Income before cumulative effect of accounting change	$	16,208		$	11,585		$	29,236		$	23,236
Cumulative effect of accounting change, net of tax	—			—			—			1,041
Net income	$	16,208		$	11,585		$	29,236		$	24,277
Denominator:
Weighted average common shares—basic	67,153			64,257			66,630			63,625
Less: weighted average common shares subject to repurchase	(468		)	(475		)	(471		)	(475		)
Shares used to calculate basic net income per share	66,685			63,782			66,159			63,150
Add: Dilutive effect of stock options, restricted stock and employee stock purchase plan	2,666			2,173			2,560			2,275
Shares used to calculate diluted net income per share	69,351			65,955			68,719			65,425
Basic net income per share:
Income before cumulative effect of accounting change	$	0.24		$	0.18		$	0.44		$	0.37
Cumulative effect of accounting change, net of tax	—			—			—			0.01
Basic net income per share	$	0.24		$	0.18		$	0.44		$	0.38
Diluted net income per share:
Income before cumulative effect of accounting change	$	0.23		$	0.18		$	0.43		$	0.36
Cumulative effect of change in accounting principle, net of tax	—			—			—			0.01
Diluted net income per share	$	0.23		$	0.18		$	0.43		$	0.37

The diluted per share computations exclude those stock options, unvested common stock and RSUs which are antidilutive. The number of antidilutive shares at June 30, 2007 and 2006 was 2.7 million and 3.6 million, respectively.

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7.   SEGMENT INFORMATION

Revenue and income from operations by segment are as follows (in thousands):

	Quarter Ended June 30, 2007
	Content & Media			Communications			Total
Billable services		$	26,905		$	70,220	$	97,125
Advertising		22,807			11,485		34,292
Total revenues		$	49,712		$	81,705	$	131,417
Segment income from operations		$	7,844		$	32,787	$	40,631

	Quarter Ended June 30, 2006
	Content & Media			Communications			Total
Billable services		$	21,697		$	87,161	$	108,858
Advertising		16,955			9,087		26,042
Total revenues		$	38,652		$	96,248	$	134,900
Segment income from operations		$	7,357		$	35,574	$	42,931

	Six Months Ended June 30, 2007
	Content & Media			Communications			Total
Billable services		$	50,259		$	143,186	$	193,445
Advertising		43,628			24,195		67,823
Total revenues		$	93,887		$	167,381	$	261,268
Segment income from operations		$	13,609		$	65,621	$	79,230

	Six Months Ended June 30, 2006
	Content & Media			Communications			Total
Billable services		$	42,194		$	177,820	$	220,014
Advertising		23,448			18,770		42,218
Total revenues		$	65,642		$	196,590	$	262,232
Segment income from operations		$	13,651		$	69,042	$	82,693

A reconciliation of segment income from operations (which excludes corporate expenses, depreciation, amortization of intangible assets and stock-based compensation) to consolidated operating income, is as follows for each period presented (in thousands):

	Quarter Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Segment income from operations:
Content & Media	$	7,844		$	7,357		$	13,609		$	13,651
Communications	32,787			35,574			65,621			69,042
Total segment income from operations	40,631			42,931			79,230			82,693
Corporate expenses	(4,686		)	(4,912		)	(8,874		)	(10,037		)
Depreciation	(5,234		)	(5,345		)	(9,979		)	(10,052		)
Amortization of intangible assets	(3,204		)	(4,552		)	(6,699		)	(8,941		)
Stock-based compensation	(2,774		)	(5,864		)	(6,821		)	(10,833		)
Consolidated operating income	$	24,733		$	22,258		$	46,857		$	42,830

The Company manages its working capital on a consolidated basis and does not allocate long-lived assets to segments. In addition, segment assets are not reported to, or used by, the chief operating decision maker and therefore, pursuant to SFAS No. 131, total segment assets have not been disclosed. The

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Company’s $132.7 million of goodwill is related entirely to purchase transactions in the Content & Media segment.

The Company has not provided information about geographic segments because the vast majority of the Company’s revenues and related results of operations and identifiable assets are in the United States of America and additional geographic information is thus not material nor meaningful.

8.  RESTRUCTURING CHARGES

In the quarter and six months ended June 30, 2007, the Company recorded restructuring charges of $0.4 million primarily for termination benefits paid to certain employees associated with our Web hosting and photo sharing businesses.

9.COMMITMENTS AND CONTINGENCIES

Legal Contingencies

In April 2001 and in May 2001, lawsuits were filed in the United States District Court for the Southern District of New York against NetZero, Inc. (“NetZero”), certain officers and directors of NetZero and the underwriters of NetZero’s initial public offering, Goldman Sachs Group, Inc., BancBoston Robertson Stephens, Inc. and Salomon Smith Barney, Inc. A consolidated amended complaint, which is the operative complaint, was filed in April 2002. The complaint alleges that the prospectus through which NetZero conducted its initial public offering in September 1999 was materially false and misleading because it failed to disclose, among other things, that (i) the underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material portions of the restricted number of NetZero shares issued in connection with the offering; and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate NetZero shares to those customers in the offering in exchange for which the customers agreed to purchase additional NetZero shares in the aftermarket at pre-determined prices. Plaintiffs are seeking injunctive relief and damages. The case against NetZero was coordinated with approximately 300 other suits filed against more than 300 issuers that conducted their initial public offerings between 1998 and 2000, their underwriters and an unspecified number of their individual corporate officers and directors. On October 13, 2004, the district court certified a class in six of the other nearly identical actions (the “focus cases”). The underwriter defendants appealed the decision and the United States Court of Appeals for the Second Circuit vacated the district court’s decision granting class certification on December 5, 2006. Plaintiffs filed a petition for rehearing. On April 6, 2007, the Second Circuit denied the petition, but noted that plaintiffs could ask the district court to certify a more narrow class than the one that was rejected. Prior to the Second Circuit’s decision, the majority of issuers, including NetZero, and their insurers had submitted a settlement agreement to the district court for approval. In light of the Second Circuit opinion, the parties agreed that the settlement could no longer be approved, and on June 25, 2007, the court approved a stipulation filed by the plaintiffs and the issuers which terminated the proposed settlement. The plaintiffs now plan to replead their complaints and move for class certification again.

On March 6, 2006, plaintiff Anthony Piercy filed a purported consumer class action lawsuit in the Superior Court of the State of California, County of Los Angeles, against NetZero claiming that NetZero continues to charge consumers fees after they cancel their Internet access account. On July 27, 2006, plaintiff Donald E. Ewart filed a purported consumer class action lawsuit in the Superior Court of the State of California, County of Los Angeles, against NetZero containing substantially similar allegations to the Piercy case. Plaintiffs in both cases are seeking injunctive and declaratory relief and damages. NetZero filed a response to both lawsuits denying the material allegations of the complaints. Both Mr. Piercy and Mr. Ewart subsequently withdrew from the actions as class representatives. On March 16, 2007, Barbara

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Rasnake, Robert Du Verger and Peter Chrisler were substituted as purported class representatives. On May 25, 2007 the court consolidated the actions under the caption Rasnake v. NetZero, Inc., Case No. BC348461. On July 13, 2007, plaintiffs filed a consolidated amended class action complaint, at which time Peter Chrisler was also substituted as a purported class representative. Discovery is continuing and a trial date has not yet been set.

The pending lawsuits involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to defend. Although the Company does not believe the outcome of the above outstanding legal proceedings, claims and litigation will have a material adverse effect on its business, financial position, results of operations or cash flows, the results of litigation are inherently uncertain and the Company can provide no assurance that it will not be materially and adversely impacted by the results of such proceedings. At June 30, 2007, the Company had not established reserves for any of the matters described above.

The Company is subject to various other legal proceedings and claims that arise in the ordinary course of business. Management believes the amount and ultimate liability, if any, with respect to these actions will not materially affect the Company’s business, financial position, results of operations or cash flows. There can be no assurance, however, that such actions will not be material or adversely affect the Company’s business, financial position, results of operations or cash flows.

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 based on our current expectations, estimates and projections about our operations, industry, financial condition and liquidity. Statements containing words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “may,” “will” or similar expressions constitute forward-looking statements. These forward-looking statements include, but are not limited to, statements about the markets in which we compete, our pay accounts, our product and service offerings, the advertising market, operating expenses, operating efficiencies, revenues, capital requirements, tax payments and our cash position. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The section entitled “Risk Factors” in this Quarterly Report on Form 10-Q and our other filings with the SEC set forth some of the important risk factors that may affect our business, financial position, results of operations and cash flows. Statements indicating factors that we believe may impact our results are not intended to be exclusive. We undertake no obligation to revise or update publicly any forward-looking statements, other than as required by law.

Overview

We are a leading provider of consumer Internet and media services through a number of brands including Classmates, MyPoints, NetZero and Juno. Our primary Content & Media services are online social networking and online loyalty marketing. Our primary Communications services are Internet access and email. On a combined basis, our Web properties attract a significant number of Internet users each month and we offer marketers a broad array of Internet advertising services as well as online market research and measurement services.

Segment Definitions

We report our businesses in two reportable segments:

Segment	Internet Services
Content & Media	Social networking, loyalty marketing, Web hosting and photo sharing
Communications	Internet access, email, Internet security, family services and VoIP

Segment Services

Content & Media

Our primary Content & Media services are online social networking under the Classmates brand and online loyalty marketing under the MyPoints brand. Our Content & Media services also include international social networking services under our Classmates International subsidiary; The Names Database, a social networking service; as well as Web hosting and online photo sharing services; however, none of these services generate material revenues. For additional information regarding our Content & Media segment, see Note 7—“Segment Information” of the Notes to the Condensed Consolidated Financial Statements, which appears in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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Online Social Networking

Our online social networking services connect millions of users primarily across the United States and, to a lesser extent, Canada, Germany, France and Sweden, among others. The primary focus of these services has been to enable members to locate and reconnect with past acquaintances from school, work or military affiliations. Basic membership in our social networking services is free and the vast majority of our social networking accounts are free accounts. A free account allows a user to engage in a variety of activities on our Web sites including posting a personal profile and searching our database for other registered members. We also offer pay services which, in general, allow the member to engage in a variety of additional activities, including communicating with other registered members. The majority of our social networking revenues are derived from our pay services. Our social networking services also contain advertising initiatives throughout their Web sites. In general, pricing for our social networking services varies by service and term of membership, with most domestic pay accounts consisting of a three-month commitment for $15, a 12-month commitment for $39 or a 24-month commitment for $59, although the standard pricings of our international and The Names Database services are lower.

Our strategy for our social networking services is to continue to enhance our members’ experience in finding and interacting with past acquaintances from school, work and the military, and to encourage our members to contribute user-generated content. Our strategy is also to expand the scope of our services to provide members with a platform to not only connect with past acquaintances, but also to meet and interact with new people based on shared interests and communities.

Online Loyalty Marketing

Our online loyalty marketing service provides advertisers an efficient means to reach a targeted online audience while providing our members a compelling way to earn rewards while shopping and engaging in other online activities. Our loyalty marketing service provides advertisers online direct marketing solutions such as rewards-based Web shopping, targeted emails based on self-reported and behavioral data, and online surveys that pre-qualify our members for targeted offers. Our members are rewarded with points for clicking or shopping through our loyalty marketing service emails, for shopping through the service’s Web site, and for completing surveys. The points are then redeemable for gift cards and other benefits with various partners. Hundreds of major brands have used our loyalty marketing service to market their products and services. All of our loyalty marketing revenues are derived from advertising.

Our strategy for our loyalty marketing services is to increase the number of members by generating additional awareness regarding the benefits of our loyalty marketing services and to encourage utilization of the service as an online shopping portal. Our strategy is also to increase the number of major advertisers on our service.

Communications

Our primary Communications pay services are consumer Internet access and email under the NetZero and Juno brands. We offer several additional Communications pay services, such as Internet security services, but these additional services and brands do not generate significant revenues. For additional information regarding our Communications segment, see Note 7—“Segment Information” of the Notes to the Condensed Consolidated Financial Statements, which appears in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Internet Access Services

Our Internet access services consist of both dial-up and broadband digital subscriber line (“DSL”) services. Our DSL services were launched at the end of 2006 and we do not currently generate significant revenues from our DSL services.

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Our dial-up access services are provided on both a free and pay basis, with the free services subject to hourly and other limitations. Basic pay dial-up access services include Internet access and an email account, although we also offer an enhanced email service as a standalone pay service. In addition, we offer accelerated dial-up access services which reduce the time for certain Web pages to download when compared to our basic access services. Our accelerated access services are also bundled with additional benefits such as pop-up blocking, antivirus software and enhanced email storage. Our dial-up access services are available in more than 9,500 cities across the United States and Canada. In general, monthly pricing for our dial-up access services ranges from $6.95 for basic services to $14.95 for our bundled services, with $9.95 being our most prevalent price point.

Our DSL services, which we purchase from third parties, are currently available in parts of 34 states and Washington, D.C. While we intend to expand our coverage area, our ability to do so will be dependent on acquiring services from additional third parties. In general, monthly pricing for our DSL services ranges from $17.95 to $34.95, though we anticipate our pricing may change and fluctuate by speed and coverage territory.

Our strategy for our Communications segment is to manage our dial-up business primarily for profitability and cash flow while extending the life cycle of our dial-up subscribers by offering them a broadband alternative to their dial-up service.

Account Metrics

At June 30, 2007, we had approximately 5.1 million pay accounts and approximately 15.9 million active accounts. A pay account represents a unique billing relationship with a member who subscribes to one or more of our pay services. “Active” accounts include total pay accounts as well as all free access, social networking, and email members who logged on to our services at least once during the preceding 31 days. Active accounts also include the number of members of our loyalty marketing service who earned or spent points within the preceding 90 days. In anticipation of the previously announced curtailment of our photo sharing and VoIP services, we have excluded the free accounts associated with these services from our active accounts reporting at June 30, 2007. In addition, to better reflect the activity level of our membership base, we have updated our active accounts definition to include Classmates International free accounts and exclude The Names Database and Web hosting free accounts. The following table sets forth (in thousands), for the dates presented, an analysis of our pay accounts.

	June 30, 2007		March 31, 2007		December 31, 2006		September 30, 2006		June 30, 2006
Content & Media:
Social networking		2,710		2,433		2,169		2,079		2,029
Other		88		87		86		85		81
Total		2,798		2,520		2,255		2,164		2,110
Communications:
Access		2,016		2,158		2,282		2,425		2,556
Other		304		306		317		323		330
Total		2,320		2,464		2,599		2,748		2,886
Total pay accounts		5,118		4,984		4,854		4,912		4,996

In general, we count and track pay accounts and free accounts by unique member identifiers. Users have the ability to register for separate services under separate brands and member identifiers independently. We do not track whether a pay account has purchased more than one of our services unless the account uses the same member identifier. As a result, total active free accounts may not represent unique free users. At any point in time, our pay account base includes a number of accounts receiving a

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free period of service as either a promotion or retention tool and a number of accounts that have notified us that they are terminating their service but whose service is still in effect.

We have made the decision to curtail our efforts with respect to our VoIP services, and we are currently evaluating strategic alternatives for such services. Our VoIP services had approximately 10,000 pay accounts at June 30, 2007. We have made the decision to terminate our photo sharing services as of September 27, 2007. Our photo sharing services had approximately 18,000 pay accounts at June 30, 2007.

Results of Operations

The following tables set forth (in thousands), for the periods presented, selected historical statements of operations data. The information contained in the tables below should be read in conjunction with Liquidity and Capital Resources and Financial Commitments included in this Item 2 as well as the consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

Consolidated information is as follows:

	Quarter Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Billable services	$	97,125		$	108,858		$	193,445		$	220,014
Advertising	34,292			26,042			67,823			42,218
Total revenues	131,417			134,900			261,268			262,232
Operating expenses:
Cost of revenues	30,409			31,146			59,656			61,036
Sales and marketing	42,712			46,137			88,737			89,556
Product development	13,065			13,385			26,536			26,201
General and administrative	16,900			17,422			32,389			33,668
Amortization of intangible assets	3,204			4,552			6,699			8,941
Restructuring charges	394			—			394			—
Total operating expenses	106,684			112,642			214,411			219,402
Operating income	24,733			22,258			46,857			42,830
Interest and other income, net	1,881			1,354			3,581			3,070
Interest expense	(372		)	(411		)	(732		)	(2,127		)
Income before income taxes	26,242			23,201			49,706			43,773
Provision for income taxes	10,034			11,616			20,470			20,537
Income before cumulative effect of accounting change	16,208			11,585			29,236			23,236
Cumulative effect of accounting change, net of tax	—			—			—			1,041
Net income	$	16,208		$	11,585		$	29,236		$	24,277

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Information for our two reportable segments is as follows:

	Content & Media				Communications
	Quarter Ended June 30,				Quarter Ended June 30,
	2007		2006		2007		2006
Billable services	$	26,905	$	21,697	$	70,220	$	87,161
Advertising	22,807		16,955		11,485		9,087
Total revenues	49,712		38,652		81,705		96,248
Operating expenses:
Cost of revenues	10,178		7,555		17,892		20,887
Sales and marketing	20,975		16,838		20,703		28,166
Product development	4,141		3,199		6,181		7,303
General and administrative	6,180		3,703		4,142		4,318
Restructuring charges	394		—		—		—
Total operating expenses	41,868		31,295		48,918		60,674
Segment income from operations	$	7,844	$	7,357	$	32,787	$	35,574

	Content & Media				Communications
	Six Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Billable services	$	50,259	$	42,194	$	143,186	$	177,820
Advertising	43,628		23,448		24,195		18,770
Total revenues	93,887		65,642		167,381		196,590
Operating expenses:
Cost of revenues	19,534		10,708		35,588		44,950
Sales and marketing	41,914		28,969		44,769		58,451
Product development	8,303		5,612		13,184		15,221
General and administrative	10,133		6,702		8,219		8,926
Restructuring charges	394		—		—		—
Total operating expenses	80,278		51,991		101,760		127,548
Segment income from operations	$	13,609	$	13,651	$	65,621	$	69,042

A reconciliation of segment income from operations (which excludes corporate expenses, depreciation, amortization of intangible assets and stock-based compensation) to consolidated operating income, is as follows for each period presented (in thousands):

	Quarter Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Segment income from operations:
Content & Media	$	7,844		$	7,357		$	13,609		$	13,651
Communications	32,787			35,574			65,621			69,042
Total segment income from operations	40,631			42,931			79,230			82,693
Corporate expenses	(4,686		)	(4,912		)	(8,874		)	(10,037		)
Depreciation	(5,234		)	(5,345		)	(9,979		)	(10,052		)
Amortization of intangible assets	(3,204		)	(4,552		)	(6,699		)	(8,941		)
Stock-based compensation	(2,774		)	(5,864		)	(6,821		)	(10,833		)
Consolidated operating income	$	24,733		$	22,258		$	46,857		$	42,830

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Quarter and Six Months Ended June 30, 2007 Compared to Quarter and Six Months Ended June 30, 2006

Revenues

Billable Services Revenues

Billable services revenues consist of fees charged to pay accounts for our pay services and for technical support. Our billable services revenues are primarily dependent on two factors: the average number of pay accounts for a period and the average monthly revenue per pay account (“ARPU”) for a period. The average number of pay accounts is a simple average calculated based on the number of pay accounts at the beginning and end of a period. ARPU is calculated by dividing billable services revenues for a period by the average number of pay accounts for that period. ARPU may fluctuate from period to period as a result of a variety of factors including changes in the mix of pay services and their related pricing plans; the use of promotions, such as one or more free months of service, and discounted pricing plans to obtain or retain subscribers; increases or decreases in the price of our services; the number of services subscribed to by each pay account; pricing and success of new pay services and the penetration of these types of services as a percentage of total pay accounts; and the timing of pay accounts being added or removed during a period.

Consolidated Billable Services Revenues.   Consolidated billable services revenues decreased by $11.7 million, or 11%, to $97.1 million for the quarter ended June 30, 2007, compared to $108.9 million for the quarter ended June 30, 2006. Consolidated billable services revenues decreased by $26.6 million, or 12%, to $193.4 million for the six months ended June 30, 2007, compared to $220.0 million for the six months ended June 30, 2006. The decrease in billable services revenues for the quarter and six months ended June 30, 2007 was due to a decrease in billable services revenues from our Communications segment, partially offset by an increase in billable service revenues from our Content & Media segment. Billable services revenues related to our Content & Media segment and our Communications segment constituted 27.7% and 72.3%, respectively, of our consolidated billable services revenues for the quarter ended June 30, 2007, compared to 19.9% and 80.1%, respectively, for the quarter ended June 30, 2006. Billable services revenues related to our Content & Media segment and our Communications segment constituted 26.0% and 74.0%, respectively, of our consolidated billable services revenues for the six months ended June 30, 2007, compared to 19.2% and 80.8%, respectively, for the six months ended June 30, 2006. We anticipate that our consolidated billable services revenues will continue to decline as a result of expected continued declines in Communications billable services revenues.

Content & Media Billable Services Revenues.   Content & Media billable services revenues consist of fees charged to pay accounts for social networking, Web hosting and photo sharing services, with substantially all such revenues generated from social networking. Content & Media billable services revenues increased by $5.2 million, or 24%, to $26.9 million for the quarter ended June 30, 2007, compared to $21.7 million for the quarter ended June 30, 2006. The increase in Content & Media billable services revenues was due to a 29% increase in our average number of pay accounts from 2,066,000 for the quarter ended June 30, 2006 to 2,659,000 for the quarter ended June 30, 2007. Substantially all of this increase in the number of pay accounts was due to an increase in the number of social networking pay accounts, primarily attributable to the introduction of a new pay feature by Classmates in the fourth quarter of 2006. The increase in Content & Media billable services revenues was partially offset by a 4% decrease in ARPU from $3.50 for the quarter ended June 30, 2006 to $3.37 for the quarter ended June 30, 2007. The decrease in ARPU is primarily attributable to a greater percentage of pay accounts represented by international social networking pay accounts which have lower-priced subscription plans, and, to a lesser extent, to decreases in the average monthly revenue received from our Web hosting and photo sharing pay accounts. We anticipate our social networking pay accounts and Content & Media billable services revenues will continue to grow, at least in the near term, although we expect our growth in the number of pay accounts in the September 2007 quarter to decline modestly from the growth we experienced in the June 2007 quarter.

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Content & Media billable services revenues increased by $8.1 million, or 19%, to $50.3 million for the six months June 30, 2007, compared to $42.2 million for the six months ended June 30, 2006. The increase in Content & Media billable services revenues was due to a 28% increase in our average number of pay accounts from 1,975,000 for the six months ended June 30, 2006 to 2,526,000 for the six months ended June 30, 2007. Substantially all of this increase in the number of pay accounts was due to an increase in the number of social networking pay accounts, primarily attributable to the introduction of a new pay feature by Classmates in the fourth quarter of 2006. The increase in Content & Media billable services revenues was partially offset by a 7% decrease in ARPU from $3.56 for the six months ended June 30, 2006 to $3.32 for the six months ended June 30, 2007. The decrease in ARPU is primarily attributable to a greater percentage of pay accounts represented by international social networking pay accounts which have lower-priced subscription plans, and, to a lesser extent, decreases in the average monthly revenue received from our Web hosting and photo sharing pay accounts.

Communications Billable Services Revenues.   Communications billable services revenues consist of fees charged to pay accounts for access, email, Internet security and other services, with substantially all of such revenues generated from Internet access. Communications billable services revenues decreased by $16.9 million, or 19%, to $70.2 million for the quarter ended June 30, 2007, compared to $87.2 million for the quarter ended June 30, 2006. The decrease in billable services revenues was due to a 20% decrease in our average number of pay accounts from 2,979,000 for the quarter ended June 30, 2006 to 2,392,000 for the quarter ended June 30, 2007. The decrease in average number of pay accounts is substantially attributable to a decrease in the number of dial-up pay access accounts. The decrease in billable services revenues was partially offset by a slight increase in ARPU from $9.75 for the quarter ended June 30, 2006 to $9.78 for the quarter ended June 30, 2007. We anticipate that the average number of Communications pay accounts will continue to decline due to decreases in dial-up pay access accounts. We may experience declines in ARPU primarily as a result of discounted prices for extended service commitments on our dial-up access services, including providing our $14.95 accelerated access services at $9.95 for a one-year commitment. We anticipate continued declines in Communications billable services revenues.

Communications billable services revenues decreased by $34.6 million, or 19%, to $143.2 million for the six months ended June 30, 2007, compared to $177.8 million for the six months ended June 30, 2006. The decrease in billable services revenues was due to a 19% decrease in our average number of pay accounts from 3,027,000 for the six months ended June 30, 2006 to 2,459,000 for the six months ended June 30, 2007, and a decrease in ARPU from $9.79 for the six months ended June 30, 2006 to $9.70 for the six months ended June 30, 2007. The decrease in average number of pay accounts is substantially attributable to a decrease in the number of dial-up pay access accounts.

Advertising Revenues

We connect advertisers to consumers through a variety of online marketing initiatives integrated throughout our services and Web properties, including advertising and search placements, email campaigns and user registration placements. In addition, we offer advertisers sophisticated market research capabilities and online direct marketing solutions. Factors impacting our advertising revenues generally include changes in orders from significant customers, the performance of our online marketing initiatives, the state of the online search and advertising markets, seasonality, increases or decreases in our active accounts, and increases or decreases in advertising inventory available for sale. Advertising revenues also include post-transaction revenues pursuant to an agreement whereby we generate revenues by displaying a third party’s service offerings to our Classmates’ members upon completion of the paid subscription registration process.

Consolidated Advertising Revenues.   Consolidated advertising revenues increased by $8.3 million, or 32%, to $34.3 million for the quarter ended June 30, 2007, compared to $26.0 million for the quarter ended June 30, 2006. Consolidated advertising revenues increased by $25.6 million, or 61%, to $67.8 million for

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the six months ended June 30, 2007, compared to $42.2 million for the six months ended June 30, 2006. The increase was primarily attributable to increases in advertising revenues in our Content & Media segment and, to a lesser extent, our Communications segment. Advertising revenues related to our Content & Media segment and our Communications segment constituted 66.5% and 33.5%, respectively, of our consolidated advertising revenues for the quarter ended June 30, 2007, compared to 65.1% and 34.9%, respectively, for the quarter ended June 30, 2006. Advertising revenues related to our Content & Media segment and our Communications segment constituted 64.3% and 35.7%, respectively, of our consolidated advertising revenues for the six months ended June 30, 2007, compared to 55.5% and 44.5%, respectively, for the six months ended June 30, 2006.

Content & Media Advertising Revenues.   Content & Media advertising revenues increased by $5.9 million, or 35%, to $22.8 million for the quarter ended June 30, 2007, compared to $17.0 million for the quarter ended June 30, 2006. The increase was due to revenues generated from our loyalty marketing service, which was acquired in April 2006, and increased revenues generated from our post-transaction sales agreement as a result of significant growth in Content & Media pay accounts. We anticipate that Content & Media advertising revenues will decrease sequentially in the September 2007 quarter when compared to the June 2007 quarter due to the September quarter being a seasonally slower quarter.

Content & Media advertising revenues increased by $20.2 million, or 86%, to $43.6 million for the six months ended June 30, 2007, compared to $23.4 million for the six months ended June 30, 2006. The increase was due to revenues generated from our loyalty marketing service, increased revenues generated from our post-transaction sales agreement as a result of growth in Content & Media pay accounts, and increased revenues generated from our Web hosting business.

Communications Advertising Revenues.   Communications advertising revenues increased by $2.4 million, or 26%, to $11.5 million for the quarter ended June 30, 2007, from $9.1 million for the quarter ended June 30, 2006. The increase was primarily attributable to increases in search revenues and, to a lesser extent, increases in advertising rates. Decreases in advertising inventory as a result of a decrease in the number of our active accounts were offset by increased advertising rates. We anticipate that Communications advertising revenues will be flat to slightly down, at least in the September 2007 quarter when compared to the June 2007 quarter.

Communications advertising revenues increased by $5.4 million, or 29%, to $24.2 million for the six months ended June 30, 2007, from $18.8 million for the six months ended June 30, 2006. The increase was primarily attributable to increases in search revenues and, to a lesser extent, increases in advertising rates.

Cost of Revenues

Cost of revenues includes telecommunications and data center costs; costs of providing rewards to members of our loyalty marketing service; personnel and overhead-related costs associated with operating our networks and data centers; depreciation of network computers and equipment; email technical support and license fees; costs related to providing telephone technical support; customer billing and billing support to our pay accounts; and domain name registration fees. Historically, the costs that comprise our Content & Media cost of revenues were relatively fixed. However, as a result of our loyalty marketing service, which was acquired in April 2006, these costs have become more variable as the costs associated with this service tend to fluctuate with revenues. The majority of the costs that comprise our Communications cost of revenues are variable. As such, our Communications cost of revenues as a percentage of revenues is highly dependent on our ARPU, our average hourly telecommunications cost and usage, and our average customer billing and support costs per pay account.

Consolidated Cost of Revenues.   Consolidated cost of revenues decreased by $0.7 million, or 2%, to $30.4 million for the quarter ended June 30, 2007, compared to $31.1 million for the quarter ended June 30, 2006. The decrease was primarily due to decreased costs associated with our Communications

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segment and a $0.4 million decrease in depreciation, partially offset by increased costs associated with our Content & Media segment. Cost of revenues related to our Content & Media segment and our Communications segment constituted 36.3% and 63.7%, respectively, of our total segment cost of revenues for the quarter ended June 30, 2007, compared to 26.6% and 73.4%, respectively, for the quarter ended June 30, 2006.

Consolidated cost of revenues decreased by $1.4 million, or 2%, to $59.7 million for the six months ended June 30, 2007, compared to $61.0 million for the six months ended June 30, 2006. The decrease was primarily due to decreased costs associated with our Communications segment and a $0.8 million decrease in depreciation, partially offset by increased costs associated with our Content & Media segment. Cost of revenues related to our Content & Media segment and our Communications segment constituted 35.4% and 64.6%, respectively, of our total segment cost of revenues for the six months ended June 30, 2007, compared to 19.2% and 80.8%, respectively, for the six months ended June 30, 2006.

Content & Media Cost of Revenues.   Content & Media cost of revenues increased by $2.6 million, or 35%, to $10.2 million for the quarter ended June 30, 2007, compared to $7.6 million for the quarter ended June 30, 2006. The increase was primarily related to costs associated with our loyalty marketing service and, to a lesser extent, increased costs associated with our social networking services. As a percentage of Content & Media revenues, Content & Media cost of revenues increased to 20.5% in the quarter ended June 30, 2007, compared to 19.5% in the quarter ended June 30, 2006, primarily due to the inclusion of MyPoints revenues for the entire quarter in 2007 versus a partial quarter in 2006. In addition, our loyalty marketing service cost of revenues as a percentage of revenues is higher relative to our social networking service cost of revenues as a percentage of revenues.

Content & Media cost of revenues increased by $8.8 million, or 82%, to $19.5 million for the six months ended June 30, 2007, compared to $10.7 million for the six months ended June 30, 2006. The increase was primarily related to costs associated with our loyalty marketing service, which was acquired in April 2006 and, to a lesser extent, increased costs associated with our social networking services. As a percentage of Content & Media revenues, Content & Media cost of revenues increased to 20.8% in the six months ended June 30, 2007, compared to 16.3% in the six months ended June 30, 2006, primarily due to costs associated with our loyalty marketing service.

Communications Cost of Revenues.   Communications cost of revenues decreased by $3.0 million, or 14%, to $17.9 million for the quarter ended June 30, 2007, compared to $20.9 million for the quarter ended June 30, 2006. The decrease was primarily due to a $3.7 million decrease in telecommunications costs associated with our dial-up access, a $0.9 million decrease in customer support and billing-related costs as a result of a decrease in the number of pay accounts and a $0.3 million decrease in costs associated with our VoIP service. These decreases were partially offset by a $1.7 million increase in costs associated with our DSL service. As a percentage of Communications revenues, Communications cost of revenues increased slightly to 21.9% in the quarter ended June 30, 2007, compared to 21.7% in the quarter ended June 30, 2006.

Communications cost of revenues decreased by $9.4 million, or 21%, to $35.6 million for the six months ended June 30, 2007, compared to $45.0 million for the six months ended June 30, 2006. The decrease was primarily due to an $8.4 million decrease in telecommunications costs associated with our dial-up access, a $2.7 million decrease in customer support and billing-related costs as a result of a decrease in the number of pay accounts and a $1.1 million decrease in costs associated with our VoIP service. These decreases were partially offset by a $2.4 million increase in costs associated with our DSL service. As a percentage of Communications revenues, Communications cost of revenues decreased to 21.3% in the six months ended June 30, 2007, compared to 22.9% in the six months ended June 30, 2006, primarily as a result of decreased telecommunications costs.

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Sales and Marketing

Sales and marketing expenses include advertising and promotion expenses; fees paid to distribution partners, third party advertising networks and co-registration partners to acquire new accounts; personnel-related expenses for sales and marketing personnel; and telemarketing costs incurred to acquire and retain pay accounts and up-sell pay accounts to additional services. Advertising and promotion expenses include media, agency and promotion expenses. Most of our marketing expenses are expensed in the period incurred except that media production costs are expensed the first time the advertisement is run and media and agency fees are expensed over the period the advertising runs. Sales expenses are expensed in the period incurred or, in the case of commissions paid to sales personnel, when the associated advertising revenue is recognized.

Consolidated Sales and Marketing Expenses.   Consolidated sales and marketing expenses decreased by $3.4 million, or 7%, to $42.7 million, or 32.5% of consolidated revenues, for the quarter ended June 30, 2007, compared to $46.1 million, or 34.2% of consolidated revenues, for the quarter ended June 30, 2006. The decrease was primarily attributable to a significant reduction in marketing expenses related to our Communications segment, partially offset by an increase in marketing expenses related to our Content & Media segment. Sales and marketing expenses related to our Content & Media segment and our Communications segment constituted 50.3% and 49.7%, respectively, of total segment sales and marketing expenses for the quarter ended June 30, 2007 versus 37.4% and 62.6%, respectively, for the quarter ended June 30, 2006.

Consolidated sales and marketing expenses decreased by $0.8 million, or 1%, to $88.7 million, or 34.0% of consolidated revenues, for the six months ended June 30, 2007, compared to $89.6 million, or 34.2% of consolidated revenues, for the six months ended June 30, 2006. The decrease was primarily attributable to a significant reduction in marketing expenses related to our Communications segment, offset almost entirely by an increase in marketing expenses related to our Content & Media segment. Sales and marketing expenses related to our Content & Media segment and our Communications segment constituted 48.4% and 51.6%, respectively, of total segment sales and marketing expenses for the six months ended June 30, 2007 versus 33.1% and 66.8%, respectively, for the six months ended June 30, 2006.

Content & Media Sales and Marketing Expenses.   Content & Media sales and marketing expenses increased by $4.1 million, or 25%, to $21.0 million, or 42.2% of Content & Media revenues, for the quarter ended June 30, 2007, compared to $16.8 million, or 43.6% of Content & Media revenues, for the quarter ended June 30, 2006. The increase was the result of a $3.1 million increase in costs related to acquiring free accounts, primarily social networking accounts and, to a lesser extent, loyalty marketing accounts, and a $1.1 million increase in personnel and overhead-related expenses.

Content & Media sales and marketing expenses increased by $12.9 million, or 45%, to $41.9 million, or 44.6% of Content & Media revenues, for the six months ended June 30, 2007, compared to $29.0 million, or 44.1% of Content & Media revenues, for the six months ended June 30, 2006. The increase was the result of a $7.7 million increase in costs related to acquiring free accounts, primarily social networking accounts and, to a lesser extent, loyalty marketing accounts, costs associated with our loyalty marketing service which was acquired in April 2006 and a $1.5 million increase in personnel and overhead-related expenses.

Communications Sales and Marketing Expenses.   Communications sales and marketing expenses decreased by $7.5 million, or 26%, to $20.7 million, or 25.3% of Communications revenues, for the quarter ended June 30, 2007, compared to $28.2 million, or 29.3% of Communications revenues, for the quarter ended June 30, 2006. This decrease is attributable to a $5.8 million decrease in advertising costs associated with our VoIP service and a $2.7 million decline in advertising, promotion and distribution costs related to our access services, the majority of which was due to reductions in distribution, media and telemarketing

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costs. These decreases were partially offset by a $0.6 million increase in advertising costs related to our broadband services and a $0.3 million increase in personnel and overhead-related expenses.

Communications sales and marketing expenses decreased by $13.7 million, or 23%, to $44.8 million, or 26.7% of Communications revenues, for the six months ended June 30, 2007, compared to $58.5 million, or 29.7% of Communications revenues, for the six months ended June 30, 2006. This decrease is attributable to a $9.9 million decline in advertising, promotion and distribution costs related to our access services, the majority of which was due to reductions in distribution, media and telemarketing advertising costs and a $6.5 million decrease in advertising costs associated with our VoIP service. These decreases were partially offset by a $1.7 million increase in personnel and overhead-related expenses and a $0.9 million increase in advertising costs related to our broadband services.

Product Development

Product development expenses include expenses for the maintenance of existing software and technology and the development of new or improved software and technology, including personnel-related expenses for the software engineering department and the costs associated with operating our facility in India. Costs incurred by us to manage, monitor and operate our services are generally expensed as incurred, except for certain costs relating to the acquisition and development of internal-use software, which are capitalized and depreciated over their estimated useful lives, generally three years or less.

Consolidated Product Development Expenses.   Consolidated product development expenses decreased by $0.3 million, or 2%, to $13.1 million for the quarter ended June 30, 2007, compared to $13.4 million for the quarter ended June 30, 2006. The decrease was attributable to decreases in expenses in the Communications segment as well as a $0.4 million decrease in stock-based compensation, partially offset by increases in expenses in the Content & Media segment and a $0.3 million increase in depreciation. Product development expenses related to our Content & Media segment and our Communications segment constituted 40.1% and 59.9%, respectively, of total segment product development expenses for the quarter ended June 30, 2007, compared to 30.5% and 69.5%, respectively, for the quarter ended June 30, 2006.

Consolidated product development expenses increased by $0.3 million, or 1%, to $26.5 million for the six months ended June 30, 2007, compared to $26.2 million for the six months ended June 30, 2006. The increase was attributable to increases in expenses in the Content & Media segment and a $0.3 million increase in depreciation, partially offset by decreases in expenses in the Communications segment as well as a $0.7 million decrease in stock-based compensation. Product development expenses related to our Content & Media segment and our Communications segment constituted 38.6% and 61.4%, respectively, of total segment product development expenses for the six months ended June 30, 2007, compared to 26.9% and 73.1%, respectively, for the six months ended June 30, 2006.

Content & Media Product Development Expenses.   Content & Media product development expenses increased by $0.9 million, or 29%, to $4.1 million for the quarter ended June 30, 2007, compared to $3.2 million for the quarter ended June 30, 2006. The increase was primarily due to increases in personnel-related expenses.

Content & Media product development expenses increased by $2.7 million, or 48%, to $8.3 million for the six months ended June 30, 2007, compared to $5.6 million for the six months ended June 30, 2006. The increase was primarily due to headcount associated with our loyalty marketing service which was acquired in April 2006 and increases in personnel-related expenses related to our social networking services.

Communications Product Development Expenses.   Communications product development expenses decreased by $1.1 million, or 15%, to $6.2 million for the quarter ended June 30, 2007, compared to $7.3 million for the quarter ended June 30, 2006. The decrease was primarily the result of a $0.8 million

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decrease in personnel-related expenses and a $0.4 million decrease in other overhead-related expenses. Capitalized software expenses decreased to $1.5 million for the quarter ended June 30, 2007, compared to $2.2 million for the quarter ended June 30, 2006 due to a decrease in the number of development projects in 2007 compared to 2006.

Communications product development expenses decreased by $2.0 million, or 13%, to $13.2 million for the six months ended June 30, 2007, compared to $15.2 million for the six months ended June 30, 2006. The decrease was primarily the result of a $1.4 million decrease in personnel-related expenses and a $0.6 million decrease in other overhead-related expenses. Capitalized software expenses decreased to $3.3 million for the six months ended June 30, 2007, compared to $3.9 million for the six months ended June 30, 2006 due to a decrease in the number of development projects in 2007 compared to 2006.

General and Administrative

General and administrative expenses include personnel-related expenses for executive, finance, legal, human resources and internal customer support personnel. In addition, general and administrative expenses include professional fees for legal, accounting and financial services; office relocation costs; non-income taxes; insurance; and occupancy and other overhead-related costs, as well as the expenses incurred and credits received as a result of certain legal settlements.

Consolidated General and Administrative Expenses.   Consolidated general and administrative expenses decreased by $0.5 million, or 3%, to $16.8 million for the quarter ended June 30, 2007, compared to $17.4 million for the quarter ended June 30, 2006. The decrease was due to a $2.5 million decrease in stock-based compensation primarily related to the resignation of a former executive and decreases in unallocated corporate expenses and expenses associated with our Communications segment. This decrease was substantially offset by an increase in expenses associated with our Content & Media segment. General and administrative expenses related to our Content & Media segment and our Communications segment constituted 59.9% and 40.1%, respectively, of total segment general and administrative expenses for the quarter ended June 30, 2007, compared to 46.2% and 53.8%, respectively, for the quarter ended June 30, 2006.

Consolidated general and administrative expenses decreased by $1.3 million, or 4%, to $32.4 million for the six months ended June 30, 2007, compared to $33.7 million for the six months ended June 30, 2006. This decrease was due to a $3.1 million decrease in stock-based compensation primarily related to the resignation of a former executive and equity awards granted prior to 2006 being expensed in connection with Financial Accounting Standards Board (“FASB”) Interpretation No. (“FIN”) 28; and decreases in unallocated corporate expenses and expenses associated with our Communications segment. The decrease was partially offset by an increase in expenses associated with our Content & Media segment. General and administrative expenses related to our Content & Media segment and our Communications segment constituted 55.2% and 44.8%, respectively, of total segment general and administrative expenses for the six months ended June 30, 2007, compared to 42.9% and 57.1%, respectively, for the six months ended June 30, 2006.

Content & Media General and Administrative Expenses.   Content & Media general and administrative expenses increased by $2.5 million, or 67%, to $6.2 million for the quarter ended June 30, 2007, compared to $3.7 million for the quarter ended June 30, 2006. The increase was primarily due to a $1.2 million increase in bad debt expense and increases in overhead-related costs and consulting fees.

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Content & Media general and administrative expenses increased by $3.4 million, or 51%, to $10.1 million for the six months ended June 30, 2007, compared to $6.7 million for the six months ended June 30, 2006. The increase was primarily due to increases in bad debt expense for an uncollectible customer account, facilities and other overhead-related costs, compensation costs related to our loyalty marketing service, which was acquired in April 2006, and consulting fees.

Communications General and Administrative Expenses.   Communications general and administrative expenses decreased by $0.2 million, or 4%, to $4.1 million for the quarter ended June 30, 2007, compared to $4.3 million for the quarter ended June 30, 2006. The decrease was primarily due to a decrease in compensation costs.

Communications general and administrative expenses decreased by $0.7 million, or 8%, to $8.2 million for the six months ended June 30, 2007, compared to $8.9 million for the six months ended June 30, 2006. The decrease was due to a decrease in consulting fees and compensation costs.

Unallocated Corporate Expenses.   Excluding stock-based compensation and depreciation, unallocated corporate general and administrative expenses decreased by $0.2 million, or 5%, to $4.7 million for the quarter ended June 30, 2007, compared to $4.9 million for the quarter ended June 30, 2006. The decrease was primarily due to decreases in facilities and other overhead-related expenses, partially offset by increases in consulting fees and compensation costs.

Excluding stock-based compensation and depreciation, unallocated corporate general and administrative expenses decreased by $1.2 million, or 12%, to $8.9 million for the six months ended June 30, 2007, compared to $10.1 million for the six months ended June 30, 2006. The decrease was primarily due to decreases in facilities and other overhead-related expenses and consulting fees, partially offset by an increase in compensation costs.

Amortization of Intangible Assets

Amortization of intangible assets includes amortization of acquired pay accounts and free accounts, acquired trademarks and trade names, purchased technologies and other identifiable intangible assets. In accordance with the provisions set forth in Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, goodwill is not being amortized but is tested for impairment at a reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would indicate the fair value of a reporting unit is below its carrying value amount.

Consolidated amortization of intangible assets decreased by $1.3 million, or 30%, to $3.2 million for the quarter ended June 30, 2007, compared to $4.6 million for the quarter ended June 30, 2006. Consolidated amortization of intangible assets decreased by $2.2 million, or 25%, to $6.7 million for the six months ended June 30, 2007, compared to $8.8 million for the six months ended June 30, 2006. The decreases were primarily attributable to the accelerated amortization of intangible assets in earlier years associated with the Classmates acquisition in November 2004, partially offset by increased amortization related to intangible assets acquired in connection with the acquisition of The Names Database in the March 2006 quarter and the acquisition of MyPoints in the June 2006 quarter.

Interest and Other Income, Net

Interest income consists of earnings on our cash, cash equivalents and short-term investments. Other income and expense, net consists of realized gains and losses recognized in connection with the sale of short-term investments.

Interest and other income, net increased by $0.5 million, or 39%, to $1.9 million for the quarter ended June 30, 2007, compared to $1.4 million for the quarter ended June 30, 2006. Interest and other income, net increased by $0.5 million, or 17%, to $3.6 million for the six months ended June 30, 2007, compared to

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$3.1 million for the six months ended June 30, 2006. The increases were due to higher average cash balances and higher interest rates. Net realized gains on our short-term investments were not significant for the quarters and six months ended June 30, 2007 and 2006.

Interest Expense

Interest expense consists of interest expense on our term loan retired in January 2006, capital leases, the amortization of premiums on certain of our short-term investments and imputed interest on the acquired member redemption liability.

Interest expense for the quarters ended June 30, 2007 and 2006 remained relatively flat at $0.4 million.

Interest expense decreased by $1.4 million, or 66%, to $0.7 million for the six months ended June 30, 2007, compared to $2.1 million for the six months ended June 30, 2006. The decrease was primarily the result of decreases in interest expense and amortized deferred financing costs related to the term loan. In January 2006, we expensed the remaining $1.5 million in deferred financing costs upon the repayment of the $54.2 million balance of the term loan.

Provision for Income Taxes

For the quarter and six months ended June 30, 2007, we recorded a tax provision of $10.0 million and $20.5 million, respectively on pre-tax income of $26.2 million and $49.7 million, respectively, resulting in a year-to-date effective tax rate of 41.2%. For the quarter and six months ended June 30, 2006, we recorded a tax provision of $11.6 million and $20.5 million, respectively, on pre-tax income of $23.2 million and $43.8 million, respectively, resulting in a year-to-date effective tax rate of 46.9%. The effective tax rates differ from the statutory rate primarily due to (1) stock-based compensation that is limited under Section 162(m) of the Internal Revenue Code, (2) foreign losses, the benefit of which is not currently recognizable due to uncertainty regarding realization, (3) employee stock purchase plan compensation, the benefit of which is not currently recognized under SFAS No. 123R, but which benefit is currently recognized upon disqualified disposition, (4) the benefit of federal tax exempt interest income and (5) the re-measurement of certain tax deferred tax assets in New York.

Cumulative Effect of Accounting Change, Net of Tax

In the six months ended June 30, 2006, we recorded a $1.1 million pretax benefit ($1.0 million, net of tax) as the cumulative effect of a change in accounting principle upon the adoption of SFAS No. 123R, Share-Based Payment, to recognize the effect of estimating the number of awards granted prior to January 1, 2006 that are not ultimately expected to vest.

Liquidity and Capital Resources

Our total cash, cash equivalent and short-term investment balances increased by $29.0 million, or 18%, to $191.4 million at June 30, 2007, compared to $162.4 million at December 31, 2006. Our summary cash flows for the six months ended June 30, 2007 and 2006 were as follows (in thousands):

	Six Months Ended June 30,
	2007			2006
Net cash provided by operating activities	$	61,046		$	52,888
Net cash used for investing activities	(41,466		)	(56,978		)
Net cash used for financing activities	(19,109		)	(71,969		)

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Net cash provided by operating activities increased by $8.2 million, or 15%, for the six months ended June 30, 2007 compared to the six months ended June 30, 2006. Cash provided by operating activities is driven by our net income adjusted for non-cash items, including depreciation and amortization, stock-based compensation, deferred taxes and tax benefits from stock options and changes in working capital. The increase was primarily the result of the following:

·a $9.0 million net increase in working capital account changes, including an $8.4 million increase in deferred revenue primarily due to increases in social networking pay accounts, a $5.0 million decrease in current income taxes payable, a $10.7 million increase in accounts payable and accrued liabilities, a $5.8 million decrease in other assets primarily due to increases in prepaid media expenses, a $2.0 million increase in member redemption liability related to our loyalty marketing service, and a $1.3 million decrease in accounts receivable; and

·a $5.0 million increase in net income, excluding a $1.0 million cumulative effect of an accounting change in connection with the adoption of SFAS No. 123R in the March 2006 quarter.

These increases were partially offset by a $6.3 million decrease in depreciation, amortization and stock-based compensation and a $1.5 million decrease in amortization of debt issuance costs.

Net cash used for investing activities decreased by $15.5 million, or 27%, for the six months ended June 30, 2007 compared to the six months ended June 30, 2006. The decrease was primarily the result of the following:

·a $60.5 million decrease in cash paid for acquisitions. We acquired MyPoints in April 2006 for $49.5 million, net of cash acquired; The Names Database in March 2006 for $9.5 million, net of cash acquired; and we paid the remaining $1.5 million due in connection with the acquisition of our photo sharing service in March 2006; and

·a $1.4 million decrease in purchases of property and equipment.

These decreases were offset by a $46.9 million increase in net purchases of short-term investments.

We have invested significantly in our network infrastructure, software licenses, leasehold improvements, and computer equipment and we will need to make further significant investments in the future. Capital expenditures for the six months ended June 30, 2007 were $12.6 million. We anticipate that our total capital expenditures for the remainder of 2007 will be in the range of $15 million to $20 million. The actual amount of future capital expenditures may fluctuate due to a number of factors including, without limitation, potential future acquisitions and new business initiatives, which are difficult to predict and could change significantly over time. Additionally, technological advances may require us to make capital expenditures to develop or acquire new equipment or technology in order to replace aging or technologically obsolete equipment.

Net cash used for financing activities decreased by $52.8 million, or 73%, for the six months ended June 30, 2007 compared to the six months ended June 30, 2006. The decrease was primarily the result of payments on the term loan of $54.2 million in the March 2006 quarter.

The payment of dividends will negatively impact cash flows from financing activities. In February and April 2007, our Board of Directors declared a quarterly cash dividend of $0.20 per share of common stock. The dividends were paid on February 28, 2007 and May 31, 2007 and totaled $13.7 million and $14.4 million, respectively. In July 2007, our Board of Directors declared a quarterly cash dividend of $0.20 per share of common stock. The record date for the dividend is August 14, 2007 and the dividend will be paid on August 31, 2007. The payment of future dividends is discretionary and will be subject to determination by the Board of Directors each quarter following its review of our financial performance.

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Future cash flows from financing activities may also be affected by repurchases of common stock. Our Board of Directors authorized a common stock repurchase program that allows us to repurchase shares of our common stock through open market or privately negotiated transactions based on prevailing market conditions and other factors through December 31, 2007. At June 30, 2007, we had repurchased $139.2 million of our common stock under the program, and the remaining amount available under the program was $60.8 million.

Cash flows from financing activities may also be negatively impacted by the withholding of a portion of shares underlying the restricted stock units (“RSUs”) we award to employees. Upon vesting, we currently do not collect the applicable withholding taxes for RSUs from employees. Instead, we automatically withhold, from the RSUs that vest, the portion of those shares with a fair market value equal to the amount of the withholding taxes due. We then pay the applicable withholding taxes in cash. Similar to repurchases of common stock, the net effect of such withholding will adversely impact our cash flows. The amounts remitted in the six months ended June 30, 2007 and 2006 were $3.8 million and $2.0 million, respectively, for which we withheld approximately 265,000 shares and 155,000 shares of common stock, respectively, that were underlying the RSUs. The amount we pay in future quarters will vary based on our stock price and the number of RSUs vesting during the quarter.

Based on our current projections, we expect to continue to generate positive cash flows from operations, at least in the near term. We intend to use our existing cash balances and future cash generated from operations to fund dividend payments, if declared by the Board; to develop and acquire complementary services, businesses or technologies; to repurchase shares of our common stock if we believe market conditions to be favorable; to repurchase the common stock underlying RSUs and pay the withholding taxes due on vested RSUs; and to fund future capital expenditures. We currently anticipate that our future cash flows from operations and existing cash, cash equivalent and short-term investment balances will be sufficient to fund our operations over the next year, and in the near term we do not anticipate the need for additional financing to fund our operations. However, we may raise additional debt or equity capital for a variety of reasons including, without limitation, developing new or enhancing existing services or products, repurchasing our common stock, acquiring complementary services, businesses or technologies or funding significant capital expenditures. If we need to raise additional capital through public or private debt or equity financings, strategic relationships or other arrangements, it might not be available to us in a timely manner, on acceptable terms, or at all. Our failure to raise sufficient capital when needed could have a material adverse effect on our business, financial position, results of operations and cash flows, and could impair our ability to pay dividends. If additional funds were raised through the issuance of equity securities, the percentage of stock owned by the then-current stockholders would be reduced. Furthermore, such equity securities might have rights, preferences or privileges senior to holders of our common stock.

Financial Commitments

Our financial commitments were as follows at June 30, 2007 (in thousands):

			Apr-Dec		Year Ending December 31,
	Total		2007		2008		2009		2010		2011		2012		Thereafter
Capital leases(1)	$	23	$	9	$	14	$	—	$	—	$	—	$	—		$	—
Operating leases	51,622		6,025		11,976		10,957		6,962		4,528		4,072			7,102
Telecommunications purchases	14,583		5,782		6,790		1,102		909		—		—			—
Media purchases	4,540		4,540		—		—		—		—		—			—
Total	$	70,768	$	16,356	$	18,780	$	12,059	$	7,871	$	4,528	$	4,072		$	7,102

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(1)Includes $1 of imputed interest.

Off-Balance Sheet Arrangements

At June 30, 2007, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.

Recent Accounting Pronouncements

Accounting for Uncertainty in Income Taxes

In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income tax positions. This Interpretation requires that we recognize, in the consolidated financial statements, the impact of a tax position that is more likely than not to be sustained upon examination based on the technical merits of the position. The provisions of FIN 48 were effective for us beginning in the March 2007 quarter, with any cumulative effect of a change in accounting principle recorded as an adjustment to opening retained earnings. The implementation of FIN 48 did not have a material impact on our financial position, results of operations or cash flows.

Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which clarifies the definition of 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 and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 will be effective for us on January 1, 2008. We are currently evaluating the impact of adopting SFAS No. 157 on our financial position, results of operations and cash flows.

Fair Value Option

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits entities 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 will be effective for us on January 1, 2008. We are currently evaluating the impact of adopting SFAS No. 159 on our financial position, results of operations and cash flows.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks arising from transactions in the normal course of business, principally risk associated with interest rate and foreign currency fluctuations.

Interest Rate Risk

We have interest rate risk primarily related to our investment portfolio.

We maintain a short-term investment portfolio consisting of U.S. commercial paper, U.S. Government or U.S. Government Agency obligations, municipal obligations, auction rate securities and money market funds. Our primary objective is the preservation of principal and liquidity while maximizing yield. The minimum long-term rating is A, and if a long-term rating is not available, we require a short-term credit rating of A1 and P1. The value of these investments may fluctuate with changes in

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interest rates. However, we believe this risk is immaterial due to the relatively short-term nature of the investments.

Foreign Currency Risk

We transact business in different foreign currencies and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange rates, particularly the Indian Rupee (INR) and the Euro, which may result in a gain or loss of earnings to us. The volatilities of the INR and the Euro (and all other applicable currencies) are monitored throughout the year. We face two risks related to foreign currency exchange: translation risk and transaction risk. Amounts invested in our foreign operations are translated into U.S. dollars using period-end exchange rates. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Our foreign subsidiaries generally collect revenues and pay expenses in currencies other than the U.S. dollar. Since the functional currencies of our foreign operations are denominated in the local currency of our subsidiaries, the foreign currency translation adjustments are reflected as a component of stockholders’ equity and do not impact operating results. Revenues and expenses in foreign currencies translate into higher or lower revenues and expenses in U.S. dollars as the U.S. dollar weakens or strengthens against other currencies. Therefore, changes in exchange rates may negatively affect our consolidated revenues and expenses (as expressed in U.S. dollars) from foreign operations. Currency transaction gains or losses arising from transactions in currencies other than the functional currency are included in operating expenses. While we have not engaged in foreign currency hedging, we may in the future use hedging programs, currency forward contracts, currency options and/or other derivative financial instruments commonly utilized to reduce financial market risks if it is determined that such hedging activities are appropriate to reduce risk.

ITEM 4.CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Interim Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal controls over financial reporting (as such term is defined in Rules 13a 15(f) and 15d 15(f) under the Exchange Act) during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

In April, 2001 and in May 2001, lawsuits were filed in the United States District Court for the Southern District of New York against NetZero, Inc. (“NetZero”), certain officers and directors of NetZero and the underwriters of NetZero’s initial public offering, Goldman Sachs Group, Inc., BancBoston Robertson Stephens, Inc. and Salomon Smith Barney, Inc. A consolidated amended complaint, which is the operative complaint, was filed in April 2002. The complaint alleges that the prospectus through which NetZero conducted its initial public offering in September 1999 was materially false and misleading because it failed to disclose, among other things, that (i) the underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material portions of the restricted number of NetZero shares issued in connection with the offering; and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate NetZero shares to those customers in the offering in exchange for which the customers agreed to purchase additional NetZero shares in the aftermarket at pre-determined prices. Plaintiffs are seeking injunctive relief and damages. The case against NetZero was coordinated with approximately 300 other suits filed against more than 300 issuers that conducted their initial public offerings between 1998 and 2000, their underwriters and an unspecified number of their individual corporate officers and directors. On October 13, 2004, the district court certified a class in six of the other nearly identical actions (the “focus cases”). The underwriter defendants appealed the decision and the United States Court of Appeals for the Second Circuit vacated the district court’s decision granting class certification on December 5, 2006. Plaintiffs filed a petition for rehearing. On April 6, 2007, the Second Circuit denied the petition, but noted that plaintiffs could ask the district court to certify a more narrow class than the one that was rejected. Prior to the Second Circuit’s decision, the majority of issuers, including NetZero, and their insurers had submitted a settlement agreement to the district court for approval. In light of the Second Circuit opinion, the parties agreed that the settlement could no longer be approved, and on June 25, 2007, the court approved a stipulation filed by the plaintiffs and the issuers which terminated the proposed settlement. The plaintiffs now plan to replead their complaints and move for class certification again.

On March 6, 2006, plaintiff Anthony Piercy filed a purported consumer class action lawsuit in the Superior Court of the State of California, County of Los Angeles, against NetZero claiming that NetZero continues to charge consumers fees after they cancel their Internet access account. On July 27, 2006, plaintiff Donald E. Ewart filed a purported consumer class action lawsuit in the Superior Court of the State of California, County of Los Angeles, against NetZero containing substantially similar allegations to the Piercy case. Plaintiffs in both cases are seeking injunctive and declaratory relief and damages. NetZero filed a response to both lawsuits denying the material allegations of the complaints. Both Mr. Piercy and Mr. Ewart subsequently withdrew from the actions as class representatives. On March 16, 2007, Barbara Rasnake, Robert Du Verger and Peter Chrisler were substituted as purported class representatives. On May 25, 2007, the court consolidated the actions under the caption Rasnake v. NetZero, Inc., Case No. BC348461. On July 13, 2007, plaintiffs filed a consolidated amended class action complaint, at which time Peter Chrisler was also substituted as a purported class representative. Discovery is continuing and a trial date has not yet been set.

The pending lawsuits involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to defend. Although we do not believe the outcome of the above outstanding legal proceedings, claims and litigation will have a material adverse effect on our business, financial condition, results of operations or cash flows, the results of litigation are inherently uncertain and we cannot assure you that we will not be materially and adversely impacted by the results of such proceedings. At June 30, 2007, we had not established reserves for any of the matters described above.

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We are subject to various other legal proceedings and claims that arise in the ordinary course of business. We believe the amount, and ultimate liability, if any, with respect to these actions will not materially affect our business, financial condition, results of operations or cash flows. We cannot assure you, however, that such actions will not be material and will not adversely affect our business, financial condition, results of operations or cash flows.

ITEM 1A.RISK FACTORS

Before deciding to invest in our Company or to maintain or increase your investment, you should carefully consider the risks described below as well as the other information in this report and our other filings with the SEC. The risks and uncertainties described below are not the only ones facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect us. If any of these risks actually materialize, our business, financial position, results of operations and cash flows could be adversely impacted. In that event, the market price of our common stock could decline and you may lose all or part of your investment.

We have updated the Risk Factors previously disclosed in Part I, Item IA in our Annual Report on Form 10-K for the year ended December 31, 2006, which was filed with the Securities and Exchange Commission on March 1, 2007, as set forth below.

Our business will suffer if we are unable to compete effectively.

Competition for Internet Access Services.   Our principal Communications services, our Internet access services, compete with many emerging and seasoned competitors, including the following:

·established online service and content providers such as AOL, AOL’s Netscape subsidiary and MSN;

·independent national Internet service providers (“ISPs”) such as EarthLink and its PeoplePC subsidiary;

·companies combining their resources to offer Internet access in conjunction with other services such as Yahoo! and AT&T Internet Services, and Yahoo! and Verizon;

·national communications companies and local exchange carriers such as AT&T Inc., Qwest Communications International, Inc. and Verizon;

·cable companies such as Comcast Corporation, Time Warner Cable, Inc., Cox Communications, Inc., and Charter Communications, Inc.;

·local telephone companies;

·regional and local commercial ISPs; and

·municipalities.

Our primary service offering is dial-up Internet access. Our historical success in competing for Internet access subscribers has been based primarily on offering dial-up access services at prices lower than the prices of our principal competitors. However, in the last few years the market has changed dramatically due to a variety of factors including increased availability of broadband services, decreases in broadband pricing and widespread consumer adoption of applications that require a broadband connection. Dial-up services do not compete favorably with broadband services with respect to connection speed, and dial-up services no longer have a significant, if any, price advantage over certain broadband services. As a result, dial-up services have an increasingly difficult time competing with broadband services and the number of dial-up accounts in the United States has been declining at an increasing rate. In addition to competition from broadband providers, competition among dial-up providers has increased and neither our pricing nor

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our features provide us with a significant competitive advantage, if any, over certain of our dial-up competitors. We expect that competition, particularly with respect to price, both for broadband as well as dial-up services, will continue to intensify, and that our dial-up subscriber base will continue to decrease, potentially at an increasing rate.

In the fourth quarter of 2006, we began offering broadband services by purchasing and reselling broadband services acquired through third party providers. The providers from whom we purchase such services are either our direct competitors or acquire their services from our competitors. We currently have agreements with only a limited number of providers and their services cover only a portion of the U.S. There is no assurance that we will be successful in entering into the agreements necessary to offer broadband services on a significant scale, that we will be able to maintain such agreements or that the pricing under such agreements will enable us to profitably resell the services. Most of the largest providers of broadband services, such as cable and telecommunications companies, control their own networks and offer a wider variety of services than we offer, including phone, data and video services and content. Their ability to bundle services and to offer broadband services at prices below the price that we can profitably offer comparable services puts us at a competitive disadvantage. Decreases in retail broadband pricing as a result of competition would adversely impact our ability to offer such services profitably or at a competitive price. We only have a limited number of subscribers to our broadband services and there can be no assurance that our broadband services will be commercially successful.

In order to compete effectively we may have to make significant revisions to our services, pricing and marketing strategies, and business model. For example, we may have to lower our introductory rates, offer additional free periods of service, offer additional features at little or no additional cost to the consumer, and/or reduce the standard pricing of our services. Measures such as these could decrease our revenues and our average revenue per pay access account. We may also have to allocate more marketing resources toward our access services than we anticipate. All of the foregoing could adversely affect the profitability of our access services which could materially and adversely impact our financial condition, results of operations and cash flows.

Competition for Online Social Networking Services.   The market for our services is competitive, and we expect competition to significantly increase in the future. Our social networking services compete with a wide variety of social networking Web sites, including broad social networking sites such as MySpace and Facebook; a number of specialty sites, including LinkedIn, Reunion.com and Monster.com's Military.com service, that offer similar online social networking services based on school, work or military communities; and an increasing number of schools, employers and associations that maintain their own Internet-based alumni information services. We also compete with a wide variety of Web sites that provide users with alternative networks and ways of locating and interacting with acquaintances from various affiliations, including Web portals such as Yahoo!, MSN and AOL, and online services designed to locate individuals such as White Pages and US Search. As Internet search engines continue to improve their technology and their ability to locate individuals, including by finding individuals through their profiles on social networking sites, these services will increasingly compete with our services. As a result of the growth of the social networking market, a number of companies are attempting to enter our market, either directly or indirectly, some of which may become significant competitors in the future. In addition, many existing social networking services are broadening their offerings to compete with our services. As we broaden our services and evolve into a service used for meeting new people with similar interests or affiliations, we may compete with the increasing number of social networking sites for special niches and areas of interest. For example, our recently launched dating feature competes with a number of online dating services.

Some of our competitors have longer operating histories, greater name and brand recognition, larger customer bases, significantly greater financial, technical, sales and marketing resources, and engage in more extensive research and development than we do. Some of our competitors also have lower customer acquisition costs than we do and offer a wider variety of services and more sophisticated or compelling

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features than ours.  In addition, we have relied extensively on Internet advertising through portals and other Internet service providers, including AOL, MSN and Yahoo!, to grow our free and pay accounts. A number of these companies are competitors of United Online with respect to Internet access and other services, and they may not be willing to retain the same advertising relationship going forward. To the extent we are not able to maintain advertising relationships with these companies, our ability to obtain new online social networking pay and free accounts would be adversely impacted. If our competitors are more successful than we are in attracting users, our ability to maintain a large and growing user base will be adversely affected. Some of our social networking competitors have more compelling Web sites with more extensive user generated content and offer their services free to their users. If our social networking services are not as compelling and we do not stay current with evolving consumer trends, we may not succeed in maintaining or increasing our membership base. If our competitors provide similar services for free, we may not be able to charge for any of our services. Competition could have a material adverse affect on our subscription revenues and advertising revenues from social networking services. Although our pay account base has grown in recent periods, there are no assurances that this rate of growth will continue, if at all. More intense competition could also require us to increase our marketing expenditures. As a result of competition, our revenues and profitability could be adversely affected.

Competition for Online Loyalty Marketing Services.   Our online loyalty marketing service faces competition for members from several other loyalty programs that offer competitive online products and services, including Ebates, Upromise and ThankYou Network. We also face competition from offline loyalty rewards programs that have a significant online presence, such as those operated by credit card, airline and hotel companies. The success of our loyalty marketing service is dependent upon our ability to maintain and expand our active member base. The vast majority of our new member loyalty marketing accounts are derived from a few co-registration sources, which are services that provide new member registrations for MyPoints and unrelated third-party services. The loss of any of these sources of new member registrations or a decrease in the number of new members acquired through these sources could have an adverse affect on our loyalty marketing business. In addition, we generate a significant portion of our loyalty marketing revenues from the activity of a small percentage of MyPoints members. If the advertising campaigns directed to our MyPoints members and the rewards offered are not sufficiently compelling, we may not be able to maintain or increase the percentage of our MyPoints members who actively participate in our programs. If we are unable to increase or maintain the number of new MyPoints members and encourage existing members to actively participate in our programs, then our business and financial results could be adversely affected. Although our membership has grown in prior periods, there are no assurances that our membership growth will continue or increase in the future. We have limited experience in this market and cannot assure you that we will be able to compete effectively.

Competition for Advertising Customers.   We are dependent upon advertising revenues for a significant portion of our revenues and profits. Internet advertising techniques are evolving, and if our technology and ad serving techniques do not keep up with the needs of advertisers, we will not be able to compete effectively. We compete for advertising revenues with major ISPs, portal companies, social networking Web sites, content providers, large Web publishers, Web search engine companies, content aggregation companies, direct marketing businesses, and various other companies that facilitate Internet advertising. We also compete with traditional offline advertising media, such as television, radio and print advertising, because most companies currently spend only a small portion of their advertising budgets on Internet-based advertising. Many of our competitors have longer operating histories, greater name recognition, larger user bases and significantly greater financial, technical, sales and marketing resources than we do. This may allow them to devote greater resources to the development, promotion and sale of their products and services. These competitors may also engage in more extensive research and development, offer more sophisticated or compelling products and services, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies. In certain instances, we generate advertising revenues from

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companies who are also our competitors. To the extent competitors who are also sources of significant advertising revenue cease to do business with us, our revenues and profits could suffer.

Revenues and profitability of our Communications segment are expected to decrease.

Substantially all of our Communications revenues and profits come from our access services. As a result of expected continued decreases in our pay access accounts and, potentially, the average monthly revenue per pay account, we expect that our Communications billable services revenues and the profitability of this segment will decline over time. The rate of decline in billable services revenues has accelerated in some periods and may continue to accelerate. Our Communications advertising revenues may decline as well due to decreases in our access accounts. Continued declines, particularly if such declines accelerate, in Communications revenues may materially and adversely impact the profitability of this segment and the Company as a whole.

Revenues and profitability of our Content & Media segment may not increase.

A key element of our strategy involves the diversification from the declining access business to businesses with growth opportunities. We view the Content & Media segment as a growth opportunity. Both billable services revenues and advertising revenues are key components in the profitability of this segment. We derive substantially all of this segment’s billable services revenues from pay accounts relating to our social networking services. We derive significant advertising revenues from both our social networking services as well as our loyalty marketing service. We have experienced periods where our advertising revenues and billable services revenues have declined. There can be no assurance that we will be successful in increasing Content & Media advertising revenues or billable services revenues in the future. If we are not successful in growing our revenues within this segment, it is likely to adversely affect our diversification strategy and our future prospects. Failure to increase revenues in this segment could also adversely impact the profitability of this segment and the Company as a whole.

We may be unable to maintain or grow our advertising revenues. Reduced advertising revenues may reduce our profits.

Advertising revenues are an increasingly important component of our revenues and profitability. Our revenues from advertising have in the past fluctuated, and may in the future fluctuate, due to a variety of factors including, without limitation, the effect of key advertising relationships, changes in our business models, changes in the online advertising market, changes in our advertising inventory, and changes in usage. In particular, we derive significant revenues from search, an agreement with Webloyalty, Inc. for post-transaction sales and certain other advertising initiatives or partners, and any termination, change or decrease in revenues from these sources could have a material impact on our advertising revenues. Webloyalty and some of its post-transaction partners are subject to a consumer class action lawsuit relating to their post-transaction sales registration practices. There can be no assurance that we will maintain our post-transaction advertising revenues or that our business will not be adversely impacted. In response to competition, we also could be required to expend significant resources to develop or enhance our advertising services, although there can be no assurance that our efforts will be successful. From time to time, we have undertaken initiatives that we believed would increase our advertising revenues but have resulted in decreased advertising revenues. There can be no assurance our advertising initiatives will be effective, and our advertising revenues may decline in future periods.

Our business is subject to fluctuations.

Our results of operations and changes in the number and mix of pay accounts from period to period have varied in the past and may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control and difficult to predict. A number of factors that may impact us are

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discussed in greater detail in this Form 10-Q, and these factors may affect us from period to period and may affect our long-term performance. As a result, you should not rely on period-to-period comparisons as an indication of future or long-term performance. In addition, these factors create difficulties with respect to our ability to forecast our financial performance accurately. We believe that these difficulties in forecasting present even greater challenges for financial analysts who publish their own estimates of our future financial results and account metrics. We cannot assure you that we will achieve the expectations or financial projections made by our management or by the financial analysts. In the event we do not achieve such expectations or projections, the price of our common stock could be adversely affected.

Our marketing activities may not be successful.

We spend significant funds to market our services. From time to time, we may allocate our advertising expenditures to different services for various reasons, and these allocations may adversely impact some of our other services. Even if we choose to allocate significant marketing resources to a particular service, there is no assurance that our marketing activities will be successful. We use online advertising to promote our social networking and loyalty marketing services to potential new members. Most of our online advertising arrangements are structured such that we pay a fee for each new account registration generated through a particular advertisement. The cost of online advertising has generally been increasing in recent periods, which has resulted in an increase in our marketing expenditures. If the cost of online advertising continues to escalate, we may experience decreases in the number of new account registrations unless we increase our marketing expenditures. At times we have increased our profitability, in part, by decreasing our marketing expenditures. Future decreases in our marketing expenditures could adversely impact our business. Future increases in our marketing expenditures could adversely impact our profitability and there can be no assurance that our marketing activities will be successful in growing our businesses. We rely on a variety of distribution channels to obtain new accounts. If these channels prove to be ineffective, or if the cost to acquire new accounts increases, our financial results could be materially and adversely impacted.

If we are unable to retain users, our business and financial results will suffer.

Historically, we have lost an average of four to five percent of our pay accounts each month, which we refer to as churn, with churn in recent periods approximating five percent. Our churn rate is calculated as the total number of pay accounts that terminated or expired in a period divided by the average number of pay accounts for the same period. The average number of pay accounts is a simple average of the number of pay accounts at the beginning and end of a period. We make certain normalizing adjustments to the calculation of our churn percentage for periods in which we add a significant number of pay accounts due to acquisitions. We do not include in our churn calculation those accounts cancelled during the first thirty days of service unless the accounts have upgraded from free accounts, although a number of such accounts will be included in our account totals at any given measurement date. Subscribers who cancel one pay service but subscribe to another pay service are not considered to have cancelled a pay account and, as such, our overall churn rate is not necessarily indicative of the percentage of subscribers canceling any particular service. We have experienced, and will likely continue to experience, a higher percentage of subscribers canceling our accelerated access services than is indicated by our churn rate. In addition, the percentage of subscribers canceling our social networking services has fluctuated significantly from quarter to quarter due to our mix of subscription terms, which affects the timing of subscription expirations. A significant majority of our social networking pay accounts are on plans that automatically renew at the end of their subscription period. Our sales and marketing practices are currently subject to an inquiry by the United States Federal Trade Commission, or FTC, and any change in our renewal practices as a result of the inquiry or otherwise could have a material impact on our churn rate. Our churn may be higher in future periods and will fluctuate from period to period and from service to service. If we continue to experience a high percentage of pay accounts canceling our services, it will make it more difficult to grow, maintain or minimize decreases in the number of pay accounts for those services. If we experience an

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increased percentage of cancellations, our revenues and profitability may be adversely affected. In addition, we could be required to increase our marketing expenditures to replace these lost subscribers, which could also adversely affect our profitability.

Each month, a significant number of free accounts become inactive and we may experience continued declines in the number of active free accounts. In addition, a user may have more than one account on more than one of our services, and we are not able to determine in most cases the number of accounts held by an individual. As such, the actual number of unique individuals using our services may be much lower than our total number of accounts.

We may be unsuccessful at acquiring additional businesses, services or technologies. Even if we complete an acquisition, it may not improve our results of operations and may adversely impact our business and financial condition.

One of our strategic objectives is to acquire businesses, services or technologies that will provide us with an opportunity to leverage our assets and core competencies, or that otherwise will be complementary to our existing businesses. We may not succeed in growing or maintaining our revenues unless we are able to successfully complete acquisitions. The merger and acquisition market for companies offering Internet services is extremely competitive, particularly for companies who have demonstrated a profitable business model with long-term growth potential. Companies with these characteristics trade publicly or are privately valued at multiples of earnings, revenues, operating income and other metrics significantly higher than the multiples at which we are currently valued. Acquisitions may require us to obtain additional debt or equity financing, which may not be available to us on reasonable terms, or at all. These and other factors may make it difficult for us to acquire additional businesses, product lines or technologies at affordable prices, or at all, and there is no assurance that we will be successful in completing additional acquisitions.

We routinely engage in discussions regarding potential acquisitions and any of these transactions could be material to our financial condition and results of operations. However, we cannot assure you that the anticipated benefits of an acquisition will materialize or that any integration attempts will be successful. Acquiring a business, product line or technology involves many risks, including:

·disruption of our ongoing business and significant diversion of management from day-to-day responsibilities;

·acquisition financings that involve the issuance of potential dilutive equity or the incurrence of debt;

·reduction of cash and other resources available for operations and other uses;

·unforeseen obligations or liabilities;

·difficulty assimilating the acquired customer bases, technologies and operations;

·difficulty assimilating and retaining employees from the acquired business;

·risks of entering markets in which we have little or no direct prior experience;

·potential impairment of relationships with users, customers or vendors as a result of changes in management of the acquired business; and

·large write-offs either at the time of the acquisition or in the future, the incurrence of restructuring charges, the amortization of identifiable intangible assets, and the impairment of amounts capitalized as intangible assets; and

·lack of controls, policies and procedures appropriate for a public company, and the time and cost related to the remediation of such controls, policies and procedures.

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Any of these risks could harm our business and financial results. In addition, an acquisition of a foreign business involves risks in addition to those set forth above, including risks associated with potentially unfamiliar economic, political and regulatory environments and integration difficulties due to language, cultural and geographic differences.

We may not successfully develop and market new services and features in a timely or cost-effective manner; consumers or advertisers may not accept our new services and features.

We may not be able to compete effectively if we are not able to adapt to changes in technology and industry standards or develop or acquire and successfully commercialize new and enhanced services and features. New services or features, such as our broadband services, may be dependent on our obtaining needed technology or services from third parties, which we may not be able to obtain in a timely manner upon terms acceptable to us, or at all. Our ability to compete successfully will also depend upon the continued compatibility of our services with products and services offered by various vendors, which we may not be able to achieve. We have expended, and may in the future expend, significant resources enhancing our existing services and developing, acquiring and implementing new services or features, such as our broadband services and the recently launched or proposed new features and designs on our Classmates and MyPoints Web sites. Product development involves a number of uncertainties, including unanticipated delays and expenses. New or enhanced services and features, including those proposed or recently launched, may have technological problems or may not be accepted by consumers or advertisers. For example, our VoIP and photo sharing services did not meet with commercial success. We cannot assure you that we will be successful in developing, acquiring or implementing new or enhanced services or features, or that new or enhanced services or features will be commercially successful.

Our access business is dependent on our ability to effectively manage our telecommunications and network capacities.

Our access business substantially depends on the capacity, affordability, reliability and security of our telecommunications networks. We will have to accurately anticipate our future telecommunications capacity needs within lead-time requirements. Only a small number of telecommunications providers offer the network and data services we currently require, and we purchase most of our telecommunications services from a few providers. Some of our telecommunications services are provided pursuant to short-term agreements that the providers can terminate or elect not to renew. Vendors may experience significant financial difficulties and be unable to perform satisfactorily or to continue to offer their services. The loss of vendors has resulted, and may result, in increased costs, decreased service quality and the loss of users. If we are unable to maintain, renew or obtain new agreements with the third party providers of our telecommunications services, or to secure new or alternative arrangements with other providers, to provide the scope, quantity, quality, type and pricing of services to meet our current and future needs, our business, financial position, results of operations and cash flows could be materially and adversely affected.

Our business is highly dependent on our billing and customer support systems, and on third parties for technical support and customer service, and our business may suffer if these systems do not function and we cannot perform and provide these services.

Customer billing and service are highly complex processes, and our systems must efficiently interface with other third parties’ systems such as the systems of credit card processing companies and other companies to whom we outsource these functions. Our ability to accurately and efficiently bill and service our users is dependent on the successful operation of these systems. We have experienced customer billing and service problems from time to time and may experience additional problems in the future. We currently outsource a majority of the live technical and billing support functions. As a result, we maintain only a small number of internal customer service personnel. We are not equipped to provide the necessary range of customer service functions in the event that our vendors become unable or unwilling to offer these services to us. Problems with our third party software applications, our internally developed software

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applications, our credit card processors, our outsourced customer service vendors, other customer billing and support vendors, and any other failures or errors in our customer billing and service systems, could materially and adversely affect our business, financial position, results of operations and cash flows.

If our software or hardware contains errors or fails, if we fail to operate our services effectively or if we encounter difficulties integrating our systems and technologies, our business could be seriously harmed.

Our services, and the hardware and software systems underlying our services, are complex. Our systems may contain undetected errors or failures and are susceptible to human error. We have in the past encountered, and may in the future encounter, software and hardware errors, system design errors, errors in the operation of our systems, and technical and customer support issues associated with our services and software releases. This has resulted in, and may in the future result in, a number of adverse consequences, which have included or may include:

·users being disconnected from our services or being unable to access our services;

·loss of data or revenue;

·injury to reputation; and

·diversion of development resources.

A number of our material technologies and systems are based on different platforms. To the extent we attempt to integrate these technologies and systems, we may experience a number of difficulties, errors, failures and unanticipated costs. In addition, our business relies on third-party software for various applications including, without limitation, our internal operations, our billing and customer support, our accelerated services, and our advertising products and services. Any significant failure of this software could materially and adversely affect our business, financial position, results of operations and cash flows. Our services also rely on their compatibility with other third-party systems, particularly operating systems. Incompatibility with future changes to third-party software upon which our systems rely could materially affect our ability to deliver our services. We cannot assure you that we will not experience significant technical problems with our services in the future.

A security breach or inappropriate use of our network or services could expose us to claims or a loss of revenue.

The success of our business depends on the security of our networks and, in part, on the security of the network infrastructures of our third-party vendors. Unauthorized or inappropriate access to, or use of, our networks, computer systems and services could potentially jeopardize the security of confidential information, including credit card information, of our users and of third parties. Third parties have in the past used our networks, services and brand names to perpetrate crimes, such as identity theft or credit card theft, and may do so in the future. Users or third parties may assert claims of liability against us as a result of any failure by us to prevent security breaches, unauthorized disclosure of user information or other such activities. Although we use security measures that we believe to be effective by industry standards, we cannot assure you that the measures we take will be successfully implemented or will be effective in preventing these types of activities. We also cannot assure you that the security measures of our third-party network providers, providers of customer and billing support services or other vendors will be adequate. In addition to potential legal liability, these activities may adversely impact our reputation or our revenues and may interfere with our ability to provide our services, all of which could adversely impact our business.

Harmful software programs such as viruses could disrupt our business.

Our business is dependent on the continued acceptance of the Internet as an effective medium. Damaging software programs, such as computer viruses, worms and Trojan horses, have from time to time

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been disseminated through the Internet and have caused significant disruption to Internet users. Certain of these programs have disabled the ability of computers to access the Internet, requiring users to obtain technical support in order to gain access to the Internet. Other programs have had the potential to damage or delete computer programs. The development and widespread dissemination of harmful programs has the potential to seriously disrupt Internet usage. If Internet usage is significantly disrupted for an extended period of time, or if the prevalence of these programs results in decreased residential Internet usage, our business could be materially and adversely impacted. In addition, actions taken by us or our telecommunications providers to attempt to minimize the spread of harmful programs could adversely impact our users’ ability to utilize our services.

Our failure to protect our proprietary rights could harm our business.

Our trademarks, patents, copyrights, domain names and trade secrets are important to the success of our business. We principally rely upon patent, trademark, copyright, trade secret and contract laws to protect our proprietary technology. The protection of our proprietary rights may require the expenditure of significant financial and internal resources. We cannot assure you that we have taken adequate steps to prevent misappropriation of our rights. Our failure to adequately protect our proprietary rights could adversely affect our brands.

Legal actions, particularly those associated with proprietary rights, could subject us to substantial liability and expense and require us to change our business practices.

We are currently, and have been in the past, party to various legal actions. These actions include, without limitation, claims by private parties in connection with consumer protection and other laws, claims that we infringe third party patents, claims in connection with employment practices, securities laws claims, breach of contract claims and other business-related claims. The nature of our business could subject us to additional claims for similar matters, as well as a wide variety of other claims including, without limitation, claims for defamation, negligence, trademark infringement, copyright infringement, and privacy matters. Various governmental agencies may also assert claims or institute investigations relating to our business practices, such as our marketing, billing, customer retention, cancellation, refund or disclosure practices.

Defending against lawsuits and investigations involves significant expense and diversion of management’s attention and resources from other matters. We may not prevail in existing claims or claims that may be made in the future. The failure to successfully defend against certain types of claims, including claims based on infringement of proprietary rights, could require us to change our business practices or obtain licenses from third parties, which licenses may not be available on acceptable terms, if at all. Lawsuits and investigations also involve the risk of significant settlements or judgments against us. Both the cost of defending claims, as well as the effect of settlements and judgments, could cause our results of operations to fluctuate significantly from period to period and could materially and adversely affect our business, financial position, results of operations and cash flows.

We may not realize the benefits associated with our intangible assets and may be required to record a significant charge to earnings if we are required to impair our goodwill or identifiable intangible assets.

We are required, under accounting principles generally accepted in the United States, to review our intangible assets for impairment when events occur or circumstances change that would more indicate the fair value of a reporting unit below its carrying value amount. Goodwill is required to be tested for impairment at least annually. Certain of our services are relatively new and have not generated significant revenues. We have capitalized certain proprietary rights related to some of these services as well as certain costs incurred by us in connection with the development of these services. We have also capitalized goodwill and intangible assets in connection with some of our acquisitions. If these services are not commercially successful, we would likely be required to record an impairment charge for these assets

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which would negatively impact our financial condition and results of operations. For example, in the fourth quarter of 2006, we had to write-down (impair) certain long-lived assets associated with our VoIP services and certain goodwill and intangible assets associated with the acquisition of our photo-sharing service. We have experienced impairment losses in the past and we cannot assure you that we will not experience impairment losses in the future. Any such loss could adversely and materially impact our financial condition and results of operations.

Our ability to operate our business could be seriously harmed if we lose members of our senior management team or other key employees.

Our business is largely dependent on the efforts and abilities of our senior management, particularly Mark R. Goldston, our chairman, president and chief executive officer, and other key personnel. Any of our officers or employees can terminate his or her employment relationship at any time. The loss of these key employees or our inability to attract or retain other qualified employees could seriously harm our business and prospects. We do not carry key person life insurance on any of our employees.

Changes in laws and regulation changes and new laws and regulations may adversely affect our results of operations.

We are subject to a variety of international, federal, state and local laws and regulations, including those relating to issues such as user privacy and data protection, defamation, pricing, advertising, taxation, sweepstakes, promotions, billing, content regulation, bulk email or “spam,” anti-spyware initiatives, security breaches and consumer protection. Compliance with the various laws and regulations, which in many instances are unclear or unsettled, is complex. Any changes in such laws and regulations, the enactment of any additional laws or regulations, or increased enforcement activity of such laws and regulations, could significantly impact our costs or the manner in which we conduct business, all of which could adversely impact our results of operations and cause our business to suffer.

The United States Federal Trade Commission, or FTC, and certain state agencies have investigated Internet companies in connection with consumer protection and privacy matters. The federal government has also enacted consumer protection laws, including laws protecting the privacy of consumers' nonpublic personal information. Our failure to comply with existing laws, including those of foreign countries in which we operate, the adoption of new laws or regulations regarding the use of personal information or an investigation of our privacy practices could increase the costs of operating our business.

In June 2007, we received a letter from the FTC advising us that it was conducting an inquiry into Classmates’ activities in the marketing and sale of subscriptions to consumers. We are in the process of providing the documents and information requested by the FTC which include documents related to our autorenewal practices. We cannot assure you that our services and business practices, or future changes to our services and business practices, will not subject us to claims and liability by governmental agencies or private parties. To the extent that our services and business practices change as a result of claims or actions by governmental agencies, such as the FTC, or private parties, any such changes could materially and adversely affect our business, financial position, results of operations and cash flows.

Currently, ISPs are considered “information service” providers and regulations that apply to telephone companies and other telecommunications common carriers do not apply to our Internet access services. However, our Internet access services could become subject to Federal Communications Commission and state regulation as Internet access services and telecommunications services converge. If the regulatory status of ISPs changes, our business may be adversely affected. The Internet Tax Freedom Act, which placed a moratorium on new state and local taxes on Internet commerce, is in effect through November 2007. However, future laws imposing taxes or other regulations on the provision of goods and services over the Internet could make it substantially more expensive to operate our business.

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Our online social networking services and online loyalty marketing service rely heavily on email campaigns, and any restrictions on the sending of emails could materially and adversely affect our business.

Our online social networking services and online loyalty marketing service deliver a significant number of emails to our members. In addition to any government laws and regulations, voluntary actions by third parties to block, impose restrictions on or charge for the delivery of emails through their email systems could materially and adversely impact our business. In addition, from time to time, ISPs block bulk email transmissions or otherwise experience technical difficulties which result in the inability to transmit emails to our members. Restrictions on the sending of emails could materially and adversely affect our business and results of operations.

Our business could be shut down or severely impacted by a catastrophic event.

Our computer equipment and the telecommunications infrastructure of our third-party network providers are vulnerable to damage from fires, earthquakes, floods, power loss, telecommunications failures, terrorism and similar events. We have experienced situations where power loss and telecommunications failures have adversely impacted our services, although to date such failures have not been material to our operations. Despite our implementation of network security measures, our servers are also vulnerable to computer viruses, worms, physical and electronic break-ins, sabotage and similar disruptions from unauthorized tampering of our computer systems. In addition, a significant portion of our critical computer equipment, including our data centers, is located in areas of the states of California and Washington that are particularly susceptible to earthquakes, and a significant portion of our Classmates subsidiary’s computer equipment and data centers are also located in a flood plain. We do not maintain redundant capabilities for our Classmates and MyPoints services and any of these events could result in a significant and extended disruption of these services. Currently, we do not have a disaster recovery plan to address these and other vulnerabilities. As a result, it would be difficult to operate the Classmates and MyPoints businesses in the event of disaster. While we maintain redundant capabilities for our Internet access services, a disaster could result in a significant and extended disruption of these services as well. Any prolonged disruption of our services due to these or other events would severely impact or shut down our business. We do not carry earthquake or flood insurance, and the property, business interruption and other insurance we do carry may not be sufficient to cover, if at all, losses that may occur as a result of any events which cause interruptions in our services.

Our business could be severely impacted due to political instability or other factors in India.

We have a significant number of employees located in our India office. Our product development, customer support and quality assurance operations would be severely disrupted if telecommunications issues, political instability, labor strife or other factors adversely impacted these operations or our ability to communicate with these operations. Any disruption that continued for an extended period of time would likely have a material adverse effect on our ability to service our customers and develop our products and services. If we were to cease our operations in India and transfer these operations to another geographic area, such change could result in increased overhead costs which could materially and adversely impact our results of operations.

We cannot predict our future capital needs and we may not be able to secure additional financing.

We may need to raise additional funds in the future to fund our operations, for acquisitions of businesses or technologies or for other purposes. Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available or not available when required in sufficient amounts or on acceptable terms, our business and its future prospects may suffer.

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We may stop paying quarterly cash dividends on our common stock.

Commencing with the second quarter of 2005, we have declared and paid a quarterly cash dividend of $0.20 per share of common stock. The payment of future dividends is discretionary and will be subject to determination by our Board of Directors each quarter following its review of our financial condition, results of operations and cash flows and such other factors as are deemed relevant by our board of directors. Our future cash flows may significantly decline due to, among other things, declines in our dial-up Internet access business, the payment of income taxes and other factors, and our cash balances will decline if we use our cash to acquire businesses or technologies, repurchase stock or for other purposes. A change in our business needs, including working capital and funding for acquisitions, or a change in tax laws relating to dividends, could cause our Board of Directors to decide to cease the payment of, or reduce, the dividend in the future. We cannot assure you that we will continue to pay quarterly cash dividends, and if we do not, our stock price could be negatively impacted.

We have anti-takeover provisions that may make it difficult for a third party to acquire us.

Provisions of our certificate of incorporation, our bylaws and Delaware law could make it difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders because of a premium price offered by a potential acquirer. In addition, our Board of Directors adopted a stockholder rights plan, which is an anti-takeover measure that will cause substantial dilution to a person who attempts to acquire our company on terms not approved by our Board of Directors.

Our stock price has been highly volatile and may continue to be volatile.

The market price of our common stock has fluctuated significantly since our stock began trading on the Nasdaq Stock Market in September 2001 and it is likely to continue to be volatile with extreme volume fluctuations. In addition, the Nasdaq Stock Market, where most publicly-held Internet companies are traded, has experienced substantial price and volume fluctuations. The broad market and industry factors that influence or affect such fluctuations may harm the market price of our common stock, regardless of our actual operating performance, and for this or other reasons we could suffer significant declines in the market price of our common stock.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Common Stock Repurchases

Our Board of Directors authorized a common stock repurchase program that allows us to repurchase shares of our common stock through open market or privately negotiated transactions based on prevailing market conditions and other factors. From time to time, the Board of Directors has increased the amount authorized for repurchase under this program. On April 22, 2004, the Board of Directors authorized us to purchase up to an additional $100 million of our common stock through May 31, 2005 under the program, bringing the total amount authorized under the program to $200 million. On April 29, 2005, the Board of Directors extended the program through December 31, 2006. In January 2007, the Board further extended the program through December 31, 2007. At June 30, 2007, we had repurchased $139.2 million of our common stock under the program, leaving $60.8 million remaining under the program.

Shares withheld from restricted stock units (“RSUs”) awarded to employees upon vesting to pay applicable withholding taxes on their behalf are considered common stock repurchases, but are not counted as purchases against the Board-approved repurchase program. Upon vesting, the Company currently does not collect the applicable withholding taxes for RSUs from employees. Instead, the Company automatically withholds, from the RSUs that vest, the portion of those shares with a fair market value equal to the amount of the withholding taxes due. The Company then pays the applicable withholding taxes in cash, which is accounted for as a repurchase of common stock.

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Common stock repurchases at June 30, 2007 were as follows (in thousands, except per share amounts):

Period	Total Number of Shares Purchased		Average Price  Paid per Share			Total Number of Shares Purchased as Part of a Publicly Announced Program		Maximum Approximate Dollar Value that May Yet be Purchased Under the Program
2001-2004		9,664		$	12.92		9,664		$	74,989
February 2005		1,268		11.20			1,268		60,782
February 2006		129		12.77			—		60,782
May 2006		26		11.87			—		60,782
August 2006		38		10.92			—		60,782
November 2006		22		13.88			—		60,782
February 2007		194		13.72			—		60,782
May 2007		71		15.89			—		60,782
Total		11,412		$	12.77		10,932

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ITEM 6.EXHIBITS

		Filed with this		Incorporated by Reference to
No.	Exhibit Description	Form 10-Q		Form	File No.	Date Filed
2.1	Stock Purchase Agreement, dated as of April 9, 2006, by and between United Online, Inc. and UAL Corporation			8-K	000-33367	4/13/2006
3.1	Amended and Restated Certificate of Incorporation			10-K	000-33367	3/1/2007
3.2	Amended and Restated Bylaws			10-K	000-33367	3/1/2007
3.3	Certificate of Designation for Series A Junior Participating Preferred Stock (included in exhibit 4.1 below)			10-K	000-33367	3/1/2007
4.1	Rights Agreement, dated as of November 15, 2001, between the Company and U.S. Stock Transfer Corporation, which includes the form of Certificate of Designation for the Series A junior participating preferred stock as Exhibit A, and the form of Rights Certificate as Exhibit B			10-K	000-33367	3/1/2007
4.2	Amendment No. 1 to Rights Agreement, dated as of April 29, 2003, between the Registrant and U.S. Stock Transfer Corporation			10-Q	000-33367	5/1/2003
10.1	2001 Amended and Restated Employee Stock Purchase Plan			10-Q	000-33367	5/3/2004
10.2	2001 Stock Incentive Plan		X		000-33367	8/9/2007
10.3	Form of Option Agreement for 2001 Stock Incentive Plan			10-Q	000-33367	10/27/2004
10.4	Form of Restricted Stock Unit Issuance Agreement for 2001 Stock Incentive Plan			10-Q	000-33367	8/8/2005
10.5	2001 Supplemental Stock Incentive Plan		X		000-33367	8/9/2007
10.6	Form of Option Agreement for 2001 Supplemental Stock Incentive Plan			10-Q	000-33367	10/27/2004
10.7	Classmates Online, Inc. Amended and Restated 1999 Stock Plan			S-8	333-121217	2/11/2005
10.8	Classmates Online, Inc. 2004 Stock Plan			10-Q	000-33367	5/10/2005
10.9	Form of Option Agreement for Classmates Online, Inc. 2004 Stock Plan			10-Q	000-33367	5/10/2005
10.10	United Online, Inc. 2007 Management Bonus Plan			10-Q	000-33367	5/4/2007
10.11	Employment Agreement between the Registrant and Mark R. Goldston			10-Q	000-33367	5/4/2007

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10.12	Amended and Restated Employment Agreement between the Registrant and Charles S. Hilliard		10-KT	000-33367	2/5/2004
10.13	Amended and Restated Employment Agreement between the Registrant and Frederic A. Randall, Jr.		10-KT	000-33367	2/5/2004
10.14	Employment Agreement between the Registrant and Matt Wisk		10-Q	000-33367	8/8/2005
10.15	Employment Agreement between the Registrant and Ted Cahall		10-Q	000-33367	8/8/2005
10.16	Employment Agreement between the Registrant and Jon Fetveit		10-Q	000-33367	8/8/2005
10.17	Employment Agreement between the Registrant and Gerald Popek		10-Q	000-33367	8/8/2005
10.18	Employment Agreement between the Registrant and Robert Taragan		10-Q	000-33367	8/8/2005
10.19	Employment Agreement between the Registrant and Jeremy Helfand		10-Q	000-33367	8/9/2006
10.20	Office Lease between LNR Warner Center, LLC and NetZero, Inc.		10-Q	000-33367	5/3/2004
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X		000-33367	8/9/2007
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X		000-33367	8/9/2007
32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X		000-33367	8/9/2007
32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X		000-33367	8/9/2007

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SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 9, 2007.

UNITED ONLINE, INC. (Registrant)
By:	/s/ NEIL P. EDWARDS
	Neil P. Edwards
	Interim Chief Financial Officer (as Principal Financial Officer)

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EXHIBIT INDEX

		Filed with this		Incorporated by Reference to
No.	Exhibit Description	Form 10-Q		Form	File No.	Date Filed
2.1	Stock Purchase Agreement, dated as of April 9, 2006, by and between United Online, Inc. and UAL Corporation			8-K	000-33367	4/13/2006
3.1	Amended and Restated Certificate of Incorporation			10-K	000-33367	3/1/2007
3.2	Amended and Restated Bylaws			10-K	000-33367	3/1/2007
3.3	Certificate of Designation for Series A Junior Participating Preferred Stock (included in exhibit 4.1 below)			10-K	000-33367	3/1/2007
4.1	Rights Agreement, dated as of November 15, 2001, between the Company and U.S. Stock Transfer Corporation, which includes the form of Certificate of Designation for the Series A junior participating preferred stock as Exhibit A, and the form of Rights Certificate as Exhibit B			10-K	000-33367	3/1/2007
4.2	Amendment No. 1 to Rights Agreement, dated as of April 29, 2003, between the Registrant and U.S. Stock Transfer Corporation			10-Q	000-33367	5/1/2003
10.1	2001 Amended and Restated Employee Stock Purchase Plan			10-Q	000-33367	5/3/2004
10.2	2001 Stock Incentive Plan		X		000-33367	8/9/2007
10.3	Form of Option Agreement for 2001 Stock Incentive Plan			10-Q	000-33367	10/27/2004
10.4	Form of Restricted Stock Unit Issuance Agreement for 2001 Stock Incentive Plan			10-Q	000-33367	8/8/2005
10.5	2001 Supplemental Stock Incentive Plan		X		000-33367	8/9/2007
10.6	Form of Option Agreement for 2001 Supplemental Stock Incentive Plan			10-Q	000-33367	10/27/2004
10.7	Classmates Online, Inc. Amended and Restated 1999 Stock Plan			S-8	333-121217	2/11/2005
10.8	Classmates Online, Inc. 2004 Stock Plan			10-Q	000-33367	5/10/2005
10.9	Form of Option Agreement for Classmates Online, Inc. 2004 Stock Plan			10-Q	000-33367	5/10/2005
10.10	United Online, Inc. 2007 Management Bonus Plan			10-Q	000-33367	5/4/2007
10.11	Employment Agreement between the Registrant and Mark R. Goldston			10-Q	000-33367	5/4/2007

53

10.12	Amended and Restated Employment Agreement between the Registrant and Charles S. Hilliard		10-KT	000-33367	2/5/2004
10.13	Amended and Restated Employment Agreement between the Registrant and Frederic A. Randall, Jr.		10-KT	000-33367	2/5/2004
10.14	Employment Agreement between the Registrant and Matt Wisk		10-Q	000-33367	8/8/2005
10.15	Employment Agreement between the Registrant and Ted Cahall		10-Q	000-33367	8/8/2005
10.16	Employment Agreement between the Registrant and Jon Fetveit		10-Q	000-33367	8/8/2005
10.17	Employment Agreement between the Registrant and Gerald Popek		10-Q	000-33367	8/8/2005
10.18	Employment Agreement between the Registrant and Robert Taragan		10-Q	000-33367	8/8/2005
10.19	Employment Agreement between the Registrant and Jeremy Helfand		10-Q	000-33367	8/9/2006
10.20	Office Lease between LNR Warner Center, LLC and NetZero, Inc.		10-Q	000-33367	5/3/2004
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X		000-33367	8/9/2007
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X		000-33367	8/9/2007
32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X		000-33367	8/9/2007
32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X		000-33367	8/9/2007

54