**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**




**WASHINGTON,
      D.C. 20549**






**FORM
      10-Q**




x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




**FOR
      THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008**





**or**




 ̈
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934









**COMMISSION
      FILE NUMBER: 000-28271**




**THE
      KNOT, INC.**


(Exact
      Name of Registrant as Specified in its Charter)




**Delaware**
              (State
                of incorporation)
            **13-3895178**
              (I.R.S.
                Employer Identification Number)




**462
      Broadway, 6** **th** **Floor**


**New
      York, New York 10013**


(Address
      of Principal Executive Officer and Zip Code)




**(212)
      219-8555**


(Registrant’s
      Telephone Number, Including Area Code)




Indicate
      by check whether the registrant: (1) filed all reports required to be filed
      by
      Section 13 or 15(d) of the Securities Exchange Act 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  ̈




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




Large
      accelerated filer  ̈    Accelerated
      filer x




Non-accelerated
      filer  ̈ (Do not
      check if a smaller reporting company)  Smaller
      reporting company  ̈




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).




Yes o    No x




As
      of
      November 5, 2008, there were 32,300,612 shares of the registrant’s common stock
      outstanding.








Page
                NumberPART
                  IFINANCIAL
                  INFORMATIONITEM
                  1:
              Financial
                  Statements (Unaudited):Condensed
                    Consolidated Balance Sheets as of September 30, 2008 and December
                    31,
                    2007
              
              4Condensed
                  Consolidated Statements of Operations for the three and nine months
                  ended
                  September 30, 2008 and 2007
              
              5Condensed
                    Consolidated Statements of Cash Flows for the nine months ended
                    September
                    30, 2008 and 2007
              
              6Notes
                  to Condensed Consolidated Financial Statements
              
              7ITEM
                  2:
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              19ITEM
                  3:
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              30ITEM
                  4:
              Controls
                  and Procedures
              
              31PART
                  IIOTHER
                  INFORMATIONITEM
                  1:
              Legal
                  Proceedings
              
              32ITEM1A:
              Risk
                  Factors
              
              32ITEM
                  2:
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              
              33ITEM
                  6:
              Exhibits
              
              33SIGNATURES






2




**SPECIAL
      NOTE ON FORWARD-LOOKING** **STATEMENTS**




This
      report contains forward-looking statements relating to future events and the
      future performance of The Knot, Inc. based on our current expectations,
      assumptions, estimates and projections about us and our industry. These
      forward-looking statements involve risks and uncertainties. Actual results
      or
      events could differ materially from those anticipated in such forward-looking
      statements as a result of certain factors, as more fully described in Item
      1A
      (Risk Factors) in each of our most recent Annual Report on Form 10-K and Part
      II
      of this report, and elsewhere in this report. We undertake no obligation to
      update publicly any forward-looking statements for any reason, even if new
      information becomes available or other events occur in the future.





Unless
      the context otherwise indicates, references in this report to the terms “The
      Knot,” “we,” “our” and “us” refer to The Knot, Inc., its divisions and its
      subsidiaries.





3





**PART
      I**   **FINANCIAL
      INFORMATION**




**ITEM
      1.**  **Financial
      Statements**




**THE
      KNOT, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(UNAUDITED)**


**September
                30,**
            
            **December
                31,****ASSETS**
            
            **2008**
            
            **2007**Current
                assets:Cash
                and cash equivalents
            
            $
            69,025,806
            
            $
            33,127,457Short-term
                investments
            
            
            —
            
            
            72,648,519Accounts
                receivable, net of allowances of $1,584,381 and $1,416,280 atSeptember
                30, 2008 and December 31, 2007, respectively
            
            
            10,992,181
            
            
            14,927,145Accounts
                receivable from affiliate
            
            
            958,918
            
            
            1,327,029Inventories
            
            
            2,605,484
            
            
            1,878,478Deferred
                production and marketing costs
            
            
            515,730
            
            
            482,833Deferred
                tax assets, current portion
            
            
            3,748,419
            
            
            3,388,419Other
                current assets
            
            
            2,089,822
            
            
            1,622,556Total
                current assets
            
            
            89,936,360
            
            
            129,402,436Long-term
                investments
            
            
            48,900,000
            
            
            —Property
                and equipment, net
            
            
            9,504,229
            
            
            8,497,030Intangible
                assets, net
            
            
            28,778,797
            
            
            30,952,683Goodwill
            
            
            33,812,366
            
            
            32,105,110Deferred
                tax assets
            
            
            20,252,910
            
            
            22,017,689Other
                assets
            
            
            219,720
            
            
            278,517Total
                assets
            
            $
            231,404,382
            
            $
            223,253,465**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable and accrued expenses
            
            $
            7,966,718
            
            $
            7,616,431Deferred
                revenue
            
            
            15,773,744
            
            
            14,665,083Current
                portion of long-term debt
            
            
            55,173
            
            
            55,173Total
                current liabilities
            
            
            23,795,635
            
            
            22,336,687Deferred
                tax liabilities
            
            
            13,299,360
            
            
            14,177,960Other
                liabilities
            
            
            393,037
            
            
            455,631Total
                liabilities
            
            
            37,488,032
            
            
            36,970,278Commitments
                and contingencies (Note 12)Stockholders’
                equity:Preferred
                stock, $0.001 par value; 5,000,000 shares authorized; no shares issued
                and
                outstanding
            
            
            —
            
            
            —Common
                stock, $0.01 par value; 100,000,000 shares authorized;32,305,446
                shares and 31,578,404 shares issued and outstanding at September
                30, 2008
                and December 31, 2007, respectively
            
            
            323,054
            
            
            315,784Additional
                paid-in capital
            
            
            198,609,541
            
            
            192,893,753Accumulated
                deficit
            
            
            (1,816,245
            )
            
            (6,926,350
            )Accumulated
                other comprehensive loss
            
            
            (3,200,000
            )
            
            —Total
                stockholders’ equity
            
            
            193,916,350
            
            
            186,283,187Total
                liabilities and stockholders’ equity
            
            $
            231,404,382
            
            $
            223,253,465




*See
      accompanying Notes to Condensed Consolidated Financial
      Statements.*





4





**THE
      KNOT, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(UNAUDITED)**




**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Net
                revenues:Online
                sponsorship and advertising
            
            $
            13,949,041
            
            $
            12,394,070
            
            $
            40,322,645
            
            $
            35,691,614Registry
                services
            
            
            3,452,546
            
            
            3,665,755
            
            
            8,519,853
            
            
            8,782,342Merchandise
            
            
            5,751,149
            
            
            5,316,915
            
            
            17,478,521
            
            
            16,447,195Publishing
                and other
            
            
            3,830,102
            
            
            3,632,668
            
            
            13,133,575
            
            
            13,603,111Total
                net revenues
            
            
            26,982,838
            
            
            25,009,408
            
            
            79,454,594
            
            
            74,524,262Cost
                of revenues:Online
                sponsorship and advertising
            
            
            601,040
            
            
            386,190
            
            
            1,583,314
            
            
            1,163,120Merchandise
            
            
            2,945,582
            
            
            2,446,873
            
            
            8,474,536
            
            
            7,720,728Publishing
                and other
            
            
            1,544,926
            
            
            1,561,030
            
            
            5,269,094
            
            
            5,177,081Total
                cost of revenues
            
            
            5,091,548
            
            
            4,394,093
            
            
            15,326,944
            
            
            14,060,929Gross
                profit
            
            
            21,891,290
            
            
            20,615,315
            
            
            64,127,650
            
            
            60,463,333Operating
                expenses:Product
                and content development
            
            
            5,296,140
            
            
            3,486,799
            
            
            15,285,332
            
            
            9,937,098Sales
                and marketing
            
            
            7,826,354
            
            
            6,230,330
            
            
            23,022,190
            
            
            18,567,666General
                and administrative
            
            
            4,004,556
            
            
            4,399,333
            
            
            14,026,452
            
            
            12,470,968Goodwill
                impairment
            
            
            —
            
            
            495,578
            
            
            —
            
            
            495,578Depreciation
                and amortization
            
            
            2,020,966
            
            
            2,078,598
            
            
            6,460,133
            
            
            6,384,499Total
                operating expenses
            
            
            19,148,016
            
            
            16,690,638
            
            
            58,794,107
            
            
            47,855,809Income
                from operations
            
            
            2,743,274
            
            
            3,924,677
            
            
            5,333,543
            
            
            12,607,524Interest
                and other income, net
            
            
            826,063
            
            
            1,272,843
            
            
            2,908,592
            
            
            3,496,047Income
                before income taxes
            
            
            3,569,337
            
            
            5,197,520
            
            
            8,242,135
            
            
            16,103,571Provision
                for income taxes
            
            
            1,329,031
            
            
            2,299,213
            
            
            3,132,030
            
            
            6,811,056Net
                income
            
            $
            2,240,306
            
            $
            2,898,307
            
            $
            5,110,105
            
            $
            9,292,515Net
                earnings per share—basic
            
            $
            0.07
            
            $
            0.09
            
            $
            0.16
            
            $
            0.30Net
                earnings per share—diluted
            
            $
            0.07
            
            $
            0.09
            
            $
            0.16
            
            $
            0.28Weighted
                average number of common shares outstandingBasic
            
            
            31,572,340
            
            
            31,034,101
            
            
            31,423,993
            
            
            30,915,579Diluted
            
            
            32,708,879
            
            
            32,767,237
            
            
            32,631,982
            
            
            32,786,345







*See
      accompanying Notes to Condensed Consolidated Financial
      Statements.*





5





**THE
      KNOT, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**





**Nine
                Months Ended September 30,****2008**
            
            **2007****CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                income
            
            $
            5,110,105
            
            $
            9,292,515Adjustments
                to reconcile net income to net cash provided byoperating
                activities:Depreciation
                and amortization
            
            
            3,688,235
            
            
            3,510,846Amortization
                of intangibles
            
            
            2,752,887
            
            
            2,873,653Stock-based
                compensation
            
            
            2,413,640
            
            
            1,676,226Deferred
                income taxes
            
            
            2,410,576
            
            
            6,111,790Reserve
                for returns
            
            
            2,662,126
            
            
            2,503,522Goodwill
                impairment
            
            
            —
            
            
            495,578Allowance
                for doubtful accounts
            
            
            (248,503
            )
            
            421,824Excess
                tax benefits from stock-based awards
            
            
            (2,119,397
            )
            
            —Other
                non-cash charges
            
            
            17,940
            
            
            29,723Changes
                in operating assets and liabilities:Decrease
                (increase) in accounts receivable
            
            
            1,557,444
            
            
            (5,258,380
            )Decrease
                (increase) in accounts receivable from affiliate
            
            
            368,111
            
            
            (677,003
            )Increase
                in inventories
            
            
            (725,935
            )
            
            (826,416
            )(Increase)
                decrease in deferred production and marketing costs
            
            
            (2,964
            )
            
            32,547Increase
                in other current assets
            
            
            (467,266
            )
            
            (34,849
            )Decrease
                (increase) in other assets
            
            
            59,038
            
            
            (656
            )Decrease
                in accounts payable and accrued expenses
            
            
            (380,767
            )
            
            (1,430,021
            )Increase
                in deferred revenue
            
            
            1,065,050
            
            
            3,362,050Decrease
                in other liabilities
            
            
            (68,033
            )
            
            (70,576
            )Net
                cash provided by operating activities.
            
            
            18,092,287
            
            
            22,012,373**CASH
                FLOWS FROM INVESTING ACTIVITIES**Purchases
                of property and equipment
            
            
            (4,691,045
            )
            
            (2,338,775
            )Purchases
                of short-term investments
            
            
            (63,707
            )
            
            (126,812,681
            )Proceeds
                from sales of short-term investments
            
            
            13,937,226
            
            
            52,972,000Purchases
                of long-term investments
            
            
            (39,600,000
            )
            
            —Proceeds
                from sales of long-term investments
            
            
            46,275,000
            
            
            —Acquisition
                of business, net of cash acquired
            
            
            (1,360,830
            )
            
            52,410Net
                cash provided by (used in) investing activities
            
            
            14,496,644
            
            
            (76,127,046
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Proceeds
                from issuance of common stock
            
            
            380,318
            
            
            423,138Proceeds
                from exercise of stock options and warrants
            
            
            1,091,402
            
            
            932,907Excess
                tax benefits from stock-based awards
            
            
            2,119,397
            
            
            —Repurchase
                of common stock
            
            
            (281,699
            )
            
            (309,762
            )Net
                cash provided by financing activities
            
            
            3,309,418
            
            
            1,046,283Increase
                (decrease) in cash and cash equivalents
            
            
            35,898,349
            
            
            (53,068,390
            )Cash
                and cash equivalents at beginning of period
            
            
            33,127,457
            
            
            73,633,011Cash
                and cash equivalents at end of period
            
            $
            69,025,806
            
            $
            20,564,621





*See
      accompanying Notes to Condensed Consolidated Financial
      Statements.*





6





**THE
      KNOT, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**





**1.**  **ORGANIZATION
      AND BASIS OF PRESENTATION**





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared by the management of The Knot, Inc. (“The Knot” or the “Company”) in
      accordance with U.S. generally accepted accounting principles for interim
      financial information and applicable rules and regulations of the Securities
      and
      Exchange Commission (“SEC”). The condensed consolidated financial statements
      include the accounts of the Company and its wholly-owned subsidiaries. All
      intercompany accounts and transactions have been eliminated. Certain information
      and footnote disclosures normally included in financial statements prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America have been condensed or omitted from this report as is permitted by
      SEC
      rules and regulations. However, the Company believes that the disclosures are
      adequate to make the information presented not misleading. This report should
      be
      read in conjunction with the audited consolidated financial statements and
      notes
      thereto, included in the Company’s Annual Report on Form 10-K filed with the SEC
      for the year ended December 31, 2007.





In
      the
      opinion of management, the accompanying unaudited condensed consolidated
      financial statements contain all normal and recurring adjustments necessary
      to
      present fairly the consolidated financial condition, results of operations
      and
      changes in cash flows of the Company for the interim periods presented. The
      results of operations for the quarter and nine months ended September 30, 2008
      are not necessarily indicative of results to be expected for the entire fiscal
      year, which will end on December 31, 2008.





The
      Company has only achieved operating income in recent periods and has an
      accumulated deficit of $1,816,245 as of September 30, 2008. The Company believes
      that its current cash and cash equivalents will be sufficient to fund its
      working capital and capital expenditure requirements for the foreseeable future.
      The Company’s ability to meet its obligations in the ordinary course of business
      is dependent upon its ability to maintain profitable operations and/or raise
      additional financing through public or private debt or equity financings, or
      other arrangements with corporate sources, or other sources of financing to
      fund
      operations. However, there is no assurance that the Company will maintain
      profitable operations or that additional funding, if required, will be available
      to the Company in amounts or on terms acceptable to the Company.




**CONCENTRATION
      OF CREDIT RISK**





Financial
      instruments that potentially subject the Company to concentrations of credit
      risk consist principally of cash and cash equivalents, short-term investments
      and accounts receivable. Cash and cash equivalents are deposited with four
      major
      financial institutions. The Company's customers are primarily concentrated
      in
      the United States. The Company performs on-going credit evaluations, generally
      does not require collateral, and establishes an allowance for doubtful accounts
      based upon factors surrounding the credit risk of customers, historical trends
      and other information.





For
      the
      three and nine months ended September 30, 2008 and 2007, one customer, Macy’s,
      accounted for 12% and 10% of net revenues, respectively. As of September 30,
      2008 and December 31, 2007, no customer accounted for more than 10% of accounts
      receivable.





**SEGMENT
      INFORMATION**





The
      Company operates in one reportable segment because it is organized around its
      online and offline media and e-commerce service lines. These service lines
      do
      not have operating managers who report to the chief operating decision maker.
      The chief operating decision maker generally reviews financial information
      at a
      consolidated results of operations level but does review revenue and cost of
      revenue results of the individual service lines.




**RECENTLY
      ADOPTED ACCOUNTING PRONOUNCEMENT**





On
      January 1, 2008, the Company adopted Statement of Financial Accounting Standards
      (“SFAS”) No. 157, *Fair
      Value Measurements* (“SFAS
      157”), which defines fair value, establishes a framework for measuring fair
      value in accordance with generally accepted accounting principles, and expands
      disclosures about fair value measurements. SFAS 157 does not require any new
      fair value measurements, but provides guidance on how to measure fair value
      by
      providing a fair value hierarchy used to classify the source of the information.
      In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
      Staff Position (“FSP”) No. 157-2 (“FSP 157-2”) which would delay the effective
      date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities,
      except those that are recognized or disclosed at fair value in the financial
      statements on a recurring basis (at least annually) until January 1, 2009.
      The
      Company is currently evaluating the impact of SFAS 157 on its nonfinancial
      assets and liabilities. In October 2008, the FASB issued FSP No. 157-3 (“FSP
      157-3”) which clarifies the application of SFAS 157 as it relates to the
      valuation of financial assets in a market that is not active for those financial
      assets. FSP 157-3 is effective immediately. FSP 157-3 is applicable to the
      valuation of auction rate securities held by the Company for which there was
      no
      active market as of September 30, 2008. The adoption of FSP 157-3 during the
      three month period ending September 30, 2008 did not have an impact on the
      Company’s consolidated results of operations or financial condition as the
      Company’s valuation model met the provisions of FSP 157-3.





7




**NEW
      ACCOUNTING PRONOUNCEMENTS**





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities — including an Amendment of FASB Statement No.
      115* (“SFAS
      159”), which allows an entity to choose to measure certain financial instruments
      and liabilities at fair value. Subsequent measurements for the financial
      instruments and liabilities an entity elects to fair value will be recognized
      in
      earnings. SFAS 159 also establishes additional disclosure requirements. Through
      September 30, 2008, the Company has elected not to extend the use of the fair
      value option to its assets and liabilities.




In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), *Business
      Combinations* (“SFAS
      141R”). SFAS 141R establishes principles and requirements for how an acquirer
      recognizes and measures in its financial statements the identifiable assets
      acquired, the liabilities assumed, any noncontrolling interest in the acquiree
      and the goodwill acquired. SFAS 141R also establishes disclosure requirements
      to
      enable the evaluation of the nature and financial effects of the business
      combination. This statement is effective beginning January 1, 2009. The adoption
      of SFAS 141R will not have an impact on the Company’s existing acquisitions.
      SFAS 141R will be prospectively applied to acquisitions occurring on or after
      January 1, 2009.




In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements- an amendment of Accounting
      Research Bulletin* No.
      51
      (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for
      ownership interests in subsidiaries held by parties other than the parent,
      the
      amount of consolidated net income attributable to the parent and to the
      noncontrolling interest, changes in a parent’s ownership interest, and the
      valuation of retained noncontrolling equity investments when a subsidiary is
      deconsolidated. SFAS 160 also establishes disclosure requirements that clearly
      identify and distinguish between the interests of the parent and the interests
      of the noncontrolling owners. This statement is effective beginning January
      1,
      2009. The Company is currently evaluating the potential impact of the adoption
      of SFAS 160 on its consolidated financial position, results of operations and
      cash flows.





In
      April
      2008, the FASB issued FSP No. 142-3, *Determination
      of the Useful Life of Intangible Assets* ,
      (“FSP
      142-3”) that amends the factors considered in developing renewal or extension
      assumptions used to determine the useful life of a recognized intangible asset
      under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). FSP 142-3
      requires a consistent approach between the useful life of a recognized
      intangible asset under SFAS 142 and the period of expected cash flows used
      to
      measure the fair value of an asset under SFAS No. 141 (R), Business
      Combinations. The FSP also requires enhanced disclosures when an intangible
      asset’s expected future cash flows are affected by an entity’s intent and/or
      ability to renew or extend the arrangement. FSP 142-3 is effective for financial
      statements issued for fiscal years beginning after December 15, 2008 and is
      applied prospectively. Early adoption is prohibited. The Company is currently
      evaluating the potential impact of the adoption of FSP 142-3 on its consolidated
      financial position, results of operations and cash flows.





8





**RECLASSIFICATION**




Certain
      amounts in the accompanying consolidated statement of cash flows for the nine
      months ended September 30, 2007 have been reclassified to conform to the current
      year’s presentation.




**2.
      CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS**




Cash
      and
      cash equivalents and short-term investments consist of the
      following:





**September
                30,**
            
            **December
                31,****2008**
            
            **2007**Cash
            
            $
            5,607,685
            
            $
            3,170,537Money
                market funds
            
            
            633,039
            
            
            18,895,945US
                Treasury funds
            
            
            29,451,550
            
            
            —Commercial
                paper
            
            
            33,333,532
            
            
            11,060,975Cash
                and cash equivalents
            
            $
            69,025,806
            
            $
            33,127,457Auction
                rate securities (See Note 3)
            
            $
            —
            
            $
            58,775,000Commercial
                paper
            
            
            —
            
            
            13,856,293Certificate
                of deposit
            
            
            —
            
            
            17,226Short-term
                investments
            
            $
            —
            
            $
            72,648,519





The
      Company’s investments in commercial paper at September 30, 2008, consisted of
      P1/A1 rated corporate debt securities.




**3.
      FAIR VALUE MEASUREMENTS**





The
      fair
      value hierarchy for disclosure of fair value measurements under SFAS 157 is
      as
      follows:




Level
      1-
      Quoted prices in active markets for identical assets or liabilities


Level
      2-
      Quoted prices for similar assets and liabilities in active markets or inputs
      that are observable


Level
      3-
      Inputs that are unobservable (for example, cash flow modeling inputs based
      on
      assumptions)




As
      of
      September 30, 2008, the Company’s investment in cash equivalents of $69.0
      million was measured at fair value using Level 1 inputs.




As
      of
      September 30, 2008, the Company estimated the fair value of its investment
      in
      auction rate securities at $48.9 million through discounted cash flow models
      which were classified as Level 3 inputs. These auction rate securities consisted
      of AAA/Aaa rated variable rate debt securities. The securities are
      collateralized by student loans, with approximately 87% of such collateral,
      in
      the aggregate, guaranteed by the United States government under the Federal
      Family Education Loan Program. $3.0 million of these securities have an
      underlying maturity date of November 1, 2009 while the remaining securities
      have
      maturity dates ranging from March 1, 2022 through December 1, 2041. The interest
      rates reset every 35 days through a competitive bidding process often referred
      to as a “Dutch auction.” If there is insufficient interest in the securities at
      the time of an auction, the auction may not be completed and the rates reset
      to
      pre-determined “penalty” or “maximum” rates based on mathematical formulas in
      accordance with each security’s prospectus. The reset rates on the auction rate
      securities currently held by the Company consist of a short-term debt index
      plus
      100 to 200 basis points which is generally higher than what the current market
      rates would be for the securities in a successful auction. From February 14,
      2008 through September 30, 2008, one auction was successful. All other auctions
      during that time period for these securities failed. An auction failure does
      not
      represent a default by the issuer of the auction rate security.





No
      Level
      1 inputs were considered in valuing the auction rate securities since there
      were
      no active markets and quoted prices for these securities as of September 30,
      2008.  Certain Level 2 inputs such as the current cost of funds for recent
      student bond issuances of similar credit quality were observed and used in
      computing the risk adjusted interest rate used in the Company’s discounted cash
      flow valuation model.   Level 3 inputs were more significant to the overall
      fair value measurement, including an illiquidity premium of 200 basis points,
      and an expected holding period for these securities of five years.





9




The
      Company estimated that the fair market value of these securities at September
      30, 2008 was approximately $48.9 million and recorded a temporary impairment
      charge of $3.2 million in other comprehensive loss within stockholders’ equity,
      an increase of $100,000 from June 30, 2008. The Company concluded that the
      impairment charge recorded was temporary because (i) the Company believes that
      the decline in market value is due to general market conditions; (ii) the
      auction rate securities continue to be of a high credit quality and interest
      is
      paid when due; and (iii) the Company currently has the intent and ability to
      hold the auction rate securities until a recovery in market value occurs. If
      unsuccessful auctions continue, and issuer credit ratings deteriorate, or if
      there are actual issuer defaults with respect to such securities, the Company
      may be required to record additional temporary or other-than-temporary
      impairment charges in future periods. It may also take until the final maturity
      of the underlying securities to realize the Company’s investments. In June and
      September 2008, $5.0 million and $1.9 million, respectively, of auction rate
      securities held by the Company were redeemed at par; however, the Company is
      currently unable to determine whether other issuers of its remaining portfolio
      of auction rate securities will attempt or be able to redeem
      securities.




The
      Company’s holdings of auction rate securities are classified as long-term
      investments on the accompanying condensed consolidated balance sheet as of
      September 30, 2008 primarily because the Company’s discounted cash flow model
      assumes an average expected holding period for the auction rate securities
      of
      five years, the markets for auction rate securities continue to be illiquid
      and
      the maturity dates for the majority of the securities range from March 1, 2022
      through December 1, 2041.





In
      October 2008, the Company received an offer (the “Offer”) from UBS AG (“UBS”),
      one of its investment providers, to sell at par value all of its auction rate
      securities, which had been originally purchased from UBS (approximately $52.1
      million) at any time during a two-year period beginning June 30, 2010. The
      Offer
      is non-transferable and expires on November 14, 2008. The Company is in the
      process of evaluating the Offer and its potential financial statement
      impact.





As
      of
      December 31, 2007, the carrying value of the auction rate securities
      approximated fair value. The following table provides a reconciliation of the
      beginning and ending balances for the assets measured at fair value using
      significant Level 3 inputs:


Balance
                  as of December 31, 2007
              
              $
              58,775,000Purchases,
                  sales and redemptions, net
              
              
              (6,675,000
              )Unrealized
                  losses included in other comprehensive income
              
              
              (3,200,000
              )Realized
                  losses
              
              
              —Balance
                  as of September 30, 2008
              
              $
              48,900,000




**4.
      COMPREHENSIVE INCOME**





Comprehensive
      income is comprised of the following:




**Three
                Months Ended September 30**
            
            **Nine
                Months Ended September 30,****2008**
            
            **2008**Net
                income
            
            $
            2,240,306
            
            $
            5,110,105Unrealized
                (loss) on auction rate securities
            
            
            (100,000
            )
            
            (3,200,000
            )Comprehensive
                income
            
            $
            2,140,306
            
            $
            1,910,105




10




Through
      December 31, 2007, the Company’s comprehensive income equaled its net
      income.





**5.
      SHIPPING AND HANDLING CHARGES**





For
      the
      three months ended September 30, 2008 and 2007, merchandise revenues included
      outbound shipping and handling charges of $976,674 and $794,179, respectively.
      For the nine months ended September 30, 2008 and 2007, merchandise revenues
      included outbound shipping and handling charges of $2.8 million and $2.4
      million, respectively.




**6** **.
      INVENTORY**





Inventory
      consists of the following:





**September
                30,**
            
            **December
                31,****2008**
            
            **2007**Raw
                materials
            
            $
            386,832
            
            $
            204,811Finished
                goods
            
            
            2,218,652
            
            
            1,673,667Total
            
            $
            2,605,484
            
            $
            1,878,478




**7.
      GOODWILL AND OTHER INTANGIBLE ASSETS**





The
      changes in the carrying amount of goodwill for the nine months ended September
      30, 2008 are as follows:





Balance
                as of December 31, 2007
            
            $
            32,105,110Acquisition
                of The Bump Media, Inc. (See Note 13)
            
            
            1,707,256Balance
                as of September 30, 2008
            
            $
            33,812,366




During
      the three months ended September 30, 2008, the fair value of assets acquired
      other than goodwill in connection with the acquisition of The Bump Media, Inc.
      increased by $42,000 with a corresponding reduction to previously recorded
      goodwill.




Other
      intangible assets consisted of the following:




**September
                30, 2008**
            
            **December
                31, 2007**Gross
                Cost
            
            Accumulated
            
            Net
            
            Gross
                Cost
            
            Accumulated
            
            NetCarrying
                Amount
            
            Amortization
            
            Book
                Value
            
            Carrying
                Amount
            
            Amortization
            
            Book
                ValueIndefinite
                lived intangibles:Tradenames
            
            $
            15,700,000
            
            $
            —
            
            $
            15,700,000
            
            $
            15,220,000
            
            $
            —
            
            $
            15,220,000Amortizable
                intangibles:Customer
                and advertiserrelationships
            
            
            5,709,000
            
            
            1,325,378
            
            
            4,383,622
            
            
            5,610,000
            
            
            830,378
            
            
            4,779,622Developed
                technologyand
                patents
            
            
            12,280,000
            
            
            5,069,000
            
            
            7,211,000
            
            
            12,280,000
            
            
            3,227,000
            
            
            9,053,000Trademarks
                andtradenames
            
            
            211,920
            
            
            149,691
            
            
            62,229
            
            
            211,920
            
            
            109,603
            
            
            102,317Service
                contracts andother
            
            
            3,328,000
            
            
            1,906,054
            
            
            1,421,946
            
            
            3,328,000
            
            
            1,530,256
            
            
            1,797,74421,528,920
            
            
            8,450,123
            
            
            13,078,797
            
            
            21,429,920
            
            
            5,697,237
            
            
            15,732,683Total
            
            $
            37,228,920
            
            $
            8,450,123
            
            $
            28,778,797
            
            $
            36,649,920
            
            $
            5,697,237
            
            $
            30,952,683




11





Definite
      lived intangible assets are amortized over their estimated useful lives as
      follows:





Customer
                and advertiser relationships
            2
                to 10 yearsDeveloped
                technology and patents
            5
                yearsTrademarks
                and tradenames
            3
                to 5 yearsService
                contracts and other
            1
                to 7 years




The
      increase in the gross cost carrying amount of intangibles for the nine months
      ended September 30, 2008 resulted from a preliminary determination of the fair
      value of assets acquired in connection with the acquisition of The Bump Media,
      Inc. (See Note 13).




Amortization
      expense was $916,387 and $941,020 for the three months ended September 30,
      2008
      and 2007, respectively, and $2.8 million and $2.9 million for the nine months
      ended September 30, 2008 and 2007, respectively. Estimated
      annual amortization expense is $3.7 million in 2008, $3.6 million in 2009,
      $3.5
      million in 2010 $2.4 million in 2011, $564,000 in 2012, and $2.1 million,
      thereafter.




**8.**  **ACCOUNTS
      PAYABLE AND ACCRUED EXPENSES**





Accounts
      payable and accrued expenses consist of the following:





**September
                30,**
            
            **December
                31,****2008**
            
            **2007**Accounts
                payable
            
            $
            2,490,804
            
            $
            2,053,126Professional
                services
            
            
            686,825
            
            
            680,067Compensation
                and related benefits
            
            
            1,702,299
            
            
            1,621,464Other
                accrued expenses
            
            
            3,086,790
            
            
            3,261,774$
            7,966,718
            
            $
            7,616,431




**9.**  **LONG-TERM
      DEBT**





The
      current portion of long-term debt as of September 30, 2008 consists of the
      following:


Note
                  due in annual installments of $60,000 through October 2008, based
                  on
                  imputed interest of 8.75%
              
              $
              55,173





Interest
      expense was approximately $1,200 and $2,000 for the three months ended September
      30, 2008 and 2007, respectively. Interest expense was approximately $3,600
      and
      $7,000 for the nine months ended September 30, 2008 and 2007, respectively.
      The
      Company paid the outstanding balance plus accrued interest on October 1,
      2008.





12





**10.
      STOCK BASED COMPENSATION**





The
      Company maintains several share-based compensation plans which are more fully
      described below. Total stock-based compensation expense related to all of the
      Company’s stock awards was included in various operating expense categories for
      the three and nine months ended September 30, 2008 and 2007, as
      follows:




**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2008**
            
            **200****7**
            
            **2008**
            
            **2007**Product
                and content development
            
            $
            208,212
            
            $
            93,233
            
            $
            566,401
            
            $
            332,657Sales
                and marketing
            
            
            (63,025
            )
            
            76,741
            
            
            350,245
            
            
            294,926General
                and administrative
            
            
            404,207
            
            
            456,279
            
            
            1,496,994
            
            
            1,048,643Total
                stock-based compensation expense
            
            $
            549,394
            
            $
            626,253
            
            $
            2,413,640
            
            $
            1,676,226




The
      negative stock based compensation expense in sales and marketing for the three
      months ended September 30, 2008 relates to the cancellation of restricted stock
      related to the departure of the Company’s Chief Marketing Officer in August
      2008.




The
      1999
      Stock Incentive Plan (the “1999 Plan”) was adopted by the Board of Directors and
      approved by the stockholders in November 1999, as a successor plan to the
      Company’s 1997 Long Term Incentive Plan (the “1997 Plan”). All options under the
      1997 Plan have been incorporated into the 1999 Plan. The 1999 Plan became
      effective upon completion of the Company’s initial public offering of its common
      stock and was amended and restated as of March 27, 2001.




Under
      the
      terms of the 1999 Plan, 3,849,868 shares of common stock of the Company were
      initially reserved for incentive stock options, nonqualified stock options
      (incentive and nonqualified stock options are collectively referred to as
“options”), stock appreciation rights, stock issuances (which may be subject to
      the attainment of designated performance goals or service requirements
      (“restricted stock”), or any combination thereof. On May 15, 2001, the Company’s
      stockholders approved a further increase of 1,000,000 to the number of shares
      reserved for issuance under the 1999 Plan. Through September 30, 2008, an
      additional 3,089,872 shares were added to the reserve pursuant to the automatic
      share increase provisions of the 1999 Plan. The shares reserved under the 1999
      Plan automatically increase on the first trading day in January of each calendar
      year by an amount equal to two percent (2%) of the total number of shares of
      the
      Company’s common stock outstanding on the last trading day of December in the
      prior calendar year, but in no event will this annual increase exceed 1,000,000
      shares (or such other lesser number determined by the Board of Directors).
      Awards may be granted to such non-employee directors, officers, employees and
      consultants of the Company as the Compensation Committee of Board of Directors
      shall in its discretion select. Only employees of the Company are eligible
      to
      receive grants of incentive stock options. Options are granted at the fair
      market value of the stock on the date of grant. Options vest over periods up
      to
      four years and have terms not to exceed 10 years. Restricted stock awards vest
      over periods ranging from one to five years.




The
      2000
      Non-Officer Stock Incentive Plan (the “2000 Plan”) was approved by the Board of
      Directors in June 2000. Under the terms of the 2000 Plan, 435,000 shares of
      common stock of the Company have been reserved for nonqualified stock options,
      stock issuances (which may be restricted stock) or any combination thereof.
      Awards may be granted to employees (other than officers or directors of the
      Company) and consultants and other independent advisors who provide services
      to
      the Company. Options are granted at the fair market value of the stock on the
      date of grant. Generally, options have vested over a four-year period and have
      terms not to exceed 10 years. Currently, there are no unvested options
      outstanding under the 2000 Plan.




The
      Employee Stock Purchase Plan (the “ESPP”) was adopted by the Board of Directors
      and approved by the stockholders in November 1999 and became effective upon
      completion of the Company’s initial public offering of its common stock. The
      Compensation Committee of the Board of Directors administers the ESPP. The
      ESPP
      permits a participating employee to make contributions to purchase shares of
      common stock by having withheld from his or her salary an amount between 1
      percent and 15 percent of compensation. Under the ESPP, eligible employees
      of
      the Company may elect to participate on the start date of an offering period
      or
      subsequent semi-annual entry date, if any, within the offering period. On each
      purchase date during an offering period, a participating employee’s
      contributions will be used to purchase up to 1,000 shares of the Company’s
      common stock for such participating employee at a 15 percent discount from
      the
      fair market value, as defined in the ESPP, of such stock. Each offering period
      is determined by the plan administrator and may not exceed two years. The
      Company initially reserved 300,000 shares of common stock under the ESPP. The
      shares reserved automatically increase on the first trading day in January
      of
      each calendar year by the lesser of the (i) the number of shares of common
      stock
      issued under the ESPP in the immediately preceding calendar year, (ii) 300,000
      shares or (iii) such other lesser amount approved by the Board of Directors.
      Through September 30, 2008, 432,174 shares were issued under the ESPP and
      393,239 shares were added to the reserve pursuant to the automatic share
      increase provision.




13




The
      following table represents a summary of the Company’s stock option activity
      under the 1999 and 2000 Plans and related information, without regard for
      estimated forfeitures, for the nine months ended September 30,
      2008:





Shares
            
            Weighted
                AverageExercise
                PriceOptions
                outstanding at December 31, 2007
            
            
            1,972,054
            
            $
            6.04Options
                exercised
            
            
            (311,329
            )
            
            3.50Options
                canceled
            
            
            (29,547
            )
            
            4.07Options
                outstanding at September 30, 2008
            
            
            1,631,178
            
            $
            6.56





The
      fair
      value of options which vested during the three months ended September 30, 2008
      and 2007 was $1.93 and $1.75, respectively. The fair value of options which
      vested during the nine months ended September 30, 2008 and 2007 was $5.69 and
      $1.96, respectively. The total intrinsic value of options exercised during
      the
      three months ended September 30, 2008 and 2007 was $8,500 and $1.2 million,
      respectively. The total intrinsic value of options exercised during the nine
      months ended September 30, 2008 and 2007 was $2.5 million and $6.0 million,
      respectively.





The
      following table summarizes information about options outstanding at September
      30, 2008:


Options
                  Outstanding
              
              Options
                  ExercisableRange
                  of exercise price
              
              Number
                Outstanding
                as
                  of
                September
                  30,2008
              
              Weighted
                Average
                Remaining
                Contractual
                Life
                (In
                  Years)
              
              Weighted
                Average
                Exercise
                Price
              
              Number
                Exercisable
                as
                  of
                September
                  30,
                  2008
              
              Weighted
                Average
                Exercise
                Price$0.42
                  to $1.03
              
              
              336,447
              
              
              2.36
              
              $
              0.90
              
              
              336,447
              
              $
              0.90$1.37
                  to $4.10
              
              
              884,731
              
              
              4.96
              
              
              3.30
              
              
              884,731
              
              
              3.30$18.26
              
              
              410,000
              
              
              9.66
              
              
              18.26
              
              
              136,667
              
              
              18.261,631,178
              
              
              4.10
              
              $
              6.56
              
              
              1,357,845
              
              $
              4.21





The
      weighted average remaining contractual life of options exercisable as of
      September 30, 2008 was 4.19 years.





As
      of
      September 30, 2008, there were 2,393,470 shares available for future grants
      under the 1999 Plan and 270,418 shares available for future grants under the
      2000 Plan.




14





The
      aggregate intrinsic value of stock options outstanding at September 30, 2008
      was
      $7.0 million, all of which relates to vested awards. The intrinsic value for
      stock options is calculated based on the exercise price of the underlying awards
      and the quoted price of the Company’s common stock as of September 30, 2008. The
      following table summarizes nonvested stock option activity for the nine months
      ended September 30, 2008:





Shares
            
            Weighted
                Average Exercise
              PriceNonvested
                options outstanding at December 31, 2007
            
            
            440,611
            
            $
            17.33Granted
            
            
            -
            
            
            -Vested
            
            
            (146,444
            )
            
            17.34Canceled
            
            
            (20,834
            )
            
            5.05Nonvested
                options outstanding at September 30, 2008
            
            
            273,333
            
            $
            18.26





The
      weighted average grant-date fair value of ESPP rights arising from elections
      made by ESPP plan participants was $1.35 and $2.79 during the three and nine
      months ended September 30, 2008, respectively, and $2.32 and $5.07 during the
      three and nine months ended September 30, 2007, respectively. The fair value
      of
      ESPP rights that vested during the three and nine months ended September 30,
      2008 was $2.07 and $3.90, respectively, and was $3.51 and $5.26 during the
      three
      and nine months ended September 30, 2007, respectively. On January 31, 2008,
      the
      Company issued 17,190 shares at a weighted average price of $12.44 under the
      ESPP. On July 31, 2008, the Company issued 21,745 shares at a weighted average
      price of $7.45 under the ESPP.




The
      intrinsic value of shares purchased through the ESPP on January 31 and July
      31,
      2008, was $38,000 and $29,000, respectively. The intrinsic value of outstanding
      ESPP rights as of September 30, 2008 was $37,000. The intrinsic value of the
      ESPP rights is calculated as the discount from the quoted price of the Company’s
      common stock, as defined in the ESPP, which was available to employees as of
      the
      respective dates.





As
      of
      September 30, 2008, there was $564,000 of unrecognized compensation cost related
      to non-vested stock options and ESPP rights, net of estimated forfeitures,
      which
      is expected to be recognized over a weighted average period of 1.58
      years.




The
      fair
      value for options and ESPP rights have been estimated on the date of grant
      using
      the Black-Scholes option pricing model with the following
      assumptions:





Nine
                Months Ended September 30,2008
            
            2007Options
            ESPP
                Rights
            
            Options
            ESPP
                RightsWeighted
                average expected option lives
            -
            0.5
                years
            
            4.0
                years
            0.5
                yearsRisk-free
                interest rate
            -
            1.88%-2.15%
            
            4.83%
            4.96%-5.16%Expected
                volatility
            -
            37.6%-44.6%
            
            32.1%
            20.3%-29.3%Dividend
                yield
            -
            0%
            
            0%
            0%




Expected
      volatility is based on the historical volatility of the market price of the
      Company’s stock. The expected lives of options granted are based on analyses of
      historical employee termination rates and option exercises. The risk-free
      interest rates are based on the expected option lives and the corresponding
      U.S.
      treasury yields in effect at the time of grant. The fair value for ESPP rights
      includes the option exercise price discount from market value provided for
      under
      the ESPP.





During
      the three months ended September 30, 2008 and 2007, the Company recorded $85,000
      and $240,000, respectively, of compensation expense related to options and
      ESPP
      rights. During the nine months ended September 30, 2008 and 2007, the Company
      recorded $670,000 and $429,000, respectively, of compensation expense related
      to
      options and ESPP rights and received cash from the exercise of options and
      ESPP
      rights of $1.1 million and $1.3 million, respectively, for which the Company
      issued new shares of common stock.





As
      of
      September 30, 2008 and 2007, there were 707,006 and 365,668 service-based
      restricted stock awards outstanding, respectively. During the three months
      ended
      September 30, 2008 and 2007, 318,000 shares and 30,000 shares, respectively,
      of
      restricted stock were awarded at weighted average grant-date fair values of
      $8.46 and $19.68, respectively. During the nine months ended September 30,
      2008
      and 2007, 509,500 shares and 86,000 shares, respectively, of restricted stock
      were awarded at weighted average grant-date fair values of $9.82 and $20.05,
      respectively. During the nine months ended September 30, 2008, 111,166 shares
      of
      restricted stock vested and 103,875 shares of restricted stock were canceled.
      During the nine months ended September 30, 2007, 123,332 shares of restricted
      stock vested and 20,500 shares of restricted stock were canceled. During the
      nine months ended September 30, 2008 and 2007, 28,847 and 14,866 shares of
      restricted stock, respectively, were repurchased by the Company in connection
      with the surrender of these shares by employees to satisfy tax withholding
      obligations related to the vesting of the stock awards. The aggregate intrinsic
      value of restricted shares at September 30, 2008 was $5.9 million. The intrinsic
      value for restricted shares is calculated based on the par value of the
      underlying shares and the quoted price of the Company’s common stock as of
      September 30, 2008.





15




As
      of
      September 30, 2008, there was $6.1 million of total unrecognized compensation
      cost related to nonvested restricted shares, net of estimated forfeitures,
      which
      is expected to be recognized over a weighted average period of 2.6 years. During
      the three months ended September 30, 2008 and 2007, the Company recorded
      $464,000 and $387,000, respectively, of compensation expense related to
      restricted shares. During the nine months ended September 30, 2008 and 2007,
      the
      Company recorded $1.7 million and $1.2 million, respectively, of compensation
      expense related to restricted shares.




**11.
      AGREEMENT WITH COLLAGES. NET, INC. (“Collages”)**





In
      March
      2005, the Company entered into a Marketing Services Agreement (the “Agreement”)
      with Collages, a provider of hosting and website development services to
      professional photographers. Under the Agreement, which has expired, the Company
      delivered online and print advertising services to Collages in exchange for
      having received Collages Series A Preferred Stock, which vested over the first
      two years of the Agreement. The fair value of the marketing services provided
      over the term of the Agreement approximated the fair value of Series A Preferred
      Stock received.





The
      Company earned approximately $1.9 million in revenue pursuant to the Agreement
      and has deferred recognition of this revenue since the realization of the
      resulting asset, representing an equity investment in Collages, is not
      reasonably assured.




**12.
      COMMITMENTS AND CONTINGENCIES**





The
      Company is engaged in legal actions arising in the ordinary course of business
      and believes that the ultimate outcome of these actions will not have a material
      effect on its results of operations, financial position or cash
      flows.




**13.
      ACQUISITION**




In
      February 2008, the Company acquired The Bump Media, Inc. (“The Bump”), through
      the merger of a wholly-owned subsidiary of the Company with and into The Bump.
      The Bump is a publisher of local print and website guides to pregnancy,
      maternity and baby resources, and the acquisition will expand the Company’s
      service offerings in these areas. The purchase price for all of the capital
      stock of The Bump, including transaction costs, was $1.7 million.




16





The
      estimated cost of this acquisition was allocated to the assets acquired and
      the
      liabilities assumed based upon a preliminary determination of their values
      as
      follows:




**Assets
                and Liabilities Acquired**
            
            **Amount**Current
                assets
            
            $
            74,014Property
                and equipment
            
            
            23,400Intangible
                assets:Trademarks
            
            
            480,000Advertiser
                relationships
            
            
            45,000Distribution
                network
            
            
            54,000Goodwill
            
            
            1,707,256Other
                assets
            
            
            242Total
                assets acquired
            
            
            2,383,912Current
                liabilities
            
            
            447,119Deferred
                tax liabilities
            
            
            235,000Other
                liabilities
            
            
            5,439Total
                liabilities assumed
            
            
            687,558Total
                estimated cost
            
            $
            1,696,354




This
      acquisition would not have had a material impact with respect to the
      consolidated results of operations for the three and nine months ended September
      30, 2008 and 2007 had the acquisition been consummated on January 1,
      2007.




**14.** **INCOME
      TAXES**




As
      of
      September 30, 2008, the Company had approximately $4.3 million in unrecognized
      tax benefits related to certain acquired net operating loss carryforwards of
      WeddingChannel arising from a tax position taken in the 2006 income tax filings
      related to losses associated with the dissolution of a subsidiary. This amount
      has been netted against the related deferred tax assets and, if recognized,
      would result in a reduction of goodwill. However, a portion of these
      unrecognized tax benefits could be subject to a valuation allowance if and
      when
      recognized in a future period.




The
      Company is subject to taxation in the United States and various state and local
      jurisdictions. In December 2007, the Internal Revenue Service completed its
      audit of the Company’s 2005 U.S. federal tax return with no adjustment. As of
      September 30, 2008, none of the Company’s other tax returns have been examined
      by any income taxing authority. As a result of the ongoing use of tax loss
      carryforwards, all of the Company’s U.S. federal tax returns from 1998 through
      2004 and 2006, its more significant state and local returns, as well as all
      tax
      returns of WeddingChannel remain subject to examination. Through September
      30,
      2008, the Company has not recorded any interest and penalties related to
      uncertain tax positions.




**15.
      EARNINGS PER SHARE**





The
      Company computes earnings per share in accordance with Statement of Financial
      Accounting Standards (“SFAS”) No. 128, *Earnings
      per Share.* Basic
      earnings per share is computed by dividing net income by the weighted average
      number of common shares outstanding during the period. Diluted earnings per
      share adjusts basic earnings per share for the effects of stock options,
      restricted common stock, warrants and other potentially dilutive financial
      instruments, only in the periods in which the effects are dilutive.








17





The
      following is a reconciliation of the weighted-average shares outstanding and
      calculation of basic and diluted earnings per share:





**Three
                Months Ended September 30,**
            
            **Nine
                Months Ended****September
                30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Net
                income
            
            $
            2,240,306
            
            $
            2,898,307
            
            $
            5,110,105
            
            $
            9,292,517Total weighted-average basic shares
            
            
            31,572,340
            
            
            31,034,101
            
            
            31,423,993
            
            
            30,915,579Dilutive securities:Restricted
                stock
            
            
            47,556
            
            
            181,513
            
            
            36,237
            
            
            221,809Employee
                stock purchase plan
            
            
            23,572
            
            
            8,998
            
            
            14,171
            
            
            13,097Options/warrants
            
            
            1,065,411
            
            
            1,542,625
            
            
            1,157,581
            
            
            1,635,860Total weighted-average diluted shares
            
            
            32,708,879
            
            
            32,767,237
            
            
            32,631,982
            
            
            32,786,345Net
                income per share:Basic
            
            $
            0.07
            
            $
            0.09
            
            $
            0.16
            
            $
            0.30Diluted
            
            $
            0.07
            
            $
            0.09
            
            $
            0.16
            
            $
            0.28





The
      calculation of diluted earnings per share excludes a weighted average number
      of
      stock options and restricted stock of 630,395 and 566,939 for the three and
      nine
      months ended September 30, 2008, respectively, and 410,000 and 186,227 for
      the
      three and nine months ended September 30, 2007, respectively, because to include
      them in the calculation would be antidilutive.




**16.
      SUBSEQUENT EVENT** **S**




**AUCTION
      RATE SECURITIES**





In
      October 2008, the Company received an offer (the “Offer”) from UBS AG (“UBS”),
      one of its investment providers, to sell at par value all of its auction rate
      securities, which had been originally purchased from UBS (approximately $52.1
      million) at any time during a two-year period beginning June 30, 2010. The
      Offer
      is non-transferable and expires on November 14, 2008. The Company is in the
      process of evaluating the Offer and its potential financial statement impact.





**LEGAL
      PROCEEDING**





On
      November 4, 2008, the Company was named as a defendant in a complaint filed
      in
      the United States District Court for the Eastern District of Texas and captioned
      Balthaser Online, Inc. v. Network Solutions, LLC, The Knot, Inc., Insider
      Guides, Inc., Cyworld Inc., FriendFinder Networks, Inc., Hi5 Networks, Inc.,
      Freewebs, Inc., Gaia Interactive Inc., Friendster Inc., Ebaum’s World, Inc.,
      Puma International, LLC, Imeem, Inc., Scripps Networks, LLC, Live Journal Inc.,
      Nike, Inc., Ning, Inc., Swatchbox Technologies, Inc., Electronic Arts Inc.,
      Hookumu Inc., Meredith Corp., and Capcom USA, Inc. The complaint alleges that
      the defendants are willfully infringing a patent held by the plaintiff by,
      among
      other things, operating websites covered by one or more claims of the patent
      that relate to rich-media Internet applications. The complaint seeks
      compensatory damages in an amount to be determined at trial, but in no event
      less than a reasonable royalty; an accounting of all sales and revenues derived
      in connection with the conduct alleged to infringe the patent; an order that
      would treble all damages awarded; an award of costs, interest on damages and
      reasonable attorneys’ fees; and a permanent injunction. While the Company
      intends to vigorously defend against the claims asserted, this case is in the
      preliminary stages of litigation and, as a result, the ultimate outcome of
      this
      case and any potential financial impact on the Company are not reasonably
      determinable at this time.





18




**ITEM
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**




*You
      should read the following discussion and analysis in conjunction with our
      financial statements and related notes included elsewhere in this report. This
      discussion contains forward-looking statements relating to future events and
      the
      future performance of The Knot based on our current expectations, assumptions,
      estimates and projections about us and our industry. These forward-looking
      statements involve risks and uncertainties. Actual results or events could
      differ materially from those anticipated in such forward-looking statements
      as a
      result of certain factors, as more fully described in this section and elsewhere
      in this report. We undertake no obligation to update publicly any
      forward-looking statements for any reason, even if new information becomes
      available or other events occur in the future.*




**Overview**




The
      Knot,
      Inc. is a leading lifestage media company targeting couples planning their
      weddings and future lives together. Our flagship brand, The Knot, is the
      nation's leading wedding resource, reaching over a million engaged couples
      each
      year through the #1 wedding website, TheKnot.com. Extensions of The Knot brand
      include The Knot’s national and local magazines, The Knot books (published by
      Random House and Chronicle), and television programming bearing The Knot name
      (aired on Style Network and Comcast). The Knot’s subsidiary, WeddingChannel.com,
      is the most visited wedding gift registry website. The Nest brand focuses on
      the
      newlywed lifestage with the popular lifestyle website TheNest.com, a home décor
      book series with Clarkson Potter and The Nest magazine. The Bump brand focuses
      on the pregnancy and first-time parenthood lifestage with TheBump.com website
      and The Bump local guides. Also under The Knot, Inc. umbrella are
      WeddingTracker.com, GiftRegistryLocator.com, party planning site PartySpot.com,
      teen-oriented PromSpot.com, and local baby services and community site
      Lilaguide.com.




**Milestones
      and Strategy**




We
      commenced operations in 1996. In 2000, we acquired Weddingpages, Inc., the
      nation’s largest local wedding magazine publisher, helping us to extend The Knot
      brand on the local level. In November 2004, with the launch of TheNest.com,
      we
      extended our audience relationship beyond weddings with the first online
      destination for newly married couples. In 2006, we acquired personal wedding
      website WeddingTracker.com and local baby resource Lilaguide.com, which have
      allowed us to deepen the relationship with both our core audience and
      advertisers.




In
      September 2006, we acquired WeddingChannel.com, Inc. We made the acquisition
      to
      increase our market share and provide us additional opportunities to leverage
      core assets including our commerce operations and local and national sales
      forces. We also undertook the acquisition to enhance the services we are able
      to
      provide our audience of engaged couples and their wedding guests through
      WeddingChannel’s registry offerings. We intend to maintain WeddingChannel.com as
      a separate website and continue to offer WeddingChannel’s services ranging from
      planning content and interactive tools to convenient, comprehensive shopping
      and
      community participation. The decision to retain WeddingChannel.com as a separate
      brand and a distinct destination from The Knot.com is driven, in part, by the
      fact that at the time of the acquisition, there was only a 20 percent overlap
      of
      unique visitors between the two websites. This low overlap indicated that the
      WeddingChannel brand was appealing to a different audience. As a result, keeping
      these two destinations affords us the opportunity to reach a larger engaged
      audience for our advertisers. The results of operations for WeddingChannel
      have
      been included in our consolidated statements of operations since the acquisition
      date.




In
      May
      2007, we entered the baby market with the launch of TheNestBaby.com, a new
      web
      site for soon-to-be-parents. The site benefited from the natural flow of first
      time parents coming from The Knot and The Nest. In February 2008, we acquired
      The Bump Media, Inc., a publisher of local print guides that feature pregnancy,
      maternity and baby resources. We rebranded TheNestBaby.com as TheBump.com and
      redesigned the print guides with a new look. The Bump specifically targets
      first
      time parents from fertility through pregnancy, birth and the first year and
      facilitates community by enabling moms in each stage to meet each other and
      to
      share local advice. Like TheKnot.com, the baby site provides content and tools
      surrounding the event, featuring checklists, personal blogs, message boards,
      articles and a baby shop for personalized gifts and supplies. The Bump print
      guides are distributed through OB/GYN offices to new moms-to-be. They feature
      editorial content alongside print advertising from local boutiques and service
      providers that help expecting couples get ready for their baby. Our local sales
      force sells local print advertising in the city guides as well as online local
      listings.




19




Our
      strategy is to expand our position as a leading lifestage media company
      providing comprehensive information, services and products to couples from
      engagement through pregnancy on multiple platforms that keep in step with the
      changing media landscape.




*Increase
      Our Market Share and Leverage Assets.* Acquiring
      companies or services that are complementary to our business increases our
      leverage with advertisers as well as our ability to satisfy our customers.
      The
      acquisition of WeddingChannel has significantly increased our share of the
      online bridal audience and provides additional opportunities to leverage our
      local and national sales forces as well as our wedding merchandise offerings.
      WeddingChannel's registry search platform will also enhance the service we
      are
      able to provide all of our engaged couples and their wedding guests. The launch
      of PartySpot.com leverages our technologies as well as our local sales force
      and
      vendor relationships to provide local party planning information to families
      hosting rehearsal dinners, bar mitzvahs, sweet sixteens and graduation
      parties.




*Deepen
      Our Relationship with Our Audience* .  A
      large and active membership base is critical to our success. Annual new
      membership has remained generally consistent in recent years. Membership
      enrollment is free and gives members the use of important services such as
      free
      personal wedding webpages, message boards, interactive planning tools, wedding
      checklists and wedding gown databases. Our priority in the wedding space is
      to
      increase the depth of member engagement with our sites through new content
      and
      product offerings, additional interactive premium services, and active community
      participation. We also acquire and create properties to expand our services.
      Our
      websites, WeddingTracker.com and Wed-o-rama.com, allow us to offer our engaged
      couples premium personal wedding webpage design and hosting for a
      fee.




*Expand
      into Other Lifestages and Services* .  In
      the first years of marriage, The Knot members will spend even more than they
      did
      on their weddings as they buy and furnish homes, organize their finances and
      start having children. With TheNest.com, we are now extending our relationship
      with our core membership base — and new advertiser
      categories — by providing access to services and products relevant to
      newlyweds and growing families. Getting pregnant is another intense event for
      young married couples, and we believe there is an opportunity to continue
      serving our audience as they enter this significant lifestage. The launch of
      TheBump.com extends our social network to provide pregnant moms and new parents
      with essential information such as stage-by-stage advice, expert Q&As,
      interactive tools, checklists, as well as local events listings and resource
      reviews in more than 100 local markets powered by sibling site
      Lilaguide.com.




*Leverage
      Brands and New Media Platforms.* Maintaining
      our strong brands is critical to attracting and expanding both our online and
      offline user base and securing our leading position in the bridal market and
      beyond. Distribution on new media platforms is a key effort in our brand
      building. We have been a leader in the production and distribution of high
      quality video content online. This branded wedding video content has been
      popular on TheKnot.com and has also gained us increased visibility on
      distribution partner portal MSN. In 2004, we partnered with Comcast, the
      nation's leading cable and broadband provider, to launch The Knot Weddings
      channel, the first-ever all-weddings Video-on-Demand service. In April 2007,
      we
      kicked off our strategic partnership with Style Network with our branded TV
      special, “My Celebrity Wedding by The Knot,” a new spin-off which showcased a
      wedding inspired by a celebrity ceremony, planned by The Knot’s Editor in Chief,
      Carley Roney. The second branded segment, “My Destination Wedding with The
      Knot,” aired in December of 2007.




Aggressive
      public relations outreach is another key tool we use to promote our brands.
      In
      the last twelve months, Carley Roney, as a leading wedding and lifestyle expert,
      has appeared on more than 35 national and local television programs promoting
      The Knot, The Nest and The Nest Baby brands. In addition, in spring 2007, our
      WeddingChannel brand was featured during a seven week wedding series on Fox
      Television’s daytime show *Mike
      & Juliet* .




20




**Summary**





Over
      the
      past year and a half, we have seen many of our offline competitors increase
      their investments in online media. We have also seen a significant number of
      new
      competitors emerging both online as well as in print. For example, over the
      last
      five years, the number of independent wedding magazines has nearly doubled.
      Despite these trends in the competitive landscape, we believe we continue to
      maintain a dominant consumer market share and that our members are more engaged
      than ever. We continue to focus on better monetizing this dominant position
      within the valuable consumer group we serve.





Accordingly,
      in 2008, we are concentrating on several key initiatives that we believe will
      be
      the foundation for the future growth of The Knot. First, we are in the process
      of upgrading legacy technology platforms to more flexible and scalable systems.
      Second, we are continuing to expand our brands into the newlywed and first
      pregnancy lifestages. In addition, we are expanding our marketing efforts to
      increase awareness of our brands and products.




The
      majority of our current technology upgrades are aimed at increasing our
      operational efficiency so that we can access a greater market share of
      advertising dollars and commerce revenue in the weddings portion of our
      business. We are developing a new content management system that will allow
      us
      to more efficiently maintain and organize information on our websites. The
      Nest
      and The Knot websites have been converted to the new platform, and our goal
      is
      to have the WeddingChannel website converted before the end of the year. Our
      new
      local contract entry system and surrounding support applications, also under
      development, will allow greater pricing flexibility, which we believe will
      allow
      us to expand our local vendor base, as well as achieve operational efficiencies,
      which will provide additional time for our local sales force to pursue new
      accounts. In addition to the new contract entry system, we are also in the
      process of converting our existing local art management application off of
      our
      legacy AS/400 system. We currently believe that these local systems projects
      will be completed in early 2009. We then expect to proceed with further projects
      involving a self-service platform that will allow local vendors to automatically
      select their advertising programs and an auction-based platform for selling
      featured vendor positions in the local areas on our websites. We expect that
      these new programs will allow us to more effectively scale our local business
      and drive further growth for local online revenue.




Our
      efforts to expand our brands into the lifestages beyond weddings, such as the
      acquisition of Lilaguide in 2006 and our recent acquisition of The Bump Media,
      are designed to reduce our reliance on bridal endemic advertising, which is
      an
      important part of our strategy for increasing national online advertising
      revenue. To that end, we have increased our investments in editorial and
      creative staff to increase our content offerings for these additional
      lifestages.





We
      believe that we have generally excelled at marketing to our consumers with
      compelling brands, engaging content and products and a highly successful
      consumer public relations program, but we have not aggressively marketed our
      media offerings to advertisers. Accordingly, in 2008, we have established a
      new
      marketing team to develop trade marketing programs and supporting research
      aimed
      at the local vendor community and national advertising marketplace as a
      foundation to drive further national and local advertising revenue growth.
      This
      team will also be involved in launching programs to increase registry searches
      and transactions from which we would derive commission revenue, as well as
      to
      improve conversion of more of our members to customers of our online stores
      for
      wedding supplies.




We
      currently expect that our overall revenue growth for the calendar year ending
      December 31, 2008 will range from 5% to 7%. As a result of the significant
      investments we are making in 2008, particularly for additional information
      technology, project management, editorial, creative and marketing staff,
      operating expense increases for the three and nine months ended September 30,
      2008, have exceeded revenue growth for each period. As a result, our operating
      income has declined. We currently expect this trend to continue at least for
      the
      next quarter.





21




**Results
      of Operations**






*Net
      Revenues*




Net
      revenues increased to $27.0 million and $79.5 million for the three and nine
      months ended September 30, 2008, respectively, from $25.0 million and $74.5
      million for the corresponding periods in 2007.





Total
      online sponsorship and advertising revenues increased to $13.9 million and
      $40.3
      million for the three and nine months ended September 30, 2008, respectively,
      as
      compared to $12.4 million and $35.7 million for the corresponding periods in
      2007. Revenue from local vendor online advertising programs increased to $8.3
      million and $24.6 million or by $491,000 and $1.9 million, for the three and
      nine months ended September 30, 2008, respectively, when compared to the
      corresponding periods in 2007. These increases were primarily the result of
      higher average spending by local vendor clients due to the continuing effect
      of
      price increases which were offset, in part, by the impact on revenue from the
      elimination of certain acquired WeddingChannel local vendor accounts over the
      course of the year ended December 31, 2007. Revenue from these accounts amounted
      to approximately $1.2 million for the nine months ended September 30, 2007.
      National online sponsorship and advertising revenue increased to $5.6 million
      and $15.7 million for the three and nine months ended September 30, 2008, or
      by
      $1.1 million and $2.7 million, respectively, when compared to the corresponding
      periods in 2007 due to increases in the average spending by national accounts.
      Online sponsorship and advertising revenues amounted to 52% and 50% of our
      net
      revenues for the three months ended September 30, 2008 and 2007, respectively.
      For the nine months ended September 30, 2008 and 2007, online sponsorship and
      advertising revenues amounted to 51% and 48% of our net revenues,
      respectively.




Registry
      services revenue was $3.5 million and $8.5 million for the three and nine months
      ended September 30, 2008, respectively, as compared to $3.7
      million and $8.8 million for the corresponding periods in 2007. The changes
      were
      driven by a
      small
      decrease in commissions earned from WeddingChannel retail partners and other
      registry commission sources. Registry services revenue amounted to 13% and
      11%
      of our net revenues for the three and nine months ended September 30, 2008,
      respectively, as compared to 15% and 12% of our net revenues for the
      corresponding periods in 2007.




Merchandise
      revenues, which consist primarily of the sale of wedding supplies, increased
      to
      $5.8 million and $17.5 million for the three and nine months ended September
      30,
      2008, respectively, as compared to $5.3 million and $16.4 million for the
      corresponding periods in 2007. Revenue for The Knot Wedding Shop increased
      by
      $683,000 and $2.0 million or 18% and 17% for the three and nine months ended
      September 30, 2008, respectively, as compared to the corresponding periods
      in
      the prior year, generally due to an increase in the number of orders. These
      increases were offset, in part, by declines in revenue from the WeddingChannel
      store. Merchandise revenues amounted to 21% of net revenues for both the three
      months ended September 30, 2008 and 2007. For both the nine months ended
      September 30, 2008 and 2007, merchandise revenue was 22% of net
      revenues.





Publishing
      and other revenues were $3.8 million and $13.1 million for the three and nine
      months ended September 30, 2008, respectively, as compared to $3.6 million
      and
      $13.6 million for the corresponding periods in 2007. The increase for the recent
      quarter resulted from advertising revenue contributed from *The
      Bump* local
      guides which we acquired earlier this year. Advertising revenue from the August *The
      Knot Best of Weddings* and our
      other local print publications which published in the third quarter of this
      year
      were relatively flat when compared to the corresponding period in 2007. The
      decrease in publishing and other revenues for the nine months ended September
      30, 2007, was attributed to declines in revenue related to *The
      Knot Weddings* magazine, primarily the February issue, of approximately $385,000. The decrease
      was primarily due to a decline in the number of designer advertising pages
      sold,
      and estimated sell-through for newsstand copies. Included in the nine months
      ended September 30, 2007 results was a one-time joint publication of a magazine
      with the American Express Travel and Leisure group. The revenue recorded in
      2007
      for that publication was approximately $190,000. These decreases were partially
      offset by the impact of advertising revenue contributed from *The
      Bump* publications, acquired in February 2008, as well as increased revenues from
      our
      quarterly *The
      Nest* magazines. Publishing and other revenue amounted to 14% of our net revenues
      for
      both the three months ended September 30, 2008 and 2007. For the nine months
      ended September 30, 2008 and 2007, publishing and other revenue was 16% and
      18%
      of our net revenues, respectively.





22




*Cost
      of Revenues*





Cost
      of
      revenues consists of the cost of merchandise sold, including outbound shipping
      costs, costs related to the production of national and regional magazines and
      The Knot TV, payroll and related expenses for our personnel who are responsible
      for the production of online and offline media, and costs of Internet and
      hosting services.





Cost
      of
      revenues increased to $5.1 million and $15.3 million for the three and nine
      months ended September 30, 2008, respectively, as compared to $4.4 million
      and
      $14.1 million for the corresponding periods in 2007. The increases for the
      three
      and nine months ended September 30, 2008 were due to the higher merchandise
      cost
      of revenues as a result of an increase in the sale of wedding supplies, as
      well
      as increased host services costs. As a percentage of net revenues, total cost
      of
      revenues was 19% for both the three and nine months ended September 30, 2008,
      as
      compared to 18% and 19% for the corresponding periods in 2007.





*Product
      and Content Development*





Product
      and content development expenses consist primarily of payroll and related
      expenses for editorial, creative and information technology personnel and
      computer hardware and software costs.




Product
      and content development expenses increased to $5.3 million and $15.3 million
      for
      the three and nine months ended September 30, 2008, as compared to $3.5 million
      and $9.9 million for the three and nine months ended September 30, 2007. These
      increases are a result of additional investments in our information technology
      platforms and related information technology and project management staff to
      improve our operating efficiency. The increases are also the result of additions
      to our editorial staff to increase content offerings for lifestages beyond
      weddings. As a percentage of our net revenues, product and content development
      expenses increased to 20% and 19% for the three and nine months ended September
      30, 2008, respectively, from 14% and 13% for the corresponding periods in 2007.





*Sales
      and Marketing*




Sales
      and
      marketing expenses consist primarily of payroll and related expenses for sales
      and marketing, customer service, registry and public relations personnel, as
      well as the costs for marketing and other promotional activities and fulfillment
      and distribution of merchandise and magazines.





Sales
      and
      marketing expenses increased to $7.8 million and $23.0 million for the three
      and
      nine months ended September 30, 2008, respectively, as compared to $6.2 million
      and $18.6 million for the corresponding periods in 2007. Sales personnel and
      related costs increased by approximately $368,000 and $1.5 million,
      respectively, for the three and nine months ended September 30, 2008, primarily
      as a result of further investments in marketing and national sales and sales
      support staff. We also incurred additional marketing expenses in 2008 to support
      research programs, analytics and other promotional efforts to raise awareness
      of
      our brands and products within the local vendor community and national
      advertising marketplace, to develop programs designed to promote registry
      searches from which we derive commission revenue and to improve the conversion
      rate of our membership base to customers of our online stores for wedding
      supplies. As a percentage of our net revenues, sales and marketing expenses
      increased to 29% for both the three and nine months ended September 30, 2008,
      as
      compared to 25% for each of the corresponding periods in 2007.




*General
      and Administrative*




General
      and administrative expenses consist primarily of payroll and related expenses
      for our executive management, finance and administrative personnel, legal and
      accounting fees, facilities costs, insurance and bad debt expenses.





General
      and administrative expenses were $4.0 million and $14.0 million for the three
      and nine months ended September 30, 2008, respectively, as compared to $4.4
      million and $12.5 million for the corresponding periods in 2007. The recent
      quarter to quarter decrease over 2007 was primarily due to lower bad debt
      expense of approximately $411,000 and lower legal costs of approximately
      $232,000; partially offset by increased personnel and related costs of
      approximately $239,000. The year-to-date increase over 2007 includes increased
      personnel and related costs of approximately $1.2 million to support the growth
      of the Company and higher legal and professional fees of approximately $608,000,
      related, in part, to the putative class action complaint captioned *Haslam
      v. Macy’s Inc., The Knot, Inc., WeddingChannel.com, Inc. and*  *Does*  *1-100* .
      In May
      2008, an order was entered dismissing the complaint with prejudice. These
      increases were partially offset by lower bad debt expense of approximately
      $670,000. As a percentage of our net revenues, general and administrative
      expenses were 15% and 18% for the three and nine months ended September 30,
      2008, respectively, as compared to 18% and 17% for the corresponding periods
      in
      2007.





23




*Stock-Based
      Compensation*




Total
      stock-based compensation expense related to all of our stock awards was included
      in various operating expense categories for the three and nine months ended
      September 30, 2008 and 2007, as follows:




**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2008**
            
            **200****7**
            
            **2008**
            
            **2007**Product
                and content development
            
            $
            208,212
            
            $
            93,233
            
            $
            566,401
            
            $
            332,657Sales
                and marketing
            
            
            (63,025
            )
            
            76,741
            
            
            350,245
            
            
            294,926General
                and administrative
            
            
            404,207
            
            
            456,279
            
            
            1,496,994
            
            
            1,048,643Total
                stock-based compensation expense
            
            $
            549,394
            
            $
            626,253
            
            $
            2,413,640
            
            $
            1,676,226





As
      of
      September 30, 2008, total unrecognized estimated compensation expense related
      to
      nonvested stock options, restricted shares and ESPP rights was $ 6.7
      million, which is expected to be recognized over a weighted average period
      of
      2.5 years. The negative stock based compensation expense in sales and marketing
      for the three months ended September 30, 2008 relates to the cancellation of
      restricted stock due to the departure of our Chief Marketing Officer in August
      2008.




*Goodwill
      Impairment*




For
      the
      three and nine months ended September 30, 2007, we recorded an impairment charge
      of approximately $496,000 after determining that the carrying value of goodwill
      for GreatBoyfriends.com exceeded its implied fair value at September 30, 2007.
      There were no impairment charges for the three and nine months ended September
      30, 2008.




*Depreciation
      and Amortization*




Depreciation
      and amortization consists of depreciation and amortization of property and
      equipment and capitalized software, and amortization of intangible assets
      related to acquisitions.





Depreciation
      and amortization was $2.0 million and $6.5 million for the three and nine months
      ended September 30, 2008, respectively, as compared to $2.1 million and $6.4
      million for the corresponding periods in 2007. The year-to-date increase in
      2008
      was primarily the result of our increased investments in information technology
      platforms.





*Interest
      and Other Income*




Interest
      and other income, net decreased to approximately $826,000 and $2.9 million
      for
      the three and nine months ended September 30, 2008, respectively, as compared
      to
      $1.3 million and $3.5 million for the corresponding periods in 2007. The
      decreases were the result of significantly lower interest rates in 2008 compared
      to those in 2007. The lower interest on our short-term cash and cash equivalents
      was partially offset by interest from our auction rate securities, which carry
      higher interest rates.





*Provision
      for Taxes on Income*




The
      effective tax rates for the three and nine months ended September 30, 2008
      were
      approximately 37% and 38% respectively, as compared to 44% and 42% for the
      three
      and nine months ended September 30, 2007.  These effective tax rates differ
      from the amount computed by applying the Federal statutory income tax rate
      due
      primarily to state income taxes, net of Federal benefit and, in 2008, the
      increased impact of tax exempt interest income.




24





**Liquidity
      and Capital Resources**




As
      of
      September 30, 2008, our cash and cash equivalents amounted to $69.0 million.
      We
      currently invest primarily in short-term debt instruments that are highly
      liquid, of high-quality investment grade, and have maturities ranging from
      one
      to three months, with the intent to make such funds readily available for
      operating purposes.




Net
      cash
      provided by operating activities was $18.1 million for the nine months ended
      September 30, 2008. This resulted primarily from the net income for the period
      of $5.1 million, depreciation, amortization, stock-based compensation, deferred
      income taxes and other non-cash items of $9.2 million and a decrease in accounts
      receivable, net of deferred revenue, of $5.4 million due primarily to relatively
      strong collections from both national and local accounts during the period.
      These sources of cash were offset, in part, by an increase in inventory of
      $726,000 to maintain larger quantities of promotional items and to add new
      products, an increase in other current assets of $467,000 and a decrease in
      accounts payable and accrued expenses of $381,000. Net cash provided by
      operating activities was $22.0 million for the nine months ended September
      30,
      2007. This resulted primarily from the net income for the period of $9.3 million
      and depreciation, amortization, stock-based compensation, deferred income taxes
      and goodwill impairment of $14.7 million. These sources of cash were offset,
      in
      part, by an increase in inventory of $826,000 and a decrease in accounts payable
      and accrued expenses of $1.4 million.





Net
      cash
      provided by investing activities was $14.5 million for the nine months ended
      September 30, 2008 due primarily to proceeds from the sales of short-term and
      long-term investments, net of proceeds from sales, of $20.5 million. These
      proceeds were offset by purchases of property and equipment of $4.7 million
      and
      the acquisition of The Bump for $1.4 million (excluding transaction costs).
      Net
      cash used in investing activities of $76.1 million for the nine months ended
      September 30, 2007 was due to purchases of short-term investments, net of
      proceeds from sales, of $73.8 million and purchases of property and equipment
      of
      $2.3 million.




Net
      cash
      provided by financing activities was $3.3 million and $1.0 million for the
      nine
      months ended September 30, 2008 and 2007, respectively. The increase in cash
      provided from financing activities was primarily due to excess tax benefits
      for
      stock-based awards, and proceeds from the issuance of common stock in connection
      with the exercise of stock options, warrants and through our Employee Stock
      Purchase Plan.




As
      of
      September 30, 2008, we have classified our investment in auction rate securities
      at $48.9 million as long-term assets and recorded a temporary impairment charge
      of $3.2 million with respect to these securities, an increase of $100,000 from
      June 30, 2008. These auction rate securities consisted of AAA/Aaa rated variable
      rate debt securities. The securities are collateralized by student loans, with
      approximately 87% of such collateral, in the aggregate, guaranteed by the United
      States government under the Federal Family Education Loan Program. $3.0 million
      of these securities have an underlying maturity date of November 1, 2009 while
      the remaining securities have maturity dates ranging from March 1, 2022 through
      December 1, 2041. The interest rates reset every 35 days through a competitive
      bidding process often referred to as a “Dutch auction.” If there is insufficient
      interest in the securities at the time of an auction, the auction may not be
      completed and the rates reset to pre-determined “penalty” or “maximum” rates
      based on mathematical formulas in accordance with each security’s prospectus.
      The reset rates on the auction rate securities currently held by us consists
      of
      a short-term debt index plus 100 to 200 basis points which is generally higher
      than what the current market rates would be for the securities in a successful
      auction. From February 14, 2008 through September 30, 2008, one auction was
      successful. All other auctions during that time period for these securities
      failed. An auction failure does not represent a default by the issuer of the
      auction rate security.




We
      concluded that the impairment charge recorded was temporary because (i) we
      believe that the decline in market value is due to general market conditions;
      (ii) the auction rate securities continue to be of a high credit quality and
      interest is paid when due; and (iii) we currently have the intent and ability
      to
      hold the auction rate securities until a recovery in market value occurs. If
      unsuccessful auctions continue, and issuer credit ratings deteriorate, or if
      there are actual issuer defaults with respect to such securities, we may be
      required to record additional temporary or other-than-temporary impairment
      charges in future periods. It may
      also take until the final maturity of the underlying securities to realize
      our
      investments.




In
      June
      and September 2008, $5.0 million and $1.9 million, respectively, of auction
      rate
      securities held by us were redeemed at par; however, we are currently unable
      to
      determine whether other issuers of its remaining portfolio of auction rate
      securities will attempt or be able to redeem securities.




25




InOctober
      2008, we received an offer (the “Offer”) from UBS AG (“UBS”), one of our
      investment providers, to sell at par value auction-rate securities originally
      purchased from UBS (approximately $52.1 million) at any time during a two-year
      period beginning June 30, 2010. The Offer is non-transferable and expires on
      November 14, 2008. We are in the process of evaluating the Offer and its
      potential financial statement impact.





Based
      on
      expected future operating cash flows and our other sources of cash and cash
      equivalents, we do not currently anticipate that any potential lack of liquidity
      in these auction rate securities will affect our ability to execute our current
      business plan and that our current liquid cash and cash equivalents will be
      sufficient to fund our working capital and capital expenditure requirements
      for
      the foreseeable future. Our ability to meet our obligations in the ordinary
      course of business is dependent upon our ability to maintain profitable
      operations and/or raise additional financing through public or private debt
      or
      equity financings, or other arrangements with corporate sources, or other
      sources of financing to fund operations. However, there is no assurance that
      we
      will maintain profitable operations or that additional funding, if required,
      will be available to us in amounts or on terms acceptable to us.




**Contractual
      Obligations and Commitments**




We
      do not
      have any special purpose entities or capital leases. Other than operating
      leases, which are described below, we do not engage in off-balance sheet
      financing arrangements.




In
      the
      ordinary course of business, we enter into various arrangements with vendors
      and
      other business partners principally for magazine production, inventory
      purchases, computer equipment, host services and bandwidth.




As
      of
      September 30, 2008, we had no material commitments for capital expenditures.




As
      of
      September 30, 2008, other long-term liabilities of $393,037 primarily
      represented accruals to recognize rent expense on a straight-line basis over
      the
      respective lives of four of our operating leases under which rental payments
      increase over the lease periods. These accruals will be reduced as the operating
      lease payments, summarized in the table of contractual obligations below, are
      made.




Our
      contractual obligations as of September 30, 2008 are summarized as follows:




**Payments
                due by period****Contractual
                Obligations**
            
            **Total**
            
            **Less
                than 1 year**
            
            **1-3
                years**
            
            **3-5
                years**
            
            **More
                than 5 years**Long-term
                debt
            
            $
            55,173
            
            $
            55,173
            
            $
            -
            
            $
            -
            
            $
            -Operating
                leases
            
            
            5,187,808
            
            
            1,632,295
            
            
            2,633,108
            
            
            922,405
            
            
            -Purchase
                commitments
            
            
            1,961,468
            
            
            1,760,952
            
            
            167,866
            
            
            32,650
            
            
            -Total
            
            $
            7,204,449
            
            $
            3,448,420
            
            $
            2,800,974
            
            $
            955,055
            
            $
            -





**Seasonality**





We
      believe that the impact of the frequency of weddings from quarter to quarter
      results in lower registry services and merchandise revenues in the first and
      fourth quarters.




**Critical
      Accounting Policies**




The
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements which have been prepared in
      accordance with U.S. generally accepted accounting principles. The preparation
      of these financial statements requires us to make estimates and judgments that
      affect the reported amounts of assets, liabilities, revenues and expenses,
      and
      related disclosure of contingent assets and liabilities on an on-going basis.
      We
      evaluate these estimates including those related to revenue recognition,
      allowances for doubtful accounts, inventory provisions, impairment of intangible
      assets, including goodwill, and deferred taxes. Actual results may differ from
      these estimates under different assumptions or conditions.





26




***Revenue
      Recognition***




We
      recognize revenues when earned from the sale of online sponsorship and
      advertising programs, from commissions earned in connection with the sale of
      gift registry products, from the sale of merchandise and from the publication
      of
      magazines.




Online
      sponsorship programs are designed to integrate advertising with online editorial
      content. Sponsors can purchase the exclusive right to promote products or
      services on a specific online editorial area and can purchase a special feature
      on our sites. These programs commonly include banner advertisements and direct
      e-mail marketing. Sponsors can also promote their services and products within
      the programming on our streaming video channel, The Knot TV.




Online
      advertising includes online banner advertisements and direct e-mail marketing
      as
      well as placement in our online search tools. This category also includes online
      listings, including preferred placement and other premium programs, in the
      local
      area of our websites for local wedding and other vendors. Local vendors may
      purchase online listings through fixed term contracts or open-ended
      subscriptions.




Certain
      elements of online sponsorship and advertising contracts provide for the
      delivery of a minimum number of impressions. Impressions are the featuring
      of a
      sponsor's advertisement, banner, link or other form of content on our sites.
      We
      recognize online sponsorship and advertising revenue over the duration of the
      contracts on a straight-line basis when we deliver impressions in excess of
      minimum guarantees. To the extent that minimum guaranteed impressions are not
      met, we are often obligated to extend the period of the contract until the
      guaranteed impressions are achieved. If this occurs, we defer and recognize
      the
      corresponding revenues over the extended period.




Registry
      services revenue primarily represents commissions from retailers who participate
      in WeddingChannel’s registry aggregation service which offers couples and their
      guests the opportunity to view multiple registries in one location and for
      guests to order gifts off of these registries. Sales orders are fulfilled and
      shipped by the retail partners, at which point the related commissions are
      contractually earned by us and recognized as revenue. Product returns or
      exchanges do not materially impact the commissions earned by us. In accordance
      with Emerging Issues Task Force Issue No. 99-19, *“Reporting
      Revenue Gross As A Principal Versus Net As An Agent,”* we only
      record net commissions, and not gross revenue and cost of revenue associated
      with these products, since the we are not primarily obligated in these
      transactions, are not subject to inventory risk and amounts earned are
      determined using a fixed percentage.




Merchandise
      revenue generally includes the selling price of wedding supplies through our
      websites as well as related outbound shipping and handling charges since we
      are
      the primary party obligated in a transaction, are subject to inventory risk,
      and
      we establish our own pricing and selection of suppliers. Merchandise revenues
      are recognized when products are shipped to customers, reduced by discounts
      as
      well as an allowance for estimated sales returns.




Publishing
      revenue primarily includes print advertising revenue derived from the
      publication of national and regional magazines. These revenues are recognized
      upon the publication of the related magazines, at which time all material
      services related to the magazine have been performed. Additionally, publishing
      revenues are derived from the sale of magazines on newsstands and in bookstores,
      and from author royalties received related to book publishing contracts.
      Revenues from the sale of magazines are recognized when the magazines are
      shipped, reduced by an allowance for estimated sales returns. Author royalties,
      to date, have been derived primarily from publisher royalty advances that are
      recognized as revenue when all of our contractual obligations have been met
      which is typically upon the delivery to, and acceptance by, the publisher of
      the
      final manuscript.




For
      contracts with multiple elements, including programs which combine online and
      print advertising components, we allocate revenue to each element based on
      evidence of its fair value. Evidence of fair value is the normal pricing and
      discounting practices for those deliverables when sold separately. We defer
      revenue for any undelivered elements and recognize revenue allocated to each
      element in accordance with the revenue recognition policies set forth above.




Revenue
      for which realization is not reasonably assured is deferred.




27




***Allowance
      for Doubtful Accounts***




We
      maintain an allowance for doubtful accounts for estimated losses resulting
      from
      the inability of our customers to make required payments. As of September 30,
      2008 and December 31, 2007, our allowance for doubtful accounts amounted to
      approximately $682,000 and $1.0 million, respectively. In determining these
      allowances, we evaluate a number of factors, including the credit risk of
      customers, historical trends and other relevant information. If the financial
      condition of our customers were to deteriorate, additional allowances may be
      required.




***Inventory***




In
      order
      to record our inventory at its lower of cost or market, we assess the ultimate
      realizability of our inventory, which requires us to make judgments as to future
      demand and compare that with current inventory levels. We record a provision
      to
      adjust our inventory balance based upon that assessment. If our merchandise
      revenues grow, the investment in inventory would likely increase. It is possible
      that we would need to further increase our inventory provisions in the
      future.




***Goodwill
      and Other Intangibles***




As
      of
      September 30, 2008, we had recorded goodwill and other intangible assets of
      $62.6 million. In our most recent annual assessment of impairment of remaining
      goodwill and intangible assets as of October 1, 2007, we made estimates of
      fair
      value using multiple approaches. In our ongoing assessment of impairment of
      goodwill and other intangible assets, we consider whether events or changes
      in
      circumstances such as significant declines in revenues, earnings or material
      adverse changes in the business climate, indicate that the carrying value of
      assets may be impaired. As of September 30, 2008, no current impairment
      indicators were noted. Future adverse changes in market conditions or poor
      operating results of strategic investments could result in losses or an
      inability to recover the carrying value of the investments, thereby possibly
      requiring impairment charges in the future.




***Deferred
      Tax Asset Valuation Allowance***




In
      connection with the acquisition of WeddingChannel, we recorded a deferred tax
      asset related to certain acquired tax loss carryforwards of WeddingChannel
      of
      $21.7 million which resulted in a reduction of goodwill associated with the
      acquisition. The substantial portion of the acquired tax loss carryforwards
      of
      WeddingChannel are subject to a limitation on future utilization under Section
      382 of the Internal Revenue Code. We currently estimate that the effect of
      Section 382 will generally limit the amount of the loss carryforwards of
      WeddingChannel which is available to offset future taxable income to
      approximately $3.6 million annually. The overall determination of the annual
      loss limitation is subject to interpretation, and therefore, the annual loss
      limitation could be subject to change.




Through
      September 30, 2008, we continue to maintain an estimated valuation allowance
      for
      deferred tax assets associated with certain state net operating loss
      carryforwards of WeddingChannel. The recognition of these additional tax
      benefits would result in a reduction to goodwill.




As
      of
      September 30, 2008, we had recorded total deferred tax assets of $24.0 million.
      The realization of these deferred tax assets depends upon our ability to
      continue to generate taxable income in the future, as well as other factors
      including limitations which may arise from changes in our ownership. The
      valuation allowance may need to be adjusted in the future if facts and
      circumstances change causing a reassessment of the realization of the deferred
      tax assets.




***Stock-Based
      Compensation***




We
      compute stock-based compensation in accordance with Statement of Financial
      Accounting Standards (“SFAS”) No. 123(R), *Share-Based
      Payment.* SFAS No.
      123(R) requires the measurement of compensation expense for all stock awards
      granted to employees and non-employee directors at fair value on the date of
      grant and recognition of compensation expense over the related service periods
      for awards expected to vest.




The
      fair
      value of restricted stock is determined based on the number of shares granted
      and the quoted price of our common stock, and the fair value of stock options
      is
      determined using the Black-Scholes valuation model. The calculation for fair
      value of stock options requires considerable judgment including the estimation
      of stock price volatility, expected option lives and risk-free investment rates.
      We develop estimates based on historical data and market information which
      may
      change significantly over time and, accordingly, have a large impact on
      valuation.




28




We
      recognized stock-based compensation for service-based graded-vesting stock
      awards granted prior to January 1, 2006 using the accelerated method prescribed
      by Financial Accounting Standards Board (“FASB”) *Interpretation
      No. 28.* As
      permitted by SFAS No. 123(R), for stock awards granted after December 31, 2005,
      we have adopted the straight-line attribution method. We include an estimate
      of
      stock awards to be forfeited in the future in calculating stock-based
      compensation expense for the period. We consider several factors when estimating
      future forfeitures, including types of awards, employee level and historical
      experience. Actual forfeitures may differ substantially from our current
      estimates.




***Recently
      Adopted Accounting Pronouncement***





On
      January 1, 2008, we adopted Statement of Financial Accounting Standards (“SFAS”)
      No. 157, *Fair
      Value Measurements* (“SFAS
      157”), which defines fair value, establishes a framework for measuring fair
      value in accordance with generally accepted accounting principles, and expands
      disclosures about fair value measurements. SFAS 157 does not require any new
      fair value measurements, but provides guidance on how to measure fair value
      by
      providing a fair value hierarchy used to classify the source of the information.
      In February 2008, the FASB issued FASB Staff Position (“FSP”) No.157-2 (“FSP
      157-2”) which would delay the effective date of SFAS 157 for all nonfinancial
      assets and nonfinancial liabilities, except those that are recognized or
      disclosed at fair value in the financial statements on a recurring basis (at
      least annually) until January 1, 2009. We are currently evaluating the impact
      of
      SFAS 157 on our nonfinancial assets and liabilities. In October 2008, the FASB
      issued FSP No. 157-3 (“FSP 157-3”) which clarifies the application of SFAS 157
      as it relates to the valuation of financial assets in a market that is not
      active for those financial assets. FSP 157-3 is effective immediately. FSP
      157-3
      is applicable to the valuation of auction rate securities held by us for which
      there was no active market as of September 30, 2008. The adoption of FSP 157-3
      during the three month period ending September 30, 2008 did not have a material
      impact on our consolidated results of operations or financial condition as
      our
      valuation model met the provisions of FSP 157-3. See Note 3 to the accompanying
      condensed consolidated financial statements for a discussion of the application
      of SFAS 157 to the valuation of our investments in auction rate securities
      as of
      September 30, 2008.




***New
      Accounting Pronouncements***





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities — including an Amendment of FASB Statement No.
      115* (“SFAS
      159”), which allows an entity to choose to measure certain financial instruments
      and liabilities at fair value. Subsequent measurements for the financial
      instruments and liabilities an entity elects to fair value will be recognized
      in
      earnings. SFAS 159 also establishes additional disclosure requirements. Through
      September 30, 2008, we have elected not to extend the use of the fair value
      option to our assets and liabilities.




In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), *Business
      Combinations* (“SFAS
      141R”). SFAS 141R establishes principles and requirements for how an acquirer
      recognizes and measures in its financial statements the identifiable assets
      acquired, the liabilities assumed, any noncontrolling interest in the acquiree
      and the goodwill acquired. SFAS 141R also establishes disclosure requirements
      to
      enable the evaluation of the nature and financial effects of the business
      combination. This statement is effective beginning January 1, 2009. The adoption
      of SFAS 141R will not have an impact on our existing acquisitions. SFAS 141R
      will be prospectively applied to acquisitions occurring on or after January
      1,
      2009.




In
      December 2007, the FASB issued SFAS No. 160, *Noncontrolling
      Interests in Consolidated Financial Statements- an amendment of Accounting
      Research Bulletin* No.
      51
      (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for
      ownership interests in subsidiaries held by parties other than the parent,
      the
      amount of consolidated net income attributable to the parent and to the
      noncontrolling interest, changes in a parent’s ownership interest, and the
      valuation of retained noncontrolling equity investments when a subsidiary is
      deconsolidated. SFAS 160 also establishes disclosure requirements that clearly
      identify and distinguish between the interests of the parent and the interests
      of the noncontrolling owners. This statement is effective beginning January
      1,
      2009. We are currently evaluating the potential impact of the adoption of SFAS
      160 on our consolidated financial position, results of operations and cash
      flows.




29




In
      April
      2008, the FASB issued FSP No. 142-3, *Determination
      of the Useful Life of Intangible Assets* ,
      (“FSP
      142-3”) that amends the factors considered in developing renewal or extension
      assumptions used to determine the useful life of a recognized intangible asset
      under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). FSP 142-3
      requires a consistent approach between the useful life of a recognized
      intangible asset under SFAS 142 and the period of expected cash flows used
      to
      measure the fair value of an asset under SFAS No. 141 (R), Business
      Combinations. The FSP also requires enhanced disclosures when an intangible
      asset’s expected future cash flows are affected by an entity’s intent and/or
      ability to renew or extend the arrangement. FSP 142-3 is effective for financial
      statements issued for fiscal years beginning after December 15, 2008 and is
      applied prospectively. Early adoption is prohibited. We are currently evaluating
      the potential impact of the adoption of FSP 142-3 on our consolidated financial
      position, results of operations and cash flows.




**ITEM
      3.**  **Quantitative and Qualitative Disclosures About Market Risk**




Market
      risk represents the risk of loss that may impact the financial position, results
      of operations, or cash flows of the Company due to adverse changes in financial
      market prices, including interest rate risk, foreign currency exchange rate
      risk, commodity price risk, and other relevant market rate or price risks.





We
      are
      exposed to some market risk through interest rates related to the investment
      of
      our current cash and cash equivalents of $69.0 million as of September 30,
      2008.
      These funds are generally invested in highly liquid debt instruments. As such
      instruments mature and the funds are re-invested, we are exposed to changes
      in
      market interest rates. This risk is not considered material, and we manage
      such
      risk by continuing to evaluate the best investment rates available for
      short-term, high quality investments.





We
      have
      long-term investments in auction rate securities totaling $48.9 million as
      of
      September 30, 2008. We recorded a temporary impairment charge of $3.2 million
      with respect to these securities, an increase of $100,000 from June 30, 2008.
      These auction rate securities consisted of AAA/Aaa rated variable rate debt
      securities. The securities are collateralized by student loans, with
      approximately 87% of such collateral, in the aggregate, guaranteed by the United
      States government under the Federal Family Education Loan Program. $3.0 million
      of these securities have an underlying maturity date of November 1, 2009 while
      the remaining securities have maturity dates ranging from March 1, 2022 through
      December 1, 2041. The interest rates reset every 35 days through a competitive
      bidding process often referred to as a “Dutch auction.” If there is insufficient
      interest in the securities at the time of an auction, the auction may not be
      completed and the rates reset to pre-determined “penalty” or “maximum” rates
      based on mathematical formulas in accordance with each security’s prospectus.
      The reset rates on the auction rate securities currently held by us consist
      of a
      short-term debt index plus 100 to 200 basis points which is generally higher
      than what the current market rates would be for the securities in a successful
      auction. From February 14, 2008 through September 30, 2008, one auction was
      successful. All other auctions during that time period for these securities
      failed. An auction failure does not represent a default by the issuer of the
      auction rate security. We
      concluded that the impairment charge recorded was temporary because (i) we
      believe that the decline in market value is due to general market conditions;
      (ii) the auction rate securities continue to be of a high credit quality and
      interest is paid when due; and (iii) we currently have the intent and ability
      to
      hold the auction rate securities until a recovery in market value occurs. If
      unsuccessful auctions continue, and issuer credit ratings deteriorate, or if
      there are actual issuer defaults with respect to such securities, we may be
      required to record additional temporary or other-than-temporary impairment
      charges in future periods. It may
      also take until the final maturity of the underlying securities to realize
      our
      investments.





In
      June
      and September 2008, $5.0 million and $1.9 million, respectively, of auction
      rate
      securities held by us were redeemed at par; however, we are currently unable
      to
      determine whether other issuers of its remaining portfolio of auction rate
      securities will attempt or be able to redeem securities. In the event we need
      to
      access these funds, we could be required to sell these securities at an amount
      below our original purchase value. If we are unable to liquidate these
      investments as necessary to execute our current business plan, we may need
      to
      change or postpone such business plan or find alternative financing, if
      available, for such business plan. Any of these events could materially affect
      our results of operations and our financial condition.





30




In
      October 2008, we received an offer (the “Offer”) from UBS AG (“UBS”), one of our
      investment providers, to sell at par value all of our auction-rate securities,
      which had been originally purchased from UBS (approximately $52.1 million)
      at
      any time during a two-year period beginning June 30, 2010. The Offer is
      non-transferable and expires on November 14, 2008. We are in the process of
      evaluating the Offer and its potential financial statement impact.




We
      have
      no activities related to derivative financial instruments or derivative
      commodity instruments, and we are not currently subject to any significant
      foreign currency exchange risk




**ITEM
      4.**  **Controls
      and Procedures**




The
      Company’s management, including the Chief Executive Officer and Chief Financial
      Officer, evaluated the effectiveness of the Company’s disclosure controls and
      procedures, as that term is defined in Rule 13a-15(e) promulgated under the
      Securities Exchange Act of 1934, as amended (the Exchange Act), as of September
      30, 2008. Based on that evaluation, the Chief Executive Officer and Chief
      Financial Officer concluded that the disclosure controls and procedures are
      effective to ensure that information required to be disclosed by the Company
      in
      the reports that the Company files or submits under the Exchange Act is
      recorded, processed, summarized and reported, within the time periods specified
      in the rules and forms of the Securities and Exchange Commission (“SEC”), and to
      ensure that such information is accumulated and communicated to the Company’s
      management, including the Chief Executive Officer and Chief Financial Officer,
      as appropriate to allow timely decisions regarding required
      disclosure.




There
      were no changes in the Company’s internal control over financial reporting
      during the quarter ended September 30, 2008 identified in connection with the
      evaluation thereof by the Company’s management, including the Chief Executive
      Officer and Chief Financial Officer, that has materially affected, or is
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.




Management
      does not expect that our disclosure controls and procedures or our internal
      control over financial reporting will prevent or detect all error and fraud.
      Any
      control system, no matter how well designed and operated, is based upon certain
      assumptions and can provide only reasonable, not absolute, assurance that its
      objectives will be met. Further, no evaluation of controls can provide absolute
      assurance that misstatements due to error or fraud will not occur or that all
      control issues and instances of fraud, if any, within the Company have been
      detected. The Company’s disclosure controls and procedures are designed to
      provide reasonable assurance of achieving their objectives and the Chief
      Executive Officer and Chief Financial Officer have concluded that the disclosure
      controls and procedures are effective at that reasonable assurance
      level.





31





**PART
      II - OTHER INFORMATION**




**ITEM
      1.** **Legal Proceedings**




On
      November 4, 2008, we were named as a defendant in a complaint filed in the
      United States District Court for the Eastern District of Texas and captioned
      Balthaser Online, Inc. v. Network Solutions, LLC, The Knot, Inc., Insider
      Guides, Inc., Cyworld Inc., FriendFinder Networks, Inc., Hi5 Networks, Inc.,
      Freewebs, Inc., Gaia Interactive Inc., Friendster Inc., Ebaum’s World, Inc.,
      Puma International, LLC, Imeem, Inc., Scripps Networks, LLC, Live Journal Inc.,
      Nike, Inc., Ning, Inc., Swatchbox Technologies, Inc., Electronic Arts Inc.,
      Hookumu Inc., Meredith Corp., and Capcom USA, Inc. The complaint alleges that
      the defendants are willfully infringing a patent held by the plaintiff by,
      among
      other things, operating websites covered by one or more claims of the patent
      that relate to rich-media Internet applications. The complaint seeks
      compensatory damages in an amount to be determined at trial, but in no event
      less than a reasonable royalty; an accounting of all sales and revenues derived
      in connection with the conduct alleged to infringe the patent; an order that
      would treble all damages awarded; an award of costs, interest on damages and
      reasonable attorneys’ fees; and a permanent injunction. While we intend to
      vigorously defend against the claims asserted, this case is in the preliminary
      stages of litigation and, as a result, the ultimate outcome of this case and
      any
      potential financial impact on us are not reasonably determinable at this
      time.





We
      are
      engaged in other legal actions arising in the ordinary course of business and
      believe that the ultimate outcome of these actions will not have a material
      effect on our results of operations, financial position or cash
      flows.







**ITEM
      1A.****Risk
      Factors**




Risks
      that could have a negative impact on our business, results of operations and
      financial condition include without limitation, (i) The Knot’s unproven business
      model, (ii) The Knot’s history of losses, (iii) the significant fluctuation to
      which The Knot’s quarterly revenues and operating results are subject, (iv) the
      seasonality of the wedding industry, (v) the dependence of our registry services
      business on the continued use of the WeddingChannel website by our retail
      partners, and (vi) other factors detailed in documents The Knot files from
      time
      to time with the Securities and Exchange Commission. A more detailed description
      of each of these and other risk factors can be found under the caption “Risk
      Factors” in our most recent Annual Report on Form 10-K, filed on March 13, 2008.
      Except as noted below, there have been no material changes to the risk factors
      described in the Form 10-K. In addition, the risk factor in the Form 10-K
      captioned “We have not independently verified market share and industry data and
      forecasts” should not be deemed to be included in the risk factors affecting the
      Company.




***We
      have invested in securities that are subject to market risk and the current
      negative liquidity conditions in the global credit markets could adversely
      affect the value of our assets.***




As
      of
      September 30, 2008, we have classified our investment in auction rate securities
      at $48.9 million as long-term assets and recorded a temporary impairment charge
      of $3.2 million with respect to these securities, an increase of $100,000 from
      June 30, 2008. These auction rate securities consisted of AAA/Aaa rated variable
      rate debt securities. The securities are collateralized by student loans, with
      approximately 87% of such collateral, in the aggregate, guaranteed by the United
      States government under the Federal Family Education Loan Program. $3.0 million
      of these securities have an underlying maturity date of November 1, 2009 while
      the remaining securities have maturity dates ranging from March 1, 2022 through
      December 1, 2041. The interest rates reset every 35 days through a competitive
      bidding process often referred to as a “Dutch auction.” If there is insufficient
      interest in the securities at the time of an auction, the auction may not be
      completed and the rates reset to pre-determined “penalty” or “maximum” rates
      based on mathematical formulas in accordance with each security’s prospectus.
      The reset rates on the auction rate securities currently held by us consist
      of a
      short-term debt index plus 100 to 200 basis points which is generally higher
      than what the current market rates would be for the securities in a successful
      auction. From February 14, 2008 through September 30, 2008, one auction was
      successful. All other auctions during that time period for these securities
      failed. An auction failure does not represent a default by the issuer of the
      auction rate security.




We
      concluded that the impairment charge recorded was temporary because (i) we
      believe that the decline in market value is due to general market conditions;
      (ii) the auction rate securities continue to be of a high credit quality and
      interest is paid when due; and (iii) we currently have the intent and ability
      to
      hold the auction rate securities until a recovery in market value occurs. If
      unsuccessful auctions continue, and issuer credit ratings deteriorate, or if
      there are actual issuer defaults with respect to such securities, we may be
      required to record additional temporary or other-than-temporary impairment
      charges in future periods. It may
      also take until the final maturity of the underlying securities to realize
      our
      investment.





32




In
      June
      and September 2008, $5.0 million and $1.9 million, respectively, of auction
      rate
      securities held by us were redeemed at par; however, we are currently unable
      to
      determine whether other issuers of its remaining portfolio of auction rate
      securities will attempt or be able to redeem securities. In the event we need
      to
      access these funds, we could be required to sell these securities at an amount
      below our original purchase value. If we are unable to liquidate these
      investments as necessary to execute our current business plan, we may need
      to
      change or postpone such business plan or find alternative financing, if
      available, for such business plan. Any of these events could materially affect
      our results of operations and our financial condition.





In
      October 2008, we received an offer (the “Offer”) from UBS AG (“UBS”), one of our
      investment providers, to sell at par value all of our auction-rate securities,
      which had been originally purchased from UBS (approximately $52.1 million)
      at
      any time during a two-year period beginning June 30, 2010. The Offer is
      non-transferable and expires on November 14, 2008. We are in the process of
      evaluating the Offer and its potential financial statement impact.




**ITEM.
      2**  **Unregistered
      Sales of Equity Securities and Use of Proceeds**




**Issuer
      Purchases of Equity Securities**





**Period**
            **(a)
                Total Number of Shares Purchased**
            **(b)
                Average Price Paid per Share**
            **(c)
                Total Number of Shares Purchased as Part of Publicly Announced Plans
                or
                Programs**
            **(d)
                Maximum Number of Shares that May Yet Be Purchased Under the Plans
                or
                Programs****July
                1, 2008 to July 31, 2008**
            **14,992**
            **$8.64**
            **n/a**
            **n/a****August
                1, 2008 to August 31, 2008**
            **1,666**
            **$9.03**
            **n/a**
            **n/a****September
                1, 2008 to September 30, 2008**
            **1,612**
            **$8.90**
            **n/a**
            **n/a****Total**
            **18,270**
            **$8.70**
            **n/a**
            **n/a**





The
      terms
      of restricted stock awards granted under certain of the Company’s stock
      incentive plans allow participants to surrender or deliver shares of The Knot’s
      common stock to the Company to satisfy tax withholding obligations related
      to
      the vesting of those awards. All of the shares listed in the table above
      represent the surrender of shares to the Company in connection with such tax
      withholding obligations. For purposes of this table, the “price paid per share”
is determined by reference to the closing sales price per share of The Knot’s
      common stock on The Nasdaq Global Market on the date of such surrender (or
      on
      the last date preceding such surrender for which such reported price
      exists).




**ITEM
      6.**  **Exhibits**




Incorporated
      by reference to the Exhibit Index immediately preceding the exhibits attached
      to
      this Quarterly Report on Form 10-Q.





33





**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act, the Registrant has duly
      caused this report to be signed on its behalf by the undersigned thereunto
      duly
      authorized.


Date:
              November 7, 2008
            THE
              KNOT,
              INC.By:
            /s/ John
              P.
              MuellerJohn
              P. MuellerChief
                Financial Officer (Principal Financial Officerand
                Duly Authorized Officer)





34





**EXHIBIT
      INDEX**


**Number**
              
              **Description**10.20
              
              Letter
                  Agreement between The Knot, Inc. and David Liu dated November 5,
                  2008.10.21
              
              Letter
                  Agreement between The Knot, Inc. and Carley Roney dated November
                  5,
                  2008.10.22
              
              Name
                  And Likeness Licensing Agreement between The Knot, Inc. and Carley
                  Roney
                  dated November 5, 2008.10.23
              
              Letter
                  Agreement between The Knot, Inc. and John P. Mueller dated August
                  13,
                  2008.10.24
              
              Letter
                  Agreement between The Knot, Inc. and Jeremy Lechtzin dated August
                  7,
                  2008.31.1
              
              Certification
                  of Chairman and Chief Executive Officer Pursuant to Exchange Act
                  Rule
                  13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley
                  Act of
                  2002.31.2
              
              Certification
                  of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a),
                  As
                  Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.32.1
              
              Certification
                  of Chairman and Chief Executive Officer Pursuant to 18 U.S.C. Section
                  1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley
                  Act of
                  2002.32.2
              
              Certification
                  of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
                  As Adopted
                  Pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.







35