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 JUNE 30, 2010


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




462
Broadway, 6th 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. Yesx     
No ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes ̈
    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
      filerxNon-accelerated
      filer ̈ (Do not check if
      a smaller reporting)
            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 ̈      
Nox




As of
August 7, 2010, there were 34,044,884 shares of the registrant’s common stock
outstanding.








PageNumberPART
      IFINANCIAL
      INFORMATIONITEM
      1:
                                                
                                                Financial
      Statements (Unaudited):Condensed
      Consolidated Balance Sheets as of June 30, 2010 andDecember
      31, 2009
                                                
                                                4Condensed
      Consolidated Statements of Operations for the three and six months
      endedJune
      30, 2010 and 2009
                                                
                                                5Condensed
      Consolidated Statements of Cash Flows for the six months
    endedJune
      30, 2010 and 2009
                                                
                                                6Notes
      to Condensed Consolidated Financial Statements
                                                
                                                7ITEM
      2:
                                                
                                                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                
                                                17ITEM
      3:
                                                
                                                Quantitative
      and Qualitative Disclosures About Market Risk
                                                
                                                29ITEM
      4:
                                                
                                                Controls
      and Procedures
                                                
                                                29PART
      IIOTHER
      INFORMATIONITEM
      1:
                                                
                                                Legal
      Proceedings
                                                
                                                30ITEM1A:
                                                
                                                Risk
      Factors
                                                
                                                30ITEM
      2:
                                                
                                                Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                
                                                30ITEM
      6:
                                                
                                                Exhibits
                                                
                                                31SIGNATURES
                                                
                                                
                                                
                                                32


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.





WHERE
YOU CAN FIND MORE INFORMATION





The
Knot’s corporate website is located atwww.theknotinc.com. The Knot
makes available free of charge, on or through our corporate website, our annual,
quarterly and current reports, and any amendments to those reports, as soon as
reasonably practicable after electronically filing such reports with, or
furnishing to, the Securities and Exchange Commission (“SEC”). Information
contained on The Knot’s corporate website is not part of this report or any
other report filed with the SEC.




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





THE
KNOT, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(amounts
in thousands, except for share data)





June 30,
                    
                    
                    December 31,2010
                    
                    
                    2009(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    124,337
                    
                    
                    $
                    94,993Short-term
      investments
                    
                    
                    -
                    
                    
                    
                    36,498Accounts
      receivable, net of allowances of $2,415 and $1,696 at June 30, 2010 and
      December 31, 2009, respectively
                    
                    
                    8,581
                    
                    
                    
                    8,704Accounts
      receivable from affiliate
                    
                    
                    1,257
                    
                    
                    
                    444Receivable
      from bank
                    
                    
                    9,600
                    
                    
                    
                    -Inventories
                    
                    
                    4,562
                    
                    
                    
                    2,708Deferred
      production and marketing costs
                    
                    
                    801
                    
                    
                    
                    685Deferred
      tax assets, current portion
                    
                    
                    2,441
                    
                    
                    
                    2,441Other
      current assets
                    
                    
                    2,746
                    
                    
                    
                    2,948Total
      current assets
                    
                    
                    154,325
                    
                    
                    
                    149,421Property
      and equipment, net
                    
                    
                    5,592
                    
                    
                    
                    6,148Intangible
      assets, net
                    
                    
                    9,347
                    
                    
                    
                    10,341Goodwill
                    
                    
                    37,750
                    
                    
                    
                    37,757Deferred
      tax assets
                    
                    
                    20,585
                    
                    
                    
                    20,588Investment
      in equity interest, net
                    
                    
                    707
                    
                    
                    
                    419Other
      assets
                    
                    
                    390
                    
                    
                    
                    201Total
      assets
                    
                    $
                    228,696
                    
                    
                    $
                    224,875LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
                    
                    $
                    10,433
                    
                    
                    $
                    8,861Deferred
      revenue
                    
                    
                    10,266
                    
                    
                    
                    10,190Total
      current liabilities
                    
                    
                    20,699
                    
                    
                    
                    19,051Deferred
      tax liabilities
                    
                    
                    3,502
                    
                    
                    
                    3,504Other
      liabilities
                    
                    
                    155
                    
                    
                    
                    214Total
      liabilities
                    
                    
                    24,356
                    
                    
                    
                    22,769Stockholders’
      equity:Common
      stock, $.01 par value; 100,000,000 shares authorized and 34,085,560 and
      33,707,358 shares issued and outstanding at June 30, 2010 and December 31,
      2009, respectively
                    
                    
                    341
                    
                    
                    
                    337Additional
      paid-in-capital
                    
                    
                    210,629
                    
                    
                    
                    209,440Accumulated
      deficit
                    
                    
                    (6,630
                    )
                    
                    
                    (7,671
                    )Total
      stockholders’ equity
                    
                    
                    204,340
                    
                    
                    
                    202,106Total
      liabilities and stockholders’ equity
                    
                    $
                    228,696
                    
                    
                    $
                    224,875





See
accompanying Notes to Condensed Consolidated Financial
Statements


4




THE
KNOT, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(amounts
in thousands, except for per share data)


(unaudited)





Three Months Ended June 30,
                  
                  
                  Six Months Ended June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      revenue:Online
      sponsorship and advertising
                  
                  $
                  14,981
                  
                  
                  $
                  14,217
                  
                  
                  $
                  29,445
                  
                  
                  $
                  27,041Registry
      services
                  
                  
                  1,957
                  
                  
                  
                  2,981
                  
                  
                  
                  3,655
                  
                  
                  
                  4,698Merchandise
                  
                  
                  8,439
                  
                  
                  
                  8,110
                  
                  
                  
                  15,360
                  
                  
                  
                  13,276Publishing
      and other
                  
                  
                  5,192
                  
                  
                  
                  4,163
                  
                  
                  
                  9,612
                  
                  
                  
                  8,173Total
      net revenue
                  
                  
                  30,569
                  
                  
                  
                  29,471
                  
                  
                  
                  58,072
                  
                  
                  
                  53,188Cost
      of revenue:Online
      sponsorship and advertising
                  
                  
                  447
                  
                  
                  
                  618
                  
                  
                  
                  914
                  
                  
                  
                  1,231Merchandise
                  
                  
                  4,619
                  
                  
                  
                  4,124
                  
                  
                  
                  8,502
                  
                  
                  
                  6,576Publishing
      and other
                  
                  
                  2,060
                  
                  
                  
                  1,534
                  
                  
                  
                  3,547
                  
                  
                  
                  3,327Total
      cost of revenue
                  
                  
                  7,126
                  
                  
                  
                  6,276
                  
                  
                  
                  12,963
                  
                  
                  
                  11,134Gross
      profit
                  
                  
                  23,443
                  
                  
                  
                  23,195
                  
                  
                  
                  45,109
                  
                  
                  
                  42,054Operating
      expenses:Product
      and content development
                  
                  
                  5,651
                  
                  
                  
                  5,061
                  
                  
                  
                  11,252
                  
                  
                  
                  10,234Sales
      and marketing
                  
                  
                  8,679
                  
                  
                  
                  7,703
                  
                  
                  
                  17,842
                  
                  
                  
                  15,659General
      and administrative
                  
                  
                  5,635
                  
                  
                  
                  4,817
                  
                  
                  
                  11,184
                  
                  
                  
                  10,222Depreciation
      and amortization
                  
                  
                  1,211
                  
                  
                  
                  2,534
                  
                  
                  
                  2,740
                  
                  
                  
                  5,181Total
      operating expenses
                  
                  
                  21,176
                  
                  
                  
                  20,115
                  
                  
                  
                  43,018
                  
                  
                  
                  41,296Income
      from operations
                  
                  
                  2,267
                  
                  
                  
                  3,080
                  
                  
                  
                  2,091
                  
                  
                  
                  758Loss
      in equity interest
                  
                  
                  (97
                  )
                  
                  
                  -
                  
                  
                  
                  (212
                  )
                  
                  
                  -Interest
      and other income, net
                  
                  
                  3
                  
                  
                  
                  216
                  
                  
                  
                  85
                  
                  
                  
                  520Income
      before income taxes
                  
                  
                  2,173
                  
                  
                  
                  3,296
                  
                  
                  
                  1,964
                  
                  
                  
                  1,278Provision
      for income taxes
                  
                  
                  1,021
                  
                  
                  
                  1,602
                  
                  
                  
                  923
                  
                  
                  
                  875Net
      income
                  
                  $
                  1,152
                  
                  
                  $
                  1,694
                  
                  
                  $
                  1,041
                  
                  
                  $
                  403Net
      earnings per share:Basic
                  
                  $
                  0.04
                  
                  
                  $
                  0.05
                  
                  
                  $
                  0.03
                  
                  
                  $
                  0.01Diluted
                  
                  $
                  0.03
                  
                  
                  $
                  0.05
                  
                  
                  $
                  0.03
                  
                  
                  $
                  0.01Weighted
      average number of shares used in calculating net earnings per
      shareBasic
                  
                  
                  32,610
                  
                  
                  
                  32,097
                  
                  
                  
                  32,486
                  
                  
                  
                  31,988Diluted
                  
                  
                  33,565
                  
                  
                  
                  33,083
                  
                  
                  
                  33,561
                  
                  
                  
                  32,879





See
accompanying Notes to Condensed Consolidated Financial
Statements


5


THE
KNOT, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(amounts
in thousands)


(unaudited)





Six Months Ended June 30,2010
                      
                      
                      2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                      
                      $
                      1,041
                      
                      
                      $
                      403Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                      
                      
                      1,698
                      
                      
                      
                      2,735Amortization
      of intangibles
                      
                      
                      1,042
                      
                      
                      
                      2,446Stock-based
      compensation
                      
                      
                      2,107
                      
                      
                      
                      2,081Deferred
      income taxes
                      
                      
                      -
                      
                      
                      
                      793Excess
      tax benefits from stock-based awards
                      
                      
                      -
                      
                      
                      
                      1,025Reserve
      for returns
                      
                      
                      2,364
                      
                      
                      
                      1,092Realized
      gain on value of auction rate securities
                      
                      
                      (2
                      )
                      
                      
                      (116
                      )Allowance
      for doubtful accounts
                      
                      
                      167
                      
                      
                      
                      670Other
      non-cash charges
                      
                      
                      (22
                      )
                      
                      
                      (55
                      )Changes
      in operating assets and liabilities:Increase
      in accounts receivable
                      
                      
                      (2,408
                      )
                      
                      
                      (1,424
                      )Increase
      in accounts receivable from affiliate
                      
                      
                      (813
                      )
                      
                      
                      (823
                      )Increase
      in inventories
                      
                      
                      (1,833
                      )
                      
                      
                      (1,002
                      )(Increase)
      decrease in deferred production and marketing costs
                      
                      
                      (115
                      )
                      
                      
                      45Decrease
      (increase) in other current assets
                      
                      
                      201
                      
                      
                      
                      (361
                      )Decrease
      (increase) in other assets
                      
                      
                      188
                      
                      
                      
                      (23
                      )Increase
      in accounts payable and accrued expenses
                      
                      
                      1,573
                      
                      
                      
                      154Increase
      (decrease) in deferred revenue
                      
                      
                      76
                      
                      
                      
                      (18
                      )Decrease
      in other liabilities
                      
                      
                      (59
                      )
                      
                      
                      (72
                      )Net
      cash provided by operating activities
                      
                      
                      5,205
                      
                      
                      
                      7,550CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property and equipment
                      
                      
                      (1,140
                      )
                      
                      
                      (1,039
                      )Proceeds
      from sales/maturities of short-term investments
                      
                      
                      26,900
                      
                      
                      
                      9,992Redemptions
      of long-term investments
                      
                      
                      -
                      
                      
                      
                      -Proceeds
      from sales/maturities of long-term investments
                      
                      
                      -
                      
                      
                      
                      1,250Investment
      in equity interest
                      
                      
                      (500
                      )
                      
                      
                      -Loan
      to foreign trustee
                      
                      
                      (165
                      )
                      
                      
                      -Acquisition
      of business, net of cash acquired
                      
                      
                      (48
                      )
                      
                      
                      (5,769
                      )Net
      cash provided by investing activities
                      
                      
                      25,047
                      
                      
                      
                      4,434CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from issuance of common stock
                      
                      
                      199
                      
                      
                      
                      160Proceeds
      from exercise of stock options
                      
                      
                      89
                      
                      
                      
                      845Excess
      tax benefits from stock-based awards
                      
                      
                      -
                      
                      
                      
                      (1,025
                      )Surrender
      of restricted common stock for income tax purposes
                      
                      
                      (1,202
                      )
                      
                      
                      (230
                      )Settlement
      of WedSnap escrow
                      
                      
                      6
                      
                      
                      
                      -Net
      cash used in financing activities
                      
                      
                      (908
                      )
                      
                      
                      (250
                      )Increase
      in cash and cash equivalents
                      
                      
                      29,344
                      
                      
                      
                      11,734Cash
      and cash equivalents at beginning of period
                      
                      
                      94,993
                      
                      
                      
                      61,488Cash
      and cash equivalents at end of period
                      
                      $
                      124,337
                      
                      
                      $
                      73,222Supplemental
      information:Cash
      paid for interest
                      
                      $
                      -
                      
                      
                      $
                      -Cash
      paid for income taxes
                      
                      $
                      1,106
                      
                      
                      $
                      888Cash
      paid for acquisitions
                      
                      $
                      (48
                      )
                      
                      $
                      (6,474
                      )Cash
      acquired in acquisitions
                      
                      
                      -
                      
                      
                      
                      705$
                      (48
                      )
                      
                      $
                      (5,769
                      )





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 include (1)
the accounts of The Knot, Inc. (“The Knot” or the “Company”) and all 100% owned
subsidiaries and (2) 50% of the net income of an entity formed in July 2009
accounted for as an equity interest. The condensed consolidated financial
statements included in this report have been prepared by the Company pursuant to
the rules and regulations of the SEC.  Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States
have been condensed or omitted pursuant to such SEC rules and
regulations.  The Company believes that the disclosures are adequate
to make the information presented not misleading.  The financial
statements contained herein should be read in conjunction with the consolidated
and combined 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, 2009.





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 three and six months
ended June 30, 2010 are not necessarily indicative of results to be expected for
the entire calendar year.





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 result of operations level but does not review
revenue and cost of revenue results of the individual service
lines.  A considerable amount of shared expenses for the revenue and
cost of revenue categories are shown as operating expenses.




Recently
Adopted Accounting Pronouncements





The
adoption of the following accounting standards and updates did not result in a
material impact to the Company’s condensed consolidated financial
statements:




On June
12, 2009, the accounting standard relating to the transfers and servicing of
financial assets and extinguishment of liabilities was updated to require
additional information about transfers of financial assets, including
securitization transactions, and where companies have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. This standard update is
effective as of January 1, 2010.





On June
12, 2009, the accounting standard regarding the requirements of consolidation
accounting for variable interest entities was updated to require an enterprise
to perform an analysis to determine whether the entity’s variable interest or
interests give it a controlling interest in a variable interest entity. This
standard update is effective for all interim and annual reporting periods as of
January 1, 2010.





On
January 21, 2010, the accounting standard relating to fair value measurements
was updated to require additional new disclosures for transfers in and out of
Levels 1 and 2 and activity in Level 3.  This update also amends the
standard by requiring an entity to provide fair value measurement disclosures
for each class of assets and liabilities as well as the inputs and valuation
techniques.  This standard update is effective for all interim and
annual reporting periods on or after December 15, 2009 excluding certain
exceptions which will be effective for fiscal years beginning after December 15,
2010.


7


2.
            Fair
      Value Measurements





Cash and
cash equivalents, investments and investment receivables consist of the
following:





June 30,
                  
                  
                  December 31,2010
                  
                  
                  2009(in
      thousands)Cash
      and cash equivalentsCash
                  
                  $
                  5,990
                  
                  
                  $
                  6,007Money
      market funds
                  
                  
                  118,347
                  
                  
                  
                  88,986Subtotal
      cash and cash equivalents
                  
                  
                  124,337
                  
                  
                  
                  94,993Short-term
      investmentsAuction
      rate securities
                  
                  
                  -
                  
                  
                  
                  36,498ReceivableReceivable
      from bank
                  
                  
                  9,600
                  
                  
                  
                  -Total
      cash and cash equivalents, investments and investment
      receivables
                  
                  $
                  133,937
                  
                  
                  $
                  131,491





The
inputs to the valuation techniques used to measure fair value are classified
into the following categories:




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
June 30, 2010, the Company’s investment in cash and cash equivalents of $124.3
million was measured at fair value using Level 1 inputs.  On June 30,
2010, we exercised our right to receive cash from UBS for the remaining $9.6
million in par value of auction rate securities.  We received the $9.6
million on July 1, 2010, and, accordingly, it is classified on the balance sheet
as of June 30 as “Receivable from bank”.





The
carrying amount of the Company’s auction rate securities is as
follows:





Amount(in thousands)Balance
      at December 31, 2009
                  
                  $
                  36,498Redemptions,
      at par
                  
                  
                  (26,900
                  )Change
      in fair value of ARS portfolio
                  
                  
                  -Change
      in fair value of ARS Right
                  
                  
                  2Exercise
      of ARS Right
                  
                  
                  (9,600
                  )Balance
      at June 30, 2010
                  
                  $
                  -




8


3.
            Stock-Based
      Compensation




The
Company maintains several stock-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 six months ended June 30, 2010 and 2009, as follows:





Three Months Ended
                      June 30,
                    
                    
                    Six Months Ended
                      June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(in
      thousands)Product
      and content development
                    
                    $
                    365
                    
                    
                    $
                    323
                    
                    
                    $
                    724
                    
                    
                    $
                    630Sales
      and marketing
                    
                    
                    272
                    
                    
                    
                    268
                    
                    
                    
                    588
                    
                    
                    
                    530General
      and administrative
                    
                    
                    391
                    
                    
                    
                    472
                    
                    
                    
                    795
                    
                    
                    
                    921Total
      stock-based compensation
                    
                    $
                    1,028
                    
                    
                    $
                    1,063
                    
                    
                    $
                    2,107
                    
                    
                    $
                    2,081





The
Knot Stock-Based Incentive Plans




The 2009
Stock Incentive Plan (the “2009 Plan”) was adopted by the Board of Directors,
and became effective in May 2009 following approval by the stockholders, as a
successor plan to the Company’s 1999 Stock Incentive Plan (the “1999 Plan”). All
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 outstanding under the 1999 Plan have been incorporated into
the 2009 Plan. Under the terms of the 2009 Plan 1,000,000 shares of common stock
of the Company were initially reserved for issuance in addition to the 3,190,737
shares which were incorporated from the 1999 Plan. The 2009 Plan provides that
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.




As of
June 30, 2010, there were 3,204,715 shares available for future grants under the
2009 Plan.  The 2000 Plan expired as of June 30,
2010.


9




Options




The
following table represents a summary of the Company’s stock option activity
under the 2009 and 2000 Plans and related information, without regard for
estimated forfeitures, for the six months ended June 30, 2010:





Shares
                      
                      
                      Weighted
                        Average Exercise
                        Price(in
      thousands)Options
      outstanding at December 31, 2009
                      
                      
                      895
                      
                      
                      $
                      5.29Options
      granted
                      
                      
                      -
                      
                      
                      
                      -Options
      exercised
                      
                      
                      (496
                      )
                      
                      
                      2.04Options
      forfeited
                      
                      
                      -
                      
                      
                      
                      -Options
      outstanding at June 30, 2010
                      
                      
                      399
                      
                      
                      $
                      9.34





The
intrinsic value of options exercised during the three months ended June 30, 2010
and 2009 was $2.8 million and $160, respectively.  The intrinsic value
of options exercised during the six months ended June 30, 2010 and 2009 was $2.8
million and $1.8 million, respectively.





The
following table summarizes information about options outstanding at June 30,
2010:





Options Outstanding
                      
                      
                      Options ExercisableRange of Exercise Price
                      
                      Number
                        Outstanding
                        as of June 30,2010
                      
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        Life (in
                        Years)
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Number
                        Exercisable as
                        of June 30,
                        2010
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price(in
      thousands)
                      
                      
                      
                      
                      
                      
                      
                      
                      (in
      thousands)$0.42
      to $1.03
                      
                      
                      17
                      
                      
                      
                      0.95
                      
                      
                      $
                      0.76
                      
                      
                      
                      17
                      
                      
                      $
                      0.76$1.37
      to $4.10
                      
                      
                      222
                      
                      
                      
                      3.58
                      
                      
                      
                      3.54
                      
                      
                      
                      222
                      
                      
                      
                      3.54$18.26
                      
                      
                      160
                      
                      
                      
                      1.91
                      
                      
                      
                      18.26
                      
                      
                      
                      160
                      
                      
                      
                      18.26399
                      
                      
                      
                      2.80
                      
                      
                      $
                      9.34
                      
                      
                      
                      399
                      
                      
                      $
                      9.34





The
weighted average remaining contractual life of options exercisable as of June
30, 2010 was 2.80 years. The aggregate intrinsic value of stock options
outstanding at June 30, 2010 was $1.1 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 closing price of the
Company’s common stock as of June 30, 2010.


10




The
following table summarizes non-vested stock option activity for the six months
ended June 30, 2010:





Shares
                    
                    
                    WeightedAverage
                      ExercisePrice(in
      thousands)Nonvested
      options outstanding at December 31, 2009
                    
                    
                    53
                    
                    
                    $
                    18.26Vested
                    
                    
                    (53
                    )
                    
                    
                    18.26Canceled
                    
                    
                    -Nonvested
      options outstanding at June 30, 2010
                    
                    
                    -
                    
                    
                    $
                    -





During
the three and six months ended June 30, 2010 and 2009, 53,000 stock options
vested.  During the three and six months ended June 30, 2010 and 2009,
the weighted average fair value of options that vested was
$5.95.





Restricted
Stock




As of
June 30, 2010 and 2009, there were 1,244,915 and 1,605,587 service-based
restricted stock awards outstanding, respectively. During the three months ended
June 30, 2010 and 2009, 20,000 and 26,000 shares, respectively, of restricted
stock were awarded at weighted average grant-date fair values of $7.63 and
$8.43, respectively. During the six months ended June 30, 2010 and 2009, 185,000
and 1,037,500 shares, respectively, of restricted stock were awarded at weighted
average grant-date fair values of $8.04 and $6.95, respectively. During the six
months ended June 30, 2010 and 2009, 320,504 and 79,288 shares of restricted
stock, respectively, vested. During the six months ended June 30, 2010 and 2009,
78,467 and 17,592 shares of restricted stock, respectively, were canceled.
During the six months ended June 30, 2010 and 2009, 130,868 and 28,573 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 as of June 30, 2010 was $9.7 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 June
30, 2010.




As of
June 30, 2010, there was $7.9 million of total unrecognized compensation cost
related to non-vested restricted shares, net of estimated forfeitures, which is
expected to be recognized over a weighted average period of 2.5 years. During
the three months ended June 30, 2010 and 2009, the Company recorded $948,000 and
$963,000, respectively, of compensation expense related to restricted
shares.  During the six months ended June 30, 2010 and 2009, the
Company recorded $1.9 million and $1.9 million, respectively, of compensation
expense related to restricted shares.




Employee
Stock Purchase Plan




The 2009
Employee Stock Purchase Plan (the “2009 ESPP”) was adopted by the Board of
Directors, and was approved by the stockholders in May 2009, as a successor plan
to the Company’s 1999 Employee Stock Purchase Plan (the “1999 ESPP”). The first
offering period under the 2009 ESPP began August 1, 2009 and shares were first
purchased under this plan on January 31, 2010. The Compensation Committee of the
Board of Directors administers each 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% and 15% of compensation.
Under each ESPP, eligible employees of the Company may elect to participate
before the start date of a semi-annual 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% discount from the fair market value, as defined
in each ESPP, of such stock. In addition to the 1,000 share purchase limit, the
cost of shares purchased under the plan by a participating employee cannot
exceed $25,000 in any plan year. The Company initially reserved 300,000 shares
of common stock under the 1999 ESPP. The shares reserved under the 1999 ESPP
automatically increased 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 1999 ESPP in the immediately preceding calendar year, (ii) 300,000 shares or
(iii) such other lesser amount approved by the Board of
Directors.  Through June 30, 2010, 26,612 shares were issued under the
2009 ESPP.  The Company initially reserved 300,000 shares of common
stock under the 2009 ESPP.


11




The
weighted average grant-date fair value of ESPP rights arising from elections
made by ESPP plan participants was $2.02 and $1.85 during the three and six
months ended June 30, 2010 and 2009, respectively. The fair value of ESPP rights
that vested during the three and six months ended June 30, 2010 and
2009 were $2.11 and $2.21, respectively.  On January 31, 2010,
the Company issued 26,612 shares at a weighted average price of $7.43 under the
2009 ESPP.





The
intrinsic value of shares purchased through the 2009 ESPP on January 31, 2010
was $46,000. The intrinsic value of outstanding 2009 ESPP rights as of June 30,
2010 was $57,000. The intrinsic value of the shares of 2009 ESPP rights is
calculated as the discount from the quoted price of the Company’s common stock,
as defined in the 2009 ESPP, which was available to employees as of the
respective dates.





As of
June 30, 2010, there was $10,000 of unrecognized compensation cost related to
2010 ESPP rights, net of estimated forfeitures, which is expected to be
recognized over a weighted average period of one month.




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





Six Months Ended June 30,2010
                      
                      
                      2009Weighted
      average expected lives
                      
                      Six
      months
                      
                      
                      Six
      monthsRisk-free
      rate
                      
                      
                      0.17
                      %
                      
                      
                      0.36
                      %Expected
      volatility
                      
                      
                      25.7
                      %
                      
                      
                      44.6
                      %Dividend
      yield
                      
                      
                      0.0
                      %
                      
                      
                      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 June 30, 2010 and 2009, the Company recorded $80,000 and
$100,000, respectively, of compensation expense related to options and ESPP
rights and received cash from the exercise of options and ESPP rights of $65,000
and $10,000 for the three months ended June 30, 2010 and 2009, respectively, for
which the Company issued new shares of common stock.  During the six
months ended June 30, 2010 and 2009, the Company recorded $190,000 and $202,000,
respectively, of compensation expense related to options and ESPP rights and
received cash from the exercise of options and ESPP rights of $288,000 and $1.0
million for the six months ended June 30, 2010 and 2009, respectively, for which
the Company issued new shares of common stock.




4.
            Comprehensive
      Income





The
Company’s comprehensive net income is equal to its net income for all periods
presented.


12




5.
            Inventory





Inventory
consists of the following:





June 30,
                      2010
                    
                    
                    December31,
                      2009(in
      thousands)InventoryRaw
      materials
                    
                    $
                    1,093
                    
                    
                    $
                    606Finished
      goods
                    
                    
                    3,469
                    
                    
                    
                    2,102Total
      inventory, net
                    
                    $
                    4,562
                    
                    
                    $
                    2,708





6.
            Goodwill and
      Other Intangible Assets





The
change in the carrying amount of goodwill at June 30, 2010 is as
follows:





Amount(in
      thousands)Balance
      at December 31, 2009
                    
                    $
                    37,757WedSnap
      goodwill adjustment, escrow settlement
                    
                    
                    (7
                    )Balance
      at June 30, 2010
                    
                    $
                    37,750





Other
intangible assets consisted of the following:





June 30, 2010
                  
                  
                  December 31, 2009Gross
                    Carrying
                    Amount
                  
                  
                  Accumulated
                    Amortization
                  
                  
                  NetCost
                  
                  
                  Gross
                    Carrying
                    Amount
                  
                  
                  Accumulated
                    Amortization
                  
                  
                  NetCost(in thousands)Indefinite
      lived intangible assets:Tradenames
                  
                  $
                  6,995
                  
                  
                  $
                  -
                  
                  
                  $
                  6,995
                  
                  
                  $
                  6,995
                  
                  
                  $
                  -
                  
                  
                  $
                  6,995URL's
                  
                  
                  77
                  
                  
                  
                  -
                  
                  
                  
                  77
                  
                  
                  
                  64
                  
                  
                  
                  -
                  
                  
                  
                  64Subtotal
      indefinite lived intangible assets
                  
                  
                  7,072
                  
                  
                  
                  -
                  
                  
                  
                  7,072
                  
                  
                  
                  7,059
                  
                  
                  
                  -
                  
                  
                  
                  7,059Definite
      lived intangible assets:Customer
      and advertiser relationships
                  
                  
                  4,780
                  
                  
                  
                  (4,413
                  )
                  
                  
                  367
                  
                  
                  
                  4,780
                  
                  
                  
                  (4,029
                  )
                  
                  
                  751Developed
      technology and patents
                  
                  
                  10,265
                  
                  
                  
                  (8,495
                  )
                  
                  
                  1,770
                  
                  
                  
                  10,230
                  
                  
                  
                  (7,904
                  )
                  
                  
                  2,326Trademarks
      and tradenames
                  
                  
                  129
                  
                  
                  
                  (125
                  )
                  
                  
                  4
                  
                  
                  
                  129
                  
                  
                  
                  (122
                  )
                  
                  
                  7Service
      contracts and other
                  
                  
                  1,402
                  
                  
                  
                  (1,268
                  )
                  
                  
                  134
                  
                  
                  
                  1,402
                  
                  
                  
                  (1,204
                  )
                  
                  
                  198Subtotal
      definite lived intangible assets
                  
                  
                  16,576
                  
                  
                  
                  (14,301
                  )
                  
                  
                  2,275
                  
                  
                  
                  16,541
                  
                  
                  
                  (13,259
                  )
                  
                  
                  3,282Total
      intangible assets
                  
                  $
                  23,648
                  
                  
                  $
                  (14,301
                  )
                  
                  $
                  9,347
                  
                  
                  $
                  23,600
                  
                  
                  $
                  (13,259
                  )
                  
                  $
                  10,341




13




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





Amortization
expense was $369,000 and $1.2 million for the three months ended June 30, 2010
and 2009, and $1.0 million and $2.4 million for the six months ended June 30,
2010 and 2009, respectively. Estimated annual amortization expense is $1.8
million in 2010, $984,000 in 2011, $187,000 in 2012, $187,000 in 2013, $60,000
in 2014 and $83,000, thereafter.





7.
            Commitments
      and Contingencies





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 revenue 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. On January 2, 2009, the
Company filed an answer and counter-claims, in which it denied infringement and
denied that Balthaser is entitled to damages, equitable relief, pre-judgment or
post-judgment interest, an exceptional case award, or to any relief whatsoever.
The Company asserted as its affirmative defenses non-infringement, invalidity,
an adequate remedy other than injunctive relief, and no willful infringement.
The Company asserted counter-claims for declaratory judgments as to
non-infringement and invalidity. On September 15, 2009, the United States
District Court for the Eastern District of Texas granted the motion made by
several defendants to transfer the case to the United States District Court for
the Northern District of California, and the claims made against the Company
were transferred along with the claims made against most of the other
defendants. While the Company intends to vigorously defend against the claims
asserted and pursue its counter-claims, 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.




As of
June 30, 2010, the Company was engaged in other 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.





8.
            Income
      Taxes




As of
December 31, 2009, 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 be reported as a reduction of income tax expense. However, a portion of
these unrecognized tax benefits could be subject to a valuation allowance and if
and when recognized in a future period. The Company had excess tax benefits of
$374,000 related to the vesting of restricted stock for the six months ended
June 30, 2010.




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. On June
17, 2009 the Company received notification that its New York State franchise tax
returns would be audited for the year ended December 31, 2005. As of June 30,
2010, 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.


14





9.
            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.





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





Three Months Ended June 30,
                    
                    
                    Six Months Ended June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(in
      thousands, except for per share data)Net
      income
                    
                    $
                    1,152
                    
                    
                    $
                    1,694
                    
                    
                    $
                    1,041
                    
                    
                    $
                    403Total weighted-average basic shares
                    
                    
                    32,610
                    
                    
                    
                    32,097
                    
                    
                    
                    32,486
                    
                    
                    
                    31,988Dilutive securities:Restricted
      stock
                    
                    
                    448
                    
                    
                    
                    322
                    
                    
                    
                    494
                    
                    
                    
                    184Employee
      Stock Purchase Plan
                    
                    
                    30
                    
                    
                    
                    18
                    
                    
                    
                    21
                    
                    
                    
                    18Options/warrants
                    
                    
                    477
                    
                    
                    
                    646
                    
                    
                    
                    560
                    
                    
                    
                    689Total weighted-average diluted shares
                    
                    
                    33,565
                    
                    
                    
                    33,083
                    
                    
                    
                    33,561
                    
                    
                    
                    32,879Net
      earnings per share:Basic
                    
                    $
                    0.04
                    
                    
                    $
                    0.05
                    
                    
                    $
                    0.03
                    
                    
                    $
                    0.01Diluted
                    
                    $
                    0.03
                    
                    
                    $
                    0.05
                    
                    
                    $
                    0.03
                    
                    
                    $
                    0.01





The
calculation of earnings per share excludes a weighted average number of stock
options and restricted stock of 162,000 and 162,000 for the three and six
months ended June 30, 2010, respectively, and 192,000 and 304,000 for the three
and six months ended June 30, 2009, respectively, because to include them in the
calculation would be antidilutive.





10.
            Stock
      Repurchase Program





On
February 22, 2010, the Company announced that its Board of Directors had
authorized the repurchase of up to $50.0 million of the Company’s common stock
from time to time on the open market or in privately negotiated transactions.
The timing and amount of any shares repurchased will be determined by the
Company’s management based on its evaluation of market conditions and other
factors. The repurchase program may be suspended or discontinued at any time.
The repurchase program will be funded using the Company’s working
capital.





During
the three months and six months ended June 30, 2010, the Company did not
repurchase any shares under this program.





11.
            New
      Registry Agreement-Macy’s





As of
June 1, 1999, the Company’s subsidiary WeddingChannel.com, Inc. and Federated
Department Stores, Inc., now known as Macy’s, Inc., entered into a registry
agreement (the “Old Registry Agreement”). The Old Registry Agreement, as amended
and supplemented, provided that WeddingChannel.com was responsible for the
operation and maintenance of the website from which all bridal registries for
the department stores owned by Macy’s could be accessed. WeddingChannel.com
received a commission from the sale of Macy’s merchandise through this
website.


15




On
January 11, 2010, WeddingChannel.com and Macy’s entered into an agreement to
terminate the Old Registry Agreement (the “Termination Agreement”), which had
been scheduled to expire in January 2011, and entered into a new registry
agreement (the “New Registry Agreement”). The initial term of the New Registry
Agreement is three years from the last launch date of the new Macy’s and
Bloomingdale’s online registry platforms, followed by an automatic renewal term
of two additional years (subject to either party’s election not to renew with 90
days notice before the expiration of the initial term). Under the New Registry
Agreement, WeddingChannel.com no longer hosts and manages the registry websites
for Macy’s and Bloomingdale’s. Instead, the New Registry Agreement is similar to
contracts that WeddingChannel.com has with its other retail partners, whereby
the Company only receive a commission for purchases originating from its
websites. The Old Registry Agreement terminated after a transition period to
fully implement the launch of the new Macy’s and Bloomingdale’s online registry
platforms under the New Registry Agreement, which began in February 2010. Under
the Termination Agreement, Macy’s has agreed to spend $3,000,000 between
February 1, 2010 and January 31, 2011 for advertising and sponsorship programs
with the Company designed to promote the new Macy’s and Bloomingdale’s online
registry platforms.  Pursuant to the Termination Agreement, Macy’s
paid WeddingChannel.com $1,000,000 in February 2010 as a premium for agreeing to
the early termination of the Old Registry Agreement. The impact of the New
Registry Agreement on the Company’s 2010 results depends on multiple factors
that cannot be reasonably predicted at this time. However, the Company believes
that it is unlikely to generate the same level of revenue from the Macy’s
relationship in 2010 as it did in 2009, primarily because it will no longer
receive commissions on 100% of Macy’s and Bloomingdale’s online registry
transactions.





12.
            Subsequent
      Events





The
Company has evaluated subsequent events up through the date the financial
statements were issued, and determined there were no subsequent events to report
as of that date.


16




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





You
should read the following discussion and analysis of our financial
condition and results of operations in conjunction with our condensed
consolidated financial statements and related notes included elsewhere in this
report.




Overview





The Knot,
Inc. is the premier media company devoted to weddings, pregnancy, and everything
in between, providing young women with the trusted information, products, and
advice they need to guide them through the most transformative events of their
lives. Our family of premium brands began with the industry’s #1 wedding brand,
The Knot, and has grown to include WeddingChannel.com, The Nest, and The Bump.
Our groundbreaking community platforms and incomparable content have ignited
passionate communities across the country. The Knot, Inc. is recognized by the
industry for being innovative in all media — from the web to social
media and mobile, to magazines and books, television and video. For our
advertisers and partners, The Knot, Inc. offers the consummate opportunity to
connect with our devoted communities as they make the most important decisions
of their lives. The Knot, Inc. is made up of four major revenue categories:
online sponsorship and advertising, registry services, merchandise, and
publishing.




In order
to sustain growth within the customer groups we serve, we focus on our key
growth strategy, which 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 remain relevant to
the changing media landscape. To that end we are focused on the following
objectives:





·
            Upgrade our technology to
      increase 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 developed a new content management system
      that allows us to more efficiently maintain and organize information on
      our websites. Our new contract entry system and surrounding support
      applications have enabled us to implement greater pricing flexibility in
      all of our local markets, which we believe will allow us to expand our
      local vendor base, as well as achieve operational efficiencies, providing
      additional time for our local sales force to pursue new accounts. In
      addition to the new contract entry system, we have completed the process
      of converting our existing local art management application off of our
      legacy AS/400 system. In January 2010 we launched a self-service platform
      that will allow local vendors to automatically select their advertising
      programs. We anticipate launching an auction-based platform for selling
      featured vendor positions in the local areas on our websites. We are
      working to enhance the functionality of our patented gift registry
      application to encompass a wide selection of items and retailers. To this
      end, we believe our recently launched Gift Registry 360, a universal gift
      registry platform, improves the ability of our users to seamlessly add
      items from multiple retailers to their registry lists and complete
      transactions. We expect that these new programs will allow us to more
      effectively scale our local and registry business and drive further growth
      for local online and registry
revenue.





·
            Increase awareness of our
      brands and products.  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 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 increase revenue of our wedding supplies business through
      opportunistic acquisitions and improved conversion of our members to
      customers of our online stores.  In 2010 we are increasing the
      publication frequency ofThe Knot Weddings national magazine from semi-annually to
      quarterly.  We are also increasing the publication frequency
      ofThe Bump local
      market guides from annually to
semi-annually.





·
            Expand our brands
      internationally.  We are focused on identifying
      opportunities in large international markets where we can use our brand
      recognition and editorial authority on the key lifestages of engagement,
      newlywed and first-time pregnancy to drive further growth. In 2009 we
      established a software development center in Guangzhou, China for the
      purposes of increasing technology development productivity without
      materially growing technology costs. The software development center will
      also serve as a development resource for expanding our business in China.
      With a large number of weddings and an affinity for western styles, we
      believe there is a substantial opportunity to serve Chinese couples with
      information and services about western-style weddings, through the office
      we opened in Beijing. In addition, we established an exclusive licensing
      arrangement for our brands in Australia in 2009. To date, no revenue has
      been generated by our operations in China nor do we anticipate a material
      revenue contribution in 2010.


17




We
believe the growth strategies outlined above will allow us to continue to
increase consumer market share and deliver strong returns on our
investments.





Second
Quarter 2010




During
the second quarter of 2010, our net revenue increased and our net income
decreased compared to the same period in 2009. The highlights of the second
quarter of 2010 were:





·
            Total
      net revenue increased 3.7% to $30.6 million over the corresponding 2009
      period.





·
            National
      online advertising revenue increased 10.0% to $6.1 million over the
      corresponding 2009 period.





·
            Local
      online advertising revenue increased 2.4% to $8.8 million over the
      corresponding 2009 period.





·
            Merchandise
      revenue increased 4.1% to $8.4 million over the corresponding 2009 period
      primarily due to an acquisition of an e-commerce company in May
      2009.





·
            Publishing
      and other revenue increased 24.7% to $5.2 million over the corresponding
      2009 period primarily due to an increase in our national magazine
      publication cycle from twice a year to four times a
  year.





·
            Registry
      services revenue decreased by 34.3% to $2.0 million primarily due to the
      change in our registry relationship with
Macy’s.





·
            We
      had operating income of $2.3 million compared to $3.1 million in the prior
      year’s quarter. The year-over-year decrease in operating income was
      primarily due to increased operating expenses offset by higher net revenue
      and gross profit.  The increase in operating expenses was driven
      by incremental operating expenses related to our acquisition and expansion
      activities in 2009, as well as increased marketing and personnel related
      costs.  These increases were partially offset by lower
      depreciation and amortization expense.  This was due to
      impairment charges in the fourth quarter of 2009 that led to intangible
      asset write-downs.  We also had several assets that became fully
      depreciated at the end of 2009 and lower purchases of fixed assets in 2009
      and 2010.





·
            We
      had net income for the three months ended June 30, 2010 of $1.2 million,
      or $0.04 per basic share and $0.03 per diluted share, compared to net
      income of $1.7 million, or $0.05 per basic and per diluted share for the
      three months ended June 30, 2009.





·
            At
      June 30, 2010, we had total cash, cash equivalents, and investments
      receivables of $133.9 million. Cash and cash equivalents were $124.3
      million.  At the end of the quarter, we exercised our right to
      receive cash from UBS for the $9.6 million of remaining auction rate
      securities.  We received the $9.6 million subsequent to June 30,
      and, accordingly, it is classified on the balance sheet as of June 30 as a
      receivable called “Receivable from
bank”.





·
            At
      June 30, 2010, we had no debt.




18




Results
of Operations




Three
Months Ended June 30, 2010 Compared to Three Months Ended June 30,
2009




The
following table summarizes results of operations for the three months ended June
30, 2010 compared to the three months ended June 30, 2009:





Three Months Ended June 30,2010
                  
                  
                  2009Amount
                  
                  
                  % of Net
                    Revenue
                  
                  
                  Amount
                  
                  
                  % of Net
                    Revenue(in
      thousands, except for per share data)Net
      revenue
                  
                  $
                  30,569
                  
                  
                  
                  100.0
                  %
                  
                  $
                  29,471
                  
                  
                  
                  100.0
                  %Cost
      of revenue
                  
                  
                  7,126
                  
                  
                  
                  23.3
                  
                  
                  
                  6,276
                  
                  
                  
                  21.3Gross
      profit
                  
                  
                  23,443
                  
                  
                  
                  76.7
                  
                  
                  
                  23,195
                  
                  
                  
                  78.7Operating
      expenses
                  
                  
                  21,176
                  
                  
                  
                  69.3
                  
                  
                  
                  20,115
                  
                  
                  
                  68.3Income
      from operations
                  
                  
                  2,267
                  
                  
                  
                  7.4
                  
                  
                  
                  3,080
                  
                  
                  
                  10.4Loss
      in equity interest
                  
                  
                  (97
                  )
                  
                  
                  (0.3
                  )
                  
                  
                  -
                  
                  
                  
                  -Interest
      and other income, net
                  
                  
                  3
                  
                  
                  
                  0.0
                  
                  
                  
                  216
                  
                  
                  
                  0.7Income
      before income taxes
                  
                  
                  2,173
                  
                  
                  
                  7.1
                  
                  
                  
                  3,296
                  
                  
                  
                  11.1Provision
      for income taxes
                  
                  
                  1,021
                  
                  
                  
                  3.3
                  
                  
                  
                  1,602
                  
                  
                  
                  5.4Net
      inome
                  
                  $
                  1,152
                  
                  
                  
                  3.8
                  %
                  
                  $
                  1,694
                  
                  
                  
                  5.7
                  %Net
      earnings per share:Basic
                  
                  $
                  0.04
                  
                  
                  
                  
                  
                  
                  $
                  0.05Diluted
                  
                  $
                  0.03
                  
                  
                  
                  
                  
                  
                  $
                  0.05




19




Net
Revenue




Net
revenue increased to $30.6 million for the three months ended June 30, 2010,
from $29.5 million for the three months ended June 30, 2009.  The
following table sets forth revenue by category for the three months ended June
30, 2010 compared to the three months ended June 30, 2009, the percentage
increase or decrease between those periods, and the percentage of total net
revenue that each category represented for those periods:





Three Months Ended June 30,Net Revenue
                  
                  
                  
                  
                  
                  Percentage of
                    Total Net Revenue2010
                  
                  
                  2009
                  
                  
                  Percentage
                    Increase/
                    (Decrease)
                  
                  
                  2010
                  
                  
                  2009(in thousands)National
      online sponsorship and advertising
                  
                  $
                  6,140
                  
                  
                  $
                  5,582
                  
                  
                  
                  10.0
                  %
                  
                  
                  20.1
                  %
                  
                  
                  18.9
                  %Local
      online sponsorship and advertising
                  
                  
                  8,841
                  
                  
                  
                  8,635
                  
                  
                  
                  2.4
                  
                  
                  
                  28.9
                  
                  
                  
                  29.3Total
      online sponsorship and advertising
                  
                  
                  14,981
                  
                  
                  
                  14,217
                  
                  
                  
                  5.4
                  
                  
                  
                  49.0
                  
                  
                  
                  48.2Registry
      services
                  
                  
                  1,957
                  
                  
                  
                  2,981
                  
                  
                  
                  (34.3
                  )
                  
                  
                  6.4
                  
                  
                  
                  10.1Merchandise
                  
                  
                  8,439
                  
                  
                  
                  8,110
                  
                  
                  
                  4.1
                  
                  
                  
                  27.6
                  
                  
                  
                  27.5Publishing
      and other
                  
                  
                  5,192
                  
                  
                  
                  4,163
                  
                  
                  
                  24.7
                  
                  
                  
                  17.0
                  
                  
                  
                  14.2Total
      net revenue
                  
                  $
                  30,569
                  
                  
                  $
                  29,471
                  
                  
                  
                  3.7
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %





Online sponsorship and
advertising - The increase of 5.4% was driven by increased revenue from
both national and local advertising programs.  National online
sponsorship and advertising revenue increased 10.0%, driven by new and
repeat advertisers to our network of websites.  A key driver in
this increase was our registry agreement with Macy’s.  Under the terms
of the termination of the old Macy’s registry contract Macy’s agreed to spend
$3.0 million between February 1, 2010 and January 31, 2011 for advertising and
sponsorship programs with us, designed to promote the new Macy’s and
Bloomingdale’s online registry platforms.  Local online sponsorship
and advertising revenue increased 2.4%, driven by an increased number of local
vendors advertising with us.  As of June 30, 2010, we had over 17,000
local vendors who display nearly 21,000 profiles compared to over 16,000 vendors
who displayed over 19,000 profiles as of June 30, 2009.




Registry services – The
decrease of 34.3% was driven by lower commissions from Macy’s.  On
January 11, 2010, we signed an agreement to terminate the old registry agreement
with Macy’s. The original contract was scheduled to expire in January
2011.   Additionally, we entered into a new contract with Macy’s
for registry services that commenced on February 1, 2010.  Under the
old contract, WeddingChannel hosted and processed all of Macy’s registry
transactions regardless of whether the transactions originated on Macy’s website
or WeddingChannel’s website and received commission on 100% of registry
sales.  Under the new contract, WeddingChannel's registry relationship
with Macy’s is now similar to our other retail partners, and WeddingChannel
receives a commission for registry purchases originating from the WeddingChannel
and other The Knot affiliate websites. This resulted in lower commissions from
Macy’s.   This decrease was partially offset by increased
registry commissions from our new and historic registry retail
partners.  The impact of the new registry agreement with Macy’s on our
full-year 2010 results depends on multiple factors that cannot be reasonably
predicted at this time. However, we believe that we are unlikely to generate the
same level of revenue from the Macy’s relationship in 2010 as we did in 2009,
primarily because we will no longer receive commissions on 100% of Macy’s and
Bloomingdale’s online registry transactions.




Merchandise – The increase of
4.1% was driven by incremental revenue from an e-commerce company that we
acquired on May 1, 2009.  The acquired company contributed $701,000
million of net revenue during the period.  This increase was offset,
in part, by lower revenue from both The Knot Wedding Shop and the WeddingChannel
Shop.  The decrease in The Knot Wedding Shop was driven by declines in
traffic to the site.  The decrease in the WeddingChannel Shop was
caused by the decline in visitor traffic due to the change in the Macy’s
registry relationship which reduced visitor traffic to the WeddingChannel
website.





Publishing and other – The
increase of 24.7% was driven by the increase in our national magazine
publication cycle from twice a year to four times a year.


20




Gross
Profit/Gross Margin




Gross
margin decreased 2.0% to 76.7%, compared to 78.7% in 2009.  The
following table presents the components of gross profit and gross margin for the
three months ended June 30, 2010 compared to the three months ended June 30,
2009:





Three Months Ended June 30,2010
                        
                        
                        2009
                        
                        
                        Increase/(Decrease)Gross
                          Profit
                        
                        
                        Gross
                          Margin %
                        
                        
                        Gross
                          Profit
                        
                        
                        Gross
                          Margin %
                        
                        
                        Gross
                          Profit
                        
                        
                        Gross
                          Margin %(in
      thousands)Online
      sponsorship and advertising (national & local)
                        
                        $
                        14,534
                        
                        
                        
                        97.0
                        %
                        
                        $
                        13,599
                        
                        
                        
                        95.7
                        %
                        
                        $
                        935
                        
                        
                        
                        1.3
                        %Registry
                        
                        
                        1,957
                        
                        
                        
                        100.0
                        
                        
                        
                        2,981
                        
                        
                        
                        100.0
                        
                        
                        
                        (1,024
                        )
                        
                        
                        -Merchandise
                        
                        
                        3,820
                        
                        
                        
                        45.3
                        
                        
                        
                        3,986
                        
                        
                        
                        49.1
                        
                        
                        
                        (166
                        )
                        
                        
                        (3.8
                        )Publishing
      and other
                        
                        
                        3,132
                        
                        
                        
                        60.3
                        
                        
                        
                        2,629
                        
                        
                        
                        63.2
                        
                        
                        
                        503
                        
                        
                        
                        (2.9
                        )Total
      gross profit
                        
                        $
                        23,443
                        
                        
                        
                        76.7
                        %
                        
                        $
                        23,195
                        
                        
                        
                        78.7
                        %
                        
                        $
                        248
                        
                        
                        
                        (2.0
                        )
       %





The
decrease in gross margin was driven by lower gross margin for merchandise and
publishing and other. The decrease in merchandise margin was driven by sales
promotions, product mix within the gifts category and higher than planned
personalization costs.  We also had increases in damaged
inventory.  The decrease in publishing and other gross margin was due
to increased editorial pages relative to advertising pages within our magazines.
This decrease was partially offset by increased margin in online sponsorship and
advertising. The increase in online sponsorship and advertising margin was
driven by higher advertiser revenue.  Overall gross margin was also
impacted by reduced registry revenue.





Operating
Expenses





Operating
expenses increased 5.3% to $21.2 million, compared to $20.1 million in 2009,
driven by incremental operating expenses related to our acquisition and
expansion activities in 2009, as well as increased marketing and personnel
related costs.  These increases were partially offset by lower
depreciation and amortization expense due to intangible asset impairment charges
in the fourth quarter of 2009.   As a percentage of net revenue,
operating expenses were 69.3% and 68.3% during 2010 and 2009,
respectively.


21




The
following table presents the components of operating expenses and the percentage
of revenue that each component represented for the three months ended June 30,
2010 compared to the three months ended June 30, 2009:




Three Months Ended June 30,Operating Expenses
                  
                  
                  
                  
                  
                  Percentage of
                    Total Net Revenue2010
                  
                  
                  2009
                  
                  
                  Percentage
                    Increase/
                    (Decrease)
                  
                  
                  2010
                  
                  
                  2009(in thousands)Product
      and content development
                  
                  $
                  5,651
                  
                  
                  $
                  5,061
                  
                  
                  
                  11.7
                  %
                  
                  
                  18.5
                  %
                  
                  
                  17.2
                  %Sales
      and marketing
                  
                  
                  8,679
                  
                  
                  
                  7,703
                  
                  
                  
                  12.7
                  
                  
                  
                  28.4
                  
                  
                  
                  26.1General
      and administrative
                  
                  
                  5,635
                  
                  
                  
                  4,817
                  
                  
                  
                  17.0
                  
                  
                  
                  18.4
                  
                  
                  
                  16.3Depreciation
      and amortization
                  
                  
                  1,211
                  
                  
                  
                  2,534
                  
                  
                  
                  (52.2
                  )
                  
                  
                  4.0
                  
                  
                  
                  8.7Total
      operating expenses
                  
                  $
                  21,176
                  
                  
                  $
                  20,115
                  
                  
                  
                  5.3
                  %
                  
                  
                  69.3
                  %
                  
                  
                  68.3
                  %




Product and Content Development
– The increase of 11.7% was primarily due to incremental operating
expenses associated with the software development center we opened in Guangzhou,
China in May 2009 and the opening of our Beijing, China office.  The
expensesare
primarily personnel and occupancy related.  We also had increased
employee compensation to support our growth initiatives.




Sales and Marketing – The
increase of 12.7% was primarily due to increased advertising and promotional
initiatives to continue 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
e-commerce business.  Also included is increased headcount to support
those initiatives.





General and Administrative –
The increase of 17.0% was primarily due to increased expenses in connection with
our international expansion.  We opened an office in Beijing, China
during the first quarter of 2010.  We also had increased employee
compensation cost to support our growth initiatives.  These increases
were partially offset by lower bad debt expense.  This was due to
lower specific customer reserves in 2010 compared to 2009.





Depreciation and Amortization
–The decrease of 52.2% was primarily due to impairment charges in the fourth
quarter of 2009 that led to intangible asset write-downs.  We also had
several assets that became fully depreciated at the end of 2009 and lower
purchases of fixed assets in 2009 and 2010.





Interest
and Other Income




Interest
and other income, net was $3,000 for the three months ended June 30, 2010 as
compared to $216,000 for three months ended June 30, 2009. The decrease was due
to the impact of lower interest rates on our entire portfolio of cash,
commercial paper, treasuries and auction rate securities.





Loss
in Equity Interest





Loss in
equity interest was $97,000 for the three months ended June 30,
2010.  The entity in which we have an equity interest was formed in
July 2009; therefore, there was no equity income or loss for the three months
ended June 30, 2009.


22




Provision
for Income Taxes




The
effective tax rate for the three months ended June 30, 2010, was approximately
47% as compared to 48.6% for the three months ended June 30,
2009.





Six
Months Ended June 30, 2010 Compared to Six Months Ended June 30,
2009




The
following table summarizes results of operations for the six months ended June
30, 2010 compared to the six months ended June 30, 2009:





Six Months Ended June 30,2010
                      
                      
                      2009Amount
                      
                      
                      % of Net
                        Revenue
                      
                      
                      Amount
                      
                      
                      % of Net
                        Revenue(in
      thousands, except for per share data)Net
      revenue
                      
                      $
                      58,072
                      
                      
                      
                      100.0
                      %
                      
                      $
                      53,188
                      
                      
                      
                      100.0
                      %Cost
      of revenue
                      
                      
                      12,963
                      
                      
                      
                      22.3
                      
                      
                      
                      11,134
                      
                      
                      
                      20.9Gross
      profit
                      
                      
                      45,109
                      
                      
                      
                      77.7
                      
                      
                      
                      42,054
                      
                      
                      
                      79.1Operating
      expenses
                      
                      
                      43,018
                      
                      
                      
                      74.1
                      
                      
                      
                      41,296
                      
                      
                      
                      77.6Income
      from operations
                      
                      
                      2,091
                      
                      
                      
                      3.6
                      
                      
                      
                      758
                      
                      
                      
                      1.5Loss
      in equity interest
                      
                      
                      (212
                      )
                      
                      
                      (0.4
                      )
                      
                      
                      -
                      
                      
                      
                      -Interest
      and other income, net
                      
                      
                      85
                      
                      
                      
                      0.1
                      
                      
                      
                      520
                      
                      
                      
                      1.0Income
      before income taxes
                      
                      
                      1,964
                      
                      
                      
                      3.4
                      
                      
                      
                      1,278
                      
                      
                      
                      2.5Benefit
      for income taxes
                      
                      
                      923
                      
                      
                      
                      1.6
                      
                      
                      
                      875
                      
                      
                      
                      1.7Net
      income
                      
                      $
                      1,041
                      
                      
                      
                      1.8
                      %
                      
                      $
                      403
                      
                      
                      
                      0.8
                      %Net
      earnings per share:Basic
                      
                      $
                      0.03
                      
                      
                      
                      
                      
                      
                      $
                      0.01Diluted
                      
                      $
                      0.03
                      
                      
                      
                      
                      
                      
                      $
                      0.01




23


Net
Revenue




Net
revenue increased to $58.1 million for the six months ended June 30, 2010, from
$53.2 million for the six months ended June 30, 2009.  The following
table sets forth revenue by category for the six months ended June 30, 2010
compared to the six months ended June 30, 2009, the percentage increase or
decrease between those periods, and the percentage of total net revenue that
each category represented for those periods:





Six Months Ended June 30,Net Revenue
                  
                  
                  
                  
                  
                  Percentage of
                    Total Net Revenue2010
                  
                  
                  2009
                  
                  
                  Percentage
                    Increase/
                    (Decrease)
                  
                  
                  2010
                  
                  
                  2009(in thousands)National
      online sponsorship and advertising
                  
                  $
                  11,703
                  
                  
                  $
                  9,814
                  
                  
                  
                  19.2
                  %
                  
                  
                  20.2
                  %
                  
                  
                  18.5
                  %Local
      online sponsorship and advertising
                  
                  
                  17,742
                  
                  
                  
                  17,227
                  
                  
                  
                  3.0
                  
                  
                  
                  30.6
                  
                  
                  
                  32.4Total
      online sponsorship and advertising
                  
                  
                  29,445
                  
                  
                  
                  27,041
                  
                  
                  
                  8.9
                  
                  
                  
                  50.8
                  
                  
                  
                  50.9Registry
      services
                  
                  
                  3,655
                  
                  
                  
                  4,698
                  
                  
                  
                  (22.2
                  )
                  
                  
                  6.3
                  
                  
                  
                  8.8Merchandise
                  
                  
                  15,360
                  
                  
                  
                  13,276
                  
                  
                  
                  15.7
                  
                  
                  
                  26.4
                  
                  
                  
                  25.0Publishing
      and other
                  
                  
                  9,612
                  
                  
                  
                  8,173
                  
                  
                  
                  17.6
                  
                  
                  
                  16.6
                  
                  
                  
                  15.3Total
      net revenue
                  
                  $
                  58,072
                  
                  
                  $
                  53,188
                  
                  
                  
                  9.2
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %





Online sponsorship and
advertising - The increase of 8.9% was driven by increased revenue from
both national and local advertising programs.  National online
sponsorship and advertising revenue increased 19.2%, driven by new and
repeat advertisers to our network of websites.  A key driver in
this increase was our registry agreement with Macy’s.  Under the terms
of the termination of the old Macy’s registry contract Macy’s agreed to spend
$3.0 million between February 1, 2010 and January 31, 2011 for advertising and
sponsorship programs with us, designed to promote the new Macy’s and
Bloomingdale’s online registry platforms.  Local online sponsorship
and advertising revenue increased 3.0%, driven by an increased number of local
vendors advertising with us.  As of June 30, 2010, we had over 17,000
local vendors who display nearly 21,000 profiles compared to over 16,000 vendors
who displayed over 19,000 profiles as of June 30, 2009.




Registry services – The
decrease of 22.2% was driven by lower commissions from Macy’s.  On
January 11, 2010, we signed an agreement to terminate the old registry agreement
with Macy’s. The original contract was scheduled to expire in January
2011.   Additionally, we entered into a new contract with Macy’s
for registry services that commenced on February 1, 2010.  Under the
old contract, WeddingChannel hosted and processed all of Macy’s registry
transactions regardless of whether the transactions originated on Macy’s website
or WeddingChannel’s website and received commission on 100% of registry
sales.  Under the new contract, WeddingChannel's registry relationship
with Macy’s is now similar to our other retail partners, and WeddingChannel
receives a commission for registry purchases originating from the WeddingChannel
and other The Knot affiliate websites. This resulted in lower commissions from
Macy’s.   This decrease was partially offset by increased
registry commissions from our new and historic registry retail
partners.  The impact of the new registry agreement with Macy’s on our
full-year 2010 results depends on multiple factors that cannot be reasonably
predicted at this time. However, we believe that we are unlikely to generate the
same level of revenue from the Macy’s relationship in 2010 as we did in 2009,
primarily because we will no longer receive commissions on 100% of Macy’s and
Bloomingdale’s online registry transactions.




Merchandise – The increase of
15.7% was driven by incremental revenue from an e-commerce company that we
acquired on May 1, 2009.  The acquired company contributed $2.3
million of net revenue during the year.  This increase was offset, in part,
by declines in revenue from the WeddingChannel Shop which were impacted by the
decline in visitor traffic due to the change in the Macy’s registry relationship
which reduced visitor traffic to the WeddingChannel website.





Publishing and other – The
increase of 17.6% was driven by the increase in our national magazine
publication cycle from twice a year to four times a year.  We also
received a termination fee of $1.0 million that Macy’s paid to WeddingChannel to
terminate its old registry agreement.  This increase was offset, in part,
by the discontinuation ofThe
Knot Best of Weddings magazine that was published in the first quarter of
2009.




24




Gross
Profit/Gross Margin





Gross
margin decreased 1.4% to 77.7%, compared to 79.1% in 2009.  The
following table presents the components of gross profit and gross margin for the
six months ended June 30, 2010 compared to the six months ended June 30,
2009:




Six Months Ended June 30,2010
                        
                        
                        2009
                        
                        
                        Increase/(Decrease)Gross
                          Profit
                        
                        
                        Gross
                          Margin %
                        
                        
                        Gross
                          Profit
                        
                        
                        Gross
                          Margin %
                        
                        
                        Gross
                          Profit
                        
                        
                        Gross
                          Margin %(in
      thousands)Online
      sponsorship and advertising (national & local)
                        
                        $
                        28,531
                        
                        
                        
                        96.9
                        %
                        
                        $
                        25,810
                        
                        
                        
                        95.4
                        %
                        
                        $
                        2,721
                        
                        
                        
                        1.5
                        %Registry
                        
                        
                        3,655
                        
                        
                        
                        100.0
                        
                        
                        
                        4,698
                        
                        
                        
                        100.0
                        
                        
                        
                        (1,043
                        )
                        
                        
                        -Merchandise
                        
                        
                        6,858
                        
                        
                        
                        44.6
                        
                        
                        
                        6,700
                        
                        
                        
                        50.5
                        
                        
                        
                        158
                        
                        
                        
                        (5.9
                        )Publishing
      and other
                        
                        
                        6,065
                        
                        
                        
                        63.1
                        
                        
                        
                        4,846
                        
                        
                        
                        59.3
                        
                        
                        
                        1,219
                        
                        
                        
                        3.8Total
      gross profit
                        
                        $
                        45,109
                        
                        
                        
                        77.7
                        %
                        
                        $
                        42,054
                        
                        
                        
                        79.1
                        %
                        
                        $
                        3,055
                        
                        
                        
                        (1.4
                        )
       %




The
decrease in gross margin was driven by lower gross margin for merchandise. The
decrease in merchandise margin was driven by sales promotions, product mix
within the gifts category and higher than planned personalization
costs.  We also had increases in damaged inventory.  This
decrease in margin was partially offset by increased margin in the online
sponsorship and advertising and publishing and other revenue categories. The
increase in online sponsorship and advertising margin was driven by higher
advertiser revenue.  The increase in publishing and other revenue
margin was due to the registry contract termination payment from Macy’s and
savings in overall printing expenses.





Operating
Expenses





Operating
expenses increased 4.2% to $43.0 million, compared to $41.3 million in 2009,
driven by incremental operating expenses related to our acquisition and
expansion activities in 2009, as well as increased marketing and personnel
related costs.  These increases were partially offset by lower
depreciation and amortization expense due to impairment charges in the fourth
quarter of 2009 that led to intangible asset write-downs.   As a
percentage of net revenue, operating expenses were 74.1% and 77.6% during 2010
and 2009, respectively.


25


The
following table presents the components of operating expenses and the percentage
of revenue that each component represented for the six months ended June 30,
2010 compared to the six months ended June 30, 2009:





Six Months Ended June 30,Operating Expenses
                  
                  
                  
                  
                  
                  Percentage of
                    Total Net Revenue2010
                  
                  
                  2009
                  
                  
                  Percentage
                    Increase/
                    (Decrease)
                  
                  
                  2010
                  
                  
                  2009(in
      thousands)Product
      and content development
                  
                  $
                  11,252
                  
                  
                  $
                  10,234
                  
                  
                  
                  9.9
                  %
                  
                  
                  19.4
                  %
                  
                  
                  19.2
                  %Sales
      and marketing
                  
                  
                  17,842
                  
                  
                  
                  15,659
                  
                  
                  
                  13.9
                  
                  
                  
                  30.7
                  
                  
                  
                  29.4General
      and administrative
                  
                  
                  11,184
                  
                  
                  
                  10,222
                  
                  
                  
                  9.4
                  
                  
                  
                  19.3
                  
                  
                  
                  19.2Depreciation
      and amortization
                  
                  
                  2,740
                  
                  
                  
                  5,181
                  
                  
                  
                  (47.1
                  )
                  
                  
                  4.7
                  
                  
                  
                  9.8Total
      operating expenses
                  
                  $
                  43,018
                  
                  
                  $
                  41,296
                  
                  
                  
                  4.2
                  %
                  
                  
                  74.1
                  %
                  
                  
                  77.6
                  %





Product and Content Development
– The increase of 9.9% was primarily due to incremental operating
expenses associated with the software development center we opened in Guangzhou,
China in May 2009 and from our acquisition of WedSnap in January
2009.  The expensesare primarily personnel
and occupancy related.  We also had increased employee compensation to
support our growth initiatives.




Sales and Marketing – The
increase of 13.9% was primarily due to increased advertising and promotional
initiatives to continue 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
e-commerce business.  Also included is increased headcount to support
those initiatives.





General and Administrative –
The increase of 9.4% was primarily due to a reserve for a potential state sales
tax liability related to our e-commerce business.  We also had
increased expenses in connection with our international expansion.  We
opened an office in Beijing, China during the first quarter of
2010.  We also had increased employee compensation to support our
growth initiatives.


These
increases were partially offset by lower bad debt expense.  This was
due to lower specific customer reserves in 2010 compared to 2009.





Depreciation and Amortization
–The decrease of 47.1% was primarily due to impairment charges in the fourth
quarter of 2009 that led to intangible asset write-downs.  We also had
several assets that became fully depreciated at the end of 2009 and lower
purchases of fixed assets in 2009 and 2010.





Interest
and Other Income




Interest
and other income, net was $85,000 for the six months ended June 30, 2010 as
compared to $520,000 for six months ended June 30, 2009. The decrease was due to
the impact of lower interest rates on our entire portfolio of cash,
commercial paper, treasuries and auction rate securities.




Loss
in Equity Interest





Loss in
equity interest was $212,000 for the six months ended June 30,
2010.  The entity in which we have an equity interest was formed in
July 2009; therefore, there was no equity income or loss for the six months
ended June 30, 2009.




26




Provision
for Income Taxes




The
effective tax rate for the six months ended June 30, 2010, was approximately 47%
as compared to 68.5% for the six months ended June 30, 2009.





Liquidity
and Capital Resources





Cash
Flow




Cash and
cash equivalents consist of cash and highly liquid investments with maturities
of 90 days or less at the date of acquisition.  At June 30, 2010, we
had $124.3 million in cash and cash equivalents compared to $73.2 million at
June 30, 2009.




The
following table sets forth our cash flows from operating activities, investing
activities and financing activities for the periods indicated:





For the Six Months Ended June 30,2010
                  
                  
                  2009(in
      thousands)Net
      cash provided by operating activities
                  
                  $
                  5,205
                  
                  
                  $
                  7,550Net
      cash provided by investing activities
                  
                  
                  25,047
                  
                  
                  
                  4,434Net
      cash used in financing activities
                  
                  
                  (908
                  )
                  
                  
                  (250
                  )Increase
      in cash and cash equivalents
                  
                  $
                  29,344
                  
                  
                  $
                  11,734





Operating
Activities




Net cash
provided by operating activities was $5.2 million for the six months ended June
30, 2010. This was driven by our net income of $1.0 million adjusted for
non-cash items. Non-cash items included depreciation, amortization, stock-based
compensation, reserve for returns and other non-cash items of $7.4 million. We
also had increased accounts payable and accrued expenses of $1.6 million driven
by a reserve for a potential state sales tax liability related to our e-commerce
business as well as expenses in connection with our increased publication
cycle.  These sources of cash were offset by increased trade accounts
receivable and receivables from affiliates of $2.4 million and $813,000,
respectively due to open billings for national advertising and registry. We also
had increased inventory of $1.8 million in anticipation of higher seasonal sales
of wedding supplies in the third quarter.




Net cash
provided by operating activities was $7.6 million for the six months ended June
30, 2009. This resulted primarily from net income for the period of $403,000,
depreciation, amortization, stock-based compensation, deferred income taxes and
other non cash items of $10.7 million.  These sources of cash were
offset by increased accounts receivable $1.4 million due to increased billings,
increased accounts receivable from affiliates of $823,000 due to open
billings to Macy’s for registry and national online advertising and
increased inventory of $1.0 million to support higher seasonal
sales.




Investing
Activities




Net cash
provided by investing activities was $25.0 million for the six months ended June
30, 2010.  This resulted from the proceeds from the redemptions of
auction rate securities of $26.9 million.  This source of cash was
offset, in part, by capitalized expenditures and purchases of fixed assets of
$1.1 million and our contribution of $500,000 to the entity in which we have an
equity interest.




Net cash
provided by investing activities was $4.4 million for the six months ended June
30, 2009.  This resulted primarily from $10.0 million of proceeds
related to the maturity of U.S. Treasury bills held by us during the quarter and
$1.3 million of proceeds from the redemption of long-term auction rate
securities.  These sources of cash were offset by business
acquisitions of $5.7 million, net of cash acquired, and the purchase
of property and equipment of $1.0 million.


27


Financing
Activities




Net cash
used in financing activities was $908,000 for the six months ended June 30,
2010.  This was primarily due to our repurchases of common stock in
connection with the surrender of these shares by employees to satisfy tax
withholding obligations related to the vesting of restricted stock
awards.





Net cash
used in financing activities was $250,000 for the six months ended June 30,
2009.  This was primarily due to decreased excess tax benefits
from stock-based awards of $1.0 million. For the six months ended June 30, 2009,
we also repurchased $230,000 of common stock in connection with the surrender of
restricted shares by employees to satisfy tax withholding obligations related to
the vesting of the stock awards.  These uses of cash were partially
offset by the issuance of common stock in connection with the exercise of vested
options and our employee stock purchase plan.





Off-Balance
Sheet Arrangements





As of
June 30, 2010, we did not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special purpose entities, which would have been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.





Seasonality




Seasonal
and cyclical patterns may affect our revenue. Wedding-related merchandise
revenue and registry sales generally are lower in the first and fourth quarters
of each year. As a result of these factors, we may experience fluctuations in
our revenue from quarter to quarter.





Critical
Accounting Policies





Our
discussion of results of operations and financial condition relies on our
consolidated financial statements that are prepared based on certain critical
accounting policies that require management to make judgments and estimates that
are subject to varying degrees of uncertainty.  We believe that
investors need to be aware of these policies and how they impact our financial
statements as a whole, as well as our related discussion and analysis presented
herein.  While we believe that these accounting policies are based on
sound measurement criteria, actual future events can result in outcomes
that may be materially different from these estimates or
forecasts.




The
accounting policies and related risks described in our Annual Report on Form
10-K for the year ended December 31, 2009 are those that depend most heavily on
these judgments and estimates.  As of June 30, 2010, there have been
no material changes to any of the critical accounting policies contained
therein.




Recently
Adopted Accounting Pronouncements





The
adoption of the following accounting standards and updates did not result in a
material impact to our condensed consolidated financial statements:




On June
12, 2009, the accounting standard relating to the transfers and servicing of
financial assets and extinguishment of liabilities was updated to require
additional information about transfers of financial assets, including
securitization transactions, and where companies have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. This standard update is
effective as of January 1, 2010.




On June
12, 2009, the accounting standard regarding the requirements of consolidation
accounting for variable interest entities was updated to require an enterprise
to perform an analysis to determine whether the entity’s variable interest or
interests give it a controlling interest in a variable interest entity. This
standard update is effective for all interim and annual reporting periods as of
January 1, 2010.


28


On
January 21, 2010, the accounting standard relating to fair value measurements
was updated to require additional new disclosures for transfers in and out of
Levels 1 and 2 and activity in Level 3.  This update also amends the
standard by requiring an entity to provide fair value measurement disclosures
for each class of assets and liabilities as well as the inputs and valuation
techniques.  This standard update is effective for all interim and
annual reporting periods on or after December 15, 2009 excluding certain
exceptions which will be effective for fiscal years beginning after December 15,
2010.





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 market risk through interest rates related to the investment of our
current cash and cash equivalents of $124.3 million as of June 30, 2010. 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.





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 June 30,
2010. 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 SEC’s
rules and forms, 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 three months ended June 30, 2010 identified in connection with the
evaluation thereof by the Company’s management, including the Chief Executive
Officer and Chief Financial Officer, that have materially affected, or are
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.


29


PART
II – OTHER INFORMATION





ITEM
1.  Legal Proceedings




On
November 4, 2008, The Knot, Inc. 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 revenue 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. On January 2, 2009, we
filed an answer and counter-claims, in which we denied infringement and denied
that Balthaser is entitled to damages, equitable relief, pre-judgment or
post-judgment interest, an exceptional case award, or to any relief whatsoever.
We asserted as our affirmative defenses non-infringement, invalidity, an
adequate remedy other than injunctive relief, and no willful infringement. We
asserted counter-claims for declaratory judgments as to non-infringement and
invalidity. On September 15, 2009, the United States District Court for the
Eastern District of Texas granted the motion made by several defendants to
transfer the case to the United States District Court for the Northern District
of California, and the claims made against The Knot were transferred along with
the claims made against most of the other defendants. While we intend to
vigorously defend against the claims asserted and pursue our counter-claims,
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) our online wedding-related
and other websites may fail to generate sufficient revenue to survive over the
long term, (ii) our history of losses, (iii) inability to adjust spending
quickly enough to offset any unexpected revenue shortfall, (iv) delays or
cancellations in spending by our advertisers and sponsors, (v) the significant
fluctuation to which our quarterly revenue and operating results are subject,
(vi) the seasonality of the wedding industry, (vii) our expectation that we will
generate a lower level of revenue from the Macy’s relationship in 2010 compared
to 2009, (viii) our expectation of a decline in WeddingChannel.com membership
and traffic to the WeddingChannel.com online shop as a result of the termination
of the old Macy’s registry services agreement, (ix) the dependence of
WeddingChannel.com’s registry services business on third parties, and (x) other
factors detailed in documents we file from time to time with the SEC. 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
with the SEC on March 12, 2010. There have been no material changes to the risk
factors described in our most recent Annual Report on Form 10-K.




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 Paidper
                  Share
                
                
                ( c) Total Number of
                  Shares Purchased as
                  Part of Publicly
                  Announced Plans or
                  Programs
                
                
                (d) Approximate Dollar
                  Value of Shares ThatMay
                  Yet Be Purchased Under
                  the Plans orProgramsApril
      1 to April 30, 2010
                
                
                9,856
                
                
                $
                8.12
                
                
                
                -
                
                
                $
                50,000,000May
      1 to May 31, 2010
                
                
                124,682
                
                
                
                7.55
                
                
                
                -
                
                
                $
                50,000,000June
      1 to June 30, 2010
                
                
                3,111
                
                
                
                7.52
                
                
                
                -
                
                
                $
                50,000,000Total
                
                
                137,649
                
                
                $
                7.59
                
                
                
                -





(a)
              None
      of these shares were purchased as part of publicly announced plans or
      programs.




The terms
of certain 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 pay for the exercise price of those awards or to satisfy tax
withholding obligations related to the exercise or vesting of those awards. All
of the shares listed in column (a) in the table above represent the surrender or
delivery of shares to the Company in connection with such exercise price
payments or 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 delivery (or on the last date preceding such surrender or
delivery for which such reported price exists).


30


(c),
(d)        On February 22, 2010, the Company
announced that its Board of Directors had authorized the repurchase of up to
$50.0 million of the Company’s common stock from time to time on the open market
or in privately negotiated transactions.  The repurchase program may
be suspended or discontinued at any time, but does not have an expiration date.
During the three months ended June 30, 2010, the Company did not repurchase any
shares under this program.





ITEM 6. Exhibits




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


31


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:  August
      9, 2010
              THE
      KNOT, INC.By:
              /s/ John P. MuellerJohn
      P. MuellerChief
      Financial Officer(Principal
      Financial Officer and Duly AuthorizedOfficer)




32




EXHIBIT
INDEX





Number
                Description31.1
                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.


33