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 MARCH 31, 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
                (State
      of incorporation)
              13-3895178
                (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           
Noo





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). Yeso  Noo





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 filero
              Accelerated
      filerxNon-accelerated
      filero (Do not
      check if a smaller reporting)
              Smaller
      reporting companyo




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




As of May
7, 2010, there were 33,762,873 shares of the registrant’s common stock
outstanding.










PageNumberPART
      I           FINANCIAL
      INFORMATIONITEM
      1:
                                                          
                                                          Financial
      Statements (Unaudited):Condensed
      Consolidated Balance Sheets as of March 31, 2010 andDecember
      31, 2009
                                                          
                                                          4Condensed
      Consolidated Statements of Operations for the three months
      endedMarch
      31, 2010 and 2009
                                                          
                                                          5Condensed
      Consolidated Statements of Cash Flows for the three months
      endedMarch
      31, 2010 and 2009
                                                          
                                                          6Notes
      to Condensed Consolidated Financial Statements
                                                          
                                                          7ITEM
      2:
                                                          
                                                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                          
                                                          18ITEM
      3:
                                                          
                                                          Quantitative
      and Qualitative Disclosures About Market Risk
                                                          
                                                          26ITEM
      4:
                                                          
                                                          Controls
      and Procedures
                                                          
                                                          27PART
      II           OTHER
      INFORMATIONITEM
      1:
                                                          
                                                          Legal
      Proceedings
                                                          
                                                          28ITEM1A:
                                                          
                                                          Risk
      Factors
                                                          
                                                          28ITEM
      2:
                                                          
                                                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                          
                                                          29ITEM
      6:
                                                          
                                                          Exhibits
                                                          
                                                          29SIGNATURES
                                                          
                                                          
                                                          
                                                          30





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)





March 31,
                          
                          
                          December 31,2010
                          
                          
                          2009(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          101,705
                          
                          
                          $
                          94,993Short-term
      investments
                          
                          
                          30,749
                          
                          
                          
                          36,498Accounts
      receivable, net of allowances of $2,361 and $1,696 at March 31, 2010 and
      December 31, 2009, respectively
                          
                          
                          8,385
                          
                          
                          
                          8,704Accounts
      receivable from affiliate
                          
                          
                          1,163
                          
                          
                          
                          444Inventories
                          
                          
                          3,441
                          
                          
                          
                          2,708Deferred
      production and marketing costs
                          
                          
                          573
                          
                          
                          
                          685Deferred
      tax assets, current portion
                          
                          
                          2,441
                          
                          
                          
                          2,441Other
      current assets
                          
                          
                          3,796
                          
                          
                          
                          2,948Total
      current assets
                          
                          
                          152,253
                          
                          
                          
                          149,421Property
      and equipment, net
                          
                          
                          5,593
                          
                          
                          
                          6,148Intangible
      assets, net
                          
                          
                          9,668
                          
                          
                          
                          10,341Goodwill
                          
                          
                          37,750
                          
                          
                          
                          37,757Deferred
      tax assets
                          
                          
                          20,594
                          
                          
                          
                          20,588Investment
      in equity interest, net
                          
                          
                          304
                          
                          
                          
                          419Other
      assets
                          
                          
                          225
                          
                          
                          
                          201Total
      assets
                          
                          $
                          226,387
                          
                          
                          $
                          224,875LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
                          
                          $
                          9,023
                          
                          
                          $
                          8,861Deferred
      revenue
                          
                          
                          11,441
                          
                          
                          
                          10,190Total
      current liabilities
                          
                          
                          20,464
                          
                          
                          
                          19,051Deferred
      tax liabilities
                          
                          
                          3,508
                          
                          
                          
                          3,504Other
      liabilities
                          
                          
                          183
                          
                          
                          
                          214Total
      liabilities
                          
                          
                          24,155
                          
                          
                          
                          22,769Stockholders’
      equity:Common
      stock, $.01 par value; 100,000,000 shares authorized and 33,770,415 and
      33,707,358 shares issued and outstanding at March 31, 2010 and December
      31, 2009, respectively
                          
                          
                          338
                          
                          
                          
                          337Additional
      paid-in-capital
                          
                          
                          209,676
                          
                          
                          
                          209,440Accumulated
      deficit
                          
                          
                          (7,782
                          )
                          
                          
                          (7,671
                          )Total
      stockholders’ equity
                          
                          
                          202,232
                          
                          
                          
                          202,106Total
      liabilities and stockholders’ equity
                          
                          $
                          226,387
                          
                          
                          $
                          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 March 31,2010
                  
                  
                  2009Net
      revenue:Online
      sponsorship and advertising
                  
                  $
                  14,464
                  
                  
                  $
                  12,823Registry
      services
                  
                  
                  1,698
                  
                  
                  
                  1,718Merchandise
                  
                  
                  6,921
                  
                  
                  
                  5,166Publishing
      and other
                  
                  
                  4,420
                  
                  
                  
                  4,010Total
      net revenue
                  
                  
                  27,503
                  
                  
                  
                  23,717Cost
      of revenue:Online
      sponsorship and advertising
                  
                  
                  467
                  
                  
                  
                  675Merchandise
                  
                  
                  3,883
                  
                  
                  
                  2,451Publishing
      and other
                  
                  
                  1,487
                  
                  
                  
                  1,732Total
      cost of revenue
                  
                  
                  5,837
                  
                  
                  
                  4,858Gross
      profit
                  
                  
                  21,666
                  
                  
                  
                  18,859Operating
      expenses:Product
      and content development
                  
                  
                  5,601
                  
                  
                  
                  5,173Sales
      and marketing
                  
                  
                  9,163
                  
                  
                  
                  7,956General
      and administrative
                  
                  
                  5,549
                  
                  
                  
                  5,405Depreciation
      and amortization
                  
                  
                  1,529
                  
                  
                  
                  2,646Total
      operating expenses
                  
                  
                  21,842
                  
                  
                  
                  21,180Loss
      from operations
                  
                  
                  (176
                  )
                  
                  
                  (2,321
                  )Loss
      in equity interest
                  
                  
                  (115
                  )
                  
                  
                  -Interest
      and other income, net
                  
                  
                  82
                  
                  
                  
                  303Loss
      before income taxes
                  
                  
                  (209
                  )
                  
                  
                  (2,018
                  )Benefit
      for income taxes
                  
                  
                  (98
                  )
                  
                  
                  (727
                  )Net
      loss
                  
                  $
                  (111
                  )
                  
                  $
                  (1,291
                  )Net
      loss per share:Basic
                  
                  $
                  (0.00
                  )
                  
                  $
                  (0.04
                  )Diluted
                  
                  $
                  (0.00
                  )
                  
                  $
                  (0.04
                  )Weighted
      average number of shares used in calculating net earnings per
      shareBasic
                  
                  
                  32,362
                  
                  
                  
                  31,878Diluted
                  
                  
                  32,362
                  
                  
                  
                  31,878




See
accompanying Notes to Condensed Consolidated Financial
Statements




5




THE
KNOT, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(amounts
in thousands)


(unaudited)





Three Months Ended March 31,2010
                    
                    
                    2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                    
                    $
                    (111
                    )
                    
                    $
                    (1,291
                    )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
      and amortization
                    
                    
                    856
                    
                    
                    
                    1,425Amortization
      of intangibles
                    
                    
                    673
                    
                    
                    
                    1,221Stock-based
      compensation
                    
                    
                    1,079
                    
                    
                    
                    1,018Deferred
      income taxes
                    
                    
                    (2
                    )
                    
                    
                    (727
                    )Excess
      tax benefits from stock-based awards
                    
                    
                    -
                    
                    
                    
                    425Reserve
      for returns
                    
                    
                    1,164
                    
                    
                    
                    1,077Realized
      gain on value of auction rate securities
                    
                    
                    (1
                    )
                    
                    
                    (64
                    )Allowance
      for doubtful accounts
                    
                    
                    56
                    
                    
                    
                    519Other
      non-cash charges
                    
                    
                    21
                    
                    
                    
                    (79
                    )Changes
      in operating assets and liabilities:Increase
      in accounts receivable
                    
                    
                    (902
                    )
                    
                    
                    (1,586
                    )Increase
      in accounts receivable from affiliate
                    
                    
                    (720
                    )
                    
                    
                    (615
                    )Increase
      in inventories
                    
                    
                    (755
                    )
                    
                    
                    (266
                    )Decrease
      in deferred production and marketing costs
                    
                    
                    112
                    
                    
                    
                    28Increase
      in other current assets
                    
                    
                    (847
                    )
                    
                    
                    (183
                    )Decrease
      in other assets
                    
                    
                    92
                    
                    
                    
                    4Increase
      in accounts payable and accrued expenses
                    
                    
                    162
                    
                    
                    
                    297Increase
      in deferred revenue
                    
                    
                    1,251
                    
                    
                    
                    1,103Decrease
      in other liabilities
                    
                    
                    (32
                    )
                    
                    
                    (31
                    )Net
      cash provided by operating activities
                    
                    
                    2,096
                    
                    
                    
                    2,275CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property and equipment
                    
                    
                    (299
                    )
                    
                    
                    (575
                    )Proceeds
      from sales/maturities of short-term investments
                    
                    
                    -
                    
                    
                    
                    9,992Redemptions
      of long-term investments
                    
                    
                    5,750
                    
                    
                    
                    1,200Acquisition
      of business, net of cash acquired
                    
                    
                    -
                    
                    
                    
                    (3,206
                    )Net
      cash provided by investing activities
                    
                    
                    5,451
                    
                    
                    
                    7,411CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from issuance of common stock
                    
                    
                    199
                    
                    
                    
                    149Proceeds
      from exercise of stock options
                    
                    
                    24
                    
                    
                    
                    846Excess
      tax benefits from stock-based awards
                    
                    
                    -
                    
                    
                    
                    (425
                    )Surrender
      of restricted common stock for income tax purposes
                    
                    
                    (1,064
                    )
                    
                    
                    (52
                    )Settlement
      of WedSnap escrow
                    
                    
                    6
                    
                    
                    
                    -Net
      cash (used in) provided by financing activities
                    
                    
                    (835
                    )
                    
                    
                    518Increase
      in cash and cash equivalents
                    
                    
                    6,712
                    
                    
                    
                    10,204Cash
      and cash equivalents at beginning of period
                    
                    
                    94,993
                    
                    
                    
                    61,488Cash
      and cash equivalents at end of period
                    
                    $
                    101,705
                    
                    
                    $
                    71,692Supplemental
      information:Cash
      paid for interest
                    
                    $
                    -
                    
                    
                    $
                    -Cash
      paid for income taxes
                    
                    $
                    911
                    
                    
                    $
                    176Cash
      paid for acquisitions
                    
                    $
                    -
                    
                    
                    $
                    3,206Cash
      acquired in acquisitions
                    
                    
                    -
                    
                    
                    
                    -$
                    -
                    
                    
                    $
                    3,206





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 months ended March
31, 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 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 April
9, 2009, the Company adopted the accounting standard that addresses recognition
and presentation of other than temporary impairments. This standard replaced the
existing requirement that the entity’s management assert it has both the intent
and ability to hold an impaired security until recovery with a requirement that
management assert (a) it does not have the intent to sell the security, and (b)
it is more likely than not it will have to sell the security before recovery of
its cost basis. The application of this standard is limited to debt securities
and is effective for interim and annual periods ending after June 15,
2009.




On April
9, 2009, the Company adopted the accounting standard that expands the fair value
disclosures for financial instruments to interim periods for publicly traded
entities. It also requires disclosure of the methods and significant assumptions
used to estimate the fair value of financial instruments and any changes of the
methods and significant assumptions from prior periods. This standard was
effective for interim and annual periods ending after June 15,
2009.




On May
28, 2009, the Company adopted the accounting standard related to subsequent
events, which addresses the accounting for and disclosures of events that occur
after the balance sheet date but before financial statements are issued or are
available to be issued. Disclosure is required as of the date through which an
entity has evaluated subsequent events and the basis for that
date — that is, whether that date represents the date the financial
statements were issued or were available to be issued. This disclosure will
alert all users of financial statements that an entity has not evaluated
subsequent events after that date in the set of financial statements being
presented. This standard was effective for interim and annual periods ending
after June 15, 2009.




7




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.





2.      Fair
Value Measurements





Cash and
cash equivalents and investments consist of the following:





March 31,
                      
                      
                      December 31,2010
                      
                      
                      2009(in
      thousands)Cash
      and cash equivalentsCash
                      
                      $
                      6,256
                      
                      
                      $
                      6,007Money
      market funds
                      
                      
                      95,449
                      
                      
                      
                      88,986Subtotal
      cash and cash equivalents
                      
                      
                      101,705
                      
                      
                      
                      94,993Short-term
      investmentsAuction
      rate securities
                      
                      
                      30,749
                      
                      
                      
                      36,498Total
      cash and cash equivalents and investments
                      
                      $
                      132,454
                      
                      
                      $
                      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
March 31, 2010, the Company’s investment in cash and cash equivalents of $101.7
million was measured at fair value using Level 1 inputs.




8




All of
the Company’s auction rate securities (“ARS”) are classified as Level 3
instruments. At March 31, 2010, the Company held $30.7 million of investments in
ARS accounted for as short-term investments. The Company's ARS are variable
interest rate debt securities which have student loans as the underlying
collateral. Approximately 95% of such collateral, in the aggregate, is
guaranteed by the United States government under the Federal Family Education
Loan Program. These securities have underlying maturity dates ranging from March
1, 2022 through December 1, 2041. The interest rates for the ARS are set at
monthly auctions. In February 2008, these auctions began to fail and all but one
auction since then has failed. Consequently, the investments are not currently
liquid. Typically, the fair value of ARS investments approximates par value due
to the frequent interest rate resets associated with the auction process. As a
result of the auction failures, the Company continues to earn interest on its
ARS investments at the “penalty” or “maximum” rate, prescribed in the securities
prospectus. Currently, there is not an active market for these securities, and
therefore they do not have a readily determinable market value. Accordingly, the
estimated fair value of the ARS no longer approximates par value. At March 31,
2010 the Company prepared a valuation for its entire ARS portfolio
utilizing a discounted cash flow approach. Based on this Level 3 valuation, the
Company valued its ARS portfolio at $30.7 million, which represents a decline in
value of $88,000 from par. The assumptions used in preparing the discounted cash
flow model were based on data available as of March 31, 2010 and included
estimates of interest rates, timing and amount of cash flows, credit and
liquidity premiums, and expected holding periods of the ARS. Given the current
market environment, these assumptions are volatile and subject to change, and
thereby could result in significant changes to the fair value of the
ARS.





In
November 2008, the Company accepted an offer from UBS, entitling them to
sell, at par value, their auction-rate securities originally purchased from
UBS. The Company can sell the ARS back to UBS at any time during a two-year
period from June 30, 2010 through July 2, 2012 (the “Right”). In accepting the
offer, the Company granted UBS the authority to sell or auction the ARS at par
at any time up until the expiration date of the Right and released UBS from any
claims relating to the marketing and sale of ARS. Although the Company expects
to sell its ARS under the Right, if the Right is not exercised before July
2, 2012 it will expire and UBS will have no further obligation to buy their
ARS. Unless and until the Company sells the ARS to UBS pursuant to the Right,
ARS will continue to accrue and pay interest as determined by the auction
process or the “penalty” or “maximum” rates specified in the prospectus of the
ARS should the auction process continue to fail. UBS’s obligations under the
Right are not secured by its assets and do not require UBS to obtain any
financing to support its performance obligations under the Right. UBS has
disclaimed any assurance that it will have sufficient financial resources to
satisfy its obligations under the Right. If UBS has insufficient funding to buy
back the ARS and the auction process continues to fail, then the Company may
incur further losses on the carrying value of the ARS; be forced to liquidate
the securities at depressed prices; or have to hold the securities to their full
maturities which may be over 20 years from now.




The
enforceability of the Right results in a separate freestanding instrument that
is accounted for separately from the ARS portfolio. The Company accounts for
this security in accordance with the accounting standard for fair value. The
Company valued the security using a discounted cash flow approach based on data
available as of March 31, 2010, which included estimates of interest rates,
timing and amount of cash flow, and an adjustment for any bearer risk associated
with UBS’s financial ability to repurchase the ARS beginning June 30, 2010. Any
change in these assumptions and market conditions would affect the value of the
Right. The value of the Right was determined to be $87,000 as of March 31, 2010.
The resulting gain largely offsets the realized loss on the ARS portfolio. The
change in the difference between the loss on the ARS portfolio and the
offsetting gain from the Rights resulted in a $1,000 gain for the three months
ended March 31, 2010 and was accounted for in Interest and Other Income, net.
The Company believes that subsequent changes in the value of the Rights will
largely offset the subsequent fair value movements of the ARS, subject to the
continued expected performance by UBS of its obligations under the Right. The
Company is entitled to receive the par value of its entire ARS portfolio
beginning on June 30, 2010. Assuming the complete performance of UBS of its
obligations related to the Right, the Company will recover the accumulated
losses recognized from the difference in the fair value movements of the ARS and
the offsetting fair value movements of the Right. In the interim, our settlement
agreement with UBS allows us to borrow up to 75% of the fair value of the ARS as
determined by UBS. As of March 31, 2010, we have not borrowed funds under the
agreement.




9




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
                  
                  
                  (5,750
                  )Change
      in fair value of ARS portfolio
                  
                  
                  230Change
      in fair value of ARS Right
                  
                  
                  (229
                  )Balance
      at March 31, 2010
                  
                  $
                  30,749




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 months ended March 31, 2010 and 2009, as
follows:





Three Months EndedMarch 31,2010
                  
                  
                  2009(in thousands)Product
      and content development
                  
                  $
                  359
                  
                  
                  $
                  307Sales
      and marketing
                  
                  
                  317
                  
                  
                  
                  262General
      and administrative
                  
                  
                  403
                  
                  
                  
                  449Total
      stock-based compensation
                  
                  $
                  1,079
                  
                  
                  $
                  1,018




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
March 31, 2010, there were 3,167,148 shares available for future grants under
the 2009 Plan and 270,418 shares available for future grants under the 2000
Plan.




10




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 three months ended March 31,
2010:




Shares
                        
                        
                        WeightedAverage ExercisePriceOptions
      outstanding at December 31, 2009
                        
                        
                        895
                        
                        
                        $
                        5.29Options
      granted
                        
                        
                        -
                        
                        
                        
                        -Options
      exercised
                        
                        
                        (6
                        )
                        
                        
                        3.94Options
      forfeited
                        
                        
                        -
                        
                        
                        
                        -Options
      outstanding at March 31, 2010
                        
                        
                        889
                        
                        
                        $
                        5.30




The
intrinsic value of options exercised during the three months ended March 31,
2010 and 2009 was $22,000 and $1.8 million, respectively.




The
following table summarizes information about options outstanding at March 31,
2010:




Options Outstanding
                  
                  
                  Options ExercisableRange of Exercise Price
                  
                  NumberOutstanding asof March 31,2010
                  
                  
                  WeightedAverageRemainingContractualLife (inYears)
                  
                  
                  WeightedAverageExercisePrice
                  
                  
                  NumberExercisable asof March 31,2010
                  
                  
                  WeightedAverageExercisePrice(in
      thousands)
                  
                  
                  
                  
                  
                  
                  
                  
                  (in
      thousands)$0.42
      to $1.03
                  
                  
                  255
                  
                  
                  
                  0.81
                  
                  
                  $
                  0.94
                  
                  
                  
                  255
                  
                  
                  $
                  0.94$1.37
      to $4.10
                  
                  
                  474
                  
                  
                  
                  3.50
                  
                  
                  
                  3.26
                  
                  
                  
                  474
                  
                  
                  
                  3.26$18.26
                  
                  
                  160
                  
                  
                  
                  2.16
                  
                  
                  
                  18.26
                  
                  
                  
                  107
                  
                  
                  
                  18.26889
                  
                  
                  
                  2.49
                  
                  
                  $
                  5.30
                  
                  
                  
                  836
                  
                  
                  $
                  4.47




The
weighted average remaining contractual life of options exercisable as of March
31, 2010 was 2.5 years. The aggregate intrinsic value of stock options
outstanding at March 31, 2010 was $3.9 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 March 31, 2010.





11




The
following table summarizes non-vested stock option activity for the three months
ended March 31, 2010:




Shares
                          
                          
                          Weighted AverageExercise
      Price(in thousands)Nonvested
      options outstanding at December 31, 2009
                          
                          
                          53
                          
                          
                          $
                          18.26Vested
                          
                          
                          -Canceled
                          
                          
                          -Nonvested
      options outstanding at March 31, 2010
                          
                          
                          53
                          
                          
                          $
                          18.26




There
were no stock options that vested during the three months ended March 31, 2010
and 2009.




Restricted
Stock




As of
March 31, 2010 and 2009, there were 1,333,643 and 1,646,674 service-based
restricted stock awards outstanding, respectively. During the three months ended
March 31, 2010 and 2009, 165,000 and 1,011,500 shares, respectively, of
restricted stock were awarded at weighted average grant-date fair values of
$8.09 and $6.91, respectively. During the three months ended March 31, 2010 and
2009, 269,343 and 21,001 shares of restricted stock, respectively, vested.
During the three months ended March 31, 2010 and 2009, 20,900 and 8,792 shares
of restricted stock, respectively, were canceled. During the three months ended
March 31, 2010 and 2009, 113,655 and 8,855 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 March 31, 2010 was $10.4 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 March 31,
2010.




As of
March 31, 2010, there was $8.9 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 2.7 years. During
the three months ended March 31, 2010 and 2009, the Company recorded $1.0
million and $0.9 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 March 31, 2010, 26,612 shares were issued under
the 2009 ESPP.  The Company initially reserved 300,000 shares of
common stock under the 2009 ESPP.




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 months ended
March 31, 2010 and 2009, respectively. The fair value of ESPP rights that vested
during the three months ended March 31, 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. On January 31, 2009, the
Company issued 25,485 shares at a weighted average price of $5.85 under the 1999
ESPP.




12




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 March 31,
2010 was $32,000. 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
March 31, 2010, there was $89,000 of unrecognized compensation cost related to
non-vested stock options and 2009 ESPP rights, net of estimated forfeitures,
which is expected to be recognized over a weighted average period of three
months.




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:




Three Months Ended March 31,2010
                  
                  
                  2009Weighted
      average expected lives
                  
                  0.50
      years
                  
                  
                  0.50
      yearsRisk-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 March 31, 2010 and 2009, the Company recorded $110,000
and $102,000, respectively, of compensation expense related to options and ESPP
rights and received cash from the exercise of options and ESPP rights of
$223,000 and $1.1 million for the three months ended March 31, 2010 and 2009,
respectively, for which the Company issued new shares of common
stock.




4.      Comprehensive
Loss





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




13




5.      Inventory





Inventory
consists of the following:




March 31,
                      2010
                    
                    
                    December 31,
                      2009(in
      thousands)InventoryRaw
      materials
                    
                    $
                    829
                    
                    
                    $
                    606Finished
      goods
                    
                    
                    2,612
                    
                    
                    
                    2,102Total
      inventory, net
                    
                    $
                    3,441
                    
                    
                    $
                    2,708




6.      Goodwill and
Other Intangible Assets





The
change in the carrying amount of goodwill at March 31, 2010 is as
follows:





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




Other
intangible assets consisted of the following:





March 31, 2010
                  
                  
                  December 31, 2009GrossCarryingAmount
                  
                  
                  AccumulatedAmortization
                  
                  
                  Net Cost
                  
                  
                  GrossCarryingAmount
                  
                  
                  AccumulatedAmortization
                  
                  
                  Net Cost(in thousands)Indefinite lived intangible assets:Tradenames
                  
                  $
                  6,995
                  
                  
                  $
                  -
                  
                  
                  $
                  6,995
                  
                  
                  $
                  6,995
                  
                  
                  $
                  -
                  
                  
                  $
                  6,995URL's
                  
                  
                  64
                  
                  
                  
                  -
                  
                  
                  
                  64
                  
                  
                  
                  64
                  
                  
                  
                  -
                  
                  
                  
                  64Subtotal
      indefinite lived intangible assets
                  
                  
                  7,059
                  
                  
                  
                  -
                  
                  
                  
                  7,059
                  
                  
                  
                  7,059
                  
                  
                  
                  -
                  
                  
                  
                  7,059Definite
      lived intangible assets:Customer
      and advertiser relationships
                  
                  
                  4,780
                  
                  
                  
                  (4,368
                  )
                  
                  
                  412
                  
                  
                  
                  4,780
                  
                  
                  
                  (4,029
                  )
                  
                  
                  751Developed
      technology and patents
                  
                  
                  10,230
                  
                  
                  
                  (8,200
                  )
                  
                  
                  2,030
                  
                  
                  
                  10,230
                  
                  
                  
                  (7,904
                  )
                  
                  
                  2,326Trademarks
      and tradenames
                  
                  
                  129
                  
                  
                  
                  (123
                  )
                  
                  
                  6
                  
                  
                  
                  129
                  
                  
                  
                  (122
                  )
                  
                  
                  7Service
      contracts and other
                  
                  
                  1,402
                  
                  
                  
                  (1,241
                  )
                  
                  
                  161
                  
                  
                  
                  1,402
                  
                  
                  
                  (1,204
                  )
                  
                  
                  198Subtotal
      definite lived intangible assets
                  
                  
                  16,541
                  
                  
                  
                  (13,932
                  )
                  
                  
                  2,609
                  
                  
                  
                  16,541
                  
                  
                  
                  (13,259
                  )
                  
                  
                  3,282Total
      intangible assets
                  
                  $
                  23,600
                  
                  
                  $
                  (13,932
                  )
                  
                  $
                  9,668
                  
                  
                  $
                  23,600
                  
                  
                  $
                  (13,259
                  )
                  
                  $
                  10,341




14




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 $673,000 and $1.2 million for the three months ended March 31, 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
March 31, 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 three months ended
March 31, 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 March 31,
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.




15




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 March 31,2010
                          
                          
                          2009(in thousands, except for per share data)Net
      loss
                          
                          $
                          (111
                          )
                          
                          $
                          (1,291
                          )Total weighted-average basic shares
                          
                          
                          32,362
                          
                          
                          
                          31,878Dilutive securities:Restricted
      stock
                          
                          
                          -
                          
                          
                          
                          -Employee
      Stock Purchase Plan
                          
                          
                          -
                          
                          
                          
                          -Options/warrants
                          
                          
                          -
                          
                          
                          
                          -Total weighted-average diluted shares
                          
                          
                          32,362
                          
                          
                          
                          31,878Net
      loss per share:Basic
                          
                          $
                          (0.00
                          )
                          
                          $
                          (0.04
                          )Diluted
                          
                          $
                          (0.00
                          )
                          
                          $
                          (0.04
                          )




The
calculation of earnings per share excludes a weighted average number of stock
options and restricted stock of 160,880 and 417,000 for the three months
ended March 31, 2010 and 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 ended March 31, 2010, the Company did not repurchase any shares
under this program.





16





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.




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 will no longer host and manage 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 will terminate 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. In addition, Macy’s is
obligated under the Termination Agreement to pay WeddingChannel.com service fees
if the transition period to implement the operation of each of the new Macy’s
and Bloomingdale’s online registry platforms under the New Registry Agreement
extends beyond agreed-upon dates. 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.





17





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 ofTheKnot Weddingsnational magazine from semi-annually to quarterly.  We
      are also increasing the publication frequency ofThe Bump local market
      guides from annually to
semi-annually.




18




·
            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 are opening 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.




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





First
Quarter 2010




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




·
            Total
      net revenue increased 16.0% to $27.5 million over the corresponding 2009
      period.




·
            National
      online advertising revenue increased 31.5% to $5.6 million over the
      corresponding 2009 period.




·
            Local
      online advertising revenue increased 3.6% to $8.9 million over the
      corresponding 2009 period.




·
            Merchandise
      revenue increased 34.0% to $6.9 million over the corresponding 2009 period
      primarily due to an acquisition of an e-commerce company in May
      2009.




·
            Publishing
      and other revenue increased 10.2% to $4.4 million over the corresponding
      2009 period primarily due to the termination fee of $1.0 million Macy’s
      paid WeddingChannel.com to terminate its old registry
      agreement.




·
            Registry
      services revenue decreased by 1.2% to $1.7 million primarily due to the
      change in our registry relationship with
Macy’s.




·
            We
      had an operating loss of $176,000 compared to operating loss of $2.3
      million in the prior year’s quarter. The year-over-year decrease in
      operating loss was primarily due to increased net revenue and gross
      profit, offset by higher operating expenses.  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 intangible asset write-downs in the
      fourth quarter of 2009.  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 a net loss for the three months ended March 31, 2010 of $111,000, or
      ($0.00) per basic and per diluted share, compared to net loss of $1.3
      million, or ($0.04) per basic and per diluted share for the three months
      ended March 31, 2009.




·
            At
      March 31, 2010 we had total cash, cash equivalents, and investments of
      $132.4 million. Cash and cash equivalents were $101.7 million and
      short-term investments were $30.7 million which consisted entirely of
      auction-rate securities. $5.8 million in auction-rate securities were
      redeemed by issuers at par value during the three months ended March 31,
      2010.




·
            At
      March 31, 2010 we had no debt.




19




Results
of Operations




Three
Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009




The
following table summarizes results of operations for the three months ended
March 31, 2010 compared to the three months ended March 31,
2009:





Three Months Ended March 31,2010
                    
                    
                    2009Amount
                    
                    
                    % of Net
                      Revenue
                    
                    
                    Amount
                    
                    
                    % of Net
                      Revenue(in
      thousands, except for per share data)Net
      revenue
                    
                    $
                    27,503
                    
                    
                    
                    100.0
                    %
                    
                    $
                    23,717
                    
                    
                    
                    100.0
                    %Cost
      of revenue
                    
                    
                    5,837
                    
                    
                    
                    21.2
                    
                    
                    
                    4,858
                    
                    
                    
                    20.5Gross
      profit
                    
                    
                    21,666
                    
                    
                    
                    78.8
                    
                    
                    
                    18,859
                    
                    
                    
                    79.5Operating
      expenses
                    
                    
                    21,842
                    
                    
                    
                    79.4
                    
                    
                    
                    21,180
                    
                    
                    
                    89.3Loss
      from operations
                    
                    
                    (176
                    )
                    
                    
                    (0.6
                    )
                    
                    
                    (2,321
                    )
                    
                    
                    (9.8
                    )Loss
      in equity interest
                    
                    
                    (115
                    )
                    
                    
                    (0.4
                    )
                    
                    
                    -
                    
                    
                    
                    -Interest
      and other income, net
                    
                    
                    82
                    
                    
                    
                    0.2
                    
                    
                    
                    303
                    
                    
                    
                    1.3Loss
      before income taxes
                    
                    
                    (209
                    )
                    
                    
                    (0.8
                    )
                    
                    
                    (2,018
                    )
                    
                    
                    (8.5
                    )Benefit
      for income taxes
                    
                    
                    (98
                    )
                    
                    
                    (0.4
                    )
                    
                    
                    (727
                    )
                    
                    
                    (3.1
                    )Net
      loss
                    
                    $
                    (111
                    )
                    
                    
                    (0.4
                    )%
                    
                    $
                    (1,291
                    )
                    
                    
                    (5.4
                    )%Net
      loss per share:Basic
                    
                    $
                    (0.00
                    )
                    
                    
                    
                    
                    
                    $
                    (0.04
                    )Diluted
                    
                    $
                    (0.00
                    )
                    
                    
                    
                    
                    
                    $
                    (0.04
                    )


20


Net
Revenue




Net
revenue increased to $27.5 million for the three months ended March 31, 2010,
from $23.7 million for the three months ended March 31, 2009.  The
following table sets forth revenue by category for the three months ended March
31, 2010 compared to the three months ended March 31, 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 March 31,Net Revenue
                
                
                Percentage
                  Increase/
                
                
                Percentage of
                  Total Net Revenue2010
                
                
                2009
                
                
                (Decrease)
                
                
                2010
                
                
                2009(in
      thousands)National
      online sponsorship and advertising
                
                $
                5,564
                
                
                $
                4,231
                
                
                
                31.5
                %
                
                
                20.2
                %
                
                
                17.8
                %Local
      online sponsorship and advertising
                
                
                8,900
                
                
                
                8,592
                
                
                
                3.6
                
                
                
                32.4
                
                
                
                36.3Total
      online sponsorship and advertising
                
                
                14,464
                
                
                
                12,823
                
                
                
                12.8
                
                
                
                52.6
                
                
                
                54.1Registry
      services
                
                
                1,698
                
                
                
                1,718
                
                
                
                (1.2
                )
                
                
                6.2
                
                
                
                7.2Merchandise
                
                
                6,921
                
                
                
                5,166
                
                
                
                34.0
                
                
                
                25.2
                
                
                
                21.8Publishing
      and other
                
                
                4,420
                
                
                
                4,010
                
                
                
                10.2
                
                
                
                16.0
                
                
                
                16.9Total
      net revenue
                
                $
                27,503
                
                
                $
                23,717
                
                
                
                16.0
                %
                
                
                100.0
                %
                
                
                100.0
                %





Online sponsorship and
advertising - The increase of 12.8% was driven by increased revenue from
both national and local advertising programs.  National online
sponsorship and advertising revenue increased 31.5%, 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 3.6%, driven by an increased number of local
vendors advertising with us.  As of March 31, 2010 we had over 17,000
local vendors who display over 20,000 profiles compared to over 15,000 vendors
who displayed over 18,000 profiles as of March 31, 2009.




Registry services – The
decrease of 1.2% 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
34.0% was driven by incremental revenue from an e-commerce company that we
acquired on May 1, 2009.  The acquired company contributed $1.6
million of net revenue during the quarter.  We also had increased
revenue from The Knot Wedding Shop.  The increase was attributable to
sales promotions conducted during the quarter.  This increase was
offset, in part, by declines in revenue from the WeddingChannel Shop which was
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.


21





Publishing and other – The
increase of 10.2% was driven by the termination fee of $1.0 million that Macy’s
paid WeddingChannel to terminate its old registry agreement.  This
increase was offset, in part, by the discontinuation of The Knot Best of Weddings
magazine that was published in the first quarter of
2009.





Gross
Profit/Gross Margin




Gross
margin decreased 0.7% to 78.8%, compared to 79.5% in 2009.  The
following table presents the components of gross profit and gross margin for the
three months ended March 31, 2010 compared to the three months ended March 31,
2009:




Three Months Ended March 31,2010
                
                
                2009
                
                
                Increase/(Decrease)Gross
                  Profit
                
                
                Gross
                  Margin %
                
                
                Gross
                  Profit
                
                
                Gross
                  Margin %
                
                
                Gross
                  Profit
                
                
                Gross
                  Margin %(in
      thousands)Online
      sponsorship and advertising (national & local)
                
                $
                13,997
                
                
                
                96.8
                %
                
                $
                12,148
                
                
                
                94.7
                %
                
                $
                1,849
                
                
                
                2.1
                %Registry
                
                
                1,698
                
                
                
                100.0
                
                
                
                1,718
                
                
                
                100.0
                
                
                
                (20
                )
                
                
                -Merchandise
                
                
                3,038
                
                
                
                43.9
                
                
                
                2,715
                
                
                
                52.6
                
                
                
                323
                
                
                
                (8.7
                )Publishing
      and other
                
                
                2,933
                
                
                
                66.4
                
                
                
                2,278
                
                
                
                56.8
                
                
                
                655
                
                
                
                9.6Total
      gross profit
                
                $
                21,666
                
                
                
                78.8
                %
                
                $
                18,859
                
                
                
                79.5
                %
                
                $
                2,807
                
                
                
                (0.7
                )%





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 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 3.1% to $21.8 million, compared to $21.2 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 write-downs in the
fourth quarter of 2009.   As a percentage of net revenue,
operating expenses were 79.4% and 89.3% during 2010 and 2009,
respectively.


22




The
following table presents the components of operating expenses and the percentage
of revenue that each component represented for the three months ended March 31,
2010 compared to the three months ended March 31, 2009:





Three Months Ended March 31,Operating Expenses
                  
                  
                  Percentage
                    Increase/
                  
                  
                  Percentage of
                    Total Net Revenue2010
                  
                  
                  2009
                  
                  
                  (Decrease)
                  
                  
                  2010
                  
                  
                  2009(in
      thousands)Product
      and content development
                  
                  $
                  5,601
                  
                  
                  $
                  5,173
                  
                  
                  
                  8.3
                  %
                  
                  
                  20.4
                  %
                  
                  
                  21.8
                  %Sales
      and marketing
                  
                  
                  9,163
                  
                  
                  
                  7,956
                  
                  
                  
                  15.2
                  
                  
                  
                  33.3
                  
                  
                  
                  33.5General
      and administrative
                  
                  
                  5,549
                  
                  
                  
                  5,405
                  
                  
                  
                  2.7
                  
                  
                  
                  20.1
                  
                  
                  
                  22.8Depreciation
      and amortization
                  
                  
                  1,529
                  
                  
                  
                  2,646
                  
                  
                  
                  (42.2
                  )
                  
                  
                  5.6
                  
                  
                  
                  11.2Total
      operating expenses
                  
                  $
                  21,842
                  
                  
                  $
                  21,180
                  
                  
                  
                  3.1
                  %
                  
                  
                  79.4
                  %
                  
                  
                  89.3
                  %





Product and Content Development
– The increase of 8.3% 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.




Sales and Marketing – The
increase of 15.2% 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 2.7% 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 quarter.  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 42.2% was primarily due to intangible asset write-downs in the
fourth quarter of 2009.  We also had several assets 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 $82,000 for the three months ended March 31, 2010 as
compared to $303,000 for three months ended March 31, 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 $115,000
for the three months ended March 31, 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 March 31, 2009.


23


Benefit
for Income Taxes




The
effective tax rate for the three months ended March 31, 2010, was approximately
47% as compared to 36% for the three months ended March 31,
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 March 31, 2010, we
had $101.7 million in cash and cash equivalents compared to $71.7 million at
March 31, 2009.




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




For the Three MonthsEnded
                        March 31,2010
                      
                      
                      2009(in thousands)Net
      cash provided by operating activities
                      
                      $
                      2,096
                      
                      
                      $
                      2,275Net
      cash provided by investing activities
                      
                      
                      5,451
                      
                      
                      
                      7,411Net
      cash (used in) provided by financing activities
                      
                      
                      (835
                      )
                      
                      
                      518Increase
      in cash and cash equivalents
                      
                      $
                      6,712
                      
                      
                      $
                      10,204





Operating
Activities




Net cash
provided by operating activities was $2.1 million for the three months ended
March 31, 2010. This was driven by our net loss of $111,000 adjusted for
non-cash items. Non-cash items included depreciation, amortization, stock-based
compensation, reserve for returns and other non-cash items of $3.8 million. We
also had increased deferred revenue, net of accounts receivable of $349,000 due
to our advance billings for various print publications. These sources of cash
were offset by increased prepaid and other current assets of $847,000 due
primarily to first quarter estimated income tax payments. We had increased
inventory of $755,000 in anticipation of higher seasonal sales of wedding
supplies in the second and third quarters.  Finally we had accounts
receivable from affiliates of $720,000 due to open billings to Macy’s for
registry and national online advertising.




Net cash
provided by operating activities was $2.3 million for the three months ended
March 31, 2009. This resulted primarily from depreciation, amortization,
stock-based compensation and deferred income taxes of $3.4 million and an
increase deferred revenue, net of accounts receivable of $1.1 million due
primarily to advanced billings for the next publication cycle as well as
billings for advertising campaigns in advance of revenue
recognized.  These sources of cash were offset by our net loss of $1.3
million, increased accounts receivable from affiliates of $615,000 due to open
billings to Macy’s for registry and national online advertising and
increased inventory of $266,000 in anticipation of higher seasonal sales of
wedding supplies in the second and third quarters.




Investing
Activities




Net cash
provided by investing activities was $5.5 million for the three months ended
March 31, 2010.  This resulted from the proceeds from the redemptions
of auction rate securities of $5.8 million.  This source of cash was
offset, in part, by capitalized expenditures and purchases of fixed assets of
$299,000.




24




Net cash
provided by investing activities was $7.4 million for the three months ended
March 31, 2009 due primarily to proceeds from the maturity of U.S. Treasury
bills held by us during the quarter of $10.0 million and proceeds from the
redemption of long-term auction rate securities of $1.2
million.  These increases were offset by the purchase of WedSnap for
$3.2 million and the purchase of property and equipment of
$575,000.




Financing
Activities




Net cash
used in financing activities was $835,000 for the three months ended March 31,
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
provided by financing activities was $518,000 for the three months ended March
31, 2009.  This was primarily due to proceeds from the issuance of
common stock in connection with the exercise of stock options and through our
Employee Stock Purchase Plan and excess tax benefits for stock-based
awards.





Off-Balance
Sheet Arrangements




As of
March 31, 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 March 31, 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 April
9, 2009, we adopted the accounting standard that addresses recognition and
presentation of other than temporary impairments. This standard replaced the
existing requirement that the entity’s management assert it has both the intent
and ability to hold an impaired security until recovery with a requirement that
management assert (a) it does not have the intent to sell the security, and (b)
it is more likely than not it will have to sell the security before recovery of
its cost basis. The application of this standard is limited to debt securities
and is effective for interim and annual periods ending after June 15,
2009.




25




On April
9, 2009, we adopted the accounting standard that expands the fair value
disclosures for financial instruments to interim periods for publicly traded
entities. It also requires disclosure of the methods and significant assumptions
used to estimate the fair value of financial instruments and any changes of the
methods and significant assumptions from prior periods. This standard was
effective for interim and annual periods ending after June 15,
2009.




On May
28, 2009, we adopted the accounting standard related to subsequent events, which
addresses the accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. Disclosure is required as of the date through which an entity has
evaluated subsequent events and the basis for that date — that is,
whether that date represents the date the financial statements were issued or
were available to be issued. This disclosure will alert all users of financial
statements that an entity has not evaluated subsequent events after that date in
the set of financial statements being presented. This standard was effective for
interim and annual periods ending after June 15, 2009.




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.





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 $101.7 million as of March 31, 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.


26





At March
31, 2010, we held $30.7 million of auction rate securities (“ARS”) which were
classified as short-term investments on our consolidated balance sheet. ARS are
variable interest rate debt securities which have student loans as the
underlying collateral. Approximately 95% of such collateral, in the aggregate,
is guaranteed by the United States government under the Federal Family Education
Loan Program. These securities have underlying maturity dates ranging from March
1, 2022 through December 1, 2041. The interest rates for the ARS are set at
monthly auctions. In February 2008, these auctions began to fail and all but one
auction since then has failed. Consequently, the investments are not currently
liquid. Typically, the fair value of ARS investments approximates par value due
to the frequent interest rate resets associated with the auction process. As a
result of the auction failures, we continue to earn interest on our ARS
investments at the “penalty” or “maximum” rate, prescribed in the securities
prospectus. Currently, there is not an active market for these securities, and
therefore they do not have a readily determinable market value. Accordingly, the
estimated fair value of the ARS no longer approximates par value. At March 31,
2010 we prepared a valuation for our entire ARS portfolio utilizing a discounted
cash flow approach. Based on this Level 3 valuation, we valued our ARS portfolio
at $30.7 million, which represents a decline in value of $88,000 from par. The
assumptions used in preparing the discounted cash flow model were based on data
available as of March 31, 2010 and included estimates of interest rates, timing
and amount of cash flows, credit and liquidity premiums, and expected holding
periods of the ARS. Given the current market environment, these assumptions are
volatile and subject to change, and thereby could result in significant changes
to the fair value of the ARS.




In
November 2008, we accepted an offer from UBS, entitling us to sell, at par
value, our auction-rate securities originally purchased from UBS. We can sell
the ARS back to UBS at any time during a two-year period from June 30, 2010
through July 2, 2012 (“the Right”). In accepting the offer, we granted UBS the
authority to sell or auction the ARS at par at any time up until the expiration
date of the Right and released UBS from any claims relating to the marketing and
sale of ARS. Although we expect to sell our ARS under the Right, if the Right is
not exercised before July 2, 2012 it will expire and UBS will have no further
obligation to buy our ARS. Unless and until we sell the ARS to UBS pursuant to
the offer, ARS will continue to accrue and pay interest as determined by the
auction process or the “penalty” or “maximum” rates specified in the prospectus
of the ARS should the auction process continue to fail.  We believe
that subsequent changes in the value of the Right will largely offset the
subsequent fair value movements of the ARS, subject to the continued expected
performance by UBS of its obligations related to the Right.




UBS’s
obligations under the Right are not secured by its assets and do not require UBS
to obtain any financing to support its performance obligations under the Right.
UBS has disclaimed any assurance that it will have sufficient financial
resources to satisfy its obligations under the Right. If UBS has insufficient
funding to buy back the ARS and the auction process continues to fail, then we
may incur further losses on the carrying value of the ARS; be forced to
liquidate the securities at depressed prices; or have to hold the securities to
their full maturities which may be over 20 years from now.




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 March
31, 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 March 31, 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.


27




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, (x) the
potential for losses on our investments in auction rate securities or our
inability to liquidate these investments at desired times and in desired
amounts,  and (xi) 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.


28


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 PurchasedUnder
                  the Plans orProgramsJanuary
      1 to January 31, 2010
                
                
                2,337
                
                
                $
                9.86
                
                
                
                n/a
                
                
                
                n/aFebruary
      1 to February 28, 2010
                
                
                107,377
                
                
                $
                9.40
                
                
                
                -
                
                
                $
                50,000,000March
      1 to March 31, 2010
                
                
                3,941
                
                
                $
                7.81
                
                
                
                -
                
                
                $
                50,000,000Total
                
                
                113,655
                
                
                $
                9.35
                
                
                
                -




(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).


(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 March 31, 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.


29




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:  May
      10, 2010
                    THE
      KNOT, INC.By:
                    /s/
      John P. MuellerJohn
      P. Mueller
                      Chief
      Financial Officer
                      (Principal
      Financial Officer and Duly Authorized
                      Officer)


30





EXHIBIT INDEX





Number
              
              Description10.28
              
              Agreement,
      dated as of January 11, 2010, between Macy’s, Inc. and The Knot,
      Inc.10.29
              
              Amendment
      to Name And Likeness Licensing Agreement between The Knot, Inc. and Carley
      Roney dated as of February 18, 2010.31.1
              
              Certification
      of Chairman and Chief Executive Officer Pursuant to Exchange Act Rule
      13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
              
              Certification
      of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a), As
      Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
              
              Certification
      of Chairman and Chief Executive Officer Pursuant to 18 U.S.C. Section
      1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
              
              Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.




31