UNITED
STATES SECURITIES AND EXCHANGE COMMISSION





WASHINGTON
D.C. 20549





FORM
10-Q




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





FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2009


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 No ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes ̈ No ̈





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




Large
      accelerated filer ̈
            Accelerated
      filerxNon-accelerated
      filer ̈ (Do
      not check if a smaller reporting company)
            Smaller
      reporting company ̈





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





As of
August 5, 2009, there were 33,737,082 shares of the registrant’s common stock
outstanding.








PageNumberPART
      I         FINANCIAL
      INFORMATIONITEM
      1:
                                              Financial
      Statements (Unaudited):Condensed
      Consolidated Balance Sheets as of June 30, 2009 andDecember
      31, 2008
                                              
                                              
                                              4Condensed
      Consolidated Statements of Operations for the three months and six months
      endedJune
      30, 2009 and 2008
                                              
                                              
                                              5Condensed
      Consolidated Statements of Cash Flows for the six months
    endedJune
      30, 2009 and 2008
                                              
                                              
                                              6Notes
      to Condensed Consolidated Financial Statements
                                              
                                              
                                              7ITEM
      2:
                                              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                              
                                              
                                              19ITEM
      3:
                                              Quantitative
      and Qualitative Disclosures About Market Risk
                                              
                                              
                                              32ITEM
      4:
                                              Controls
      and Procedures
                                              
                                              
                                              33PART
      II       OTHER
    INFORMATIONITEM
      1:
                                              Legal
      Proceedings
                                              
                                              
                                              33ITEM1A:
                                              Risk
      Factors
                                              
                                              
                                              34ITEM
      2:
                                              Unregistered
      Sales of Equity Securities and Use of Proceeds
                                              
                                              
                                              34ITEM
      4:
                                              Submission
      of Matters to a Vote of Security Holders
                                              
                                              
                                              35ITEM
      6:
                                              Exhibits
                                              
                                              
                                              35SIGNATURES
                                              
                                              
                                              
                                              36




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





ITEM
1. Financial Statements


THE
KNOT, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(amounts
in thousands, except for share data)





June
      30,
                          
                          
                          December
      31,2009
                          
                          
                          2008(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          73,222
                          
                          
                          $
                          61,488Short-term
      investments
                          
                          
                          2,999
                          
                          
                          
                          12,987Accounts
      receivable, net of allowance of $2,085 and $1,161 at June 30, 2009 and
      December 31, 2008, respectively
                          
                          
                          9,043
                          
                          
                          
                          9,381Accounts
      receivable from affiliate
                          
                          
                          1,175
                          
                          
                          
                          351Inventories
                          
                          
                          3,352
                          
                          
                          
                          2,087Deferred
      production and marketing costs
                          
                          
                          474
                          
                          
                          
                          519Deferred
      tax assets, current portion
                          
                          
                          2,651
                          
                          
                          
                          2,310Other
      current assets
                          
                          
                          2,669
                          
                          
                          
                          2,270Total
      current assets
                          
                          
                          95,585
                          
                          
                          
                          91,393Long-term
      investments
                          
                          
                          47,836
                          
                          
                          
                          48,974Property
      and equipment, net
                          
                          
                          6,818
                          
                          
                          
                          8,331Intangible
      assets, net
                          
                          
                          22,381
                          
                          
                          
                          23,686Goodwill
                          
                          
                          38,964
                          
                          
                          
                          34,607Deferred
      tax assets
                          
                          
                          19,287
                          
                          
                          
                          22,160Other
      assets
                          
                          
                          224
                          
                          
                          
                          201Total
      assets
                          
                          $
                          231,095
                          
                          
                          $
                          229,352LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
                          
                          $
                          8,961
                          
                          
                          $
                          8,648Deferred
      revenue
                          
                          
                          11,742
                          
                          
                          
                          11,760Total
      current liabilities
                          
                          
                          20,703
                          
                          
                          
                          20,408Deferred
      tax liabilities
                          
                          
                          9,522
                          
                          
                          
                          10,236Other
      liabilities
                          
                          
                          288
                          
                          
                          
                          360Total
      liabilities
                          
                          
                          30,513
                          
                          
                          
                          31,004Stockholders’
      equity:Common
      stock, $.01 par value; 100,000,000 shares authorized and 33,724,578 and
      32,341,172 shares issued and outstanding at June 30, 2009 and December 31,
      2008, respectively
                          
                          
                          337
                          
                          
                          
                          323Additional
      paid-in-capital
                          
                          
                          202,639
                          
                          
                          
                          200,822Accumulated
      deficit
                          
                          
                          (2,394
                          )
                          
                          
                          (2,797
                          )Total
      stockholders’ equity
                          
                          
                          200,582
                          
                          
                          
                          198,348Total
      liabilities and stockholders’ equity
                          
                          $
                          231,095
                          
                          
                          $
                          229,352





See
accompanying Notes to Condensed Consolidated Financial
Statements


4





THE
KNOT, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(amounts
in thousands, except for per share data)


(unaudited)





Three Months Ended June 30,
                
                
                Six Months Ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      revenues:Online
      sponsorship and advertising
                
                $
                14,217
                
                
                $
                13,464
                
                
                $
                27,041
                
                
                $
                26,374Registry
      services
                
                
                2,981
                
                
                
                3,289
                
                
                
                4,698
                
                
                
                5,067Merchandise
                
                
                8,110
                
                
                
                7,133
                
                
                
                13,276
                
                
                
                11,727Publishing
      and other
                
                
                4,163
                
                
                
                4,785
                
                
                
                8,173
                
                
                
                9,303Total
      net revenues
                
                
                29,471
                
                
                
                28,671
                
                
                
                53,188
                
                
                
                52,471Cost
      of revenue:Online
      sponsorship and advertising
                
                
                618
                
                
                
                460
                
                
                
                1,231
                
                
                
                982Merchandise
                
                
                4,124
                
                
                
                3,425
                
                
                
                6,576
                
                
                
                5,529Publishing
      and other
                
                
                1,534
                
                
                
                1,880
                
                
                
                3,327
                
                
                
                3,724Total
      cost of revenues
                
                
                6,276
                
                
                
                5,765
                
                
                
                11,134
                
                
                
                10,235Gross
      profit
                
                
                23,195
                
                
                
                22,906
                
                
                
                42,054
                
                
                
                42,236Operating
      expenses:Product
      and content development
                
                
                5,061
                
                
                
                5,037
                
                
                
                10,234
                
                
                
                9,989Sales
      and marketing
                
                
                7,703
                
                
                
                7,617
                
                
                
                15,659
                
                
                
                15,196General
      and administrative
                
                
                4,817
                
                
                
                5,213
                
                
                
                10,222
                
                
                
                10,022Depreciation
      and amortization
                
                
                2,534
                
                
                
                2,238
                
                
                
                5,181
                
                
                
                4,439Total
      operating expenses
                
                
                20,115
                
                
                
                20,105
                
                
                
                41,296
                
                
                
                39,646Income
      from operations
                
                
                3,080
                
                
                
                2,801
                
                
                
                758
                
                
                
                2,590Interest
      and other income, net
                
                
                216
                
                
                
                880
                
                
                
                520
                
                
                
                2,083Income
      before income taxes
                
                
                3,296
                
                
                
                3,681
                
                
                
                1,278
                
                
                
                4,673Provision
      for income taxes
                
                
                1,602
                
                
                
                1,390
                
                
                
                875
                
                
                
                1,803Net
      income
                
                $
                1,694
                
                
                $
                2,291
                
                
                $
                403
                
                
                $
                2,870Net
      earnings per share:Basic
                
                $
                0.05
                
                
                $
                0.07
                
                
                $
                0.01
                
                
                $
                0.09Diluted
                
                $
                0.05
                
                
                $
                0.07
                
                
                $
                0.01
                
                
                $
                0.09Weighted
      average number of shares used in calculating net earnings per
      shareBasic
                
                
                32,097
                
                
                
                31,445
                
                
                
                31,988
                
                
                
                31,349Diluted
                
                
                33,083
                
                
                
                32,592
                
                
                
                32,879
                
                
                
                32,592





See
accompanying Notes to Condensed Consolidated Financial
Statements


5





THE
KNOT, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(amounts
in thousands)


(unaudited)





Six Months Ended June 30,2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                
                $
                403
                
                
                $
                2,870Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                
                
                2,735
                
                
                
                2,584Amortization
      of intangibles
                
                
                2,446
                
                
                
                1,837Stock-based
      compensation
                
                
                2,081
                
                
                
                1,864Deferred
      income taxes
                
                
                793
                
                
                
                1,423Excess
      tax benefits from stock-based awards
                
                
                1,025
                
                
                
                (767
                )Reserve
      for returns
                
                
                1,092
                
                
                
                1,696Realized
      gain on value of auction rate securities
                
                
                (116
                )
                
                
                -Allowance
      for doubtful accounts
                
                
                670
                
                
                
                (79
                )Other
      non-cash charges
                
                
                (55
                )
                
                
                (59
                )Changes
      in operating assets and liabilities:(Increase)
      decrease in accounts receivable
                
                
                (1,424
                )
                
                
                3,019(Increase)
      decrease in accounts receivable from affiliate
                
                
                (823
                )
                
                
                193Increase
      in inventories
                
                
                (1,002
                )
                
                
                (1,015
                )Decrease
      (increase) in deferred production and marketing costs
                
                
                45
                
                
                
                (211
                )Increase
      in other current assets
                
                
                (361
                )
                
                
                (6
                )(Increase)
      decrease in other assets
                
                
                (23
                )
                
                
                49Increase
      in accounts payable and accrued expenses
                
                
                154
                
                
                
                277Decrease
      (increase) in deferred revenue
                
                
                (18
                )
                
                
                77Decrease
      in other liabilities
                
                
                (72
                )
                
                
                (43
                )Net
      cash provided by operating activities
                
                
                7,550
                
                
                
                13,709CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property and equipment
                
                
                (1,039
                )
                
                
                (3,641
                )Purchases
      of short-term investments
                
                
                -
                
                
                
                (64
                )Proceeds
      from sales/maturities of short-term investments
                
                
                9,992
                
                
                
                13,937Redemptions
      (purchases) of long-term investments
                
                
                -
                
                
                
                (39,600
                )Proceeds
      from sales/maturities of long-term investments
                
                
                1,250
                
                
                
                44,375Acquisition
      of business, net of cash acquired
                
                
                (5,769
                )
                
                
                (1,358
                )Net
      cash provided by investing activities
                
                
                4,434
                
                
                
                13,649CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from issuance of common stock
                
                
                160
                
                
                
                221Proceeds
      from exercise of stock options
                
                
                845
                
                
                
                1,089Excess
      tax benefits from stock-based awards
                
                
                (1,025
                )
                
                
                767Repurchase
      of common stock
                
                
                (230
                )
                
                
                (124
                )Net
      cash (used in) provided by financing activities
                
                
                (250
                )
                
                
                1,953Increase
      in cash and cash equivalents
                
                
                11,734
                
                
                
                29,311Cash
      and cash equivalents at beginning of year
                
                
                61,488
                
                
                
                33,127Cash
      and cash equivalents at end of year
                
                $
                73,222
                
                
                $
                62,438Supplemental
      information:Cash
      paid for interest
                
                $
                -
                
                
                $
                2Cash
      paid for income taxes
                
                $
                888
                
                
                $
                506Cash
      paid for acquisitions
                
                $
                (6,474
                )
                
                $
                (1,366
                )Cash
      acquired in acquisitions
                
                
                705
                
                
                
                8$
                (5,769
                )
                
                $
                (1,358
                )





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 the
accounts of The Knot, Inc. (“The Knot” or the “Company”) and all 100% owned
subsidiaries.  These 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.  However, 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, 2008.





In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all normal and recurring adjustments necessary to
present fairly the consolidated financial condition, results of operations and
changes in cash flows of the Company for the interim periods
presented.  The results of operations for the three and six months
ended June 30, 2009 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.





Recently
Adopted Accounting Pronouncements





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





On
January 1, 2008 the Company adopted SFAS No. 159,The Fair Value Option for Financial
Assets and Financial Liabilities — including an Amendment of FASB Statement No.
115  (“SFAS 159”), which allows an entity to choose to measure
certain financial instruments and liabilities at fair value. Subsequent
measurements for the financial instruments and liabilities an entity elects to
fair value will be recognized in earnings. SFAS 159 also establishes additional
disclosure requirements. Through June 30, 2009, the Company elected the use of
the fair value option to account for the acceptance of an offer from UBS AG
(“UBS”), one of the Company’s investment providers, entitling the Company to
sell at par value its entire portfolio of auction rate securities (“ARS”) to UBS
at anytime during a two-year period from June 30, 2010 through July 2, 2012. See
Note 2 for a discussion of the application of SFAS
159.


7


On
January 1, 2009 the Company adopted SFAS No. 141 (revised 2007), Business
Combinations (“SFAS 141R”). SFAS 141R establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial
effects of the business combination.  The adoption of SFAS 141R did
not have a material impact on the Company’s condensed consolidated financial
statements.





On
January 1, 2009 the Company adopted SFAS No. 160,Noncontrolling Interests in
Consolidated Financial Statements- an amendment of Accounting Research
Bulletin  No. 51 (“SFAS 160”). SFAS 160 establishes accounting
and reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements
that clearly identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. The adoption of SFAS 160 did not
have a material impact on the Company’s condensed consolidated financial
statements.





On
January 1, 2009 the Company adopted FASB FSP No. 142-3,Determination of the Useful Life of
Intangible Assets, (“FSP 142-3”) that amends the factors considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142,Goodwill and Other Intangible
Assets (“SFAS 142”). FSP 142-3 requires a consistent approach between the
useful life of a recognized intangible asset under SFAS 142 and the period of
expected cash flows used to measure the fair value of an asset under SFAS 141R.
FSP 142-3 also requires enhanced disclosures when an intangible asset’s expected
future cash flows are affected by an entity’s intent and/or ability to renew or
extend the arrangement. The adoption of FSP 142-3 did not have a material impact
on the Company’s condensed consolidated financial statements.





On April
9, 2009, the FASB issued FSP No. 157-4,Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly  (“FSP
157-4”), which amends SFAS 157 by incorporating a two-step process to determine
whether a market is not active and a transaction is not
distressed.  FSP 157-4 is effective for interim and annual periods
ending after June 15, 2009.  The adoption of FSP 157-4 did not have a
material impact on the Company’s condensed consolidated financial
statements.





On April
9, 2009, the FASB issued FSP No. 115-2 and 124-2,Recognition and Presentation of
Other-Than-Temporary Impairments, which amends the other-than-temporary
impairment indicators to (a) management has no intent to sell the security and
(b) it is more likely than not management will not have to sell the security
before recovery.  This FSP is effective for interim and annual periods
ending after June 15, 2009.  The adoption of FSP 115-2 and 124-2 did
not have a material impact on the Company’s condensed consolidated financial
statements.





On April
9, 2009, the FASB issued FSP No. 107-1 and APB 28-1,Interim Disclosures about Fair
Value of Financial Statements, which amends the interim disclosure
requirements in scope for FAS 107,Disclosures about Fair Value of
Financial Instruments . This FSP is effective for interim and annual
periods ending after June 15, 2009.  The adoption of FSP 107-1 and APB
28-1 did not have a material impact on the Company’s condensed consolidated
financial statements.





On May
28, 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
165”). SFAS 165 establishes general standards of accounting for and disclosure
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 SFAS is effective for interim and annual periods ending
after June 15, 2009. The adoption of SFAS 165 did not have a material impact on
the Company’s condensed consolidated financial statements.


8


New
Accounting Pronouncements





On June
12, 2009, the FASB issued SFAS No. 166, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS
166”). SFAS 166 is a revision to Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS
166 requires 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. SFAS 166
is effective as of January 1, 2010, for interim periods within that first annual
reporting period and for interim and annual reporting periods thereafter.
Earlier application is prohibited. The recognition and measurement provisions of
SFAS 166 are effective for transfers occurring on or after the effective
date.The
disclosures required by SFAS 166 are effective for the first reporting period
(interim or annual) beginning January 1, 2010, and will be applied to both
transfers that occurred before and after the effective date.  The Company
is currently evaluating the potential impact of the adoption of SFAS 166 on its
consolidated financial statements.




On June
12, 2009, the FASB issued SFAS No. 167, “Consolidation of Variable Interest
Entities” (“SFAS 167”). SFAS 167 is a revision to FASB Interpretation No.
46(R), Consolidation of
Variable Interest Entities, and changes how a company determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of whether a
company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic performance.
SFAS 167
is effective as of January 1, 2010, for interim periods within that first annual
reporting period and for interim and annual reporting periods thereafter, with
earlier application prohibited.  SFAS 167 may be applied retrospectively in
previously issued financial statements for one or more years with a
cumulative-effect adjustment to retained earnings as of the beginning of the
first year restated.The Company is currently evaluating the potential impact of the
adoption of SFAS 167 on its consolidated financial
statements.




2.
Fair Value Measurements





Cash and
cash equivalents and investments consist of the following:




June
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008(in
      thousands)Cash
      and cash equivalentsCash
                  
                  $
                  7,208
                  
                  
                  $
                  3,623Money
      market funds
                  
                  
                  63,818
                  
                  
                  
                  13,023Commercial
      paper
                  
                  
                  2,196
                  
                  
                  
                  44,842Subtotal
      cash and cash equivalents
                  
                  
                  73,222
                  
                  
                  
                  61,488Short-term
      investmentsAuction
      rate securities and related rights
                  
                  
                  2,999
                  
                  
                  
                  2,995US
      Treasury bill
                  
                  
                  -
                  
                  
                  
                  9,992Subtotal
      short-term investments
                  
                  
                  2,999
                  
                  
                  
                  12,987Long-term
      investmentsAuction
      rate securities and related rights
                  
                  
                  47,836
                  
                  
                  
                  48,974Total
      cash and cash equivalents and investments
                  
                  $
                  124,057
                  
                  
                  $
                  123,449




The
Company’s investments in commercial paper at June 30, 2009, consisted of P1/A1
rated corporate debt securities.





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





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





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





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





As of
June 30, 2009 the Company’s investment in cash and cash equivalents of $73.2
million was measured at fair value using Level 1 inputs.


9





All of
the auction rate securities (“ARS”) are classified as Level 3 instruments. At
June 30, 2009, the Company held $50.8 million of investments in ARS. $3.0
million of these investments were classified as short-term investments, while
$47.8 million were classified as long-term investments. ARS are variable
interest rate debt securities which have student loans as the underlying
collateral. Approximately 87% of such collateral, in the aggregate, is
guaranteed by the United States government under the Federal Family Education
Loan Program. $3.0 million of these securities have an underlying maturity date
of November 1, 2009 while the remaining securities have maturity dates ranging
from March 1, 2022 through December 1, 2041.





The
interest rates for 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
market cessation, the Company continues to earn interest on our ARS investments,
but at the “penalty” or “maximum” rate specified 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 June
30, 2009, the Company prepared a valuation for the ARS investments utilizing a
discounted cash flow approach. Based on this Level 3 valuation, the Company
valued its long-term ARS investments at $47.2 million, which represents a
decline in value of $649,000 from par. In addition, based on the same Level 3
valuation, the Company valued its short-term ARS investments at $3.0 million,
which represents a decline in value of $12,000. The Company’s short-term ARS
investments are classified as short-term investments on the Company’s
consolidated balance sheet and mature on November 1, 2009. The assumptions used
in preparing the discounted cash flow model were based on data available as of
June 30, 2009 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 (the “Right”) from UBS, one of the
Company’s investment providers, entitling the Company to sell at par value its
entire portfolio of ARS at anytime during a two-year period from June 30, 2010
through July 2, 2012. In accepting the Right, the Company granted UBS the
authority to sell or auction the ARS at par at any time up until the expiration
date of the offer and released UBS from any claims relating to the marketing and
sale of ARS. Although the Company expects to sell the 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 the Company sells 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. 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.





The
enforceability of the Right results in a separate freestanding instrument that
is accounted for separately from the ARS portfolio. The Company elected to
account for this security at fair value under SFAS 159. The Company valued the
security using a discounted cash flow approach based on data available as of
June 30, 2009, 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 this Right. The
value of the long-term right was determined to be $635,000 as of June 30, 2009,
while the value of the short-term right was determined to be $12,000. 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 $53,000 gain for the three months
ended June 30, 2009 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 the financial institution of its
obligations under the agreement. 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.




10




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





Amount(in
      thousands)Balance
      at December 31, 2008
                  
                  $
                  51,969Redemptions
                  
                  
                  (1,250
                  )Change
      in fair value of ARS portfolio
                  
                  
                  2,960Change
      in fair value of ARS Right
                  
                  
                  (2,844
                  )Balance
      at June 30, 2009
                  
                  $
                  50,835





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 and
six months ended June 30, 2009 and 2008, as follows:





Three
      Months Ended
                    June
      30,
                  
                  
                  Six
      Months Ended
                    June
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008(in
      thousands)Product
      and content development
                  
                  $
                  323
                  
                  
                  $
                  181
                  
                  
                  $
                  630
                  
                  
                  $
                  358Sales
      and marketing
                  
                  
                  268
                  
                  
                  
                  223
                  
                  
                  
                  530
                  
                  
                  
                  413General
      and administrative
                  
                  
                  472
                  
                  
                  
                  713
                  
                  
                  
                  921
                  
                  
                  
                  1,093Total
      stock based compensation
                  
                  $
                  1,063
                  
                  
                  $
                  1,117
                  
                  
                  $
                  2,081
                  
                  
                  $
                  1,864





The
Knot Stock-Based Incentive Plans





The 2009 Stock Incentive Plan (the
“2009 Plan”) was adopted by the Board of Directors, and become 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 have been 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.


11


As of June 30, 2009, there were
3,277,087 shares available for future grants under the 2009 Plan and 270,418
shares available for future grants under the 2000 Plan.





Options





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





Shares
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price(in
      thousands)Options
      outstanding at December 31, 2008
                  
                  
                  1,496
                  
                  
                  $
                  6.04Options
      exercised
                  
                  
                  (408
                  )
                  
                  
                  2.87Options
      canceled
                  
                  
                  (169
                  )
                  
                  
                  17.97Options
      outstanding at June 30, 2009
                  
                  
                  919
                  
                  
                  $
                  5.25




The total intrinsic value of options
exercised during the three months ended June 30, 2009 and 2008 was $160 and
$825,000, respectively. The total intrinsic value of options exercised during
the six months ended June 30, 2009 and 2008 was $1.8 million and $2.5 million,
respectively.  The following table summarizes information about
options outstanding at June 30, 2009:





Options Outstanding
                  
                  
                  Options ExercisableRange of Exercise Price
                  
                  Number
                    Outstanding as
                    of June 30, 2009
                  
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Life
      (in Years)
                  
                  
                  Weighted
                    Average
                    Exercise Price
                  
                  
                  Number
                    Exercisable as
                    of
      June 30, 2009
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price(in
      thousands)
                  
                  
                  
                  
                  
                  
                  
                  
                  (in
      thousands)$0.42
      to $1.03
                  
                  
                  256
                  
                  
                  
                  1.57
                  
                  
                  $
                  0.94
                  
                  
                  
                  256
                  
                  
                  $
                  0.94$1.37
      to $4.10
                  
                  
                  503
                  
                  
                  
                  4.07
                  
                  
                  
                  3.30
                  
                  
                  
                  503
                  
                  
                  
                  3.30$18.26
                  
                  
                  160
                  
                  
                  
                  2.91
                  
                  
                  
                  18.26
                  
                  
                  
                  107
                  
                  
                  
                  18.26919
                  
                  
                  
                  3.17
                  
                  
                  $
                  5.25
                  
                  
                  
                  866
                  
                  
                  $
                  4.44




The weighted average remaining
contractual life of options exercisable as of June 30, 2009 was 3.19
years.  The aggregate intrinsic value of stock options outstanding at
June 30, 2009 was $4.1 million, all of which relates to vested awards. The
intrinsic value for stock options is calculated based on the exercise price of
the underlying awards and the quoted closing price of the Company’s common stock
as of June 30, 2009.





12





The
following table summarizes non-vested stock option activity for the six months
ended June 30, 2009:





Shares
                        
                        
                        Weighted
                          Average
                          Exercise
                          Price(in
      thousands)Nonvested
      options outstanding at December 31, 2008
                        
                        
                        190
                        
                        
                        $
                        18.26Vested
                        
                        
                        (53
                        )
                        
                        
                        18.26Canceled
                        
                        
                        (83
                        )
                        
                        
                        18.26Nonvested
      options outstanding at June 30, 2009
                        
                        
                        54
                        
                        
                        $
                        18.26





During the three months ended June 30,
2009 and 2008 the weighted average fair value of options that vested was $5.95
and $5.90, respectively.  During the six months ended June 30, 2009
and 2008 the weighted average fair value of options that vested was $5.95 and
$5.71, respectively.





Restricted
Stock





As of
June 30, 2009 and 2008, there were 1,605,587 and 526,793 service-based
restricted stock awards outstanding, respectively.  During the three
months ended June 30, 2009 and 2008, 26,000 and 116,500 shares, respectively, of
restricted stock were awarded at weighted average grant-date fair values of
$8.43 and $11.35, respectively.  During the six months ended June 30,
2009 and 2008, 1,037,500 and 191,500 shares, respectively, of restricted stock
were awarded at weighted average grant-date fair values of $6.95 and $12.09,
respectively.  During the six months ended June 30, 2009 and 2008,
79,288 and 45,254 shares of restricted stock, respectively,
vested.  During the six months ended June 30, 2009 and 2008, 17,592
and 32,000 shares of restricted stock, respectively, were
cancelled.  During the six months ended June 30, 2009 and 2008, 28,573
and 10,577 shares of restricted stock, respectively, were repurchased by the
Company in connection with the surrender of these shares by employees to satisfy
tax withholding obligations related to the vesting of the stock
awards.  The aggregate intrinsic value of restricted shares as of June
30, 2009 and 2008 was $12.6 million and $5.1 million, respectively. The
intrinsic value for restricted shares is calculated based on the par value of
the underlying shares and the quoted price of the Company’s common stock as of
June 30, 2009.





As of
June 30, 2009, there was $10.1 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 3.13 years. During
the three months ended June 30, 2009 and 2008, the Company recorded $963,000 and
$700,000, respectively, of compensation expense related to restricted
shares.  During the six months ended June 30, 2009 and 2008, the
Company recorded $1.9 million and $1.3 million 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 will begin August 2009.  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. The
Company initially reserved 300,000 shares of common stock under the 1999 ESPP.
The
shares reserved under the 1999 ESPP automatically increased on the first trading
day in January of each calendar year by the lesser of the (i) the number of
shares of common stock issued under the 1999 ESPP in the immediately preceding
calendar year, (ii) 300,000 shares or (iii) such other lesser amount approved by
the Board of Directors. Through June 30, 2009, 457,663 shares were
issued under the 1999 ESPP and
432,174 shares were added to the reserve pursuant to the automatic share
increase provision. The Company initially reserved 300,000 shares of common
stock under the 2009 ESPP.  No shares have been issued to date
under the 2009 ESPP.


13




The
weighted average grant-date fair value of 1999 ESPP rights arising from
elections made by 1999 ESPP plan participants was $1.85 and $3.71 during the
three and six months ended June 30, 2009 and 2008 respectively. The fair value
of 1999 ESPP rights that vested during the three and six months ended June 30,
2009 and 2008 was $2.21and $4.13, respectively. On January 31, 2009, the Company
issued 25,485 shares at a weighted average price of $5.85 under the 1999
ESPP.





The intrinsic value of shares purchased
through the 1999 ESPP on January 31, 2009 and of outstanding 1999 ESPP rights as
of June 30, 2009 was $26,000 and $34,000, respectively. The intrinsic value of
the shares of 1999 ESPP rights is calculated as the discount from the quoted
price of the Company’s common stock, as defined in the 1999 ESPP, which was
available to employees as of the respective dates.





As of June 30, 2009, there was $298,000
of unrecognized compensation cost related to nonvested stock options and 1999
ESPP rights, net of estimated forfeitures, which is expected to be recognized
over a weighted average period of .90 years.


The fair
value of 1999 ESPP rights have been estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:





Six
      Months Ended June 30,2009
                    
                    2008Weighted
      average expected lives
                    
                    0.50
      years
                    
                    0.50
      yearsRisk-free
      rate
                    
                    0.36%
                    
                    2.15%Expected
      volatility
                    
                    44.6%
                    
                    44.6%Dividend
      yield
                    
                    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 1999 ESPP rights includes the
option exercise price discount from market value provided for under the 1999
ESPP.





During the three months ended June 30,
2009 and 2008, the Company recorded $100,000 and $417,000, respectively, of
compensation expense related to options and 1999 ESPP rights.  During
the six months ended June 30, 2009 and 2008, the Company recorded $202,000 and
$584,000, respectively, of compensation expense related to options and 1999 ESPP
rights.





4.
Comprehensive Income/(Loss)





Comprehensive
income (loss), net of taxes, is comprised of the following:





Three
      Months Ended June 30,
                
                
                Six
      Months Ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008(in
      thousands)Net
      income
                
                $
                1,694
                
                
                $
                2,291
                
                
                $
                403
                
                
                $
                2,870Unrealized
      loss on auction rate securities
                
                
                -
                
                
                
                (2,033
                )
                
                
                -
                
                
                
                (3,100
                )Comprehensive
      income (loss)
                
                $
                1,694
                
                
                $
                258
                
                
                $
                403
                
                
                $
                (230
                )




14




5.
Inventory





Inventory
consists of the following:




June
      30,
                        2009
                      
                      
                      December
      31,
                        2008(in
      thousands)InventoryRaw
      materials
                      
                      $
                      759
                      
                      
                      $
                      366Finished
      goods
                      
                      
                      2,593
                      
                      
                      
                      1,721Total
      inventory, net
                      
                      $
                      3,352
                      
                      
                      $
                      2,087





6.
Goodwill and Other Intangibles





The
change in the carrying amount of goodwill at June 30, 2009 is as
follows:





Amount(in
      thousands)Balance
      at December 31, 2008
                      
                      $
                      34,607WedSnap
      acquisition (see Note 8)
                      
                      
                      3,253Other
      acquisitions(see
      Note 8)
                      
                      
                      1,105Breastfeeding.com
      goodwill adjustment
                      
                      
                      (1
                      )Balance
      at June 30, 2009
                      
                      $
                      38,964





Other
intangible assets consisted of the following:





June 30, 2009
                
                
                December 31, 2008Gross
                  Carrying
                  Amount
                
                
                Accumulated
                  Amortization
                
                
                Net Cost
                
                
                Gross
                  Carrying
                  Amount
                
                
                Accumulated
                  Amortization
                
                
                Net Cost(in
      thousands)Indefinite
      lived intangible assets:Tradenames
                
                $
                12,821
                
                
                $
                -
                
                
                $
                12,821
                
                
                $
                11,851
                
                
                $
                -
                
                
                $
                11,851URL's
                
                
                61
                
                
                
                -
                
                
                
                61
                
                
                
                -
                
                
                
                -
                
                
                
                -Subtotal
      indefinite lived intangible assets
                
                
                12,882
                
                
                
                -
                
                
                
                12,882
                
                
                
                11,851
                
                
                
                -
                
                
                
                11,851Definite
      lived intangible assets:Customer
      and advertiser relationships
                
                
                5,709
                
                
                
                (2,657
                )
                
                
                3,052
                
                
                
                5,709
                
                
                
                (1,769
                )
                
                
                3,940Developed
      technology and patents
                
                
                12,390
                
                
                
                (6,914
                )
                
                
                5,476
                
                
                
                12,280
                
                
                
                (5,683
                )
                
                
                6,597Trademarks
      and tradenames
                
                
                129
                
                
                
                (109
                )
                
                
                20
                
                
                
                129
                
                
                
                (96
                )
                
                
                33Service
      contracts and other
                
                
                3,328
                
                
                
                (2,377
                )
                
                
                951
                
                
                
                3,328
                
                
                
                (2,063
                )
                
                
                1,265Subtotal
      definite lived intangible assets
                
                
                21,556
                
                
                
                (12,057
                )
                
                
                9,499
                
                
                
                21,446
                
                
                
                (9,611
                )
                
                
                11,835Total
      intangible assets
                
                $
                34,438
                
                
                $
                (12,057
                )
                
                $
                22,381
                
                
                $
                33,297
                
                
                $
                (9,611
                )
                
                $
                23,686




15




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 $1.2 million
and $908,000 for the three months ended June 30, 2009 and 2008, respectively,
and $2.4 million and $1.8 million for the six months ended June 30, 2009 and
2008, respectively. Estimated annual amortization expense is $4.9 million in
2009, $4.8 million in 2010, $2.0 million in 2011, $58,000 in 2012, $58,000 in
2013, and $81,000 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 revenues derived
in connection with the conduct alleged to infringe the patent; an order that
would treble all damages awarded; an award of costs, interest on damages and
reasonable attorneys’ fees; and a permanent injunction. 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. While the Company intends to vigorously defend
against the claims asserted and pursue its counter-claims, this case is in the
preliminary stages of litigation and, as a result, the ultimate outcome of this
case and any potential financial impact on the Company are not reasonably
determinable at this time.





As of
June 30, 2009, 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.
Acquisitions





On January 13, 2009, the Company
acquired WedSnap, Inc., the developer of the Weddingbook application on
Facebook.  WedSnap has over 400,000 members and users that utilize the
Weddingbook application to communicate wedding details, share gift registry
information, and introduce guests to one another across the Facebook social
network. With the acquisition, The Knot community broadens by branching into a
fast-growing social network of brides on Facebook, while Weddingbook members
will have access to our extensive repertoire of tools, content, and vendor
directories. The results of WedSnap have been included in the condensed
consolidated financial statements since the acquisition
date.


16




WedSnap
was purchased in an all cash transaction at an aggregate amount of $3.2 million.
The following table summarizes the estimated fair values of the assets acquired
at the date of acquisition.  The fair values are based on a
preliminary valuation and are subject to adjustment.





Assets
      and Liabilities Acquired
                  
                  Amount(in
      thousands)Current
      assets
                  
                  $
                  2Property
      and equipment
                  
                  
                  8Goodwill
                  
                  
                  3,253Total
      assets acquired
                  
                  
                  3,263Current
      liabilities
                  
                  
                  57Total
      liabilities assumed
                  
                  
                  57Total
      estimated cost
                  
                  $
                  3,206





During
May 2009 the Company acquired a wedding-related e-commerce company and a
web-based registry company. The results of these companies have been included in
the condensed consolidated financial statements since their acquisition
dates.  With these acquisitions the Company will augment its existing
online store fronts and provide its customers with greater flexibility in their
registry gifting alternatives.





The
companies were purchased in all cash transactions totaling $3.3
million.  The following table summarizes the estimated fair values of
the assets acquired.  The fair values are based on a preliminary
valuation and are subject to adjustment.





Assets
      and Liabilities Acquired
                  
                  Amount(in
      thousands)Current
      assets
                  
                  $
                  946Property
      and equipment
                  
                  
                  178Intangible
      assets:Tradename
                  
                  
                  970Technology
                  
                  
                  110Goodwill
                  
                  
                  1,105Total
      assets acquired
                  
                  
                  3,309Current
      liabilities
                  
                  
                  3Total
      liabilities assumed
                  
                  
                  3Total
      estimated cost
                  
                  $
                  3,306





The goodwill of approximately $1.1
million that was acquired during the three months ended June 30, 2009 is
expected to be deductible for income tax purposes. None of the above mentioned
acquisitions, individually or in the aggregate would have had a material
impact with respect to the consolidated results of operations for the three and
six months ended June 30, 2009 and 2008 had the acquisition been consummated on
January 1, 2009.


17




9.
Income Taxes





As of
June 30, 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. A portion of these
unrecognized tax benefits could be subject to a valuation allowance if and when
recognized in a future period.





The
Company is subject to taxation in the United States and various state and local
jurisdictions. In December 2007, the Internal Revenue Service completed its
audit of the Company’s 2005 U.S. federal tax return with no
adjustment.  On June 17, 2009 the Company received notification that
its New York State franchise tax returns would be audited for the year ended
December 31, 2005.  As of June 30, 2009, 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 state and local returns, as well as
all tax returns of WeddingChannel remain subject to examination. Through June 30
2009, the Company has not recorded any interest and penalties related to
uncertain tax positions.





10.
Earnings Per Share





The
Company computes earnings per share in accordance with SFAS No. 128,Earnings per Share. Basic
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share adjusts basic earnings per share for the effects of stock options,
restricted common stock, warrants and other potentially dilutive financial
instruments, only in the periods in which the effects are dilutive. For the
three months ended June 30, 2009 and 2008, the weighted average number of shares
used in calculating diluted earnings per share includes stock options,
restricted common stock and warrants to purchase common stock of 986,000 and
1,147,000 respectively. For the six months ended June 30, 2009 and 2008, the
weighted average number of shares used in calculating diluted earnings per share
includes stock options, restricted common stock and warrants to purchase common
stock of 891,000 and 1,244,000, respectively.





The
calculation of earnings per share excludes a weighted average number of stock
options and restricted stock of 192,000 and 304,000 for the three and six months
ended June 30, 2009, respectively, and 755,000 and 712,000 for the three and six
months ended June 30, 2008, respectively, because to include them in the
calculation would be antidilutive.





11.
Subsequent Events





Under
SFAS 165 the Company is required to disclose a date through which
subsequent events have been evaluated.  The Company has evaluated
subsequent events up through August 7, 2009, the date the financial
statements were issued and determined there were no subsequent events to report
as of that date.


18




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
is a leading lifestage media company targeting couples planning their future
lives together. We offer multiplatform media services to the wedding, newlywed,
and pregnancy markets. We operate a network of websites under several different
brands, most notably TheKnot.com, focused on wedding content, products and
services, WeddingChannel.com, focused on registry services, TheNest.com, focused
on newlywed content and services, and TheBump.com, focused on pre-natal and
pregnancy content, products and services. Extensions of our brand include The
Knot’s national and local magazines, The Knot books and television programming
bearing The Knot name.  Also under our umbrella are
WeddingTracker.com, GiftRegistryLocator.com, party-planning site PartySpot.com,
teen-oriented PromSpot.com, Breastfeeding.com, local baby services and community
site LilaGuide.com, and WedSnap, the developer of the Weddingbook and Mommyhood
applications on Facebook.





In order
to sustain growth within the customer group 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 keep in step with 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 local contract entry system and
      surrounding support applications under development will allow greater
      pricing flexibility, which we believe will allow us to expand our local
      vendor base, as well as achieve operational efficiencies, providing
      additional time for our local sales force to pursue new
      accounts.  In addition to the new contract entry system, we are
      in the process of converting our existing local art management application
      off of our legacy AS/400 system. We currently believe that these local
      systems projects will be completed and rolled out across the local markets
      we serve through the end of 2009.  We then expect to proceed
      with further projects involving a self-service platform that will allow
      local vendors to automatically select their advertising programs and an
      auction-based platform for selling featured vendor positions in the local
      areas on our websites. We are working to enhance the functionality of our
      patented wedding gift registry application to encompass a wide selection
      of items and retailers improving the ability of our users to seamlessly
      add items from multiple retailers to their wish list 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.





-
            Expand
      our brands into the newlywed and first pregnancy lifestages. Our
      acquisition of The Bump Media in February 2008 and Breastfeeding.com in
      December 2008 are designed to reduce our reliance on bridal endemic
      advertising, which is an important part of our strategy for increasing
      national online advertising revenue.  To that end, we have
      increased our investments in editorial and creative staff to increase our
      content offerings for these additional
  lifestages.





-
            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.




19




-
            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.





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





Second
Quarter 2009





The
highlights and key metrics of the second quarter 2009 compared to the second
quarter 2008 were:





·
            Total
      net revenues increased 2.8% to $29.5
million.





·
            National
      online advertising revenue increased 2.9% to $5.6
  million.





·
            Local
      online advertising revenue increased 7.4% to $8.6
  million.





·
            Merchandise
      revenue increased 13.7% to $8.1
million.





·
            Registry
      services revenue and publishing and other revenue declined by 9.4% and
      13.0% to $3.0 million and $4.2 million,
  respectively.





·
            Total
      operating expenses were flat when compared to last
    year.





·
            Interest
      income declined by $664,000 this quarter from the second quarter of 2008
      due to lower interest rates earned on our cash and
      investments.





·
            Net
      income for the second quarter was $1.7 million, or $0.05 per basic and per
      diluted share, compared to net income of $2.3 million, or $0.07 per basic
      and diluted share in the second quarter of
2008.





·
            At
      June 30, 2009 we had total cash, cash equivalents, and investments of
      $124.1 million. Cash and cash equivalents were $73.2 million, short-term
      investments were $3.0 million and long-term investments were $47.8
      million. Our short-term and long-term investments consisted entirely of
      auction rate securities.





·
            At
      June 30, 2009 we had no debt.




20




Results
of Operations




Three
Months Ended June 30, 2009 Compared to Three Months Ended June 30,
2008





The following table summarizes results
of operations for the three months ended June 30, 2009 compared to the three
months ended June 30, 2008:





Three Months Ended June 30,2009
                  
                  
                  2008Amount
                  
                  
                  % of Net
                    Revenue
                  
                  
                  Amount
                  
                  
                  % of Net
                    Revenue(in thousands, except for per share data)Net
      revenues
                  
                  $
                  29,471
                  
                  
                  
                  100.0
                  %
                  
                  $
                  28,671
                  
                  
                  
                  100.0
                  %Cost
      of revenues
                  
                  
                  6,276
                  
                  
                  
                  21.3
                  
                  
                  
                  5,765
                  
                  
                  
                  20.1Gross
      profit
                  
                  
                  23,195
                  
                  
                  
                  78.7
                  
                  
                  
                  22,906
                  
                  
                  
                  79.9Operating
      expenses
                  
                  
                  20,115
                  
                  
                  
                  68.3
                  
                  
                  
                  20,105
                  
                  
                  
                  70.1Income
      from operations
                  
                  
                  3,080
                  
                  
                  
                  10.4
                  
                  
                  
                  2,801
                  
                  
                  
                  9.8Interest
      and other income, net
                  
                  
                  216
                  
                  
                  
                  0.7
                  
                  
                  
                  880
                  
                  
                  
                  3.1Income
      before income taxes
                  
                  
                  3,296
                  
                  
                  
                  11.1
                  
                  
                  
                  3,681
                  
                  
                  
                  12.9Provision
      for income taxes
                  
                  
                  1,602
                  
                  
                  
                  5.4
                  
                  
                  
                  1,390
                  
                  
                  
                  4.9Net
      income
                  
                  $
                  1,694
                  
                  
                  
                  5.7
                  %
                  
                  $
                  2,291
                  
                  
                  
                  8.0
                  %Net
      earnings per share:Basic
                  
                  $
                  0.05
                  
                  
                  
                  
                  
                  
                  $
                  0.07Diluted
                  
                  $
                  0.05
                  
                  
                  
                  
                  
                  
                  $
                  0.07




21




Net
Revenues





Net
revenues increased to $29.5 million for the three months ended June 30, 2009,
from $28.7 million for the three months ended June 30, 2008.




Three Months Ended June 30,Net Revenue
                            
                            
                            
                            
                            
                            Percentage of
                              Total Net Revenue2009
                            
                            
                            2008
                            
                            
                            Percentage
                              Increase/
                              (Decrease)
                            
                            
                            2009
                            
                            
                            2008(in thousands)National
      online sponsorship and advertising
                            
                            $
                            5,582
                            
                            
                            $
                            5,427
                            
                            
                            
                            2.9
                            %
                            
                            
                            18.9
                            %
                            
                            
                            18.9
                            %Local
      online sponsorship and advertising
                            
                            
                            8,635
                            
                            
                            
                            8,037
                            
                            
                            
                            7.4
                            
                            
                            
                            29.3
                            
                            
                            
                            28.0Total
      online sponsorship and advertising
                            
                            
                            14,217
                            
                            
                            
                            13,464
                            
                            
                            
                            5.6
                            
                            
                            
                            48.2
                            
                            
                            
                            46.9Registry
      services
                            
                            
                            2,981
                            
                            
                            
                            3,289
                            
                            
                            
                            (9.4
                            )
                            
                            
                            10.1
                            
                            
                            
                            11.5Merchandise
                            
                            
                            8,110
                            
                            
                            
                            7,133
                            
                            
                            
                            13.7
                            
                            
                            
                            27.5
                            
                            
                            
                            24.9Publishing
      and other
                            
                            
                            4,163
                            
                            
                            
                            4,785
                            
                            
                            
                            (13.0
                            )
                            
                            
                            14.2
                            
                            
                            
                            16.7Total
      net revenues
                            
                            $
                            29,471
                            
                            
                            $
                            28,671
                            
                            
                            
                            2.8
                            %
                            
                            
                            100.0
                            %
                            
                            
                            100.0
                            %




Online sponsorship and
advertising - Net revenues increased 5.6% driven by increased revenue
from both local and national advertising programs.  Local online
sponsorship and advertising revenue increased 7.4%, driven by an increased
number of local vendor clients.  As of June 30, 2009 we had over
16,000 local vendors who display over 19,000 profiles compared to nearly 13,000
vendors who displayed over 15,000 profiles as of June 30, 2008. National
online sponsorship and advertising revenue increased 2.9% driven by increased
advertising spend for The Bump and The Nest websites.  These increases
were partially offset by the loss of key accounts and less spending by national
advertisers at the WeddingChannel and The Knot websites.





Registry services – Net
revenues decreased 9.4%, driven by a net decrease in sales by our retail
registry partners resulting in lower commissions earned.





Merchandise – Net revenues
increased 13.7%, driven by revenues from an e-commerce company that was
acquired by us on May 1, 2009, which contributed $1.1 million of revenues during
the quarter.  We also experienced increased revenues from The Knot
Wedding Shop of $240,000.  The increase in The Knot Wedding Shop
revenues was attributable to 2008 initiatives focused on product redesigns and
new product introductions, as well as improving e-mail technology. These
initiatives helped drive increased order and customer count.  These
increases were partially offset by declines in revenue from the WeddingChannel
store and The Nest Baby shop.





Publishing and other – Net
revenues decreased 13.0% driven by declines in advertising revenue related to
The Knot regional magazines.  This decrease was
partially offset by advertising revenues fromThe
Bump magazines.  We acquired The Bump Media in February
2008 and did not have any publications during the second quarter of
2008.




22


Gross
Profit/Gross Margin





The
following table presents the components of gross profit and gross margin for
June 30, 2009 compared to June 30, 2008:




Three Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      Increase/(Decrease)Gross
                        Profit
                      
                      
                      Gross
                        Margin %
                      
                      
                      Gross
                        Profit
                      
                      
                      Gross
                        Margin %
                      
                      
                      Gross
                        Profit
                      
                      
                      Gross
                        Margin %(in thousands)Online
      sponsorship and advertising (national &local)
                      
                      $
                      13,599
                      
                      
                      
                      95.7
                      %
                      
                      $
                      13,004
                      
                      
                      
                      96.6
                      %
                      
                      $
                      595
                      
                      
                      
                      (0.9
                      )%Registry
                      
                      
                      2,981
                      
                      
                      
                      100.0
                      
                      
                      
                      3,289
                      
                      
                      
                      100.0
                      
                      
                      
                      (308
                      )
                      
                      
                      -Merchandise
                      
                      
                      3,986
                      
                      
                      
                      49.1
                      
                      
                      
                      3,708
                      
                      
                      
                      52.0
                      
                      
                      
                      278
                      
                      
                      
                      (2.9
                      )Publishing
      and other
                      
                      
                      2,629
                      
                      
                      
                      63.2
                      
                      
                      
                      2,905
                      
                      
                      
                      60.7
                      
                      
                      
                      (276
                      )
                      
                      
                      2.5Total
      gross profit
                      
                      $
                      23,195
                      
                      
                      
                      78.7
                      %
                      
                      $
                      22,906
                      
                      
                      
                      79.9
                      %
                      
                      $
                      289
                      
                      
                      
                      (1.2
                      )%





The
decrease in gross margin was driven by lower gross margins in merchandise and
online sponsorship and advertising, partially offset by higher gross margins in
publishing and other. The decrease in merchandise was driven by lower outbound
shipping margins due to promotional events that provided customers with free
shipping.  The decrease in online sponsorship and advertising gross
margin was due to increased headcount in our online media advertising group
coupled with slightly higher revenues year over year.  The increase in
publishing and other gross margin was driven by the recognition of previously
deferred revenue.





Operating
Expenses





Operating
expenses were flat compared to prior year.  We had increased
compensation driven by our investments in information technology infrastructure
and marketing and national sales support staffthat occurred in
mid-2008, increased bad debt expense, accelerated amortization of the Macy’s
relationship intangible asset and incremental operating expenses associated with
our acquisitions since the fourth quarter of 2008.  These increases
were offset by lower legal fees, due to the non recurrence of a class action
lawsuit captioned Haslam v. Macy’s Inc., The Knot, Inc., WeddingChannel.com,
Inc. and Does 1-100, and lower recruiting and outside consultant costs due to
our investments in our internal infrastructure during the second quarter of
2008.  As a percentage of net revenue, operating expenses were 68.3% and
70.1% during the three months ended June 30, 2009 and 2008,
respectively.


23




The
following table presents the components of operating expenses and the percentage
of revenue that each component represented for 2009 compared to
2008:




Three Months Ended June 30,Operating Expenses
                              
                              
                              
                              
                              
                              Percentage of
                                Total Net Revenue2009
                              
                              
                              2008
                              
                              
                              Percentage
                                Increase/
                                (Decrease)
                              
                              
                              2009
                              
                              
                              2008(in thousands)Product
      and content development
                              
                              $
                              5,061
                              
                              
                              $
                              5,037
                              
                              
                              
                              0.5
                              %
                              
                              
                              17.2
                              %
                              
                              
                              17.6
                              %Sales
      and marketing
                              
                              
                              7,703
                              
                              
                              
                              7,617
                              
                              
                              
                              1.1
                              
                              
                              
                              26.1
                              
                              
                              
                              26.5General
      and administrative
                              
                              
                              4,817
                              
                              
                              
                              5,213
                              
                              
                              
                              (7.6
                              )
                              
                              
                              16.3
                              
                              
                              
                              18.2Depreciation
      and amortization
                              
                              
                              2,534
                              
                              
                              
                              2,238
                              
                              
                              
                              13.2
                              
                              
                              
                              8.7
                              
                              
                              
                              7.8Total
      operating expenses
                              
                              $
                              20,115
                              
                              
                              $
                              20,105
                              
                              
                              
                              0.0
                              %
                              
                              
                              68.3
                              %
                              
                              
                              70.1
                              %




Product and Content Development
– The increase in these expenseswas primarily due to
increased operational expenses related to our acquisitions since the fourth
quarter of 2008 of $168,000.  There was increased stock-based
compensation cost of $142,000 related to restricted stock awards granted over
the past twelve months.  These increases were partially offset by
lower computer costs of $281,000 due to fewer information technology projects
year over year.




Sales and Marketing – The
increase in these expenses was primarily due to increased headcount in national
sales and sales support staff departments to support our growth
initiatives.  The added headcount resulted in increased employee
related costs of $290,000.  There was increased stock-based
compensation cost of $45,000 related to restricted stock awards granted over the
past twelve months.  These increases were partially offset by lower
research and sales conference costs of $129,000 and lower fulfillment cost on
our national publications of $96,000.




General and Administrative –
The decrease in these expenses was primarily due to lower legal fees of
approximately $247,000 compared to the second quarter of 2008.  During
the second quarter of 2008, we incurred legal fees associated with a
putative class action complaint captioned Haslam v. Macy’s Inc., The Knot, Inc.,
WeddingChannel.com, Inc. and Does 1-100. In May 2008, an order was entered
dismissing the complaint with prejudice.  The non-recurrence of these
legal fees associated with this case was partially offset by legal fees related
to acquisition activity during the first half of 2009.  We had lower
stock-based compensation of $241,000.  We had lower recruiting fees of
$164,000 due to the non recurrence of staff initiatives we had in
2008.  These decreases were partially offset by higher bad debt
expense of approximately $332,000 related to increased reserves given the
current state of the economy.  Finally, we had increased employee
related costs of $130,000 to support our overall
growth.





Depreciation and Amortization
–The increase in expense was primarily the result of a reduction in the
estimated useful life of our Macy’s customer relationship intangible
asset.  The revised useful life estimate resulted in incremental
intangible amortization of approximately $318,000.  The remaining
increase was due to an increase in depreciable fixed assets year over
year.





Interest
and Other Income




Interest
and other income, net was $216,000 for the three months ended June 30, 2009 as
compared to $880,000 for three months ended June 30, 2008. The decrease was due
to the impact of lower interest rates on our entire portfolio of cash,
commercial paper, treasuries and auction rate securities.


24




Provision
for Taxes on Income




The
effective tax rate for the three months ended June 30, 2009, was 48.6% as
compared to 37.8% for the three months ended June 30, 2008.  The
declining interest rate environment has limited our tax-exempt interest income,
which raises the amount of our pre-tax income that is subject to
taxes.





Six
Months Ended June 30, 2009 Compared to Six Months Ended June 30,
2008




The
following table summarizes results of operations for the six months ended June
30, 2009 compared to the six months ended June 30, 2008:





Six Months Ended June 30,2009
                  
                  
                  2008Amount
                  
                  
                  % of Net
                    Revenue
                  
                  
                  Amount
                  
                  
                  % of Net
                    Revenue(in
      thousands, except for per share data)Net
      revenues
                  
                  $
                  53,188
                  
                  
                  
                  100.0
                  %
                  
                  $
                  52,471
                  
                  
                  
                  100.0
                  %Cost
      of revenues
                  
                  
                  11,134
                  
                  
                  
                  20.9
                  
                  
                  
                  10,235
                  
                  
                  
                  19.5Gross
      profit
                  
                  
                  42,054
                  
                  
                  
                  79.1
                  
                  
                  
                  42,236
                  
                  
                  
                  80.5Operating
      expenses
                  
                  
                  41,296
                  
                  
                  
                  77.6
                  
                  
                  
                  39,646
                  
                  
                  
                  75.6Income
      from operations
                  
                  
                  758
                  
                  
                  
                  1.5
                  
                  
                  
                  2,590
                  
                  
                  
                  4.9Interest
      and other income, net
                  
                  
                  520
                  
                  
                  
                  1.0
                  
                  
                  
                  2,083
                  
                  
                  
                  4.0Income
      before income taxes
                  
                  
                  1,278
                  
                  
                  
                  2.5
                  
                  
                  
                  4,673
                  
                  
                  
                  8.9Provision
      for income taxes
                  
                  
                  875
                  
                  
                  
                  1.7
                  
                  
                  
                  1,803
                  
                  
                  
                  3.4Net
      income
                  
                  $
                  403
                  
                  
                  
                  0.8
                  %
                  
                  $
                  2,870
                  
                  
                  
                  5.5
                  %Net
      earnings per share:Basic
                  
                  $
                  0.01
                  
                  
                  
                  
                  
                  
                  $
                  0.09Diluted
                  
                  $
                  0.01
                  
                  
                  
                  
                  
                  
                  $
                  0.09




25




Net
Revenues




Net
revenues increased to $53.2 million for the six months ended June 30, 2009, from
$52.5 million for the six months ended June 30, 2008.




Six Months Ended June 30,Net Revenue
                  
                  
                  
                  
                  
                  Percentage of
                    Total Net Revenue2009
                  
                  
                  2008
                  
                  
                  Percentage
                    Increase/
                    (Decrease)
                  
                  
                  2009
                  
                  
                  2008(in thousands)National
      online sponsorship and advertising
                  
                  $
                  9,814
                  
                  
                  $
                  10,091
                  
                  
                  
                  (2.7
                  )%
                  
                  
                  18.5
                  %
                  
                  
                  19.2
                  %Local
      online sponsorship and advertising
                  
                  
                  17,227
                  
                  
                  
                  16,283
                  
                  
                  
                  5.8
                  
                  
                  
                  32.4
                  
                  
                  
                  31.0Total
      online sponsorship and advertising
                  
                  
                  27,041
                  
                  
                  
                  26,374
                  
                  
                  
                  2.5
                  
                  
                  
                  50.9
                  
                  
                  
                  50.2Registry
      services
                  
                  
                  4,698
                  
                  
                  
                  5,067
                  
                  
                  
                  (7.3
                  )
                  
                  
                  8.8
                  
                  
                  
                  9.7Merchandise
                  
                  
                  13,276
                  
                  
                  
                  11,727
                  
                  
                  
                  13.1
                  
                  
                  
                  25.0
                  
                  
                  
                  22.3Publishing
      and other
                  
                  
                  8,173
                  
                  
                  
                  9,303
                  
                  
                  
                  (12.1
                  )
                  
                  
                  15.3
                  
                  
                  
                  17.8Total
      net revenues
                  
                  $
                  53,188
                  
                  
                  $
                  52,471
                  
                  
                  
                  1.4
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %




Online sponsorship and
advertising - Net revenues increased 2.5% driven by increased local
vendor online advertising programs offset by decreased revenue from national
advertising programs.  Local online sponsorship and advertising
revenue increased 5.8%, driven by an increased number of local vendor
clients.  As of June 30, 2009 we had over 16,000 local vendors who
display over 19,000 profiles compared to nearly 13,000 vendors who displayed
over 15,000 profiles as of June 30, 2008.


National
online sponsorship and advertising revenue decreased 2.7%, driven by the loss of
key accounts and less spending by national advertisers at the WeddingChannel and
The Knot websites.  This decrease was partially offset by increased
advertising spend on The Bump and The Nest websites.




Registry services – Net
revenues decreased 7.3%, driven by a net decrease in sales year-to-date by our
retail registry partners resulting in lower commissions earned.




Merchandise – Net revenues
increased 13.1%, driven by revenues from an e-commerce company that was
acquired by us on May 1, 2009, which contributed $1.1 million of
revenues.  We also experienced increased revenues from The Knot
Wedding Shop of $886,000.  The increase in The Knot Wedding Shop
revenues was attributable to 2008 initiatives focused on product redesigns and
new product introductions, as well as improving e-mail technology. These
initiatives helped drive increased order and customer count.  These
increases were partially offset by declines in revenue from the WeddingChannel
store and The Nest Baby shop.





Publishing and other – Net
revenues decreased 12.1% driven by declines in advertising revenue of $1.2
million related to our regional magazines.  Nationally we had
decreased advertising revenues from The Nest and The Knot Weddings magazines
of approximately $137,000 and $111,000 respectively.  We had decreased
national print profiles revenue of $155,000.  These decreases were
partially offset by advertising revenues fromThe Bump magazines of
$348,000.  We acquired The Bump Media in February 2008 and did not
have any publications during the first half of 2008.


26




Gross
Profit/Gross Margin




The
following table presents the components of gross profit and gross margin for
June 30, 2009 compared to June 30, 2008:




Six Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      Increase/(Decrease)Gross
                        Profit
                      
                      
                      Gross
                        Margin %
                      
                      
                      Gross
                        Profit
                      
                      
                      Gross
                        Margin %
                      
                      
                      Gross
                        Profit
                      
                      
                      Gross
                        Margin %(in thousands)Online
      sponsorship and advertising (national & local)
                      
                      $
                      25,810
                      
                      
                      
                      95.4
                      %
                      
                      $
                      25,392
                      
                      
                      
                      96.3
                      %
                      
                      $
                      418
                      
                      
                      
                      (0.9
                      )%Registry
                      
                      
                      4,698
                      
                      
                      
                      100.0
                      
                      
                      
                      5,067
                      
                      
                      
                      100.0
                      
                      
                      
                      (369
                      )
                      
                      
                      -Merchandise
                      
                      
                      6,700
                      
                      
                      
                      50.5
                      
                      
                      
                      6,198
                      
                      
                      
                      52.9
                      
                      
                      
                      502
                      
                      
                      
                      (2.4
                      )Publishing
      and other
                      
                      
                      4,846
                      
                      
                      
                      59.3
                      
                      
                      
                      5,579
                      
                      
                      
                      60.0
                      
                      
                      
                      (733
                      )
                      
                      
                      (0.7
                      )Total
      gross profit
                      
                      $
                      42,054
                      
                      
                      
                      79.1
                      %
                      
                      $
                      42,236
                      
                      
                      
                      80.5
                      %
                      
                      $
                      (182
                      )
                      
                      
                      (1.4
                      )%


The
decrease in gross margin was driven by lower gross margins in merchandise,
online sponsorship and advertising and publishing and other.  The
decrease in merchandise gross margin was due to lower product margins from the
certain promotions conducted in 2009.  We had a WeddingChannel Shop
promotion to help drive sales and another event that provided customers with
free shipping.  We also had increased inbound shipping charges
primarily due to expediting backordered items. The decrease in publishing gross
margin was driven by lower advertising sold in our publications.  The
decrease in online sponsorship and advertising gross margin was due to increased
headcount in our online media advertising group coupled with slightly lower
revenues year over year.




Operating
Expenses





Operating
expenses increased 4.2% to $41.3 million, compared to $39.6 million in 2008,
driven primarily by investments in our information technology infrastructure and
marketing and national sales support staffthat occurred in
mid-2008, expenses related to acquisitions, increased bad debt expense and
accelerated amortization of the Macy’s relationship intangible
asset.  As a percentage of net revenue, operating expenses were 77.6%
and 75.6% during the six months ended June 30, 2009 and 2008,
respectively.




27




The
following table presents the components of operating expenses and the percentage
of revenue that each component represented for 2009 compared to
2008:




Six Months Ended June 30,Operating Expenses
                    
                    
                    
                    
                    
                    Percentage of
                      Total Net Revenue2009
                    
                    
                    2008
                    
                    
                    Percentage
                      Increase/
                      (Decrease)
                    
                    
                    2009
                    
                    
                    2008(in thousands)Product
      and content development
                    
                    $
                    10,234
                    
                    
                    $
                    9,989
                    
                    
                    
                    2.5
                    %
                    
                    
                    19.2
                    %
                    
                    
                    19.0
                    %Sales
      and marketing
                    
                    
                    15,659
                    
                    
                    
                    15,196
                    
                    
                    
                    3.0
                    
                    
                    
                    29.4
                    
                    
                    
                    29.0General
      and administrative
                    
                    
                    10,222
                    
                    
                    
                    10,022
                    
                    
                    
                    2.0
                    
                    
                    
                    19.2
                    
                    
                    
                    19.1Depreciation
      and amortization
                    
                    
                    5,181
                    
                    
                    
                    4,439
                    
                    
                    
                    16.7
                    
                    
                    
                    9.8
                    
                    
                    
                    8.5Total
      operating expenses
                    
                    $
                    41,296
                    
                    
                    $
                    39,646
                    
                    
                    
                    4.2
                    %
                    
                    
                    77.6
                    %
                    
                    
                    75.6
                    %





Product and Content Development
– The increase in these expenseswas primarily due to
increased headcount in our information technology and editorial departments to
support our growth initiatives.  The added headcount resulted in
increased employee related costs of $579,000.  We had incremental
operating expenses from our acquisitions since the fourth quarter of 2008 of
$270,000.  There was increased stock-based compensation cost of
$272,000 related to restricted stock awards granted over the past twelve
months.   These unfavorable variances were partially offset by
lower consultant fees of $416,000, lower computer costs of $298,000
and lower recruiting costs of $174,000.




Sales and Marketing – The
increase in these expenses was primarily due to increased headcount in national
sales and sales support staff departments to support our growth
initiatives.  The added headcount resulted in increased employee
related costs of $507,000.  We also had increased stock-based
compensation cost of $117,000 related to restricted stock awards granted over
the past twelve months. These increases were partially offset by lower magazine
fulfillment costs of $194,000.





General and Administrative –
The increase in these expenses was primarily due to higher bad debt expense of
approximately $743,000 related to increased reserves, given the current state of
the economy.  We had increased employee related costs of $179,000 to
support our overall growth.   We also had increased rent expense
of $66,000 related to our new office space in Brooklyn, New
York.   These unfavorable variances were partially offset by a
net decrease in legal fees of $407,000.  In 2008 we had legal fees
related to the putative class action complaint captioned Haslam v. Macy’s Inc.,
The Knot, Inc., WeddingChannel.com, Inc. and Does 1-100. In May 2008, an order
was entered dismissing the complaint with prejudice.  The
non-recurrence of these legal fees associated with this case was partially
offset by legal fees related to our acquisition activity during the first half
of 2009.  We had lower recruiting fees of $228,000 related to staffing
initiatives in 2008 that did not recur in 2009.  Finally, we had
decreased stock-based compensation cost of $172,000.





Depreciation and Amortization
–The increase in expense was primarily the result of a reduction in the
estimated useful life of our Macy’s customer relationship intangible
asset.  The revised useful life estimate resulted in incremental
intangible amortization of $636,000.  The remaining increase was due
to an increase in depreciable fixed assets year over year.




Interest
and Other Income




Interest
and other income, net was $520,000 for the six months ended June 30, 2009 as
compared to $2.1 million for the six months ended June 30, 2008. The decrease
was due to the impact of lower interest rates on our entire portfolio of
cash, commercial paper, treasuries and auction rate securities.


28




Provision
for Taxes on Income




The
effective tax rate for the six months ended June 30, 2009, was 68.5% as compared
to 38.6% for the six months ended June 30, 2008.   The increase
is due to two factors.  First, the declining interest rate environment
has limited our tax-exempt interest income, which raises the amount of our
pre-tax income that is subject to taxes.  Second, certain state income
tax expenses are computed on an unconsolidated basis; therefore, we generate
income tax expenses even in years that our consolidated pre-tax income is lower,
which raises the effective income tax rate percentage on a GAAP
basis.




Liquidity
and Capital Resources




Cash
Flow




Cash and
cash equivalents consist of cash and highly liquid investments with maturities
of 90 days or less at the date of acquisition.  At June 30, 2009, we
had $73.2 million in cash and cash equivalents compared to $62.4 million at June
30, 2008.




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




For
      the Six Months Ended
                      June
      30,2009
                    
                    
                    2008(in
      thousands)Net
      cash provided by operating activities
                    
                    $
                    7,550
                    
                    
                    $
                    13,709Net
      cash provided by investing activities
                    
                    
                    4,434
                    
                    
                    
                    13,649Net
      cash (used in) provided by financing activities
                    
                    
                    (250
                    )
                    
                    
                    1,953Increase
      in cash and cash equivalents
                    
                    $
                    11,734
                    
                    
                    $
                    29,311





Operating
Activities




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




Net cash
provided by operating activities was $13.7 million for the six months ended June
30, 2008. This resulted primarily from the net income for the period of $2.9
million; depreciation, amortization, stock-based compensation, deferred income
taxes and other non-cash items of $6.9 million and a decrease in accounts
receivable, net of deferred revenue, of $4.9 million due primarily to relatively
strong collections from both national and local accounts during the period.
These sources of cash were offset, in part, by an increase in inventory of $1.0
million to support higher seasonal sales of wedding supplies in the second and
third quarters and to maintain larger quantities of promotional items and to add
new products.




Investing
Activities




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


29




Net cash provided by investing
activities was $13.6 million for the six months ended June 30, 2008, due
primarily to proceeds from the sales of short-term and long-term investments,
net of proceeds from sales, of $18.6 million and purchases of property and
equipment of $3.6 million.




Financing
Activities




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





Net cash
provided by financing activities was $2.0 million for the six months ended June
30, 2008.  This was primarily due to proceeds from the issuance of
common stock in connection with the exercise of stock options and warrants and
through our Employee Stock Purchase Plan. For the six months ended June 30,
2008, we also repurchased $124,000 of common stock in connection with the
surrender of restricted shares by employees to satisfy tax withholding
obligations related to the vesting of the stock awards.




Off-Balance
Sheet Arrangements




As of
June 30, 2009, 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 revenues. Wedding-related merchandise
revenues 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 revenues 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, 2008 are those that depend most heavily on
these judgments and estimates.  As of June 30, 2009, there have been
no material changes to any of the critical accounting policies contained
therein.





Recently
Adopted Accounting Pronouncements





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


30




On
January 1, 2008 we adopted SFAS No. 159,The Fair Value Option for Financial
Assets and Financial Liabilities — including an Amendment of FASB Statement No.
115  (“SFAS 159”), which allows an entity to choose to measure
certain financial instruments and liabilities at fair value. Subsequent
measurements for the financial instruments and liabilities an entity elects to
fair value will be recognized in earnings. SFAS 159 also establishes additional
disclosure requirements. Through June 30, 2009, we elected the use of the fair
value option to account for the acceptance of an offer from UBS AG (“UBS”), one
of the our investment providers, entitling us to sell at par value its entire
portfolio of ARS to UBS at anytime during a two-year period from June 30, 2010
through July 2, 2012. See Note 2 in the notes to the condensed consolidated
financial statements for a discussion of the application of SFAS
159.





On
January 1, 2009 we adopted SFAS No. 141 (revised 2007), Business Combinations (“SFAS
141R”). SFAS 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any noncontrolling interest in the acquiree
and the goodwill acquired. SFAS 141R also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination.  The adoption of SFAS 141R did not have a material impact
on our condensed consolidated financial statements.





On
January 1, 2009 we adopted SFAS No. 160,Noncontrolling Interests in
Consolidated Financial Statements- an amendment of Accounting Research
Bulletin  No. 51 (“SFAS 160”). SFAS 160 establishes accounting
and reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements
that clearly identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. The adoption of SFAS 160 did not
have a material impact on our condensed consolidated financial
statements.





On
January 1, 2009 we adopted FASB FSP No. 142-3,Determination of the Useful Life of
Intangible Assets, (“FSP 142-3”) that amends the factors considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142,Goodwill and Other Intangible
Assets (“SFAS 142”). FSP 142-3 requires a consistent approach between the
useful life of a recognized intangible asset under SFAS 142 and the period of
expected cash flows used to measure the fair value of an asset under SFAS 141R.
FSP 142-3 also requires enhanced disclosures when an intangible asset’s expected
future cash flows are affected by an entity’s intent and/or ability to renew or
extend the arrangement. The adoption of FSP 142-3 did not have a material impact
on our condensed consolidated financial statements.





On April
9, 2009, the FASB issued FSP No. 157-4,Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly  (“FSP
157-4”), which amends SFAS 157 by incorporating a two-step process to determine
whether a market is not active and a transaction is not
distressed.  FSP 157-4 is effective for interim and annual periods
ending after June 15, 2009.  The adoption of FSP 157-4 did not have a
material impact on our condensed consolidated financial statements.





On April
9, 2009, the FASB issued FSP No. 115-2 and 124-2,Recognition and Presentation of
Other-Than-Temporary Impairments, which amends the other-than-temporary
impairment indicators to (a) management has no intent to sell the security and
(b) it is more likely than not management will not have to sell the security
before recovery.  This FSP is effective for interim and annual periods
ending after June 15, 2009.  The adoption of FSP 115-2 and 124-2 did
not have a material impact on our condensed consolidated financial
statements.





On April
9, 2009, the FASB issued FSP No. 107-1 and APB 28-1,Interim Disclosures about Fair
Value of Financial Statements, which amends the interim disclosure
requirements in scope for FAS 107,Disclosures about Fair
Value of Financial Instruments . This FSP is effective for interim and
annual periods ending after June 15, 2009.  The adoption of FSP 107-1
and APB 28-1 did not have a material impact on our condensed consolidated
financial statements.


31





On May
28, 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
165”). SFAS 165 establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued.  Disclosure is
required 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 SFAS is effective for interim and annual periods ending
after June 15, 2009. The adoption of SFAS 165 did not have a material impact on
our condensed consolidated financial statements.





New
Accounting Pronouncements





On June
12, 2009, the FASB issued SFAS No. 166, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS
166”). SFAS 166 is a revision to Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS
166 requires 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. SFAS 166
is effective as of January 1, 2010, for interim periods within that first annual
reporting period and for interim and annual reporting periods thereafter.
Earlier application is prohibited. The recognition and measurement provisions of
SFAS 166 are effective for transfers occurring on or after the effective
date.The
disclosures required by SFAS 166 are effective for the first reporting period
(interim or annual) beginning January 1, 2010, and will be applied to both
transfers that occurred before and after the effective date.  We are
currently evaluating the potential impact of the adoption of SFAS 166 on our
consolidated financial statements.




On June
12, 2009, the FASB issued SFAS No. 167, “Consolidation of Variable Interest
Entities” (“SFAS 167”). SFAS 167 is a revision to FASB Interpretation No.
46(R), Consolidation of
Variable Interest Entities, and changes how a company determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of whether a
company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic performance.
SFAS 167
is effective as of January 1, 2010, for interim periods within that first annual
reporting period and for interim and annual reporting periods thereafter, with
earlier application prohibited.  SFAS 167 may be applied retrospectively in
previously issued financial statements for one or more years with a
cumulative-effect adjustment to retained earnings as of the beginning of the
first year restated.We are currently evaluating the potential impact of the adoption of
SFAS 167 on our consolidated financial statements.




ITEM
3. Quantitative and Qualitative Disclosures About Market Risk




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





We are
exposed to some market risk through interest rates related to the investment of
our current cash and cash equivalents of $73.2 million as of June 30, 2009.
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.




At June
30, 2009 we held $50.8 million of investments in auction rate securities
(“ARS”).  $3.0 million of these investments were classified as
short-term investments, while $47.8 million were classified as long-term
investments. In February 2008, auctions began to fail for these securities
and all but one auction since then has failed. Consequently, the
investments are not currently liquid and we will not be able to access
these funds until a future auction of these investments is successful, a buyer
is found outside of the auction process or the investments mature, which may be
over 20 years. As a result, our ability to liquidate our investment and fully
recover the carrying value of our investment in the near term may be limited or
not exist.  At June 30, 2009 we prepared a valuation analysis for
the ARS investments utilizing a discounted cash flow approach.  Based
on this Level 3 valuation, we valued the ARS investments at $47.2 million, which
represents a decline in value of $649,000 from par. The assumptions used in
preparing the discounted cash flow model include estimates of, based on data
available as of June 30, 2009 interest rates, timing and amount of cash flows,
credit and liquidity premiums, and expected holding periods of the ARS. These
assumptions are volatile and subject to change as the underlying sources of
these assumptions and market conditions change, and thereby could result in
significant changes to the fair value of ARS.


32





In
November 2008, we accepted an offer (the “Right”) from UBS AG (“UBS”), one of
our investment providers, entitling us to sell at par value our entire portfolio
of auction-rate securities at anytime during a two-year period from
June 30, 2010 through July 2, 2012. In accepting the Right, we granted
UBS the authority to sell or auction the ARS at par at any time up until the
expiration date of the offer 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 rights or obligation to buy our ARS. In lieu of our
acceptance of the Right, ARS will continue to accrue and pay interest as
determined by the auction process or the terms specified in the prospectus of
the ARS if the auction process fails. The value of the Right may largely offset
the decline in fair value of the ARS.




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 June 30,
2009. Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in the reports
that the Company files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s
rules and forms, and to ensure that such information is accumulated and
communicated to the Company’s management, including the Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.




There
were no changes in the Company’s internal control over financial reporting
during the three months ended June 30, 2009 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.





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 revenues derived
in connection with the conduct alleged to infringe the patent; an order that
would treble all damages awarded; an award of costs, interest on damages and
reasonable attorneys’ fees; and a permanent injunction. 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. 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.


33




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 revenues to survive over the
long term, (ii) our history of losses, (iii) the significant fluctuation to
which our quarterly revenues and operating results are subject, (iv) the
seasonality of the wedding industry, (v) our dependence on a limited number of
customers, and in particular, Macy’s, for a significant portion of our revenues,
(vi) the dependence of our registry services business on the continued use of
the WeddingChannel.com website by our retail partners, (vii) 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 (viii)
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 13, 2009. There have been no material changes to the
risk factors described in our most recent Annual Report on Form
10-K.





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





Issuer
Purchases of Equity Securities





Period
                
                (a) Total Number of
                  Shares Purchased
                
                
                (b) Average
                  Price Paid per
                  Share
                
                
                ( c) Total Number of
                  Shares Purchased as
                  Part of Publicly
                  Announced Plans or
                  Programs
                
                
                (d) Maximum Number
                  of Shares That May
                  Yet Be Purchased
                  Under the Plans or
                  ProgramsApril
      1 to April 30, 2009
                
                
                1,363
                
                
                $
                8.61
                
                
                
                n/a
                
                
                
                n/aMay
      1 to May 31, 2009
                
                
                10,151
                
                
                $
                8.58
                
                
                
                n/a
                
                
                
                n/aJune
      1 to June 30, 2009
                
                
                8,204
                
                
                $
                8.42
                
                
                
                n/a
                
                
                
                n/aTotal
                
                
                19,718
                
                
                
                
                
                
                
                -
                
                
                
                -





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 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).


34




ITEM
4.      Submission of Matters to a Vote of
Security Holders





The
Company held its Annual Meeting of Stockholders on May 20, 2009.





The
stockholders elected Ira Carlin and Eileen Naughton to the class of directors
whose terms expire at the 2012 Annual Meeting of Stockholders or until their
successors are elected and have qualified.





The
stockholders approved The Knot, Inc. 2009 Stock Incentive Plan and The Knot,
Inc. 2009 Employee Stock Purchase Plan.





The
stockholders ratified the appointment of Ernst & Young LLP as the Company’s
independent registered public accounting firm for the calendar year ending
December 31, 2009.





Shares of
common stock were voted as follows:





Director Nomineee or Proposal
                
                For
                
                
                Against/
                  Withheld
                
                
                Abstentions
                
                
                Broker
                  Non-VotesIra
      Carlin
                
                
                26,618,151
                
                
                
                2,134,576
                
                
                
                -
                
                
                
                -Eileen
      Naughton
                
                
                26,480,851
                
                
                
                2,271,876
                
                
                
                -
                
                
                
                -2009
      Stock Incentive Plan
                
                
                22,967,589
                
                
                
                3,527,103
                
                
                
                26,627
                
                
                
                2,231,4092009
      Employee Stock Purchase Plan
                
                
                26,382,769
                
                
                
                111,978
                
                
                
                26,572
                
                
                
                2,231,409Ratification
      of Auditors
                
                
                28,669,669
                
                
                
                80,008
                
                
                
                3,051
                
                
                
                -





ITEM 6. Exhibits




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


35




SIGNATURES




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




Date:  August
      7, 2009
                  THE
      KNOT, INC.By:
                  /s/ John P. MuellerJohn
      P. MuellerChief
      Financial Officer(Principal
      Financial Officer and Duly AuthorizedOfficer)




36




EXHIBIT
INDEX





Number
            
            Description10.1
            
            The
      Knot, Inc. 2009 Stock Incentive Plan (incorporated by reference to Exhibit
      99.1 of the Company’s Registration Statement on Form S-8, filed with the
      Securities and Exchange Commission on May 22, 2009).10.2
            
            The
      Knot, Inc. 2009 Employee Stock Purchase Plan (incorporated by reference to
      Exhibit 99.2 of the Company’s Registration Statement on Form S-8, filed
      with the Securities and Exchange Commission on May 22,
    2009).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.




37